HOUSE BILL NO. 525 "An Act designating certain permissible investments by the Alaska Permanent Fund Corporation in taxable municipal or state debt securities and corporate debt securities; changing the allocation limits on domestic and nondomestic government and corporate securities, nondomestic corporate promissory notes, domestic and nondomestic corporate stocks, and taxable government 1 debt securities; and providing for an effective date." Representative Martin gave a brief overview of HB 525. He noted that the legislation is the result of a joint meeting between the Legislative Budget and Audit Committee and the Revenue Subcommittee of the House Finance Committee, held on 2/7/96. The meeting examined why the State's PERS, TRS and SBS funds performed better than the Permanent Fund. He observed that it was revealed at the hearing that 90 percent of the performance difference was due to a difference in portfolio makeup. He stressed that the legislation will help the Permanent Fund Corporation to make more money. He observed that a one percent increase or decrease in the market results in a $152.0 million dollar gain or loss. BRYON MALLOT, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND CORPORATION explained that the legislation does three things. House Bill 525 removes the 5 percent allocation to foreign fixed income instruments from the 50 percent allocation, which includes the statutory authorization to invest in stocks. This would allow the Fund to remove foreign debt to the fixed income asset class. The equity portfolio could then be taken to a 50 percent asset allocation. The bill will also remove a limitation on the ability of the Fund to invest in A-rated corporate securities. In addition, HB 525 allows the Permanent Fund Corporation to invest in Baa-rated corporate paper. These are investment grade securities that are typically held in prime sponsor portfolios. He observed that the average asset allocation for stocks is at 50 percent. The Permanent Fund Corporation's limitation is currently at 45 percent. He reiterated that the Permanent Fund has under performed. He maintained that the limitations are principally responsible for the under performance. He observed that the Permanent Fund Board of Trustees view the changes as remedial. He emphasized that the legislation was not hastily drawn. He added that the entire array of statutory investment capability of the Fund will be reviewed. Representative Martin pointed out that the only function of the Permanent Fund Board of Trustees is to make the State money. Representative Kohring noted that the changes will bring additional risk. He asked if the risk had been quantified. Mr. Mallot noted that Callan and Associates provided the Board with a review of the Alaska Permanent Fund Corporation, "Asset Allocation Considerations" (copy on file). Callan And Associates quantified the risk associated with the change on page 4 of their report. The report noted that if the portfolio is increased to 50 percent that there would be a modest increase in risk during the first year. 2 He added that over a 5 and 10 year period there is no increase in risk but there is a modest increase in return. He observed that if A-rated and Baa-rated corporate securities are added to their percentage in the performance index there would be some short term risk but returns out strip the risk in 3 to 4 years. In response to a question by Representative Mulder, Mr. Mallot stated that the Board believes that there is upward pressure toward larger allocation to the equities market, in order to optimize returns over time. He stated that the Board may be back to ask for an increase in this aspect. Representative Brown MOVED to report HB 525 out of Committee with individual recommendations and with the accompanying fiscal note. There being NO OBJECTION, it was so ordered. HB 525 was reported out of Committee with a "do pass" recommendation and with a zero fiscal note by the Department of Revenue.