Legislature(1993 - 1994)
03/12/1994 08:00 AM STA
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
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.