Legislature(2015 - 2016)HOUSE FINANCE 519
03/22/2016 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB74 | |
| Preliminary Spring 2016 Revenue Forecast, Department of Revenue | |
| HB143 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 74 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 143 | TELECONFERENCED | |
HOUSE FINANCE COMMITTEE
March 22, 2016
1:31 p.m.
1:31:27 PM
CALL TO ORDER
Co-Chair Thompson called the House Finance Committee
meeting to order at 1:31 p.m.
MEMBERS PRESENT
Representative Mark Neuman, Co-Chair
Representative Steve Thompson, Co-Chair
Representative Dan Saddler, Vice-Chair
Representative Bryce Edgmon
Representative Les Gara
Representative Lynn Gattis
Representative David Guttenberg
Representative Scott Kawasaki
Representative Cathy Munoz
Representative Lance Pruitt
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Stacie Kraly, Assistant Attorney General, Department of
Law; Andrew Peterson, Attorney, Medicaid Fraud Control
Unit, Department of Law; Doug Jones, Manager, Medicaid
Program Integrity Section, Department of Health and Social
Services; Lynne Keilman-Cruz, Health Program Manager,
Department of Health and Social Services; Jerry Burnett,
Deputy Commissioner, Treasury Division, Department of
Revenue; Dan Stickel, Assistant Chief Economist, Tax
Division, Department of Revenue; Jane Pierson, Staff,
Representative Steve Thompson; Representative Cathy Munoz,
Sponsor; Keith Comstock, CEO, Juneau Hydropower Inc.; Mary
Becker, Mayor, Juneau; Rodney Hesson, IBEW, Juneau; Wayne
Zigarlick, General Manager, Coeur Alaska, Kensington Mine.
PRESENT VIA TELECONFERENCE
John Springsteen, Executive Director, Alaska Industrial
Development and Export Authority; Sarah Fisher-Goad,
Executive Director, Alaska Energy Authority, Department of
Commerce, Community and Economic Development.
SUMMARY
SB 74 MEDICAID REFORM; TELEMEDICINE; DRUG DATABASE
SB 74 was HEARD and HELD in committee for further
consideration.
HB 143 AIDEA BONDS, LOANS, FUND; AEA LOAN
CSHB 143(FIN) was REPORTED out of committee with
a "do pass" recommendation and with one
forthcoming zero fiscal note from the Department
of Commerce, Community and Economic Development.
PRELIMINARY SPRING 2016 REVENUE FORECAST, DEPARTMENT OF
REVENUE
Co-Chair Thompson relayed that the topics being covered for
SB 74 included fraud, false claims, and penalties.
1:32:31 PM
CS FOR SENATE BILL NO. 74(FIN) am
"An Act relating to diagnosis, treatment, and
prescription of drugs without a physical examination
by a physician; relating to the delivery of services
by a licensed professional counselor, marriage and
family therapist, psychologist, psychological
associate, and social worker by audio, video, or data
communications; relating to the duties of the State
Medical Board; relating to limitations of actions;
establishing the Alaska Medical Assistance False Claim
and Reporting Act; relating to medical assistance
programs administered by the Department of Health and
Social Services; relating to the controlled substance
prescription database; relating to the duties of the
Board of Pharmacy; relating to the duties of the
Department of Commerce, Community, and Economic
Development; relating to accounting for program
receipts; relating to public record status of records
related to the Alaska Medical Assistance False Claim
and Reporting Act; establishing a telemedicine
business registry; relating to competitive bidding for
medical assistance products and services; relating to
verification of eligibility for public assistance
programs administered by the Department of Health and
Social Services; relating to annual audits of state
medical assistance providers; relating to reporting
overpayments of medical assistance payments;
establishing authority to assess civil penalties for
violations of medical assistance program requirements;
relating to seizure and forfeiture of property for
medical assistance fraud; relating to the duties of
the Department of Health and Social Services;
establishing medical assistance demonstration
projects; relating to Alaska Pioneers' Homes and
Alaska Veterans' Homes; relating to the duties of the
Department of Administration; relating to the Alaska
Mental Health Trust Authority; relating to feasibility
studies for the provision of specified state services;
amending Rules 4, 5, 7, 12, 24, 26, 27, 41, 77, 79,
82, and 89, Alaska Rules of Civil Procedure, and Rule
37, Alaska Rules of Criminal Procedure; and providing
for an effective date."
1:32:31 PM
STACIE KRALY, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF
LAW, would be reviewing the provisions in SB 74 having to
do with false claims, overpayments, and fraud and
penalties. She explained that SB 74 addressed 3 major
themes outside of the important reforms that Ms. Shaddock
had testified to in the previous day. The themes included
the false claims act, overpayments, and fraud and
penalties. She stressed the importance of these provisions
to the overall administration of the Medicaid Program
Integrity (MPI) system for the Medicaid program. The
proposal in SB 74 was designed to give the Department of
Health and Social Services and the Department of Law a more
complete range of options when dealing with provider
compliance. The tools allowed for the differentiation
between fraud and false claims and it also allowed for both
criminal and civil enforcement of providers who violated
program rules.
Ms. Kraly relayed that she would be walking the committee
through a more detailed overview of the False Claims Act.
The False Claims Act could be found in Section 4 of the
bill. The bill contained a number of different amendments
to the Alaska Administrative Code that identified the
additional civil action she had discussed the previous day.
The first section talked about false claims and the
associated civil penalties. In reviewing the bill penalties
for false claims they could not be less than $5500 and not
more than $11,000 or 3 times the amount of the actual
damages. The provision also allowed for the payment of
reasonable costs and fees for a prevailing party under a
false claim act. The Attorney General was an integral part
of the false claims provisions in the bill primarily
relating to the process of an individual bringing a claim
forward and the attorney general being served with a
complaint. The attorney general would investigate the
claim. The statute contemplated giving the Attorney General
Subpoena authority and providing other investigative tools
to evaluate the merits of the underlying case brought
forward.
Ms. Kraly continued with her testimony. Upon the completion
of their investigation, the attorney general would have to
take one of three actions: They would have to intervene in
the matter, notify the court that they were not intervening
in the matter but were allowing the private plaintiff to
continue with the lawsuit, or they would move to dismiss
the case. Some of the additionally important provisions of
the bill included identifying the incentive for individuals
to come forward in identifying false claims. If the
attorney general intervened in a case the realtor or the
private plaintiff would be awarded 15 to 25 percent of the
overall recovery. If the attorney general deferred and did
not go forward the individual would be entitled to 25 to 30
percent of the total award but there was also a provision
in the bill that stated that if the individual that came
forward was somewhat complicit in the false claim there was
a provision that allowed reducing the recovery for that
complicit individual. It also provided that if the
individual was ultimately convicted of Medicaid fraud they
would not be entitled to any recovery.
Ms. Kraly reported that there were certain actions that did
not constitute false claims including matters already
familiar to the Department of Law or to the DHSS and
actively being investigated for an ongoing fraud case.
Other matters were listed within the statute that would not
be considered false claims. The statute contemplated that
the state would not be liable for attorney's fees and other
expenses in a situation where a false claim was brought by
a private plaintiff. The plaintiff would be entitled to
their fees and costs and the state would be entitled to its
fees and costs. The two did not mix.
Co-Chair Thompson acknowledged Representative Munoz at the
table and Commissioner Davidson in the audience.
1:37:41 PM
Representative Gara mentioned that to save money the state
encouraged a private party to hire a private attorney
rather than the attorney general's office handling anti-
trust, consumer protection, and other public interest cases
If the private party prevailed they would receive full
attorney fees, an incentive of sorts. He wondered whether
full attorney's fees would be paid to a private individual
that hired a private attorney and prevailed under SB 74.
Ms. Kraly responded in the negative. The fees awarded under
the provision were those provided under Civil Rule 82, a
percentage based upon the type of litigation that occurred.
If litigation was settled a person would receive 20
percent. If a case went to trial a person would receive 30
percent. There were enhancements. For example, there could
be a provision where a person could get higher fees if it
was not tied to the public interest litigate statute.
Representative Gara suggested that there were a number of
areas where private individuals were entitled to full
attorney's fees including consumer protection and unfair
trade practices. It was called privatizing the attorney
general and saved the state money. He asked that she
consider the practice and wondered why it was not in the
legislation. He thought it would save money for the state.
Ms. Kraly would look at his suggestion. However, she
thought Civil Rule 82 was sufficient to incentivize the
services because of the enhanced recoveries the plaintiffs
stood to receive. Trouble damages and penalty provisions in
the recovery portion were already included. The Department
of Law advocated that full fees were needed to incentivize
private plaintiffs. In addition, another reason the
department did not think it was necessary was because the
attorney general had the ability to take, differ, or
dismiss a case. In many cases the tool would be used as an
enforcement mechanism. She did not feel there was a lack of
incentive for bringing these cases forward because of
damages. However, the department would look at the full fee
section.
Co-Chair Thompson relayed that Representative Pruitt had
joined the meeting.
1:41:25 PM
Co-Chair Neuman asked about the source of funding to pay an
individual a percentage of the total amount of a false
claim recovery. He wondered if the payment was issued from
state or federal funds or both.
Ms. Kraly indicated that each state handled it differently.
Some states took the recovery off the top and then split
the difference. Other states took the share from the
percentages. The Department of Law would need to discuss
the issue with the Office of Inspector General. She
indicated that what was being considered was that the
recovery would come off the top and then the split would
come from the remaining amount.
Co-Chair Neuman assumed that it would split equally.
Ms. Kraly corrected Co-Chair Neuman. She relayed that the
split was not equal between the state and the federal
government. If this provision in the bill was adopted and
approved by the Office of Inspector General at the federal
level then the state would receive an enhanced match for
the recoveries. There was a 10 point swing instead of a
50/50 match. In other words, it would be a 45/55 match in
the federal rules governing the false claims act. Regarding
a private plaintiff, the recovery was split between the
state and federal government. It was outlined in the
provisions of the bill because the department felt it was
part of the ultimate judgement that would occur at the
trial level. She confirmed there was an enhanced match for
the state and the state would receive more money if the
legislation passed and was approved by the federal
government.
Co-Chair Neuman reiterated her answer that the recovery
came off the top and was split 45/55. He did not see the
information reflected in the bill. He wondered why it was
not expressly identified. He asked if it was already in
state statute.
Ms. Kraly relayed that the split was set forth in federal
law. Once approval came through the Office of Inspector
General it would be in federal law. As far as the other
adjustment, she could look into identifying it and it could
be added to the legislation as an amendment.
1:44:54 PM
Representative Gara suggested that there was a rule in
public interest cases, such as fraud, that if the state
prevailed it would receive full attorney's fees and costs.
He wondered if there was a reimbursement for the state in
the statute if the state prevailed in a fraud case.
