Legislature(1995 - 1996)
03/13/1996 03:16 PM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HOUSE LABOR AND COMMERCE STANDING COMMITTEE March 13, 1996 3:16 p.m. MEMBERS PRESENT Representative Pete Kott, Chairman Representative Norman Rokeberg, Vice Chairman Representative Beverly Masek Representative Jerry Sanders Representative Brian Porter Representative Kim Elton Representative Gene Kubina MEMBERS ABSENT All members present COMMITTEE CALENDAR *HOUSE BILL NO. 510 "An Act relating to occupational licensing fees and regulatory costs for occupational licensing functions; and providing for an effective date." - HEARD AND HELD *HOUSE BILL NO. 524 "An Act relating to insurance pooling." - HEARD AND HELD *HOUSE BILL NO. 526 "An Act relating to the financing authority, programs, operations, and projects of the Alaska Industrial Development and Export Authority; providing an exemption from the procurement code for certain projects of the authority; and providing for an effective date." - PASSED HB 526(L&C) OUT OF COMMITTEE *HOUSE BILL NO. 448 "An Act relating to eligibility for unemployment compensation benefits." - SCHEDULED BUT NOT HEARD (* First public hearing) PREVIOUS ACTION BILL: HB 510 SHORT TITLE: ENFORCEMNT COST SURCHARGE ON OCC LICENSES SPONSOR(S): REPRESENTATIVE(S) DAVIES, B.Davis JRN-DATE JRN-PG ACTION 02/12/96 2728 (H) READ THE FIRST TIME - REFERRAL(S) 02/12/96 2728 (H) L&C, STATE AFFAIRS, FINANCE 02/21/96 2847 (H) COSPONSOR(S): B.DAVIS 03/13/96 (H) L&C AT 3:00 PM CAPITOL 17 BILL: HB 524 SHORT TITLE: INSURANCE POOLING BY EMPLOYER ASS'N. SPONSOR(S): LABOR & COMMERCE BY REQUEST JRN-DATE JRN-PG ACTION 02/21/96 2834 (H) READ THE FIRST TIME - REFERRAL(S) 02/21/96 2834 (H) LABOR & COMMERCE, FINANCE 03/13/96 (H) L&C AT 3:00 PM CAPITOL 17 BILL: HB 526 SHORT TITLE: AIDEA OPERATIONS/PROJECTS/LOANS SPONSOR(S): LABOR & COMMERCE JRN-DATE JRN-PG ACTION 02/22/96 2854 (H) READ THE FIRST TIME - REFERRAL(S) 02/22/96 2855 (H) LABOR & COMMERCE, FINANCE 03/08/96 (H) L&C AT 3:00 PM CAPITOL 17 03/08/96 (H) MINUTE(L&C) 03/13/96 (H) L&C AT 3:00 PM CAPITOL 17 WITNESS REGISTER SHANNON MCCARTHY, Administrative Assistant to Representative John Davies Alaska State Legislature Capitol Building, Room 422 Juneau, Alaska 99801 Telephone: (907) 465-4457 POSITION STATEMENT: Gave sponsor statement for HB 510. CATHERINE REARDON, Director Central Office Division of Occupational Licensing Department of Commerce and Economic Development P.O. Box 110806 Juneau, Alaska 99811-0806 Telephone: (907) 465-2534 POSITION STATEMENT: Testified in support of HB 510. WILLIAM MENDENHALL 1907 Yankovich Road Fairbanks, Alaska 99701 Telephone: (907) 479-2786 POSITION STATEMENT: Testified against HB 510. GEORGE DOZIER, Committee Aid House Labor and Commerce Committee Alaska State Legislature Capital Building, Room 432 Telephone: (907) 465-6603 POSITION STATEMENT: Explained HB 524 and HB 526. MARIANNE BURKE, Director Division of Insurance Department of Commerce and Economic Development P.O. Box 110805 Juneau, Alaska 99811-0805 POSITION STATEMENT: Testified in opposition to HB 524. PAUL GROSSI, Director Division of Workers' Compensation Department of Labor P.O. Box 25512 Juneau, Alaska 99801-5512 Telephone: (907) 465-2790 POSITION STATEMENT: Testified on HB 524. ROBIN WARD Alaska State Home Builders' Association P.O. Box 91443 Anchorage, Alaska 99509 Telephone: (907) 345-1076 POSITION STATEMENT: Testified on HB 524. RON PRICE Interior Builders' Association State Alaska Home Builders' Association 520 Seventh Avenue Fairbanks, Alaska 99701 Telephone: (907) 455-6650 POSITION STATEMENT: Testified in support of HB 524. RILEY SNELL, Executive Director Alaska Industrial Development and Export Authority Department of Commerce and Economic Development 480 West Tudor Road Anchorage, Alaska 99503-6690 Telephone: (907) 269-300 POSITION STATEMENT: Testified on HB 526. ACTION NARRATIVE TAPE 96-21, SIDE A Number 001 The House Labor and Commerce Standing Committee was called to order by Chairman Pete Kott at 3:16 p.m. Members present at the call to order were Representatives Elton, Masek, Rokeberg and Kott. HB 510 - ENFORCEMNT COST SURCHARGE ON OCC LICENSES CHAIRMAN PETE KOTT announced the first order of business the committee would address would be HB 510, "An Act relating to occupational licensing fees and regulatory costs for occupational licensing functions; and providing for an effective date," sponsored by Representative Davies. Number 084 SHANNON MCCARTHY, Administrative Assistant to Representative John Davies, Alaska State Legislature, explained Representative Davies introduced the bill after hearing testimony from the Department of Commerce and Economic Development in their budget overview. She explained the Division of Occupational Licensing is required to charge each occupation with the actual cost of regulating that profession. The difficulty comes when there are legal and enforcement costs when a professional operates outside of professional standards. That becomes a problem and then the next year, when those legal costs are then charged to the professionals, it can cause wild fluctuations of licensing fees. Ms. McCarthy said there is a particular concern with midwives. There are only 18 midwives and if they have to discipline a member of their own, they are charged those fees the next year. In some cases it is pricing people out of business. MS. MCCARTHY explained each occupation has these fluctuations. It is not just that one consistently has legal costs. They fluctuate up and down. Another concern Representative Davies has is that professionals may be reluctant to turn in another professional because of the increase in fees the next year. She explained the bill prorates all enforcement costs over all licenses with the exception of business licenses. It will stabilize fees from year to year so professionals can rely on what they will have to pay each year. CATHERINE REARDON, Director, Central Office, Division of Occupational Licensing, Department of Commerce and Economic Development, testified in support of HB 510. She said there are difficulties with the way the cost allocations are currently working. The entire division operates off of license fees - general fund program receipts. The statute requires the division to charge each occupation so that it will cover all of its regulatory costs and those regulatory costs include investigations, legal fees, hearing fees and court costs as well as the regulator licensing activities. She explained they have been having trouble as enforcement costs are unpredictable, particularly in the smaller board areas. If there under 300 licensees, one year there will be a very expensive disciplinary case that can cost $20,000 to $50,000, and then it will be five years before you'll have another one. It puts the division in a situation of having to raise the fees to a level that the board area will generate $50,000 extra every year but only need it one out of five years, or else put their license fees at a level where they never budget for that expensive disciplinary case in which they under-collect. She handed out information that gave the committee an example in relation to Psychologists. The amount of money the division was spending on psychology ran around $40,000 for three of the fiscal years and then in fiscal year 94, it was $82,000. That increase was the result of one very expensive case. Ms. Reardon said HB 510 would allow her to spread enforcement costs, per capita, amongst all 33,000 licensees. Therefore, it would be predictable as to how much should be included in the fee. She said fees from profession to profession would be more similar. MS. REARDON referred to the larger licensing areas where they have 3,000 or 4,000 licensees, you don't see the fluctuations so much because there is a big enough group that you get 20 or 30 complaints every year. It averages out. In the smaller areas, it has been causing problems. Ms. Reardon said another thing she has seen is the reluctance to discipline. In the case of the Psychology Board, there was a license denial of someone who had serious problems in another state. The division investigated this person and then denied the license. The person challenged it and it went to a hearing. The person continued to repeatedly challenge the denial of the license. Ms. Reardon said she was told by the Psychology Board when she increased their fees to $700 for two years that if they had known it would have cost as much as it did, they wouldn't have denied the license. She said that is a realistic thing for them to be thinking about, but it is not necessarily a good thing for people to be thinking about as decisions are made about whether they should protect