Legislature(2003 - 2004)

03/02/2004 08:00 AM House STA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                    ALASKA STATE LEGISLATURE                                                                                  
             HOUSE STATE AFFAIRS STANDING COMMITTEE                                                                           
                         March 2, 2004                                                                                          
                           8:00 a.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Representative Bruce Weyhrauch, Chair                                                                                           
Representative Jim Holm, Vice Chair                                                                                             
Representative John Coghill                                                                                                     
Representative Bob Lynn                                                                                                         
Representative Paul Seaton                                                                                                      
Representative Ethan Berkowitz                                                                                                  
Representative Max Gruenberg                                                                                                    
MEMBERS ABSENT                                                                                                                
All members present                                                                                                             
COMMITTEE CALENDAR                                                                                                            
HOUSE BILL NO. 422                                                                                                              
"An  Act  repealing the  special  subaccount  established in  the                                                               
constitutional  budget reserve  fund; relating  to the  powers of                                                               
the Department  of Revenue for  the investment of amounts  in the                                                               
constitutional  budget   reserve  fund;  and  providing   for  an                                                               
effective date."                                                                                                                
     - HEARD AND HELD                                                                                                           
HOUSE BILL NO. 466                                                                                                              
"An Act relating to investments  of Alaska permanent fund assets;                                                               
and providing for an effective date."                                                                                           
     - HEARD AND HELD                                                                                                           
HOUSE BILL NO. 423                                                                                                              
"An Act relating  to accidents involving the vehicle  of a person                                                               
under the influence  of an alcoholic beverage;  and providing for                                                               
an effective date."                                                                                                             
     - HEARD AND HELD                                                                                                           
OVERVIEW: DEPARTMENT OF PUBLIC SAFETY                                                                                           
     - CANCELLED                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: HB 422                                                                                                                  
SHORT TITLE: BUDGET RESERVE FUND INVESTMENT                                                                                     
SPONSOR(S): FINANCE                                                                                                             
02/02/04       (H)       READ THE FIRST TIME - REFERRALS                                                                        
02/02/04       (H)       STA, FIN                                                                                               
02/10/04       (H)       STA AT 8:00 AM CAPITOL 102                                                                             
02/10/04       (H)       Scheduled But Not Heard                                                                                
02/26/04       (H)       STA AT 8:00 AM CAPITOL 102                                                                             
02/26/04       (H)       Heard & Held                                                                                           
02/26/04       (H)       MINUTE(STA)                                                                                            
03/02/04       (H)       STA AT 8:00 AM CAPITOL 102                                                                             
BILL: HB 466                                                                                                                  
SHORT TITLE: PERMANENT FUND INVESTMENTS                                                                                         
SPONSOR(S): RULES BY REQUEST OF LEG BUDGET & AUDIT                                                                              
02/16/04       (H)       READ THE FIRST TIME - REFERRALS                                                                        
02/16/04       (H)       STA, FIN                                                                                               
02/26/04       (H)       STA AT 8:00 AM CAPITOL 102                                                                             
02/26/04       (H)       Scheduled But Not Heard                                                                                
03/02/04       (H)       STA AT 8:00 AM CAPITOL 102                                                                             
BILL: HB 423                                                                                                                  
SHORT TITLE: TAXICAB DRIVER LIABILITY                                                                                           
SPONSOR(S): REPRESENTATIVE(S) ANDERSON                                                                                          
02/02/04       (H)       READ THE FIRST TIME - REFERRALS                                                                        
02/02/04       (H)       JUD                                                                                                    
02/02/04       (H)       STA REFERRAL ADDED AFTER JUD                                                                           
02/09/04       (H)       REFERRAL ORDER CHANGED                                                                                 
02/09/04       (H)       STA, JUD                                                                                               
02/10/04       (H)       STA AT 8:00 AM CAPITOL 102                                                                             
02/10/04       (H)       <Bill Hearing Postponed>                                                                               
03/02/04       (H)       STA AT 8:00 AM CAPITOL 102                                                                             
WITNESS REGISTER                                                                                                              
TOMAS H. BOUTIN, Deputy Commissioner                                                                                            
Office of the Commissioner                                                                                                      
Department of Revenue                                                                                                           
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Answered questions on behalf of the                                                                        
department during the hearing on HB 422.                                                                                        
JAMES ARMSTRONG, Staff                                                                                                          
to Representative Bill Williams                                                                                                 
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:   Testified  on behalf  of the  House Finance                                                               
Committee, sponsor.                                                                                                             
ROBERT D. STORER, Executive Director                                                                                            
Alaska Permanent Fund Corporation (APFC)                                                                                        
Department of Revenue                                                                                                           
Juneau, Alaska                                                                                                                  
POSITION  STATEMENT:    Testified  on behalf  of  the  department                                                               
during the hearing on HB 466.                                                                                                   
RONALD W. LORENSEN, Attorney at Law                                                                                             
Simpson, Tillinghast, Sorensen & Longenbaugh, P.C.                                                                              
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Addressed the changes sought in HB 466.                                                                    
JIM SHINE JR., Staff                                                                                                            
to Representative Tom Anderson                                                                                                  
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION   STATEMENT:      Presented   HB  423   on   behalf   of                                                               
Representative Anderson, sponsor.                                                                                               
DARWIN BIWER, Board Member                                                                                                      
Cabaret Hotel Restaurant & Retailers Association                                                                                
Anchorage, Alaska                                                                                                               
POSITION  STATEMENT:   Spoke in  support of  HB 423  and answered                                                               
questions from the committee.                                                                                                   
ACTION NARRATIVE                                                                                                              
TAPE 04-25, SIDE A                                                                                                            
Number 0001                                                                                                                     
CHAIR  BRUCE WEYHRAUCH  called the  House State  Affairs Standing                                                             
Committee  meeting  to  order  at   8:00  a.m.    Representatives                                                               
Weyhrauch, Holm,  Seaton, and  Lynn were present  at the  call to                                                               
order.     Representatives  Coghill,  Berkowitz,   and  Gruenberg                                                               
arrived while the meeting was in progress.                                                                                      
HB 422-BUDGET RESERVE FUND INVESTMENT                                                                                         
Number 0060                                                                                                                     
CHAIR WEYHRAUCH  announced that the  first order of  business was                                                               
HOUSE  BILL NO.  422, "An  Act repealing  the special  subaccount                                                               
established in  the constitutional budget reserve  fund; relating                                                               
to the powers of the Department  of Revenue for the investment of                                                               
amounts in the constitutional budget  reserve fund; and providing                                                               
for an effective date."                                                                                                         
TOMAS   H.   BOUTIN,   Deputy   Commissioner,   Office   of   the                                                               
Commissioner, Department of Revenue,  stated he would address the                                                               
four  questions about  HB 422  that Representative  Berkowitz had                                                               
emailed to  the Department of  Revenue.  The first  question that                                                               
he addressed  related to  the current  and projected  returns for                                                               
the Constitutional  Budget Reserve  Fund (CBRF), and  the returns                                                               
for the subaccount that HB 422  would be eliminating.  Mr. Boutin                                                               
stated  that  the  Department  of  Revenue  usually  doesn't  get                                                               
together  and make  projections for  the funds.   He  pointed out                                                               
that the Department  of Revenue does make  projections on returns                                                               
for the  general fund and the  CBRF in the Revenue  Sources Book.                                                               
He  said the  last time  that the  Department of  Revenue did  an                                                               
official projection  on the  CBRF was for  the Fall  2003 Revenue                                                               
Sources Book.   Citing the information  on page 7 of  the Revenue                                                               
Sources Book,  Mr. Boutin  stated that  the three-year  return on                                                               
the  subaccount has  been  1.8 percent  and  has shown  "textbook                                                               
volatility,"  which can  be  expected from  an  account that  has                                                               
higher risk.   He  stated that  the three-year  annualized report                                                               
for the CBRF showed that the account had a 5.9 percent return.                                                                  
Number 0260                                                                                                                     
MR.  BOUTIN  addressed the  question  regarding  when the  [CBRF]                                                               
account would  be completely  "down" and  require entry  into the                                                               
subaccount.   He  noted  that the  [2003]  fall revenue  forecast                                                               
shows  the entire  CBRF  running out  in May  2007.   Mr.  Boutin                                                               
explained  that   Commissioner  [William]   Corbus  had   made  a                                                               
presentation recently in Fairbanks on  [the status of] the entire                                                               
CBRF.    Mr.  Boutin  stated that  the  department  prepared  the                                                               
handout  for  that  presentation  and that  he  had  some  copies                                                               
available.  He  noted that [the one-page handout  included in the                                                               
committee  packet,   which  shows  two  CBR   subaccount  graphs]                                                               
explained  in detail  how the  CBRF is  forecasted today  to "run                                                               
CHAIR  WEYHRAUCH  stated that  the  annual  return rate  for  the                                                               
subaccount cited  in the annual  report 2003 seemed  aberrant and                                                               
he asked why that was.                                                                                                          
MR. BOUTIN  stated that equities  had really taken  off recently,                                                               
which is reflected  in the rate.  He cited  the subaccount graphs                                                               
in  the packet  and  noted  that the  subaccount  went below  the                                                               
initial  investment  shortly after  its  inception  and has  just                                                               
recently  recovered  and risen  above  the  initial $400  million                                                               
Number 0412                                                                                                                     
MR. BOUTIN  addressed another question,  regarding the  amount of                                                               
money that the Department of  Revenue felt was prudent to require                                                               
as a  minimum balance  for the  CBRF, and  how they  derived that                                                               
balance.  He  stated that the number the  administration is using                                                               
is a $1-billion minimum balance.   He explained that $400 million                                                               
is  required just  for cash  flow  purposes, and  the other  $600                                                               
million is  a result  of the  price volatility of  oil.   He said                                                               
that  the Office  of Management  &  Budget (OMB)  decided on  the                                                               
$600-million figure.                                                                                                            
Number 0506                                                                                                                     
MR. BOUTIN  addressed the final question  previously submitted by                                                               
Representative  Berkowitz, relating  to the  state's bond  rating                                                               
and how it would  be affected by the passage of HB  422.  He said                                                               
that the transfer of funds from  the subaccount to the CBRF would                                                               
have  no  impact  on  the  bond  rating,  especially  since  this                                                               
particular move  would have  the entire fund  at a  fixed income,                                                               
which  suggests more  liquidity.   He  said that  he talked  with                                                               
"government finance  associates" and asked them  about the credit                                                               
rating implications  that HB 422  would carry  with it.   He said                                                               
that government finance  associates didn't see any  impact on the                                                               
state's bond rating.                                                                                                            
Number 0646                                                                                                                     
REPRESENTATIVE BERKOWITZ  asked for further clarification  on the                                                               
$1-billion  figure  that  the administration  was  using  as  the                                                               
minimum amount needed for the CBRF.   He said that he had been to                                                               
the  Conference of  Alaskans and  he saw  no direct  relationship                                                               
illustrated between the $1-billion figure  and anything else.  He                                                               
stated that  at the Fiscal Policy  Caucus, it seemed that  it was                                                               
determined   that    $1.5   billion   was   a    better   number.                                                               
Representative Berkowitz said  that some people want  to link the                                                               
minimum balance  in the CBRF  to general fund spending,  so there                                                               
would  be a  cushion that  is rationally  related to  the state's                                                               
Number 0702                                                                                                                     
MR. BOUTIN explained  that where there was a  zero aggregate draw                                                               
from the  CBRF throughout the year,  there would still be  a need                                                               
