Legislature(1993 - 1994)
03/12/1994 08:00 AM House STA
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HOUSE STATE AFFAIRS STANDING COMMITTEE March 12, 1994 8:00 a.m. MEMBERS PRESENT Representative Al Vezey, Chairman Representative Pete Kott, Vice Chairman Representative Bettye Davis Representative Gary Davis Representative Harley Olberg Representative Jerry Sanders Representative Fran Ulmer MEMBERS ABSENT None COMMITTEE CALENDAR *HB 512: "An Act relating to the awarding of attorney fees and costs in civil actions to a prevailing party in a civil action in which the losing party is a public interest litigant; and amending Alaska Rules of Civil Procedure 79 and 82." PASSED OUT OF COMMITTEE *HB 494: "An Act changing the Alaska State Pension Investment Board to the Alaska Pension Investment Authority and relating to the authority; and providing for an effective date." PASSED OUT OF COMMITTEE HB 450: "An Act relating to investment pools for public entities; and providing for an effective date." PASSED OUT OF COMMITTEE *HB 369: "An Act relating to state leases and to state lease-purchase and lease-financing agreements, and repealing a legislative authorization previously given for acquisition of a facility through a lease- purchase agreement; and providing for an effective date." PASSED OUT OF COMMITTEE HB 342: "An Act extending the termination date of the Alaska Tourism Marketing Council." NOT HEARD (*First public hearing) WITNESS REGISTER REPRESENTATIVE AL VEZEY, Chairman House State Affairs Committee Alaska State Capitol, Room 102 Juneau, AK 99811-0460 Phone: 465-3719 POSITION STATEMENT: Addressed HB 512 DAVID HARDING, Staff Representative Eileen MacLean Alaska State Capitol, Room 507 Juneau, AK 99811-0460 Phone: 465-4833 POSITION STATEMENT: Addressed HB 494 for Representative MacLean, Sponsor BILL CORBUS, Chairman Alaska State Pension Investment Board 612 W. Willoughby Juneau, AK 99801 Phone: 586-2222 POSITION STATEMENT: Supported HB 494 GAIL R. OBA, Vice Chairman Alaska State Pension Investment Board 10615 Main Tree Anchorage, AK 99516 Phone: 276-1550 POSITION STATEMENT: Supported HB 494 DARREL REXWINKEL, Commissioner Department of Revenue P.O. Box 110400 Juneau, AK 99811-0400 Phone: 465-2300 POSITION STATEMENT: Supported HB 494 ROBERT D. STORER, Chief Investment Officer Department of Revenue P.O. Box 110405 Juneau, AK 99811-0405 Phone: 465-4399 POSITION STATEMENT: Supported HB 494 STEVE MCPHETRES, Executive Director Alaska Council on School Administration 326 4th Ave. #404 Juneau, AK 99801 Phone: 586-9702 POSITION STATEMENT: Supported HB 494 CLAUDIA DOUGLAS NEA Alaska 114 Seward St. Juneau, AK 99801 Phone: 586-3090 POSITION STATEMENT: Supported HB 494 JOHN BITNEY, Staff Representative Ron Larson Alaska State Capitol, Room 502 Juneau, AK 99811-0460 Phone: 465-3878 POSITION STATEMENT: Addressed HB 450 for Representative Larson, Co-Chairman of the House Finance Committee DAVE ROSE, Principal Alaska Permanent Management Company Financial Advisor, Alaska Municipal League Investment Pool 900 W. 5th Ave. #701 Anchorage, AK 99501-2029 Phone: 272-7575 POSITION STATEMENT: Commented on HB 450 KENT SWISHER, Executive Director Alaska Municipal League 217 2nd St. Juneau, AK 99801 Phone: 586-1325 POSITION STATEMENT: Answered questions on HB 450 DUGAN PETTY, Director General Services Division Department of Administration P.O. Box 110210 Juneau, AK 99811-0210 Phone: 465-2250 POSITION STATEMENT: Addressed HB 369 PREVIOUS ACTION BILL: HB 512 SHORT TITLE: COURT COSTS/ATTORNEY FEES:PREVAILING PTY SPONSOR(S): STATE AFFAIRS JRN-DATE JRN-PG ACTION 02/28/94 2550 (H) READ THE FIRST TIME/REFERRAL(S) 02/28/94 2551 (H) STATE AFFAIRS, JUDICIARY 03/12/94 (H) STA AT 08:00 AM CAPITOL 102 BILL: HB 494 SHORT TITLE: ALASKA PENSION INVESTMENT AUTHORITY SPONSOR(S): REPRESENTATIVE(S) MACLEAN JRN-DATE JRN-PG ACTION 02/14/94 2380 (H) READ THE FIRST TIME/REFERRAL(S) 02/14/94 2380 (H) STATE AFFAIRS, FINANCE 03/12/94 (H) STA AT 08:00 AM CAPITOL 102 BILL: HB 450 SHORT TITLE: INVESTMENT POOLS FOR PUBLIC ENTITIES SPONSOR(S): FINANCE JRN-DATE JRN-PG ACTION 02/09/94 2315 (H) READ THE FIRST TIME/REFERRAL(S) 02/09/94 2315 (H) STATE AFFAIRS, FINANCE 02/24/94 (H) STA AT 08:00 AM CAPITOL 102 03/12/94 (H) STA AT 08:00 AM CAPITOL 102 BILL: HB 369 SHORT TITLE: STATE LEASES & LEASE-PURCHASE FINANCING SPONSOR(S): RULES BY REQUEST OF LEGISLATIVE BUDGET AND AUDIT JRN-DATE JRN-PG ACTION 01/14/94 2061 (H) READ THE FIRST TIME/REFERRAL(S) 01/14/94 2062 (H) STATE AFFAIRS, FINANCE 03/12/94 (H) STA AT 08:00 AM CAPITOL 102 BILL: HB 342 SHORT TITLE: EXTEND TOURISM MARKETING