Legislature(1999 - 2000)
03/03/1999 03:20 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 3, 1999 3:20 p.m. MEMBERS PRESENT Representative Norman Rokeberg, Chairman Representative Andrew Halcro, Vice Chairman Representative Jerry Sanders Representative Lisa Murkowski Representative John Harris Representative Sharon Cissna MEMBERS ABSENT Representative Tom Brice COMMITTEE CALENDAR * HOUSE BILL NO. 87 "An Act relating to money credited to the account of the state in the unemployment trust fund by the Secretary of the Treasury of the United States; and providing for an effective date." - MOVED HB 87 OUT OF COMMITTEE HOUSE BILL NO. 82 "An Act relating to immunity for certain claims arising out of or in connection with the year 2000 date change; and providing for an effective date." - MOVED CSHB 82(L&C) OUT OF COMMITTEE HOUSE BILL NO. 79 "An Act relating to letters of credit under the Uniform Commercial Code; and providing for an effective date." - MOVED HB 79 OUT OF COMMITTEE (* First public hearing) PREVIOUS ACTION BILL: HB 87 SHORT TITLE: UNEMPLOYMENT TRUST FUND SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR Jrn-Date Jrn-Page Action 2/10/99 189 (H) READ THE FIRST TIME - REFERRAL(S) 2/10/99 190 (H) L&C, FINANCE 2/10/99 190 (H) ZERO FISCAL NOTE (LABOR) 2/10/99 190 (H) GOVERNOR'S TRANSMITTAL LETTER 3/03/99 (H) L&C AT 3:15 PM CAPITOL 17 BILL: HB 82 SHORT TITLE: IMMUNITY:CLAIMS ARISING FROM Y2K PROBLEMS SPONSOR(S): REPRESENTATIVES(S) ROKEBERG, Dyson Jrn-Date Jrn-Page Action 2/05/99 144 (H) READ THE FIRST TIME - REFERRAL(S) 2/05/99 144 (H) L&C, JUDICIARY 2/12/99 (H) L&C AT 3:15 PM CAPITOL 17 2/12/99 (H) HEARD AND HELD 2/12/99 (H) MINUTE(L&C) 2/16/99 228 (H) COSPONSOR(S): DYSON 2/26/99 (H) L&C AT 3:15 PM CAPITOL 17 2/26/99 (H) HEARD AND HELD 3/03/99 (H) L&C AT 3:15 PM CAPITOL 17 BILL: HB 79 SHORT TITLE: UNIFORM COMMERCIAL CODE:LETTERS OF CREDIT SPONSOR(S): LABOR & COMMERCE BY REQUEST Jrn-Date Jrn-Page Action 2/03/99 132 (H) READ THE FIRST TIME - REFERRAL(S) 2/03/99 133 (H) LABOR AND COMMERCE, JUDICIARY 2/26/99 (H) L&C AT 3:15 PM CAPITOL 17 2/26/99 (H) HEARD AND HELD 3/03/99 (H) L&C AT 3:15 PM CAPITOL 17 WITNESS REGISTER DWIGHT PERKINS, Deputy Commissioner Department of Labor P.O. Box 21149 Juneau, Alaska 99802-1149 Telephone: (907) 465-2700 POSITION STATEMENT: Explained HB 87. CHARLES BLANKENSHIP, Program Manager Unemployment Insurance Division of Employment Security Department of Labor P.O. Box 25509 Juneau, Alaska 99802-5509 Telephone: (907) 465-5930 POSITION STATEMENT: Answered questions on HB 87. DANIEL KANOUSE, Budget Officer Division of Employment Security Department of Labor P.O. Box 25509 Juneau, Alaska 99802-5509 Telephone: (907) 465-2711 POSITION STATEMENT: Answered questions on HB 87. JANET SEITZ, Legislative Assistant to Representative Norman Rokeberg Alaska State Legislature Capitol Building, Room 24 Juneau, Alaska 99801 Telephone: (907) 465-4968 POSITION STATEMENT: Explained changes in proposed Version I committee substitute for HB 82 on behalf of sponsor. JERRY WEAVER, Senior Vice President and Manager of Commercial Lending National Bank of Alaska; Secretary-Treasurer, Alaska Bankers Association P.O. Box 10600 Anchorage, Alaska 99510-0600 Telephone: (907) 265-2920 POSITION STATEMENT: Testified in strong support of HB 79. ART PETERSON, Alaska Uniform Law Commissioner National Conference of Commissioners on Uniform State Laws 350 North Franklin Street Juneau, Alaska 99801 Telephone: (907) 536-4000 POSITION STATEMENT: Testified in support of HB 79. ACTION NARRATIVE TAPE 99-19, SIDE A Number 0001 CHAIRMAN NORMAN ROKEBERG called the House Labor and Commerce Standing Committee meeting to order at 3:20 p.m. Members present at the call to order were Representatives Rokeberg, Halcro, Sanders, Murkowski, Harris and Cissna. HB 87 - UNEMPLOYMENT TRUST FUND Number 0079 CHAIRMAN ROKEBERG announced the first order of business would be HB 87, "An Act relating to money credited to the account of the state in the unemployment trust fund by the Secretary of the Treasury of the United States; and providing for an effective date." Number 0096 DWIGHT PERKINS, Deputy Commissioner, Department of Labor (DOL), came forward to explain that HB 87 provides the state authority to receive federal funds for the administration of the unemployment insurance program, as required in the Balanced Budget Act of 1997 [federal]. That Act provided for disbursement from the federal unemployment trust fund to the state unemployment trust fund; these disbursements are known as "Reed Act distributions." States must enact legislation restricting the use of those funds to the administration of the unemployment insurance program, rather than using them for unemployment benefits or services. This bill is housekeeping language necessary to allow the state to accept the funds from the federal government, and to ensure that the employment insurance program continues to operate. MR. PERKINS explained that these are excess funds from the Federal Unemployment Tax Act (FUTA), known as the FUTA tax. The federal government has several billions of dollars in excess; when overfunded, they are to refund to the states their portions. What members see before them is the state's share of those FUTA taxes to run the unemployment insurance program, administratively only, for the next three years; language in the bill says this will go away in 2002. Mr. Perkins reminded members