public health and safety. Number 560 CHAIRMAN KOTT questioned how many licenses are currently issued by the department. MS. REARDON said there are approximately 34,000. She noted half of them renew each year. The licenses are all two year licenses. CHAIRMAN KOTT asked Ms. Reardon if she has numbers regarding one end of the spectrum to the other as far as what is currently being paid. MS. REARDON gave the committee members a booklet which lists every fee the division charges. She said there are 34 licensing areas which are either boards like the medical board or groupings of licensees where there isn't a board. She continued to discuss the information she gave the committee in relation to architects, engineers and land surveyors to midwives. Number 705 CHAIRMAN KOTT inquired if the bill would have been in law, what the average board fee would have been. MS. REARDON referred to fiscal year 95 and said they believe it would be between $35 and $40 per licensee, per year. It would cost $80 for a biannual license. She noted all of the licenses already include some enforcement costs. It wouldn't be an addition $80 on all of them. Some of the costs would go down and some would go up. She indicated the fees that would go up would be the ones in the large board areas like engineers where there are 5,000 licensees. She said she would expect them to go up in minor amounts, yet per capita. The ones that would go down, in general, would be in the areas where there fewer than 250 licensees. CHAIRMAN KOTT noted Representatives Porter, Sanders and Kubina were in attendance. Number 797 REPRESENTATIVE GENE KUBINA questioned why there is a two year time period. MS. REARDON explained that in their statute they currently have biannual licenses. That was a move from one year licenses. It was motivated to try and hold down administrative costs. She said it would take a change in the law and two isn't necessarily a magic number. She said you wouldn't want to have it too high because renewal where they prove continuing education. Ms. Reardon said maybe increasing the length of some of the licenses would be a good way to go. Number 915 REPRESENTATIVE NORMAN ROKEBERG asked Ms. Reardon if she has discussed the concept of the bill with any of the licensee registrants. MS. REARDON said she spoke with three boards, but have not notified all of the boards. She said she believes she would get a slightly mixed response because there will be some people whose fees will be going up a little bit. MS. REARDON clarified between $35 and $40 per licensee per year would be spent on enforcement activities. So a two year license would be approximately $70 or $80. CHAIRMAN KOTT questioned if the maximum increase would be $70. MS. REARDON said if it were possible that there was an area where no investigative or legal resources were being expended, then they would see that entire increase. However, in every board area there are some legal and enforcement costs are already built into their budget. Number 1063 REPRESENTATIVE KIM ELTON asked Ms. Reardon how she will determine the base from which she will do the increment for the different licensees. MS. REARDON explained that enforcement costs are directly tracked costs. She said they can actually tell how much money was spent on legal fees within the contractual services line item for psychologists in fiscal year 95. She indicated when she came to project what their costs will be for the next two years, she would back out all those costs and say it's going to $80 per person. REPRESENTATIVE ELTON referred to midwives and said for fiscal year 93 the fee was $350 and in fiscal year 95 it was $850. He asked Ms. Reardon how she determines the base for midwives. MS. REARDON said she really wouldn't determine a base. She said what she would do is every two years before they renew, she would go through the process of projecting what their costs are going to be for the next two years. She would look at the two most recent fiscal years, fiscal years 95-96, and then back out the investigative costs and that would be the base. REPRESENTATIVE ELTON referred to determining the enforcement costs of the pool, the pool is all the licensees, and said they would periodically assess the costs, then prorate those costs to each of the different licensees. MS. REARDON indicated she would say $1.2 million a year. She said she would divide it out by the $33,000 or $34,000 per person. Number 1223 REPRESENTATIVE ROKEBERG said there are 22,088 nurse aids paying $55 biennium and there is 90 marine pilots paying $3,200. He questioned what the math is. MS. REARDON explained two things are going on with the marine pilots. One is there are 80 marine pilots and some agents. There are under 100 of them. She explained they have a marine pilot coordinator, a range 20 position, because you're basically regulating an industry. It has been determined through the budget and statute that they need a coordinator. They have higher personal services costs. Most of the other boards run off a range 12 licensing examiner and that is part of the difference. Ms. Reardon explained the other is that marine pilots have extremely high legal costs because every time a boat hits the rocks, the hearing, court and the appeal goes on because of the millions of dollars that are at stake over the result. REPRESENTATIVE ROKEBERG asked what the difference in cost be for the marine pilots and nurse aids. MS. REARDON explained the marine pilot's fees would go down to around $900. She indicated the last time the division looked at marine pilot license fees two years ago, $800 of their $3,200 for their staff and licensing functions. She noted those figures were off the top of her head. Ms. Reardon said it is possible that the marine pilots being such an unusual situation, it might need to be dealt with. They are a very unusual case within the division because of the very large legal costs they incur. MS. REARDON referred to nurse aids and said most of their money comes in a RSA from HESS. It is a federal program. REPRESENTATIVE ROKEBERG reiterated the same question only with nurses. MS. REARDON indicated she doesn't know the answer because she isn't sure how much of that is currently enforcement. She noted she is currently reviewing their fees and is proposing to reduce them. Number 1510 REPRESENTATIVE KUBINA referred to barbers or hairdressers and said their fee would probably go up because it is currently low. By their fee increase, they would sort of be subsidizing the marine pilots. MS. REARDON said there is obviously a policy issue. She noted because marine pilots earn a lot of money, they are in the least sympathetic situation. She said maybe they should be dealt with separately from everyone else. The policy issue is everyone paying for themselves. That seems fair, but the downside of everyone paying their own costs is the fluctuations and professions boomeranging every two years, and some of them depending on how they're hit by a once every couple of years expensive case. She said the other argument is their fee would be covering the cost of having an investigative unit there for when they need it. It is an issue where there are two ways of looking at it and charging fees for services is never fun. REPRESENTATIVE ELTON said this isn't an unusual concept because that is how the division allocates the administrative costs that have to be paid to the commissioner of Administration. Everybody is kind of assessed the same amount to pay for administrative overhead that they get from the Division of Administration, Department of Commerce. MS. REARDON explained they have what is called administrative indirect costs. She referred to her salary and said she may be spending a whole lot more time on guide licensing this year, but she doesn't actually bill her salary hourly depending on which program she worked on. Ms. Reardon said she is a "per capita spread Admin indirect cost." She said the same is for the receptionists, the budget person, the bookkeepers, because there comes a point when it isn't worth the cost of people tracking on their time sheets that closely for some of those positions. She said they do have an addition of per capita spread of some costs and others they try to directly allocate such as licensing examiners and travel, etc. Number 1532 CHAIRMAN KOTT said in reviewing the information Ms. Reardon distributed, it seems some of the professions he would call wealthier professions could probably absorb a greater amount of the enforcement dollars whereas barbers, hairdressers and some of the professions on the other end which are what he wouldn't say "wealthy professions" would then be penalized and their enforcement dollars