COUNCIL SPONSOR(S): REPRESENTATIVE(S) KOTT,Hudson,Ulmer JRN-DATE JRN-PG ACTION 01/03/94 2017 (H) PREFILE RELEASED 01/10/94 2017 (H) READ THE FIRST TIME/REFERRAL(S) 01/10/94 2017 (H) L&C, STATE AFFAIRS, FINANCE 01/20/94 (H) L&C AT 03:00 PM CAPITOL 17 01/20/94 (H) MINUTE(L&C) 01/21/94 2122 (H) L&C RPT 6DP 01/21/94 2122 (H) DP: MACKIE, HUDSON, WILLIAMS, SITTON, 01/21/94 2122 (H) DP: PORTER, GREEN 01/21/94 2122 (H) -ZERO FISCAL NOTE (DCED) 1/21/94 01/21/94 2122 (H) REFERRED TO STATE AFFAIRS 03/12/94 (H) STA AT 08:00 AM CAPITOL 102 ACTION NARRATIVE TAPE 94-28, SIDE A Number 000 CHAIRMAN AL VEZEY called the meeting to order at 7:58 a.m. Members present were REPRESENTATIVES KOTT, SANDERS, G. DAVIS, OLBERG, AND B. DAVIS. A quorum was present. HB 512 - COURT COSTS/ATTORNEY FEES: PREVAILING PARTY CHAIRMAN VEZEY opened HB 512, introduced by the House State Affairs Committee, for discussion. VICE CHAIRMAN KOTT was given control of the gavel so CHAIRMAN VEZEY could address HB 512. CHAIRMAN VEZEY, HOUSE STATE AFFAIRS COMMITTEE, said HB 512 codifies the legislature's intent in passing SCR 4. He noted SCR 4 was a recommendation to the Supreme Court, and HB 512 would make the same action into law. The House passed HB 512 by a 33 to 4 vote. Number 045 REPRESENTATIVE GARY DAVIS inquired why the original SCR 4 was not in bill form. Number 053 CHAIRMAN VEZEY responded that a resolution requires a majority vote to pass the legislature and a bill changing a court rule requires a two-thirds vote. He believed the original sponsor of SCR 4 had felt a two-thirds vote was not attainable. He emphasized HB 512 would not pass without a two-thirds vote. Number 070 CHAIRMAN VEZEY moved to pass HB 512 from committee with individual recommendations. Number 073 VICE CHAIRMAN PETE KOTT recognized the motion and asked the committee secretary to call the roll. IN FAVOR: VEZEY, KOTT, B. DAVIS, G. DAVIS, SANDERS, OLBERG. ABSENT: ULMER The House State Affairs Committee passed HB 512, with individual recommendations. VICE CHAIRMAN KOTT returned control of the gavel to CHAIRMAN VEZEY. HB 494 - ALASKA PENSION INVESTMENT AUTHORITY CHAIRMAN VEZEY opened HB 494 for discussion. Number 099 DAVID HARDING, STAFF, REPRESENTATIVE EILEEN MACLEAN, PRIME SPONSOR, addressed HB 494. He stated HB 494 will lead to greater long-term financial stability, and more appropriate lines of authority for the state's pension investment system. With HB 494, the Alaska State Pension Investment Board (ASPIB) would be moved out of the Department of Revenue (DOR), and reconstituted as a separate authority. This separation will allow employees of the Pension Authority to focus solely on the investment of the $7 billion in PERS, TRS, and SBS funds they manage. The Treasury Division, DOR, will be able to focus on other functions, including the management of cash balances in the general fund. New positions would be created, but the DOR analysis shows the net result would be an annually general fund gain of $10 million or more. He thought the private sector would agree with the gain created by HB 494 and the state should follow suit. MR. HARDING explained there would be a political consideration, in addition to the fiscal consideration. The current ASPIB structure and its' membership has a smooth relationship with the DOR; however, he noted there could be problems in the future. Presently, the ASPIB makes decisions which are carried out solely by people would work for the commissioner of Revenue. He expressed the current structure was not stable and people would be better served if it was improved. (REPRESENTATIVE ULMER arrived at 8:10 a.m.) MR. HARDING outlined an amendment REPRESENTATIVE MACLEAN proposed for HB 494, due to an oversight in drafting. Page 2, line 20, would be amended to read, "council and the executive director," and "Department of Revenue" would be deleted. This amendment would make HB 494 consistent throughout in its separation of the Pension Authority from the DOR. Number 211 CHAIRMAN VEZEY clarified that on page 2, line 20, the "Department of Revenue" would be deleted. He questioned the connection between the expenditures and the revenues in the fiscal note. Number 221 MR. HARDING could not answer and deferred the question to another witness. Number 232 BILL CORBUS, CHAIRMAN, ALASKA STATE PENSION INVESTMENT BOARD, supported HB 494. He stated the ASPIB has approximately $7 billion in assets for which it has fiduciary responsibility. There are approximately 57,000 beneficiaries, retired or current. MR. CORBUS stated the ASPIB was created by the passage of HB 329 in 1992. Trustees