that HB 87 is enabling language that helps the state. He noted that with him to answer technical questions, both from the DOL's Division of Employment Security, were Charles Blankenship, the program coordinator, and Daniel Kanouse, the "budget person." Number 0289 CHAIRMAN ROKEBERG referred to the revised fiscal note, dated 3/1/99. He asked whether the change in revenue of $700,000 is per annum. MR. PERKINS affirmed that. CHAIRMAN ROKEBERG noted that the $700,000 from the federal government is for the administration only of the funds, and it cannot be paid out in benefits. He asked whether that language is within the "BBA" [Balanced Budget Act]. MR. PERKINS affirmed that, as well. He reminded members that the Division of Employment Security is wholly funded by federal dollars; there are no general fund receipts. Number 0366 CHAIRMAN ROKEBERG expressed his understanding that state employees, uniquely, pay into the unemployment compensation monies. MR. PERKINS said the federal dollars pay for programs, with the exception of the State Training Employment Program (STEP). Alaskan employees pay towards their unemployment benefits, with about an 80/20 split. Alaska is one of five or six states nationwide where employees contribute to weekly unemployment benefit amounts. Number 0448 REPRESENTATIVE MURKOWSKI referred to the fiscal note attachment, which indicates funds will be utilized to enhance data processing upgrades and to redesign the automated Unemployment Insurance tax system; she said she assumes that will be coming in 2000 to 2001. She asked whether, with the Y2K [year 2000] funds allocated recently for upgrades to state systems, anything was specifically allocated towards unemployment insurance taxes. MR. PERKINS indicated that although the DOL had put in such a request, the current Y2K-related legislation from the Administration has no dollars for the DOL. CHAIRMAN ROKEBERG indicated the House and Senate have passed bills regarding use of general funds and program receipts money for that. He asked whether the DOL is authorized to use those for Y2K problems. Number 0540 MR. PERKINS affirmed that, pointing out that he and Representative Murkowski had been referring to new funds. He stated, "And the answer is no, we don't have any new dollars for Y2K issues. The employment security division does have funds, but those are federal dollars, and we are doing it internally, if you will, with the funds that we have." He emphasized that the DOL is not requesting new state general fund dollars for the Y2K issue. CHAIRMAN ROKEBERG asked if there are any general fund dollars that the monies in HB 87 can replace, for a savings to the state. MR. PERKINS said no. These are additional monies, to enhance the administrative side of the unemployment insurance program by purchasing state-of-the-art hardware and software, running the day-to-day program, and helping unemployed workers by getting checks out in a timely manner, for example. At a recent overview, Rebecca Gamez, director of the Division of Employment Security, had explained about direct deposits of checks and other improvements. CHAIRMAN ROKEBERG noted that from other testimony before the committee, the money would be used to enhance a system that apparently is not broken. Number 0735 MR. PERKINS said unfortunately these funds cannot help reduce the state's general fund dollars in other areas. These funds are from the FUTA tax, collected by the federal government from the state. This Reed Act was started in 1954, and there have been three distributions since: 1956, 1957 and 1958. When the federal government gets overfunded in this area, they like to reimburse money to the states for shoring up the state programs. Number 0812 CHARLES BLANKENSHIP, Program Manager, Unemployment Insurance, Division of Employment Security, Department of Labor, came forward. He stated, "The money that we expect to receive from this Reed Act distribution does have some intended purposes. We currently have a capital improvement project with a price tag of about $2.6 million for redoing our tax collection ... automated system. Some of that money has been diverted - operating expenses toward Y2K efforts - and we intend to replace that money, then, with the Reed Act distribution that's coming in the next three years." He added, "Money that we had set aside from the operating budget and other sources to do the project have been diverted to Y2K." CHAIRMAN ROKEBERG requested that before this goes to the House Finance Standing Committee, the DOL provide the intended uses of those funds, as well as the federal language that restricts the use to administrative purposes. MR. PERKINS agreed to that. Number 0911 REPRESENTATIVE SANDERS asked if the money invested in hardware wouldn't relieve the DOL's needs for Y2K money. MR. BLANKENSHIP replied, "Yes, to some degree. The tax project is largely a software project. We have invested money in hardware for testing for Y2K compliance and replacing the equipment that wasn't compliant." REPRESENTATIVE SANDERS asked what that savings might be. MR. BLANKENSHIP said he couldn't provide a figure. Number 0959 REPRESENTATIVE HALCRO commented that when any commissioner talks about increasing the administration side, it makes him nervous. He then asked, "What is your department's burden on the general fund?" MR. PERKINS said he believes it is just short of $8 million. He stated the Division