Legislature(2003 - 2004)
03/27/2003 01:35 PM Senate L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 64-PURCHASE OF STRUCTURED SETTLEMENTS
CHAIR BUNDE announced HB 64 to be up for consideration.
MR. PAUL LABOLLE, staff to Representative Foster, sponsor, said
this bill sets up oversight for transfers of structured
settlements, primarily for three reasons. He explained:
One is consumer protection. Factoring companies have
been purchasing structured settlements for as low as
20 cents on the dollar. A structured settlement by
definition is tax-free. Once they have lump-summed it
out, they now have to pay tax on their lump sum. So,
whatever the discount hits them for, taxes hit them
for it again.
The second reason is for the good of the state. A lot
of times a structured settlement is set up because it
is determined that the payee isn't equipped to deal
with a large lump sum and so they set him up so there
will be a continuous flow of cash. Once they lump sum
it out, they spend up all the money, they become a
burden on the state.
Also, for the good of the state, these structured
settlements are often set up as non-transferable
agreements, but since there is no oversight set up,
the right hand doesn't know what the left hand is
doing. So, they're happening illegally.
Third, there is a federal tax law currently on the
books [that] passed last year which imposes a 40
percent prohibitive tax on any transfer of structured
settlements unless it has been approved by a qualified
order, such as a state statute, state law or overview
of an administrative body.
CHAIR BUNDE asked if HB 64 would apply to the legislature and
GARVEE bonds. He noted the bill has a zero fiscal note and
questioned whether there would be a cost for the court reviews.
MR. LABOLLE said he didn't know the ins and outs of the court
system or why it submitted a zero fiscal note.
SENATOR FRENCH asked how many structured settlements get
arranged in Alaska each year.
MR. LABOLLE replied that he wasn't sure.
CHAIR BUNDE asked if he won the lottery and wanted an immediate
payout, whether the court would have to decide if he was
competent to do that.
MR. LABOLLE said that the lottery isn't technically a structured
settlement.
MR. AL TAMAGNI, SR., Structured Financial Associates of
Anchorage, Alaska, said the bill addresses who will pay the
costs, which is the purchaser of the annuity contract upon court
approval. He indicated that's why the bill has a zero fiscal
note.
MR. TAMAGNI explained that his business deals with cases of
personal injury or wrongful death and workers' compensation
where the people and the courts may have decided they would like
to get periodic payments in lieu of a cash settlement. He noted:
Annuities are purchased [indisc.] and provide some
people with a lifetime income, either on a monthly
basis or a lump sum basis or combinations with cost of
living escalators. As a result of that, under Section
104 A(2) of the code [indisc.], all these future
payments are exempt from gross income. And the
payments are to provide and to maintain the people's
style of living, provide medical expenses and also
dependent expenses in a lot of cases. That's kind of
what in general a structured settlement is.
MR. RANDY DYER, Executive Vice President, National Structured
Settlement Trade Association, supported Mr. Tamagni's comments
but clarified that the bill before the committee was not
intended to regulate a structured settlement; it was intended to
regulate the factoring of them. Factoring companies arose in the
mid-1990s for the purpose of buying streams of payments. He told
members:
There are companies that will buy mortgage payments,
lottery payments, etc., but some of them ventured into
buying structured settlements and we became very
concerned because the people who receive such
settlements are generally people who have catastrophic
physical injuries and when represented by counsel in a
claim decided the best way for them to take their
money was in periodic payments so they would be
assured of never outliving their funds. The factoring
companies entered the scene and started buying these
payments. We became concerned that a number of people
might lose the security of their payments to these
companies and end up falling back on the social safety
net.
He explained how it works:
Assume you're getting $2,000 a month tax-free. A factoring
company would approach you and say, 'Listen, we want to buy
payments, but we only want to buy $500 of your $2,000.' After
signing a 20-page contract, your $2,000 a month checks will be
transferred to the factoring company in your name. In the
contract you gave the factoring company the right to cash the
$2,000 check, which it does. It keeps the $500 and sends you
$1,500. He said this first transaction is probably the best deal
it is going to get, because the factoring company knows if
you're talking to it, you're talking to other factoring
companies. So this best deal is 75 percent of the present value
of the payments that you sell, which means you've suffered a
discount rate of 25 percent.
You used to receive your $2,000 on the first of the month, but
now the factoring company receives it on that date, cashes it,
takes $500 and sends the balance to you maybe on the second, the
fifth or the eighth of the month. Each month it delays the
payments, which puts economic pressure on you. You call and ask
where your payment is and they give you some excuse. The
pressure builds up until what you really need is to get paid
another $500 a month. The factoring company has to sell you that
payment, because the contract gives that factoring company the
right of first refusal, plus the factoring company controls your
check. Now that the factoring company essentially owns your
check, it's only going to give you half of what it's worth. If
there is a third deal, they might give you 25 percent of what
it's worth and so on.
You might realize the problem is that the factoring company owns
your check so you contact the annuity company and tell it not to
send the factoring company the check any more. Once the check
goes back to you, you'll find that you're in breach of another
portion of the 20-page contract and at that point the factoring
company will go into court in its state, not in Alaska, and get
an order against you that gives it the rights to all of the
payments until their judgment is satisfied.
MR. DYER said this bill is important because it will end that
practice. A federal bill was passed that will put the hammer on
these companies; it imposes a 40 percent excise tax on these
transactions that falls on the factoring companies unless they
can get a court order that allows them to do this. In some
cases, it will be important for some people to sell a portion of
their payments for good reasons and they shouldn't be denied the
right to do that. He stated, "We want to make sure that it is
done fairly."
MR. DYER said this bill provides important up-front disclosures.
For example, workers' compensation payments may not be sold and
this bill provides for disclosures to other interested parties.
A person who owed child support couldn't sell the child support
payments. This legislation has been enacted in 35 states and a
number of other states are considering it this year. It will
probably be enacted by all states in the next two years.
CHAIR BUNDE asked what a typical cash payment would be to
purchase that portion of the check.
MR. DYER replied assuming your payments were $500 for the next
10 years and your settlement had a value of $20,000, that first
deal might pay $15,000. The next deal wouldn't be so generous
and you wouldn't have any other place to go.
SENATOR SEEKINS asked where the statute provides that the
parties to this agreement pay to the court.
MR. DYER said he believed it was in the statute, but couldn't
find it.
CHAIR BUNDE asked Mr. Dyer to work with the bill's sponsor and
said the committee would bring it up again.
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