consist of two members of the Public Employee's Pension System, two members from the Teacher's Retirement System, three members appointed by the Governor and the commissioner of Revenue. As of December 31, 1993, the ASPIB has $6.8 billion in defined benefits, $150 million in defined contribution moneys, and $900 million dollars in the Supplemental Benefits program. MR. CORBUS stated as of December 31, 1993, the ASPIB had returns in excess of 14 percent, which is greater than that earned by the permanent fund. MR. CORBUS explained HB 494 was proposed because the current structure of the ASPIB maintains that the staff works for the commissioner of Revenue, not the ASPIB. The ASPIB has fiduciary responsibility for these large sums of money, however, they do not have the authority to retain or let go any of the staff. He expressed it was essential, for the future, for the ASPIB to be able to manage their staff. MR. CORBUS stated a separate authority should be created with the same Board of Directors, and they should have the ability to hire an executive director and manage their own staff. MR. CORBUS said the ASPIB unanimously passed a resolution in an effort toward this separation, which has led to the introduction of HB 494. Number 315 GAIL OBA, VICE CHAIRMAN, ALASKA STATE PENSION INVESTMENT BOARD, commented on HB 494. She stated HB 494 merely substitutes the executive director and employees in the proposed authority, for the commissioner of Revenue. She noted there are no increases in benefits for any of the planned beneficiaries, and there would not be any embedded costs for either the employers or the employees. The ASPIB believes this will provide a better structure for managing the funds for which they have fiduciary responsibility. MS. OBA stated the staff of the DOR conducted a survey to confirm the fiduciary responsibility and structure of large public retirement funds. Five questions were asked of 46 participants, and all of these public funds have assets of over $5 billion. The participants were selected from a Pensions & Investments publication. Questions were as follows: 1) In regard to investment of pension funds, who is the fiduciary? 2) If a board is their subcommittee? 3) If an individual is a position elected or appointed? 4) To whom does the chief administrative officer report? 5) To whom do investments staff report? MR. OBA explained the survey indicated that 37 of the 46 pension funds had boards with fiduciary responsibility and staff reporting directly to the administrative officer, hired by the board. Only six had sole fiduciaries, either state treasurers or chief financial officers, with staff reporting directly to them. Of these six, four were elected and two were appointed. The Oregon PERS, New York City, and the ASPIB were the only three of the 36 pension funds which had boards where the staff reported directly to the treasurer or another individual. Number 366 CHAIRMAN VEZEY stated he would like a copy of the ASPIB resolution. Number 370 MR. CORBUS replied he would provide CHAIRMAN VEZEY with one. Number 373 CHAIRMAN VEZEY asked if the term "participants" in relation to 57,000 meant beneficiaries, both currently employed and retired. MR. CORBUS affirmed CHAIRMAN VEZEY. Number 380 CHAIRMAN VEZEY asked the number of people currently retired and receiving benefits. MR. CORBUS did not know. Number 382 CHAIRMAN VEZEY asked MR. CORBUS to explain what would happen in the change from a board to a corporate structure. He believed staff would be transferred without change and questioned why operating costs would increase. MR. CORBUS deferred the question to DARREL REXWINKEL. Number 399 CHAIRMAN VEZEY asked if the current structure allows the commissioner of Revenue to exert undue influence upon his work. Number 409 MR. CORBUS answered the ASPIB feels that potential exists. Number 412 MS. OBA rephrased the commissioner of Revenue did not have undue influence, but a future commissioner might thwart the implementation of ASPIB policies. Number 425 CHAIRMAN VEZEY asked DARREL REXWINKEL to be the next individual to testify. Number 434 DARREL REXWINKEL, COMMISSIONER DEPARTMENT OF REVENUE, commented on HB 494. He stated the separation as proposed in HB 494 was considered in 1991 as SB 18, but it was ultimately vetoed for two reasons; board composition and the cost of creating a separate corporation. In 1992, SB 329 was passed which created a balance investment board which took care the board composition. He noted the cost is still a problem in creating a separate authority; however, both SB 18 and SB 