HOUSE BILL NO. 156 "An Act relating to investments by the Alaska Permanent Fund Corporation; and providing for an effective date." CS FOR HOUSE BILL NO. 156(STA) "An Act relating to investments by the Alaska Permanent Fund Corporation; and providing for an effective date." CS FOR HOUSE BILL NO. 156(FIN) "An Act relating to investments by the Alaska Permanent Fund Corporation; and providing for an effective date." REPRESENTATIVE GAIL PHILLIPS was invited to join the committee. She read her sponsor statement into the record. Revisions would include more investment possibilities, and therefore more returns for the Permanent Fund Corporation. She noted one amendment, page six, lines 26 CSHB 156(FIN) from the original version. She reminded the committee that the House passed the bill out with a 39 yea - 1 nay vote. She urged the Senate Finance Committee to report this bill out. In response to a question by Senator P. Kelly she said this bill would allow more flexibility to increase stock. JIM KELLY, Research and Liaison Officer, Alaska Permanent Fund Corporation was invited to join the committee. CLARK GRUENING, Vice-Chair, Alaska Permanent Fund Board of Trustees was also invited to join the committee. He gave a brief history of the Permanent Fund. The Legislature has made the pivotal decisions to increase the funds in the Permanent Fund Corporation. They voluntarily made special appropriations to the principle. Two-thirds of the amount was voluntarily deposited for inflation proofing. The fund today is approximately $26 billion. The Legislature has also helped in investment flexibility. They allowed investment in stock and real estate. They have also been successful in allowing foreign investments for the corporation. Mr. Kelly said he would not go into the case for investment flexibility as Representative Phillips had made sufficient comments. The Permanent Fund was a public fund as they had funds over $5 million. Senator Leman commented on requested flexibility last year. "How have the earnings been affected? Is an incremental improvement better than none at all?" Mr. Kelly responded. He said the fund expected to earn 7.75 percent. There is a diminishment of volatility. Mr. Gruening said volatility also appears in fixed income. Mitigation of volatility is the mixture of assets. Co-chair Torgerson asked for an explanation of Section 1 of the bill. Mr. Kelly indicated that it was sometimes prudent in real estate investment to borrow money to protect the particular asset. A limited liability corporation would be set up. Co-chair Torgerson said he did not understand that if they were the one hundred percent owner that they would not be the liable entity. Mr. Gruening further explained. He said this bill would protect from increase of risk to the fund. He referred to line nine on page one, "if the borrowing is without recourse to the corporation". Senator Parnell asked how this would work. Would the LLC handle this? Mr. Gruening explained the necessity to protect tenants. Senator Parnell said LLC would have the liability rather than the corporation? Mr. Gruening indicated that was correct. They wanted to protect any recourse to the corporation. Senator Parnell asked if the State was protected in this transaction? Mr. Gruening said if the paperwork was done properly there should be no liability to the State. Borrowings are done where the borrowing entities are corporations. Senator Parnell asked if the Permanent Fund would be the shareholder with someone else in these transactions? Mr. Gruening indicated again that was correct. "We are not talking about tort liability, we are talking about contracts." Co-chair Torgerson asked why they did not just take cash rather than borrowing money? Mr. Gruening said they could get more out of their assets rather than using cash. Mr. Kelly indicated they could directly borrow money. Co- chair Torgerson asked for an explanation. Mr. Gruening said there was would be a mortgage against the property; however the lender would know this was going on. Co-chair Torgerson asked if this would come before the Legislature again? Mr. Gruening said this was true on all investments. Co-chair Torgerson asked about page two, lines 19 - 23. Mr. Gruening said that this offered a broader definition of entities as opposed to securities. Co-chair Torgerson asked about page three, lines 17 and 18. Why do we need the addition of "and other equity interests in entities organized"? TERRY A. BROWN, Chief Investment Officer, Alaska Permanent Fund Corporation was invited to join the corporation. He responded to the question posed by Co-chair Torgerson. He said this was a vehicle potential for asset backed securities. This would allow us to buy into some other markets and the ability to go into asset backed securities, which are a form of fixed income investments. Mr. Kelly said most of the language had been drafted twenty years ago and therefore they had tried to clean up the language more to present day. They have looked to increase investment without increasing risk. Co-chair Torgerson felt that the language was too broad-based and did not know if he was in favor of this or not. Co-chair Torgerson asked for an explanation of the bottom of page three, top of page four. Mr. Kelly indicated that this was a substantial portion of the bill granting increased flexibility. He explained the process of getting an increase in real estate for the corporation. The Legislature however, put a dollar limit of $150 million on a project, which in some cases only allowed them two-thirds ownership, rather than one hundred percent. They are now asking for the ability to purchase property and be one hundred percent owners regardless of the dollar amount. He explained the difficulties in protecting the permanent fund interests when partners know there is a specific dollar amount limit. Senator Pete Kelly asked for further clarification of this statement. Mr. Kelly said that someone could set a false higher price on the property and force the permanent fund to have to sell. Mr. Gruening also explained the leverage the other partner can use against them in the selling of property they may feel they need to get out of. Senator Wilken asked if by lifting this restriction would put them more at risk? Mr. Brown explained that on the contrary they would not be so restricted and therefore this would enhance any deals they could make. Co-chair Torgerson referred to the top of page five. "Are we going to be hiring more individuals?" Mr. Kelly said no and referred the committee to "Real Estate Policies". There is a substantial checklist they must conform to and there is no anticipated increase to staff. Co-chair Torgerson voiced concern over increase in employees. Mr. Gruening explained there was sufficient oversight to prevent this. Mr. Kelly further indicated that the investment properties would not change; they would continue to be investing in the same kinds as at present. Co-chair Torgerson asked for an explanation of "nondomestic entities" as opposed to "nondomestic corporations". Mr. Gruening explained that this would include some entities that were not necessarily corporations. Co-chair Torgerson asked that further clarification of this be submitted to his office. Mr. Kelly went on to explain interests in a titleholding entity, real estate investment trust, real estate operating company, or other entity. Sometimes a real estate investment trust could be purchased without a foreign investment. However, later a foreign company could be picked up. (Tape number 135, Side A switched to Side B at log #591.) Co-chair Torgerson continued on page six. Mr. Brown said there might be occasions when they would have to sell stocks and put them in another asset. This was a mechanism used by many today for specific asset allocation decisions. Mr. Kelly commented briefly on the real estate trust. Co-chair Torgerson continued on page six, line 19. Mr. Gruening said that this was amended in the House to increase the allocation an additional five- percent. Co-chair Torgerson asked for an explanation of Section 6, page six. Mr. Kelly said this was explained in a letter from Mr. O'Leary of CALLAN ASSOCIATES. Mr. Brown explained direct ownership. They have a limited partnership/ownership. Mr. Gruening said gold was not available to them as an investment. Mr. Kelly said a bond, for instance would be available and could be picked up quickly with this kind of flexibility. He explained that the Treasury Division has policies for investments. Co-chair Torgerson suggested a change on page seven, line 1 for the deletion of "comments" and insertion of "approval". Mr. Kelly said this would have to be taken up with the board. They system up until now has worked fine with the language of the past twenty years. Co-chair Torgerson suggested that there be a complete cap on fifty-five percent to anything outside stock. He asked that they think about this. Co-chair Torgerson HELD the bill in committee and said he would try to bring it up again by Friday. He then called HB 209, noting that it had been schedule last evening.