for $400  million for cash  flow purposes.  He  explained further                                                               
that early  on in  the fiscal  year, the  state borrows  from the                                                               
CBRF to pay for fire suppression  and federal projects.  He added                                                               
that when the  state is reimbursed by the  federal government, it                                                               
then replenishes  the money  borrowed.   He said  that this  is a                                                               
typical year, except for the  recent oil prices, and $100 million                                                               
was just  reinvested in  the CBRF,  and there  is expected  to be                                                               
another  $100-million  deposit made  into  the  CBRF this  fiscal                                                               
MR.  BOUTIN referred  to [the  second page  - entitled,  "General                                                               
Fund  Cash Sufficiency  With CBRF  Borrowing" -  of a  seven-page                                                               
handout  included in  the committee  packet], which  he said  was                                                               
prepared  for the  Conference of  Alaskans by  the Department  of                                                               
Revenue.   He used that  graph to  illustrate how the  account is                                                               
drawn from  and replenished and  why the need for  a $400-million                                                               
balance  for cash  flow  purposes  is a  reasonable  number.   He                                                               
further  explained that  the OMB  came up  with the  $600-million                                                               
figure  by assessing  the  80 percent  confidence  level for  oil                                                               
price  volatility.   He  said  that it  determined  that a  $600-                                                               
million balance  was necessary to  account for a  one-year change                                                               
in oil prices and the time  necessary for the legislature to deal                                                               
with an  oil price shock.   He said  that these factors  were the                                                               
reasons the  $1-billion minimum  was set,  adding that  it wasn't                                                               
linear  programming or  operations research,  just pretty  simple                                                               
calculus that established that number.                                                                                          
Number 0951                                                                                                                     
REPRESENTATIVE  BERKOWITZ  asked  if there  were  any  statistics                                                               
pertaining to the performance of  the CBRF or the subaccounts for                                                               
the current year.                                                                                                               
MR. BOUTIN  indicated that the  most current figures that  he has                                                               
are found  in the graph with  the end date of  December 31, 2003.                                                               
He stated that  the subaccount had earned a  19.17 percent profit                                                               
for that year.                                                                                                                  
REPRESENTATIVE  BERKOWITZ asked  if  Mr. Boutin  had the  current                                                               
balances of each account.                                                                                                       
MR. BOUTIN said that he didn't have that information with him.                                                                  
CHAIR  WEYHRAUCH  asked if  the  May  2007 projections  mentioned                                                               
earlier would  be extended,  since the  account has  been getting                                                               
such a high return.                                                                                                             
Number 1041                                                                                                                     
MR. BOUTIN  estimated that in  the upcoming spring  forecast, the                                                               
rates will look  better than the fall forecast,  unless there was                                                               
a drastic plummet in oil prices.   He said that he didn't want to                                                               
"forecast a forecast," but he felt  that because of that, the May                                                               
2007,  depletion  forecast could  potentially  be  pushed back  a                                                               
little.   He  pointed out  that  the depletion  date wasn't  that                                                               
sensitive to earnings  on the CBRF, stating that  it is sensitive                                                               
to expenditures versus revenues.                                                                                                
Number 1112                                                                                                                     
CHAIR WEYHRAUCH  asked if there  were going to be  any additional                                                               
fees for management of this money.                                                                                              
MR.  BOUTIN  responded that  the  Department  of Revenue  manages                                                               
about $18  billion, most of  which is  pension funds.   He stated                                                               
that they manage $6 billion of  fixed income "in house."  He said                                                               
that  other types  of investments,  real estate,  private equity,                                                               
and equity  are managed by  external sources.   He said  that the                                                               
Department of Revenue  will save $125,000 by  moving this account                                                               
to a fixed income account and keeping it "in house"                                                                             
CHAIR WEYHRAUCH asked if the  Department of Revenue would need to                                                               
add more employees to manage the larger amount of money.                                                                        
MR.  BOUTIN  stated  that the  Department  of  Revenue,  Treasury                                                               
Division,  has recently  become  the student  loan money  manager                                                               
[for the  state] and  has looked  to add  a fixed  income analyst                                                               
position because of that.                                                                                                       
CHAIR  WEYHRAUCH  explained that  he  had  inquired about  hiring                                                               
additional staff  because, based on his  experience, usually when                                                               
a bill is passed that takes  thousands of dollars to manage there                                                               
is a  need to  hire more  people.  Chair  Weyhrauch said  that he                                                               
wanted  clarification that  that wouldn't  be the  case, although                                                               
the  Department of  Revenue  would be  dealing  with millions  of                                                               
Number 1224                                                                                                                     
REPRESENTATIVE  SEATON   commented  on   what  he  felt   was  an                                                               
underlying  concern from  the committee,  stating  he feels  that                                                               
because the  rate of return  was so  high this last  fiscal year,                                                               
the  committee is  attempting to  be "market  timers" and  assume                                                               
that  it will  continue  to do  as  well.   He  stated that  they                                                               
weren't in a position to do that.                                                                                               
MR. BOUTIN agreed and said, "We are not market timers."                                                                         
Number 1289                                                                                                                     
REPRESENTATIVE HOLM  asked for clarification about  the statement                                                               
Mr. Boutin  made earlier  regarding the cash  flow needing  to be                                                               
$400 million  and the  OMB needing $600  [million].   Citing [the                                                               
fourth page of the previously  mentioned] packet prepared for the                                                               
Conference   of   Alaskans   by  the   Department   of   Revenue,                                                               
Representative Holm asked why the  figures represented there were                                                               
different - $700  million from the OMB and $300  million for cash                                                               
flow.   He  stated that  he didn't  see a  reason that  the $400-                                                               
million  figure  was needed.    Representative  Holm backed  this                                                               
point  up  further  by  noting  pages 10  and  11,  of  the  same                                                               
document, seemed to  show that the balance never  falls more than                                                               
$150 million below zero.  He  asked why the Department of Revenue                                                               
sought $400 million for cash  flow purposes, when the information                                                               
presented doesn't support that.                                                                                                 
MR. BOUTIN  responded that he didn't  feel that there was  a true                                                               
science to forecasting  the market.  He said that  if someone was                                                               
going to argue  that $1 billion wasn't the  right minimum balance                                                               
amount, but $900  million or $1.1 billion is  instead, he doubted                                                               
that there would be that much  of an argument from the Department                                                               
of Revenue.                                                                                                                     
REPRESENTATIVE HOLM asked, "So its  not that critical of a number                                                               
MR. BOUTIN responded  that it was critical to have  a balance; if                                                               
there  was no  balance it  would  effect the  credit rating  that                                                               
Representative   Berkowitz  was   inquiring   about  in   earlier                                                               
testimony.   He said that  he didn't  think that a  transfer like                                                               
the  one that  is suggested  in HB  422 would  effect the  credit                                                               
rating, stating that  the credit rating agencies  are much easier                                                               
to predict than oil volatility.                                                                                                 
Number 1443                                                                                                                     
CHAIR WEYHRAUCH asked  if June 30, 2004, should  be the effective                                                               
date of HB 422.                                                                                                                 
MR.  BOUTIN  responded that  because  the  Department of  Revenue                                                               
doesn't  have  the management  fees  for  the subaccount  in  the                                                               
budget for  fiscal year 2005, the  sooner that HB 422  can become                                                               
effective, the  better.  He  stated that the  way a fund  is run,                                                               
the money  is tapered out  of the  fund; therefore, it  will take                                                               
some  time and  there will  probably  be some  costs absorbed  in                                                               
fiscal year  2005.  Those costs  will increase the longer  HB 422                                                               
is not in effect.                                                                                                               
CHAIR  WEYHRAUCH  asked  if  HB  422  should  have  an  immediate                                                               
effective date.                                                                                                                 
MR.  BOUTIN stated  that if  HB  422 had  an immediate  effective                                                               
date, it would  give the Department of  Revenue more flexibility.                                                               
He stated that  flexibility is always a good  thing when managing                                                               
Number 1510                                                                                                                     
CHAIR  WEYHRAUCH  asked  if  having  the title  read:    "An  Act                                                               
repealing  the  special subaccount  under  the  authority of  the                                                               
Constitutional Budget  Reserve Fund."  would be  more appropriate                                                               
than the  current title, since  the subaccount is not  created in                                                               
the fund as a constitutional matter.                                                                                            
MR. BOUTIN  said that  he hadn't  looked at  the title  from that                                                               
perspective,  but that  Chair Weyhrauch  was correct.   He  added                                                               
that, during  the last hearing  on HB 422, Chair  Weyhrauch asked                                                               
if the  effect needed could  be done as  an executive order.   He                                                               
stated  that  he  had  spoken with  Jim  Baldwin,  the  Assistant                                                               
Attorney General,  and Mr. Baldwin  answered that this  wasn't an                                                               
executive  branch management  issue,  but a  fund established  by                                                               
law, so a change in statute was necessary.                                                                                      
REPRESENTATIVE BERKOWITZ  asked if  Mr. Boutin  was aware  of any                                                               
analysis that has  been done that would project  what would occur                                                               
if the bulk of the CBRF was deposited into the Permanent Fund.                                                                  
Number 1640                                                                                                                     
MR. BOUTIN  said he  wasn't aware  of any  analysis done  on that                                                               
Number 1652                                                                                                                     
REPRESENTATIVE GRUENBERG  asked if  it would give  the Department                                                               
of Revenue the  flexibility it needed if  the legislature granted                                                               
the department  the authority to  access the  subaccount, without                                                               
repealing AS 37.10.430, subsection (c).                                                                                         
Number 1756                                                                                                                     
MR.  BOUTIN stated  that the  Department of  Revenue's motivation                                                               
was based  on the fact  that the  CBRF was regularly  being drawn                                                               
from, which  doesn't suggest  to the  Department of  Revenue that                                                               
the  money should  be invested  in any  other account  than fixed                                                               
income.   He  stated that  although the  subaccount is  earning a                                                               
higher rate  at this  time, the  Department of  Revenue is  not a                                                               
market timer,  and so,  based on  the use of  the fund,  it makes                                                               
more sense to  have that money in  a fixed account.   He used the                                                               
example  that the  CBRF would  never be  invested in  real estate                                                               
because the fund isn't being used in  that way.  He said that the                                                               
Department of  Revenue currently  has long-term  investments, but                                                               
he doesn't  see the  CBRF as a  fund where  long-term investments                                                               
are appropriate.                                                                                                                
REPRESENTATIVE  GRUENBERG  stated  that Mr.  Boutin's  logic  was                                                               
flawless,  if  the  Department  of  Revenue  proceeds  from  that                                                               
premise.   He said that  if the department maintains  the premise                                                               
that they  try to maintain a  balance in the CBRF,  the reasoning                                                               
is flawed.   He stated that  by keeping the statute  on the books                                                               
but granting  the Department of  Revenue access to the  money, it                                                               
would give the  Department of Revenue the  flexibility it needed.                                                               
He stated that he thought the  statute should exist if there were                                                               
policy changes in the future.                                                                                                   
Number 1925                                                                                                                     
MR. BOUTIN  replied that regardless  of the balance in  the CBRF,                                                               
the fact that there are  drawdowns from the account suggests that                                                               
it  has to  have  high  liquidity, and  HB  422  allows for  that                                                               
REPRESENTATIVE GRUENBERG said  that he feels that it  would be in                                                               
the  Department  of  Revenue's  best  interest  to  maintain  the                                                               
flexibility of having the subaccount  there, but having access to                                                               
it, rather  than eliminating  it.   He asked  Mr. Boutin  why the                                                               
Department  of Revenue  felt it  was necessary  to foreclose  the                                                               
subaccount  and  eliminate  the ability  for  the  department  of                                                               
Revenue to make discretionary decisions.                                                                                        
MR. BOUTIN  said that  he didn't see  the utility  in maintaining                                                               
the subaccount, based on the way the  fund is used.  He said that                                                               
