Legislature(2003 - 2004)

03/02/2004 08:00 AM STA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 422-BUDGET RESERVE FUND INVESTMENT                                                                                         
Number 0060                                                                                                                     
CHAIR WEYHRAUCH  announced that the  first order of  business was                                                               
HOUSE  BILL NO.  422, "An  Act repealing  the special  subaccount                                                               
established in  the constitutional budget reserve  fund; relating                                                               
to the powers of the Department  of Revenue for the investment of                                                               
amounts in the constitutional budget  reserve fund; and providing                                                               
for an effective date."                                                                                                         
TOMAS   H.   BOUTIN,   Deputy   Commissioner,   Office   of   the                                                               
Commissioner, Department of Revenue,  stated he would address the                                                               
four  questions about  HB 422  that Representative  Berkowitz had                                                               
emailed to  the Department of  Revenue.  The first  question that                                                               
he addressed  related to  the current  and projected  returns for                                                               
the Constitutional  Budget Reserve  Fund (CBRF), and  the returns                                                               
for the subaccount that HB 422  would be eliminating.  Mr. Boutin                                                               
stated  that  the  Department  of  Revenue  usually  doesn't  get                                                               
together  and make  projections for  the funds.   He  pointed out                                                               
that the Department  of Revenue does make  projections on returns                                                               
for the  general fund and the  CBRF in the Revenue  Sources Book.                                                               
He  said the  last time  that the  Department of  Revenue did  an                                                               
official projection  on the  CBRF was for  the Fall  2003 Revenue                                                               
Sources Book.   Citing the information  on page 7 of  the Revenue                                                               
Sources Book,  Mr. Boutin  stated that  the three-year  return on                                                               
the  subaccount has  been  1.8 percent  and  has shown  "textbook                                                               
volatility,"  which can  be  expected from  an  account that  has                                                               
higher risk.   He  stated that  the three-year  annualized report                                                               
for the CBRF showed that the account had a 5.9 percent return.                                                                  
Number 0260                                                                                                                     
MR.  BOUTIN  addressed the  question  regarding  when the  [CBRF]                                                               
account would  be completely  "down" and  require entry  into the                                                               
subaccount.   He  noted  that the  [2003]  fall revenue  forecast                                                               
shows  the entire  CBRF  running out  in May  2007.   Mr.  Boutin                                                               
explained  that   Commissioner  [William]   Corbus  had   made  a                                                               
presentation recently in Fairbanks on  [the status of] the entire                                                               
CBRF.    Mr.  Boutin  stated that  the  department  prepared  the                                                               
handout  for  that  presentation  and that  he  had  some  copies                                                               
available.  He  noted that [the one-page handout  included in the                                                               
committee  packet,   which  shows  two  CBR   subaccount  graphs]                                                               
explained  in detail  how the  CBRF is  forecasted today  to "run                                                               
CHAIR  WEYHRAUCH  stated that  the  annual  return rate  for  the                                                               
subaccount cited  in the annual  report 2003 seemed  aberrant and                                                               
he asked why that was.                                                                                                          
MR. BOUTIN  stated that equities  had really taken  off recently,                                                               
which is reflected  in the rate.  He cited  the subaccount graphs                                                               
in  the packet  and  noted  that the  subaccount  went below  the                                                               
initial  investment  shortly after  its  inception  and has  just                                                               
recently  recovered  and risen  above  the  initial $400  million                                                               
Number 0412                                                                                                                     
MR. BOUTIN  addressed another question,  regarding the  amount of                                                               
money that the Department of  Revenue felt was prudent to require                                                               
as a  minimum balance  for the  CBRF, and  how they  derived that                                                               
balance.  He  stated that the number the  administration is using                                                               
is a $1-billion minimum balance.   He explained that $400 million                                                               
is  required just  for cash  flow  purposes, and  the other  $600                                                               
million is  a result  of the  price volatility of  oil.   He said                                                               
that  the Office  of Management  &  Budget (OMB)  decided on  the                                                               
$600-million figure.                                                                                                            
Number 0506                                                                                                                     
MR. BOUTIN  addressed the final question  previously submitted by                                                               
Representative  Berkowitz, relating  to the  state's bond  rating                                                               
and how it would  be affected by the passage of HB  422.  He said                                                               
that the transfer of funds from  the subaccount to the CBRF would                                                               
have  no  impact  on  the  bond  rating,  especially  since  this                                                               
particular move  would have  the entire fund  at a  fixed income,                                                               
which  suggests more  liquidity.   He  said that  he talked  with                                                               
"government finance  associates" and asked them  about the credit                                                               
rating implications  that HB 422  would carry  with it.   He said                                                               
that government finance  associates didn't see any  impact on the                                                               
state's bond rating.                                                                                                            
Number 0646                                                                                                                     
REPRESENTATIVE BERKOWITZ  asked for further clarification  on the                                                               
$1-billion  figure  that  the administration  was  using  as  the                                                               
minimum amount needed for the CBRF.   He said that he had been to                                                               
the  Conference of  Alaskans and  he saw  no direct  relationship                                                               
illustrated between the $1-billion figure  and anything else.  He                                                               
stated that  at the Fiscal Policy  Caucus, it seemed that  it was                                                               
determined   that    $1.5   billion   was   a    better   number.                                                               
Representative Berkowitz said  that some people want  to link the                                                               
minimum balance  in the CBRF  to general fund spending,  so there                                                               