329 passed with a substantial majority. MR. REXWINKEL clarified the resolution passed by the ASPIB was a motion to request legislation to create a separate authority. MR. REXWINKEL addressed the two fiscal notes for HB 494. One was for revenue operations or treasury management, and the other is for the investment board. He explained the discrepancy with the addition of employees without an increase in workload. The ASPIB advisory council deduced the board was very close to being fiduciarily irresponsible due the already low amount of staff they have. He assumed if the ASPIB had more staff they could generate more revenue for the state. He noted HB 494 would force the increase in cost, which would give the DOR the capability to add revenues to the State of Alaska. Currently, staff is divided between different duties. With HB 494, however, the employees would be solely focused on the investment management process. He added with $7 billion, the cost of $497,000 for the investment board, would amply be covered even with 1/100th of a percent increase in earnings, $700,000. He stated the 1993 ASPIB returns, which were in excess of 14 percent, landed them in the top eight percent of an independent performance measurement firm hired by the Pension Board. MR. REXWINKEL stated the ASPIB is concerned because they would like the increased returns to continue. Increasing the funded status of the programs helps reduce the employer contribution rate, thereby providing a cost savings to the state of Alaska and all of the participating employers. MR. REXWINKEL referred to an organizational chart. The Permanent Fund program has 27 positions in their FY 95 budget, therefore the amount of positions required in HB 494 would still be relatively light. He accounted for some of the additional cost in the expansion of work space necessary to accommodate more employees. They are not being charged for the current space in the State Office Building, but new space would have to be acquired by the ASPIB. MR. REXWINKEL agreed with the fiscal note for treasury operations costing $398,000, with a net increase of about seven positions. The Treasury Division would need these positions because the present positions, which are more dedicated toward the pension funds, would go away. Investment officers would also have to be added to focus on the cash flow requirements of Alaska. As these officers coordinate with the agencies, determining the nature of the cash flow, they would be able to invest further out on the yield curve achieving incremental returns. He emphasized an incremental return of one basis point with the $7 billion would equal $700,000. The portfolio staff believes $10 million would be the minimum increase they could return to the nonpension fund moneys. He pointed out the actual figures could run $10-30 million. MR. REXWINKEL stated the ASPIB and the DOR would have reciprocal functions, whereby if one system were to go down, they could share the other operative one. He stated the example of the DOR's reciprocal relationship it shares with the Permanent Fund Division with respect to data processing. Number 565 CHAIRMAN VEZEY assumed some of the current DOR employees would become employees of the new corporation. Number 569 MR. REXWINKEL replied CHAIRMAN VEZEY was correct. Number 570 CHAIRMAN VEZEY clarified the employees would be paid for by the ASPIB out of pension funds. Number 572 MR. REXWINKEL affirmed CHAIRMAN VEZEY, and noted there would be a net increase of about one half of a full-time equivalent position in the Pension Board. The fiscal note, however, states it would increase by one. Number 578 CHAIRMAN VEZEY stated, regarding the ASPIB, DOR, fiscal note, FY 95 operating expenditures would be $497,000 and capital expenditures would be $388,000, to set up the office. He clarified all of the money would come from the pension system. Number 581 MR. REXWINKEL affirmed CHAIRMAN VEZEY, and stated there would be no general fund money. Number 590 CHAIRMAN VEZEY examined the Treasury Management, DOR, fiscal note and made clear MR. REXWINKEL stated positions would be added in the Treasury Division to make up for losing those positions. Number 594 MR. REXWINKEL agreed and clarified a couple of additional positions would be added to the Treasury Division to provide portfolio management individuals. A total of eight positions would be added. Number 598 CHAIRMAN VEZEY asked if under component #1961 a total of eight people would leaving the DOR and transferring to ASPIB. MR. REXWINKEL stated he thought there be more employees leaving, because