Ms. Kraly responded in the negative. She informed him that
the rules for attorney's fees were governed under the civil
rules under Rule 82. It would be something the Department
of Law would have to look at if it was the will of the
committee.
Representative Gara thought that without the two provisions
it would cost the state a significant amount of money.
Representative Wilson wondered about how difficult it would
be to reverse the legislation in the future.
Ms. Kraly responded that the state did not need federal
approval to pass the legislation. The state would need
federal approval of the framework of the False Claims Act
within the provision. If it was approved the state would
get the enhanced match of a 45/55 split. If the federal
government did not approve it the split would remain a
50/50 split. If, in 2 to 3 years when the private plaintiff
provisions were sun-setting and the false claim provision
was not doing what it was intended to do, the state could
repeal the provisions without a penalty from the federal
government for not having them. They were not required.
1:46:55 PM
Vice-Chair Saddler asked about the potential benefit to the
state for allowing private plaintiffs to proceed with the
100 percent reimbursement. He noted that Ms. Kraly had
mentioned that other states did things differently. He
wondered if the DOL had done review of states that might
have moved entirely to the privatization of the prosecution
of Medicaid fraud.
Ms. Kraly explained that the state, under the federal
Medicaid act the state was required to have a Medicaid
Fraud Control Unit (MFCU), a separate and distinct
enforcement arm from the DHSS. The way it was set up in
Alaska, as well as most other states, it was within the
DOL. Mr. Peterson's office was through the Office of
Special Prosecutions and Appeals. He had a team of
individuals that worked on Medicaid fraud unit. The
department decided to place the false claim provision
within the MFCU for a couple of reasons should the
legislation pass. The first reason was that as a Medicaid
fraud unit they would receive an enhanced match for
administrative costs. For every dollar the state paid for
Medicaid fraud, the federal government would pay 75
percent. The state would have to come up with the 25
percent match. There were other ways to use the recovery
funds through dedicated receipts to use the money the unit
was recovering to backfill the state match. She concluded
that it was almost a zero sum game for the provision. She
had worked closely with Mr. Peterson had worked closely
over the course of the previous 6 months on the provisions
and he had looked at many other states and talked to other
Medicaid fraud units doing the same work. Mr. Peterson
would be able to provide additional detail.
Ms. Kraly told of a final provision which was the employee
protection against retaliation. There were very stringent
whistleblower protections within the act that allowed an
individual working for an enrolled provider to come forward
and to identify and report fraud without being ostracized
by their current employer or with other employers. There
was an incentive and a whistleblower protection in place,
critical components of any false claim provisions. In
summary, the provisions she discussed were critical to
enhance and provide additional tools and a means for the
DOL and the DHSS to have a robust program integrity system
to ensure provider compliance with program rules. She
thought it would be helpful for the committee to hear from
certain individuals including Andrew Peterson, Doug Jones,
and Lynne Keilman-Cruz. They would walk through the
spreadsheets and explain how the system currently worked as
a fraud case, an overpayment case, or a sanctioned case and
how the provisions would help them to make a better system.
1:50:32 PM
Co-Chair Neuman asked about the whistleblower provision and
thought there would be a plethora of complaints by the
public. He wondered if the department had the personnel to
handle the complaints or if additional staff would have to
be hired.
Ms. Kraly indicated that what constituted a false claim for
purposes of the False Claims Act were very well defined.
The provisions in the bill allowed the state to
differentiate between a false claim and a fraudulent claim.
Fraudulent claims were already being prosecuted. The
importance of the provisions of the bill allowed for
reports to come in and for the DOL and the DHSS to make
appropriate referrals administratively through the DHSS,
criminally through the MFCU, or through the False Claims
Act. Some resources were requested by the DOL as a result
of the provisions. The Department of Law and the DHSS were
not asking for a significant amount of resources because
each department felt it had the resources needed to absorb
the related work. The departments saw the legislation as a
set of additional tools to get to a more robust and
complete compliance package. She thought it was a missing
part of the system currently in place.
Co-Chair Thompson invited other testifiers to the table.
1:53:14 PM
ANDREW PETERSON, ATTORNEY, MEDICAID FRAUD CONTROL UNIT,
DEPARTMENT OF LAW, relayed that the MFCU was
congressionally mandated and funded at 75 percent federal
funds with a 25 percent state match. The unit currently
consisted of Mr. Peterson and another prosecutor. There
were 6 criminal investigators that were partially sworn -
meaning they had the authority to receive and execute
search warrants but did not have the authority to arrest or
carry firearms. The unit also had a forensic accountant and
an office administrator. He had two answers to the earlier
question about sufficient staffing to support the
activities of the unit. The Medicaid Fraud Control Unit had
over the previous 3 years formed a significant number of
partnerships with the various state and federal entities
that had an interest in the Medicaid program. The committee
would hear from Doug Jones, the MPI manager, and Lynne
Keilman-Cruz, the quality assurance manager. The unit
coordinated with everyone with an interest in preventing
Medicaid fraud and relied on everybody's limited resources
to expand on the unit's abilities. The coordination efforts
with respect to criminal prosecutions had resulted in
charging 130 criminal cases, secured criminal convictions
in 96 of those cases, and resolved an additional 10 civil
cases. The courts had ordered just over $4.6 million in
restitution and the unit had secured fines in the amount of
$505,000. This was all based on the 25 percent match from
the state equal to about $225,000 to $300,000 per year for
the previous 3 years.
Mr. Peterson cited that the focus the MFCU had was somewhat
limited. The unit prosecuted medical assistance fraud,
allegations of abuse or neglect, and financial exploitation
or misappropriation of patient assets in residents that
were funded by Medicaid. The unit's focus was almost
entirely criminal. It had a mandate to prosecute medical
assistance fraud or Medicaid fraud. However, when the unit
initiated or conducted an investigation and found in the
course of the investigation that the act did not rise to
the level of fraud that the unit would prosecute criminally
or found there was something about the case that gave
pause, the unit had limited options. Such a case would be
referred back to MPI to do a civil recovery. That recovery
consisted only of asking the provider who might have been
involved in wasteful or abusive conduct but not necessarily
fraudulent conduct to give back the money. It was
essentially a mulligan or a do-over. The only other option
was for MPI or the agency within the DHSS that had
authorized an entity to provide Medicaid services to dis-
enroll them or bar them from being part of the Medicaid
program. The unit did not have any other tools at its
disposal. A large part of what the unit was asking for
through legislation was to provide the unit with additional
tools in its tool chest to address waste and fraud. It
would also help the unit to get recoveries back for the
state in the form of Medicaid money that was paid out that
should not have been. There would be interest and penalties
associated to restore the state to the financial position
it would have been in had the abuse or wasteful billing not
occurred. It would also incentivize others in the industry
to refrain from committing the same offences. One of the
most important provisions was that the tool would give the
state the ability to address waste and fraud without
putting the provider out of business. It would benefit the
providers within the industry and would benefit the
recipients of Medicaid services who rely on many of the
crucial and essential services. In dealing with the DHSS
over the prior 3 years the unit had identified numerous
issues with cases where there had been alternate ways of
handling them outside of criminal prosecution or asking for
the money back. The False Claims Act was one of the tools
that would greatly benefit the state along with the option
for MPI to implement civil penalties for providers who
continued to ignore the rules and regulations of the
Medicaid program.
1:59:54 PM
Vice-Chair Saddler appreciated the detailed information. He
asked about the $4.6 in restitution and $500,000 collected
in fines. He wondered how much money the state had foregone
in Medicaid fraud.
Mr. Peterson could provide some examples regarding personal
care attendant services. At one point the program was
costing the state about $60 million per year. It was on a
skyrocket trajectory going up and reached the point of
costing the state about $130 million per year within about
a 5 year period. A significant number of the cases the unit
prosecuted over the previous 3 years dealt with personal
care attendant services. The unit convicted 57 individuals
within a single corporation. His understanding was that the
cost of the personal care attendant services for the State
of Alaska was declining by about $20 million. He believed
it was a direct result of two factors. First, Senior and
Disabilities Services had revised regulations pertaining to
personal care attendant services which tightened up the
regulations, limited waste and fraud, and had made his job
easier to prosecute fraudulent conduct. He explained that
the regulations were clear as to what services were and
were not allowed to be billed. He considered it a joint
effort by the DHSS in tightening regulations and the
attorney general's office in making the prosecution of
Medicaid fraud a priority for the current and previous
administrations.
Vice-Chair Saddler asked about the reach and effect of MFCU
on the entire universe of Medicaid fraud.
Mr. Peterson relayed that the deterrent effect of Medicaid
fraud prosecution was called general deterrence or a
sentinel effect. He wanted to be able to provide a specific
dollar amount of avoided costs to the state. Medicaid
Program Integrity over the first couple of years estimated
that the prosecutions and the Medicaid fraud arena saved
the State of Alaska approximately $30 million, well above
and beyond what had been recovered. However, it was
difficult to provide a precise number. In the packet given
to committee members there was a "Stop the Scam" pamphlet
that stated that somewhere between 5 to 25 percent of
welfare spending had been wasteful or fraudulent. He did
not know the entity's meaning of "wasteful." The statistics
he relied on were provided by the Federal Bureau of
Investigation (FBI). Their estimation was that somewhere
between 3 to 10 percent of all healthcare billing in the
United States was fraudulent. If the number was accurate,
even on the low end, there would be a significant amount of
additional funds to be recovered by the State of Alaska.
2:04:20 PM
Vice-Chair Saddler asked who had estimated that the state
had saved $30 million over what time frame. Mr. Peterson
answered that it was MPI. Doug Jones was the manager for
the MPI.
Vice-Chair Saddler asked what the time period was for
saving the state $300 million. Mr. Peterson believed it was
over the first 2 years in which he was prosecuting Medicaid
fraud cases. He thought it was in FY 13 and FY 14.
Co-Chair Thompson noted that Mr. Peterson had quoted
several recovery dollars and penalty fees. He asked about
the collection percentages associated with those dollars.
Mr. Peterson responded that the collection percentages were
difficult to pin down due to the fact that when the unit
prosecuted a Medicaid case the provider was, by effect of
the prosecution, barred from billing Medicaid. It depended
on the amount of money to be paid back. He did not have an
exact number but offered to reach out to the attorney
general's collection unit to obtain a more precise number
for the committee. He reported having been surprised at the
number of cases in which the unit had fully recovered the
money with respect to fines or restitution that had been
imposed. One of the things the unit had done in the prior
1.5 years was to require partial or full payment of
restitution upfront in any plea agreement. He had been
surprised at the number of cases in which the individuals
had been able to come up with the money. He would try to
get the precise number for committee members.
2:06:50 PM
Representative Gara asked if Mr. Peterson was familiar with
parts of the law where the attorney general's office was
allowed to recover full attorney's fees and costs for their
case.
Mr. Peterson was familiar with the related provisions of
the law. It was not something that he would be opposed to.
