Legislature(1993 - 1994)

03/12/1994 08:00 AM STA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
  HB 450 - INVESTMENT POOLS FOR PUBLIC ENTITIES                                
                                                                               
  Number 524                                                                   
                                                                               
  CHAIRMAN VEZEY opened HB 450, sponsored by the HOUSE FINANCE                 
  COMMITTEE, for discussion.                                                   
                                                                               
  JOHN BITNEY, STAFF FOR REPRESENTATIVE RON LARSON, CO-                        
  CHAIRMAN HOUSE FINANCE COMMITTEE, addressed HB 450 for the                   
  sponsor.  Beginning four years ago, through the Alaska                       
  Municipal League (AML), various political subdivisions                       
  approached the legislature.  They strove for statutory                       
  authority so they could have the ability to pull together                    
  their cash assets, providing better returns for their                        
  investments.  In 1992, SB 374 was passed by the legislature                  
  which enabled these subdivisions to pull their assets                        
  together, and also provided guidelines in the types of                       
  investments they should make.  MR. BITNEY stated this system                 
  is now in place and various political subdivisions,                          
  municipalities, school districts, and "REAAs" across the                     
  state, are now beginning to incorporate into the system to                   
  provide better investment management.                                        
                                                                               
  (REPRESENTATIVES KOTT and SANDERS rejoined the meeting at                    
  9:25 a.m.)                                                                   
                                                                               
  MR. BITNEY explained REPRESENTATIVE LARSON had been made                     
  aware that the AML was examining additional ways to improve                  
  the investments.  After consultation, the AML brought                        
  forward the recommendations to REPRESENTATIVE LARSON, and                    
  they were drafted into what is now HB 450.                                   
                                                                               
  (REPRESENTATIVE ULMER rejoined the meeting at 9:27 a.m.)                     
                                                                               
  Number 562                                                                   
                                                                               
  DAVE ROSE, PRINCIPAL, ALASKA PERMANENT MANAGEMENT COMPANY,                   
  FINANCIAL ADVISOR TO THE AML INVESTMENT POOL (AMLIP),                        
  commented on HB 450.  He said the AML pool presently                         
  consists of 27 different municipalities throughout Alaska,                   
  holding $33,282,000.  MR. ROSE functions as an extension of                  
  AML staff to monitor the investment pool, deal with the                      
  cities, and supervise J.P. Morgan, the banking custodian,                    
  and supervise the Templeton Franklin organization, doing the                 
  actual investing.  He ensures that state statute and policy                  
  of AMLIP is followed.  MR. ROSE commented state statute                      
  merely enables cities to form a pool, and there is not any                   
  actual state involvement.                                                    
                                                                               
  MR. ROSE outlined the amendments HB 450 would set forth in                   
  the statutes.  First, additional language would be added so                  
  the pool would be able to acquire floating rate securities,                  
  as long as the rate was reset within each annual period.                     
  Current statute requires the pool not to invest in any                       
  security with a maturity of more than 13 months.  This would                 
  enable the cities to reach a greater return.  The second                     
  amendment, dealing with debt that is rated A, is corrective                  
  language to ensure dollar denominated obligations issued by                  
  U.S. branches of a foreign banks.  He noted the problem that                 
  all debt, particularly debt issued by bank branches located                  
  within the U.S. but are from foreign banks, are typically                    
  not rated at all.  The AMLIP interpreted, as long as the                     
  parent bank is rated A, the child bank operating within the                  
  U.S. is also rated A.  The third amendment deals with                        
  securities lending.  He related to the "prudent investor                     
  rule," whereas if all institutions of a like type engage in                  
  securities lending, it is a norm.  He explained PERS, TRS                    
  and the permanent fund lends securities; however, they also                  
  do not have specific wording in statute allowing this.  The                  
  AMLIP felt uncomfortable lending securities, although it is                  
  a norm of the "prudent investor rule" because they with so                   
  many entities.  He expressed the statute should specifically                 
  address the empowerment to lend securities by the AMLIP.                     
  The fourth amendment waives the restriction that the AMLIP                   
  is not able to purchase more than 30 percent of the                          
  portfolio in stock, CDs, or issuance of the banking                          
  industry.  This waiver would make the AMLIP consistent with                  
  other money market funds throughout the country.  MR. ROSE                   
  stated these four amendments would create better returns for                 
  the cities, while not adding risk to the investments.                        
                                                                               
  Number 649                                                                   
                                                                               
  CHAIRMAN VEZEY referred to the floating rate fixed income                    
  instruments, and felt the amendment would not exist unless                   
  it would offer a higher yield than short-term instruments.                   
                                                                               
