MINUTES SENATE FINANCE COMMITTEE March 19, 1996 10:00 a.m. TAPES SFC-96, #42, Side 1 (000-575) SFC-96, #42, Side 2 (575-266) CALL TO ORDER Senator Rick Halford, Co-chairman, convened the meeting at approximately 10:00 a.m. PRESENT In addition to Co-chairmen Halford and Frank, Senators Phillips, Rieger, Sharp, and Zharoff were present. Senator Donley arrived soon after the meeting began. ALSO ATTENDING: Janine Reep, Assistant Attorney General, Human Services Section, Civil Division, Dept. of Law; Annie Carpeneti, Assistant Attorney General, Criminal Division, Dept. of Law; Don Wanie, Director, Division of Finance, Dept. of Administration; Joe Thomas, State Accountant, Division of Finance, Dept. of Administration; Robert Storer, Chief Investment Officer, Treasury Division, Dept. of Revenue; Peter Bushre, Chief Financial Officer, Alaska Permanent Fund Corporation, Dept. of Revenue; Jim Kelly, Research and Liaison Officer, Alaska Permanent Fund Corporation, Dept. of Revenue; Donna Schulz, Juvenile Probation Officer, Division of Family and Youth Services, Dept. of Health and Social Services; Mike Greany, Director, Legislative Finance Division; and aides to committee members and other members of the legislature. SUMMARY INFORMATION SB 289 - MISC. LAWS RELATING TO RUNAWAY MINORS Discussion was had with Janine Reep and Donna Schultz. The bill was subsequently held in committee for incorporation of provisions allowing for placement of runaways in protective custody should they leave semi-secure care and for review of penalties for contributing to the delinquency of a minor. SB 303 - MANAGEMENT OF CONSTITUTIONAL BUDGET RESERVE FUND Initial discussion was had with Don Wanie and Robert Storer. The bill was then held for continued discussion at the next committee meeting. SENATE BILL NO. 289 An Act relating to runaway minors and their families or legal custodians. Co-chairman Halford directed that SB 289 be brought on for discussion. Co-chairman Frank explained that, at a previous meeting, the committee asked that the Dept. of Law review case law on the constitutional rights of minors. He referenced the department's March 18, 1996, memo (copy on file in the original file for SB 289). He further noted that the department declined to comply with a committee request that it draft a findings and purposes section for the bill. The Division of Legal Services therefore drafted the requested language per amendment 9-LS1635\M.1, Lauterbach, 3/19/96. Co-chairman Frank voiced his belief there is no constitutional question associated with placement of juveniles in semi-secure facilities. Co-chairman Halford noted that advocates of the legislation would only be "shortly satisfied with a semi-secure environment because it won't work either." It will make the situation a bit better, but it will not provide a solution for problem kids. Co-chairman Halford voiced his belief that the Dept. of Law is not prepared to take the necessary steps the legislature is inclined to take because it is the legislature rather than the department that has heard constituents complain for many years. In response to a question from Senator Phillips, Co-chairman Halford reiterated that one cannot take the right to freedom away from a status offender without meeting constitutional guidelines. JANINE REEP, Assistant Attorney General, Civil Division, Dept. of Law, came before committee. She advised that she drafted the March 18, 1996, memo in response to the committee request for review of case law relating to the placement of minors. She explained that she did not draft findings and purposes language since it generally cites legislative intent and why the legislation is being promulgated. She said that while she could guess at reasoning behind the legislation, she is not a legislative employee and does not know exactly what the legislature wants set forth. Further, the department does not have statistics on runaways. Co-chairman Halford said the legislature needs to know the source of constitutional challenges and what kinds of findings strengthen arguments against those challenges. As an example, he cited both substantial threat to public health and safety or to the minor. He then suggested that cases relative thereto be reviewed and court language used in effecting statutory corrections. Ms. Reep explained that case law relating to juvenile delinquency and confinement of minors provides no solutions. The end result is that if the state is going to confine a minor, protections (notice, hearing, oversight by the court) must be in place. Co-chairman Halford asked if it would be possible to provide security for a short period, such as three days, without running the gamut of full constitutional protections. Ms. Reep said she did not know. She acknowledged that other states have experimented in this area. Co-chairman Frank suggested that, in the absence of case law in Alaska, the legislature do its best to structure a system that provides greater safety and security for juveniles and let the courts rule on the issue after the fact. Ms. Reep directed attention to page 2 of her memo and noted provisions that allow runaways in need of aid to be locked up for 24 hours. That involves going before the court and obtaining a probable cause finding that the child is in imminent danger, and there is no alternative to detention. Ms. Reep stressed need to ensure due process so that "people aren't put away without a really good reason." Current protections accorded delinquents attach to the fact that delinquents face the possibility of incarceration. They are thus entitled to counsel. In a delinquency case, young people can be held for 48 hours before they go to court. Within that time, the state must prove probable cause. Co-chairman Frank asked if a minor would have to be represented by counsel to be placed in a secure environment until the