he felt that  it was better to  invest the CBRF in  a manner that                                                               
is appropriate  to how [the state]  uses it.  He  stated that if,                                                               
in the future,  the CBRF is used differently, it  will be another                                                               
issue;  however, that  doesn't seem  to be  on the  horizon right                                                               
Number 2117                                                                                                                     
REPRESENTATIVE BERKOWITZ  commented on the statements  made about                                                               
the  need  for the  CBRF  based  on  the cash  flow  inequalities                                                               
throughout the fiscal year.  He  said he felt that there wouldn't                                                               
be a  cash flow problem  if there  was a balanced  fiscal regime.                                                               
He followed up that comment  by illustrating the three cases that                                                               
could come about,  involving the CBRF.  He stated  that the first                                                               
case  would  be  where the  CBRF  has  a  lot  of money  and  the                                                               
subaccount would  prove useful.   The second case would  be where                                                               
there is  a $1-billion CBRF  and the  money needed for  cash flow                                                               
purposes is  covered by the  $1-billion minimum.  The  third case                                                               
would be  where the CBRF was  approaching zero and the  assets in                                                               
the  subaccount would  be liquidated.    He then  asked why  this                                                               
legislation needed to be introduced  at all, since the Department                                                               
of  Revenue was  going  to manage  the entire  CBRF  in the  best                                                               
interest [of the state] given the constraints at the time.                                                                      
Number 2210                                                                                                                     
MR.  BOUTIN   responded  that,  like   a  private   company,  the                                                               
Department of  Revenue has a need  for cash.  He  stated that the                                                               
cash inflows and  outflows are not balanced, so cash  needs to be                                                               
available [to cover  that imbalance].  He clarified  that the $1-                                                               
billion minimum  would include the  subaccount, and he  said that                                                               
in order to account for the  cash flow and the price shocks, that                                                               
money should  be readily available  in fixed income,  rather than                                                               
in real estate or equities, for example.                                                                                        
REPRESENTATIVE BERKOWITZ  stated that it wouldn't  be prudent for                                                               
the Department of Revenue to manage  the fund in liquid assets if                                                               
the fund was going to be drawn  from.  He voiced his opinion that                                                               
repealing  this statute  [as proposed  by HB  422] would  have no                                                               
bearing on  how the Department of  Revenue manages the fund.   He                                                               
added that  the statute exists  for direction of the  fund during                                                               
flusher times.                                                                                                                  
Number 2324                                                                                                                     
REPRESENTATIVE GRUENBERG  turned to  Section 3 of  the bill.   He                                                               
asked  if  [the department]  would  need  statutory authority  in                                                               
order to transfer  some of the money out of  the fund, or whether                                                               
that authority would be inherent.                                                                                               
MR.  BOUTIN  responded  that when  language  has  been  carefully                                                               
drafted by attorneys,  he should not attempt to try  to change it                                                               
on  the spot.   He  added  that he  is not  certain what  problem                                                               
Representative Gruenberg is addressing and  he would want to read                                                               
the language  and consider if "it  does the same thing  under all                                                               
CHAIR   WEYHRAUCH  noted   that  the   bill  will   have  further                                                               
consideration in the House Finance Committee.                                                                                   
Number 2435                                                                                                                     
JAMES ARMSTRONG,  Staff to  Representative Bill  Williams, Alaska                                                               
State  Legislature,  testified on  behalf  of  the House  Finance                                                               
Committee,  sponsor,   which  is  co-chaired   by  Representative                                                               
Williams.   Mr.  Armstrong suggested  having a  trigger mechanism                                                               
that would "collapse"  the subaccount into the  main account when                                                               
the  main account  falls below  a certain  number, such  as "$300                                                               
million for  cash flow purposes."   He observed, "I mean,  if the                                                               
stock market does  10 percent the next four years,  it could make                                                               
$160 million."                                                                                                                  
CHAIR WEYHRAUCH said that seems  to conflict with what Mr. Boutin                                                               
previously  indicated,  regarding the  need  to  work with  money                                                               
managers  and  the  efficiencies  that may  be  inherent  in  the                                                               
ability  to  give   notice  and  react  to   the  state's  fiscal                                                               
situation.   He stated that if  this were contained in  a longer-                                                               
term investment  portfolio, then there certainly  wouldn't be the                                                               
flexibility that  Mr. Boutin  and the  state is  looking towards.                                                               
He mentioned a trigger mechanism  that could happen in an instant                                                               
in a catastrophic market situation.                                                                                             
Number 2505                                                                                                                     
REPRESENTATIVE BERKOWITZ responded that  the trigger mechanism is                                                               
there.  He  explained that if prudence dictates that  the fund be                                                               
drawn to zero, then it will be drawn  to zero.  If, in the course                                                               
of drawing  it to zero, the  assets of the subaccount  have to be                                                               
liquidated, then that's  what is going to happen.   He reiterated                                                               
that he  does not  see the  need for  HB 422.   He  expressed his                                                               
opinion  that this  proposed legislation  signals a  pessimism on                                                               
the part  of the  administration about its  ability to  solve the                                                               
fiscal gap.                                                                                                                     
CHAIR WEYHRAUCH responded  that he doesn't think  it signals that                                                               
at  all.    For  example,  he  said,  if  there  is  a  five-year                                                               
investment  portfolio with  a penalty  for  early withdrawal,  it                                                               
does  the  citizens  and  the  CBR  no  good  to  use  the  early                                                               
withdrawal  to pay  a penalty.   He  noted that  the statute  was                                                               
passed during flush  times and a long bull market.   He indicated                                                               
that any  pessimism is not  reflective of the  administration but                                                               
is reflective of reality.                                                                                                       
REPRESENTATIVE BERKOWITZ  disagreed.  He stated  that the reality                                                               
of the situation is that [the  legislature] is going to solve the                                                               
fiscal  gap one  way or  the  other.   He said  that the  current                                                               
administration has  said that  it wants  a $1-billion  minimum in                                                               
the  CBR.   He  stated  that  if  the administration  wants  that                                                               
minimum -  an amount  that he said  he thinks is  too low  - then                                                               
there is no  need to invade the subaccount.   Furthermore, if the                                                               
subaccount is  not invaded, then it  should be invested in  a way                                                               
that prudence  dictates.   Representative Berkowitz  clarified as                                                               
     In a lot of ways, all  this subaccount does - and I was                                                                    
     there  for  the debate  -  [is  it] authorizes  prudent                                                                    
     investment rather  than simple liquidity.   That's what                                                                    
     the change inherent  in the subaccount is.   And ... it                                                                    
     just seems to  me that if there's a need  to invade the                                                                    
     principle  of the  subaccount, that's  what's going  to                                                                    
     happen.    And they  don't  need  the authority  that's                                                                    
     inherent in  repeal of  a statute.   But they  need ...                                                                    
     the  existence of  the statute  for  flusher times,  in                                                                    
     order to authorize better yielding investments.                                                                            
CHAIR  WEYHRAUCH said  a  lot  of people  have  discussed how  to                                                               
cushion  the budget.   He  said, "It's  case by  case, person  by                                                               
Number 2643                                                                                                                     
REPRESENTATIVE SEATON said:                                                                                                     
     If we're  talking about a five-year  investment horizon                                                                    
     for this account, [and] we  look back at the last three                                                                    
     years' average return of 1.8  percent, I don't care how                                                                    
     good one year was in that  horizon, that has not been a                                                                    
     good investment  for us compared  to what  they've done                                                                    
     with the  regular fund.   So,  we can  pick a  year and                                                                    
     say, "Oh,  it was great -  10.2 percent in one  year, "                                                                    
     but when  you look  at the three-year  annualized, it's                                                                    
     terrible.  And  so, why [would we] say, "Do  we want to                                                                    
     maintain  that investment?"   It's  supposed  to be  in                                                                    
     higher yield,  which would mean higher  risk generally;                                                                    
     especially it's  higher risk if  you're saying  that at                                                                    
     some  point  during  that time,  prudent  investing  is                                                                    
     going to  mean you  have to liquidate  some of  it when                                                                    
     it's not the appropriate time.                                                                                             
     So, it  seems to me  that we have our  prudent investor                                                                    
     here  from [the]  Department of  Revenue, that  manages                                                                    
     the  retirement accounts  and  everything else,  saying                                                                    
     that  with the  direction that  the CBR  is used  [and]                                                                    
     with the projections of what  the CBR is going to there                                                                    
     for, it's  easier -- we're  listening to  our investors                                                                    
     saying  its   not  prudent  to  have   this  subaccount                                                                    
     invested  in longer-term  strategy,  because no  longer                                                                    
     are  we  looking  at  the CBR;  we're  not  looking  at                                                                    
     replacing the $5 billion or  $7 billion that we owe the                                                                    
     CBR.   If  we had  a  structure that  was putting  that                                                                    
     money  back into  the CBR,  we would  be talking  about                                                                    
     something quite  different.  I haven't  heard that from                                                                    
     anyone in the legislature  - that we are reconstituting                                                                    
     and  "re-depositing"   money  into   the  CBR   in  any                                                                    
     significant amount.   So, it  seems to me that  we have                                                                    
     to listen  to our prudent  investors who are  coming to                                                                    
     us and saying  that they don't figure  a five-year time                                                                    
     horizon when  we have  a shorter-than-five-year  use of                                                                    
     that fund horizon, currently ....                                                                                          
REPRESENTATIVE  BERKOWITZ  noted  that  Mr.  Boutin  is  not  the                                                               
investor - that's not what he  does.  He noted that the committee                                                               
has not  seen forward-looking  projections.   He said,  "If we're                                                               
here in  a fiduciary capacity,  looking at what  the expectations                                                               
are  going to  be  for  the subaccount  as  opposed  to the  main                                                               
account,  I  think  we  ought to  see  what  the  forward-looking                                                               
projections  are."    He  said  it is  not  prudent  or  fiscally                                                               
responsible for the  legislature to take a backwards  look at the                                                               
past three  year's biggest  bear markets  seen in  "our lifetime"                                                               
and make a  determination that that's what  the long-term effects                                                               
are going to be.                                                                                                                
Number 2780                                                                                                                     
MR. BOUTIN  stated that  the commissioner  of [the  Department of                                                               
revenue] is  the fiduciary  for "this  account."   The projection                                                               
that is used to  decide how the account will be  used is the fall                                                               
revenue forecast.   He noted that in several weeks  there will be                                                               
a spring  revenue forecast.   He said,  "The information  that we                                                               
have, I have shared with you, and I think it's all here."                                                                       
CHAIR  WEYHRAUCH said  there  has been  some  indication that  an                                                               
immediate effective date would be beneficial.                                                                                   
Number 2826                                                                                                                     
CHAIR  WEYHRAUCH moved  [Amendment 1],  to modify  Section 4  [on                                                               
page 2, line 3], to make the bill effective immediately.                                                                        
CHAIR   WEYHRAUCH  noted   that   Representative  Berkowitz   had                                                               
REPRESENTATIVE BERKOWITZ  said he  doesn't see "the  emergency in                                                               
an immediate effective  date."  He strongly suggested  that if an                                                               
effective date is chosen, it should  be to a trigger point in the                                                               
CBR, not tied to a "date certain."                                                                                              
Number 2875                                                                                                                     
CHAIR WEYHRAUCH offered  his understanding that if an  Act has an                                                               
immediate  effective date,  it  takes a  two-thirds  vote of  the                                                               
legislature [to pass];  however, if it doesn't  have an immediate                                                               
effective date, it would take effect 90 days after passage.                                                                     
REPRESENTATIVE BERKOWITZ said, "After the signature."                                                                           
CHAIR WEYHRAUCH noted  that even if the  immediate effective date                                                               
failed, "this" effective  date would effect sooner  than if there                                                               
were no effective date.                                                                                                         
REPRESENTATIVE  BERKOWITZ  responded,   "If  the  effective  date                                                               
prevails on the floor."                                                                                                         
