HB 86-PCE ENDOWMENT FUND INVESTMENT  4:39:35 PM CHAIR OLSON announced that the final order of business would be HOUSE BILL NO. 86, "An Act relating to investment of the power cost equalization endowment fund; and providing for an effective date." 4:39:47 PM JERRY BURNETT, Deputy Commissioner, Office of the Commissioner, Department of Revenue (DOR), stated that HB 86 would remove "seven percent" from the statute and replaces it with a phrase that reads, "to meet the objectives of the power cost equalization and rural electric capitalization fund (AS 42.45.100)." He clarified that none of the other funds have a numerical objective in statute, but risk is involved in trying to reach a specific numerical objective over time. 4:40:59 PM REPRESENTATIVE JOSEPHSON asked whether anything unfortunate happened to the account or the language is just being adjusted. MR. BURNETT stated that he has been with the department for 10 years. He recalled that the department suffered some fairly large losses in 2008 in the fund, but relatively speaking there haven't been any bad decisions during that time; however, since he has been with the department, all five commissioners have supported removing the number from statute. 4:42:01 PM REPRESENTATIVE KITO said it seemed as though the investment goals may have changed, since enough income is being generated by the fund to pay for the current Power Cost Equalization Program. He said it appeared as though the department wants to manage it and not lose the ability to do so. MR. BURNETT said it is currently probably less important to be an aggressive investor than it might have been a few years ago. The balance in the fund is over $950 million and a 7 percent payout is more than what is required to manage the power cost equalization (PCE) expenditures. He suggested it is well within the objectives of the fund to "ratchet down risk" a little bit. 4:43:06 PM CHAIR OLSON reported that the committee has received documentation today that since 2000 the PCE fund has averaged 6.05 percent return on investment. MR. BURNETT said it is a geometric annualized return and not an arithmetic average of the returns year to year, but is a geometric average, which includes the losses. 4:43:32 PM REPRESENTATIVE HUGHES asked whether this is now just being brought forward due to the market. She asked for further clarification on the types of investments. 4:44:01 PM MR. BURNETT said Gary Bader previously testified on the standard deviation between different types of investments and how having a riskier investment may look like it will reap a higher return, which will happen arithmetically over time, but the geometric return can be reduced due to the losses. He stated that capital market assumptions change each year so the department considers different levels of risk. This year the goal might be a 6 percent return and next year it might be a 9 percent return, depending on the market. He referred to the different types of investments such as stocks relative to bonds, or fixed investment - which currently has little return. He reported that the stock market has been going up for the past six years, but it has never gone up for seven years. It doesn't mean it won't but it has never happened since 1802, he said. This matter was introduced in last legislature, but it did not move through the process, he reported. 4:45:41 PM REPRESENTATIVE HUGHES related her understanding that the 7 percent requirement was established in statute since it was what was considered necessary to pay the PCE expenditures. She asked for the target return to meet expenditures. MR. BURNETT answered that the statute for the payout is 7 percent of the average of the prior three years. He said that this is reported to the Alaska Energy Authority and they use that figure as the maximum that it could request. He recalled that the budget for the PCE is in $50 million range, which is approximately between a 5-6 percent return. 4:47:03 PM CHAIR OLSON, after first determining no one wished to testify, closed public testimony on HB 86. 4:47:22 PM REPRESENTATIVE HUGHES moved to report HB 86 out of committee with individual recommendations and the accompanying fiscal note. There being no objection, HB 86 was reported from the House Labor and Commerce Standing Committee.