most employees in the Treasury Division, except in cash management, are allocated between treasury general fund moneys and pension fund moneys. A lot of positions and costs are being divided amongst different program categories so that programs pay for their appropriate share of the function. He clarified the pension funds could not be charged anymore than the services they are receiving. The positions were divided by their percentage of work, therefore; the ASPIB, DOR, fiscal note reads one position would be added because of this analysis. Number 627 CHAIRMAN VEZEY clarified the net result would be eight additional positions. Number 629 MR. REXWINKEL stated yes, but it would really amount to seven full-time equivalent employees. He pointed the added positions to Treasury would provide for better cash management and more positive returns. Number 650 CHAIRMAN VEZEY believed the pension funds should be self supporting. He asked if the new authority would have approximately the equivalent of eight full-time employees. Number 655 MR. REXWINKEL corrected, by referring to the organizational chart, the new authority would have 20 employees. Treasury Division would be left with 17 positions total. He clarified cash management individuals would process warrants, maintain bank accounts, and run the regular treasury functions. Number 663 CHAIRMAN VEZEY examined the $278,000 increase to the DOR for the separation. Number 670 MR. REXWINKEL explained the cost was minor compared to this opportunity to earn more money. The state would not want to invest short-term money "long", need it, and then have to sell the securities and realize the loss. Number 683 CHAIRMAN VEZEY stated general fund moneys definitely need to be short-term. MR. REXWINKEL continued the difference between a 30-day investment compared to a 180-day investment could be substantial with relation to the current interest environment. Number 687 REPRESENTATIVE HARLEY OLBERG clarified at the present time the DOR has 29 employees working on both pensions and treasury. Number 690 MR. REXWINKEL replied REPRESENTATIVE OLBERG was approximately correct. Number 691 REPRESENTATIVE OLBERG clarified 20 of those positions would leave the DOR, and they would add 7 positions to the 8-9 remaining positions after the transfer. Number 694 MR. REXWINKEL responded the exact number would depend upon the decision by the investment board and who they hire as the executive director. The exact transfer amount would depend upon the negotiations. TAPE 94-28, SIDE B Number 000 REPRESENTATIVE OLBERG asked, referring to the Treasury Division within the DOR, if most divisions had a director. Number 011 MR. REXWINKEL responded no, instead a director, the DOR sequentially has a commissioner, deputy commissioner, comptroller, debt manager, cash manager, and portfolio manager. The portfolio manager would go under the cash manager in the revised organization chart. The deputy commissioner also functions in child support. He noted the deputy commissioner is somewhat elevated from a director because of the importance of the treasury function. Those positions just under the deputy commissioner he said could be termed as directors. MR. REXWINKEL pointed out the impressiveness of the FY 93 return of approximately $150 million more than what all the employers in the state paid into the pension fund. Increasing returns will reduce costs two years in the future. REPRESENTATIVE OLBERG clarified Treasury would only manage the general fund. He asked if the basis point values were based only on that amount. Number 071 MR. REXWINKEL responded yes, but on top of the general fund there are more funds within the general investment fund. Number 075 CHAIRMAN VEZEY noted there is a difference between the general fund and the general investment fund. Number 076 MR. REXWINKEL confirmed CHAIRMAN VEZEY. Number 078 REPRESENTATIVE OLBERG clarified the $10 million increment is based on the general investment fund and has nothing to do with pensions. Number 081 MR. REXWINKEL said REPRESENTATIVE OLBERG was correct, the general investment and a few other minor funds. Number 086 REPRESENTATIVE FRAN ULMER commented this change has been worked on for nearly four years. She mentioned, in reference to the veto letter from June 1991, that MR. REXWINKEL's past principle objection dealt with the philosophical concept of shared fiduciary responsibility, as opposed to money. She quoted the Governor as saying, "It appears the real purpose of SB 18 is to create shared fiduciary responsibility. Shared fiduciary boards have been involved in