Number 2918                                                                                                                     
REPRESENTATIVE SEATON noted, "Part of  what we're trying to do is                                                               
...  to   allow  an  orderly   phase-out  of   these  longer-term                                                               
investments."   He stated that he  is not sure how  the effective                                                               
date will influence that.                                                                                                       
Number 2927                                                                                                                     
MR. BOUTIN said the department  would direct the manager to begin                                                               
"getting out  as they  see appropriate."   He indicated  that the                                                               
management  fees for  fiscal year  (FY) 2005  were not  included.                                                               
Even if the bill is enacted,  he said, the department would still                                                               
not be through  with its management fee responsibility  by July 1                                                               
and would  have to find the  money for approximately 60  days "as                                                               
we take her out of it."                                                                                                         
CHAIR  WEYHRAUCH  said  it  sounds   like  the  department  could                                                               
implement its management  responsibilities, whether the effective                                                               
date is immediate or July 1.                                                                                                    
MR. BOUTIN concurred.                                                                                                           
CHAIR WEYHRAUCH withdrew Amendment 1.                                                                                           
Number 2975                                                                                                                     
REPRESENTATIVE   BERKOWITZ  asked,   "What  precludes   you  from                                                               
directing the fund managers to do just that anyway?"                                                                            
[Not on tape, but taken from  the Gavel to Gavel recording on the                                                               
Internet, was  Mr. Boutin's  response as follows:   "Well,  as we                                                               
understand existing statute,  we have this ...  sub fund invested                                                               
at a five-year time horizon,  which suggests to us mostly equity.                                                               
And so,  we believe  that precludes  us from  doing ...  now what                                                               
this bill would allow."]                                                                                                        
TAPE 04-25, SIDE B                                                                                                            
Number 2959                                                                                                                     
REPRESENTATIVE COGHILL turned  to [page 1, line 11,  Section 2 of                                                               
the bill], which shows that  [AS 37.10.430(c)] would be repealed.                                                               
AS 37.10.430(c) read as follows:                                                                                                
          (c) A special subaccount is established in the                                                                        
     budget reserve fund (art. IX,  sec. 17, Constitution of                                                                    
     the State  of Alaska).   Money in the  subaccount shall                                                                    
     be  invested  to yield  higher  returns  than might  be                                                                    
     feasible  to  obtain with  other  money  in the  budget                                                                    
     reserve  fund.    In   establishing  or  modifying  the                                                                    
     investment   policy   for   the   subaccount   in   the                                                                    
     constitutional  budget reserve  fund, the  commissioner                                                                    
     of revenue  shall assume that  those funds will  not be                                                                    
     needed  for at  least  five years.    Income earned  on                                                                    
        money in the subaccount shall be retained in the                                                                        
     subaccount by the department.                                                                                              
REPRESENTATIVE  COGHILL  offered  his  understanding  that  [that                                                               
statute] is  a directive  that states  that the  department shall                                                               
assume  that the  funds  will not  be needed  for  at least  five                                                               
years.  He noted that if  it is not repealed, the directive would                                                               
remain.    He  added,  "So, that  would  definitely  change  your                                                               
management style."                                                                                                              
MR. BOUTIN said he believes that's certainly true.                                                                              
REPRESENTATIVE   GRUENBERG  turned   to  a   one-page  memorandum                                                               
included  in the  committee packet,  from Tam  Cook [director  of                                                               
Legislative Legal and Research Services].   It is a legal opinion                                                               
[regarding Section  1 of  the bill].   He  indicated that  he had                                                               
spoken  with Mr.  Boutin about  the  memorandum.   Representative                                                               
Gruenberg  stated that  he sees  no need  for Section  1, because                                                               
"you have that authority anyway."                                                                                               
Number 2916                                                                                                                     
REPRESENTATIVE GRUENBERG moved to  adopt Amendment 2, which would                                                               
strike Section  1 of  the bill [and  renumber the  other sections                                                               
CHAIR WEYHRAUCH  note that  [Section 1]  would be  unnecessary if                                                               
Section 2 is enacted.                                                                                                           
REPRESENTATIVE GRUENBERG responded that it's unnecessary anyway.                                                                
MR. BOUTIN concurred.                                                                                                           
CHAIR WEYHRAUCH asked if there  was any objection to Amendment 2.                                                               
He clarified Amendment 2.                                                                                                       
Number 2865                                                                                                                     
CHAIR WEYHRAUCH objected to Amendment 2 for discussion purposes.                                                                
REPRESENTATIVE  GRUENBERG,   in  response  to  a   question  from                                                               
Representative  Coghill, clarified  that  Section 1  is found  on                                                               
page 1, lines 5-10 of HB 422.                                                                                                   
Number 2844                                                                                                                     
CHAIR WEYHRAUCH  withdrew his objection.   He asked if  there was                                                               
further objection.                                                                                                              
REPRESENTATIVE SEATON asked if a title change would be required.                                                                
Number 2831                                                                                                                     
REPRESENTATIVE GRUENBERG  responded that he would  allow the bill                                                               
drafter to change the title, if necessary.                                                                                      
CHAIR   WEYHRAUCH,  in   response   to  Representative   Seaton's                                                               
question,  said, "It  may, depending  on how  discussion goes  on                                                               
this amendment."                                                                                                                
Number 2820                                                                                                                     
REPRESENTATIVE  GRUENBERG  said,  "Part  of my  amendment  is  to                                                               
authorize any title change necessary."                                                                                          
Number 2812                                                                                                                     
CHAIR  WEYHRAUCH  asked  again  if there  was  any  objection  to                                                               
adopting  Amendment  2  [with  the   authorization  for  a  title                                                               
change].  There being none, it was so ordered.                                                                                  
Number 2789                                                                                                                     
CHAIR  WEYHRAUCH moved  to adopt  Amendment  3 [AS  37.10.430(c),                                                               
with handwritten changes], as follows:                                                                                          
     (c) Money  in the  budget reserve  fund (art.  IX, sec.                                                                    
     17,  constitution  of  the  State  of  Alaska)  may  be                                                                    
     invested  to   yield  higher  returns  than   might  be                                                                    
     feasible  to  obtain with  other  money  in the  budget                                                                    
     reserve  fund.    In   establishing  or  modifying  the                                                                    
     investment  policy  for  money  in  the  constitutional                                                                    
     budget reserve fund, the  commissioner of revenue shall                                                                    
     assume  that those  funds may  be needed  to meet  cash                                                                    
     flow  needs and  prudent  financial  management of  the                                                                    
     state's budget.                                                                                                            
Number 2768                                                                                                                     
REPRESENTATIVE BERKOWITZ objected.  He  pointed out that the fund                                                               
is not all money, but is also  made up of equities and bonds, for                                                               
CHAIR  WEYHRAUCH suggested  that the  word "fund"  could be  used                                                               
instead of the word "money".                                                                                                    
REPRESENTATIVE GRUENBERG said, "Yeah, it would be the CBR fund."                                                                
CHAIR WEYHRAUCH read the Amendment  3, as amended, to incorporate                                                               
the foregoing suggestion, as follows:                                                                                           
     The   budget   reserve   fund  (art.   IX,   sec.   17,                                                                    
     Constitution of  the State of  Alaska) may  be invested                                                                    
     to  yield  higher returns  than  might  be feasible  to                                                                    
     obtain  with other  money in  the budget  reserve fund.                                                                    
     In establishing or modifying  the investment policy for                                                                    
     the   constitutional    budget   reserve    fund,   the                                                                    
     commissioner of  revenue shall assume that  those funds                                                                    
     may  be needed  to  meet cash  flow  needs and  prudent                                                                    
     financial management of the state's budget.                                                                                
CHAIR WEYHRAUCH stated that that  language comes from a letter of                                                               
intent from the House Finance Committee sponsor statement.                                                                      
REPRESENTATIVE GRUENBERG pointed to the  part of Amendment 3 that                                                               
read,  "yield higher  returns than  might be  feasible to  obtain                                                               
with other money in the budget  reserve fund."  He suggested that                                                               
the word "money" be changed to "assets".                                                                                        
CHAIR  WEYHRAUCH  agreed.     He  asked  if   there  was  further                                                               
discussion on Amendment 3, [as amended].                                                                                        
Number 2699                                                                                                                     
REPRESENTATIVE  BERKOWITZ moved  to  adopt  another amendment  to                                                               
Amendment 3, to change the words "may be" to "shall be".                                                                        
REPRESENTATIVE GRUENBERG offered his  understanding that that was                                                               
the intent of the original [AS 37.10.430(c)].                                                                                   
CHAIR WEYHRAUCH objected for purposes  of discussion.  He opined,                                                               
"I think  we want  to optimize  returns so that  we can  meet the                                                               
state's budget, while getting a  reasonable return on investment.                                                               
And that leaves us a lot  more discretionary with the managers of                                                               
the  fund and  their fiduciary  duty, as  opposed to  tying their                                                               
hands by ... giving them a ... specific directive ...."                                                                         
REPRESENTATIVE  HOLM  said  it  seems to  him  that  "we're"  not                                                               
particularly interested  in getting the greatest  investment, but                                                               
rather in making the fund liquid.   He posited that "shall" would                                                               
defeat the purpose of what the bill is trying to accomplish.                                                                    
Number 2614                                                                                                                     
REPRESENTATIVE SEATON said:                                                                                                     
     I  disagree with  agreeing  that  the shorter-term  and                                                                    
     longer-term  alignments within  the  department of  the                                                                    
     management  of those  funds is  where  that should  be;                                                                    
     that  if we  are in  a  situation where  there is  more                                                                    
     money  in  the  CBR  and revenues  project,  say,  [an]                                                                    
     eight-year horizon  at some  time, then  it's perfectly                                                                    
     logical of  them to  do it.   So I  think the  "may" is                                                                    
     (indisc. - overlapping conversation).                                                                                      
CHAIR WEYHRAUCH requested  that Representative Berkowitz withdraw                                                               
his amendment so that the  committee could adopt [Amendment 3, as                                                               
amended], at which point,  he suggested, Representative Berkowitz                                                               
could "amend to add the 'shall'."                                                                                               
REPRESENTATIVE BERKOWITZ said he would do that.                                                                                 
Number 2533                                                                                                                     
CHAIR  WEYHRAUCH   asked  if  there  was   further  objection  to                                                               
[Amendment 3, as amended].                                                                                                      
REPRESENTATIVE BERKOWITZ objected.                                                                                              
CHAIR WEYHRAUCH, in response to  a request for clarification from                                                               
Representative Seaton, read  the second half of  [Amendment 3, as                                                               
REPRESENTATIVE GRUENBERG pointed to  "the commissioner of revenue                                                               
shall  assume  that those  funds".    He suggested  that  "funds"                                                               
should be changed to "assets".                                                                                                  
CHAIR   WEYHRAUCH  agreed   to   the  change   for  purposes   of                                                               
consistency.  He said, "I'll take that as a friendly amendment."                                                                
REPRESENTATIVE GRUENBERG asked about  Chair Weyhrauch's choice of                                                               
the term  "cash flow needs".   He asked  if there might  be other                                                               
needs,  as well  as cash  flow needs,  that the  committee should                                                               
include.  He  also remarked that he thinks  the "special account"                                                               
should be kept.                                                                                                                 
REPRESENTATIVE SEATON said he agrees  with the elimination of the                                                               
subaccount and allowing  the department to invest  prudently.  He                                                               
mentioned the structure and the time  horizon.  He said he thinks                                                               
the  committee  needs  to  "take  a  look  at  this  and  get  it                                                               
structurally correct."                                                                                                          
Number 2451                                                                                                                     
CHAIR WEYHRAUCH announced that Amendment  3, [as amended], and HB
422 would be set aside.                                                                                                         
REPRESENTATIVE BERKOWITZ  said it's clear  at this point  that he                                                               
is an advocate of the subaccount,  but it seems that the "primary                                                               