of Employment Security's budget is about $43 million. He stated, "I think the legislature took the remaining balance of $1,500 last year when they did their budget reductions." Number 1009 REPRESENTATIVE HALCRO asked about the $2.6 million capital improvement project against which they had borrowed for Y2K issues. MR. BLANKENSHIP explained that initially that was a Y2K project. He stated, "When we saw that we wouldn't be able to get the system redone by the requisite deadline, we remediated the old system; and part of what we thought would go into the project that was to start on revising the tax system has now been used, instead, for Y2K preparedness. The capital improvement project had basically been planned to come out of the operating grant for the three-year period. This will assist us in making up some of the money that's been diverted." REPRESENTATIVE HALCRO asked how much of the $2.6 million has been used to date. DANIEL KANOUSE, Budget Officer, Division of Employment Security, Department of Labor, said approximately $.5 million dollars. MR. BLANKENSHIP clarified that it had been spent on the Y2K issue. Number 1093 REPRESENTATIVE HARRIS requested confirmation that if the legislature doesn't pass HB 87, the DOL won't receive the money. MR. PERKINS confirmed that. REPRESENTATIVE HARRIS referred to the fiscal note attachment, which says the national distribution is anticipated to be $100 million annually for three years. He asked whether Alaska's share of $600,000 to $700,000 is per year, for the next three years. MR. BLANKENSHIP said that is correct. REPRESENTATIVE HARRIS asked whether that is to offset the $2.6 million. He then asked whether that is in the Y2K legislation and what HB 52 relates to. Number 1142 MR. PERKINS indicated HB 52 is the Governor's capital budget, under which the DOL has requested equipment. He re-emphasized that if HB 87 is not adopted, the state will not receive that $600,000 to $700,000 per year. REPRESENTATIVE HARRIS asked whether the $600,000 to $700,000 per year will be used to offset the request of $2.6 million in the budget. Number 1216 MR. KANOUSE explained, "This is a collection of revenues to be applied against the expenditure authorization we're requesting in the capital budget. We were intending to use part of our normal unemployment insurance federal grant, ... part of it to go to the ongoing operating costs, and part of it to the capital budget, because we had to divert some of those dollars back to the operating budget to cover our Y2K expenditures. We're taking these revenues and applying them against our capital budget request." CHAIRMAN ROKEBERG asked, "Which are embodied in HB 52 and SB 32?" MR. KANOUSE affirmed that, indicating they have to stay in there to give the DOL authorization to spend those revenues. CHAIRMAN ROKEBERG suggested HB 87 is not a spending or appropriation bill, but merely an authorization bill. MR. KANOUSE agreed. CHAIRMAN ROKEBERG suggested they actually need two bills from the legislature, then, to deal with this money. MR. KANOUSE said that is his understanding. Number 1302 REPRESENTATIVE HALCRO asked whether the DOL knew that the $600 or $700 [thousand] was coming down the road before they came up with the $2.6 million. MR. KANOUSE replied, "Our request for capital funds happened before ... it was clear to us exactly what we could anticipate from the Reed Act distribution. They were fairly close together; it happened in the fall, early winter." Number 1340 REPRESENTATIVE MURKOWSKI asked whether she had heard correctly that a portion of these monies, in addition to upgrading systems, could be towards job training. MR. PERKINS said no. CHAIRMAN ROKEBERG noted that the DOL would provide the federal statute delineating the use of the monies. Number 1361 REPRESENTATIVE SANDERS asked for confirmation that the state will save no money from the $600,000 to $700,000 per year. MR. PERKINS affirmed that. REPRESENTATIVE SANDERS asked whether, without the money, the DOL would simply not do these things. MR. PERKINS deferred to Mr. Blankenship. Number 1402 MR. BLANKENSHIP answered, "Your question's a good one. ... We had planned the capital project, $2.6 million, before we anticipated this revenue. We had also anticipated starting that capital project a little earlier. In the interim, we have had to use some of the operating money that would have gone to a capital project for Y2K expenses, and we anticipate more through the balance of this year. This apparent windfall will help us offset some of that, as well as add additional enhancements to the program. The money coming in is not replacing any state general fund money that the department has used for the program. The basis for this distribution, at the national level, is the USDOL's [United States Department of Labor] attempt to make up for frozen administrative funding that has been a shortfall over the last several years. And that's part of the driver behind this distribution. So, unemployment programs across the nation have been cutting back, trying to do more with less, and USDOL is making up for some of that now with this distribution." MR. BLANKENSHIP explained that two tax streams go into unemployment insurance. The federal FUTA tax collected by the IRS [Internal Revenue Service] is largely offset by the employers' participation in Alaska's state employment security tax; the FUTA tax goes only for administration