would  be a  cushion that  is rationally  related to  the state's                                                               
Number 0702                                                                                                                     
MR. BOUTIN explained  that where there was a  zero aggregate draw                                                               
from the  CBRF throughout the year,  there would still be  a need                                                               
for $400  million for cash  flow purposes.  He  explained further                                                               
that early  on in  the fiscal  year, the  state borrows  from the                                                               
CBRF to pay for fire suppression  and federal projects.  He added                                                               
that when the  state is reimbursed by the  federal government, it                                                               
then replenishes  the money  borrowed.   He said  that this  is a                                                               
typical year, except for the  recent oil prices, and $100 million                                                               
was just  reinvested in  the CBRF,  and there  is expected  to be                                                               
another  $100-million  deposit made  into  the  CBRF this  fiscal                                                               
MR.  BOUTIN referred  to [the  second page  - entitled,  "General                                                               
Fund  Cash Sufficiency  With CBRF  Borrowing" -  of a  seven-page                                                               
handout  included in  the committee  packet], which  he said  was                                                               
prepared  for the  Conference of  Alaskans by  the Department  of                                                               
Revenue.   He used that  graph to  illustrate how the  account is                                                               
drawn from  and replenished and  why the need for  a $400-million                                                               
balance  for cash  flow  purposes  is a  reasonable  number.   He                                                               
further  explained that  the OMB  came up  with the  $600-million                                                               
figure  by assessing  the  80 percent  confidence  level for  oil                                                               
price  volatility.   He  said  that it  determined  that a  $600-                                                               
million balance  was necessary to  account for a  one-year change                                                               
in oil prices and the time  necessary for the legislature to deal                                                               
with an  oil price shock.   He said  that these factors  were the                                                               
reasons the  $1-billion minimum  was set,  adding that  it wasn't                                                               
linear  programming or  operations research,  just pretty  simple                                                               
calculus that established that number.                                                                                          
Number 0951                                                                                                                     
REPRESENTATIVE  BERKOWITZ  asked  if there  were  any  statistics                                                               
pertaining to the performance of  the CBRF or the subaccounts for                                                               
the current year.                                                                                                               
MR. BOUTIN  indicated that the  most current figures that  he has                                                               
are found  in the graph with  the end date of  December 31, 2003.                                                               
He stated that  the subaccount had earned a  19.17 percent profit                                                               
for that year.                                                                                                                  
REPRESENTATIVE  BERKOWITZ asked  if  Mr. Boutin  had the  current                                                               
balances of each account.                                                                                                       
MR. BOUTIN said that he didn't have that information with him.                                                                  
CHAIR  WEYHRAUCH  asked if  the  May  2007 projections  mentioned                                                               
earlier would  be extended,  since the  account has  been getting                                                               
such a high return.                                                                                                             
Number 1041                                                                                                                     
MR. BOUTIN  estimated that in  the upcoming spring  forecast, the                                                               
rates will look  better than the fall forecast,  unless there was                                                               
a drastic plummet in oil prices.   He said that he didn't want to                                                               
"forecast a forecast," but he felt  that because of that, the May                                                               
2007,  depletion  forecast could  potentially  be  pushed back  a                                                               
little.   He  pointed out  that  the depletion  date wasn't  that                                                               
sensitive to earnings  on the CBRF, stating that  it is sensitive                                                               
to expenditures versus revenues.                                                                                                
Number 1112                                                                                                                     
CHAIR WEYHRAUCH  asked if there  were going to be  any additional                                                               
fees for management of this money.                                                                                              
MR.  BOUTIN  responded that  the  Department  of Revenue  manages                                                               
about $18  billion, most of  which is  pension funds.   He stated                                                               
that they manage $6 billion of  fixed income "in house."  He said                                                               
that  other types  of investments,  real estate,  private equity,                                                               
and equity  are managed by  external sources.   He said  that the                                                               
Department of Revenue  will save $125,000 by  moving this account                                                               
to a fixed income account and keeping it "in house"                                                                             
CHAIR WEYHRAUCH asked if the  Department of Revenue would need to                                                               
add more employees to manage the larger amount of money.                                                                        
MR.  BOUTIN  stated  that the  Department  of  Revenue,  Treasury                                                               
Division,  has recently  become  the student  loan money  manager                                                               
[for the  state] and  has looked  to add  a fixed  income analyst                                                               
position because of that.                                                                                                       
CHAIR  WEYHRAUCH  explained that  he  had  inquired about  hiring                                                               
additional staff  because, based on his  experience, usually when                                                               
a bill is passed that takes  thousands of dollars to manage there                                                               
is a  need to  hire more  people.  Chair  Weyhrauch said  that he                                                               
wanted  clarification that  that wouldn't  be the  case, although                                                               
the  Department of  Revenue  would be  dealing  with millions  of                                                               
Number 1224                                                                                                                     
REPRESENTATIVE  SEATON   commented  on   what  he  felt   was  an                                                               
underlying  concern from  the committee,  stating  he feels  that                                                               
because the  rate of return  was so  high this last  fiscal year,                                                               
the  committee is  attempting to  be "market  timers" and  assume                                                               
that  it will  continue  to do  as  well.   He  stated that  they                                                               
weren't in a position to do that.                                                                                               
