Legislature(1993 - 1994)
02/04/1994 09:09 AM Senate STA
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* first hearing in first committee of referral
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SENATE STATE AFFAIRS COMMITTEE
February 4, 1994
9:09 a.m.
MEMBERS PRESENT
Senator Loren Leman, Chair
Senator Mike Miller, Vice Chair
Senator Johnny Ellis
MEMBERS ABSENT
Senator Robin Taylor
Senator Jim Duncan
COMMITTEE CALENDAR
SENATE BILL NO. 245
"An Act relating to investments of the permanent fund involving
equity interests in and debt obligations secured by mortgages on
real estate; and providing for an effective date."
SENATE BILL NO. 170
"An Act relating to income of the permanent fund."
SENATE JOINT RESOLUTION NO. 38
Proposing amendments to the Constitution of the State of Alaska
relating to revenues from natural resources, the Alaska permanent
fund, the appropriation limit and the budget reserve fund; and
providing for an effective date for the amendments.
PREVIOUS SENATE COMMITTEE ACTION
SB 245 - See State Affairs minutes dated 1/28/94.
SB 170 - See State Affairs minutes dated 1/26/94, 1/28/94.
SJR 38 - See State Affairs minutes dated 1/26/94, 1/28/94.
WITNESS REGISTER
William H. Scott, Executive Director
Alaska Permanent Fund Corporation
P.O. Box 25500, Juneau, AK 99802-5500¶465-2047
POSITION STATEMENT: in favor of SB 245
Pete Jeans, Chief Real Estate Investment Officer
Alaska Permanent Fund Corporation
P.O. Box 25500, Juneau, AK 99802-5500¶465-2047
POSITION STATEMENT: in favor of SB 245
Jim Kelly, Research & Liaison Officer
Alaska Permanent Fund Corporation
P.O. Box 25500, Juneau, AK 99802-5500¶465-2047
POSITION STATEMENT: in favor of SB 245
POSITION STATEMENT: testified on SJR 38
Shelby Stastny, Director
Office of Management & Budget
¶465-3568
POSITION STATEMENT: in favor of SB 170
POSITION STATEMENT: testified on SJR 38
Roger Cremo
425 G Street, Anchorage, AK 99501¶333-8188
POSITION STATEMENT: in favor of SJR 38
Representative Mark Hanley
State Capitol, Juneau, AK 99801-1182¶465-4939
POSITION STATEMENT: testified on SJR 38
ACTION NARRATIVE
TAPE 94-6, SIDE A
Number 001
CHAIRMAN LEMAN calls the Senate State Affairs Committee to order at
9:09 a.m.
Number 010
CHAIRMAN LEMAN announces SB 170 will be heard later in the meeting.
Number 016
CHAIRMAN LEMAN brings up SB 245 (PERMANENT FUND INVESTMENTS IN REAL
ESTATE) as the first order of business before the committee today.
The chairman calls representatives of the Alaska Permanent Fund
Corporation as the first witnesses.
Number 023
WILLIAM H. SCOTT, Executive Director, Alaska Permanent Fund
Corporation, introduces Pete Jeans, the Chief Real Estate
Investment Officer for the corporation.
Number 037
PETE JEANS, Chief Real Estate Investment Officer, Alaska Permanent
Fund Corporation, gives the committee some background on the real
estate investment experience of the corporation. Originally, the
corporation began by investing in real estate pools. Since that
time, the corporation has become one of the largest institutional
real estate holders in the United States. One of the problems
investors in real estate pools have is that there absolutely no
control over the assets. Other than real estate pools, the
corporation also had the option of co-investing in property with
other institutional investors. Six years ago, when the corporation
began co-investing, many of the other pension funds and co-
investors were sitting on the sidelines. This enabled the
corporation to do quite a bit of investing, mostly with small
pension funds. The larger pension funds weren't willing to co-
invest; if they were investing, they were going to invest 100%.
The few properties in which the corporation did invest with the
larger pension funds, were properties worth 200-250 million
dollars; even the larger funds don't want to hold one property of
that size.