rub against  it has to  do with  the five-year look  forward, and                                                               
that's the offending sentence."                                                                                                 
CHAIR WEYHRAUCH told Mr. Boutin  that although this process seems                                                               
frustrating, it will save time on the House floor.                                                                              
Number 2424                                                                                                                     
MR. BOUTIN  stated that he  doesn't see  the utility in  having a                                                               
subaccount in the CBR at this stage.   He noted that "all of this                                                               
money is invested under the prudent investor rule."                                                                             
Number 2407                                                                                                                     
CHAIR WEYHRAUCH announced that HB 422 was heard and held.                                                                       
HB 466-PERMANENT FUND INVESTMENTS                                                                                             
[Contains discussion of HB 156.]                                                                                                
Number 2383                                                                                                                     
CHAIR WEYHRAUCH  announced that  the next  order of  business was                                                               
HOUSE BILL  NO. 466,  "An Act relating  to investments  of Alaska                                                               
permanent fund assets; and providing for an effective date."                                                                    
Number 2365                                                                                                                     
ROBERT  D.  STORER,  Executive Director,  Alaska  Permanent  Fund                                                               
Corporation  (APFC),  Department  of  Revenue,  stated  that  the                                                               
department is  held to the  prudent investor  rule.  He  said the                                                               
permanent fund "has  an extra layer"; in addition  to the prudent                                                               
investor rule,  there is a  statutory list that defines  what may                                                               
be invested in.   He indicated that the list  includes one clause                                                               
that "gives a little additional  flexibility."  He noted that the                                                               
modern prudent investor  rule started with the  enactment of [the                                                               
Employee  Retirement and  Income Security  Act of  1974] (ERISA).                                                               
He explained that  although ERISA has to do  with private pension                                                               
plans and  corporations, everyone uses ERISA  where applicable in                                                               
regard  to public  funds.   Mr. Storer  read selections  from [29                                                               
U.S.C. 1104 - Fiduciary Duties], which read in part as follows:                                                                 
     (a) Prudent man standard of care                                                                                           
          Subject to sections 1103(c) and (d), 1342, and                                                                        
     1344  of this  title, a  fiduciary shall  discharge his                                                                    
     duties with  respect to a  plan solely in  the interest                                                                    
     of the participants and beneficiaries and                                                                                  
          with the care, skill, prudence, and diligence                                                                         
     under the circumstances then  prevailing that a prudent                                                                    
     man acting  in a like  capacity and familiar  with such                                                                    
     matters would use in the  conduct of an enterprise of a                                                                    
     like character and with like aims;                                                                                         
       by diversifying the investments of the plan so as                                                                        
     to minimize the risk of  large losses, unless under the                                                                    
     circumstances it is clearly prudent not to do so;                                                                          
MR. STORER  said that although  it was typical  in the 70s  for a                                                               
public fund  to have a  statutory list defining  what investments                                                               
can  be   made,  currently  virtually   all  public   funds  have                                                               
eliminated  the  statutory  list  and "just  follow  the  prudent                                                               
investor guideline."                                                                                                            
Number 2186                                                                                                                     
MR.  STORER directed  the committee's  attention to  a [six-page]                                                               
handout  [included in  the committee  packet], entitled,  "Alaska                                                               
Permanent  Fund."   He  noted that  pages two  and  three of  the                                                               
handout show all the times  that the legislature has expanded the                                                               
investment  flexibility and  given  the [APFC]  more latitude  to                                                               
achieve  its investment  goals.   He indicated  his understanding                                                               
that it is  a "misstatement" on the bottom of  page three that it                                                               
reads that HB  156 was sponsored by the  Senate Finance Committee                                                               
in 1999.   Notwithstanding that,  he highlighted  that paragraph,                                                               
which read as follows:                                                                                                          
     HB  156  allowed  the  Fund  to  leverage  real  estate                                                                    
     investments  and increased  asset allocation  limit for                                                                    
     stocks to 55  percent of the total market  value of the                                                                    
     Fund.   HB 156  also created  the "basket  clause" that                                                                    
     allows up  to 5 percent of  the Fund to be  invested in                                                                    
     alternative investments  or to  be applied  to existing                                                                    
     asset  allocations   to  expand   their  limits.     In                                                                    
     addition, HB 156  allowed the Permanent Fund  to be the                                                                    
     sole owner  of any real estate  property, regardless of                                                                    
MR. STORER noted that page four  of the handout shows the history                                                               
of the fund's  various asset allocations.  For  example, he noted                                                               
that  during  the early  70s  and  80s,  the permanent  fund  was                                                               
invested  exclusively in  fixed income  securities, "even  though                                                               
it's a long  term fund."  He revealed that  he began working with                                                               
the APFC  in May of  1983, and in June  of that year,  the [APFC]                                                               
funded its first "equity managers."   He remarked that as of late                                                               
1987 the fund  was invested in only about 13  percent in the U.S.                                                               
equity market  alone and  the [APFC] did  not have  permission to                                                               
invest in the international equity  market.  He stated, "What you                                                               
see  ... right  now  in  the asset  allocation  is slightly  more                                                               
conservative than other public funds,  but a mature fund that ...                                                               
constructs  their portfolios,  essentially, the  way most  public                                                               
funds invest their money."                                                                                                      
Number 2061                                                                                                                     
MR.  STORER  said  HB  466 proposes  an  increase  in  investment                                                               
flexibility.  The  changes, he noted, will  potentially allow the                                                               
[APFC] to increase its returns and  to meet future needs in terms                                                               
of   increasing  diversification,   as  well   as  to   implement                                                               
strategies  more   efficiently  at  a  lower   cost  and  address                                                               
contemporary needs as they occur.                                                                                               
MR.  STORER revealed  that next  week the  [APFC] will  propose a                                                               
change in its asset allocation,  which is something it does every                                                               
March after  a review of the  capital market in the  beginning of                                                               
the  year.   He turned  to [a  one-page handout  included in  the                                                               
committee packet], entitled "Fund's  asset allocation and control                                                               
bands."  He  explained that the column of numbers  on the left is                                                               
the target number  - for example, 37 percent  U.S. equity market,                                                               
while  the column  of  numbers on  the right  shows  bands -  for                                                               
example, plus or  minus 7 percent.  He explained  that the [APDC]                                                               
tries  to create  targets  and then  create  "bands around  those                                                               
targets."   The  corporation does  not want  to balance  "a lot,"                                                               
because that  can result in creating  transaction costs; however,                                                               
it does want  to "discipline it mechanically,"  which "forces you                                                               
to rebalance."                                                                                                                  
Number 1922                                                                                                                     
MR.  STORER stated  that the  September quarter  of 2002  was the                                                               
worst  quarter in  the  history  of the  permanent  fund, with  a                                                               
negative  7.5  percent   rate  of  return  due   primarily  to  a                                                               
plummeting stock  market, which  forced the  [APFC] to  add about                                                               
$750  million  in  the  equity  market to  "get  back  closer  to                                                               
target."   He  added, "We  got permission  from the  board around                                                               
October 10.  I  think we missed the bottom of  the bear market by                                                               
about four days and so we  captured very high returns."  He noted                                                               
that "this  was not any special  insight on what was  going on in                                                               
the  bear  market," but  was  an  example  of how  a  disciplined                                                               
approach works.  He stated that  his point in bringing this up is                                                               
that "after  four years of  study, we're about to  implement some                                                               
strategies that will use the basket clause."                                                                                    
Number 1861                                                                                                                     
MR. STORER continued as follows:                                                                                                
     We   are  ...   banging   up   against  our   statutory                                                                    
     limitations very soon.   ...  That means  if the equity                                                                    
     market  continues -  if these  strategies  that we  ...                                                                    
     employ  using  the basket  clause  work  - we  will  be                                                                    
     forced  to  liquidate  the assets.    Not  because  the                                                                    
     capital markets  tell us  to do  [so], not  because our                                                                    
     advisors  are  saying  we need  to  liquidate  or  take                                                                    
     profits or redirect  that money.  We will  be forced to                                                                    
     liquidate because  statutes will  not allow us  to gain                                                                    
     the benefits of the ...  full rising market.  So, there                                                                    
     is  a  big  negative,   I  believe,  to  our  statutory                                                                    
     limitations,  which forces  us to  take potential  gain                                                                    
     off the  table, because  of statutory  limitations, not                                                                    
     what the financial markets are telling us.                                                                                 
Number 1794                                                                                                                     
MR.  STORER turned  attention  to the  last page  of  the of  the                                                               
previously  noted  six-page  handout, which  addresses  potential                                                               
questions.   He noted  that one  question may  be, "Will  you ...                                                               
take on too much risk?"  He continued:                                                                                          
     We've all  said we  have this target  [of] hitting  a 5                                                                    
     percent  real  rate  of return  over  time,  and  we're                                                                    
     comfortable  making that  statement.   But what  if, to                                                                    
     achieve   a   higher   rate    of   return,   ...   our                                                                    
     constitutional amendment  doesn't pass and we,  one way                                                                    
     or another, ...  believe we should strive  for a higher                                                                    
     rate  of  return  ...  and accept  more  risk  than  is                                                                    
     prudent?"   And that is a  risk.  You can't  say, "That                                                                    
     will  never happen,  it has  never happened,  I see  no                                                                    
     evidence it will happen."                                                                                                  
     I  ... have  worked  with about  every  trustee of  the                                                                    
     permanent fund with the exception  of about four in the                                                                    
     beginning.    ...   I've  worked  with every  executive                                                                    
     director.    I've  worked  for   or  with  every  chief                                                                    
     investment officer [of] the  Alaska Permanent Fund, and                                                                    
     I will tell you, in  the history of the permanent fund,                                                                    
     there  has never  been an  inclination of  striving for                                                                    
     too much  risk.  When  you become a fiduciary  and have                                                                    
     responsibility of  managing the fund, it's  inherent in                                                                    
     the  process that  you take  your responsibility  very,                                                                    
     very  seriously,  and  so  there's   no  history  -  no                                                                    
     suggestion - that the permanent  fund would be prepared                                                                    
     to reach too far for a return.                                                                                             
Number 1700                                                                                                                     
     How will  the board  of trustees use  this flexibility?                                                                    
     That  becomes a  tougher  question.   One is  obviously                                                                    
     because [of]  the statutory  limitations; we  would use                                                                    
     it to allow  our investments [to] rise to  what we hope                                                                    
     are their  potential.  As  I noted at the  beginning of                                                                    
     my  presentation, we're  trying  to  set the  permanent                                                                    
     fund up  to meet future  flexibility, and so  there's a                                                                    
     "nonpredictive"  element about  how you  would use  it.                                                                    
     If you  ask me right now  what [we would] look  at, one                                                                    
     of  course is  being able  to increase  our returns  by                                                                    
     letting  our winners  continue on.   We  might look  at                                                                    
     some high yield.   High yield is:   the pejorative term                                                                    
     is  "junk bonds."   There's  really  two categories  of                                                                    
     high yields; you  can really divide a  line between the                                                                    
     two.  ...There is a  category of high yield that's very                                                                    
     close  to  investment-grade  corporate debt.    They've                                                                    
     worked out their  problems and they are  in the process                                                                    
     of  probably  being   upgraded  and  become  investment                                                                    
     debts.  That's a  more conservative approach, if that's                                                                    
     not an oxymoron.  Then  there's the other, where you're                                                                    