MR. BOUTIN agreed and said, "We are not market timers."                                                                         
Number 1289                                                                                                                     
REPRESENTATIVE HOLM  asked for clarification about  the statement                                                               
Mr. Boutin  made earlier  regarding the cash  flow needing  to be                                                               
$400 million  and the  OMB needing $600  [million].   Citing [the                                                               
fourth page of the previously  mentioned] packet prepared for the                                                               
Conference   of   Alaskans   by  the   Department   of   Revenue,                                                               
Representative Holm asked why the  figures represented there were                                                               
different - $700  million from the OMB and $300  million for cash                                                               
flow.   He  stated that  he didn't  see a  reason that  the $400-                                                               
million  figure  was needed.    Representative  Holm backed  this                                                               
point  up  further  by  noting  pages 10  and  11,  of  the  same                                                               
document, seemed to  show that the balance never  falls more than                                                               
$150 million below zero.  He  asked why the Department of Revenue                                                               
sought $400 million for cash  flow purposes, when the information                                                               
presented doesn't support that.                                                                                                 
MR. BOUTIN  responded that he didn't  feel that there was  a true                                                               
science to forecasting  the market.  He said that  if someone was                                                               
going to argue  that $1 billion wasn't the  right minimum balance                                                               
amount, but $900  million or $1.1 billion is  instead, he doubted                                                               
that there would be that much  of an argument from the Department                                                               
of Revenue.                                                                                                                     
REPRESENTATIVE HOLM asked, "So its  not that critical of a number                                                               
MR. BOUTIN responded  that it was critical to have  a balance; if                                                               
there  was no  balance it  would  effect the  credit rating  that                                                               
Representative   Berkowitz  was   inquiring   about  in   earlier                                                               
testimony.   He said that  he didn't  think that a  transfer like                                                               
the  one that  is suggested  in HB  422 would  effect the  credit                                                               
rating, stating that  the credit rating agencies  are much easier                                                               
to predict than oil volatility.                                                                                                 
Number 1443                                                                                                                     
CHAIR WEYHRAUCH asked  if June 30, 2004, should  be the effective                                                               
date of HB 422.                                                                                                                 
MR.  BOUTIN  responded that  because  the  Department of  Revenue                                                               
doesn't  have  the management  fees  for  the subaccount  in  the                                                               
budget for  fiscal year 2005, the  sooner that HB 422  can become                                                               
effective, the  better.  He  stated that the  way a fund  is run,                                                               
the money  is tapered out  of the  fund; therefore, it  will take                                                               
some  time and  there will  probably  be some  costs absorbed  in                                                               
fiscal year  2005.  Those costs  will increase the longer  HB 422                                                               
is not in effect.                                                                                                               
CHAIR  WEYHRAUCH  asked  if  HB  422  should  have  an  immediate                                                               
effective date.                                                                                                                 
MR.  BOUTIN stated  that if  HB  422 had  an immediate  effective                                                               
date, it would  give the Department of  Revenue more flexibility.                                                               
He stated that  flexibility is always a good  thing when managing                                                               
Number 1510                                                                                                                     
CHAIR  WEYHRAUCH  asked  if  having  the title  read:    "An  Act                                                               
repealing  the  special subaccount  under  the  authority of  the                                                               
Constitutional Budget  Reserve Fund."  would be  more appropriate                                                               
than the  current title, since  the subaccount is not  created in                                                               
the fund as a constitutional matter.                                                                                            
MR. BOUTIN  said that  he hadn't  looked at  the title  from that                                                               
perspective,  but that  Chair Weyhrauch  was correct.   He  added                                                               
that, during  the last hearing  on HB 422, Chair  Weyhrauch asked                                                               
if the  effect needed could  be done as  an executive order.   He                                                               
stated  that  he  had  spoken with  Jim  Baldwin,  the  Assistant                                                               
Attorney General,  and Mr. Baldwin  answered that this  wasn't an                                                               
executive  branch management  issue,  but a  fund established  by                                                               
law, so a change in statute was necessary.                                                                                      
REPRESENTATIVE BERKOWITZ  asked if  Mr. Boutin  was aware  of any                                                               
analysis that has  been done that would project  what would occur                                                               
if the bulk of the CBRF was deposited into the Permanent Fund.                                                                  
Number 1640                                                                                                                     
MR. BOUTIN  said he  wasn't aware  of any  analysis done  on that                                                               
Number 1652                                                                                                                     
REPRESENTATIVE GRUENBERG  asked if  it would give  the Department                                                               
of Revenue the  flexibility it needed if  the legislature granted                                                               
the department  the authority to  access the  subaccount, without                                                               
repealing AS 37.10.430, subsection (c).                                                                                         
Number 1756                                                                                                                     
MR.  BOUTIN stated  that the  Department of  Revenue's motivation                                                               
was based  on the fact  that the  CBRF was regularly  being drawn                                                               
from, which  doesn't suggest  to the  Department of  Revenue that                                                               
the  money should  be invested  in any  other account  than fixed                                                               
income.   He  stated that  although the  subaccount is  earning a                                                               
higher rate  at this  time, the  Department of  Revenue is  not a                                                               
market timer,  and so,  based on  the use of  the fund,  it makes                                                               
more sense to  have that money in  a fixed account.   He used the                                                               
example  that the  CBRF would  never be  invested in  real estate                                                               