He thought it was a balancing act between wanting to deter
waste, fraud, and abuse. However, unlike most typical civil
cases, it came with penalties and interest. The more that
was tacked on to the providers the more burdensome it could
be. He thought that the way it was currently designed was a
compromise to recognize that waste, fraud, and abuse needed
to be addressed. He also wanted to make sure that the
providers, even if they made a mistake but were not being
prosecuted criminally, could continue working in the
industry and providing a service to Medicaid recipients. He
thought it would come down to a judgement call of the best
way to implement the False Claims Act. He was happy to
bring a recommendation to the committee for consideration.
Representative Gara relayed that his focus was on the worst
conduct, fraud. He felt that fraud was intentional and
deceptive. It was the kind of conduct that he wanted Mr.
Peterson to look at as far as reimbursing the state for
reasonable attorney's fees and costs.
Mr. Peterson explained that the reason he was
distinguishing between the two was that if the conduct was
fraudulent the state would generally address fraud with a
criminal prosecution. While there were some states that
allowed for attorney's fees provisions in criminal cases,
Alaska was not one of those states. If the state went after
a provider for fraudulent conduct with a criminal charge,
upon the filing of the charge or the finding of a credible
allegation, the provider would be barred from filling
Medicaid even during the pendency of the criminal case.
There were significant additional penalties that were
automatically imposed once the fraud unit decided to take a
case criminally. He was making that distinction between
waste and abuse which were less egregious.
Representative Gara commented that if there was fraud,
there would be the option to prosecute both criminally and
civilly. Mr. Peterson responded, "That is correct."
Representative Gara stated that if it was fraud, it would
be dishonest conduct in which the state would be paying
money. He added that it seemed like in the case of fraud
the traditional role of full reasonable attorney's fees
should apply. He did not see any reason to do a favor for
anyone that had committed fraud against the state.
Representative Wilson asked if anyone kept track of the
payments of fines and penalties.
Mr. Peterson responded that the attorney general's
collection unit tracked the payment of fines and penalties.
He did not have the collections totals but would get them
to the committee.
Representative Wilson thanked Mr. Peterson for the
clarification.
2:11:57 PM
Vice-Chair Saddler asked Mr. Peterson to differentiate
between a false claim and a fraudulent claim.
Mr. Peterson responded with some examples of fraudulent
claims that would be prosecuted criminally. Examples
included submitting a bill to Medicaid knowing that the
person was not entitled to the money, billing for a service
that was not provided, up-coding (billing for a higher
level of service than was authorized to provide), or
billing for a service in a manner that a provider knew was
wrong (a provider was warned by MPI that a certain service
was not allowed to be billed but continued to do so
anyway). Examples of waste or abuse might include billing
for a service not allowed by regulations but providers were
unaware of or it was unintentional, things that were caught
in a lot of audits. It could also be something that was
slightly more grievous but did not rise to the level of
criminal prosecution or a case that could be proven beyond
a reasonable doubt. The distinction between a false claims
act and a criminal case was that in a criminal case he
would have to prove the case beyond a reasonable doubt.
Whereas, in a false claims act, since it was a civil
matter, it was a preponderance.
Vice-Chair Saddler clarified that fraudulent was knowingly
doing something wrong and trying to obtain a benefit that a
person knew they were not entitled to. A false claim was a
claim that was submitted in good faith but was incorrect.
Mr. Peterson thought Vice-Chair Saddler's assessment was
fair. He asked that Doug Jones further comment since he
dealt with audits in the MPI unit for DHSS.
Co-Chair Thompson asked for Mr. Peterson to continue.
Mr. Peterson relayed that there had been a question the
previous day regarding forfeiture. He informed the
committee that SB 74 contained forfeiture provisions within
Section 28. There was a question about bank accounts
providing clear evidence of proceeds of Medicaid fraud. The
forfeiture provision would allow for forfeiture of other
assets because in some of the cases the individuals
committing Medicaid fraud were taking money that they got
from fraudulently billing the State of Alaska and the
federal government and converting it to other assets such
as homes, cars, and other tangible items. Once a criminal
case started there was nothing to recover. One of the
reasons for the provision was to give the State of Alaska
the opportunity to ask a court to freeze the assets or
limit the transfer of certain assets pending the outcome of
the criminal case. If the court agreed with the
prosecutor's assessment on the case that the items were
purchased as a result of proceeds of fraud, the state would
have the opportunity to have those items forfeited to the
state as a means of debt repayment. It had happened in a
number of historical cases where there was not an account
in which the company could pay the State of Alaska back if
a criminal case was successful. He reemphasized that the
provisions of the forfeiture statue were that it had to be
shown to the court that the items were purchased with
fraudulent proceeds. Any forfeiture would be up to the
courts to decide following the conclusion of the criminal
case.
Vice-Chair Saddler asked if he had the appropriate level of
staffing and resources for Mr. Peterson to accomplish his
job. He wondered if he could recover more in Medicaid fraud
money for the state if he had more resources.
Mr. Peterson answered that it was a difficult question
about the proper level of staff. The legislature expanded
the unit's number of investigators from 3 to 6 about 3.5
years prior. The unit had done a substantial job of
utilizing the resources that the legislature had given them
in the previous 3 years. The bill authorized the hiring of
2 additional individuals. His intent was to move forward
with the number of people already on staff and as the
demand became evident they would bring on additional
personnel. He wanted to make sure that there was sufficient
work for everyone in the unit.
2:18:32 PM
Representative Kawasaki referred to the second part of
Section 28 dealing with seizure and forfeiture of real
property. He asked if the language in the sentence that
included "proper cause" was commonly used for civil asset
forfeitures and Medicaid fraud cases for other MFCUs.
Mr. Peterson did not know what the standard was for other
units. He would be happy to reach out to other unit
directors to pose the question as to their standards. He
relayed that the language was standard in other areas of
the law within the State of Alaska, such as the Department
of Fish and Game when looking at crimes that might have
been committed such as using an airplane. If a unit could
establish probable cause that an airplane was used to
commit a crime, the state would be entitled to seize the
aircraft, with a proper court order granted by a judge. In
Alaska Fish and Game cases as well as with Medicaid cases
the individual would be entitled to come before the court
to ask for an immediate court order to have the items
returned to them if they believed the state had made a
mistake. The decision would rest with the court.
Representative Kawasaki mentioned that a civil asset
forfeiture was used in the case of a hunting and fishing
violation when the use of an airplane was the object
committing the crime. Another example was using a boat to
transfer drugs from point A to point B. He was aware that
civil asset forfeiture was used and wondered if it was
possible to get more information on how often civil asset
forfeiture was used specifically for white collar crime
such as Medicaid in the future. He also had a question
regarding item E of the same question having to do with the
property seized under the chapter including bank accounts,
automobiles, boats, planes, and stocks and bonds. He
appreciated the information regarding liquidating assets
and putting them into other tangible property. He referred
to the last section that said "Real or personal property
owned and used to conduct the Medical Assistance Prover's
business." He thought the language was limiting. He thought
the word "and" could be replaced with "or."
Co-Chair Thompson did not understand the question.
Representative Kawasaki elaborated that in Item E of the
section it talked about property that could be seized, and
it talked about real or personal property. It stated that
"real or personal property owned and used to conduct the
medical assistance providers business." He thought "and"
limited it to the persons' business.
Mr. Peterson was aware of the section Representative
Kawasaki was referring to. He indicated he would be
speaking with Ms. Kraly following the hearing to discuss
the provision. He saw how the provision could be
interpreted to limit what the state could go after. He
spoke to Representative Kawasaki's first question with
respect to Medicaid fraud cases the state had used a
seizure of proceeds within a bank account, the accounts for
which Medicaid was paying funds into the account for the
provider. There was one case against a physician that
resulted in a successful conviction and one against a home
healthcare agency which also resulted in a successful
conviction. In both cases the proceeds were forfeited to
the State of Alaska to go towards paying the restitution
due to the state.
2:23:26 PM
Representative Munoz asked if most of the cases were aimed
at providers or consumers of Medicaid.
Mr. Peterson responded that by and large the fraud comes
from the provider rather than the recipient. The unit's
mandate was to prosecute fraud by providers within the
Medicaid program. However, the unit was allowed to
prosecute recipients when the recipient was colluding with
the provider to commit a fraud. The unit had prosecuted a
few recipients in the previous 3 years. If the unit
discovered through its investigation that a recipient was
committing Medicaid fraud then the unit would refer the
case to the Office of Special Prosecutions which had a
public assistance prosecutor.
Representative Munoz asked if it would remain the case with
the new legislation.
Mr. Peterson was uncertain of Representative Munoz's
question.
Ms. Kraly responded that it would not change the
prosecution dynamic. Individuals would still be prosecuted
by the public assistance prosecutor and providers would be
prosecuted by the MFCU.
Representative Edgmon asked how Medicaid expansion would
affect the work of the MFCU.
Mr. Peterson answered that he did not see any noticeable
change in work load due to the expansion of Medicaid. He
thought the reason for that was because the focus of the
unit was primarily on provider fraud. There had not been a
large expansion or explosion of the number of providers in
the industry. One of the ways in which the unit prosecuted
white collar fraud cases was that it would find out about a
fraud scheme or some type of conduct that would be in
violation of state law. In working with the Department of
Health and Social Services the unit analyzed billing data.
However, whether analyzing billing data for 200, 300, or
400 recipients there had not been a significant change in
his workload.
Co-Chair Thompson relayed that there were a number of
questions for Doug Jones. He invited him to introduce
himself.
2:27:27 PM
DOUG JONES, MANAGER, MEDICAID PROGRAM INTEGRITY SECTION,
DEPARTMENT OF HEALTH AND SOCIAL SERVICES, introduced
himself and relayed that his section managed the audit
contract under AS.47.05.200. His section worked closely
with the federal government on some of its audit programs
including the Program Error Rate Measurement (PERM) program
and the Medicaid Integrity Contractor Program. His office
also worked closely with the MFCU and the Medicaid division
in cases of suspected Medicaid fraud. He reviewed slide 3:
"Overview of Medicaid Provider Audit/ Over Payment." He
relayed that the slide covered the procedural aspects of an
audit and of an overpayment and notice scenario. He wanted
to review some of the benefits of the bill that would
broaden the section's tool chest in order to maintain and
preserve the integrity of the Medicaid program. He referred
to a question from the previous day about Section 25
regarding the number of audits. It was changed in the bill
requiring the department's contract for no less than 50
audits annually of medical assistance providers, a change
from the current language of 75. Ms. Kraly had indicated
correctly that there had been a large change in the
landscape of provider audits since the original statute was
enacted. Large changes had included the Affordable Care
Act, which rolled out recovery audit contractors from the
Medicare program to the Medicaid program. Another change
was the implementation of the PERM program which seemed to
grow significantly. Another area of change, for those
providers that participated in electronic health records,
were incentive payment audits and audits conducted directly
on state Medicaid providers by the Centers for Medicare and
Medicaid services.
