HOUSE BILL NO. 308 "An Act making a supplemental appropriation to the Alaska Permanent Fund Corporation; and providing for an effective date." JIM KELLY, DIRECTOR OF COMMUNICATIONS, ALASKA PERMANENT FUND CORPORATION testified in support of HB 308. He observed that the Permanent Fund performed better than expected in the current fiscal year. Assets under management grew from $22.1 to $23 billion dollars between June and December 1997. This growth is in addition to the $747 million dollars that were paid in dividends. Mr. Kelly noted that the Fund's total return was flat to modestly positive during the last three months. The first quarter of the fiscal year the Fund earned a period return, not annualized, of 5.04 percent. He noted that U.S. equities performed at 8.84 percent. This equals an annualized return of more than 35 percent. He observed that manager fees are based on the value of assets under management. When the Fund goes up in value, the manager fees increase. Mr. Kelly noted that the Board has put mitigating factors into place that has reduced the growth of manager fees. A greater percentage of equity assets were moved into passive index accounts. Fees for passive management are just a fraction of active management fees. He added that there was a temporary movement of billions of dollars of equity assets into a passive transition account during the Fund's restructuring. Restructuring was undertaken to accomplish the Board-directed shift in asset allocation into passive management, international equities and emerging markets. He explained that most of this restructuring took place in the last quarter. Mr. Kelly observed that the Fund experienced a number of positive outcomes from restructuring. Significant capital gains have been realized. The net income for the Permanent Fund during the first half of the year was $1.5 billion. A net income of $2.1 billion dollars is projected for the year. Mr. Kelly cautioned that future expectations are not as high. He did not think that the kind of returns institutional and individual investors have been earning in the past few years would continue. The Fund is expecting single digit returns from all asset classes for the intermediate-term, with the exception of small-cap U.S. stocks which the Fund's investment consultant, Callan Associates, projects at an average of 10.1 percent for the next five years. He emphasized that expectations are also for increased short-term volatility. He stressed that the Corporation requests that SB 200 be amended and reduced to $4,494 thousand dollars. He estimated that this would provide sufficient corporate receipts to pay managers for the remainder of the year. He asserted that money budgeted for manager fees will be used solely for manager fees. If there is a surplus the unused corporate receipts will lapse. Mr. Kelly observed that fees for the first six months total $11,079,800. The supplemental will allow an additional $14,106,200 for the last two quarters of the year. For every dollar of net income the Fund earns this year, manager fees will cost 1.19 cents. Co-Chair Therriault noted that the fee structure was negotiated down for a saving. PETER BUSHRE, CHIEF FINANCIAL OFFICER, ALASKA PERMANENT FUND CORPORATION explained that custody fees were negotiated down by $625 thousand dollars. The supplemental request is for manager fees. Contract negotiations have reduced a number of manger fees during the current fiscal year. Custody fees and manager fees are both paid with corporate receipts. Co-Chair Therriault asked if savings in custody fees were taken into consideration in the shift of authorization. Mr. Bushre replied that a portion of the savings was taken into consideration. A portion was also used to cover deficits in other categories. Mr. Kelly noted that the Alaska Permanent Fund Corporation is committed to lapse funds left over from manager fees. He observed that the funds left over from custody fees have not been obligated in other categories at this time. He noted that the year is only half over. In response to a question by Co-Chair Therriault, Mr. Bushre observed that the request is for the last quarter of the fiscal year. Representative Davies reiterated that any remaining funds will be lapsed. Mr. Kelly agreed that any corporate receipts authorized to pay manager fees would not be shifted to other categories, but would be lapsed back to the Fund. Representative Martin maintained that the current arrangement is working well. He stressed that managers should be paid for their success, but cautioned that manager fees should not become a vehicle for supplemental funding. Co-Chair Therriault clarified that the intent is to scrutinize expenditures, even if they are corporate receipts. He stated that it does not make sense to lapse money if it can be shifted over to reduce other costs. He asked for more information regarding the $625 thousand dollars that were saved in custody fees. Mr. Bushre clarified that $625 thousand dollars is a projected surplus in the custody fee budget for FY 99. The supplemental request is for FY 98. He added that new contracts have recently gone into effect. There are some savings as a result of the new contracts. HB 308 was HELD in Committee for further consideration.