because the fund isn't being used in  that way.  He said that the                                                               
Department of  Revenue currently  has long-term  investments, but                                                               
he doesn't  see the  CBRF as a  fund where  long-term investments                                                               
are appropriate.                                                                                                                
REPRESENTATIVE  GRUENBERG  stated  that Mr.  Boutin's  logic  was                                                               
flawless,  if  the  Department  of  Revenue  proceeds  from  that                                                               
premise.   He said that  if the department maintains  the premise                                                               
that they  try to maintain a  balance in the CBRF,  the reasoning                                                               
is flawed.   He stated that  by keeping the statute  on the books                                                               
but granting  the Department of  Revenue access to the  money, it                                                               
would give the  Department of Revenue the  flexibility it needed.                                                               
He stated that he thought the  statute should exist if there were                                                               
policy changes in the future.                                                                                                   
Number 1925                                                                                                                     
MR. BOUTIN  replied that regardless  of the balance in  the CBRF,                                                               
the fact that there are  drawdowns from the account suggests that                                                               
it  has to  have  high  liquidity, and  HB  422  allows for  that                                                               
REPRESENTATIVE GRUENBERG said  that he feels that it  would be in                                                               
the  Department  of  Revenue's  best  interest  to  maintain  the                                                               
flexibility of having the subaccount  there, but having access to                                                               
it, rather  than eliminating  it.   He asked  Mr. Boutin  why the                                                               
Department  of Revenue  felt it  was necessary  to foreclose  the                                                               
subaccount  and  eliminate  the ability  for  the  department  of                                                               
Revenue to make discretionary decisions.                                                                                        
MR. BOUTIN  said that  he didn't see  the utility  in maintaining                                                               
the subaccount, based on the way the  fund is used.  He said that                                                               
he felt that  it was better to  invest the CBRF in  a manner that                                                               
is appropriate  to how [the state]  uses it.  He  stated that if,                                                               
in the future,  the CBRF is used differently, it  will be another                                                               
issue;  however, that  doesn't seem  to be  on the  horizon right                                                               
Number 2117                                                                                                                     
REPRESENTATIVE BERKOWITZ  commented on the statements  made about                                                               
the  need  for the  CBRF  based  on  the cash  flow  inequalities                                                               
throughout the fiscal year.  He  said he felt that there wouldn't                                                               
be a  cash flow problem  if there  was a balanced  fiscal regime.                                                               
He followed up that comment  by illustrating the three cases that                                                               
could come about,  involving the CBRF.  He stated  that the first                                                               
case  would  be  where the  CBRF  has  a  lot  of money  and  the                                                               
subaccount would  prove useful.   The second case would  be where                                                               
there is  a $1-billion CBRF  and the  money needed for  cash flow                                                               
purposes is  covered by the  $1-billion minimum.  The  third case                                                               
would be  where the CBRF was  approaching zero and the  assets in                                                               
the  subaccount would  be liquidated.    He then  asked why  this                                                               
legislation needed to be introduced  at all, since the Department                                                               
of  Revenue was  going  to manage  the entire  CBRF  in the  best                                                               
interest [of the state] given the constraints at the time.                                                                      
Number 2210                                                                                                                     
MR.  BOUTIN   responded  that,  like   a  private   company,  the                                                               
Department of  Revenue has a need  for cash.  He  stated that the                                                               
cash inflows and  outflows are not balanced, so cash  needs to be                                                               
available [to cover  that imbalance].  He clarified  that the $1-                                                               
billion minimum  would include the  subaccount, and he  said that                                                               
in order to account for the  cash flow and the price shocks, that                                                               
money should  be readily available  in fixed income,  rather than                                                               
in real estate or equities, for example.                                                                                        
REPRESENTATIVE BERKOWITZ  stated that it wouldn't  be prudent for                                                               
the Department of Revenue to manage  the fund in liquid assets if                                                               
the fund was going to be drawn  from.  He voiced his opinion that                                                               
repealing  this statute  [as proposed  by HB  422] would  have no                                                               
bearing on  how the Department of  Revenue manages the fund.   He                                                               
added that  the statute exists  for direction of the  fund during                                                               
flusher times.                                                                                                                  
Number 2324                                                                                                                     
REPRESENTATIVE GRUENBERG  turned to  Section 3 of  the bill.   He                                                               
asked  if  [the department]  would  need  statutory authority  in                                                               
order to transfer  some of the money out of  the fund, or whether                                                               
that authority would be inherent.                                                                                               
MR.  BOUTIN  responded  that when  language  has  been  carefully                                                               
drafted by attorneys,  he should not attempt to try  to change it                                                               
on  the spot.   He  added  that he  is not  certain what  problem                                                               
Representative Gruenberg is addressing and  he would want to read                                                               
the language  and consider if "it  does the same thing  under all                                                               
CHAIR   WEYHRAUCH  noted   that  the   bill  will   have  further                                                               
consideration in the House Finance Committee.                                                                                   
Number 2435                                                                                                                     
JAMES ARMSTRONG,  Staff to  Representative Bill  Williams, Alaska                                                               
State  Legislature,  testified on  behalf  of  the House  Finance                                                               
Committee,  sponsor,   which  is  co-chaired   by  Representative                                                               
Williams.   Mr.  Armstrong suggested  having a  trigger mechanism                                                               
that would "collapse"  the subaccount into the  main account when                                                               
