HB 139-AK PERM. FUND CORP. PROCUREMENT EXEMPTION    3:04:06 PM CO-CHAIR FIELDS announced that the first order of business would be HOUSE BILL NO. 139, "An Act providing an exemption from the state procurement code for the acquisition of investment-related services for assets managed by the Board of Trustees of the Alaska Permanent Fund Corporation." 3:04:23 PM ROBERT ERVINE, Staff, Representative Jennifer Johnston, Alaska State Legislature, on behalf of Representative Johnston, prime sponsor of HB 139, paraphrased from the sponsor statement, which read as follows [original punctuation provided]: House Bill 139 adds an exemption to the state's procurement code that would let the Alaska Permanent Fund Corporation (APFC) be exempt from the code when evaluating and managing assets. In a recent effort to cut costs and increase revenue margins, pressure has been placed on the APFC to bring more of their fund management in-house. With markets changing quickly, it is important that they have the tools to quickly evaluate and manage investments. Under existing law, APFC is exempt from the state's procurement code when it acquires income producing assets or delegates its investment authority. However, they must comply with the state's procurement code when evaluating and managing the assets in which it invests. This bill will allow them to perform due diligence in a timely manner. This exemption will improve APFC's ability to identify subject matter experts, gather professional background information and negotiate contracts in under 10 days, compared to the minimum 54 days required under the state's procurement code. The change proposed in this bill will allow an expeditious timeline that closely aligns with the pace of the markets in which APFC works. Allowing APFC the exemption in HB 139 will give them the tools they need to meet the added demands that Alaskans are placing on the fund. 3:05:36 PM REPRESENTATIVE STORY asked for the number of investments that would be exempt from the procurement code under HB 139. 3:06:37 PM ANGELA RODELL, Executive Director, Alaska Permanent Fund Corporation (APFC), responded that APFC expects HB 139 to affect about eight to ten decisions annually. REPRESENTATIVE STORY asked whether money would be saved through the procedures proposed under HB 139. MS. RODELL answered that it is her belief that there will be some cost savings. The APFC would be able to acquire subject matter experts itself instead of relying on third party contractors to acquire subject matter experts and, thereby, generating cost savings to the state and to the fund. REPRESENTATIVE VANCE asked for an explanation of the current procurement code under which APFC operates. MS. RODELL relayed that APFC is under the full state procurement code, and the only exemption is for the investment decisions. For example, APFC is not subject to the procurement code to buy a bond or to hire a money manager. REPRESENTATIVE VANCE asked for the length of time in the current procurement process. MS. RODELL answered that the length of time is about 50 to 60 days, including notifications and appeals. REPRESENTATIVE VANCE asked whether HB 139 would waive that process, so that someone could be hired within a few days. MS. RODELL responded, "That is correct." REPRESENTATIVE VANCE commented that she understands the need to respond quickly to investment opportunities. She asked why there is need for the proposed change considering the fund is performing well. MS. RODELL offered that if APFC can streamline the process, use staff resources to directly acquire the needed expertise, and not rely on third parties in order to avoid the procurement process, it can be much more opportunistic and timely in accessing investments and, therefore, get more investment return. REPRESENTATIVE VANCE questioned how procedures under HB 139 would prevent the "good old boy" type of hiring of which many people are suspicious. MS. RODELL answered that the APFC trustees and staff take their fiduciary responsibility very seriously. The proposed exemption is meant to confirm the underlying thesis of an investment, not give a "good old boy" a subject matter waiver or steer business in any one direction. The APFC has instituted processes to prevent such from occurring, and the fund results demonstrate the efficacy of those processes. REPRESENTATIVE VANCE asked for an elaboration of the requirements for hiring investors. MS. RODELL explained that the process for hiring managers and investment advisors is in the APFC Board of Trustees investment policy. The policy is a living document that the board reviews annually to ensure that the policy continues to reflect the procedures and the goals of the fund. Within that policy are manager selection rules and requirements; the APFC is required to use the board's general consultant to assist with the selection process; and a process for alternative manager searches is outlined in the policy. She offered that a series of questionnaires are used for the selection process. The process is like the [state] procurement process absent the time periods and state contracting requirements. 3:13:16 PM REPRESENTATIVE LEDOUX stated that she was under the impression that the proposed legislation would allow APFC to retain third party people, which currently must be accomplished under the procurement code. She asked for confirmation that Ms. Rodell's testimony is that APFC currently relies on a consulting firm to make the hires, and HB 139 would allow APFC to hire the [subject matter experts] directly. MS. RODELL replied that currently APFC can hire a fiduciary - someone with specific responsibility to manage fund money. The proposed legislation would expand APFC's hiring authority to include subject matter experts relevant to a specific investment idea. For example, APFC wants to directly invest in a biotechnology idea and not use a fiduciary, but because it lacks the underlying expertise [in the subject matter], it would like to consult with a medical person. Currently APFC must go through the state procurement process to find that professional service. She stated that APFC is asking for a procurement code exemption to acquire that professional service. REPRESENTATIVE LEDOUX asked whether the state's procurement code, not personnel code, would be used to hire state employees. MS. RODELL responded that APFC does not use the procurement code to hire people. She explained that she is referring to professional service contracts with subject matter experts. REPRESENTATIVE LEDOUX asked for confirmation that the experts would not be hired as employees but retained as contractors. MS. RODELL answered, "That is correct." She stated that the experts would be hired to opine on a specific subject matter in their fields of expertise, such as engineering, biotechnology, technology, or software. The APFC would ask the experts to use their expertise to opine on the business validity of a potential investment. REPRESENTATIVE LEDOUX mentioned that she is confused by the term "hire." She offered that MS. Rodell is referring to retaining an expert as a third-party contractor and not an employee of APFC. MS. RODELL concurred. 