would be increased to cover the more wealthier professions. MS. REARDON said, "I think it actually breaks a little bit, less predictably than that. For example, engineers and architects - fairly highly compensated probably. They're a big board area, 5,000 licensees, they would probably see an increase as a result of this. So I think the effect would depend on how many licensees you have more than anything." Number 1590 REPRESENTATIVE KUBINA questioned whether it would be fair to go back and do a ten year average. That way they'd be hitting the people that are costing more. MS. REARDON said the difficulty is that the division needs to get money appropriated every year and they have to spend it every year. She said there would be a designated fund if they just kept all the money. Even though they could set the fee by averaging over ten years, that won't necessarily generate enough money to carry out her functions the next year unless all fees were going into a pot of money that always did go forward. Ms. Reardon also pointed out that accounting systems change. She said fiscal year 93 was when the division needed to be self sufficient. Before that they were receiving general funds for enforcement. That then increased the costs that needed to be spread. In fiscal year 94 and 95, they started accounting for things on time sheets. Before then they were just predicting what percentage of time you think you spend on what and the bigger board areas were subsidizing the little ones that way. They then went to time sheets. So, they've been getting more and more specific but it means that a cost in fiscal year 96 is not necessarily determined the same way that it would have been in fiscal year 91. Number 1702 WILLIAM MENDENHALL was next to testify via teleconference from Fairbanks. He noted he is a member of the Board of Architects, Engineers and Land Surveyors but isn't testifying on their behalf. He said that board is one of the larger boards with approximately 5,000 people. As indicated, their fees are going to go up again. He said it is awfully easy to say, "Oh, lets just divide everything by the number of people involved regardless of whether we have enforcement costs that goes to that board." Mr. Mendenhall said if the licenses go up $70 per biennium, this is one of the reasons why the board has asked for legislation to make this semi-autonomous. He said they would like to get out from the Division of Occupational Licensing. He said whoever suggested there be a ten year averaging to find out what the actual costs and assign those to the boards is a good idea. Mr. Mendenhall said if somebody hits a rock, why should everyone else pay. He said he is testify against HB 510 and would suggest some kind of ten year averaging to try to determine a reasonable cost for the enforcement process. He thanked the committee for listening to him. Number 1811 There being no further testimony on HB 510, CHAIRMAN KOTT closed public testimony. He said it is not his intent to move the bill. He referred to some of the ideas suggested such as carving out an exemption, removing some of the high-end cost occupations from the bill and looking at a longer average perspective and said some of those ideas may be in order. Chairman Kott said the bill would be held over in order to work with the department to reach a conclusion. HB 524 - INSURANCE POOLING BY EMPLOYER ASS'N. Number 1856 CHAIRMAN KOTT announced the next order of business would be HB 524, "An Act relating to insurance pooling." GEORGE DOZIER, Committee Aid, House Labor and Commerce Committee, explained HB 524 would permit employer associations to form joint insurance arrangements (JIA). The purpose of the JIAs is to permit a greater number of individuals to collectively assume risk and/or to purchase group coverage. Mr. Dozier explained the bill defines an "employer association" as consisting of at least five employers who are in the same or similar business. Each employer association would have to be in existence at least five years. Pursuant to the bill, any type of insurance could be purchased except for four types. Those are disability, health, life and title insurance. If a JIA is formed, it would not be subject to regulation under Title 21, but the JIA would have to file an annual report with Legislative Audit. Number 1930 MARIANNE BURKE, Director, Division of Insurance, Department of Commerce and Economic Development, was next to testify on HB 524. She indicated the division is against the bill and their concern is one of solvency. The division, by statute, is precluded from oversight of the JIAs. They have no way of assuring that they have adequate reserves and surplus to meet their claims as they come due, and that their claimants are treated in a fair, nondiscriminatory way and that if their claimants have problems, the division doesn't have a statutory authority to assist them in resolving these problems. MS. BURKE said the solvency issue is their primary concern. She said the one JIA currently in the state has not ran into any problems with solvency. She believes this is due to a combination of good management and good luck. They have not reached a situation where they have had to make assessments against their members to cover catastrophic occurrences. However, if they do reach that situation, they all have a taxing base; they can raise additional monies. An unidentified speaker questioned who "they" is. MS. BURKE answered municipalities, governmental entities. She said they can raise additional funds. She referred to the group that is considered in the bill and said if they ran into a catastrophic situation where they had claims that were in excess of whatever reserves they had set aside, assuming they had set aside reserves, they could easily face an assessment that would exceed their available assets. In that case there would be no money to pay the (indisc.) and there is no safety net because they are not protected by guarantee funds. There have some been some very notable successes with JIAs, again it was because of a combination of really good management and good fortune. On the other side of the coin, there have been some very notable disasters. Ms. Burke said in preparation for her testimony, the division did query other states to see what their experience has been. There was one that was a group of small businesses. They consisted of the "mom and pop" type business that joined into a JIA arrangement in Florida in January, 1991. By May, 1995, they had a $4 million deficit. There was legislation enacted in Florida to give their department the authority to oversee them and to insist on solvency. Currently, their deficit is at $20 million and growing. On the other extreme, there is a hospital association that also joined together to form a JIA. They have been taken over by the Department of Insurance in Florida because they are insolvent. The only way the department has of trying to assist them in raising money to pay the legitimate claims of these people who are relying on this association is to consider assessing every hospital in the state for a pro rata share. Ms. Burke said the feedback they've gotten is that's not very popular down there. MS. BURKE pointed out insurance companies can become insolvent and that happens, but at least we minimize that risk by insisting that they have adequate reserves, that they adhere to a set of statutes as far as nondiscrimination is concerned, as far as claims handling, and that they all play by the rules. If they still go under, there is the guarantee association, whereby all the remaining insurance companies have to put money in to make good on the claims of the insurance company that failed. A JIA doesn't have that type of protection. She said that is a concern to the Department, as its primary mission is to protect the insurance consumers in the state of Alaska. A JIA arrangement is totally outside of the Department's ability to assist them or have any oversight. Number 2166 REPRESENTATIVE ELTON referred to the experiences in Florida and said he is curious as to why there is a zero fiscal note. MS. BURKE said the effect on the state of Alaska would be zero. She said they would have no regulatory authority. REPRESENTATIVE ELTON referred to Alaska Troller's Association, Alaska Forest Products Association, Pacific Seafood Processors Association, Alaska Miners Association and asked if those groups would be eligible to form a JIA if the bill were to become law. MS. BURKE said if it is an employer group as defined in the bill, they would be eligible. Number 2209 REPRESENTATIVE ELTON said those associations have different businesses that have been members of the associations for a long time. He