Division of Family and Youth Services could provide alternative placement. Ms. Reep said that 24-hour detention is not often used. However, under current practice, "Those minors are appointed counsel." Comments followed regarding cost concerns that have acted as roadblocks to past legislative action on this issue. In the course of further discussion, Ms. Reep attested to cases involving equal protection challenges in other states for confinement of status offenders or runaways with juvenile delinquents. Co-chairman Frank asked if a minor could be placed in protective custody for a status offense. Ms. Reep said she had not conducted sufficient research to make a determination. Many states have done many different things. Co-chairman Frank referenced the administration's focus on children and families and specifically noted funding for the children's trust. He then questioned the department's unwillingness to develop reasonable methods of addressing the runaway problem. Ms. Reep made reference to the conference on juvenile justice, terming it an effort by the administration to address the problem. Many from the Dept. of Law are involved. Work is ongoing. The intention is to develop solutions. Senator Randy Phillips stressed that additional study is not the answer. A solution lies in return of authority to parents. Co-chairman Halford referenced an earlier comment regarding 48-hour detention, prior to a hearing, and asked why that provision could not be applied to a status offense. The runaway could then be held in protective custody. The only way out of that custody would be pick up by a parent or legal guardian. Ms. Reep explained that for 48-hour detention to occur, probable cause must be established by someone, generally a police officer, that the juvenile has committed a crime. Co-chairman Halford suggested that the crime be the status crime. That would at least provide a 48-hour cooling off period. Ms. Reep again cautioned that necessary protections must be in place. Due process is a constitutional right that must be addressed. Further comments followed by Co-chairman Frank regarding protective custody situations. Additional discussion followed regarding current 48-hour detention of juvenile delinquents. Co-chairman Halford suggested that failure of the minor to remain in a semi-secure facility be backed up by 48-hour detention. The youth would then have the right to counsel, and after 48 hours a decision would be made for court- directed placement. Co-chairman Halford suggested that the 48-hour period would serve as a deterrent to running from a semi-secure facility. It would further serve as a deterrent to avoidance of parental authority. Ms. Reep commented that one of the findings that must be made by an officer when he or she detains a minor is that detention is necessary to protect the minor or the community. Under runaway statutes (child in need of aid provisions) an individualized finding that the minor is in danger must also be made. Ms. Reep attested to overcrowding in juvenile facilities and noted that the state does not have room to "detain the kids that need to be detained." That raises a question regarding where runaways would be placed. That is a significant problem. Co-chairman Frank acknowledged that, while provisions for semi-secure placement and enhanced opportunity to prosecute those who contribute to the delinquency of a minor are steps in the right direction, the bill does not go as far as it should. He suggested that further exploration might uncover a reasonable next step, within constitutional parameters, to make the bill truly meaningful in getting families back together. Co-chairman Halford asked that staff from the Dept. of Law review proposed findings. Co-chairman Frank stressed that the objective is not incarceration of young people. The intent is to get their attention and get them back with their families. He suggested that the threat of incarceration would serve as a deterrent, and 48 hours of protective custody might be beneficial. Discussion followed regarding making the act of running away a crime. Senator Randy Phillips reiterated need to backup parental authority. DONNA SCHULZ, Juvenile Probation Officer, Division of Family and Youth Services, Dept. of Health and Social Services, came before committee. She cited the following areas as problematic: 1. Movement from semi-secure to secure placement would entail loss of $787.0 in federal moneys. Funding depends upon meeting core requirements of the Juvenile Justice and Delinquency Prevention Act. One of those requirements relates to status offenders and does not allow for placement in jails or detention facilities. 2. Where would these young people be detained? Detention facilities are already overcrowded, and there are waiting lists for placement of juvenile offenders. The impact of bringing runaways into the system would exacerbate the problem. 3. Does placement of runaways in existing facilities meet the philosophical aim of the facility? Ms. Schulz voiced support for semi-secure placement provisions. She referenced clear delineation between delinquents and status offenders. Co-chairman Halford advised of his understanding the state would lose federal funding if it incarcerates status offenders with delinquents. He then asked if runaways could be held in protective custody for 48 hours in separate confinement in the same facility. Ms. Schulz noted that Alaska law allowing for a 12-hour hold in protective care is considered a violation of federal requirements. The state is only allowed a certain percentage of violations per 100,000 before federal funds are lost. Discussion of federal law, renewal, and possible changes followed between Co-chairman Frank and Ms. Schulz. She acknowledged that abused children were the focus of 1974 federal law. END: SFC-96, #42, Side 1 BEGIN: SFC-96, #42, Side 