2:30:49 PM
Mr. Jones continued to speak about the influx in the number
and types of audits being conducted on Medicaid providers.
He was very comfortable with the reduction in the number of
audits in AS.47.05.200. Section 26 of the bill allowed for
the assessment of interest on overpayments. He relayed that
with the allowability for interest on overpayments over the
last couple of years the section had identified about $20
million in overpayments through the administrative conduct
of audits and reviews on medical assistance providers. In
the same timeframe the section had collected about $6
million which underscored a couple of points. First, there
was no incentive for a provider who was faced with an
overpayment to resolve the matter quickly and no
disincentive for them not to appeal the case. Secondly, he
referred to the realm between administrative overpayment
and a criminal Medicaid fraud case. The difference between
false claims and Medicaid fraud was difficult because the
MFCU had to prove that the provider intended to seek a
benefit that was not theirs. A false claims act allowed for
the ability to identify a middle ground. When the
department sought recovery on an overpayment there was due
process rights for Alaska providers. In some cases,
providers took the due process to an unhealthy level,
pushing poor positions to Superior Court where they most
likely did not belong tying up resources in staff time for
various offices. It ultimately could eat up Superior Court.
The false claims act and civil penalties provided an extra
incentive for providers to come into compliance without
having to be shut down. There were measures that could be
taken but if it was difficult to prove Medicaid fraud, the
False Claims Act gave the department a boost in encouraging
compliance with Medicaid rules and regulations.
Mr. Jones explained that Section 27 of the bill provided
another tool in encouraging providers to identify and repay
a self-identified overpayment. The provision worked well in
conjunction with the false claim and reporting act. It
would encourage providers to initiate compliance programs.
For those providers with compliance programs already in
effect it would incentivize them to look for cases where
they might have inadvertently overbilled the program and
return the funds. He was available for questions.
2:36:37 PM
Co-Chair Thompson had heard Mr. Jones report that there was
overpayments in excess of $20 million. However, only about
$6 million had been recovered. He wondered if he had heard
him correctly.
Mr. Jones replied in the affirmative. He explained that
whenever he talked about a matrix in the fraud, waste, and
abuse realm he thought of them in three different areas.
The first was what had been identified as an overpayment -
in cases where the department issued a final audit and
informed the provider. Secondly, collections were hard
dollar recoveries, money which actually came in the door.
He reminded members that his numbers were separate from the
numbers Mr. Peterson had discussed which was on the
criminal restitution side. The third piece had to do with
the idea of cost avoidance or how much was saved through
the sentinel effect. The number for the previous 2 years
was about $30 million, a calculation that was not very
scientific. Every state struggled in trying to support or
prove up the effectiveness and efficiency of any program
integrity, fraud, and abuse program. A question to ask was
how much money was saved by prosecuting cases to put some
bad guys in jail. The number was calculated by identifying
the prosecuted and looking at their annual billings. The
annual billing amount for 1 year was calculated out as a
cost avoidance amount which was where the $30 million
figure came from. The cost avoidance or the sentinel effect
amount was difficult to assign a scientific and rational
calculation.
Representative Gattis could not help but think about the
state having a glitch in its own software system. She
wondered if that factored into the $30 million overpayment
figure.
Mr. Jones responded in the negative. He suggested that the
$30 million only had to do with a cost avoidance number due
to the sentinel effect. Any issues with the payment system
would not affect the number.
2:40:54 PM
Representative Gattis stated that the state had problems
with its system. She wondered if it was possible that the
state overpaid or underpaid. Assuming that the state
overpaid, she wondered if it was possible that the state
overpaid and was unable to collect. She wondered it if
would be categorized as fraud.
Mr. Jones reported not having focused its reviews on
payments associated with the new system. He relayed that he
had not studied the full impact of the system. Currently,
audits being conducted were from calendar year 2012. There
was only limited focused reviews on more current
timeframes. The primary audit program under AS. 47.05.200
was still looking at years prior to the implementation of
the new system. The potential impact of the payment system
had not been reviewed.
Representative Gara asked about the potential of losing
money by pursuing a fraud case.
Mr. Jones responded that he would have to defer to Mr.
Peterson regarding fraud cases. He could see Representative
Gara's point about a relatively small overpayment and
whether it was worth appealing.
Representative Gara asked whether the civil side of the
unit had the right to pursue someone that had committed
fraud against the state.
Mr. Jones responded in the affirmative. He clarified that
they would be pursuing the overpayment associated with the
fraud.
Representative Gara understood that the process began
administratively but wondered if it ended in court. He
assumed if the state won, the losing party would have the
right to appeal.
Mr. Jones relayed the Representative Gara was accurate. He
stated that he worked closely with Mr. Peterson on such
cases. On the administrative side he would be looking for
the administrative overpayment through administrative
remedies. A party had due process rights and could appeal
the overpayment findings through Superior Court.
Co-Chair Thompson noted that Mr. Jones had mentioned
looking at cases from 2012 and wondered if there was a
statute of limitations that would apply.
Mr. Jones confirmed that there was a limit of 7 years.
Co-Chair Thompson remarked that they were at year 5 and
encouraged Mr. Jones to keep going.
Representative Gara asked about the number of attorneys in
Mr. Jones' fraud unit.
Mr. Jones responded that the unit worked with one assistant
attorney general and often times Ms. Kraly was involved in
some of the cases. On the administrative side he worked
primarily with one assistant attorney general and in part
with Ms. Kraly.
2:46:35 PM
LYNNE KEILMAN-CRUZ, HEALTH PROGRAM MANAGER, DEPARTMENT OF
HEALTH AND SOCIAL SERVICES, relayed that she would be
discussing how each of the divisions worked together with
MPI and the MFCU to fight Medicaid fraud. The Senior and
Disabilities Services Division had 3 full time
investigators, one of whom was a non-permanent position.
The quality assurance unit within the division had donated
some of its resources cross-training individuals to assist
with identifying cases and receiving complaints from
providers and recipients of services. She explained her
division had a centralized intake for complaints (several
complaints had been received). The division streamlined and
reviewed reports and did some of the investigating. Often
times the division provided technical assistance to
providers to ensure their compliance with state rules and
regulations. She also oversaw the Provider Certification
and Compliance Unit. She had compliance reviewers within
that unit that went out into the field to check for
compliance with different providers. Many of the complaints
that rose to the level of fraud, waste, and abuse came
through the complaint system or through provider compliance
checks. Many complaints that were investigated turned into
provider fraud cases, some of which involved recipients
colluding with providers. Many related cases involved the
personal care assistance program. The division had taken
some cases against waiver providers as well as with
personal care assistance programs. She highlighted the
importance of the three units working together. Her
division was the programmatic piece of the three-legged
stool which also included the MFCU and the MPI unit.
Sometimes her unit was able to identify schemes or problems
with state regulations that perhaps Medicaid fraud
investigators could not. The division investigated on the
civil side and often times noticed providers to correct
their behavior. Her unit acted through progressive
discipline. The unit tried to start with the least
restrictive level of discipline and work its way up. If
something came to the unit's attention that was egregious
it would immediately become a fraud case. Much of the time
the unit provided technical assistance to a provider, they
failed to correct their way of doing business, and the
issue resulted in a sanction.
2:51:38 PM
Ms. Keilman-Cruz turned to slide 2: "Overview of Medicaid
Sanction Process." She indicated that what the unit looked
for under the Alaska Medicaid Coverage and Payment
Regulation 7AAC 105.400 were grounds for sanctions. After
the unit provided technical assistance to a provider or
explained to them that they needed to discontinue a
practice, the unit would move to impose a sanction. Many
factors were considered in sanctioning a provider. She
indicated that there were times in which providers could be
suspended if there was a credible allegation of fraud. The
divisions needed to work together because there were
recipients at the other end of a suspension. It was the
division's responsibility to ensure that recipients did not
go without services.
Vice-Chair Saddler asked Ms. Keilman-Cruz to explain what
her section did versus the other sections.
Ms. Keilman-Cruz explained that her section oversaw the
personal care assistance and Medicaid waiver program and
within that the quality assurance unit, the Senior and
Disabilities Services Division, was responsible for the
quality oversight of the program. She furthered that within
the quality assurance unit there were compliance folks and
quality assurance folks that actually performed some of the
investigation of complaints that came in. She explained
that her unit did the initial investigation and did some of
the tidying up of a case. The unit then made a referral
through MPI, responsible for tracking and triaging all of
the reports that went to the MFCU. The Medicaid Fraud
Control Unit oversaw the audit and the payment suspensions
(anything to do with payments to the provider involving
fraud, waste, or abuse. The investigators for the MFCU only
investigated actual fraud cases that came directly to them.
Her unit investigators did some of the smaller, more
technical assistance civil kind of sanctions for oversight
of the program that did not rise to the level of a fraud
investigation. Sometimes her team worked collaboratively
with the fraud investigators because there was program
expertise in the areas of fraud that were occurring within
the states programs.
Vice-Chair Saddler wanted to clarify that her division took
up low level complaints, gathered up information, and
passed them on to MPI, and if justified, complaints would
be passed to the MFCU.
Ms. Keilman-Cruz agreed with his summary.
2:56:05 PM
Representative Edgmon wanted to better understand waste. He
thought that there would likely always be a small level of
incompliance or inadvertent waste. He wondered if it would
be ongoing.
Ms. Keilman-Cruz thought there would always be a level of
waste. It was difficult to anticipate all areas of waste
but she thought her unit had done a good job of working
together with the MPI and the MFCU. In focusing on the
areas where the unit saw significant abuse and working
actively with the other two units she thought it was
possible to reduce or eliminate waste by changing
regulations. She believed there would always be a small
amount of waste but having resources in quality assurance
would lead to continuous quality improvement and the
elimination of waste, fraud, and abuse.
Representative Edgmon asked about the timeframe and the
audits being behind.
Ms. Keilman-Cruz responded that the audits went back as far
as 2012. However, investigations were current. She reported
an example in which the unit took a civil action to
terminate a provider due to program abuses. The unit had to
carefully vet whether it looked at system glitches and how
people were paid and whether it was factored into an
overpayment. The division had to examine it line-by-line to
make sure the state was able to get back the resources it
deserved.
2:59:38 PM
Representative Wilson was confused. She wondered what was
currently being done versus what the bill would do. She
asked for a short summary of what the bill would allow the
unit to do that it could not do currently.
Ms. Kraly would respond in writing. Briefly, the bill gave
the unit the authority to impose civil fines. It allowed
the unit to impose interest on overpayments, and also
provided the False Claims Act (a civil cause of action for
false or fraudulent claims that the unit did not have). It
was a specific action related to Medicaid. It gave the unit
the ability to achieve the seizure and forfeiture of assets
to offset the cost of recovery for Medicaid fraud claims
brought by Mr. Peterson's unit. In looking at the broad
scheme of things, the unit had very good tools. The unit
actively investigated and pursued fraud abuse and waste
when it was presented to them. However, there were
additional smaller efforts that would help to round out the
tools the unit needed. She relayed she would supply a
response in writing.
