JOINT COMMITTEE ON LEGISLATIVE BUDGET AND AUDIT March 19, 1999 12:00 p.m. MEMBERS PRESENT Representative Gail Phillips, Chair Representative Con Bunde Representative Eric Croft Representative Gary Davis Representative Gene Therriault Senator Randy Phillips, Vice Chair Senator Sean Parnell MEMBERS ABSENT Representative Eldon Mulder Senator Al Adams Senator Rick Halford Senator Drue Pearce Senator Gary Wilken COMMITTEE CALENDAR APPROVAL OF MINUTES EXECUTIVE SESSION AUDIT REPORTS ALASKA PERMANENT FUND CORPORATION (APFC) WITNESS REGISTER TOM MAHER, Legislative Assistant to Representative Gail Phillips Alaska State Legislature Capitol Building, Room 411 Juneau, Alaska 99801 Telephone: (907) 465-6873 POSITION STATEMENT: Explained the clean-up process of the minutes up for approval. PAT DAVIDSON, Legislative Auditor Division of Legislative Audit State Office Building, Sixth Floor Telephone: (907) 465-3830 POSITION STATEMENT: Inroduced audit reports. JIM KELLY, Research and Liaison Officer Alaska Permanent Fund Corporation Department of Revenue P.O. Box 25500 Juneau, Alaska 99802 Telephone: (907) 465-2059 POSITION STATEMENT: Presented draft legislation for committee approval. ACTION NARRATIVE TAPE 99-2, SIDE A Number 0001 CHAIR GAIL PHILLIPS called the Joint Committee on Legislative Budget and Audit meeting to order at 12:00 p.m. Members present at the call to order were Representatives Phillips, Bunde, Davis and Therriault, and Senators Phillips and Parnell. Representative Croft arrived prior to executive session [time not specified]. APPROVAL OF MINUTES Number 0081 CHAIR PHILLIPS announced the first order of business is approval of minutes from previous Legislative Budget and Audit Committee meetings. The first two sets of minutes are from meetings held on March 16 and March 23, 1995. SENATOR PHILLIPS made a motion for the approval of the March 16, 1995 and March 23, 1995, Legislative Budget and Audit Committee minutes and asked unanimous consent. CHAIR PHILLIPS asked if there was an explanation for the clean-up on the minutes. Number 0146 TOM MAHER, Legislative Assistant to Representative Gail Phillips, Alaska State Legislature, stated that it was mainly for housekeeping purposes. The tapes were run, the minutes were transcribed, and he proofed them. CHAIR PHILLIPS asked if there was any objection. There being none, the minutes from the Legislative Budget and Audit Committee meetings held March 16 and 23, 1995, were approved. CHAIR PHILLIPS continued, stating that the next two minutes up for approval are from the Legislative Budget and Audit Committee meetings held January 18 and February 12, 1999. Number 0217 SENATOR PHILLIPS made a motion for the approval of the January 18 and February 12, 1999, Legislative Budget and Audit Committee minutes and asked unanimous consent. There being no objection, the minutes from the Legislative Budget and Audit Committee meetings held January 18 and February 12, 1999, were approved. EXECUTIVE SESSION Number 0217 SENATOR PHILLIPS made a motion, in accordance with Titles 24 and 44, to move to executive session for the purpose of discussing audit reports which are held confidential by law. There being no objection, the committee went into executive session at 12:10 p.m. CHAIR PHILLIPS requested that Pat Davidson (Legislative Auditor), David Teal (Director of Legislative Finance Division), and Tom Maher (Legislative Budget and Audit Committee aide) attend the executive session. PAT DAVIDSON, Legislative Auditor, Division of Legislative Audit, asked that the staff from the Division of Legislative Audit, which included; Merle Jenson, Jim Griffin, and Nikki Rouget, also attend executive session. [not recorded] The committee resumed open session at 1:10 p.m. AUDIT REPORTS [release of audits not recorded] SENATOR PHILLIPS made a motion to release the five final audits; DCED/Alaska Public Utilities Commission, DHSS/Division of Alcohol and Drug Abuse, DHSS/DFYS Follow-Up, DOC/Point MacKenzie Rehabilitation Project, and DOTPF/DOE/UA/ACS-Art in Public Places, and one preliminary audit; DOA/Travel and Compensation Survey, to the public. There being no objection, it was so ordered. SENATOR PHILLIPS made a motion to release the five preliminary audits; Department of Revenue, Department of Community and Regional Affairs, DCRA/Pedro Bay Electrification