2 Senator Rieger stressed need to differentiate between minors who run away from an abusive home environment and those fleeing parental authority. He then suggested that focusing on protective custody for running away from a semi-secure facility might be a different question than the status crime of "being on the street in the first place." It would also help sort out the different classes of minors on the street: those who are there because they want the freedom and thrill of street life versus those who are fleeing a dangerous situation at home. Ms. Schulz questioned prior comments indicating that only 10 percent of runaways are fleeing abuse or neglect and suggested that the percentage appears very low. National statistics evidence 67 to 69%. She stressed need for better numbers at the state level and voiced her estimate that the percentage is "at least 50 percent; it could be higher." Senator Zharoff noted that the problem with runaways is not unique to one area of the state. Constituents indicate that those advising minors of their rights do not also speak to responsibilities and potential liabilities. He cited gang involvement as an example. Senator Sharp reiterated need to prosecute adults who solicit juveniles and provide communal-type living situations which encourage them to remain away from home. That is where legal emphasis must be placed rather than on attempts to incarcerate minors. Co-chairman Frank noted that the draft Finance version makes prosecution in this area easier for the state. He agreed to take a second look at penalties for contributing to the delinquency of a minor. The bill was held in committee for further review. SENATE BILL NO. 303 An Act relating to management of the budget reserve fund; and providing for an effective date. Co-chairman Frank explained that assigning the Constitutional Budget Reserve, with substantial balances in excess of current needs, to the permanent fund for management would increase the rate of return by "maybe 200 basis points or 2 percent." The Governor's long-range plan also assumes a greater rate of return on the CBR. The proposed bill represents one way that could be accomplished. It is offered as a starting point for discussion. He then asked that staff from the Dept. of Revenue and the Alaska Permanent Fund speak to the legislation. ROBERT STORER, Chief Investment Officer, Treasury Division, Dept. of Revenue, came before committee to speak to present management of the fund. He noted that much of the discussion would relate to cash flow and asked that DON WANIE, Director, Division of Finance, Dept. of Administration, join him at the table. In response to a question from Senator Phillips asking if the administration supports the bill, Mr. Storer cited the present construction of the constitutional budget reserve, significant impact on cash flow, and placement of funds within the permanent fund as areas of concern giving rise to opposition. Mr. Storer explained that the CBR is managed to address cash flows and shortfalls in the general fund. Two considerations are paramount: 1. Future expenditures 2. Future income into the general fund These considerations relate not to a one-year time horizon but a two, three, four-year, somewhat "non-predictive" time frame. For that reason, the department manages "with moderate risk." "Risk" relates to "near-term market volatility" and the chance of fluctuation of valuations in a portfolio on a year-to-year basis. Over time, investments can be made in asset classes with higher rates of return, but there is more volatility. The investor is rewarded for accepting that volatility by a higher return. Because of volatility in the equity market, the CBR is managed with fixed-income securities. The department will not invest fund assets in securities with more than a five-year maturity, because of the short-term nature of the fund. That allows for "about 95 percent of the fixed-income market returns and about one-third less risk than a bond market." The permanent fund, much like the state retirement system, has the luxury of managing for longer time horizons and can thus have multi-asset-class portfolios. That allows for investment in domestic and international equities as well as real estate. Speaking to the domestic equity market, Mr. Storer noted that, over time, it should return "about 10 percent." History also shows that a preponderance of the time those returns can fall between a positive 28 percent and a negative 8 percent. Because of that volatility, the department has been unwilling to accept the incremental risk. The department has done a number of things to add income to the fund. Those actions apply to the general fund as well as the CBR. Aggregation of assets has allowed for investment in securities with a higher rate of return, a little more volatility, but safety of principal to maintain the purchasing power and value of the fund. The result was an additional $50 million at the low end and $75 to $100 million over the last few years. Mr. Storer noted that in the last calendar year, the CBR returned 10-1/4 percent. Given the nature of the fund, that is a good return. He referenced FY 93 when the bond market lost "almost 1-1/2 percent . . . and we managed to earn a positive 3-1/2 percent" Mr. Storer reiterated that multi-asset-class portfolios that should produce a higher rate of return involve near-term volatility. In considering the proposed legislation, one must also consider the potential for incurring some losses in a portfolio that is essentially a cash flow account. Mr. Wanie next distributed materials (copy on file in the original Senate Finance Committee file for SB 303), referenced analysis language indicating Dept. of Administration opposition to the bill, and explained that opposition relates to cash flow concerns. The front section of the operating budget has