the  main account  falls below  a certain  number, such  as "$300                                                               
million for  cash flow purposes."   He observed, "I mean,  if the                                                               
stock market does  10 percent the next four years,  it could make                                                               
$160 million."                                                                                                                  
CHAIR WEYHRAUCH said that seems  to conflict with what Mr. Boutin                                                               
previously  indicated,  regarding the  need  to  work with  money                                                               
managers  and  the  efficiencies  that may  be  inherent  in  the                                                               
ability  to  give   notice  and  react  to   the  state's  fiscal                                                               
situation.   He stated that if  this were contained in  a longer-                                                               
term investment  portfolio, then there certainly  wouldn't be the                                                               
flexibility that  Mr. Boutin  and the  state is  looking towards.                                                               
He mentioned a trigger mechanism  that could happen in an instant                                                               
in a catastrophic market situation.                                                                                             
Number 2505                                                                                                                     
REPRESENTATIVE BERKOWITZ responded that  the trigger mechanism is                                                               
there.  He  explained that if prudence dictates that  the fund be                                                               
drawn to zero, then it will be drawn  to zero.  If, in the course                                                               
of drawing  it to zero, the  assets of the subaccount  have to be                                                               
liquidated, then that's  what is going to happen.   He reiterated                                                               
that he  does not  see the  need for  HB 422.   He  expressed his                                                               
opinion  that this  proposed legislation  signals a  pessimism on                                                               
the part  of the  administration about its  ability to  solve the                                                               
fiscal gap.                                                                                                                     
CHAIR WEYHRAUCH responded  that he doesn't think  it signals that                                                               
at  all.    For  example,  he  said,  if  there  is  a  five-year                                                               
investment  portfolio with  a penalty  for  early withdrawal,  it                                                               
does  the  citizens  and  the  CBR  no  good  to  use  the  early                                                               
withdrawal  to pay  a penalty.   He  noted that  the statute  was                                                               
passed during flush  times and a long bull market.   He indicated                                                               
that any  pessimism is not  reflective of the  administration but                                                               
is reflective of reality.                                                                                                       
REPRESENTATIVE BERKOWITZ  disagreed.  He stated  that the reality                                                               
of the situation is that [the  legislature] is going to solve the                                                               
fiscal  gap one  way or  the  other.   He said  that the  current                                                               
administration has  said that  it wants  a $1-billion  minimum in                                                               
the  CBR.   He  stated  that  if  the administration  wants  that                                                               
minimum -  an amount  that he said  he thinks is  too low  - then                                                               
there is no  need to invade the subaccount.   Furthermore, if the                                                               
subaccount is  not invaded, then it  should be invested in  a way                                                               
that prudence  dictates.   Representative Berkowitz  clarified as                                                               
     In a lot of ways, all  this subaccount does - and I was                                                                    
     there  for  the debate  -  [is  it] authorizes  prudent                                                                    
     investment rather  than simple liquidity.   That's what                                                                    
     the change inherent  in the subaccount is.   And ... it                                                                    
     just seems to  me that if there's a need  to invade the                                                                    
     principle  of the  subaccount, that's  what's going  to                                                                    
     happen.    And they  don't  need  the authority  that's                                                                    
     inherent in  repeal of  a statute.   But they  need ...                                                                    
     the  existence of  the statute  for  flusher times,  in                                                                    
     order to authorize better yielding investments.                                                                            
CHAIR  WEYHRAUCH said  a  lot  of people  have  discussed how  to                                                               
cushion  the budget.   He  said, "It's  case by  case, person  by                                                               
Number 2643                                                                                                                     
REPRESENTATIVE SEATON said:                                                                                                     
     If we're  talking about a five-year  investment horizon                                                                    
     for this account, [and] we  look back at the last three                                                                    
     years' average return of 1.8  percent, I don't care how                                                                    
     good one year was in that  horizon, that has not been a                                                                    
     good investment  for us compared  to what  they've done                                                                    
     with the  regular fund.   So,  we can  pick a  year and                                                                    
     say, "Oh,  it was great -  10.2 percent in one  year, "                                                                    
     but when  you look  at the three-year  annualized, it's                                                                    
     terrible.  And  so, why [would we] say, "Do  we want to                                                                    
     maintain  that investment?"   It's  supposed  to be  in                                                                    
     higher yield,  which would mean higher  risk generally;                                                                    
     especially it's  higher risk if  you're saying  that at                                                                    
     some  point  during  that time,  prudent  investing  is                                                                    
     going to  mean you  have to liquidate  some of  it when                                                                    
     it's not the appropriate time.                                                                                             
     So, it  seems to me  that we have our  prudent investor                                                                    
     here  from [the]  Department of  Revenue, that  manages                                                                    
     the  retirement accounts  and  everything else,  saying                                                                    
     that  with the  direction that  the CBR  is used  [and]                                                                    
     with the projections of what  the CBR is going to there                                                                    
     for, it's  easier -- we're  listening to  our investors                                                                    
     saying  its   not  prudent  to  have   this  subaccount                                                                    
     invested  in longer-term  strategy,  because no  longer                                                                    
     are  we  looking  at  the CBR;  we're  not  looking  at                                                                    
     replacing the $5 billion or  $7 billion that we owe the                                                                    
     CBR.   If  we had  a  structure that  was putting  that                                                                    
     money  back into  the CBR,  we would  be talking  about                                                                    