Project, DOE/Lower Yukon School District, and DCED/BSC Alaska Native Corporations, to the agencies for response. There being no objection, it was so ordered. ALASKA PERMANENT FUND CORPORATION (APFC) Number 0303 CHAIR PHILLIPS announced that the next order of business is a presentation by the APFC on the draft legislation, pertaining to increased permanent fund investment flexibility, sent on March 4, 1999, for committee consideration. Number 0341 JIM KELLY, Research and Liaison Officer, APFC, Department of Revenue, informed the committee that, in general, the APFC is asking the Legislative Budget and Audit Committee to assist them in reducing risk and increasing returns by providing the APFC managers with increased investment flexibility. The bill that the APFC is asking the committee to introduce does not make sweeping changes, but instead, modernizes existing language, gives APFC more investment tools and keeps the asset allocation limitations, although slightly expanded, in place. The two largest provisions in the bill would be, one, the elimination of the $150 million limit and 100 percent ownership of real property, and two, the creation of a 5 percent "basket clause" which will allow the APFC to retain greater asset class commitments than otherwise allowed and invest in individual securities or instruments that are not on the "legal list". Number 0500 REPRESENTATIVE CROFT asked if there are no limits in the "basket clause." MR. KELLY replied that there would be no limitations other than the amount of the "basket clause", which is 5 percent. REPRESENTATIVE CROFT requested clarification on the $150 million real property limit. MR. KELLY explained that when the APFC began investing in real estate in 1983, when the legislature first authorized it, the APFC could not own more than 40 percent of the property. In 1993 the APFC came to the legislature, saying that the property limit was restricting their ability to make proper investment decisions on the properties, and asked for 100 percent ownership in all cases. The legislature responded, five years ago, by saying no, to all cases; 100 percent on everything except if it's bigger than $150 million than a 67 percent ownership limitation applies. Over those five years the size of the fund has doubled and the amount of money invested in real estate has increased. The percentage of properties that APFC owns greater than 50 percent on, which use to be zero, is now up to three-quarters and a number of those the APFC has 100 percent ownership. The current restiction limits the APFC's ability to negotiate on large transactions, since competitors are aware that the APFC is limited to 67 percent ownership. The people negotiating in a "buy-sell" situation can negotiate a little harder than one would like. Number 0644 REPRESENTATIVE BUNDE referred to the 5 percent category without limitation and to the idea of ardent Alaskans suggesting that the APFC invest in Alaska real estate, Alaska businesses or other schemes. He wondered how, without the prudent investor rule, does the APFC plan on resisting those suggestions. MR. KELLY explained that the APFC would not be without the prudent investor rule, because the prudent investor rule still applies to the "legal list" and would continue to apply to all the investments that the APFC makes. The APFC would continue to work with the Legislative Budget and Audit Committee and inform the committee when the APFC is considering a new venture, which is required by law. REPRESENTATIVE BUNDE requested clarification on the 5 percent restriction and whether the prudent investor rule would apply to it, meaning that there would be restrictions on the 5 percent. MR. KELLY replied, that is correct. Number 0774 SENATOR PHILLIPS made a motion to introduce the draft legislation [1-LS0500\D, Cook, 2/25/99]. CHAIR PHILLIPS asked if there was any objection. There being none, the bill [1-LS0500\D, Cook, 2/25/99] will be introduced in both the House and Senate at the request of the Legislative Budget and Audit Committee. She announced that the next Legislative Budget and Audit Committee meeting will be held Friday, March 26, 1999, and the purpose of the meeting will be the release of a preliminary audit. ADJOURNMENT Number 0805 CHAIR PHILLIPS adjourned the Joint Committee on Legislative Budget and Audit at 1:25 p.m.