historically contained language appropriating moneys from the CBR to the general fund for the purpose of balancing revenues and expenditures. Language says that if revenues are not sufficient, the state can go to the CBR when it needs cash. The state spending pattern during the first four to five months of the fiscal year is such that expenditures will exceed revenues "anywhere from $250 million on the low end to over $350 million on the high end." That creates cash flow problems for the Dept. of Administration. To meet cash shortfalls and avoid shutting down payments to vendors, municipalities, the University, school districts, etc., the department borrows from the CBR and continues to make payments. Mr. Wanie asked if the department would continue to have access to cash from the CBR if custody is turned over to the permanent fund corporation. If access remains available, the next question is, "How quickly can the permanent fund corporation respond?" At the present time, when the state runs into a cash crisis, the department "can kind of predict it, but all of a sudden we're at a situation where we're at a threshold and we need to borrow cash . . . ." If that opportunity is not preserved when the CBR moves to the permanent fund corporation, what would the alternatives be? Co-chairman Frank voiced his intent that the state would retain ability to manage cash flow through loans from the CBR to the general fund. There should be no policy problem. In response to a question from Co-chairman Frank, Mr. Wanie explained that state revenues are "generally somewhat even." However, the first three or four months of the fiscal year are peak periods for all agencies. That is when employment is at its highest, construction projects are undertaken, and there is "an awful lot of activity." Much more cash goes out the door than comes in. The state attempts to spread disbursements to municipalities across the year to preserve cash. Co-chairman Frank acknowledged that the Dept. of Administration raised good questions. He then asked that staff from the permanent fund corporation respond. Senator Rieger inquired regarding the asset allocation of the CBR at the present time. Mr. Storer said it is entirely in fixed income securities--predominantly treasury and high- grade corporate bonds. The risk profile has been expanded by investment in "some intermediate securities." Approximately 30 percent of that portfolio has maturities in a three-to-five-year time horizon. That is the area that provides a 95 percent incremental return without the risk. There are currently no equities in the portfolio. Senator Rieger asked if the remaining 70 percent is in fixed-income investments of less than three years. Mr. Storer concurred. Senator Rieger asked if the department would invest in equities if the time frame was eight to ten years. Mr. Storer responded, "Unequivocally." He voiced his opinion that to successfully invest in equities, a five-year time horizon is needed. That allows opportunity to smooth out market volatility. If the department knew some element of the portfolio could not be touched for eight years, more risk could be taken. Senator Rieger referenced projections which show a substantial balance ten years hence, depending upon the type of investment. Mr. Storer agreed, saying that could be done if there is "some sort of explicit guarantee that we can eliminate this non-predictive event . . . ." Senator Rieger acknowledged the fiduciary relationship of the department to the fund and further acknowledged that it would be uncomfortable for staff to undertake additional risk investments without "some kind of release from the Legislature." He then suggested that Legislative assumption of risk should be a sufficient directive. Mr. Storer agreed. Co-chairman Frank voiced his assumption that a good portion of the 10 percent return resulted from an increase in the price of bonds and securities held by the state. Mr. Storer concurred. He added that by creating a pool--"almost a mutual fund environment"--the department was able to incur more risk (longer-dated securities) which provided potential for greater capital gains. Department evaluation of the market and price increases also helped. Co-chairman Frank then suggested that should the market turn, the state could experience no return or a loss with the same risk profile. Mr. Storer agreed that for near-term investments that is potentially correct. With a three to four-year time horizon, there is an emphasis toward safety of principal. There would be an income flow. Mr. Storer emphasized that the nature of the single-asset-class portfolio allows the state to become more conservative if the market dictates. Co-chairman Frank asked if a greater return could be achieved if $1.8 of the $2.2 billion CBRF was placed within the substantially larger permanent fund and $400 million left to deal with cash flow. Mr. Storer explained that since the department manages 18 different portfolios, it has the capability to construct a portfolio to fit the requirements of a large fund. The problem is the non- predictive element. If continuity of the fund could be predicted over a longer time horizon, assets could be differently invested. Co-chairman Frank acknowledged that should the price of oil significantly decrease, the state might have to substantially draw upon the CBRF. That might mean that securities would have to be liquidated at an inopportune time. Because the permanent fund is substantially larger, it would be in a better position to liquidate short-term securities that would naturally be turning over. It appears as though that would be of benefit. Co-chairman Halford advised of need for members to attend the Senate floor session and suggested that discussion of SB 303 continue at the next meeting. ADJOURNMENT The meeting was adjourned at approximately 11:10 a.m.