     something quite  different.  I haven't  heard that from                                                                    
     anyone in the legislature  - that we are reconstituting                                                                    
     and  "re-depositing"   money  into   the  CBR   in  any                                                                    
     significant amount.   So, it  seems to me that  we have                                                                    
     to listen  to our prudent  investors who are  coming to                                                                    
     us and saying  that they don't figure  a five-year time                                                                    
     horizon when  we have  a shorter-than-five-year  use of                                                                    
     that fund horizon, currently ....                                                                                          
REPRESENTATIVE  BERKOWITZ  noted  that  Mr.  Boutin  is  not  the                                                               
investor - that's not what he  does.  He noted that the committee                                                               
has not  seen forward-looking  projections.   He said,  "If we're                                                               
here in  a fiduciary capacity,  looking at what  the expectations                                                               
are  going to  be  for  the subaccount  as  opposed  to the  main                                                               
account,  I  think  we  ought to  see  what  the  forward-looking                                                               
projections  are."    He  said  it is  not  prudent  or  fiscally                                                               
responsible for the  legislature to take a backwards  look at the                                                               
past three  year's biggest  bear markets  seen in  "our lifetime"                                                               
and make a  determination that that's what  the long-term effects                                                               
are going to be.                                                                                                                
Number 2780                                                                                                                     
MR. BOUTIN  stated that  the commissioner  of [the  Department of                                                               
revenue] is  the fiduciary  for "this  account."   The projection                                                               
that is used to  decide how the account will be  used is the fall                                                               
revenue forecast.   He noted that in several weeks  there will be                                                               
a spring  revenue forecast.   He said,  "The information  that we                                                               
have, I have shared with you, and I think it's all here."                                                                       
CHAIR  WEYHRAUCH said  there  has been  some  indication that  an                                                               
immediate effective date would be beneficial.                                                                                   
Number 2826                                                                                                                     
CHAIR  WEYHRAUCH moved  [Amendment 1],  to modify  Section 4  [on                                                               
page 2, line 3], to make the bill effective immediately.                                                                        
CHAIR   WEYHRAUCH  noted   that   Representative  Berkowitz   had                                                               
REPRESENTATIVE BERKOWITZ  said he  doesn't see "the  emergency in                                                               
an immediate effective  date."  He strongly suggested  that if an                                                               
effective date is chosen, it should  be to a trigger point in the                                                               
CBR, not tied to a "date certain."                                                                                              
Number 2875                                                                                                                     
CHAIR WEYHRAUCH offered  his understanding that if an  Act has an                                                               
immediate  effective date,  it  takes a  two-thirds  vote of  the                                                               
legislature [to pass];  however, if it doesn't  have an immediate                                                               
effective date, it would take effect 90 days after passage.                                                                     
REPRESENTATIVE BERKOWITZ said, "After the signature."                                                                           
CHAIR WEYHRAUCH noted  that even if the  immediate effective date                                                               
failed, "this" effective  date would effect sooner  than if there                                                               
were no effective date.                                                                                                         
REPRESENTATIVE  BERKOWITZ  responded,   "If  the  effective  date                                                               
prevails on the floor."                                                                                                         
Number 2918                                                                                                                     
REPRESENTATIVE SEATON noted, "Part of  what we're trying to do is                                                               
...  to   allow  an  orderly   phase-out  of   these  longer-term                                                               
investments."   He stated that he  is not sure how  the effective                                                               
date will influence that.                                                                                                       
Number 2927                                                                                                                     
MR. BOUTIN said the department  would direct the manager to begin                                                               
"getting out  as they  see appropriate."   He indicated  that the                                                               
management  fees for  fiscal year  (FY) 2005  were not  included.                                                               
Even if the bill is enacted,  he said, the department would still                                                               
not be through  with its management fee responsibility  by July 1                                                               
and would  have to find the  money for approximately 60  days "as                                                               
we take her out of it."                                                                                                         
CHAIR  WEYHRAUCH  said  it  sounds   like  the  department  could                                                               
implement its management  responsibilities, whether the effective                                                               
date is immediate or July 1.                                                                                                    
MR. BOUTIN concurred.                                                                                                           
CHAIR WEYHRAUCH withdrew Amendment 1.                                                                                           
Number 2975                                                                                                                     
REPRESENTATIVE   BERKOWITZ  asked,   "What  precludes   you  from                                                               
directing the fund managers to do just that anyway?"                                                                            
[Not on tape, but taken from  the Gavel to Gavel recording on the                                                               
Internet, was  Mr. Boutin's  response as follows:   "Well,  as we                                                               
understand existing statute,  we have this ...  sub fund invested                                                               
at a five-year time horizon,  which suggests to us mostly equity.                                                               
And so,  we believe  that precludes  us from  doing ...  now what                                                               
this bill would allow."]                                                                                                        
TAPE 04-25, SIDE B                                                                                                            
Number 2959                                                                                                                     
REPRESENTATIVE COGHILL turned  to [page 1, line 11,  Section 2 of                                                               
the bill], which shows that  [AS 37.10.430(c)] would be repealed.                                                               
AS 37.10.430(c) read as follows:                                                                                                
          (c) A special subaccount is established in the                                                                        