Number 102
MR. JEANS says one of the problems with 40% investments, is that
the corporation doesn't have any control over the property. At the
time the Alaska Permanent Fund Corporation began co-investing,
there wasn't much investing going on, and the corporation was able
to negotiate buy-sells and shoot-out clauses which gave the
corporation some control over the deals. That is no longer the
case. Over the last year, the corporation has lost quite a few
deals because the managers weren't willing to do deals with no
controls. The corporation has become the leader in co-investing
and has dealt with over 200 funds in the country. The problem now
is that there is more money out there, and when the corporation
tries to line up partners on a proposal, if the potential partners
like it, they do the whole deal and the corporation doesn't get any
of it. One of the problems the corporation is going to run into
with less than 100% investment in properties is finding partners to
take a minority position, with no controls in the investment.
Number 140
MR. JEANS states the real estate market is starting to turn around,
and the people the corporation co-invested with five years ago are
going to be the corporation's major competitors. Unless the
corporation is allowed to go to 100% investments in real estate, it
is going to be extremely difficult for the corporation to get any
money out on real estate, especially on the good properties.
Number 149
CHAIRMAN LEMAN thanks Mr. Jeans for his testimony and asks if
anyone has any questions. The chairman agrees with Mr. Jeans that
the corporation should be able to invest 100% in real estate, but
is hesitant to make that change.
Number 183
MR. JEANS says the corporation has been fortunate for the last
three years because it has weathered the down-turn in real estate
very well. It worked to the corporation's best interest in
enabling it to find co-investors. However, that is now changing.
Since 1993, the corporation has started losing deals. The
corporation purchased quite a few apartments over the last two or
three years. It is probably a good time to be putting those
apartments back on the market, but unfortunately the corporation's
partners don't want to sell.
Number 214
The committee begins discussing some amendments and the proposed
State Affairs Committee substitute for SB 245.
SENATOR ELLIS says he thinks the amendments to SB 245 look too
restrictive to him, and he is not uncomfortable with the original
bill.
Number 221
SENATOR MILLER says he is more comfortable with the committee
substitute for SB 245 than he is with the original bill. He
believes the board is going to have to be willing to compromise to
get a bill passed in the legislature. Senator Miller is not
comfortable in giving the corporation leeway to invest 100% in any
property, of any size.
Number 235
SENATOR ELLIS comments on a historical perspective relating to
investment requirements for the corporation: he recalls Tom Fink's
proposal to only allow the Alaska Permanent Fund Corporation to
invest in property within the State of Alaska. This would have
caused an enormous crash; this kind of restriction, in hind sight,
would have been really disastrous. The restriction in the
amendment is much more reasonable than Fink's proposed restriction,
but Senator Ellis wanted to warn the committee not to put too many
restrictions on the permanent fund corporation. He reiterates that
he leans towards allowing the managers at the corporation more
discretion in their investments. The track record of the
corporation puts Senator Ellis's mind at ease.
Number 254
SENATOR MILLER states he agrees with Senator Ellis, and he did not
agree with Mayor Fink's proposal, but he does not think it is wise
to put all one's eggs in one basket either.
Number 260
JIM KELLY states the Alaska Permanent Fund Corporation has a target
of having 10% of its' investments in real estate, while the
legislature has a target of 15% investment in real estate for the
corporation. The corporation is not going to be able to reach the
legislature's target of 15% if they are not allowed to invest in a
higher percentage of a deal. PERS and TERS already have the option
to do 100% deals. They have no restrictions except the prudent
investor rule. The corporation has the prudent investor rule, plus
an authorized list of additional restrictions. If the corporation
didn't have these additional restrictions, it would still follow
the prudent investor rule. In the absence of the additional
restrictions, the corporation is not going to put 380 million
dollars into one deal. The committee could put in an upper number
if it makes the committee feel comfortable, but the board is not
going to approve the corporation getting into a 350 million dollar
deal anywhere. The board's main job is to diversify the fund and
keep it safe, in addition to making money. The board is having a
hard time keeping the fund safe with the restrictions it has right
now. The corporation is also going to have a harder time making
money.
Number 275
MR. JEANS comments it is difficult to set limits for investments,
but limits can always be changed. The corporation would like to be
able to handle real estate in the same way it would manage any
other asset class.
Number 288
CHAIRMAN LEMAN asks if the corporation can sell its' interest in a
property even if a partner does not want to sell. Mr. Scott
replies it is extremely difficult to do without control of the
investment. Mr. Jeans adds, that to sell a minority interest in a
property, the corporation would have to discount it to the extent
it wouldn't make sense to sell it.
