SENATE BILL NO. 98 "An Act relating to state ownership of submerged land underlying navigable water within the boundaries of and adjacent to federal areas; and providing for an effective date." 1:45:40 PM Co-Chair Foster discussed the agenda. He began the meeting with a continuation of SB 98 from the morning meeting. He noted that the committee would continue hearing the SB 98 fiscal note from the Department of Revenue (DNR). He explained that the department could lose $1.179 million if the bill was adopted. The department wanted to backfill the loss with Undesignated General Funds (UGF). He relayed that he had discussed the situation with the bills sponsor and determined that there were two options. There was a possibility to zero out the fiscal note or keep the fiscal note as is with a one year transition period to offer the department time to figure out ways to backfill the funding or request and justify the full amount again in the FY 2025 budget. He preferred the one year transition option. 1:47:14 PM PAM LEARY, DIRECTOR, TREASURY DIVISION, DEPARTMENT OF REVENUE, explained the basis for the fiscal note. She delineated that the division managed $48 billion in investments and had a budget of roughly $11.7 million for FY 24. The cost allocation plan divided all costs that equated to its total budget among all the funds it managed. She elaborated that around 80 percent of the funds the treasury managed were the Alaska Retirement Management Board (ARMB) funds and the remaining funds were treasury funds like the Power Cost Equalization Fund (PCE), Public School Funds and a whole host of other funds that were funded through UGF. The fiscal note was an estimate and was based on the $1.178 million that was calculated to manage the fund based on the cycle. However, with the current lower value of the fund the amount was approximately $900 thousand. She informed the committee that treasury charged endowment type funds a maximum floor of 10 basis points. She shared that it was an efficient way to manage many funds. When a fund was removed, the costs needed to be reallocated amongst the other funds. Because the funds were funded by UGF, she merely changed the funding source in the fiscal note. She elucidated that every year the division calculated its cost allocation plan and reallocated funds based on the assets under its management. Therefore, each year management costs vary and PCE typically amounted to 2 percent of all the assets treasury managed, the two percent would be reallocated among all the other funds it managed, and they would be charged accordingly. 1:50:31 PM Representative Josephson asked why the ARMB fund would be charged more if the fiscal note was adopted. Ms. Leary responded that in the future, the treasury would charge all of the management costs out to all of the funds it managed on a pro rata share, the retirement funds would have a greater share of all the assets. She reminded the committee that the divisions process was very efficient which kept its costs very low when compared to other funds managed elsewhere. 1:51:29 PM Representative Hannan understood that the fiscal note overestimated the costs in FY 2025 and in the outgoing years the costs would be zeroed out. Ms. Leary responded in the negative and explained that the treasury would still need the $1.179 million to manage all of the funds that the treasury managed. If one fund was taken away, there would be fewer dollars in total to cover costs. Representative Hannan asked for confirmation that there would still be a need for additional UGF of an uncertain amount in the future if there was a transitionary year to figure a way to recover the costs. Ms. Leary responded in the affirmative and reiterated that treasury refigured its cost allocation plan each year. She maintained that each year was always a guessing game. She exemplified the Constitutional Budget Reserve (CBR) and noted that when the balance was large there was more charges to all the underlying funds and in particular UGF, which funded the CBR. She reported that as the CBR diminished, more costs were charged to the retirement funds. She reiterated that treasurys process was efficient because they could manage hundreds of funds with one team. Co-Chair Foster understood that the fund source on the fiscal note would switch from Designated General Funds (DGF) to UGF. The revenue treasury gained from charging PCE become DGF. He asked if all the other revenue from investment charges would be UGF. Ms. Leary responded in the negative. She explicated that that the retirement funds were the source of funds for 80 percent of treasurys work, which was not necessarily UGF, but the majority of the costs would be UGF funded for the first year. She characterized it as a simple approach since the treasury budget was built on professional estimates. Typically, treasury requested slightly more than estimated, factoring in the amount the investments were expected to grow. 1:55:45 