     taking  bigger   bets  on  companies  that   have  huge                                                                    
     problems and  then you expect equity-like  returns.  We                                                                    
     may,  over the  next year  -  and I've  not posed  this                                                                    
     question with  the board  - but we  may start  taking a                                                                    
     look  at the  more conservative  approach.   Be mindful                                                                    
     that we  will educate ourselves  for as much as  a year                                                                    
     or two years on a subject  before we discard it or make                                                                    
     sense [of it].   As I noted, we got  permission for the                                                                    
     basket clause  in 1999.   We are only now,  after years                                                                    
     of   study,  beginning   to  implement   some  of   the                                                                    
     strategies that use the basket  clause.  So, when I say                                                                    
     ... something  like that, I'm saying  this is something                                                                    
     we may evaluate.                                                                                                           
Number 1549                                                                                                                     
MR. STORER turned  to the question of derivatives.   He explained                                                               
that derivatives  are financial  instruments where  "their return                                                               
is derived from some other  investment instrument."  For example,                                                               
he  noted  that a  measure  for  large-cap  equities is  the  S&P                                                               
[Standard &  Poors] 500 index.   He noted that there  are futures                                                               
and forward contracts  that base their return  on the performance                                                               
of the S&P 500 index.  He continued as follows:                                                                                 
     We  use derivatives  now, in  a sense.   We  will hedge                                                                    
     currency.  When we  bank an international investment we                                                                    
     may  hedge  that  currency  risk   before  we  buy  the                                                                    
     currency  to pay  off the  security.   Our managers  do                                                                    
     that.    So,  there  are  any number  of  ways  to  use                                                                    
     derivatives; they  all aren't  all bad.   When  you see                                                                    
     derivatives  and   you  see  negative   headlines,  ...                                                                    
     typically  it's because  they've  used derivatives  for                                                                    
     leveraging  the  portfolio   in  a  rather  significant                                                                    
     manner, and it's not the  use of the derivative so much                                                                    
     as increasing the risk by using the leverage.                                                                              
Number 1456                                                                                                                     
CHAIR WEYHRAUCH  asked Mr.  Storer if the  basket clause  got its                                                               
name when  it was adopted  in 1999, or was  it a term  that "just                                                               
MR.  STORER offered  his  belief that  it became  a  term of  art                                                               
"during that process."                                                                                                          
CHAIR WEYHRAUCH said  when he hears the word  "basket," he thinks                                                               
of a  basket used in  a grocery  store and "picking  and choosing                                                               
small amounts to  go throughout the line."  He  asked Mr. Storer,                                                               
"Is that  how the public would  view what a basket  clause is, in                                                               
terms of  the larger scale  when you're dealing  with investments                                                               
in the permanent fund?"                                                                                                         
MR. STORER  mentioned diversification.   He stated, "So,  even if                                                               
one  gets  the   ability  through  the  basket   clause  to  make                                                               
investments, we  are still  driven by  diversification.   And our                                                               
point would  be to fill that  basket with a bunch  of diversified                                                               
options that  would not  put risk in  any (indisc.  - overlapping                                                               
voices)."    In  response  to a  follow-up  question  from  Chair                                                               
Weyhrauch, he  confirmed that  "we're asking  to make  the basket                                                               
bigger," or to increase the flexibility.                                                                                        
Number 1365                                                                                                                     
REPRESENTATIVE  SEATON asked  if part  of [the  intent] is  to be                                                               
able  to maintain  assets that  have appreciated  and may  "go up                                                               
more."   He clarified  that he  is trying to  figure out  "the 15                                                               
percent."   He asked, "Does that  mean that the funds  could then                                                               
take international equities  to 31 percent, with  the 15 percent,                                                               
less  the  16  percent,  currently,   if  the  fund  thought  ...                                                               
international assets  are going up and  ... we've had a  good run                                                               
in our  investments here and we  want them to continue,  so we'll                                                               
use  our  authority  to  increase   ...  that  allocation  to  30                                                               
MR.  STORER responded  that that  technically -  emphasis on  the                                                               
word "technically" -  could be correct.  However,  he stated that                                                               
it would  also be unlikely,  keeping in mind  that the goal  is a                                                               
fully  diversified portfolio.   He  revealed that  next week  the                                                               
[APDC]  will   recommend  increasing  the   international  equity                                                               
allocation from  16 to 18 percent.   He added, "In  fact, I think                                                               
we're more like 17 [percent] as  it now stands.  We're also using                                                               
parts of the basket clause."  He continued as follows:                                                                          
      So, the fundamental question would be, "If one used                                                                       
      the entire basket clause to increase a single asset                                                                       
     class,   would    it   still   meet   the    rules   of                                                                    
     diversification  and  [the  modern]  prudent  [investor                                                                    
     rule]?"   I  am well  aware of  many public  funds that                                                                    
     have  been invested  in  excess of  25  percent in  the                                                                    
     international  equity  markets,   but  as  a  practical                                                                    
     matter, that would  be unlikely that we  would use what                                                                    
     I call the  privilege of an increased  basket clause in                                                                    
     any single thing.  ...   As [of] now we aren't going to                                                                    
     use  it  in  a  number  of  options  that  will  behave                                                                    
     differently in different market environments.                                                                              
Number 1234                                                                                                                     
REPRESENTATIVE SEATON asked for examples of "what these other                                                                   
new investments" are.                                                                                                           
Number 1168                                                                                                                     
MR. STORER responded as follows:                                                                                                
     As noted,  we do  have a 55  percent limitation  in the                                                                    
     stock   market;  that   is  unique   in  public   funds                                                                    
     throughout  the country  where you  follow the  prudent                                                                    
     investor rule.   There  are no  limitations whatsoever.                                                                    
     So, I would like to  preface my response by saying that                                                                    
     even with the increased  basket clause, our constraints                                                                    
     would  still constrain  us  to being  one  of the  more                                                                    
     conservative public funds in the  country.  So, even if                                                                    
     we  increase it,  we're  still not  going  to have  the                                                                    
     ability  to take  as much  risk as  other public  funds                                                                    
     may.     And  of   course,  risk  is   not  necessarily                                                                    
     pejorative;   you   should   be  rewarded   for   being                                                                    
     compensated for that risk.                                                                                                 
     As  an immediate  objective we  will  probably use  the                                                                    
     basket clause  to not be  forced to sell stocks  in the                                                                    
     ... equities if we  exceed the statutory limit, because                                                                    
     we  would   apply  ...  that   basket  clause   to  the                                                                    
     additional equities.   ...   We  don't believe  that is                                                                    
     bad at all.  What we're  doing is we're letting ... the                                                                    
     markets  define when  to rebalance,  we're not  letting                                                                    
     ... arbitrary constraints  tell us when to  apply.  So,                                                                    
     one immediate use  would be simply to  benefit from the                                                                    
     appreciation of the  markets and not be  forced to sell                                                                    
     for arbitrary reasons.                                                                                                     
     [Regarding]  the balance  of it,  we would  ... educate                                                                    
     ourselves  on any  number of  things.   I mentioned  an                                                                    
     example - potentially  high yield.  We've  looked at it                                                                    
     modestly.  We  have looked at private  equity and we're                                                                    
     starting a modest program in  private equity, which, by                                                                    
     definition,  that's  "nonpublicly" traded  investments.                                                                    
     ...  It's a diversified  portfolio that could have some                                                                    
     venture  capital, some  buyouts in  it.   Typically you                                                                    
     expect to earn about 5  percent return in excess of the                                                                    
     publicly traded  markets [when]  you do  something like                                                                    
Number 0997                                                                                                                     
MR. STORER mentioned absolute return strategy and hedge fund.                                                                   
He said that he is about to recommend something that's kind of                                                                  
unique.  He continued as follows:                                                                                               
     I'm introducing, for  the first time ever,  ... a pilot                                                                    
     program.    These  are  very  sophisticated  investment                                                                    
     approaches;  we've studied  it  for well  over a  year.                                                                    
     And there's a lot more to  be learned, but the only way                                                                    
     I think we can learn beyond  here is live.  And so, I'm                                                                    
     recommending that we invest a  modest amount in a pilot                                                                    
     absolute return strategy.  We're  going to define it as                                                                    
     very low risk.   Our objective is to  have ... targeted                                                                    
     risk that  is equal  to or less  than the  bond market.                                                                    
     That'll  be  part  of  the  criteria.   ...    I  think                                                                    
     everyone in this room will  agree that sometimes things                                                                    
     exist in  government perpetually, and to  make it truly                                                                    
     a pilot  program, I'm recommending a  sunset clause ...                                                                    
     so that  the program will  expire within 30  months, so                                                                    
     that not only by policy  it will die, but our contracts                                                                    
     with the  experts will  expire in  36 months,  as well.                                                                    
     So, the  only way we  can continue forward on  that one                                                                    
     is to take the knowledge  we've learned and vote it up,                                                                    
     rather than it just [becoming]  perpetual.  So, that is                                                                    
     another   use,  and   I'd  like   to  think   that's  a                                                                    
     conservative   approach   to   a   very   sophisticated                                                                    
     investment  strategy.   So, those  are sort  of on  the                                                                    
     immediate table.                                                                                                           
     I  spoke  last  week  in front  of  [the  Senate  State                                                                    
     Affairs Standing  Committee], and I did  the cornucopia                                                                    
     of  opportunities, most  of  which  I don't  personally                                                                    
     agree make  any sense.   When people invest  in timber,                                                                    
     it usually means timber in  Indonesia or overseas.  And                                                                    
     can you imagine investing in  timber in a small way and                                                                    
     then [ending]  up with an environmental  nightmare in a                                                                    
     country where you have no  control.  So, I'm giving you                                                                    
     a bad  example, in  my opinion.   So,  we have  to work                                                                    
     through all these things.                                                                                                  
Number 0760                                                                                                                     
REPRESENTATIVE BERKOWITZ said he  would quarrel with Mr. Storer's                                                               
assertion   that  the   list  forces   conservative  investments.                                                               
Conversely,  he  said   it  seems  to  him   to  force  imprudent                                                               
investments.   He  said sometimes  there  might emerge  conflicts                                                               
between  the list  in  Title 37  and the  explanation  of what  a                                                               
prudent investor  should do in Title  13.  He said,  "When you're                                                               
forced to sell  assets because you're going up  against the upper                                                               
limits, that's not conservative ...."                                                                                           
Number 0740                                                                                                                     
MR. STORER  concurred with Representative  Berkowitz's statement.                                                               
He said that he has been "at  or near" the permanent fund and has                                                               
long thought that the statutory  list could become so restrictive                                                               
that "it belongs in the  Smithsonian rather than as an investment                                                               
tool."   He stated, "We have  not suffered, to date,  but I think                                                               
...  that we  need to  create a  flexibility to  manage the  fund                                                               
successfully in the future."                                                                                                    
Number 0682                                                                                                                     
REPRESENTATIVE  GRUENBERG indicated  that he  may be  offering an                                                               
amendment that  would eliminate the  [limitations] and  allow the                                                               
board to  just invest under  the prudent  person rule.   He asked                                                               
Chair Weyhrauch if  the bill would not be moved  out of committee                                                               
today,  because he  indicated that  he  has questions  to ask  to                                                               
which he would like answers at the next meeting.                                                                                
CHAIR WEYHRAUCH stated  that it is not his intention  to move the                                                               