3:01:40 PM
Representative Wilson asked that she provide an example of
what the unit might have been able to do for the past 2
years had the legislation been in place. She wanted to have
an idea of the impact from historical data rather than a
hypothetical example. Ms. Kraly responded, "Absolutely."
Co-Chair Neuman asked why the unit wanted the tools at
present. He wondered if something had changed that would
cause the need for the additional tools.
Ms. Kraly responded that there were two separate units
within the Department of Law and then there was Department
of Health and Social Services. The Medicaid Fraud Control
Unit was a statutorily required unit set up through federal
authorization. They prosecuted and investigated criminal
fraud and abuse. The civil side of the Department of Law,
the side she was involved in, operated under the auspices
of the regulatory authority that already existed under
Title 7 of the Alaska Administrative Code. There were
certain things her unit wanted to have legislative approval
of before she took action such as achieving interest and
penalties. They were things that had not come to her
attention until after the unit engaged in the audits and
after 3 to 5 years of failure to repay in a timely fashion.
It became evident that the unit needed the additional tools
laid out in the legislation. Some of the tools were items
that came to the unit's attention. The unit had thought
about and wanted to preserve the ability to have civil
fines for many years and felt that the bill was the vehicle
to do so. She reiterated that the unit felt it was
important to have legislative approval prior to imposing
fines on Medicaid providers for violating regulations under
the Medicaid act. The items being asked for in the bill
were tools designed to help with the civil division and the
civil causes of action rather than what Mr. Peterson did
when prosecuting fraud cases.
3:04:40 PM
Co-Chair Neuman relayed concerns about the legislation
propagating significantly more regulations. He asked if the
issues had ever been brought to the attention of the
legislature previously.
Ms. Kraly responded that in her tenor she did not recall
the issues being presented to the legislature. She added
that the legislative changes would not create a large
regulatory framework. The fines would lead to some
regulations but otherwise the changes would not create a
large regulatory influx to administer these tools. The
interest and penalties under the audits would happen by
operation of law. Some regulatory input would be required
to identify the range of fines that were being requested
and how they would apply to the sanctions that were
authorized under the Medicaid act.
Co-Chair Neuman thought that Ms. Karly made his point.
Representative Wilson asked about a lower threshold of
proof for civil versus criminal cases. She wondered if
there would be a different type of prosecution due to a
different threshold.
Ms. Kraly responded that there was a lower threshold.
Criminal cases had to be proven beyond a reasonable doubt -
a preponderance of the evidence. However, she noted that in
every one of the instances individuals or providers that
were fined or who had actions or audits were provided due
process compliant notice and the ability to challenge the
findings in an administrative hearing and to pursue an
appeal to the Superior Court. It was a lower standard of
proof.
Representative Wilson asked if the cases that could not be
prosecuted criminally could be prosecuted civilly as an
alternative.
Ms. Kraly stated that the civil penalty provision that she
was identifying would not apply to the circumstance
Representative Wilson was talking about. She emphasized
that what her unit was looking for was the authority to
impose a fine on a provider who had been identified as
violating program rules and was being sanctioned. There was
a specific regulation 7AAC 120.400 which included a list of
over 30 sanctionable offenses. For each sanction there was
an enforcement rule. The sanction stated that if a provider
had violated one of the rules they could be terminated or
suspended or they could be sent to provider education -
that was the range of penalties currently in place. The
division was looking for ways to impose a fine of $250 per
occurrence. If Mr. Peterson decided not to criminally
prosecute a case her unit already had the ability to pursue
the issue through an administrative method. She was looking
at the fines from a sanction perspective which was the
intent of the legislation.
3:10:05 PM
Representative Wilson stated that it was similar to the
Board of Game or the Board of Fish. She was concerned about
adding more things at a lower threshold that the state
could do to providers when a higher threshold could not be
proven. She was concerned with the legislation.
Vice-Chair Saddler was confused. He wanted additional
clarification about the three divisions.
Ms. Kraly responded that the Medicaid divisions within DHSS
had a quality assurance program directly tied to the
administration of their individual Medicaid programs such
as Senior and Disabilities Services or Behavioral Health.
They worked directly with providers, enrolling, certifying,
and approving them. The also provided technical assistance
and dealt with program compliance. That was the foundation.
Medicaid Program Integrity was a more global entity within
the DHSS that dealt more with the overpayment and audit
side of things. However, when the quality assurance program
was working with a provider, could identify a financial
issue and refer it to MPI or could identify fraud and refer
it through MPI to the MFCU. It was a linear structure.
Vice-Chair Saddler asked where quality assurance fit in the
structure. Ms. Kraly relayed that quality assurance was the
basic block. Each division had a quality assurance
position.
Vice-Chair Saddler repeated what Ms. Kraly stated that each
of the two Medicaid divisions, Senior and Disabilities
Services and Behavioral Health had a program compliance. He
asked if program compliance was the same thing as quality
assurance. Ms. Kraly responded that she had meant to say
quality assurance. Quality assurance dealt with program
compliance and the direct interface with the providers.
Vice-Chair Saddler asked where quality assurance was in the
structure. He wondered if it was a separate office. Ms.
Kraly explained that there were quality assurance programs
in each one of the Medicaid divisions.
Vice-Chair Saddler thought she had said that there were
program compliance offices in each division. Mr. Kraly
clarified that each dealt with program compliance.
Co-Chair Thompson asked Vice-Chair Saddler if he had
further questions.
Vice-Chair Saddler responded in the negative.
Ms. Kraly agreed that it was confusing. One of the most
important points was that each of the units worked
independently in identifying fraud abuse and waste, but all
worked collectively as a team. She represented the quality
assurance units and program integrity units in each
division. Her office also worked collaboratively with the
MFCU to identify cases that did not rise to a criminal
prosecution. In looking at the original spreadsheet (slide
3) a fraud case would either come in through quality
assurance, program integrity, or a third party and would
then go to the MFCU where it would be evaluated and a
determination would be made whether to pursue a criminal
case or a civil case.
Vice-Chair Saddler asked for consistent terminology.
Co-Chair Thompson thanked Mr. Kraly for her testimony.
3:15:28 PM
Representative Wilson suggested that presentations clearly
indicate current practices versus what was being proposed
in legislation.
Ms. Kraly wanted to answer a question asked by
Representative Munoz in the previous day. She had asked
about whether the State of Alaska could be charged with a
false claim. Generally, the answer would be no. The focus
of investigating a false claim was provider compliance. The
Department of Health and Social Services outside of the
Pioneer Home was not an enrolled provider. The Pioneer Home
could potentially have a problem. However, since the false
claim was designed towards achieving compliance and
remedying overpayments or cost outlies, once they were
identified they would be remedied and immediately
internally through the Commissioner's Office. A false claim
would not necessarily achieve the same goal as what her
office was trying to do with other providers. The
department and its individual divisions were not subject
because they were not enrolled providers. Since the
idea was for provider compliance her office would rectify
issues concerning billing and documentation internally upon
discovery of those issues.
Co-Chair Neuman explained that the committee was frustrated
with her complicated answers. She shared a lot of
information.
Representative Edgmon stated that for presentation purposes
it would be helpful to have visual terms brought to the
committee in a simple form where building blocks such as
quality assurance, integrity, and control could be layered.
Co-Chair Thompson recessed the meeting until 4:00 PM.
SB 74 was HEARD and HELD in committee for further
consideration.
3:20:25 PM
AT EASE
4:03:35 PM
RECONVENED
Co-Chair Thompson reported that Representative Guttenberg
left the meeting for the day.
4:04:49 PM
^PRELIMINARY SPRING 2016 REVENUE FORECAST, DEPARTMENT OF
REVENUE
4:04:49 PM
JERRY BURNETT, DEPUTY COMMISSIONER, TREASURY DIVISION,
DEPARTMENT OF REVENUE, pointed to a one page information
spreadsheet titled: "Summary of preliminary Spring 2016
forecast data."
4:05:51 PM
AT EASE
4:08:48 PM
RECONVENED
Mr. Burnett indicated that the spreadsheet was a simple
summary of changes between the spring and the fall
forecast. He referred to the shaded bar in the top box
showing the total general fund (GF) unrestricted revenue
for FY 16 to FY 26. The spring FY 16 forecast was $1.316
million. The fall forecast was $1.593 in FY 15 for a
difference of $277 million. In FY 17 looking at the same
bar the top box listed $1.232 billion. In the center box
the fall FY 17 forecast was $1796 for a difference of $564
million. The state was looking at a lower price with
production being similar in the earlier years of the
forecast and trailing off in the later years.
Co-Chair Thompson asked about the price per barrel
estimate.
Mr. Burnett replied that the forecast was based on $39.52
per barrel in FY 16 and $38.89 per barrel in FY 17 compared
to $49.58 and $56.24 in the fall [FY 15] forecast.
Representative Gara asked why tax credits went down in 2019
to $250 million per year and remained flat. Mr. Burnett
deferred to Mr. Stickel.
Representative Gara clarified that he was talking about the
line labeled, "Tax credits for refund." It was an exact
$250 million per year starting in 2020.
4:11:16 PM
DAN STICKEL, ASSISTANT CHIEF ECONOMIST, TAX DIVISION,
DEPARTMENT OF REVENUE, explained that the department did
not have much certainty regarding the tax credits that
would be claimed for years beyond 2020. The department held
the credits constant at the $250 million per year for 2020
and beyond. It was basically about the amount that he would
expect in the 2019 to 2020.
Representative Gara suggested they had been going up to
$825 million. He wondered why they were going down after
2017.
Mr. Stickle responded that there were some tax credits
going off of the books and the underlying forecast was that
capital expenditures would start to decrease over the time
horizon of the forecast. He noted that with prices
recovering, the state would have lower net operating loss
carry forwards. All of the things combined helped to reduce
some of the tax credit liability in the out years.
Representative Gara referred to the production taxes in
2017 in the amount of $54 million but paying out tax
credits of $825 million. He spoke of Mr. Alper's report but
the tax credits were for fields that on average did not pay
any production tax up to $73 per barrel. He wondered if he
was accurate. He was referring to the GVR fields that paid
the post 2002 fields. He wondered if he was accurate.
Mr. Stickle did not have the dollar amount off the top of
his head. He relayed that the tax credits for refund were
going to be for the companies that did not have enough of a
tax liability to apply the tax credits against a liability.
It would include explorers, developers, and companies
operating GVR eligible fields.
Representative Gara asked if he knew for up to what price
those fields paid and no production taxes. Mr. Stickle did
not have that information with him.
4:14:07 PM
Vice-Chair Saddler referred to the forecast for FY 2017. He
wanted to know about what revenue sources were included. He
wondered if it presumed passage of any legislation in the
current session that would affect FY 17.
