SENATE LABOR AND COMMERCE COMMITTEE March 8, 1994 1:40 P.M. MEMBERS PRESENT Senator Steve Rieger, Vice Chairman Senator Bert Sharp MEMBERS ABSENT Senator Tim Kelly Senator Georgianna Lincoln Senator Judith Salo COMMITTEE CALENDAR HOUSE BILL NO. 327 "An Act extending the termination date of the Board of Veterinary Examiners; and providing for an effective date." CS FOR SENATE BILL NO. 245(STA) "An Act relating to investments of the permanent fund involving equity interests in and debt obligations secured by mortgages on real estate; and providing for an effective date." SB 213 (APUC EXTENSION AND REGULATORY COST CHARGE) WAS SCHEDULED, BUT NOT HEARD THIS DATE. PREVIOUS ACTION HB 327 - No previous action to record. SB 245 - See State Affairs minutes dated 1/28/94 and 2/4/94. SB 213 - See Labor & Commerce minutes dated 9/28/93, 2/8/94, and 2/24/94. WITNESS REGISTER Benjamin Brown, Legislative Aide c/o Representative Cynthia Toohey State Capitol Juneau, Ak. 99801-1182 POSITION STATEMENT: Commented on HB 327. Jim Kelly, Research Liaison Officer Permanent Fund Corporation P.O. Box 25500 Juneau, Ak. 99802 POSITION STATEMENT: Supported SB 245. Llewellyn Lutchansky, Assistant Real Estate Investment Officer Permanent Fund Corporation P.O. Box 25500 Juneau, Ak. 99802 POSITION STATEMENT: Supported SB 245. ACTION NARRATIVE TAPE 94-14, SIDE A Number 001 VICE CHAIRMAN RIEGER called the Senate Labor and Commerce meeting to order at 1:40 p.m. and announced HB 327 (EXTEND BOARD OF VETERINARY EXAMINERS) to be up for consideration. BENJAMIN BROWN, Legislative Aide for Senator Toohey, sponsor, said it extends the sunset date of the state's Board of Veterinary Examiners which has been in existence continuously since 1963. If this bill doesn't pass, it will cease to exist at the end of the current fiscal year. SENATOR RIEGER thanked him for his testimony and said they would move the bill out today if they had a quorum. SENATOR RIEGER announced SB 245 (PERMANENT FUND INVESTMENTS IN REAL AL ESTATE) to be up for consideration. JIM KELLY, Research Liaison Officer, Permanent Fund Corporation, introduced Llewellyn Lutchansky, Assistant Real Estate Investment Officer, who testified with him. MR. KELLY explained that they have run into the situation with their real estate portfolio where they have more risk than they need and certainly more risk than they want. He explained that SB 245 removes a restriction on how much of a particular investment the Permanent Fund Corporation can buy. They would like it possible to buy 100% of an investment instead of the 40% they are held to now. They need more control over the disposition of the properties and in order to be able to operate in the future, they need to be in the position where they are not always in the minority interest. MR. KELLY explained they are losing many opportunities that would give them a good rate of return with relatively low levels of risk. They are not available to them, because other investors comes are able to buy them at 100% - and they do. He said the legislature set a limit of 15% of the portfolio to be invested in real estate and they haven't even come close to that, yet. They are at about 7%. For them to reach the target the Board has set which is 10% they would need the flexibility to own more than 40% of properties. Number 108 LLEWELLYN LUTCHANSKY explained when laws were first passed governing the Permanent Fund, it was new, the managers were inexperienced, and they didn't have much money to invest in real estate which is why the 40% rule was put into law. Now they have over $1 billion in real estate, about 6% of the fund. Last year they spent $145 million on 8 new deals, Ms. Lutchansky said. That's about $18 million per deal. At this rate it would take 31 more deals this year to reach their asset allocation of 10%. SENATOR SHARP asked on page 1, section 1 if up to $50 million they can own 100% and over $50 million they can own up to 60%. MR. KELLY said that was the CS from the Labor and Commerce Committee and they would rather go with the original bill which would allow 100% with no cap. MS. LUTCHANSKY said she has asked some of the fund managers who are partners with the Permanent Fund Corporation if they have coinvestment limitations and no one else has. SENATOR SHARP asked if they had experienced difficulty in getting out of deals because they were a minority partner. MS. LUTCHANSKY said they have definitely had real problems with that. SENATOR RIEGER said he was in favor of loosening the real estate investment restrictions. He also thought they should change the percentage of portfolio restriction over all. MR. KELLY said the Fund will never reach their limit no matter what it is if they have the 40% coinvestment restriction. MS. LUTCHANSKY said they do not intend to stop coinvesting, especially on large deals, but they would like to be a majority holder and would like the flexibility to purchase more of the asset later if they need to. Number 274 SENATOR RIEGER said he was in favor of loosening some of the investment restrictions if it's accompanied by a really strong fiduciary duty by the trustees, which he was sure they practiced, but weren't mandated statutorily. MS. LUTCHANSKY said she knew the statute included a lot of discussion about prudent and intelligent investments. SENATOR RIEGER said he would also like to delete the restriction on investing in the U.S. only. MR. KELLY noted that the 40% provision was the most important to be removed. SENATOR RIEGER thanked everyone for their participation and said they would hold the bill for a future meeting. He adjourned the meeting at 2:03 p.m.