3:16:33 PM REPRESENTATIVE WOOL expressed that currently APFC can spend up to $100,000 without being subject to the state procurement code; therefore, an expert could be paid up to that amount. MS. RODELL agreed that the state procurement code has limited exception for under $100,000. REPRESENTATIVE WOOL asked whether an expert opinion costing over $100,000 is common and asked for confirmation that the amount is the cost for an opinion and not a percentage of the investment or return. MS. RODELL responded, "That is correct." She added that the cost depends on the time spent reviewing all the information and writing an opinion. She said that part of the challenge is that the shorter the time frame available for the review, the higher the cost. REPRESENTATIVE WOOL offered, "$100,000 a week, I guess that's acceptable." MS. RODELL mentioned that at times there are teams of reviewers; therefore, the procurement may involve the work of an entire group. REPRESENTATIVE WOOL asked for confirmation that an investment by APFC is not subject to the procurement code. MS. RODELL answered, "That is correct." REPRESENTATIVE WOOL asked whether a real estate investment, such as purchasing a skyscraper, can be made without adhering to the procurement code. MS. RODELL answered, "That is correct." REPRESENTATIVE WOOL offered that the procurement code needs to be followed when getting advice on the building being intact, if the advice is $150,000. MS. RODELL answered, "Exactly." REPRESENTATIVE WOOL suggested that the cost of an opinion on a major skyscraper is substantial. MS. RODELL replied, "It can be." 3:19:43 PM CO-CHAIR FIELDS asked for an example of how obtaining the expert opinion on investments has produced significant returns for the corporation and how giving APFC the ability to contract with experts would provide the opportunity for more returns. MS. RODELL stated that APFC invested $189 million in JUNO Therapeutics between 2012-2013. The investment opportunity came directly to APFC from the group forming JUNO Therapeutics; it was a fast-track investment. The APFC was unable to procure a medical expert opinion in the timeframe available for evaluating the investment. She said that the investment was offered as an IPO (initial public offering) in 2017 and has netted the permanent fund about $1.8 billion. The investment was extremely lucrative and is the type of investment that APFC wants to be able to pursue using one of its investment managers and not a third-party. REPRESENTATIVE LEDOUX asked whether using a fiduciary means using another investment manager, and therefore, paying more for the service. MS. RODELL responded, "That is correct." 3:22:11 PM CO-CHAIR KREISS-TOMKINS asked for further explanation of the two different types of third parties - the third party that APFC is currently using versus the third party it would use under the proposed legislation. MS. RODELL explained that currently APFC uses an investment manager third party; under HB 139 it would use a non-fiduciary third party - one that is not an investment manager. CO-CHAIR KREISS-TOMKINS asked if currently that [third party] investment manager in turn procures the services of the subject matter expert; therefore, APFC is paying the investment manager as a middleman to obtain the expertise. MS. RODELL responded, "That is correct." She added that the investment manager then invests some of his/her own money into the investment alongside of APFC money. CO-CHAIR KREISS-TOMKINS offered that under HB 139, the corporation could cut the middle entities out of the equation. MS. RODELL answered, "That is correct." REPRESENTATIVE WOOL offered that currently APFC is using two middlemen - the fiduciary and the subject matter expert; the proposed legislation would eliminate the fiduciary and APFC could hire the expert directly. He asked whether the intent of the proposed legislation is to save money by not paying the middleman. He also asked whether the procurement code is followed for hiring the fiduciary. MS. RODELL confirmed that eliminating the [third-party] investment manager does save the corporation the cost of the manager's fees. The proposed legislation also enables APFC to react in a timely manner to investment opportunities. REPRESENTATIVE WOOL asked whether APFC pays the investment manager an hourly rate or a percentage of the investment. MS. RODELL confirmed that APFC pays a management fee that is a percentage of the investment. She added that the investment manager usually receives a percentage of any profit-sharing over and above attaining certain performance indicators. REPRESENTATIVE WOOL suggested that APFC enters a fiscal relationship with the investment managers for a period; under HB 139, APFC would hire the expert directly, pay him/her for the service, make the investment, and "move on." MS. RODELL replied, "Correct." 3:26:23 PM REPRESENTATIVE LEDOUX offered that the proposed legislation would save APFC a great deal of money. She asked Ms. Rodell to give an example in which APFC would have liked to have retained a [subject matter expert] directly but had to retain an intermediary fiduciary. She asked what amount of money was paid to the fiduciary. MS. RODELL referred to the previous example involving JUNO Therapeutics, in which APFC invested $189 million and netted about $1.8 billion after selling the stock. She stated that if a fiduciary was involved in the transaction, he/she would have gotten a $1 million fee and 20 percent of the profit-sharing. The amount going to the fiduciary would be in the millions. She said that APFC is pleased with its return on that investment. She maintained, however, that decrements, such as the $1 million fee, cannot be seen in a $65 billion budget - it "doesn't move the needle"; therefore, discussing fee savings is a challenge for APFC. She emphasized that fee savings is important to the corporation, and the corporation is always looking for ways to create better results for the people of Alaska through its investment activity. 3:30:00 PM REPRESENTATIVE VANCE asked whether APFC could provide the legislature a report next year on the savings under HB 139 if passed. MS. RODELL responded that she believes that tracking that information would be possible, especially if the request is made in advance. REPRESENTATIVE WOOL offered that HB 139 would not only save the corporation money but extend to it nimbleness, freedom, control, and flexibility. MS. RODELL concurred. CO-CHAIR FIELDS stated that HB 139 would be held over.