imprudent and questionable actions throughout the country." She asked why he had changed his mind when faced with HB 494. Number 114 MR. REXWINKEL answered, in the past, one of the major concerns was the board composition. The bill that passed in 1992 created an eight member board, four appointed by the Governor and four elected by the beneficiaries. He felt this was a good board composition. He related to the survey MS. OBA outlined, and noticed out of 46 participants, 36 had boards and only 6 still had a sole fiduciary. He noted these funds were operating well. MR. REXWINKEL stated as he has worked with the board and it has been successful, it has become apparent the board needs to have their own staff to prevent their policies from being thwarted by a future commissioner. He is better educated about the board and the cost structure for incremental returns now. Number 168 REPRESENTATIVE ULMER clarified that MR. REXWINKEL is persuaded that the money needed to provide the management is justified in terms of the likely improved result. MR. REXWINKEL said REPRESENTATIVE ULMER was correct, and the money was also for the board to carry out their fiduciary responsibility. Number 177 REPRESENTATIVE ULMER referenced the Governor's 1991 veto letter and how it specified the lack of benefit to the beneficiaries for the amount of money that would be spent. The letter also relates to the imprudent investments as the result of shared fiduciary responsibilities. She understood, however, MR. REXWINKEL's reasoning for his change in opinion. Number 190 MR. REXWINKEL commented there have been public funds which have made inappropriate investments, but the sole fiduciary problem was resolved in 1992 when SB 329 was passed and a board was formed. The situation in 1991, where the commissioner of Revenue was the sole fiduciary, is much different than the current structure. MR. REXWINKEL stated the pension fund has had relatively good returns, and excellent returns over the past two years. The ASPIB fixed income portfolio managers have been in the top 25 percent continuously over the last five years. He pointed out equity management is improving. The benefits from the substantial invested moneys should continue for the beneficiaries. What is good for the beneficiaries, is also good for the state and participating employers. Number 230 REPRESENTATIVE ULMER felt deferred compensation was remaining status quo. She asked if it would continue to be managed by the new corporation. MR. REXWINKEL replied deferred compensation would also be managed by the investment board, so it will be active. He noted there are now 6-7 alternatives for the participating employees to invest in with a substantially reduced cost, by cooperation from the Department of Administration. He felt the lack of education may be a problem because the employees do not know of the risk factors. MR. REXWINKEL did not believe there would be very much opposition to HB 494. He stated some people thought the permanent fund should be separated, instead of the pension authority. He explained the difference between a permanent fund mandate and a pension fund mandate. With a pension mandate, the moneys have to be handled in the best interest of the beneficiaries and there is an obligation for benefits to be paid as they come due. In comparison to the permanent fund, the pension funds have a long-term perspective without a legal list, a prudent expert rule of investment, a different basis of accounting, a different group of constituency and they are able to generate better returns. Number 313 ROBERT STORER, CHIEF INVESTMENT OFFICER DEPARTMENT OF REVENUE, commented on HB 494. He stated the shape in the normal yield curve in fixed income securities, is normally positive, i.e., the longer the maturity, the higher the expected rate of return. Those who can afford to invest in a longer maturity would be served. The benefits of better cash flow analysis, which will add incremental returns, will come in these ways: 1) keeping a minimum amount of cash on hand, which is typically the lowest rate of return in a normal yield curve environment; and 2) the staff will be able take additional maturity risk on the entire portfolio, with their gained information. Number 357 CHAIRMAN VEZEY mentioned the change in their accounting method for evaluating its assets in terms of its fixed income securities, the ASPIB underwent in 1992. He asked if he was correct. MR. REXWINKEL responded the market basis of accounting has always been used for the pension funds. Number 364 MR. STORER stated the procedure of