said he would think that if "employer association" were defined to mean "An unincorporated association that had been in existence for at least five years and that consists of at least five employers who are engaged in the same or similar types of trade, business or profession." He said he is a little bit bothered because he is not sure that any of the groups should be involved in a JIA and yet it seems they would qualify under the definition in the bill. MS. BURKE said she is most concerned of any group forming a JIA that does not have any statutory requirements to have proper reserves. She noted that in Title 21 there are provisions for reciprocal arrangements and joint purchasing, but they're all tied to having adequate solvencies that is available to move the claims. Not all groups have to have what we think of as traditional insurance. In fact even in the worker's compensation statutes, if you have adequate collateral, security and assets it is her understanding that you could self-insure worker's comp, for example. But it is regulated. Number 2313 REPRESENTATIVE BRIAN PORTER said it is his understanding that insurance rates have a fee that goes to the state. MS. BURKE said there is a premium tax. All the property casualty insurance companies pay 2.7 percent of the premium in the form of a premium tax. Title insurance, for example, is 1 percent. They do vary, but all insurers that do business in the state of Alaska pay totally into the general fund. REPRESENTATIVE PORTER said this is general state revenue. He said if a number of these people pooled up and formed a JIA, wouldn't that fee revenue decrease. MS. BURKE said if the department had some way of knowing who they are going to be and what their insurance needs are that would no longer be covered. It could be done if she knew who was planning to be a part of the JIA and what their current premium base is. Number 2351 REPRESENTATIVE ROKEBERG questioned what worker's compensation insurers pay. MS. BURKE said they pay 2.7 percent. REPRESENTATIVE ROKEBERG asked who the one JIA is. MS. BURKE said the Municipal League. Number 2383 PAUL GROSSI, Director, Division of Workers' Compensation, Department of Labor, was next to address HB 524. He told the committee Ms. Burke has said many of the things he wanted to say. Basically the department is concerned about the Workers' Compensation aspect and the association's ability to pay their obligations under the Workers' Compensation Act. Currently, employers either purchase a workers' compensation insurance policy or they self insure. They purchase a workers' compensation policy and Ms. Burke's division regulates those people or they come to his division and certify to self-insure. The Division of Workers' Compensation regulates them directly. Mr. Grossi said a JIA is neither one of those things. There would be no regulatory authority over them for the workers' compensation coverage. He said they would still be required to pay according to the act but the department doesn't have any way of knowing whether they will have an ability to do that and if something happens, there is no safety net to cover these. Mr. Grossi said there is no requirement that there be funds to start out and there is no security deposit required. There is no requirement even to have joint and several liability. If something happens to an individual employer, what happens in that event? Mr. Grossi said there are a number of things the department is worried about, but primarily injured workers not being compensated. Number 2455 REPRESENTATIVE ROKEBERG asked what the regulatory or statutory requirements are to become certified self-insured. MR. GROSSI said it requires the company to show a certain amount of assets and they may be required to have a security deposit of $250,000 or $300,000. He noted he isn't sure of the exact number. There are a number of requirements to show they have the capacity to pay the claims. TAPE 96-21, SIDE B Number 001 MR. GROSSI said, "...the one - the big thing, in fact, is this would be a problem under this current legislation, they have to basically show us their financial statements so that we know that they're solvent and they have to do that yearly. Under this, we would have no way of looking at the individual employers to look at their financial statement to see what their abilities are to pay these things and what kind of assets they have." MR. GROSSI said there is a requirement for a yearly audit, which he believes the JIAs have, but that wouldn't tell him what the individual employers ability is to pay and what assets they have. Number 051 ROBIN WARD, Alaska State Home Builders' Association, was next to testify via teleconference from Anchorage. Ms. Ward read a position statement into the record: "The Alaska State Home Builders' Association is supporting a change in the insurance laws of Alaska. Alaska has the second highest workers' comp rate in the United States for home builders. The result of a study performed by the National Association of Home Builders' Economic Mortgage Finance and Housing Division revealed that the workers' comp cost to a new home in Alaska, usually calculated in dollars per $100 in wages, was a whopping $6,312. That's based on sub-suppliers and the general contractors work comp fees through the entire house building. With the national average cost being approximately $4,321, Alaska has the distinction of having rates 40 percent higher in the nation, second only to Hawaii. "The State Home Builders' Association is proposing a change in the insurance law that would allow employer associations to form a self insured fund. This allows a preselected, and I do want to reiterate a preselected group of employers to pool their money to pay workers' compensation claims. In almost all cases, the fund would be managed (indisc.--coughing) association called the third party administrator. These firms bill the premiums, pay the claims, audit the plan, underwrite clients, service risk managers, select a reinsurance company and assist the agents in marketing the insurance. The advantage is in forming groups such (indisc.-- coughing) are potential for significant work comp premium savings, more direct control over the insurance costs, a higher degree of control over claims (indisc.--coughing), self audits can be done without negative repercussions and most of the (indisc.) self insured fund can be more readily adapted to suit the needs of the association. We're hoping by some changes that we can have more control over managing our claims. We feel that we could do a better job of getting our people back to work in a short amount of time with less claims." MS. WARD indicated she has visited with the Department of Labor and it was her understanding they would oversee this. She said her organization is looking at doing substantial reserves along with reinsurance for major claims. Number 155 REPRESENTATIVE PORTER said, "Robin, your statement in conclusion there that you thought that the Department of Labor would oversee it was kind of the basis for the question that I was going to ask regarding putting a pencil, I guess, to what you would expect if there was kind of a hybrid of what this bill is which would be the ability to pool, but the ability also of the department to set reasonable criteria for available assets, and it sounds like the kinds of things that you're talking about. MS. WARD said absolutely. She indicated they have no problem. Ms. Ward said her organization assumed they would either be under the preview of the Department of Labor or under the Division of Insurance. Most builders are fiscally conservative and there is no problem following the same rules that the work comp companies do today. Ms. Ward said referred to the committee substitute and said she doesn't believe that the word "unincorporated" should be included. Most of their nonprofit associations and trade associations are incorporated nonprofits. Number 289 RON PRICE, Interior Builders' Association, State Alaska Home Builders' Association, testified via teleconference from Fairbanks in support of HB 524. He said they want to control their own destiny. Mr. Price pointed out that North Carolina has been a model state. In their years of existence, they've had $27 million worth of savings. He said he believes there is $95 million in reserves. Mr. Price said, "Granted, they are a much larger membership than we are, and that was a concern of ours, but they help us to identify with the state of New Mexico that just recently enacted self insurance for themselves." MR. PRICE referred to the question about having a catastrophe early on without any reserves is taken care of by the reinsurance out there. North