PM Co-Chair Edgmon asked if she had a sense of when the PCE fund would be transferred to the Permanent Fund if the bill were to pass. Ms. Leary responded that it would occur quickly after the bill took effect. She referenced the $200 million in losses suffered by the fund, and reminded the committee that $50 million was in spending, totaling losses of 15 percent. She communicated that as of the end of April 2023, PCE experienced about 7.5 percent in returns. She reminded the committee of the volatility of the market and that the funds were subject to market fluctuations. Co- Chair Edgmon understood that the management team for all of treasurys funds worked on a fixed cost basis and was not a fee based third party contract oriented management. He ascertained that treasury operated as a fixed cost in-house management team. Ms. Leary responded that the majority of the costs were fixed costs especially for PCE types of funds. She expounded that there was a small amount paid in management fees to companies such as SMP 500 for equities and SCI for international equities, which were embedded in the costs. The fees were based on the assets that were managed but were very small and were spread across all assets. She concluded that primarily all the divisions costs were fixed. Co-Chair Edgmon presumed that the cost allocation plan happened at the beginning of the calendar year and not the fiscal year. He deduced that if that were the case and the fund was already transferred in July 2024, he wondered whether the costs could be allocated amongst the other funds and not require any UGF. Ms. Leary answered that the division did the cost allocation plan just before the new year and were currently engaged in the process. She furthered that the majority of the transferred costs would be UGF because they transferred costs to funds that were being managed and supported by UGF. Some costs would be allocated to the ARMB and other funds, but all costs would be allocated out and PCE accounted for 2 percent of management costs, therefore, the division would need a funding source and some part of that would be UGF. 1:59:45 PM Representative Josephson recalled Ms. Learys statement that $978 million was the correct figure versus the $1.179 million. Ms. Leary answered in the affirmative and indicated that 10 basis points of the current value would be the amount that was spread among other costs. Co-Chair Foster asked what the will of the committee regarding the fiscal note was. 2:00:44 PM AT EASE 2:02:02 PM RECONVENED 2:02:14 PM Co-Chair Edgmon asked if there was a way to take an alternative approach to the fiscal note. Ms. Leary responded that in terms of managing all the divisions funds they needed the full amount of its budgetary request, it was a question of how the costs were going to get allocated. She furthered that for PCE and other endowment funds, the division switched to charging a minimum floor of 10 basis points, which resulted in needing less UGF because UGF did not support the bulk of the costs since other funds were paying 10 basis points. She disclosed that the average of all the treasury funds was 4 to 5 basis points of total costs. She had been able to decrease reliance on UGF by charging a minimum floor of 10 basis points. Removing one of the funds caused all of the costs to return and would primarily rely on UGF and in future years the costs would be reallocated to all of the funds that the treasury managed, which was also supported by UGF. She determined that treasury needed its requested funding in order to manage all of its funds, even if there was a reduction of one or two funds to manage. Co-Chair Edgmon asked if there was a scenario where the fiscal note could be zeroed out and the department could request supplemental funding to recoup costs. Ms. Leary responded that she did not see a way to zero out the fiscal note unless she started firing people. She thought the treasury was doing a good and efficient job with the amount of funding it received and zeroing out the fiscal note would harm its ability to manage the rest of the funds. Co-Chair Edgmon determined that he supported the fiscal note and the benefits that could be derived from having the Alaska Permanent Fund Corporation (APFC) manage the PCE portfolio. He also supported the bill. 2:06:09 PM Co-Chair Foster asked if Representative Galvin still wanted to offer an amendment. Representative Galvin responded that she was contemplating offering the amount of $978 thousand for the fiscal note. However, she did not want to slow the process down and the amount might seem insignificant in the future. She supported the fiscal note and the bill. 2:07:08 PM Representative Stapp agreed with Co-Chair Edgmon and Representative Galvin. He agreed that the value of incorporating the fund into the Permanent Fund overrode the fiscal note concerns. He commented that the APFC took up to 25 basis points to manage a fund versus DORs 10 basis points. He