computing income, how the income is distributed into an index, was reevaluated on July 1, 1993. Number 369 CHAIRMAN VEZEY remembered the accounting method was changed in 1993 starting fiscal year 1992. Number 372 MR. REXWINKEL clarified CHAIRMAN VEZEY's information could be found in the Actuarial Evaluation Report. He noted the DOR disagreed with their evaluation of assets. Number 373 CHAIRMAN VEZEY pointed out the two reports did not agree on the amount of assets. Number 374 MR. REXWINKEL made clear the DOR assets are accounted for on a market value basis, compared to the permanent fund's report accounting for cost. The actuarial report is smoothed out so the one year investment performance does not have a tremendous annual effect on the pension contributions made by the participating employers. He said the actuaries changed some of their evaluations because they agreed with the DOR that they were not at the proper market rate in their analysis. Number 389 REPRESENTATIVE OLBERG asked if the DOR could report on any given day the balance and composition of the general fund. Number 391 MR. STORER replied the DOR could report with market yield of every security. REPRESENTATIVE OLBERG inquired if the annual yield of the general investment fund was tracked separately so the rate fluctuations were apparent. Number 397 MR. STORER answered the DOR tracks not only on an annual basis, but also on a monthly basis. Number 400 REPRESENTATIVE OLBERG assured the benefits of HB 494 would be seen in less than a year. Number 402 MR. STORER affirmed the benefits would be apparent in less than a year; however, in incremental portions, not the full $10 million. Number 407 CHAIRMAN VEZEY introduced STEVE MCPHETRES as the next individual to testify. ATEVE MCPHETRES, EXECUTIVE DIRECTOR ALASKA COUNCIL OF SCHOOL ADMINISTRATORS, supported HB 494. He stated the Alaska Council of School Administrators wanted to ensure there will be stable amounts of money for the benefit programs in the future. From their analysis, HB 494 would provide this stability, therefore they are in support. Number 438 REPRESENTATIVE G. DAVIS asked what people the Teachers Retirement System (TRS) included. MR. MCPHETRES answered, from his organization the TRS includes all the principals, business managers, special education directors, district level people and superintendents. Number 445 REPRESENTATIVE OLBERG questioned if a superintendent's retirement varied from a teacher's retirement. MR. MCPHETRES responded the retirement for both superintendents and teachers are based on the same calculation. Number 451 REPRESENTATIVE OLBERG questioned if both groups were lumped into the same plan, or if MR. MCPHETRES was only representing one group. CHAIRMAN VEZEY clarified MR. MCPHETRES was before the committee representing the Alaska Council on School Administrators. He clarified their organization consists of 700 members which are members of the TRS. He believed the TRS has five pension programs covered by the board. CLAUDIA DOUGLAS, PRESIDENT NEA ALASKA, supported HB 494. NEA Alaska, representing both the TRS and the Public Employees Retirement System (PERS), supported changing the ASPIB to the Alaska Pension Investment Authority. She emphasized HB 494 has potential for enhanced financial stability, continuity, better accountability, member confidence and enhanced member economic security. Number 480 CHAIRMAN VEZEY stated there were two separate issues in HB 494; creating the authority and setting the staff level. He recognized REPRESENTATIVE MACLEAN's amendment recommendation, whereby on page 2, line 20, a period would be inserted after "director," and the words "and the Department of Revenue" would be deleted. He stated this amendment did seem to be the original intent of the drafter; however, "and the Department of Revenue" had failed to get deleted. Number 493 REPRESENTATIVE B. DAVIS so moved the amendment. Number 493 CHAIRMAN VEZEY asked the committee secretary to call the roll. IN FAVOR: VEZEY, KOTT, ULMER, B. DAVIS, G. DAVIS, SANDERS, OLBERG. CHAIRMAN VEZEY announced the amendment to HB 494 had passed. Number 501 REPRESENTATIVE ULMER moved HB 494 be passed from committee as amended with individual recommendations, asking unanimous consent. Number 504 CHAIRMAN VEZEY clarified the bill which the committee was acting on would be a committee substitute, reflecting the amendment. He modified REPRESENTATIVE ULMER's motion to reflect the correction. He asked the committee secretary to call the roll. IN FAVOR: VEZEY, KOTT, ULMER, B. DAVIS, G. DAVIS, SANDERS, OLBERG. CHAIRMAN VEZEY announced CSHB 494 passed from the House State Affairs Committee. CHAIRMAN VEZEY called a recess at 9:15 a.m. The meeting reconvened at 9:20 a.m. REPRESENTATIVES G. DAVIS and OLBERG were present. 