Carolina, in its first year of having this program, got a major claim. A person fell off of a scaffold and was in a coma for five years. Their responsibility was $125,000 which was taken care of by reinsurance. That was a premium paid on insurance. Mr. Price said his organizations are very concerned about the (indisc.) numbers and the membership that is available. There are 13 or 14 other states that have had it in existence. He said his organizations are industry based and includes not only builders, but suppliers, architects, appraisers, etc. Mr. Price said half the risk among those different professions is to allow them to realize some savings. By being a member of his association does not automatically qualify a person for their workmans' comp program. He said they will be selective on that. MR. PRICE explained they will also, in controlling their own destiny, initiate safety programs. The other states have found claim reductions are down by 50 percent by pursuing the safety programs actively. Mr. Price said again, the program would be handled by a third party administrator and can meet any standards that the state wants to put out there. He stated strong support for the bill. Number 412 MS. BURKE came back before the committee. She said a number of things have been brought up and she would like to address the workers' comp premiums. She explained those are by industry and are industry specific, based on costs incurred. In other words, if you are in a state that has higher wages, higher costs of rehabilitation, higher costs of training and the whole series of costs incurred, your premiums will be higher. They're based on severity and frequency. So if you are in an industry that has high frequency, lots of small claims, it will force up the premiums. If you you're in an industry that has a few very severe claims, it will force up premiums. Ms. Burke pointed out reinsurance might help in a situation where there were a few large dollar claims, but if you are in an industry that has a lot of smaller claims, claims below this umbrella, you're absorbing all those costs. MS. BURKE referred to the issue of safety programs and said that is a good issue. It is a very direct way that any industry can reduce their cost of workers' comp. She noted it has happened in the state of Alaska. Those industries that have put in safety programs benefit from them, because again, what is applied to your premium is an experience factor. If you don't have a lot of claims, you have a reduction in you premiums. MS. BURKE referred to discussion on whether or not it would be regulated and explained that JIAs, by statute, are outside the Division of Insurance's ability to regulate. If the bill did pass, there would be an additional need for legislation to provide for whatever regulation or oversight would be proposed. Number 525 CHAIRMAN KOTT questioned whether the department has any authority over Title 21. MS. BURKE said none whatsoever with JIAs. She pointed out it specifically says not regulated by the department. Number 637 REPRESENTATIVE JERRY SANDERS questioned whether there are any changes the legislature could make that would give the department authority over the JIAs. MS. BURKE said yes but then they would be subject to all the solvency requirements that they are asking to not be subject to. She pointed out the legislature could enact legislation that would spell out different criteria for their solvency requirements. Ms. Burke said her only authority is that she receives a copy of their report. She can't do anything with it, but she receives it. CHAIRMAN KOTT asked if she would receive the report directly or if it is through Legislative Budget and Audit. MS. BURKE pointed out the statute says they will provide her a copy. She said the legislature is responsible for the oversight of the JIAs. Number 588 REPRESENTATIVE ELTON said he has always assumed the size of the pool helps reduce the rates because the more you spread the risk, the better off you are. He said in one case, the committee heard from a statewide organization of homebuilders and in the second case, the committee heard from a person who was a member of the statewide organization but is also a member of the Interior Builders' Association. The way HB 524 is drafted, both of those organizations would probably qualify for establishing a JIA. He said it would seem to him that the Interior Builders' Association would be a higher risk JIA because they have a smaller number of members in the state group. He asked if that was a valid assumption. MS. BURKE said he is getting to the heart of insurance. The whole principle behind insurance is spreading the risk over a large basis, but in a JIA, without solvency requirements you could have five very profitable solvent companies that have lots of assets that would have the ability to meet their obligations to pay claims. You could have a very large group that by the simple nature of the (indisc.) that they have profitable, marginal, not so marginal members that they would not be able to meet their obligations because the assessment would be spread out among all the members. Without the joint and several liability, you would not necessarily have sufficient money from the more profitable ones. REPRESENTATIVE ELTON referred to how and employer association is defined in the bill and said it would seem that the requirement is that the employer association have at least five employers but there is no assumption that all five employers have to participate in the JIA. They could have two employers that participate. Number 711 REPRESENTATIVE PORTER said if it had joint and several liability, then if the JIA that had five businesses in it had a claim against it, the joint association would be liable or any individual member could be sued to the extent of their assets also. MS. BURKE said that is correct. REPRESENTATIVE PORTER questioned why anybody would want to sign into an association like that. MS. BURKE said there is a very sincere belief that they're not going to have large claims and that they can manage their claims and their claims would be less than what they'd pay in premiums. She said that may be true for several years. We've all paid fire insurance on our house, but she doubts if there are many people in the room that have had to collect. REPRESENTATIVE PORTER said if he has an insurance policy with State Farm and his neighbor has a State Farm policy, he doesn't want to have to pay more because somebody sues him. MS. BURKE explained under an insurance contract, you're pooling the total losses and sharing them among all of the people on a more less pro rata basis. It is not joint and several liability. She pointed out JIAs normally assess all their members equal, however if there is joint and several liability that is incorporated into their contract or the instrument that brings them together, then it could go to those people who have the dollars to make good on the claims. Ms. Burke said she is talking about a situation where you might have several builders that are financially well off and can meet these claims, but others are not. Number 848 REPRESENTATIVE ELTON referred to the definition on line 12 and said by that definition what you're doing is excluding those groups that are incorporated because in the bill an employer association means an unincorporated association. So an incorporated association would be excluded under that definition. He noted it is a small technical thing the committee might want to address. Number 891 CHAIRMAN KOTT stated it is not his intent to move HB 524. It is his intent work with the department to see if there is any way to move toward a happy medium and agree on some of the concepts. He said the bill would be held. HB 526 - AIDEA OPERATIONS/PROJECTS/LOANS Number 931 CHAIRMAN KOTT announced the next order of business would be HB 526, "An Act relating to the financing authority, programs, operations, and projects of the Alaska Industrial Development and Export Authority; providing an exemption from the procurement code for certain projects of the authority; and providing for an effective date." GEORGE DOZIER, Committee Aid, House Labor and Commerce Committee, explained HB 526 makes a number of technical changes. Sections 2 through 4 of the bill changes the phrase "loan financed" to "loan participation purchased." The purpose of this is to make it clear that AIDEA, in the Loan Participation Program, purchases part of the loans rather than actually financing the loans. Mr. Dozier explained the bill eliminates the business assistance fund. Under current law, part of AIDEA is the business assistance fund which is used to backup loan guarantees under the Business