of the program. All of the salary dollars and overhead dollars come back from that FUTA tax, through the federal government. The money that the state collects from the employers and employees also goes into a nationally-maintained trust fund, in Alaska's name, and that is dedicated strictly for benefits, with the exception of the small portion that can be diverted for the STEP program. Number 1509 CHAIRMAN ROKEBERG asked whether the DOL would have asked for general funds for a capital appropriation. MR. BLANKENSHIP replied, "We never thought there would be any." CHAIRMAN ROKEBERG asked whether they would have taken it right out of the other tax revenue dollars. MR. BLANKENSHIP affirmed that. CHAIRMAN ROKEBERG requested confirmation that in those tax income streams, there would not have been general fund appropriations, either through general funds or the capital budget. MR. BLANKENSHIP replied, "As the deputy commissioner indicated, the last general fund money that our division had was about $1,500 last year for some equipment maintenance." Number 1545 REPRESENTATIVE HALCRO asked whether the $600,000 to $700,000 was originally contributed by taxpayers. MR. BLANKENSHIP said it was contributed by the employers. REPRESENTATIVE HALCRO asked whether instead of going to pay for new programs or expansion, it shouldn't instead fill the DOL's need. MR. BLANKENSHIP asked whether Representative Halcro was suggesting it would be more logical to offset or lower employer taxes, since that is where the money came from originally. REPRESENTATIVE HALCRO replied, "Yes, either that or use that $600,000-$700,000 to offset the costs your department burdens the general fund with." MR. BLANKENSHIP said there are no costs. Number 1600 MR. PERKINS concurred, emphasizing that there are absolutely no state general fund dollars in the Division of Employment Security, and there is no burden to the state from the division. REPRESENTATIVE HALCRO asked whether they shouldn't, then, look at putting this $600,000 to $700,000 back into the pockets of the people who originally paid it. CHAIRMAN ROKEBERG said that is a good idea, but this is mandated by the federal law. Number 1622 REPRESENTATIVE MURKOWSKI stated her understanding that the last time there was a windfall like this was in the late 1950s. MR. BLANKENSHIP said that is correct. REPRESENTATIVE MURKOWSKI suggested that the DOL couldn't really have anticipated that this would come along, and that it couldn't have allocated accordingly. MR. BLANKENSHIP told members there are various statutory ceilings to the accounts in the federal unemployment trust fund. As those ceilings are reached, the overflow eventually will trickle back to the states. Since the late 1950s, those ceilings have been raised by Congress four times, essentially prohibiting such distributions. Number 1654 CHAIRMAN ROKEBERG asked if there was further testimony, then closed the public hearing. He confirmed there was no further discussion. Number 1688 REPRESENTATIVE HARRIS made a motion to move HB 87 out of committee with individual recommendations and the attached revised fiscal note dated 3/1/99. There being no objection, HB 87 moved out of the House Labor and Commerce Standing Committee. Number 1747 CHAIRMAN ROKEBERG called a brief at-ease at 3:51 p.m.; the committee came back to order within less than a minute. HB 82 - IMMUNITY:CLAIMS ARISING FROM Y2K PROBLEMS Number 1752 CHAIRMAN ROKEBERG announced the next order of business would be HB 82, "An Act relating to immunity for certain claims arising out of or in connection with the year 2000 date change; and providing for an effective date." He pointed out that the new proposed committee substitute (CS), Version I [1-LS0398\I, Ford, 3/2/99], reflects the conceptual amendments adopted by the committee the previous week. He indicated the committee packets additionally contained an executive summary of the Senate Year 2000 Problem report, "Investigating the Impact of the Year 2000 Problem," issued by the United States Senate Special Committee on the Year 2000 Technological Problem; chairman, Senator Bob Bennet; vice-chairman, Senator Chris Dodd. The chairman noted the material provided to the committee contained a web page address for anyone interested in reviewing the entire report [homepage address for the United States Senate special committee, with links to the report: http://www.senate.gov/~y2k/home.html]. The chairman indicated the report was issued on February 24, 1999, and became available March 2 on the Internet. Chairman Rokeberg commented the committee had also received additional information from Scott Thorson who testified on HB 82 on February 26, 1999. He invited Ms. Seitz forward to briefly explain the changes in the proposed Version I CS. Number 1802 JANET SEITZ, Legislative Assistant to Representative Norman Rokeberg, Alaska State Legislature, came forward. She told members that Version I incorporates the three conceptual amendments adopted by the committee on February 26. Amendment 1 added language similar to that contained in S.96, the federal legislation; these changes appear page 1, lines 12 and 13, and page 2, lines 14 through 18. Amendment 2 added "curing" language to give the business an opportunity to cure its problems before any legal action was instituted; this language appears on page 3, lines 7 through 14. Amendment 3 added some language covering people who