Mr. Burnett responded that it assumed the current status
quo tax structure entirely. He relayed that the crux of the
presentation was to review the base figures. There were
some interesting things to note. The prices in the forecast
for years 2019, 2020, and 2021 where low because of carry
forward loss credits. Producers that were currently paying
production taxes would be carrying forward losses and not
paying production taxes. They would be paying only the
nickel per barrel tax (the spill response tax and another
small tax) which was why the tax liability was only $19
million and $20 million.
Mr. Stickle reported that in those years from 2018 through
2020 the primary production tax revenues were the nickel
per barrel plus a 5 percent tax on the private land owner
royalties' interest.
Co-Chair Neuman asked if the spring 2016 total general fund
unrestricted revenues (GFUR) for 2016 in the amount of
$1.316 billion was a net figure or gross figure.
Mr. Burnette responded that it reflected the net taxes and
royalties paid to the State of Alaska.
Representative Gara provided a hypothetical scenario going
out to 2020 when the state was projected to receive only
$20 million in production taxes with an estimated price of
$54 per barrel. At that price all the state would receive
was the 4 percent gross minimum tax. He asked if he was
correct.
Mr. Burnett responded that with the prices in the forecast,
below $67 per barrel, the state would be receiving the
minimum tax for the entire period of the forecast.
4:17:09 PM
Representative Gara did not believe the state would get
past the 4 percent minimum under current law until the
price of oil per barrel reached $76. He wondered why at $39
per barrel in the previous year the state received $142
million in production taxes but by 2020 at a much higher
oil price the state's revenue would go from $142 million to
just $20 million.
Mr. Burnett answered that in 2016 the oil companies, for
the purposes of the production tax had a net operating loss
which could be carried forward as a net operating loss
credit into the future years through approximately 2022. In
2023 producers would be paying a minimum tax but not using
much of a net operating loss credit. The credit was being
reduced by the net operating loss in future years.
Representative Gara asked that when people stated that
Alaska did not have a firm minimum tax floor they were
talking about the state getting less than 4 percent because
of the net operating loss. He wanted to make sure he was
understanding correctly.
Mr. Burnett replied that Representative Gara was
essentially correct. Producers could not reduce their tax
liability below zero with a net operating loss on the
production tax but could reduce it to zero with prior year
net operating losses.
Representative Gara asked about the bill the governor had
proposed. He wondered if it established a firm 4 or 5
percent minimum so that the net operating loss could not go
below the minimum tax.
Mr. Burnett replied in the affirmative as the bill was
initially introduced.
Representative Wilson asked that of the tax credits for
refund what the state was required to pay.
Mr. Burnett responded that refundable tax credits were
subject to appropriation. The credits deducted against tax
liability were obviously not subject to appropriation. The
statute had a 10 percent or 15 percent floor depending on
oil price as to what was intended to be placed into the tax
credit fund. He believed the amount was approximately $73
million in the governor's budget in the current year. The
question was whether the state was required to pay the
money or if it needed to pay it in order to keep the
industry meeting expectations. All of the refundable
credits were technically subject to appropriation.
Representative Wilson asked Mr. Burnett to clarify the
difference between the total petroleum royalties and the
petroleum royalties in two lines appearing in the first box
on the spreadsheet.
Mr. Burnett explained that there were two lines that
referred to petroleum royalties including the Permanent
Fund share was $728 million. The general fund share was
$504. The difference between the two numbers was the amount
going into the corpus of the Permanent Fund - 25 percent of
all royalties under the constitution plus 50 percent of
certain fields.
4:21:35 PM
Representative Wilson asked how many barrels of oil were
projected.
Mr. Burnett pointed to the second line in the first box
where it showed ANS production 517 thousand barrels per day
in 2016 and 507 thousand in 2017.
Representative Wilson assumed that no additional barrels of
oil were being produced based on the numbers in the
forecast.
Mr. Burnett responded that interestingly the forecast for
production was higher than two years prior. He confirmed
that it showed the effects of earlier prices and of things
that were done. The Department of Revenue used a risk-based
model and only include production that was certain. It was
more likely that the state forecast was low rather than
high.
Co-Chair Neuman asked about the production tax minimum
floor of 4 percent. He suggested that because the state had
a net system rather than a gross taxation system producers
were allowed to deduct the standard allowable deductions
from the 4 percent net. He wondered if producers could go
below 4 percent when taking deductions such as
transportation costs and upstream costs.
Mr. Burnett stated that the 4 percent floor prevented
producers from deducting costs in the year in which they
were incurred. However, it allowed producers to deduct net
operating losses from previous years. It was a floor that
worked well in a 1-year low price environment. When
circumstances were such that producers had ongoing net
operating losses over a period of time the amount could get
down to zero.
Co-Chair Neuman was trying to clarify whether producers
could go below the minimum tax because of their deductions
and because the State of Alaska had a net system.
4:24:39 PM
Vice-Chair Saddler took some cold comfort in seeing that
the production forecasts were larger currently than they
were 2 years prior. He wondered about the forecast out to
2026 assuming a 277 thousand barrels per day. He wondered
if it presumed that there was no change or additional
significant investment in the Trans Alaska Pipeline that
would allow them to function at 277 thousand barrels per
day.
Mr. Burnett was unsure of the correct answer to Vice-Chair
Saddler's question.
Vice-Chair Saddler was curious about the status of the
audits on past year tax returns.
Mr. Burnett indicated the topic had been discussed in the
subcommittee meetings earlier in the year. However, the tax
returns were audited through 2009. The intent following
would be to do 2 years at a time. His hope was to be
completed and perhaps ahead in the following year. He
relayed that there had been challenges with having mixed
years of different tax regimes in place at different times.
The process was fairly complicated and there were several
changes to regulations and to tax filings that occurred
after the fact. He noted that he did not necessarily want
to finish the audits too soon because of all of the
changes.
Representative Gattis had questions regarding the tax
credits. She wondered what the balance was for the oil and
gas tax credits fund at present.
Mr. Burnett thought it was in the $40 million range. He
added that he had information in the packet for the meeting
that detailed the expected refunded credits for 2017. He
thought the information about what was in the pipeline and
what was expected was helpful.
Representative Gattis disclosed that she had talked to Mr.
Burnett about getting the information and commended him for
doing a great job of putting it together for her.
4:28:12 PM
Representative Gara asked about the 4 percent tax floor
projection out to 2026. He specified that it was not a net
tax. It was 4 percent of the gross value of oil with some
very limited deductions for transportation. There was a net
operating loss problem. It was not a net tax where a
company could deduct all of its costs. A company would be
allowed its full deductions as if it were a profits tax
when it reached above a 4 percent minimum and the price
reached above $76 per barrel of oil. He asked if he had
presented a fair summation.
Mr. Burnett responded that Representative Gara's
interpretation was a fair one.
Representative Gara mentioned that the statute on the tax
credits that the state paid out, $825 million in 2017,
provided that the legislature was authorized to only pay a
portion based upon available state revenues calculated
using a formula. He wondered if in FY 17 the state was
obligated to pay roughly $72 million.
Mr. Burnett reported that the formula that was used was
instated with ACES. He thought that at $65 per barrel and
above it was 10 percent of revenues. Below $65 per barrel
it was 15 percent of revenues. The governor's budget was
based on these numbers. He could not speak to the type of
obligation relative to other obligations.
Vice-Chair Saddler stated that when looking at the
projections for the North Slope lease expenditures, the
spring forecast was slightly higher than the fall forecast.
By 2026 it was higher in most years. He wondered if there
were any conclusions or assumptions that could be gained in
looking at the chart from the investment in the North
Slope.
Mr. Burnett deferred to Mr. Stickle.
Mr. Stickle reported that in putting together the spring
forecast one of the things the DOR had heard from a number
of companies was that the producers were making adjustments
to their spending for the following couple of years. They
were waiting until the following fall to make adjustments
to the out years. He relayed that there would be a
significant reduction in lease expenditures in 2016, 2017,
and 2018. The forecast reflected that there was not a
significant reduction in the later years. The department
had added a few projects seen on the horizon but largely
left them untouched until the fall forecast.
4:31:53 PM
Vice-Chair Saddler asked about what information the
producers were waiting for in order to make their
investment decisions.
Mr. Stickle had heard that it was about oil price
uncertainty and about how the state addressed its fiscal
challenge.
Vice-Chair Saddler asked if the prospect of an oil taxation
adjustment would have a role.
Mr. Stickle was sure it would.
Vice-Chair Saddler asked if he had heard.
Mr. Stickle heard companies making reference to the broader
discussion of the fact that the state was facing a $4
billion plus deficit and questions arose about how the
state would handle it.
Mr. Burnett reiterated that the forecast was a preliminary
forecast and that the final production tax returns were not
due until the end of the month. The final spring forecast
would be completed approximately one week following receipt
of the tax return. There could be some slight changes in
the amounts. He did not anticipate the changes to be more
than a few million dollars.
Co-Chair Thompson appreciated the administration providing
the preliminary forecast.
Representative Gara wanted to better understand how the net
operating loss worked. He commented that even though it was
low, the state had a positive amount of production taxes
($20 million to $54 million over the next few years). For
particular companies they could not deduct their net
operating loss unless they were at the point where a
company's deductions were so high it would lose money in a
year. He used Point Thomson as an example. He suggested
that maybe Exon Mobile's investments would be large enough
that their investments would bring them below a minimum. If
an individual company made a small amount of money they
would not get to use their net operating losses, it was
only if the company lost money based on investments and
income. He wondered if he was accurate. He asked if a
producer could deduct its net operating loss credits from
the 4 percent floor if the company was revenue positive.
Mr. Burnett believed that a company could deduct it up to
the point of the net operating loss against tax liability.
The carry forward loss credit earned in previous years
could be spread out over several years. It could reduce it
somewhere between zero and the 4 percent.
Representative Gara spoke of the governor's firm minimum
tax floor. He asked if production tax revenue would be
closer to the FY 16 amount than the numbers seen in FY 17
and beyond in the spreadsheet.
Mr. Burnett responded in the affirmative. He added that if
oil prices went up significantly producers would still be
earning net loss carry forward credits that could be taken
against future revenues. There would not be as much of a
bump from future oil price spikes as there would be if
there was not a net operating loss or if producers were
able to take the credits during the current period. The
state would be deferring revenues farther out.
Representative Gara asked that if the 4 percent floor was
firm, oil jumped above $76 per barrel, and there was a net
profits tax greater than the minimum floor, then in those
years producers could begin to deduct their net operating
losses. He asked if he was correct.
Mr. Burnett responded positively. It would push out the
taking of the credits.
4:36:37 PM
Representative Gara suggested that the way the system was
currently crafted the state would never get above the 4
percent minimum floor and the price would not reach high
enough to go beyond the 4 percent minimum floor according
the DOR's predictions out to 2026.