Assistance Program. By the elimination of the business assistance fund, that would make the entire corpus available to backup business assistance guarantees. MR. DOZIER explained Section 8 increases the amount of a loan guarantee that AIDEA may make in its Business Assistance Program from $75,000 to $100,000 without collateral. Under existing law, a guarantee could be made for a loan that is not collateralized up to the amount of $75,000 provided that the loan is amortized over a period of five years or less. With this change, that amount would increase to $100,000. He explained there was another change made in Section 8. Under current law, the proceeds of a loan that has been guaranteed, under this program, must go to a business that is majority owned by Alaskans. Under the bill in Section 8, the change would be that the proceeds would only need to go to a business that benefits or is conducted in Alaska. The ownership of the business would be irrelevant. Mr. Dozier pointed out another change made in Section 8 is that under current law, AIDEA is not permitted to guarantee the interest of loans that are made by these financial institutions to third parties. With this change interest could be guaranteed. Number 1095 MR. DOZIER explained Section 15 is related to Section 8 in that it makes it clear that a previous provision of the law is repealed. The current provision is that individuals who hold debt instruments that are subject to the Loan Guarantee Program or that had been guaranteed by AIDEA, have no recourse to the assets of AIDEA beyond those assets which are designated to be in the loan assistance fund. Since the fund is repealed, there is no longer a need for this section and it no longer makes sense. MR. DOZIER informed the committee Section 16 repeals a couple of previous legislative authorizations for bonding projects. He noted one would be the bond project for the fueling facility at the Anchorage International Airport which was in the amount of $40 million. That is no longer needed as the airlines self-financed that. Another legislative authorization was for the midrix project at Point McKenzie in the amount of $50 million. That project is no longer intended to be at Point McKenzie so it is no longer necessary to have these appropriations as part of the statutes. Mr. Dozier explained another important provision in Section 16 is a repealer of the sunset provision that applies to the Business Assistance Program. That entire program will sunset in July of this year. MR. DOZIER referred to Section 17 and said it authorizes AIDEA to issue bonds for the Delong Mountain project which services the Red Dog Mine. That would be in the amount of $60 million. MR. DOZIER said Section 18 addresses the Snettisham hydroelectric project. That would be an authorization for bonding in the amount of $100 million. MR. DOZIER explained Section 19 gives an immediate effective date. Number 1243 RILEY SNELL, Executive Director, Alaska Industrial Development and Export Authority (AIDEA), Department of Commerce and Economic Development, was next to address HB 526. He pointed out HB 526 is very similar to HB 425, introduced by the Governor. Probably the only principle difference has to do with the absence in HB 526 of including the renewed authority to issue bonds. He said AIDEA feels that is a very important provision which needs to be added to the legislation. He said he would work with the committee to explain what the absence of that provision does to their ability to assist customers throughout the businesses in Alaska. Without that addition, there are several project financings that they would be unable to respond to. Mr. Snell said currently, they are waiting for the renewal of these powers in order to be able to assist the AMX Company in Fairbanks to do a conduit of financing for their mine. There is a provision of that project that could be done as tax exempt. He explained the Authority would act as an issuer being able to use their powers, if they were renewed, in order to obtain a lower cost financing for those items that would be eligible. MR. RILEY explained there are additional projects that are awaiting the authority to regain its powers to issue those types of bonds. One includes the Kenzington mining project and they're currently having discussions with others. In addition to being able to do what they call the conduit type financings there is also, with the absence of the renewal of these powers, the inability to participate in the ability to issue bonds for loans under the loan participation program of the Authority. The most recent project where they were able to use those powers was in the Kodiak fish mill project which included a fish mill project that was under a compliance order to clean up its operations. Many of the facets of that project were eligible for tax exempt financing and AIDEA was able to use its power to bring a lower cost of financing into that project that allowed them to have a more affordable overall total cost financing. Mr. Riley said with the one absence of that provision, which was Section 2 in HB 425, AIDEA finds that this bill satisfies the recommended changes that board of directors were recommending be taken up. Mr. Riley said he would be happy to review the specifics of the projects or provisions if the Chairman wishes. Number 1416 REPRESENTATIVE KOTT asked Mr. Riley to explain what the ramifications would be if this bill, or a similar bill, were not to pass this session. MR. RILEY said he thinks there would be a very definite impact on the business communities of the state of Alaska. As most of the business people in attendance knows, you can hardly find a bank doing business in the state of Alaska who will participate in a loan that will exceed ten years in terms. That is partly because of the FDIC regulations on how they now make banks account for their participation in lending practices. In the absence of the banks being able to do that because of closer regulations from the FDIC, these types of longer amortization schedules have fallen to the markets of pension funds, insurance companies and those types of people who have traditionally been involved in commercial real estate. As a result of a downturn in the state's economy in the mid 1980s, most of these types of lenders have fled the state. He said AIDEA represents probably the only long term lender of capital of this nature. With the way their programs work, by the bank's participation remaining at a ten year term, AIDEA will take a longer term amortization which allows the businesses in the state to actually structure financing that is affordable. Absence that type of capital market, there could be distress as to the capital gap to do certain types of commercial lending in the state. Number 1516 REPRESENTATIVE ELTON asked Mr. Snell to explain what the impact of the passage of the bill would be without the bonding provisions. MR. SNELL said he believes the answer would be very similar. With no legislation, the biggest impact would be on their inability to use their bonding powers to assist businesses in the state. Mr. Snell said if the bill were to pass without that bond, they could do certain types of lending out of their cash equity, but they would still be prohibited from probably using the lowest possible financing costs or features for certain types of projects for businesses in the state. Number 1562 REPRESENTATIVE ELTON asked the committee if it is protocol not to replicate an existing bill. He asked if there is any reason that the bonding provisions are not in HB 526. CHAIRMAN KOTT stated there are no reasons to substantiate why they are not included. He said it was basically left up to the committee to determine whether or not these particular bonding requirements should be inclusive within the bill. Chairman Kott said if it is the will of the committee to insert those further recommendations of AIDEA, he wouldn't have any heartburn. Number 1617 REPRESENTATIVE PORTER asked Mr. Snell if the sunset is the problem with the bonding in general. MR. SNELL said that is correct. He said there was a provision that was in the previous legislation of the authority that had a sunset provision. As a result of that sunset provision, which became effective on July 1, 1995, AIDEA has lost its ability to issue bonds. That is something that has been traditional. These powers have been passed through to the Authority in previous years, but there has always been a sunset provision that requires them to come before the body to get these powers renewed. Number 1673 REPRESENTATIVE PORTER asked if there was an attempt last year to extend or do away with the sunset. MR. SNELL indicated the answer is