developed software, firmware, et cetera, and [those] who only sell, rent or lease those items; that language is on page 2, line 20, with the addition of the word "develops", and on line 25, with the addition of the word "sells". Number 1863 REPRESENTATIVE HALCRO made a motion to adopt the proposed committee substitute, 1-LS0398\I, Ford, 3/2/99, as a work draft. There being no objection, Version I was before the committee. Number 1881 CHAIRMAN ROKEBERG confirmed no one wished to testify on HB 82. He thanked members for their work on the bill at the previous hearing. The chairman commented on two areas that had been discussed at that hearing. He indicated Representative Murkowski had expressed some concerns, and that he was also concerned, about "those provisions of a plan of due diligence," page 1, line 14, through page 2, line 13. This language specifies specific steps, making good faith efforts, and demonstrating to the courts what due diligence is. The chairman expressed concern about these provisions; however, he indicated he would like to leave the current language for the House Judiciary Standing Committee, where the provisions as specific steps would probably be removed or possibly modified depending on legal input. Chairman Rokeberg commented he did not think this would hurt the intention of the legislation. He noted he would like to have further discussion of these issues by the public for education purposes. CHAIRMAN ROKEBERG referred to page 2, line 27, subsection (b)(2) ["(b) The defense in (a) of this section may not be asserted ... (2) in an action based on a contract."]. The chairman indicated he believes this section should probably be removed but wishes to allow the House Judiciary Committee to debate the issue regarding the legal aspect of the legislation. He based his reason for removal on allowing the defense contained in the bill to come into action, noting most causes of action brought under this "theory" will be "actions in contract." The chairman expressed his belief in the privy of contract and allowing the agreed performance to take place, but said, conversely, if the action is not allowed the defense the bill's purpose is defeated. Chairman Rokeberg stated he would like to move the current version of the legislation out of committee, asking for recommendations and discussion from the committee. Number 2020 REPRESENTATIVE HALCRO thanked the chairman for his work on the legislation. He commented on large articles in both the February 27 and 28 Seattle Times on year 2000 (Y2K) problems. Representative Halcro noted this is one issue garnering bipartisan support: Dianne Feinstein [Senator, California, Democrat] is working with Orrin Hatch [Senator, Utah, Republican] in addressing this. According to Representative Halcro, both have indicated that if some form of immunity is not granted to businesses "there's just gonna be a flood of litigation that this country has never seen before." Representative Halcro stated he thinks the chairman is "ahead of the curve on this," and he agrees the legislation needs to get moving. REPRESENTATIVE HARRIS said he echoed Representative Halcro's comments. He added that the federal legislation, S.96, is being taken up by the United States Senate, possibly this day on the floor. Number 2076 REPRESENTATIVE MURKOWSKI commended the chairman for getting this moving; however, she noted the somewhat "loose language" in the cure provision, page 3, line 12, gives her some concern although she notes she thinks the provision is absolutely critical [subsection (d)(2)(B), "(B) gives the business the opportunity to fix the problem, including reasonable access to electronic computing devices or software affected by the failure described under (A) of this paragraph;"]. She felt that language should be "tightened up," indicating a business could say it would fix the problem, but never do so. Representative Murkowski further expressed some concern with the itemization in Section 1, the drafter's either/or language: business either does the following six steps or it follows the generally accepted standards of care. Commenting she was somewhat thinking out loud, she questioned whether the specific steps would be construed to be a business's standard of care, indicating the possibility that something critical might be overlooked because it was not included in those six steps, and that the standard of care might be vary by industry. In response to the chairman's comment, she agreed the disjunctive disconnecting subsections (1) and (2) solves a lot of the concerns. She reiterated her own concern, however, that the standard of care within the industry not automatically revert back to the specific steps. Representative Murkowski indicated she is much more comfortable with the flexibility of the "or" language. CHAIRMAN ROKEBERG said he tended to agree regarding the tightness of the language. He inferred that Representative Murkowski, as a member of the House Judiciary Committee along with the chairman, could provide some possible wording. Number 2237 REPRESENTATIVE CISSNA indicated she had missed the majority of the previous hearing, but had listened to a taped copy. She confirmed she was correct in her hearing that the chairman would like to see the contract language deleted. She further confirmed the chairman did not wish to amend the bill in this committee. CHAIRMAN ROKEBERG said he thought the issue needed