Number 302
MR. SCOTT comments that the difference between the lesser players
in the real estate market and the Alaska Permanent Fund Corporation
is that when the lesser players have a property that is performing
well, they don't want to sell it, while the corporation thinks that
is the best time to sell in order to maximize returns.
Number 312
MR. KELLY asks Mr. Jeans if he would explain the reasoning behind
why the corporation invested so much money in Tyson's Corner and
the likelihood of the corporation investing that much in any one
project again.
Number 317
MR. JEANS states Tyson's Corner is a unique property and is
probably one of the top three shopping centers in the country. The
corporation owns 39% of Tyson's Corners, which is a controlling
interest. It is worth it to the corporation to have 145 million
dollars invested in Tyson's Corner in order to have the controlling
interest; the corporation has veto rights over all the other
partners. Tyson's Corner is such a well-known asset, that almost
any pension fund in the country would buy Tyson's from the
corporation. The corporation doesn't have close to that amount of
money in any other property. One of the problems the corporation
has with its co-investors is that they are mostly small pension
funds with perhaps 50-100 million dollars invested in about 5
properties, and if those properties are performing well, those
pension funds are afraid to sell. The only choice the corporation
has, if we want to market the properties, is to buy out these co-
investors. The 40% rule, when it came into effect, was to allow
the corporation to piggy-back on the major pension funds and
utilize their investment expertise. The 40% rule is now enabling
the smaller pension funds to piggy-back on the corporation, because
the larger funds are now doing their own deals and they won't give
the corporation a piece of it.
Number 348
CHAIRMAN LEMAN suggests that on page 1, lines 9 and 10 of the
proposed committee substitute the figure 20,000,000 be changed to
50,000,000. Also add: if the investment exceeds 50,000,000, the
corporation shall have no more than 67% ownership in a property.
The Chairman asks Mr. Jeans if this language would restrict the
corporation too much on its' larger investments.
Number 364
MR. JEANS replies that proposal would be more workable than the
limitations with which the corporation currently has to work.
Number 366
CHAIRMAN LEMAN asks if the corporation would lose deals or lose out
on opportunities with the changes he has just proposed.
Number 368
MR. JEANS responds the corporation will lose some major retail
properties and some major offices. The difficulty the corporation
will have with any restrictions is in finding an investor willing
to come in and take a minority share in a property. If these
restrictions pass, the corporation will probably find itself doing
deals up to 50 million, period.
Number 373
SENATOR ELLIS asks what the administration's position is on SB 245.
Number 375
CHAIRMAN LEMAN answers he is not aware of a position from the
administration.
Number 377
MR. JEANS and MR. SCOTT responds the administration has no
objection to SB 245.
Number 379
SENATOR ELLIS says one could then make the assumption the governor
would sign the legislation if it passed.
Number 380
MR. JEANS and MR. SCOTT answer that it is their understanding the
governor would sign the legislation.
Number 383
CHAIRMAN LEMAN comments that in order to pass SB 245 out of State
Affairs Committee today, the members must come to agreement on the
bill. The chairman asks Senator Miller what he would agree to in
SB 245.
Number 384
SENATOR MILLER states if the bill changes above and beyond what it
is now, he cannot vote for it on the floor.
Number 388
SENATOR MILLER moves the adoption of CSSB 245 (STA) in lieu of the
original bill.
Number 389
CHAIRMAN LEMAN, hearing no objection, notes that CSSB 245(STA) has
been adopted.
Number 391
CHAIRMAN LEMAN offers an amendment to CSSB 245(STA). On page 1,
lines 9 and 10 change 20,000,000 to 50,000,000. On page 1, line 12
change 40 percent to 33 percent. On page 2, line 5 change 40
percent to 33 percent. On page 2, line 9 change 60 percent to 6 6
percent.
Number 396
CHAIRMAN LEMAN, hearing no objection to the amendment, notes the
amendment has been adopted unanimous consent.
Number 400
SENATOR ELLIS asks that CSSB 245(STA) be moved from committee with
individual recommendations.
Number 401
CHAIRMAN LEMAN, hearing no objection, orders that CSSB 245(STA) be
discharged from the Senate State Affairs Committee with individual
recommendations.
