HOUSE FINANCE COMMITTEE May 1, 1998 9:00 A.M. TAPE HFC 98 - 139, Side 1. TAPE HFC 98 - 139, Side 2. CALL TO ORDER Co-Chair Therriault called the House Finance Committee meeting to order at 9:00 A.M. PRESENT Co-Chair Therriault Representative Kohring Representative J. Davies Representative Martin Representative G. Davis Representative Moses Representative Kelly Representative Mulder Representative Grussendorf Representatives Foster and Hanley were not present for the meeting. ALSO PRESENT James Baldwin, Assistant Attorney General, Department of Law; Patrick Lounsbury, Staff, Representative Jeannette James. SUMMARY HB 81 An Act relating to the members of the board and staff of the Alaska Permanent Fund Corporation. HB 81 was HELD in Committee for further consideration. HJR 50 Proposing amendments to the Constitution of the State of Alaska relating to a public corporation established to manage the permanent fund. HJR 50 was HELD in Committee for further consideration. HOUSE BILL NO. 81 "An Act relating to the members of the board and staff of the Alaska Permanent Fund Corporation." HOUSE JOINT RESOLUTION NO. 50 Proposing amendments to the Constitution of the State of Alaska relating to a public corporation established to manage the permanent fund. PATRICK LOUNSBURY, STAFF, REPRESENTATIVE JEANNETTE JAMES, spoke to the tremendous turnover in top management of the Alaska Permanent Fund during both Governor Knowles and Governor Hickel's administrations. He commented that HB 81 was designed to take politics out of the Permanent Fund Board of Directors appointment process. Mr. Lounsbury stated that HB 81 was designed to create continuity within the board by restricting any governor's ability to remove board members without cause and also creating staggered terms. At this time, members serve at the pleasure of the Governor. HB 81 would allow the governor to replace members only for cause and the staggered term provision would allow for continuity. Now that the fund is breaching $20 billion dollars, it would be in the State's best interest to protect the fund from the political whims of each changing administration. Mr. Lounsbury provided a sectional analysis of the proposed legislation and noted that Section #4 is the heart of the bill. It would allow a governor to remove a trustee for a "cause" of miscompetentcy. In conclusion, Mr. Lounsbury noted that there had been identical legislation passed during the 19th Legislature, and that it had overwhelming partisan support which was then vetoed by the Governor. Co-Chair Therriault questioned the intent for increasing the size of the board. Mr. Lounsbury explained that addition would guarantee that one member would have the competence and experience in investment portfolio management. Co-Chair Therriault asked why that requirement is not placed on one of the members currently on the board. Mr. Lounsbury agreed that could work. Co-Chair Therriault voiced concern with a new governor having the authority to let the entire board go. Co-Chair Therriault spoke to the importance of continuity within that body. He questioned if it was essential to change the constitution in order to allow for the dismissal cause. Mr. Lounsbury replied that the Department of Law had recommended the constitutional amendment. Since the Permanent Fund Board does not fall under the auspice of Article 3, Section 26, anyone could be removed for cause. Co-Chair Therriault asked if the proposal would create a new section of statute. Mr. Lounsbury understood that would be based on advice received by the legal department. Representative Martin pointed out that if the Legislature did not follow the constitutional amendment, the Governor would be able to veto the legislation. JAMES BALDWIN, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF LAW, advised that HB 81 requires a constitutional amendment in order to implement it. He added that the constitutional amendment would not completely resolve the legislation but it would be a responsible way to achieve the sponsor's intent. Mr. Baldwin remarked that when the Permanent Fund Corporation (PFC) was established, a decision was made that board members of the corporation would be removable. Existing law provides that a governor, by specifying his reasons, can remove board members, which provides a method of accountability. Whereas, the other side of the issue, to be able to remove only for cause establishes a requirement for a trial-like proceeding which would not be a simple process. Mr. Baldwin continued, when dealing with an entity that is as important as the Alaska Permanent Fund Corporation, it is vital to protect the well being of the State and it would not be a good idea to keep these policy makers beyond the reach of someone who is accountable to the governor. Mr. Baldwin stressed that it is a matter of legal accountability. Mr. Baldwin explained that difficulty is established with the standards imposed in the language, when addressing "competency". A problem could occur when determining where the interest of the corporation is above over the interest of the Permanent Fund, and if that could create an issue for the taxability of the fund. He recommended that language be changed in statute. Mr. Baldwin suggested that the constitutional amendment would provide a role for the Legislature during the appointment confirmation process, stressing that all action must be done in the financial best interest of the State. Mr. Baldwin addressed the circumstance of board