bill today.                                                                                                                     
Number 0487                                                                                                                     
RONALD  W.  LORENSEN,  Attorney  at  Law,  Simpson,  Tillinghast,                                                               
Sorensen & Longenbaugh,  P.C., told the committee  that that firm                                                               
is outside  counsel to the  APFC.  He  stated that he  has worked                                                               
with Mr. Storer and the  board on the proposed legislation before                                                               
the committee.   He announced  that he would limit  his testimony                                                               
to addressing the changes sought in  the bill.  Both sections, he                                                               
noted, would make amendments to AS  37.13.120.  He stated that AS                                                               
37.13 is  the chapter that deals  with the APFC and  is described                                                               
as the  legal or  statutory list.   Section 120  is approximately                                                               
four pages  long, he noted,  with subsection (g) setting  out the                                                               
legal list of those investments  that the [APFC] is authorized to                                                               
invest in.   Other subsections within Section  120 provide either                                                               
limitations or  guidance with respect  to the investments  of the                                                               
fund.   For  example, he  said, subsection  (a) is  the provision                                                               
that deals  with the prudent investor  rule as it applies  to the                                                               
fund, while  subsection (k)  is the  subsection that  created the                                                               
basket clause  in 1999.  Subsection  (k) would be amended  by the                                                               
bill  to  add references  to  two  additional subsections  within                                                               
Section  120,  as  exceptions  to the  operation  of  the  basket                                                               
clause.  Those additions are subsections (h) and (j).                                                                           
MR.  LORENSEN  stated  that subsection  (h)  would  prohibit  the                                                               
corporation  from  investing  in  futures  contracts,  except  in                                                               
specific circumstances.  He continued as follows:                                                                               
     That limitation, although it  makes sense in the scheme                                                                    
     of   the   existing   statutory  list,   creates   some                                                                    
     difficulties in  terms of flexibility, with  respect to                                                                    
     the basket  clause.  ...   The  example I have  most in                                                                    
     mind is in  the area of hedge funds,  where hedge funds                                                                    
     may invest, as part of  their strategy, some portion of                                                                    
     the funds under management  in various forms of futures                                                                    
     contracts.   This  limitation page  would prohibit  the                                                                    
     basket clause from being used  for those kinds of hedge                                                                    
     fund investments.   It certainly was  not the intention                                                                    
     at the time that the  basket clause was proposed to the                                                                    
     legislature that that limitation  exist to apply to the                                                                    
     basket clause;  it was just, basically,  something that                                                                    
     hadn't been  anticipated or perceived  as a  problem at                                                                    
     the time.                                                                                                                  
MR.  LORENSEN  stated  that  subsection (j)  is  a  provision  in                                                               
Section 120 that states that the  [APFC] may not invest in bonds,                                                               
basically,  where  the  interest  payment  on  a  bond  has  been                                                               
defaulted in  the last five years.   And again, that's  a prudent                                                               
rule, with respect to fixed income  as a class of investment, but                                                               
it  creates difficulties  when you're  talking about  alternative                                                               
forms of  investment, such as  high yield investments,  which Mr.                                                               
Storer's also described  as what some people  call, "junk bonds,"                                                               
where you're looking for a higher  return.  And the reason you're                                                               
looking for  a higher return  is because  you are investing  in a                                                               
class of bonds which is more  risky, and frequently ... that risk                                                               
is demonstrated by the fact  that interest payments have not been                                                               
made within the last five years.                                                                                                
[The committee took a brief at-ease.]                                                                                           
TAPE 04-26, SIDE A                                                                                                            
Number 0001                                                                                                                     
MR. LORENSEN continued as follows:                                                                                              
     So, adding [subsection]  (j) in Section 2  of the bill,                                                                    
     to  the  exceptions for  the  operation  of the  basket                                                                    
     clause, would  permit a  portion of  the assets  of the                                                                    
     permanent fund  to be  invested in  certain alternative                                                                    
     investments, which use - as  a part of their investment                                                                    
     strategy  - investing  in bonds,  which  have a  higher                                                                    
     risk  of   default,  but   also  the   counter  veiling                                                                    
     consideration is that they have  a higher potential for                                                                    
     an increased return.                                                                                                       
MR. LORENSEN turned to the other  change proposed in Section 2 of                                                               
the  bill, which  is to  increase the  limit on  the size  of the                                                               
basket clause from 5 percent to  15 percent.  He noted that there                                                               
had  already  been  discussion  on  the issue.    Section  1,  he                                                               
specified,   addresses   the   potential  restrictions   on   the                                                               
investment  ability   of  the   permanent  fund   in  alternative                                                               
investments.   Mr. Lorensen  paraphrased Section  1 of  the bill,                                                               
which read as follows:                                                                                                          
     *Section 1. AS 37.13.120(e) is amended to read:                                                                          
          (e) The corporation may not borrow money or                                                                           
     guarantee from  principal of  the fund  the obligations                                                                    
     of others except as provided  in this subsection.  With                                                                    
     respect  to [REAL  PROPERTY] investments  of the  fund,                                                                    
     the  corporation may,  through an  entity in  which the                                                                    
     investment is  made, borrow money  if the  borrowing is                                                                    
     without recourse to the corporation and the fund.                                                                          
MR.  LORENSEN explained  that the  idea is  as long  as the  fund                                                               
itself  is protected  by  some intervening  legal  entity, it  is                                                               
currently permissible "for real  estate only" to make investments                                                               
that  might involve  borrowing money  as part  of the  investment                                                               
strategy.  He  added, "And, of course, there  we're talking about                                                               
leverage, basically."  He continued as follows:                                                                                 
     Now  that  we  look   at  various  available  forms  of                                                                    
     alternative investments,  we see that certain  kinds of                                                                    
     hedge  funds, and  potentially  also  certain kinds  of                                                                    
     private  equity  funds,  do  -   as  a  part  of  their                                                                    
     investment  strategy  -   invest  ...  through  limited                                                                    
     partnerships.  It's never the  [APFC] itself that would                                                                    
     be  the  investor, but  the  [APFC]  would purchase  an                                                                    
     interest in  a limited partnership, for  instance.  And                                                                    
     the  limited   partnerships,  again,  may   enter  into                                                                    
     borrowing  for  leverage purposes,  as  a  part of  the                                                                    
     investment strategy.   And so, here  the recommendation                                                                    
     is  simply  to  delete   the  ...  limitation  on  real                                                                    
     property  and  make  it  available   for  any  kind  of                                                                    
     investment of the  fund, so long as it  is done through                                                                    
     a  separate legal  entity and  so long  as there  is no                                                                    
     recourse back against the fund.                                                                                            
Number 0356                                                                                                                     
REPRESENTATIVE LYNN asked how 15  percent was chosen in Section 2                                                               
of the bill.                                                                                                                    
MR. LORENSEN deferred to Mr. Storer.                                                                                            
Number 0419                                                                                                                     
MR. STORER replied that "we"  want as much investment flexibility                                                               
as  possible   and  the  constitution  [allows]   investments  as                                                               
designated  by law,  which would  be 15  percent.   He added,  "I                                                               
would note that if you looked  at other public funds, it's silent                                                               
by virtue of their rules.   Their rules would be 100 percent, not                                                               
15 percent.   So, 15 percent  still [is a] far  more conservative                                                               
constraint than others."                                                                                                        
REPRESENTATIVE  LYNN asked  if the  15 percent  was "pushing  the                                                               
envelope" or whether it was "still plenty of room."                                                                             
MR.  STORER  responded  that he  personally  doesn't  think  it's                                                               
pushing  the envelope  at all.   Conversely,  he opined  it's the                                                               
maximum that  "we" can  use and still  fall within  the direction                                                               
that  the constitution  allows.   He observed  that where  he has                                                               
seen  public funds  that  have no  constraints,  those funds  are                                                               
still  managed  in  well-diversified  portfolios.    He  said  he                                                               
doesn't see undue risk in being allowed that extra flexibility.                                                                 
Number 0610                                                                                                                     
REPRESENTATIVE  GRUENBERG  asked,  "What  do  you  mean  by  'not                                                               
withstanding these other subsections'?"                                                                                         
Number 0652                                                                                                                     
MR. LORENSEN replied as follows:                                                                                                
       "Notwithstanding", in this context means that even                                                                       
      though these limitations exist, they do not apply to                                                                      
     the basket clause.                                                                                                         
Number 0670                                                                                                                     
REPRESENTATIVE  SEATON, indicating  [the language  to be  deleted                                                               
regarding] real estate in Section 1  of the bill, asked, "Is that                                                               
because they're real estate mortgages?"                                                                                         
MR. LORENSEN  answered that he  thinks real estate  mortgages are                                                               
probably  the best  example of  how real  estate investments  are                                                               
made by  the permanent fund.   He  noted that the  permanent fund                                                               
actually  has "a  fairly low  percentage  of its  assets in  real                                                               
estate that is actually leveraged or  is borrowed."  He said some                                                               
of the  real estate properties  that are purchased by  the [APFC]                                                               
do have  a borrowing,  leverage, or  mortgage component  to them,                                                               
and "this  was inserted in  1999 to make  it clear that  that was                                                               
permissible, so  long as  it was done  through a  separate title-                                                               
holding entity."                                                                                                                
Number 0750                                                                                                                     
MR.  STORER added  that  the [APFC]  leveraged  its "direct  real                                                               
estate portfolio  approximately 15  percent; it's  an incremental                                                               
return."  He  stated that that's still  conservative by virtually                                                               
all standards.   For example,  he proffered that  publicly traded                                                               
real estate  investment trusts "tend  to run about  40-60 percent                                                               
leverage."  He  offered his understanding that  most public funds                                                               
actually use more  leverage - particularly in the  last few years                                                               
with the lower interest rate.                                                                                                   
REPRESENTATIVE  SEATON asked,  "Is that,  basically, the  futures                                                               
market  that we're  talking about,  whereas real  estate is  more                                                               
MR. LORENSEN answered no.  He continued as follows:                                                                             
     Maybe the  best example has  nothing to do  with either                                                                    
     mortgages  or  real  estate,  but is  in  the  area  of                                                                    
     private equity,  where ... there are  leveraged buyouts                                                                    
     and that  sort of  investment activity  as part  of the                                                                    
     strategy.  And so, there  will be a borrowing component                                                                    
     in these private equity transactions,  which is - again                                                                    
     -  nothing to  do with  real estate,  specifically, but                                                                    
     just is  a way to  finance the  underlying transaction.                                                                    
     And so, to the extent  that a particular private equity                                                                    
     investment involves  a leverage  aspect, we  would like                                                                    
     to see  this language  in place to  make it  clear that                                                                    
     that's permissible.  Private  equity is now permissible                                                                    
     to the extent of the cap created by the basket clause.                                                                     
Number 0903                                                                                                                     
MR.  STORER added  that  "we" view  "this" as  a  cleanup to  the                                                               
original  intent of  the basket  clause.   He said  he hopes  the                                                               
committee agrees.                                                                                                               
MR. LORENSEN concurred.                                                                                                         
Number 0948                                                                                                                     
CHAIR WEYHRAUCH announced that HB 466 was heard and held.                                                                       
HB 423-TAXICAB DRIVER LIABILITY                                                                                               
[Contains discussion of HB 68.]                                                                                                 
Number 0960                                                                                                                     