  MR. ROSE affirmed CHAIRMAN VEZEY.                                            
                                                                               
  Number 657                                                                   
                                                                               
  CHAIRMAN VEZEY referred to page 2, section 1, which states,                  
  "an A rating by one of the national recognized rating                        
  services."  He mentioned the names of Standard and Poors,                    
  and Moodys, as rating services he knew of, and asked of                      
  others MR. ROSE might know about.                                            
                                                                               
  (REPRESENTATIVE ULMER left the meeting at 9:30 a.m.)                         
                                                                               
  MR. ROSE added there was also Fitch, but Standard and Poors,                 
  and Moodys were the organizations typically used by the                      
  AMLIP.                                                                       
                                                                               
  Number 662                                                                   
                                                                               
  CHAIRMAN VEZEY announced REPRESENTATIVES ULMER and B. DAVIS                  
  had left the meeting.  He believed Standard and Poors, and                   
  Moodys do not use the same scale.                                            
                                                                               
  MR. ROSE responded there were some differences, but having                   
  reached investment grade B, AA, or better, they fall into                    
  line.  Below investment grade there are more differences.                    
                                                                               
  Number 668                                                                   
                                                                               
  CHAIRMAN VEZEY inquired if there had been a failure of a                     
  fixed rate instrument rated B, AA, or higher since the                       
  rating agencies began.                                                       
                                                                               
  MR. ROSE replied, particularly on the corporate side, an AA                  
  purchase could change overnight to BA, then six months later                 
  it could continue to C or D in default.                                      
                                                                               
  Number 675                                                                   
                                                                               
  CHAIRMAN VEZEY understood the instruments rate changes, but                  
  was under the assumption there has never been a default on                   
  an instrument rated BB or higher.                                            
                                                                               
  Number 678                                                                   
                                                                               
  MR. ROSE suspected there has been.                                           
                                                                               
  Number 679                                                                   
                                                                               
  CHAIRMAN VEZEY stated he was trying to relate to the                         
  standard of fiducial responsibility addressed in HB 450.                     
                                                                               
  Number 680                                                                   
                                                                               
  MR. ROSE responded the life of an average security is                        
  between 60-100 days.  If a security was found and bought at                  
  an A level, the maturity life would be so short that by the                  
  time an agency would downgrade or default the security, they                 
  would not be affected because it would have already been                     
  cleared.  He noted the average life of the total aggregated                  
  portfolio on February 28 was 81 days.                                        
                                                                               
  Number 690                                                                   
                                                                               
  CHAIRMAN VEZEY clarified Standard and Poors, and Moodys, are                 
  comparable in an A rating.                                                   
                                                                               
  Number 697                                                                   
                                                                               
  MR. ROSE affirmed CHAIRMAN VEZEY.  He continued, the state                   
  and the permanent fund engage in securities lending without                  
  specific legislative authority, because it is a convention                   
  of the industry.  The AMLIP believed having the securities                   
  lending authority in statute would provide "solace for the                   
  small cities."                                                               
                                                                               
  TAPE 94-29, SIDE A                                                           
  Number 000                                                                   
                                                                               
  REPRESENTATIVE G. DAVIS asked if the 13 months in investing                  
  would carry over into lending.                                               
                                                                               
  MR. ROSE answered all of the securities in the portfolio can                 
  be lent, including floating rates, CDs or bills.                             
                                                                               
  Number 018                                                                   
                                                                               
  REPRESENTATIVE G. DAVIS repeated his question.                               
                                                                               
  MR. ROSE replied the securities can be lent for any length                   
  of time, but the average life of a maturity is 81 days,                      
  therefore they will usually be lent for less.                                
                                                                               
  Number 025                                                                   
                                                                               
  CHAIRMAN VEZEY asked why someone would want to borrow a                      
  security with a life expectancy of less than 81 days.                        
                                                                               
  MR. ROSE responded most securities lending only lasts for 2-                 
  3 days, when a broker sells something they do not have, or                   
  short, they have to borrow a security from someone to be                     
  able to deliver what they do not have to the buyer.                          
  Generally 102 percent collateral is put up in cash, a fee is                 
  paid to the lender, and then they buy it on the market and                   
  replace it in the lender's portfolio.                                        
                                                                               
  Number 042                                                                   
                                                                               
  CHAIRMAN VEZEY stated lending the securities would be a                      
  source of income for the AMLIP because they receive a fee.                   
                                                                               
  Number 043                                                                   
                                                                               
  MR. ROSE affirmed CHAIRMAN VEZEY.  He stated one year, when                  
  he was with the permanent fund, they earned $5.3 million by                  
  lending out securities.  This $5.3 million was enough to                     
  cover the total administrative cost of the permanent fund at                 
  that time.                                                                   
                                                                               