Mr. Burnett responded that it was likely the case unless
producers stopped spending money.
Vice-Chair Saddler referred to page 2 of the executive
summary which made reference to the middle column to a
meaningful increase of 17,500 barrels of oil per day from
the fall forecast. He asked if it was fair to attribute it
in part or in total to the tax credits or to the changed
tax structure of SB 21.
Mr. Stickle explained that the increase was primarily due
to CD5 coming online slightly earlier than expected and
producing better than expected.
Vice-Chair Saddler asked if his answer was yes or no.
Mr. Burnett responded that it was a complex question. He
explained that when CD5 started prices were much higher
than in the present day. He thought it was started prior to
the passage of SB 21. It was likely an effect of several
things.
Representative Gara had a list of the fields that the state
was investing in prior to the change in the tax law. CD5
announced they were going forward before SB 21 passed. The
big delay was the refusal of the Army Corps of Engineers to
give them a bridge permit. He asked if he was correct.
Mr. Burnett responded in the affirmative.
Co-Chair Thompson asked Representative Gara if his question
had anything to do with the revenue forecast.
Representative Gara thought the answer to his question as
to whether SB 21 had anything to do with CD5 was no.
Co-Chair Thompson thanked Mr. Burnett and Mr. Stickle for
their presentation.
4:39:38 PM
AT EASE
4:42:09 PM
RECONVENED
Co-Chair Thompson indicated the committee would be hearing
about HB 143.
HOUSE BILL NO. 143
"An Act authorizing the Alaska Industrial Development
and Export Authority to issue bonds to finance the
infrastructure and construction costs of the
Sweetheart Lake hydroelectric project; and relating to
legislative approval for a loan from the power project
fund to the Lynn Canal Transmission Corporation."
Co-Chair Neuman MOVED to ADOPT the proposed committee
substitute for HB 143, Work Draft (29-LS0599\S).
There being NO OBJECTION, it was so ordered.
JANE PIERSON, STAFF, REPRESENTATIVE STEVE THOMPSON,
explained the changes between the S version and the H
version. The first change was the title. The title was
shortened to address what was currently in the bill. The
loan from the Power Project Fund to the Lynn Canal
Transportation Corporation had been removed and was no
longer addressed in the bill or in the title. Section 1 had
been amended to remove financing through AS.44.88.172.
Under version S financing would be what was known as
conduit funding paid through the revenue derived from the
project. The revenue bonds and interest due would not
constitute a general obligation to the state or the
authority. Bonds would not be applied against the
authority's 12 month bonding limitation in AS.44.88.095A.
As previously stated Section 2 of the bill was removed. It
would have been a loan for the Lynn Canal Transmission
Corporation. The repealer date was changed in Section 2
from June 30, 2019 to June 30, 2020.
Co-Chair Neuman assumed that the legislation allowed Alaska
Industrial Development and Export Authority (AIDEA) to work
as a conduit to help the project move forward but did not
obligate AIDEA to the financial packet.
Ms. Pierson replied that he was correct.
Representative Gara asked why the reference to the Lynn
Canal Transportation Corporation was removed.
Ms. Pierson answered that it was in working with the bill
sponsor. It was a fund that would have had to be
recapitalized for $22 million. In the state's fiscal times
it was not looking to recapitalize or to cap out its
bonding.
Representative Gara noted that he would have questions for
AIDEA.
REPRESENTATIVE CATHY MUNOZ, SPONSOR, explained that the
committee substitute for HB 143 would allow financing for
the construction of a hydroelectric facility dam located 43
miles South of Juneau. The proposed project would generate
19.8 megawatts of power and would allow the Kensington Mine
to come off of diesel generation and move to hydroelectric
power. The project would increase hydro capacity by about
20 percent and would result in many jobs for the community.
The initial application to Federal Energy Regulatory
Commission (FERC) occurred in 2009. The final FERC permit,
the final environmental impact study (EIS), and the final
404 permit were expected in the summer of 2016.
4:47:22 PM
Representative Pruitt asked if there was a power sales
agreement between Kensington Mine and the developer of the
Sweetheart Lake Project.
Representative Munoz deferred the question to the chief
executive officer of the Kensington Mine.
Representative Gara asked what percentage of power
generated from the project would go to the Kensington Mine.
Representative Munoz deferred the question to experts
available to speak to the bill.
Co-Chair Thompson asked the other testifiers to come
forward to address the committee.
KEITH COMSTOCK, CEO, JUNEAU HYDROPOWER INC., indicated that
there was a slide presentation in the member packets
titled: "Juneau Hydropower and Lynn Canal Transmission"
(copy on file). He began by providing a brief history of
the project. It was a project identified by the federal
government in 1906 as having significant hydropower
capacity. In 1929 it was identified as a federal power site
classification and removed from other uses. There had been
multiple attempts to look at the project. For a number of
reasons such as access to a market, the timing, or other
issues have prevented the project from moving forward. In
the mid to late 80s the state had come closest to building
the project. In December of 2009 Juneau Hydropower filed
for a FERC preliminary permit. At that time the company
began studying and investing money to do all the various
environmental studies, the hydrological studies, and
fortunately for the company the project had been studied
repeatedly and had 40 years of water data. The 40 to 50
year old water data was saying the same as the new water
data. He continued that from 2009 to 2014 the company
conducted environmental, hydrological, and preconstruction
studies. It had worked on all of the various regulations
and defining the customer base. In May 2014 the company
submitted its final FERC license application that FERC
accepted. Once the application was accepted the timeline
began for the EIS. The final comment period was a few
months prior. The company was expecting its final license,
the 404 permit, and the notice to proceed on or around the
July timeframe. Also in February the company announced the
existence of the Juneau District Heating, a major customer
for Juneau Hydropower Inc. The company received unanimous
letters of support from the City and Borough of Juneau
assembly. He was before the committee asking for support in
order to find some bond financing.
4:51:18 PM
Representative Kawasaki asked Mr. Comstock to tell him
about the company's attempt to make private financing
available or whether private financing has been available.
Mr. Comstock answered that the project had been 100 percent
privately financed, very unusual for a hydro power in
Alaska. He had not received any or applied for any grants
or assistance from any state or federal agencies. Every
dollar to-date had been private money. He was bringing his
own private equity to the project. In addition, should
AIDEA invest in the company, the company would still be
required to put up a significant amount of private equity.
Representative Kawasaki asked how much equity Juneau
Hydropower had in the project to-date. He wondered if the
amount of the bond, $120 million, was enough to complete
the project.
Mr. Comstock replied that the entity had invested
approximately $4 million private dollars in the project at
present. The company anticipated that between Juneau
Hydropower Inc., the Juneau District Heating, and the Lynn
Canal Transmission Corporation, the project totaled
approximately $175 million. He was expecting to put in
about $40 million to $50 million in private equity.
Representative Gara spoke to the Juneau District Heating
component that would convert energy from the canal into
heat. He asked if the component was contingent on the
Sweetheart Lake project.
Mr. Comstock answered that the items were related. He
provided a brief explanation of Juneau District Heating
project. The Ted Stevens Marine Research Center in Auke Bay
had a first generation seawater heat pump system. It
resulted in a savings of 120 gallons of fuel annually by
switching to seawater heat pump heating. The heating only
supplied a building. The same concept was in use - a
generation 2 heating system - at the Alaska Sea Life Center
in Seward. The Juneau District Heating system would be a
third generation heating system, a high heat system, which
would allow a building like Alaska's State Capital building
to cheaply and easily convert from an oil-based system to a
seawater heat pump based system or a hot water based system
without a costly retro fit only having to change certain
equipment. The other two systems were low-heat systems that
required new construction. The company was copying a system
that was first brought online in Drammen, Norway, in 2011.
The payback on their total investment was under 3 years.
Seawater heat pumps were an old technology. However, modern
refrigerants and the ability to boil refrigerants to very
high temperatures have made it viable as a capacity to heat
a city.
4:55:33 PM
Representative Gara asked how the seawater portion was
related to the Sweetheart Lake Hydro Project.
Mr. Comstock answered that in order to run the heat pumps
it required a significant amount of electricity. He
suggested that for every unit of electricity that was put
in, 3 units of heat energy resulted. It was an incredible
efficiency of 300 percent. This efficiency was the reason
the numbers worked to pay for the more expensive costs such
as digging up and laying down pipes. If a person were to
burn oil it was 85 or 90 percent efficient and natural gas
was 95 percent efficient. This project would provide a 300
percent efficiency rate. It required a lot of energy which
the Sweetheart Lake project would be able to provide.
Representative Gara asked for comfort that the project
would not damage fisheries.
Mr. Comstock replied that he was a life member of Trout
Unlimited and had been involved in cold water fisheries
issues most of his adult life. He spoke to the Sweetheart
Lake fishery claiming it was a no-deposit and no-return
salmon fishery. In other words, the Sockeye Salmon that
were stocked by Douglas Island Pink and Chum, Inc. (DIPAC)
the local hatchery were stocked and could get out. However,
they could not get back to span again. Therefore, they had
to be artificially replenished every year. His organization
worked closely with DIPAC who supported the project. His
organization believed it would enhance the fishery versus
causing any distraction at all from the fishery. They have
had good support from the sportsmen and the fishing
community.
Representative Gara wondered if there were any wild fish
runs that would be impacted in the area.
Mr. Comstock reported that there were no significant wild
runs in the lake because the lake was high in elevation
which meant it was a relatively low biomass, low producing
lake. There were some native Dolly Varden trout that would
not be impacted. There was a small population of Rainbow
trout first stocked in the 50s. The company had worked very
closely with the Department of Fish and Game (DFG) and the
Department of Natural Resources (DNR) on the issues and
they had been very supportive.
4:58:38 PM
Co-Chair Neuman asked if the group anticipated asking AIDEA
for future investments into the project. Mr. Comstock asked
if he meant beyond the request currently before the
committee.
Co-Chair Neuman understood that AIDEA's role in the project
was to provide some conduit bonds so that the company would
provide for its own financing. Alaska Industrial
Development and Export Authority would help set up the
financing mechanism. He asked if he was correct. Mr.
Comstock replied in the affirmative.
Co-Chair Neuman asked if it was the company's intent to ask
AIDEA to invest in the project. Mr. Comstock answered that
the entity's intent was to work with AIDEA as a partner to
work with the Goldman Sachs Group and various folks in the
country. He did not anticipate returning to the legislature
with an additional funding request in the future if that
was what Co-Chair Neuman was asking. He did not know the
full gamut of products and services available from AIDEA.
At the moment discussions had been focused mostly around
conduit bonds.
Co-Chair Neuman commented that his question was about
whether the financial plan for the project revolved around
AIDEA's investment. It sounded like it did not. Mr.
Comstock answered that funds from AIDEA were desired but
not required.