CHAIR WEYHRAUCH  announced that  the next  order of  business was                                                               
HOUSE BILL NO.  423, "An Act relating to  accidents involving the                                                               
vehicle  of  a  person  under   the  influence  of  an  alcoholic                                                               
beverage; and providing for an effective date."                                                                                 
Number 0985                                                                                                                     
JIM  SHINE  JR., Staff  to  Representative  Tom Anderson,  Alaska                                                               
State Legislature,  presented HB 423 on  behalf of Representative                                                               
Anderson, sponsor.  Mr. Shine read his testimony as follows:                                                                    
     House Bill 423 is a "Good Samaritan" bill for taxicab                                                                      
     operators who transport intoxicated persons or who                                                                         
     drive an intoxicated person's motor vehicle to their                                                                       
     home or another directed location.  This legislation                                                                       
     would create a deterrent for those who might otherwise                                                                     
     drive impaired if unable to find an alternative method                                                                     
     of transportation.  It grants taxicab companies legal                                                                      
     immunity in the event that an accident occurs, except                                                                      
     in the case of recklessness, gross negligence, or                                                                          
     intentional misconduct.                                                                                                    
MR.  SHINE,  in response  to  a  question from  Chair  Weyhrauch,                                                               
confirmed that the order of  committee referral was reversed from                                                               
how  it shows  on the  bill; therefore,  the House  State Affairs                                                               
Standing Committee  is the  first committee  of referral  and the                                                               
House Judiciary Standing  Committee is the second.   He continued                                                               
reading his testimony as follows:                                                                                               
     There  are times  when Alaskans  find themselves  in an                                                                    
     "end-of-evening dilemma" - they  are over the .08 blood                                                                    
     alcohol limit and shouldn't drive,  but are worried and                                                                    
     reluctant to leave their car  unattended overnight.  HB
     423  resolves  this  dilemma   by  allowing  a  taxicab                                                                    
     operator to  drive an intoxicated  person home  while a                                                                    
     second operator follows them home in their vehicle.                                                                        
     This  legislation would  allow  the intoxicated  person                                                                    
     and his or  her vehicle to get home  safely without the                                                                    
     taxicab operator  fearing liability.   HB  423 promotes                                                                    
     responsible behavior  and encourages  people to  do the                                                                    
     right thing and not drive while intoxicated.                                                                               
     While  annual alcohol-related  traffic fatalities  have                                                                    
     decreased by  more than  33 percent  over the  past few                                                                    
     decades, the  latest statistics show a  recent increase                                                                    
     with more than 17,400 people  killed and more than half                                                                    
     a million others injured  in alcohol-related crashes in                                                                    
     2002  in the  United  States.   Alaska  had 87  traffic                                                                    
     deaths,  of  which   35  were  alcohol-related,  [which                                                                    
     equated to]  40 percent  in 2002.   The  previous year,                                                                    
     there  were 47  alcohol-related  deaths out  of the  89                                                                    
     deaths, which equated to 53 percent.                                                                                       
     In  order  for  this  program  to  be  successful,  cab                                                                    
     companies  and  liquor  establishments  must  work  and                                                                    
     communicate   closely.     These  establishments   will                                                                    
     implement  the   following  strategies   and  policies:                                                                    
     Place  signs  near  pay phones,  direct  lines  to  cab                                                                    
     companies,   and  other   conspicuous   areas  of   the                                                                    
     establishment, such  as restrooms and exits;  train the                                                                    
     establishment  staff   on  the  availability   of  this                                                                    
     program  and   how  to  inform  patrons,   and  how  to                                                                    
     implement    the   process;    make   public    service                                                                    
     announcements  at   closing  time  to   help  influence                                                                    
     patrons to  use the program;  pay a portion of  the cab                                                                    
     fare  cost agreed  upon by  establishments and  program                                                                    
     officials;   and   track   program  usage   to   assess                                                                    
     effectiveness to promote and or improve the program.                                                                       
MR. SHINE noted that the Checker Cab Company in Anchorage has                                                                   
set some guidelines for the program.  He shared those written                                                                   
guidelines, which read as follows [some punctuation changed]:                                                                   
     A minimum of six designated  taxi drivers on duty every                                                                    
     night to be available for this program.                                                                                    
     A flat $40 fee per  car delivery made from any licensed                                                                    
     establishment  to  one  destination  in  the  Anchorage                                                                    
     area, for both the patron and his/her vehicle.                                                                             
     Every car delivery  that is done will be  logged into a                                                                    
     logbook  in  the  dispatch  office,   to  ease  in  the                                                                    
     tracking of the  progress of this program  and how well                                                                    
     it is working to benefit the community.                                                                                    
     Training of  taxicab drivers and dispatch  employees so                                                                    
     designated  drivers  will  be  able to  cover  the  car                                                                    
     deliveries safely.                                                                                                         
     Promote,  with all  the taxi  drivers'  help, how  this                                                                    
     program is  available to all  customers heading  to any                                                                    
     drinking establishment in the Anchorage  area.  It is a                                                                    
     convenient way  to enjoy all  [licensed] establishments                                                                    
     without worrying  about retrieving  a vehicle  the next                                                                    
MR. SHINE continued reading his testimony as follows:                                                                           
     This service  will be  free to the  consumer.   The cab                                                                    
     companies  will receive  $40 for  each trip  they make.                                                                    
     It's a  reduced flat  rate for  transportation anywhere                                                                    
     in  the  Anchorage  bowl area.    This  legislation  is                                                                    
     supported  by Mother's  Against  Drunk Drivers  (MADD),                                                                    
     and there is a letter of support in your bill packet.                                                                      
     This  bill  is  identical   to  House  Bill  68,  which                                                                    
     unanimously passed  the House  in the  22nd legislature                                                                    
     by a  vote of 37-0.   In the Senate, it  passed through                                                                    
     the  [Senate  Transportation Standing  Committee],  but                                                                    
      stalled in the [Senate Judiciary Standing Committee]                                                                      
     and was never heard.                                                                                                       
MR. SHINE noted  that Darwin Biwer was available to  testify.  He                                                               
said  he would  answer questions  from the  committee, but  would                                                               
defer any technical questions to Mr. Biwer.                                                                                     
Number 1256                                                                                                                     
DARWIN BIWER, Board Member, Cabaret  Hotel Restaurant & Retailers                                                               
Association (CHARR),  explained the formation of  HB 423, stating                                                               
that it was  a concept brought forth by two  CHARR board members,                                                               
Rod Pfleiger  and John Pattee.   He said that HB  423 was another                                                               
example of  the liquor industry  trying to promote  safe driving;                                                               
CHARR had  supported previous,  similar legislation  that stalled                                                               
in the  Senate.  He said  that HB 423 was  a "housekeeping" bill,                                                               
so  the  liability [insurance]  for  taxicab  companies would  be                                                               
lower.   He  reiterated  that  there would  be  no  costs to  the                                                               
consumer with the passage of HB  423; those costs would be [paid]                                                               
by the liquor companies and [through] donations.                                                                                
Number 1395                                                                                                                     
REPRESENTATIVE  HOLM first  complimented  CHARR, specifically  in                                                               
Anchorage, for bringing  forth HB 423.  He indicated  that he had                                                               
witnessed the  successful implementation of a  similar process in                                                               
Canada,  where  a  connection  has   been  made  between  taxicab                                                               
companies and liquor establishments.                                                                                            
REPRESENTATIVE  HOLM, noting  that  [drinking and  driving] is  a                                                               
statewide problem,  and HB  423 is  enacting a  statewide policy,                                                               
asked  Mr.  Biwer  how  CHARR  was  interacting  with  the  other                                                               
communities in Alaska.                                                                                                          
MR.  BIWER  stated that  there  is  a  pilot program  enacted  in                                                               
Anchorage, and  CHARR wanted to  implement the program,  work the                                                               
bugs  out, and  then  take  it to  other  communities within  the                                                               
REPRESENTATIVE HOLM thanked Mr. Biwer  and stated that he thought                                                               
that  HB 423  was  a very  responsible  thing that  establishment                                                               
owners did to take care of the public.                                                                                          
Number 1509                                                                                                                     
REPRESENTATIVE BERKOWITZ  asked if there  was a "sunset  date" on                                                               
the Anchorage  pilot program, and  he said, if not,  CHARR should                                                               
think about implementing  one or going statewide  from the start.                                                               
He also asked  who would bear the costs if  there was an accident                                                               
as a result of negligence on the part of a taxi driver.                                                                         
MR.  BIWER  stated  that  he  wasn't the  person  to  talk  about                                                               
insurance rates, but  he thought that there  was a representative                                                               
from Allstate  Insurance that was  present, who would be  able to                                                               
answer that  question.  He stated  that the purpose of  HB 423 is                                                               
to reduce the  insurance rates for the taxicab  companies to give                                                               
them incentive to participate in the program.                                                                                   
REPRESENTATIVE BERKOWITZ asked if  there have been any assurances                                                               
from the  insurance companies  that rates will  go down  with the                                                               
passage of HB 423.                                                                                                              
MR.  BIWER said  that the  rates for  a taxi  would be  somewhere                                                               
around $1000 a month if HB 423 was  not passed.  He cited that as                                                               
one of the reasons that HB  423 was introduced; so rates would go                                                               
down and the pilot program could be implemented.                                                                                
CHAIR WEYHRAUCH cited the earlier  testimony from Mr. Biwer, when                                                               
he said there  would be no costs to the  consumer, and asked what                                                               
costs were involved.                                                                                                            
MR. BIWER responded  that the cost would be for  the cab ride and                                                               
the  two  cab  drivers.    He said  that  the  Anchorage  taxicab                                                               
companies have  set a flat  rate of $40, regardless  of distance,                                                               
within the Anchorage bowl area.                                                                                                 
REPRESENTATIVE  WEYHRAUCH  asked  for   an  annual  estimate  for                                                               
expenses that would be required industry-wide.                                                                                  
MR. BIWER said that CHARR was  going to apply for federal grants,                                                               
and has  had financial commitments  from liquor  distributors, so                                                               
there  really  is  no  fiscal  note.    In  response  to  further                                                               
questions, he  stated that many establishments  already bear some                                                               
costs because they pay for cab  rides for their patrons.  He said                                                               
that CHARR felt  that HB 423 was  a better way to  go about doing                                                               
that.   He made  the comment  that this was  a pilot  program and                                                               
CHARR doesn't have all the answers to those questions yet.                                                                      
Number 1737                                                                                                                     
REPRESENTATIVE GRUENBERG  asked what position Frank  Dahl held in                                                               
MR. BIWER  responded that Mr. Dahl  is on the Board  of Directors                                                               
of Anchorage CHARR.                                                                                                             
Number 1800                                                                                                                     
REPRESENTATIVE SEATON noted  that in HB 423 there  was no mention                                                               
if  the vehicle  driven already  had insurance.   He  stated that                                                               
this  may  be  a  situation where  [the  legislature]  is  giving                                                               
liability for negligence to a  driver of an uninsured vehicle who                                                               
then gets  into an  accident.   He said that  it would  seem like                                                               
there will be some fallback to  the people who are paying for the                                                               
driver.  He stated that he  didn't think that the legislature was                                                               
to the point where it would  grant someone total immunity just to                                                               
get  an intoxicated  person's car  home.   He stated  that it  is                                                               
risking  a victims  injuries without  someone being  liable.   He                                                               
asked Mr. Biwer  to think about that and address  that issue when                                                               
the committee next discusses HB 423.                                                                                            
[HB 423 was heard and held.]                                                                                                    
Number 1847                                                                                                                     
There being no  further business before the  committee, the House                                                               
State Affairs  Standing Committee meeting was  adjourned at 10:00                                                               

Document Name Date/Time Subjects