  Number 051                                                                   
                                                                               
  CHAIRMAN VEZEY questioned the quality of the collateral in                   
  terms of cash.                                                               
                                                                               
  Number 057                                                                   
                                                                               
  MR. ROSE replied if the collateral is not cash, then it                      
  would be a like instrument of the same range of maturity.                    
  If a 30-day treasury bill was being lent, they could give                    
  the AMLIP a 60-day treasury bill as collateral.  The                         
  borrower has to deliver a specific instrument because that                   
  is what they sold to someone.                                                
                                                                               
  Number 067                                                                   
                                                                               
  CHAIRMAN VEZEY did not understand what was being deleted in                  
  section 3.  He clarified the requirement would be deleted                    
  which says the AMLIP cannot put more than 30 percent of its                  
  investments in one instrument.                                               
                                                                               
  Number 078                                                                   
                                                                               
  MR. ROSE stated he had also had trouble interpreting the                     
  change.  He explained the AMLIP wanted to be able to invest                  
  in an industry, such the banking industry.  The banking                      
  industry is not a single security or single company.                         
                                                                               
  CHAIRMAN VEZEY felt the wording was rather broad.                            
                                                                               
  MR. ROSE stated attorneys had been uneasy when the AMLIP had                 
  more than 30 percent in the banking industry, as a whole.                    
  The AMLIP thought the best solution would be do delete the                   
  30 percent restriction.                                                      
                                                                               
  Number 099                                                                   
                                                                               
  CHAIRMAN VEZEY clarified the intent of the restriction was                   
  to prohibit the AMLIP from putting 30 percent of its funds                   
  into a security or an industry.                                              
                                                                               
  MR. ROSE agreed.  He pointed out, not being able to put 30                   
  percent of the AMLIP assets in banks totally was very                        
  restrictive.  Putting more than five percent in each bank                    
  would lower the percentage for other invested in other                       
  banks.                                                                       
                                                                               
  Number 128                                                                   
                                                                               
  CHAIRMAN VEZEY introduced KENT SWISHER as the next                           
  individual to testify.                                                       
                                                                               
  Number 131                                                                   
                                                                               
  REPRESENTATIVE G. DAVIS asked MR. SWISHER if the AML had a                   
  resolution.                                                                  
                                                                               
  KENT SWISHER, EXECUTIVE DIRECTOR ALASKA MUNICIPAL LEAGUE,                    
  answered questions on HB 450.  He replied to REPRESENTATIVE                  
  G. DAVIS, that HB 450 was the request of the AMLIP Board,                    
  which is a separate board of largely elected local officials                 
  and finance officers.  He noted the AML Board is aware of                    
  and knowledgeable about HB 450.                                              
                                                                               
  Number 147                                                                   
                                                                               
  CHAIRMAN VEZEY stated he would like to take action on HB
  450, but it did not have a fiscal note.                                      
                                                                               
  Number 153                                                                   
                                                                               
  MR. BITNEY reminded the committee HB 450, as it stands, did                  
  not apply to any state agencies.  Therefore, no state                        
  agencies have submitted a fiscal note.  The House Finance                    
  Committee intended a zero fiscal note for HB 450 and asked                   
  if the House State Affairs Committee could prepare this                      
  fiscal note.                                                                 
                                                                               
  Number 168                                                                   
                                                                               
  CHAIRMAN VEZEY submitted to the committee that they prepare                  
  a zero fiscal note for HB 450, so it may be attached to the                  
  packet.  He asked the committee secretary to call the roll                   
  on his motion.                                                               
                                                                               
  IN FAVOR:      VEZEY, KOTT, G. DAVIS, SANDERS, OLBERG.                       
  ABSENT:        ULMER, B. DAVIS.                                              
                                                                               
  CHAIRMAN VEZEY announced the zero fiscal note was adopted.                   
                                                                               
  Number 180                                                                   
                                                                               
  REPRESENTATIVE OLBERG moved HB 450 be passed from committee                  
  with individual recommendations and accompanying fiscal                      
  note.                                                                        
                                                                               
  Number 184                                                                   
                                                                               
  CHAIRMAN VEZEY recognized the motion and asked the committee                 
  secretary to call the roll.                                                  
                                                                               
  IN FAVOR:      VEZEY, KOTT, G. DAVIS, SANDERS, OLBERG.                       
  ABSENT:        ULMER, B. DAVIS.                                              
                                                                               
  CHAIRMAN VEZEY announced HB 450 passed from the House State                  
  Affairs Committee with individual recommendations.                           

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