Vice-Chair Saddler asked about the percentage of power the
dam would use. Mr. Comstock answered that his belief was
that Kensington Mine's demand was about 60 percent of the
capacity.
Vice-Chair Saddler asked how much the Juneau District
Heating project would consume. Mr. Comstock replied that it
would take the bulk of the balance.
Vice-Chair Saddler asked if the Juneau District Heating
project would be possible without the Sweetheart Lake
project. Mr. Comstock answered that it would not be
possible. Currently the local utility had issues with the
possibility of running out of power, especially in low
water years. They had several major interruptible customers
such as the Greens Creek Mine, Princess Cruises, and a
variety of others. The short answer was not without a
significant supply of power into the community.
5:01:39 PM
Representative Pruitt asked about the Lynn Canal
Transmission Project that was removed in the committee
substitute. He wondered if Mr. Comstock was associated with
the change.
Mr. Comstock responded that Juneau Hydropower was one of
the members of the Lynn Canal Transmission Corporation.
Another primary member was the Alaska Power and Telephone
Company (the utility for Haines and Skagway and other
places). His company would like to ask for money from
AIDEA, but it was hard to ask for the funds if they did not
exist. The entity believed it could locate other sources of
funding. The company liked the terms and the interest rate
in AIDEA's program. He understood the state's current
fiscal situation and indicated that his company could
access money at a slightly higher interest rate in the
market.
Representative Pruitt wanted to ensure the legislature did
not fund another project and then find the company short of
funds before project completion. He wondered if the company
could financially handle the intertie separately. Mr.
Comstock answered that he was fairly certain. The company
had several viable plans.
Representative Pruitt asked for the total cost of the
project. Mr. Comstock answered that between the Lynn Canal
Transmission Corporation portion (set up as a non-profit to
keep transmission costs as low as possible), the build out
of the Juneau District Heating (putting pipes in the ground
and building a heat pump facility), and the Sweetheart Lake
Hydro Plant the cost would total approximately $175
million.
Representative Pruitt spoke to the hydroelectric project
itself. He asked for the cost of that portion. Mr. Comstock
answered that the cost was about $125 million without
contingencies. The amount depended on how wet the winter
was, how long it took to build, and others things. He
thought the $175 million total project cost was a good,
safe number. Juneau District Heating was a subsidiary of
Juneau Hydropower Inc. They were one and the same as far as
construction costs went. His company had been given
direction from Wall Street and other financial entities to
keep the items together as a single package.
5:05:32 PM
Representative Kawasaki asked whether the revenue bonds
would be tax exempt.
Mr. Comstock responded that Representative Kawasaki's
question would be better directed to AIDEA. He reported
that his company was not basing its decisions on any
potential future tax credits or subsidies.
Representative Kawasaki asked if Mr. Comstock's private
corporation would be required, if it were to obtain the
loans, to pass on savings to consumers or if the company
would be regulated through the Regulatory Commission of
Alaska (RCA).
Mr. Comstock believed that the hydropower function would be
a qualifying facility and not necessarily a regulated
entity. It was likely that Juneau District Heating would be
a regulated entity.
Co-Chair Thompson thanked Mr. Comstock for testifying and
introduced the next testifier. He asked Mr. Springsteen to
review the decision tree that was in member packets.
JOHN SPRINGSTEEN, EXECUTIVE DIRECTOR, ALASKA INDUSTRIAL
DEVELOPMENT AND EXPORT AUTHORITY (via teleconference),
introduced himself. He explained that the handout showed
the decision making process for any project that AIDEA
considered for AIDEA financing. He relayed that AIDEA was
looking at a conduit bond issuance for the particular
project being discussed which would be subject to the
requirements of the actual bond buyers. He believed that
their process would marginally mirror AIDEA's process. He
relayed that when AIDEA was reviewing projects for an AIDEA
investment the first step was to perform a suitability
assessment to determine if the project fit the mission of
providing jobs and creating revenue for the State of
Alaska. If the project met the mission and was suitable for
AIDEA then a feasibility analysis would follow. Alaska
Industrial Development and Export Authority would evaluate
whether the project could be done, made economic sense to
complete, and was feasible. If their criteria was met AIDEA
would move into the due diligence step, a much more
detailed review. If agreements to terms and conditions for
financing could be crafted then they would be improved
internally by AIDEA's investment committee and then by the
board of directors. The last phase would be the
finalization and closing of the deal which included
completing the agreements and doing the financing. Alaska
Industrial Development and Export Authority believed that
it would be a similar process for the bond buyers in the
case of a conduit issuance.
5:09:33 PM
Vice-Chair Saddler referred to page 13 of the AIDEA
document titled "Analysis and Decision-Making" (copy on
file). He asked Mr. Springsteen to list the elements in the
last blue box, after phase 4 was completed. Mr. Springsteen
answered that after the finalization and closing of the
agreements, ongoing interactions with the party AIDEA
financed would ensue tracking the progress of the project
and ensuring that the objectives set out with the funds
were being met.
Representative Gara asked if the $120 million requested for
the project would impact AIDEA's bonding capacity. Mr.
Springsteen replied that because it was a conduit issuance
and the project was funded on the merits of the project it
would not affect AIDEA's bonding capacity. However, it
currently affected AIDEA's rolling 12 month limit of $400
million. Through the proposed legislation the issuance
would not be counted towards the cap.
Representative Gara asked for detail related to a conduit
issuance. Mr. Springsteen answered that AIDEA only filled
the role of a facilitator related to a conduit issuance,
which was very difference than in the case of an AIDEA
obligation bond where AIDEA's revenue and assets were
providing a backstop for a bond issuance. In the case of a
conduit issuance AIDEA was only a facilitator.
Representative Gara asked about AIDEA's compensation as a
facilitator. Mr. Springsteen answered that AIDEA paid for
issuance costs and the reward was that economic capital was
being brought to the State of Alaska resulting in economic
and enterprise development and jobs.
Representative Gara observed that the project seemed great,
but he wondered if it would cost AIDEA. Mr. Springsteen
replied that AIDEA was paid back through issuances.
Representative Gara asked if AIDEA had an option to own a
portion of the project.
Co-Chair Thompson stated that the option to own was from
the old version of the bill.
Representative Gara asked if he was correct in assuming
that AIDEA did not have an option to own the project
because all it was doing was helping to secure the bonding.
Mr. Springsteen answered in the affirmative.
5:14:39 PM
Representative Kawasaki asked how long phases 1 through 4
in the established decision making process took. Mr.
Springsteen answered that the process typically took 4 to 6
months given the need for review and for board comment and
interaction. In certain cases the process could be
accelerated.
Representative Edgmon asked about the benefits the project
would provide to the longevity of the Kensington Mine by
providing lower cost energy.
Co-Chair Thompson replied that the general manager from
Kensington Mine would be testifying.
Representative Edgmon would hold his question for the
upcoming testifier.
Representative Wilson asked if the reason for the
legislation being considered was due to the legislature
deciding that if a loan was over a certain dollar amount it
had to come through statute.
Mr. Springsteen answered that AIDEA had a restriction for
general obligation bonds and for total bonds issued in the
rolling 12 month period. In the case of an AIDEA general
obligation bond over $25 million where the authority was
providing its assets as a backstop to the bond buyers
required legislative approval. In the case of a conduit
issuance the question would be about the $400 million 12-
month rolling cap for bond issuances.
Representative Wilson asked for verification that AIDEA
would conduct due diligence to ensure the investment was
sound. Mr. Springsteen replied that in terms of the project
and due diligence both AIDEA and the actual bond buyers
performed independent and similar reviews.
Representative Wilson asked for verification that his
answer was a "yes". Mr. Springsteen replied in the
affirmative. In any instance AIDEA had a reputation to
uphold in the bond market.
Representative Pruitt asked whether AIDEA would have
invested in the project on its own without the
legislature's influence if the $400 million cap was not in
place and there was not a need for the current legislation
before the committee. Mr. Springsteen answered that it
would be the type of project AIDEA would consider with its
own funds.
Co-Chair Thompson Invited the next testifier to provide
their statement.
5:18:23 PM
MARY BECKER, MAYOR, JUNEAU, relayed that the Juneau
Assembly had unanimously voted in support of the Juneau
Hydropower project at Sweetheart Lake and the Juneau
District Heating project. She thanked the committee for
taking up the legislation.
RODNEY HESSON, IBEW, JUNEAU, spoke in support of the
project.
5:20:06 PM
WAYNE ZIGARLICK, GENERAL MANAGER, COEUR ALASKA, KENSINGTON
MINE, introduced himself.
Representative Edgmon asked about the benefits the project
would offer to the Kensington Mine in terms of savings in
the future.
Mr. Zigarlick responded that the mine's single largest cost
of production was labor and the second was electricity.
Although it was difficult to quantify what kind of
extension there might be with a reduction in power costs,
any reduction in the mine's operating costs had the
potential to take mineralized material that was not
currently generating profits to do so. Thus, the life of
the mine would be extended.
Representative Edgmon surmised that the Kensington Mine was
the backbone of the project. He also thought the life of
the mine as it was currently envisioned would be
commiserate with the life of the bond issuance and possibly
beyond.
Mr. Zigarlick asked for clarification.
Representative Edgmon stated that, given the significance
of the operations of the Kensington Mine and its role in
the overall project, it would extend the life span of the
mine enough to essentially pay off the loan package.
Mr. Zigarlick answered that he was unsure of the length of
the loan package. However, the Kensington Mine's life was
dynamic in that it grew every year and was very dependent
on metal prices and other factors. He believed the
Kensington Mine would be around for a long time, but he did
not know the length of time specifically.
Representative Edgmon clarified that he was not trying to
put the testifier in a box with the question. He spoke to
long-term opportunities that cheaper power could provide
citing Red Dog Mine as an example.
Mr. Zigarlick replied that Representative Edgmon was
accurate.
5:23:25 PM
Co-Chair Thompson OPENED public testimony.
Co-Chair Thompson CLOSED public testimony.
Co-Chair Neuman asked if Alaska Energy Authority (AEA)
would play a role in the transmission of the electrical
power lines in the project.
SARAH FISHER-GOAD, EXECUTIVE DIRECTOR, ALASKA ENERGY
AUTHORITY, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC
DEVELOPMENT (via teleconference), answered that currently
AEA would not play a role in the project.
Co-Chair Thompson explained that HB 143 would have a
forthcoming zero fiscal note.
Co-Chair Neuman MOVED to REPORT CSHB 143(FIN) out of
committee with individual recommendations and the
accompanying fiscal notes. There being NO OBJECTION, it was
so ordered.
CSHB 143(FIN) was REPORTED out of committee with a "do
pass" recommendation and with one forthcoming zero fiscal
note from the Department of Commerce, Community and
Economic Development.
Co-Chair Thompson discussed the schedule for the following
day.
ADJOURNMENT
5:26:30 PM
The meeting was adjourned at 5:26 p.m.