wondered why DOR did not take higher basis points off to cover management costs instead of requesting GF. Ms. Leary responded that moving forward the treasury was taking higher basis points in total for each fund because there was less money in total that would be under management. Representative Stapp commented that the basis point number did not matter to him. He asked why she would increase basis points and still need UGF at the same time. He wondered why she would not merely increase the basis points to the amount necessary to administer the funds and not request UGF. Ms. Leary responded that the divisions costs were fixed, and the basis points calculation occurred after the costs were determined. She reiterated her answer that by removing a fund the ten basis points charged endowment funds needed to get funded through some other fund and the remaining funds would have a higher basis point calculation because they would be paying more for treasury management then they had been. Representative Stapp understood that removing $1 billion in assets under management meant the division had to spread its administrative costs to other funds due to less basis points. He repeated his question regarding why she needed to request increased basis points and increased UGF. He did not understand and hoped for a concise answer for why both were needed instead of just one. Ms. Leary responded that she was not asking for additional basis points or more UGF other than to fill the void in the budget created by removing the management of PCE. Representative Stapp asked why not take 13 basis points off the other funds to make up the loss of assets under management. He asked if it was possible. He reiterated that he did not understand why she needed to increase both UGF and basis points. Ms. Leary answered that it was because a large percentage of the funds were supported by UGF. She maintained that most of the funds were UGF funded therefore, UGF was needed to manage a UGF funded fund. 2:12:18 PM Representative Ortiz agreed with Co-Chair Edgmon's sentiments and supported the bill. He asked how much of UGF went to supporting the treasury annually. Ms. Leary responded that the amount in FY 22 was nearly $1.8 million of the total amount. She added that for FY 2024, the amount decreased to $1 million, which included the PCE fund. Representative Ortiz was confused by the answer. He understood her answer as all the UGF used to support treasury was the amount used to manage PCE. He asked whether all the money was encapsulated in the $1.8 million figure. Ms. Leary replied that the retirement plans accounted for $8 million which was about 80 percent of the divisions budget. The remainder was through UGF totaling $1 million, PCE totaling $1.2 million, and the other funds accounted for around $1.5 million from the Higher Education Fund, Airport Systems, and the Public Schools Trust fund. 2:14:39 PM Representative Galvin pondered if the fiscal note were to be maintained as is in the out years, whether the cost allocation plan was inclusive of the fiscal note. She thought it might act as a disincentive to increase the basis points. She asked why basis points would be increased if the offset funding was included in the fiscal note. Ms. Leary replied that the cost allocation plan allocated all treasurys costs. The amount budgeted was the limit of what the treasury could spend and as funds grew the divisions expenses grew as well. She asked Representative Galvin to repeat part of the question regarding incentives. Representative Galvin asked what the incentive was to increase the basis points so that UGF would not be necessary. The cost impact over the loss of one fund made sense for the current year. However, she wondered why it was necessary in the oncoming years. If the fiscal note stayed in place for the outyears, it would make it more difficult to make changes that needed to be made to cover the costs. Co-Chair Foster interjected that fiscal notes were only incorporated into the budget for the fiscal years budget they were written to. In the current case, the amount would be included in the FY 2024 budget during conference committee. In subsequent years, the departments would come before the legislature to request their budgets. He detailed that DOR would still need to come before the legislature and ask for funds for future years. The request could be revisited every year. 2:18:41 PM Co-Chair Foster thought that SB 98 was an example of a so called simple bill proving that they were not always simple. Co-Chair Edgmon moved to was REPORTED out CSSB 98 (FIN) out of committee with individual recommendations and the accompanying fiscal note. There being NO OBJECTION, it was so ordered. CSSB 98 (FIN) was REPORTED out of committee with ten "do pass" recommendations and one amend recommendation and with three previously published fiscal impact fiscal notes: FN1 (REV), FN2 (REV), and FN3 (REV). 2:19:44 PM AT EASE 2:21:28 PM RECONVENED