Legislature(2003 - 2004)
03/04/2004 01:43 PM House FIN
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 494
An Act relating to the disbursement of money by the
state, including employment compensation, unemployment
payments, and permanent fund dividends, and to bank
investments and deposits by the state; and providing
for an effective date.
SUE STANCLIFF, STAFF TO REPRESENTATIVE KOTT, explained that
HB 494 relates to the disbursement of money by the state
including unemployment payments and Permanent Fund
dividends, and bank investments and deposits by the state.
The bill would change how the state disburses funds and it
has the potential of saving the state considerable money in
the reduction of check fraud, reissuing lost or stolen
checks, postage, check printing costs, bank fees and reduced
labor costs.
Ms. Stancliff commented that the sponsor would work with the
administration to refine the legislation. Statistics
provided by the administration indicate that as of 2003,
electronic deposits executed 89% of the state payroll. She
noted that the issue of vendors poses a difficulty. The
department has almost 50,000 vendors and currently only 500,
or 1.3%, are using electronic payment. Ms. Stancliff
expressed that the sponsor would like to see vendor payments
increased, and believes it is achievable even though labor-
intensive.
Ms. Stancliff explained that the payroll and first check
issuance must be by a warrant. The committee substitute
will address that issue and build in flexibility.
KIM GARNERO, DIRECTOR, DIVISION OF FINANCE, DEPARTMENT OF
ADMINISTRATION, expressed concern regarding the mandatory
language in Section 19 of the current version. She stated
that the department would work with the sponsor on the bill,
which benefits the way the state does business. She shared
the history of electronic payments, noting that wire
transfers have been used for decades and are both expensive
and labor intensive. She said that all of the big state
revenues including royalties and large tax payments, and
most of the $1.7 billion received from the federal
government last year come in electronically. She explained
that currently 67% of public assistance payments and 90% of
pension payments to retirees are made electronically.
Electronic payments to vendors began in 1999 and it has
about doubled each year.
Ms. Garnero provided examples of agencies that use
electronic deposit for payment. The Department of Revenue,
Treasury Division, is developing an Automated Clearinghouse
(ACH) origination software to either send or receive
payments that will likely be a payment system for Medicaid.
In response to a question by Vice-Chair Meyer, Ms. Garnero
clarified that the state is paying by electronic deposit
almost $1 billion per year to vendors and contractors.
Vice-Chair Meyer asked if it could be made a requirement for
vendors. Ms. Garnero replied that the state has tried to
expand to vendors without success. In rural areas of the
state, the post office or grocery store often serves as a
bank. Workers Compensation electronic payments would not in
state's best interest. Ms. Garnero stated it would be
difficult to make electronic deposit mandatory.
Vice-Chair Meyer wondered if the state could include a
preference for Electronic Data Interchange (EDI) when it
puts work out to bid. Ms. Garnero affirmed that the
department could add the preference to procurements because
of a continuing relationship with the contractors.
Representative Hawker expressed strong support for the bill.
He noted that "the heart" of the bill is Section 19. He
questioned an account established by a state agency and an
electronic payment card. Ms. Garnero was unable to respond.
JOHN FOCHT, VICE PRESIDENT OF PREPAID CARD PRODUCTS, US
BANK, VIA TELECONFERENCE, MILWAUKEE, explained that the bank
delivers electronic products in five states, to more than
100,000 recipients. He explained the methodology, which is a
debit card for VISA or Mastercard. Instead of setting up a
checking or savings account, the bank establishes a funding
account. The state then creates a direct deposit file (ACH),
and that amount is deposited to the card. The cardholder
can go to an ATM anywhere in the world and access the money.
Representative Hawker asked if those states using the
product for their state programs are pleased with it. Mr.
Focht replied yes, and added that Iowa, one of the five
states, made it mandatory that benefits to child support
recipients are by electronic deposit. The other three states
have made the program voluntary, and 25% have opted for the
card. Mr. Focht said the model is working in Colorado,
Washington, Minnesota, Iowa and Oregon.
Representative Hawker asked if Mr. Focht has any experience
in controlling misappropriation or fraud. Mr. Focht admitted
that he does not have expense reduction information from the
five states regarding fraud, returned checks, or stop
payments. As the financial institution, US Bank has taken on
responsibilities that include managing and minimizing fraud.
Representative Hawker asked the cost to the state for the
product. Mr. Focht replied that there is tremendous cost
savings through reduced check production and mailing,
reduced handling of lost checks, and reduced fraudulent
activity. The state is not billed for any of the services,
but it has higher costs due to increased electronic
deposits, which he feels is a minor offset to cost
reduction. US Bank benefits from the deposits until the
actual money is spent, because payroll is not withdrawn
entirely or spent immediately. His bank also makes money by
the merchants' discount on VISA and Mastercard, with
merchants paying a small fee to the bank whenever the card
is used. Fees are assigned to the cardholder, but for the
most part, the card can be used without charge.
Representative Fate asked if there could be a judgment
against the card in case of indebtedness. Mr. Focht
clarified that because the bank authorizes transactions, it
wouldn't authorize above the amount on the card. The bank
would deal directly with overdrafts by the client, which
could happen.
PETER E. BROWN, KEY BANK ALASKA AND VICTORY CAPITAL
MANAGEMENT, VIA TELECONFERENCE, ANCHORAGE, expressed that
the administration would achieve economies through this
legislation. He felt that latitude is needed to make
disbursements in the old manner, but that electronic
payments should be used whenever possible and practical.
Instead of a difficulty imposed on rural bush residents,
it could be a boon if the recipient is able to transact with
a merchant over the telephone or the Internet with a card.
He said that the technology not too distant.
Representative Hawker requested that Mr. Brown work with the
sponsor to craft language addressing the exception problems
from the industry perspective. Mr. Brown replied that he
and his staff would assist. Representative Hawker commented
on the need for community input on changes that would not
compromise cost efficiency to the state.
HB 494 was heard and HELD in Committee for further
consideration.
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