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. HB 369 - STATE LEASES & LEASE-PURCHASE FINANCING CHAIRMAN VEZEY opened HB 369 for discussion. He announced a representative of the sponsor was not present to testify, but DUGAN PETTY was present. Number 201 DUGAN PETTY, DIRECTOR, DIVISION OF GENERAL SERVICES, DEPARTMENT OF ADMINISTRATION (DOA), addressed HB 369. He stated the DOA has been in support of the companion bill, SB 247 in the Senate, after some minor amendments. He directed the committee to section 6 & 7 of HB 369, which clarifies the relationship of current law between leasing and lease- financing. He stated HB 369 would create two sections in AS 36.30, one dealing with the lease of real property, and the other dealing with lease-financing of real property. He emphasized AS 36.30 was beginning to get fairly confusing in current law. MR. PETTY recommended amendments to section 7 of HB 369, which have been made in SB 247. He recommended on page 6, line 16 which states "when evaluating proposals to acquire property under lease-purchase," that the term "real" be inserted before "property." He recommended the same amendment on page 6, line 22. On page 7, line 9, he recommended inserting, after the word "agreement," "to acquire real property." Under the current definition of lease-purchase or lease-financing in AS 36.30, transactions for copier leases which cost between $100-$1,700 a month are included. The DOA has approximately 1,000 of these copier agreements by the agencies. He did not believe it was the intent of HB 369 to include those sorts of transactions approved by law. HB 369 was intended to focus on real property. Number 266 CHAIRMAN VEZEY stated HB 369 would be involved with items such as computers, copy machines, and road maintenance equipment. He asked if there is not already a $1 million cap on lease-purchase agreements. He thought HB 369 would not apply to a purchase of less than $1 million. MR. PETTY responded the $1 million cap affects the lease side. He pointed out; however, with the current form of HB 369 there is no cap whatsoever. Under section 7, any lease- purchase transaction regardless of dollar amount would require approval by the legislature. Number 282 CHAIRMAN VEZEY clarified the state would not require legislative approval to lease-purchase a $1.5 million excavator. MR. PETTY replied, as HB 369 is written, an approval would be required from the legislature to acquire a $1.5 million excavator or a $100 copier contract applied to the definition of lease-purchase or lease agreement. CHAIRMAN VEZEY believed a dollar cap might be more effective than a blanket approval. Number 297 REPRESENTATIVE OLBERG asked if the dollar cap did not already exist. MR. PETTY replied yes, for lease-financing with a cap of $1 million a year, and $10 million over the term of the lease. Number 304 REPRESENTATIVE OLBERG inquired if HB 369 was termed the "Wildwood Bill." CHAIRMAN VEZEY answered that terminology for HB 369 is in the sponsor statement by RANDY WELKER. He quoted, "This legislation has been responsible for ongoing review and concern over lease-purchases of the Wildwood Correction Center, and the Court Plaza Building." He asked if MR. PETTY had his proposed amendment in writing. Number 319 MR. PETTY did not, but he marked on his copy of the HB 369. Number 339 CHAIRMAN VEZEY clarified the recommended amendments were as follows: Page 6, line 16, shall read, "when evaluating proposals to acquire real property..."; page 7, line 9, shall read, "may not enter into lease-purchase agreement to acquire real property..." Number 347 MR. PETTY added page 6, line 22, shall read, "whether acquisition of the real property by lease-purchase agreement..." Number 350 REPRESENTATIVE G. DAVIS moved to adopt the requested amendments to HB 369. Number 353 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 the requested amendments were adopted to HB 369 and a committee substitute will be drawn up to reflect them. Number 362 REPRESENTATIVE G. DAVIS moved to pass CSHB 369 from committee with individual recommendations and attached fiscal notes. 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 CSHB 369 passed from the House State Affairs committee. ADJOURNMENT CHAIRMAN VEZEY adjourned the meeting at 9:57 a.m. BILLS NOT HEARD HB 342: "An Act extending the termination date of the Alaska Tourism Marketing Council."