Number 404
CHAIRMAN LEMAN brings up SB 170 (DISPOSITION OF PERMANENT FUND
INCOME) as the next order of business before the committee today
and calls Senator Rieger and Mr. Stastny to testify.
Number 412
SHELBY STASTNY, Director, Office of Management & Budget, Governor's
Office, says there is not a formal administration position on SB
170, but that he personally is favorably disposed to the bill.
Number 424
CHAIRMAN LEMAN asks Senator Rieger what effect SB 170 will have on
future dividends if it passes.
Number 431
SENATOR RIEGER says the effect of SB 170 will likely be that
dividends will probably hit 900 dollars before they start climbing
again. This affect is drawn from run # 10, which Senator Rieger
thinks is the most likely run. Senator Rieger continues to
describe the differences between run # 10 and run # 11. He states
under SB 170.
Number 473
CHAIRMAN LEMAN asks Senator Rieger if the formula for payout of
dividends will be changed to accommodate inflation proofing the
fund.
Number 474
SENATOR RIEGER says that a hold-harmless feature could be added to
the bill so dividend amounts do not drop. However, once the fund
is inflation proofed, any amount could be paid out in dividends
without having to worry about protecting the fund.
Number 477
CHAIRMAN LEMAN asks if anyone has questions or if there is anyone
else wishing to testify on SB 170. Hearing none, the chairman asks
the pleasure of the committee.
Number 480
SENATOR MILLER makes a motion to discharge SB 170 from the Senate
State Affairs Committee with individual recommendations.
Number 481
CHAIRMAN LEMAN, hearing no objections, orders SB 170 discharged
from committee with individual recommendations.
Number 483
CHAIRMAN LEMAN brings up SJR 38 (RESTRUCTURE PERMANENT FUND) as the
next order of business before the committee. The chairman invites
Mr. Stastny to comment on SJR 38.
Number 492
SHELBY STASTNY, Director, Office of Management & Budget (OMB),
Governor's Office, states OMB has spent some time reviewing Mr.
Cremo's proposal (SJR 38). While OMB would like to believe SJR 38
would solve the state's fiscal problems, it doesn't appear that it
would, at least in the short term, fifteen to twenty years. OMB
shares the concerns many people have regarding the amount of
revenues that will come to the state. If one excludes for current
use the resources we have in our reserve funds, then it appears
this proposal would exacerbate the current budget gap to the tune
of 200 to 300 million dollars a year. OMB bases these projections
on mid-case scenarios of the Department of Revenue projections. It
could be even more if based on low-case scenarios. So it certainly
would put great pressure on the budget. Mr. Stastny thinks that by
the year 2000 the state would be dealing with a total
appropriations budget of about the 2.4 billion dollar range, which
would be a significant reduction from today's budget. This range
would be equivalent to taking about 700 million dollars out of our
current budget. If we could live with that reduction for ten or
fifteen years, there is a period of time where we would cross the
line and there would be more money available under the Cremo plan
than there would be under the current revenue projections.
Number 540
MR. STASTNY says one of the constraints from the type of plan in
SJR 38 is that we would have difficulties investing in revenue
raising matters. One argument for SJR 38 is we would be able to
bond for projects, but the question that always comes up is if
you've got money available, should you be bonding? OMB does not
believe the state could live within the constraints of SJR 38 for
the period of time we would have to until we reached the point in
which we were in a better position with cash flow. Mr. Stastny
does not believe the state can save ourselves rich, and he thinks
that's what SJR 38 will try to do. He thinks the state will better
be able to invest its' money in income-producing resources in the
future, and will be able to make the state rich by using the
resources of the state.
Number 564
CHAIRMAN LEMAN comments that the state cannot spend itself rich
either.
Number 566
MR. STASTNY asks if the state could invest itself rich.
Number 570
CHAIRMAN LEMAN calls Representative Hanley as the next witness.
Number 579
REPRESENTATIVE HANLEY states he has set up the Alaska Permanent
Fund Corporation's numbers, as well as Mr. Cremo's plan in his
computer.