no. He said, "We did an inventory of our customers, understanding just exactly what likely was the deal flow where we would have to have the bonding (indisc.) renewed, and based upon the newness of the Administration and the fact that were told that none of our current customers that we were aware of had those projects that would be coming forth, we felt we could deal with it in this session. And as where we set today, as long as this body takes the action, then we still have all the customers in a position to where we could use these powers. Number 1724 REPRESENTATIVE ELTON offered an amendment to HB 526 that reinserts Section 2 from HB 425. It would be lines 9 through 12 on the handout the committee had just received. He said to insert that as a new Section 2 in HB 526 and then renumber the subsequent sections. CHAIRMAN KOTT said the amendment basically inserts Section 2 of the Governor's bill, HB 425. He said they would be granting AIDEA the ability to bond for projects less than $10 million without legislative approval. Number 1807 MR. SNELL pointed out that those are powers that were previously in law. CHAIRMAN KOTT asked Mr. DOZIER to come back before the committee. He said there is an opinion by counsel regarding this particular section. He then objected to the proposed amendment for the purpose of discussion. Number 1891 MR. DOZIER explained that the opinion was that the way Section of HB 425 currently reads is that there is a grant of the ability to issue bonds up the amount of $10 million without legislative oversight. A limitation on the ability to grant bonds in excess of $10 million, without legislative oversight, when the bonds are issued to assist in the financing and development projects under 44.88.172 through 177. The negative implication would be that the limitation or the requirement of legislative oversight may not apply or arguably might not apply if the intent is to issue bonds in the amount of $10 million or over for purposes not related to development projects under Sections 172 through 177. He indicated counsel has suggested that the committee should delete the language, "To assist in the financing of a development project under 44.88.172 through 44.88.177." He said it would simply read starting on line 11, "Amount greater than $10 million." REPRESENTATIVE PORTER said, "Wouldn't that generally return to where it was in the first place?" Number 1049 MR. SNELL said he thinks there is some difficulty with that language. The first concern is there are several types of programs and bonding powers within the Authority. There is a development finance program which are for the larger projects like Red Dog, Snettisham, Skagway ore terminal, Unalaska port, those types of projects that they have engaged in under what is traditionally called the "Own and Operates Projects Program." Then there are the loan participation programs where a bank will originate a loan, bring it to the Authority for their participation. He pointed out AIDEA is capped in another portion of their statues to a limit not to exceed $10 million in any participation by a bank loan. Mr. Snell said AIDEA already has the additional safeguards. He said they are ready prevented in any single loan participation of participating on their part up to anything greater than $10 million. Mr. Snell said, "Where I believe that language would run afoul of some projects that we offer assistance to businesses in the state is in what is called conduit of financing or revenue financing where the Authority's credit is not involved. It is strictly the credit of the businesses and we are just acting in the capacity of an issuer. Those would be the case in Fort Knox where there is $30 million of eligible qualifying costs under the Internal Revenue Service tax code that we can issue that do not affect, in any way, shape or form, the finances or the credit of the Authority. I believe, just listening to the language that was read, that could preclude us from acting as an issuer on behalf of businesses in the state for those types of projects without legislative approval. And these deals -- this deal flow usually come through to where the legislative body may not be in session or it could be awkward in bringing this in a bill form through that process would be my only thought at this time." Number 2205 REPRESENTATIVE PORTER said with Mr. Snell's explanation, he would presume it wouldn't be a problem if the bill were amended to say, "In an amount greater than $10 million that would affect the credit of the authority..." MR. SNELL said he believes that is correct. Number 2243 REPRESENTATIVE ROKEBERG indicated concern about cutting Legislative Budget and Audit out of the loop particularly if there is conduit financing. He said he is reluctant to jump on something like this without further review. REPRESENTATIVE PORTER referred to when AIDEA had the bonding authority and asked if this was a requirement then. MR. SNELL said they were given the $10 million and there was no restriction on what they could do under a conduit financing. It did not require further legislative oversight. REPRESENTATIVE ROKEBERG said new language is being added. REPRESENTATIVE PORTER pointed out the language being added is apparently aimed at getting us back where we were prior to the sunset. Number 2347 REPRESENTATIVE ELTON said if Representative Porter wants to put his language in the form of a motion, he would consider that a friendly amendment. REPRESENTATIVE ROKEBERG said he didn't understand. REPRESENTATIVE PORTER said he would move to amend the amendment to delete on page 1, line 11, "to assist in the financing of a development" and all of line 2, but then add words to the effect of "in an amount greater than $10 million if those bonds would affect the credit of the state of Alaska." MR. SNELL suggested that "the Authority" be inserted in place of "the state of Alaska." He noted they have independent status. REPRESENTATIVE PORTER said if those bonds would affect the credit of the Authority. REPRESENTATIVE ROKEBERG noted, for the record, that he was reading out of HB 425. REPRESENTATIVE PORTER said, "Again, for the record, the intent is to bring it back to where we were prior to July, 1995, whatever that appropriate language to do that..." [END OF TAPE...] TAPE 96-22, SIDE A Number 001 MR. SNELL said, "Representative, I believe the that the sunset provision removes the powers to do it without and then you come before them to get renewed." CHAIRMAN KOTT said currently as it stands, AIDEA has no authority to bond for any amount without coming to the legislature. MR. SNELL said other than refunding bonds, they have no ability to issue new bonds. CHAIRMAN KOTT said the question before the committee is whether or not they want to restore it to what it was July, 1995, which provided the opportunity to bond up to $10 million without legislative authority because they have sunsetted. He said that is the amendment. REPRESENTATIVE ROKEBERG said the Governor's bill did take out the accepting refunding bonds. He asked Mr. Snell if they are no longer doing refunding bonds. Number 123 MR. SNELL explained those are bonds that come due and are callable and based upon what the current interest rate environment is, a lot of time you can do what is called a "refunding bond" to lower the cost on the interest on the bonds. That then is passed to the borrowers. REPRESENTATIVE ROKEBERG said there is a lot of stuff going on in about five or six words that he is concerned about. REPRESENTATIVE PORTER asked Mr. Snell why they wanted to accept refunding bonds. MR. SNELL said it was a legal drafting issue that he believes they have the powers to do a refunding bond so that was some editing on the provisions. REPRESENTATIVE ROKEBERG said it is hard to read it out of context. Number 252 CHAIRMAN KOTT said the motion was to adopt Amendment 1 which would then read, "Without prior legislative approval, the Authority may not issue bonds greater than $10 million if those bonds would affect the credit of the authority." REPRESENTATIVE ELTON said it is important to note that this is a conceptual amendment. CHAIRMAN KOTT asked if there was objection to the amendment. Hearing none, Amendment 1 was adopted. Number 331 REPRESENTATIVE SANDERS questioned whether AIDEA is going to buy a dam and own it. MR. SNELL referred to the current owners of the Snettisham and the Eklutna hydroelectric project is owned by the Federal Alaska Power Administration. There have been ongoing discussions by our congressional delegation as well as by the state for a number of years looking at ways to transfer those projects from federal ownership back into either state or local ownership. Based on the number