members being removed only for cause. He pointed out that the high-level policy makers such as the executive director and his chief investment officers make important decisions for the best interest of the corporation. He noted that it has been determined good policy that these positions be removed at the governor's "pleasure". Co-Chair Therriault questioned the validity of discharging someone because they do not meet the same philosophical position of the governor. He noted that the "role" of the fund was to make money and invest that money prudently. Mr. Baldwin advised that the Permanent Fund Board should act consistently with the way in which the governor views the world. He emphasized that this is $27 billion dollars of the public's assets and that to have the governor and the Permanent Fund Corporation acting in concert is very important. Mr. Baldwin advised it could be "frightening" to have those two entities at odds. Mr. Baldwin noted that in the House Judiciary Committee, the Administration had proposed a work draft which would require more substantive reasons to get a requirement in law and tying it to the financial best interest of the fund. Representative J. Davies requested for a comparison of the Permanent Fund Board status to the Board of Regents status and the manner in which members are appointed and removed. Mr. Baldwin explained that the University was a public corporation with special status. The members of the Board of Regents are mentioned in the constitutional text. Representative J. Davies remarked that there is a rational reason for that type of stability in management of a huge public trust and, also, for the management of the Permanent Fund. Mr. Baldwin commented that his main concern was removal of members. Confirmation is a different concern. Mr. Baldwin continued, the Department is "nervous" about fixing the status of a corporation in the Constitution. Corporations have had a history of close scrutiny by the Internal Revenue Service (IRS). At present time, the corporation is established by law. If it appears that the federal law is changing in a way that does not favor the State, then the Legislature can do something about it. Whereas, if it is placed in the Constitution, it would not be as easy to change. Co-Chair Therriault questioned what is done with the proceeds of the fund and if that was that the purpose of the fund. Mr. Baldwin agreed that should be a consideration, although, to determine whether this type of entity is tax exempt, corporate status plays a prominent role in the area of disaster relief funds and tuition assistance funds. He summarized, the Department of Law prefers that it the Permanent Fund Corporation continues to be a public agency rather than a public corporation. Co-Chair Therriault remarked that he did not look at the role of the Board of Regents and the Permanent Fund trustees in the same light as the Department of Law would. One entity generates money, while the other is makes expenditure decisions on behalf of the State. He commented that their structure should be different because of their different charge. Representative Mulder suggested that candidates should be chosen for the PFC Board because of their ability to make good financial decisions, which is not necessarily consistent with the philosophy of each governor. Mr. Baldwin replied that language recommended to Representative James would take the standard in the bill, and state that the governor "may" remove a member of the Board when he judges that it is in the best financial interest of the Permanent Fund and citizens of the State. Representative Mulder agreed that could work as long as the standard was not politics. Representative Grussendorf suggested that the word "philosophy" is often a way to clock any differences we might have with another individual or entity. Representative J. Davies stated that it is important to remember that the PFC board members are a policy board and not an executive group. He pointed out that the Committee had been speaking of them as if they were in charge of managing the funds, but instead, they set policy for fund management. They do not make investment decisions. Representative J. Davies explained that there is a vast difference between these two groups of people. He emphasized that it is appropriate that the executive director and his primary investors serve at the pleasure of the governor, although, the Board should be more stable. (Tape Change HFC 98- 139, Side 2). Co-Chair Therriault MOVED deletion of all material except Section #4. Mr. Baldwin pointed out that Section #6 would clarify that high level people could be removed. He commented that the Department favored that section remaining in the bill. Co- Chair Therriault AMENDED the MOTION to retain only Sections adopted. Representative J. Davies WITHDREW Amendments #1 & #2. [Copy on File]. There being NO OBJECTION, the amendments were withdrawn. Co-Chair Therriault spoke to a change recommended by Mr. Baldwin on Page 2, Line 18, adding "permanent fund" after "affairs of the". Representative J. Davies suggested that would create the question of the Board being policy versus executive. Mr. Baldwin noted that at this time, the Board establishes allocation policy, while others implement that policy. His suggestion would be to abandon that language and go to a standard of full cause. HB 81 and HJR 50 were HELD in Committee for further consideration. ADJOURNMENT The meeting adjourned at 9:50 A.M. H.F.C. 6 5/01/98 a.m.