     budget reserve fund (art. IX,  sec. 17, Constitution of                                                                    
     the State  of Alaska).   Money in the  subaccount shall                                                                    
     be  invested  to yield  higher  returns  than might  be                                                                    
     feasible  to  obtain with  other  money  in the  budget                                                                    
     reserve  fund.    In   establishing  or  modifying  the                                                                    
     investment   policy   for   the   subaccount   in   the                                                                    
     constitutional  budget reserve  fund, the  commissioner                                                                    
     of revenue  shall assume that  those funds will  not be                                                                    
     needed  for at  least  five years.    Income earned  on                                                                    
        money in the subaccount shall be retained in the                                                                        
     subaccount by the department.                                                                                              
REPRESENTATIVE  COGHILL  offered  his  understanding  that  [that                                                               
statute] is  a directive  that states  that the  department shall                                                               
assume  that the  funds  will not  be needed  for  at least  five                                                               
years.  He noted that if  it is not repealed, the directive would                                                               
remain.    He  added,  "So, that  would  definitely  change  your                                                               
management style."                                                                                                              
MR. BOUTIN said he believes that's certainly true.                                                                              
REPRESENTATIVE   GRUENBERG  turned   to  a   one-page  memorandum                                                               
included  in the  committee packet,  from Tam  Cook [director  of                                                               
Legislative Legal and Research Services].   It is a legal opinion                                                               
[regarding Section  1 of  the bill].   He  indicated that  he had                                                               
spoken  with Mr.  Boutin about  the  memorandum.   Representative                                                               
Gruenberg  stated that  he sees  no need  for Section  1, because                                                               
"you have that authority anyway."                                                                                               
Number 2916                                                                                                                     
REPRESENTATIVE GRUENBERG moved to  adopt Amendment 2, which would                                                               
strike Section  1 of  the bill [and  renumber the  other sections                                                               
CHAIR WEYHRAUCH  note that  [Section 1]  would be  unnecessary if                                                               
Section 2 is enacted.                                                                                                           
REPRESENTATIVE GRUENBERG responded that it's unnecessary anyway.                                                                
MR. BOUTIN concurred.                                                                                                           
CHAIR WEYHRAUCH asked if there  was any objection to Amendment 2.                                                               
He clarified Amendment 2.                                                                                                       
Number 2865                                                                                                                     
CHAIR WEYHRAUCH objected to Amendment 2 for discussion purposes.                                                                
REPRESENTATIVE  GRUENBERG,   in  response  to  a   question  from                                                               
Representative  Coghill, clarified  that  Section 1  is found  on                                                               
page 1, lines 5-10 of HB 422.                                                                                                   
Number 2844                                                                                                                     
CHAIR WEYHRAUCH  withdrew his objection.   He asked if  there was                                                               
further objection.                                                                                                              
REPRESENTATIVE SEATON asked if a title change would be required.                                                                
Number 2831                                                                                                                     
REPRESENTATIVE GRUENBERG  responded that he would  allow the bill                                                               
drafter to change the title, if necessary.                                                                                      
CHAIR   WEYHRAUCH,  in   response   to  Representative   Seaton's                                                               
question,  said, "It  may, depending  on how  discussion goes  on                                                               
this amendment."                                                                                                                
Number 2820                                                                                                                     
REPRESENTATIVE  GRUENBERG  said,  "Part  of my  amendment  is  to                                                               
authorize any title change necessary."                                                                                          
Number 2812                                                                                                                     
CHAIR  WEYHRAUCH  asked  again  if there  was  any  objection  to                                                               
adopting  Amendment  2  [with  the   authorization  for  a  title                                                               
change].  There being none, it was so ordered.                                                                                  
Number 2789                                                                                                                     
CHAIR  WEYHRAUCH moved  to adopt  Amendment  3 [AS  37.10.430(c),                                                               
with handwritten changes], as follows:                                                                                          
     (c) Money  in the  budget reserve  fund (art.  IX, sec.                                                                    
     17,  constitution  of  the  State  of  Alaska)  may  be                                                                    
     invested  to   yield  higher  returns  than   might  be                                                                    
     feasible  to  obtain with  other  money  in the  budget                                                                    
     reserve  fund.    In   establishing  or  modifying  the                                                                    
     investment  policy  for  money  in  the  constitutional                                                                    
     budget reserve fund, the  commissioner of revenue shall                                                                    
     assume  that those  funds may  be needed  to meet  cash                                                                    
     flow  needs and  prudent  financial  management of  the                                                                    
     state's budget.                                                                                                            
Number 2768                                                                                                                     
REPRESENTATIVE BERKOWITZ objected.  He  pointed out that the fund                                                               
is not all money, but is also  made up of equities and bonds, for                                                               
CHAIR  WEYHRAUCH suggested  that the  word "fund"  could be  used                                                               
instead of the word "money".                                                                                                    
REPRESENTATIVE GRUENBERG said, "Yeah, it would be the CBR fund."                                                                
CHAIR WEYHRAUCH read the Amendment  3, as amended, to incorporate                                                               
the foregoing suggestion, as follows:                                                                                           
     The   budget   reserve   fund  (art.   IX,   sec.   17,                                                                    
     Constitution of  the State of  Alaska) may  be invested                                                                    
     to  yield  higher returns  than  might  be feasible  to                                                                    