of years of negotiation and based on a number of memorandums of understandings that have been crafted by previous administrations, Congress finally took the action last session to transfer these projects out of federal ownership to state ownership, as it relates to Snettisham. As it relates to Eklutna to participate in utilities in the railbelt area who will be acquiring that. The purpose of that transfer, as he understands, is to get the federal government out of the energy business in Alaska. He noted this is something that has been talked about for a long time. The purpose is also to allow the local governments and the state, in the case of Snettisham, to obtain the assets to ensure stable energy rates to the consumers in these areas. Mr. Snell explained he believes, based on the negotiations that AIDEA has been involved in over the last couple of years as it relates to Snettisham, that they have structured the outline of an agreement that provides substantial comfort to AIDEA through the ability of Mr. Corbus to operate the plant and to be able to meet what has already been a 20 year history on a project that has operated. Mr. Snell said they are satisfied that there are reasonable ways of having reserves and replacement funds made available so that when you need to replace parts, that there are adequate funds to do that. This means that under a taker pay contract with the local utility, that we can stabilize the electric rates within the Juneau area. Mr. Snell indicated they take comfort in the terms of the contract that they are negotiating with Mr. Corbus. He said AIDEA feels this is an appropriate deal and one that the state should follow through with. MR. SNELL said the reason that the state must be the owner is so there is the ability to use tax exempt financing. If it is publicly owned, they have the ability to bring tax exempt financing which will lower the overall cost of the acquisition costs from the federal government to the state. He explained they fully intend and have crafted the necessary agreements to put all of the operating and maintenance responsibilities back on the local utility. Mr. Snell said AIDEA is not an operating entity. Although they have several ownerships in projects, they transfer those responsibilities directly back to the businesses that they are engaged with. Number 608 REPRESENTATIVE ROKEBERG asked if this is the only legislative oversight on the Snettisham transfer. He asked if it was contained in the bill. He asked if there is other legislation that talks about this. MR. SNELL indicated this is the only legislation that talks about the Snettisham transfer. He explained AIDEA will have all the attributes of ownership, but they will transfer the direct operating and maintenance responsibilities directly to the local utility. In addition to that, under the power sales agreement that will be drafted, it will be a take or pay contract with the local utility, which they are obligated to make payments to the state under nearly and most all conditions. Number 753 REPRESENTATIVE ROKEBERG said he would like to have a background of understanding of what the changes are in what is called the participation purchase or the business assistance loan program. He said several pages of the bill are apparently AIDEA's recommendations for changing that program and rising the level up to $100,000 from $75,000. Representative Rokeberg asked when this provision was put in AIDEA's authority. MR. SNELL explained he believes the program was adopted and brought forth under the authority's umbrella in the mid 1980s. REPRESENTATIVE ROKEBERG asked how many loans the Authority has actually made. He said it was his understanding that there wasn't too many. MR. SNELL explained it has never been overly active because there have been companion type programs at the federal government level, predominately the SBA Program which is very similar in structure in providing guarantees to the banks on (indisc.). To date, he believes they have $2.8 million committed under this program. He noted they also currently have in process about another $1.7 million. Mr. Snell informed the committee they have had one default under the program and it was to the tune of $37,000. REPRESENTATIVE ROKEBERG asked Mr. Snell to walk him through the loan process. MR. SNELL explained that a borrower would not approach them directly as they do not do direct lending. They originate their loans with the bank. The bank underwrites the loan, presents their write up to the Authority, the Authority Credit Committees on the loan following their own loan officer's review and its own write up on the credit. The Credit Committee then makes a determination as to whether or not it satisfies all the requirements of credit worthiness. They will either pass to participate on the loan or they'll approve the loan and then the necessary paperwork with the bank for AIDEA's guarantee is executed. REPRESENTATIVE ROKEBERG asked what the typical loan to ratio is. MR. SNELL indicated it is about 75 percent. The bank then picks up the balance. REPRESENTATIVE ROKEBERG asked what the typical rate currently is. MR. SNELL said AIDEA's taxable rate currently is probably in the 9.2 percent range. The bank is usually prime plus something. REPRESENTATIVE ROKEBERG asked what AIDEA is selling their taxable bonds for. MR. SNELL indicated 9.25 to 9.50 depending on where the market is. He explained his actual cost of money includes necessary loan loss reserves, commitment fees and those types of things. REPRESENTATIVE ROKEBERG asked what is being done structurally. MR. SNELL explained the SBA has undergone some rather significant changes in their program. They now do not guarantee as large amount under any given loan. They've raised their fee structure to where it is not very attractive and in a lot of cases not affordable to small business in the state. He noted AIDEA has been approached by the small business community along with the banking institutions in the state asking them to modify their programs to where it is more attractive for the use by the banks and small businesses in the state. It is predominately the result of the federal government changes in the existing SBA Program. REPRESENTATIVE ROKEBERG asked what the loan to ratio would be if there was a real estate loan of $1 million. MR. SNELL explained it would be 75 percent loan to value or an appraised value on the project not to exceed 80 percent. He said if the committee were to look at AIDEA's default rate, they would agree that AIDEA probably does some of the toughest underwriting as to the loans that are brought to them. Number 1183 REPRESENTATIVE PORTER said AIDEA is going to ask the local utilities to oversee and pay the maintenance requirements for the project. MR. SNELL said from the power sales agreement, they would be responsible. REPRESENTATIVE PORTER asked if that is currently being done by the feds. MR. SNELL said it is. REPRESENTATIVE PORTER asked if it is assumed that rates are going to go up when this happens. MR. SNELL said the way the structure is set and the way that they have calculated the purchase price with the Alaska Power Administration, it is AIDEA's belief that rates will remain substantially the same. He noted any rate adjustments would have to go before the Alaska Public Utilities Commission. Number 1284 REPRESENTATIVE ROKEBERG referred to page 4, line 24, subsection (2) (c), "The authority may guarantee the payment of interest on the guaranteed portion of a loan for the time and in the manner established by the authority by regulation," and questioned the meaning. MR. SNELL explained the current program works in such a fashion that the old program of AIDEA, the existing program of AIDEA, did not guarantee interest on a loan that went into default. The new proposal, which would be adopted by regulation by the Authority, they would move forward with public hearings and adopt regulations that would allow interest payments under the guaranteed program up to a period of ninety days. He said AIDEA believes that is a prudent and reasonable time frame to allow the banker to move in and to liquidate the collateral at the point that the loan was to go into default. It is something that currently exists under the SBA Program. He indicated he would schedule time with Representative Rokeberg to review the bill. Number 1468 REPRESENTATIVE SANDERS made a motion to move HB 526, with accompanying fiscal notes and amendments. CHAIRMAN KOTT asked if there was an objection. Hearing none, CSHB 526(L&C) was moved out of the House Labor and Commerce Committee. ADJOURNMENT Number 1518 CHAIRMAN KOTT adjourned the House Labor and Commerce Committee meeting at 5:15 p.m.