further discussion and the House Judiciary Committee is the proper place for that discussion. This issue is one of whether or not the defense raised in the bill is defeated, he said, "By having the ... exception of the contract, action (indisc.) contract left in." Noting he is unsure of that dynamic, he believes it is best served by removal, and, as the bill sponsor, he will make sure it is fixed properly before it reaches the House floor. REPRESENTATIVE MURKOWSKI questioned whether the legislation had other committees of referral besides Judiciary. CHAIRMAN ROKEBERG answered in the negative, noting there was a zero fiscal note. Number 2354 REPRESENTATIVE HALCRO made a motion to move the proposed CS for HB 82, Version I, out of committee with the attached two zero fiscal notes and individual recommendations. There being no objections, CSHB 82(L&C) moved out of the House Labor and Commerce Standing Committee. Number 2373 CHAIRMAN ROKEBERG called a brief at-ease at 4:06 p.m. The time the committee came back to order was not noted. TAPE 99-19, SIDE B Number 0001 HB 79 - UNIFORM COMMERCIAL CODE:LETTERS OF CREDIT Number 0005 CHAIRMAN ROKEBERG announced the committee's next order of business would be HB 79, "An Act relating to letters of credit under the Uniform Commercial Code; and providing for an effective date." He stated the committee would continue the public hearing. He invited Jerry Weaver forward. JERRY WEAVER, Senior Vice President and Manager of Commercial Lending, National Bank of Alaska (NBA); Secretary-Treasurer, Alaska Bankers Association, came forward testify in strong support of HB 79 on behalf of both organizations. He indicated Mr. Art Peterson, Alaska Uniform Law Commissioner, is much more knowledgeable regarding the Uniform Commercial Code (UCC). Mr. Weaver indicated the legislation is part of the regular UCC revisions which is an ongoing process of the full commercial and consumer code through the National Conference of Commissioners on Uniform State Laws (NCCUSL), as Mr. Peterson will testify. These revisions and this legislation affects a rather arcane group of letters of credit, a small area of commercial law. Mr. Weaver noted there is another well-known version called the "stand-by letter of credit." The negotiable letters of credit primarily affect international trade. Mr. Weaver indicated these negotiable letters of credit are guarantees, usually by banks to banks or large commercial companies with rated credits. These institutions can substitute their credit for a small firm either unknown in the international market or without the credit rating necessary to carry out the transaction. These letters of credit are typically issued by banks, usually through their international banking departments; the process is done bank to bank. In Alaska, a letter of credit is needed in any of the export and many of the import (indisc.) to guarantee that payment will be forthcoming and to ensure that supplier's details are met. Mr. Weaver said his knowledge concerns the practical side; he does not deal with the close technical parts but he indicated NBA has personnel who do. Mr. Weaver mentioned several other banks had reviewed the legislation in detail and approved it. He indicated the bill has been worked on for an extended period of time. Number 0118 MR. WEAVER gave the example of shipping lumber from Southeast Alaska to a large firm in Tokyo, Japan, that wishes to buy this lumber but ensure it receives exactly what it buys by grade, quantity, et cetera, and ensure that the lumber is on the ship. The firm goes to its bank - in this example the Industrial Bank of Japan, Limited - to have the bank issue a letter of credit. While the Japanese firm may or may not be known to the Southeast Alaska timber supplier, the Industrial Bank of Japan, issuing a letter to NBA, certainly is known because it is rated. What this credit rating immediately says to the Southeast firm is that if it delivers the lumber, it will be paid. Number 0163 MR. WEAVER noted the letter of credit will primarily deal in documents. The bankers will never see the timber but they will see the documents stating it is there. The letter of credit and this legislation speak about some of the documents that might or might not be included: 1) a bill of lading showing the lumber got on the ship, the shipping documents, an individual authorization issued by the shipping company. He indicated these were the documents that allow one to get the lumber off the ship when it reaches Japan as well. 2) Some form of grading and rating of the lumber by an authority independent of the transaction that states it put so many thousand board feet of such and such grade and type on that ship. 3) Some insurance documents in case of loss at sea. The letter of credit issued by the Industrial Bank of Japan would say that if those documents are sent and are in proper order, it will pay on those documents. At this point the ship is underway and the buyer's bank would extend credit to the buyer for some short period of time through whatever credit lines, et cetera, that had been set up. Number 0220 MR. WEAVER referred to some discussion at the previous hearing regarding time delays. He noted "float" and similar things were not issues because money had not been exchanged in this transaction; they are simply speaking of guarantees. Mr. Weaver commented the other side is time for delays. In a