     obtain  with other  money in  the budget  reserve fund.                                                                    
     In establishing or modifying  the investment policy for                                                                    
     the   constitutional    budget   reserve    fund,   the                                                                    
     commissioner of  revenue shall assume that  those funds                                                                    
     may  be needed  to  meet cash  flow  needs and  prudent                                                                    
     financial management of the state's budget.                                                                                
CHAIR WEYHRAUCH stated that that  language comes from a letter of                                                               
intent from the House Finance Committee sponsor statement.                                                                      
REPRESENTATIVE GRUENBERG pointed to the  part of Amendment 3 that                                                               
read,  "yield higher  returns than  might be  feasible to  obtain                                                               
with other money in the budget  reserve fund."  He suggested that                                                               
the word "money" be changed to "assets".                                                                                        
CHAIR  WEYHRAUCH  agreed.     He  asked  if   there  was  further                                                               
discussion on Amendment 3, [as amended].                                                                                        
Number 2699                                                                                                                     
REPRESENTATIVE  BERKOWITZ moved  to  adopt  another amendment  to                                                               
Amendment 3, to change the words "may be" to "shall be".                                                                        
REPRESENTATIVE GRUENBERG offered his  understanding that that was                                                               
the intent of the original [AS 37.10.430(c)].                                                                                   
CHAIR WEYHRAUCH objected for purposes  of discussion.  He opined,                                                               
"I think  we want  to optimize  returns so that  we can  meet the                                                               
state's budget, while getting a  reasonable return on investment.                                                               
And that leaves us a lot  more discretionary with the managers of                                                               
the  fund and  their fiduciary  duty, as  opposed to  tying their                                                               
hands by ... giving them a ... specific directive ...."                                                                         
REPRESENTATIVE  HOLM  said  it  seems to  him  that  "we're"  not                                                               
particularly interested  in getting the greatest  investment, but                                                               
rather in making the fund liquid.   He posited that "shall" would                                                               
defeat the purpose of what the bill is trying to accomplish.                                                                    
Number 2614                                                                                                                     
REPRESENTATIVE SEATON said:                                                                                                     
     I  disagree with  agreeing  that  the shorter-term  and                                                                    
     longer-term  alignments within  the  department of  the                                                                    
     management  of those  funds is  where  that should  be;                                                                    
     that  if we  are in  a  situation where  there is  more                                                                    
     money  in  the  CBR  and revenues  project,  say,  [an]                                                                    
     eight-year horizon  at some  time, then  it's perfectly                                                                    
     logical of  them to  do it.   So I  think the  "may" is                                                                    
     (indisc. - overlapping conversation).                                                                                      
CHAIR WEYHRAUCH requested  that Representative Berkowitz withdraw                                                               
his amendment so that the  committee could adopt [Amendment 3, as                                                               
amended], at which point,  he suggested, Representative Berkowitz                                                               
could "amend to add the 'shall'."                                                                                               
REPRESENTATIVE BERKOWITZ said he would do that.                                                                                 
Number 2533                                                                                                                     
CHAIR  WEYHRAUCH   asked  if  there  was   further  objection  to                                                               
[Amendment 3, as amended].                                                                                                      
REPRESENTATIVE BERKOWITZ objected.                                                                                              
CHAIR WEYHRAUCH, in response to  a request for clarification from                                                               
Representative Seaton, read  the second half of  [Amendment 3, as                                                               
REPRESENTATIVE GRUENBERG pointed to  "the commissioner of revenue                                                               
shall  assume  that those  funds".    He suggested  that  "funds"                                                               
should be changed to "assets".                                                                                                  
CHAIR   WEYHRAUCH  agreed   to   the  change   for  purposes   of                                                               
consistency.  He said, "I'll take that as a friendly amendment."                                                                
REPRESENTATIVE GRUENBERG asked about  Chair Weyhrauch's choice of                                                               
the term  "cash flow needs".   He asked  if there might  be other                                                               
needs,  as well  as cash  flow needs,  that the  committee should                                                               
include.  He  also remarked that he thinks  the "special account"                                                               
should be kept.                                                                                                                 
REPRESENTATIVE SEATON said he agrees  with the elimination of the                                                               
subaccount and allowing  the department to invest  prudently.  He                                                               
mentioned the structure and the time  horizon.  He said he thinks                                                               
the  committee  needs  to  "take  a  look  at  this  and  get  it                                                               
structurally correct."                                                                                                          
Number 2451                                                                                                                     
CHAIR WEYHRAUCH announced that Amendment  3, [as amended], and HB
422 would be set aside.                                                                                                         
REPRESENTATIVE BERKOWITZ  said it's clear  at this point  that he                                                               
is an advocate of the subaccount,  but it seems that the "primary                                                               
rub against  it has to  do with  the five-year look  forward, and                                                               
that's the offending sentence."                                                                                                 
CHAIR WEYHRAUCH told Mr. Boutin  that although this process seems                                                               
frustrating, it will save time on the House floor.                                                                              
Number 2424                                                                                                                     
MR. BOUTIN  stated that he  doesn't see  the utility in  having a                                                               
subaccount in the CBR at this stage.   He noted that "all of this                                                               
money is invested under the prudent investor rule."                                                                             
Number 2407                                                                                                                     
CHAIR WEYHRAUCH announced that HB 422 was heard and held.                                                                       

Document Name Date/Time Subjects