SB 134-PRUDENT MANAGEMENT OF INSTITUTIONAL FUNDS  VICE CHAIR BETTYE DAVIS announced consideration of SB 134. SENATOR PASKVAN, sponsor of SB 134, said the state should consider adopting this bill because it will make sure that the best investment practices will govern the actual investment of institutional funds; it will withdraw obsolete rules governing prudent total return expenditure and provide a modern rule of prudence consistent with the rules that will govern the investment. It will eliminate the differences in investment in expenditure rules that apply to different types of non-profit organizations - in other words, the same rules will govern under all of the Uniform Prudent Management of Institutional Funds Act (UMPIFA). It will encourage the growth of institutional funds while eliminating investment risk that threaten principal, and will assure that there are adequate assets in any institutional fund to meet program needs, and it will be part of a uniform national system. SENATOR PASKVAN said he has letters of support from the University of Alaska Foundation, The Foraker Group, and the Rasmussen Foundation. These organizations believe this will get st Alaska where it should be in the 21 Century. 8:06:10 AM SENATOR HUGGINS joined the meeting. DANA OWEN, staff to the Education committee, advised that the committee substitute (CS) to SB 134, version \S, incorporates two changes on page 8, line 21 where "endowment" replaces "institutional" and on line 24 where "institution" and "institutional fund" replace "endowment". This is in response to suggestions by the University and the University Foundation that noted some of their funds don't qualify technically as "endowment funds," and they wanted to make sure that they came under the provisions of the act. SENATOR HUGGINS moved to adopt CSSB 134, labeled 26-LS0487, Version S, as the working document of the committee. VICE CHAIR DAVIS objected for discussion. SENATOR STEVENS asked what difference those term changes made. What University funds might they be able to invest because it's called "institutional funds" not "endowment funds." SENATOR PASKVAN replied that it was to make sure its application was as broad as possible. An "endowment fund" on page 6 has a more narrow definition than "institutional fund." This bill was sent back to the national committee by Alaska's member and their recommendation was to substitute "institutional" for "endowment". 8:08:58 AM JIM LYNCH, University of Alaska Foundation, Anchorage, AK, said that Senator Paskvan was correct. They are trying to assure that what Alaska has is consistent with other states' uniform laws. It is designed for prudent investment of all types of charitable organizations that are non-profits. 8:09:51 AM SENATOR OLSON asked how long the commission has been in place and what its success rate is with regard to managing funds. SENATOR PASKVAN replied that this is designed to define "prudence" so that funds don't dissipate over time, but at the same time recognizing that in difficult economic times, prudence may include disbursing from the principal. 8:11:39 AM SENATOR OLSON asked what has happened to the funds managed by this group during the 2001 downturn and now during the global recession. SENATOR PASKVAN replied that many institutional funds are below their original contributed capital amount. Mr. Lynch from the University Foundation in his testimony last week indicated that of the University's 500-plus funds, 250 were technically "under water." Many charitable organizations are struggling right now because of the economic downturn, but their charitable needs still continue. So, the question is how does a volunteer sitting on that board in a prudent manner deal with the funds they have available to meet those charitable needs. That is the intent of this bill. SENATOR OLSON said he's having a hard time equating charitable funds with institutional funds, which are used more to make sure that "some kind of university or some learning institution can continue to function in spite of what's happened." SENATOR PASKVAN responded that specifically the University distributes scholarships, and students continue to be educated even in depressed economic times. In fact, the demand for education increases in a down economy. 8:14:08 AM JIM LYNCH, University of Alaska Foundation, said the purpose of an endowment is to support a program in perpetuity. How do you do that? It requires income as well as consistency. Students who are getting scholarships are there for four and five years or more. The issue is how to sustain their scholarships over the long term prudently. You can't have rigid rules to do that. While the University is one of the primary managers of endowments, a lot of other organizations have these funds for different purposes. He explained that most of these funds come to the organizations through contributions. Courts have held with following the donor's intent rather than rigid rules. The law identified a lot of areas as to what prudence is and what has to be considered in making decisions. This guidance is includes "best practices" for non-profit boards many of which are run by volunteers. Thirty- seven states have adopted or introduced bills regarding this rule. 8:17:28 AM SENATOR OLSON asked if scholarships will be awarded from the corpus, not just the earnings. MR. LYNCH replied that this concept really came into play about 40 years ago. It moved from principal and income, which doesn't' fit the endowment concept very well in today's environment. "It's purpose and mission that drive this law." SENATOR OLSON asked SENATOR PASKVAN to interpret whether that is a yes or no. MR. LYNCH said the answer is a yes, but the concept of "corpus" no longer exists. SENATOR PASKVAN expanded upon his answer. Specifically, this law is default legislation in the sense that a charitable contribution has been made that doesn't have express restrictions on it. Many contributions are made to funds so that food can be distributed to the needy. The question is can those monies be used to fulfill the purpose of the organization, which is to feed the hungry and give scholarships to people when they need it whether it's good financial times or bad. This says that prudent management allows for those fiduciaries who are running a fund to make the distributions that are necessary and appropriate - unless there are express restrictions regarding distribution of the capital, like with the Permanent Fund - in both good and bad financial times. 8:21:16 AM SENATOR STEVENS asked if this has any impact on the Permanent Fund. SENATOR PASKVAN replied that it does not. 8:22:04 AM VICE CHAIR DAVIS withdrew her objection and version S CS was adopted. SENATOR STEVENS moved to report CSSB 134 (EDC) from committee with individual recommendations and attached fiscal note(s). There being no objection, the motion carried.