large commercial project such as this, there will typically be minor discrepancies in the contract. "'Gee, we don't have as much hemlock as these guys want, is it okay if we send them spruce?'" The bank needs time to wire the other bank and ask whether a substitution is acceptable. Another issue could be a dramatic price change in the commodity with the seller requesting a possible small change in price. Those wires go back and forth between the two banks' international banking departments, they agree on firm detail, and then the transaction is concluded. The material is on its way, the letter of credit is presented for payment, that bank wires funds to the seller's bank who in turn credits its customer. Mr. Weaver indicated that described the practical workings of these letters of credit. CHAIRMAN ROKEBERG stated he thinks Mr. Weaver's description helps explain the practical application of the legislation on a fundamental basis. Number 0282 REPRESENTATIVE MURKOWSKI agreed Mr. Weaver's description was very well-put. She commented that NBA issued the letter of credit for a fee. MR. WEAVER agreed that is correct when NBA is issuing one. In his example, the Industrial Bank of Japan, as the issuer, would receive the initial fee. There would be also be some small fees on the other bank's side assessed for handling. REPRESENTATIVE MURKOWSKI said she asked because she noticed consideration is not required in the legislation. She questioned why this requirement had been deleted, noting she had always assumed fees were a part of letters of credit. Number 0317 MR. WEAVER answered that cases where fees were not drawn had come up somewhere in the revision. He indicated sometimes the size of the parties involved might determine this, commenting that a company like Exxon Corporation could probably negotiate its way out of a fee. This allows that room. Mr. Weaver indicated HB 79 is simply the revision of a 30-year old law that works very, very well. This somewhat arcane thing affects about 5 percent of the banking business and, for the most part, the UCC revisions are just refinements. The UCC commissioners asked the bankers worldwide who deal in these for suggestions. He confirmed to Representative Murkowski, however, that in most cases there is a fee. REPRESENTATIVE HALCRO referred to the initial bill hearing on February 26, 1999, and asked if the seven day time period for denial is adequate for letters of credit. MR. WEAVER responded he doesn't deal with letters of credit daily, but the international bankers and specialists present last week say it is adequate. He noted NBA has numerous customers in Alaska that use this as a vehicle and it seems to work well. Number 0440 ART PETERSON, Alaska Uniform Law Commissioner, National Conference of Commissioners on Uniform State Laws, came forward to testify. Mr. Peterson stated he was an attorney in private practice with the law firm Dillon and Findley, P.C., in Juneau, and was present in his capacity as a uniform law commissioner for the state. He commented on Mr. Weaver's excellent capsule description of how letters of credit are used. Noting it has been 40 years since this was originally drafted, Mr. Peterson commented a number of issues have arisen since then and a number of technologic developments have occurred. The legislation is mainly aimed at: 1) addressing and solving issues that have arisen, and avoiding litigation; 2) recognizing the existence of computers. He exhorted the committee to also keep in mind that although letters of credit may be a small part of this entire commercial area, it is a $200 billion a year industry. Half of exports from the United States are financed by letters of credit. Number 0525 MR. PETERSON stated the UCC, including Article 5, has been adopted in all 50 states, the District of Columbia, Guam, Puerto Rico, et cetera. It serves as something of an international model; in practice it somewhat governs many transactions. A corresponding body of material has developed in the area of letters of credit, the Uniform Customs and Practices for Documentary Credits (UCP 500) promulgated by the International Chamber of Commerce. Mr. Peterson indicated in response to the chairman's question that the uniform law had been revised from the previous year. Mr. Peterson stated approximately 30 states had enacted this, including Illinois and California, two of the major financial centers. He explained New York usually lags a year or so behind on UCC enactments and revisions because of an elaborate procedure with the bar. For the chairman, Mr. Peterson said that Washington, Idaho, California, Hawaii, et cetera, have already adopted this. MR. PETERSON indicated this legislation recognizes the UCP 500 and also specifically recognizes international customs and practices that have developed over the years outside of that formal material. The bill recognizes that various entities involved in letters of credit are in positions to negotiate to avoid fees. He has not heard anything to suggest the lack of consideration would be a problem. Mr. Peterson offered to make the formal published UCC revision with the official commentary by the NCCUSL available to the committee. Mr. Peterson indicated the revisions anticipate a number of problems, solve a number of old issues and generally update the approximately 40-year old law; it is necessary for Alaska to keep up-to-date. Number 0760 CHAIRMAN