TAPE 94-6, SIDE B
Number 582
REPRESENTATIVE HANLEY continues, saying the January 27th run that
he did is based on mid-case scenarios. The Alaska Permanent Fund
Corporation, as well as the Governor's Office use the low-case
scenario for their revenue projections. So he then changed his
chart to show the low-case scenario as well as the percentage of
the first year withdrawal has been reduced from 20% to 16.4%, with
a geometric progression down to the 6% numbers.
Number 572
SENATOR ELLIS asks Representative Hanley if the figures on his
chart are in nominal dollars.
Number 570
REPRESENTATIVE HANLEY replies that the figures on his chart are in
nominal dollars. Those are the basic changes that were made at the
request of the committee. The chart was developed in order to come
up with an apples to apples comparison. Representative Hanley says
his numbers come out pretty comparable to Mr. Stastny's numbers.
Another addition to the chart was a net withdrawal percentage.
Representative Hanley continues with his explanation of his chart
on "Traditional vs Cremo Budgeting".
Number 559
CHAIRMAN LEMAN asks Representative Hanley if SJR 38 has been
double-checked to make sure the language in it is very clear.
Number 547
REPRESENTATIVE HANLEY states he has suggested House Finance
Committee look at the spreadsheets and fiscal aspects of SJR 38,
and then send the resolution back to the House Judiciary Committee
to double-check the language. There are some questions in regards
to clarifying some of the definitions, for instance, a definition
for the term "biological marine resource". Every single word in
SJR 38 needs to be defined for the record so that it is very clear
in the future as to what was intended.
Number 532
CHAIRMAN LEMAN thanks Representative Hanley for his testimony and
calls Mr. Cremo to testify.
Number 530
ROGER CREMO, testifying from Hawaii, states he does not share Mr.
Stastny's concerns. Mr. Stastny's characterization of SJR 38 as a
savings plan is incorrect. It is merely an attempt to convert the
fluctuating revenues that the state has now into revenues that
fluctuate less or not at all. The permanent fund now seems to be
an income fund. Mr. Cremo questions whether the Alaska Permanent
Fund Corporation has the authority to even invest 40% in stocks.
He questions whether it has the authority to invest in real estate.
He questions whether it has the authority to buy and invest in
currency.
Number 500
MR. CREMO thinks it is important that in the proposed fund, the
withdrawal is taken from a twelve quarter average of fund value.
This means the withdrawal is less than a nominal 6%. Mr. Cremo
does not agree with the comments made by Mr. Kelly, Mr. Goldsmith,
or Mr. Stastny. Mr. Cremo goes on to detail his disagreement with
their comments. One of the reasons he disagrees with the comments
of Mr. Kelly is because the Alaska Permanent Fund Corporation uses
extremely conservative figures. He continues his analysis of
permanent fund corporation practices and inflation proofing of the
fund. He believes his plan, SJR 38, would solidify the inflation
proofing of the permanent fund.
Number 368
MR. CREMO doubts the correctness of some of the points made by Mr.
Goldsmith. One point of disagreement is that Mr. Goldsmith thinks
SJR 38 is too complicated, while Mr. Cremo thinks SJR 38 is a very
simple plan. He disagrees on another point: saying the earnings
reserve account is not part of the permanent fund, but simply
another general fund. Mr. Cremo summarizes by saying he finds it
difficult to agree with much of what he is hearing.
Number 288
CHAIRMAN LEMAN thanks Mr. Cremo for his testimony and asks if
anyone else wishes to testify.
Number 284
MR. KELLY clarifies for the committee that when he referred to real
withdrawals from the fund, he was including the oil revenues that
are added in that category.
Number 272
CHAIRMAN LEMAN states there is some tinkering to be done on SJR 38,
but he doesn't necessarily thinks the resolution needs to be kept
in the committee to do it, and so is not opposed to moving it out
of committee.
Number 260
SENATOR ELLIS says work on SJR 38 will continue; he would like to
see the bill move on. Senator Ellis makes a motion to discharge
SJR 38 from the Senate State Affairs Committee with individual
recommendations.
Number 249
CHAIRMAN LEMAN, hearing no objection, orders that SJR 38 be
discharged from committee with individual recommendations.
Number 245
CHAIRMAN LEMAN announces the agenda for Wednesday, February 9, 1994
as SB 237 and SB 220.
Number 240
CHAIRMAN LEMAN adjourns the Senate State Affairs Committee meeting
at 10:27 a.m.
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