ROKEBERG asked for an citation within the bill which could be used as an example of a needed update. MR. PETERSON referred to the UCP 500. The use of computers has been recognized in those customs and practices. CHAIRMAN ROKEBERG asked if those were being adopted by reference or if the concepts were basically embodied. MR. PETERSON replied it was essentially adopting by reference. The material he provided to the committee notes that UCC Article 5 recognizes the UCP 500, which is used in most international letters of credit, providing operational rules and standards that have international acceptance. They could not have that international acceptance unless they were recognizing modern practices and technology. CHAIRMAN ROKEBERG asked if the UCP 500 was periodically revised via additions. MR. PETERSON indicated it might be contained in the commentary from the NCCUSL, but said he hadn't reviewed that material in a long time. Number 0863 CHAIRMAN ROKEBERG referred to the "Northern Lights case et al," stating adopting things by reference becomes problematic in Alaska statutory construction. He asked Mr. Peterson for further information regarding that question. MR. PETERSON said wording to the effect of "is hereby adopted by reference" now had to be used. CHAIRMAN ROKEBERG noted, "The problem is we have a supreme court case (indisc.) the UBC (ph) as it relates to adoption by reference." Chairman Rokeberg commented he thought one way to get around that was adoption by reference of a dated addition because that, therefore, is then revised. Number 0914 MR. PETERSON stated that has long been the rule in the regulations. Any adoption in the regulations had to be by specific edition with the adopting agency named, and, at least in the footnote, information provided on where it can be obtained. The statutes have been somewhat looser. When the state had an income tax, it adopted the federal income tax by reference. However, every time the federal law was amended it did not have to be updated in the Alaska Statutes. CHAIRMAN ROKEBERG referred to the "OSG case" [State of Alaska v. OSG Bulk Ships, Inc.] the previous year which was about adopting parts of the United States tax code. The chairman noted there is a lot of precedent in the statutes to withhold that; it is an issue that would probably come up in the House Judiciary Standing Committee. The chairman referred to the sectional analysis, page 9, of Section 18, Sec. 45.05.116(c), [Theresa Bannister, Legislative Counsel, 2/17/99]. This portion of the sectional analysis reads: "AS 45.05.116(c). States that, except as provided otherwise in this subsection, the liability of certain listed persons is governed by rules of custom or practice that the parties expressly select for the letter of credit or confirmation, or undertaking. Gives as an example the Uniform Customs and Practices for Documentary Credits. States that if both this chapter and the rules of custom or practice apply to the liability, the rules govern, unless they conflict with a provision of this chapter that cannot be changed (see AS 45.05.103(c))." CHAIRMAN ROKEBERG commented it appears there would be an agreement within the credit documents to be bound by those, unless overcome by superior statutory right. MR. PETERSON agreed, noting the default position is stated and the parties can overcome that by their agreement. Number 1055 REPRESENTATIVE MURKOWSKI referred to the mention of standard practice in Section 10, page 7, indicating she did not see how standard practice was incorporated into the text of the statute because subsection (e) says that it will be determined by court. She questioned how one knows what the standard of practice is, wondering whether it was possibly the UCP 500 - a separate document known within the industry. MR. PETERSON said, "I've never seen it myself, but it is a substantial body of material." REPRESENTATIVE MURKOWSKI commented, "But it is something that someone can refer to -- look at it and say, 'Ah, that's what it is.'" She confirmed Mr. Peterson agreed. Representative Murkowski asked if this legislation is the same language received from the "National Commission on Uniform Code" or if it was adapted for Alaska. Number 1140 MR. PETERSON said it adheres very closely to the official version, with minor stylistic changes made by the Legislative Affairs Agency, and there should not be any substantive change. REPRESENTATIVE MURKOWSKI noted she had some technical questions -like could one waive being an adviser? - she felt comfortable not addressing if Mr. Peterson could assure her that Alaska's law would be consistent with the recommendations of the national commissioners and what had been accepted in 38 other states. MR. PETERSON assured her this was correct. He did not know what changes other states might have made, but he is not aware of any particular issue causing some states to opt in one direction and other states to opt differently. In some uniform acts produced by the national conference a provision a state could accept or reject is placed in brackets. Mr. Peterson did not offhand recall any such options, especially any of major importance, in this. Number 1288 CHAIRMAN ROKEBERG suggested Representative Murkowski contact Mr. Peterson for the answers she desired before the legislation is heard in the House Judiciary Committee. REPRESENTATIVE HALCRO asked for clarification on page 2, lines 20 through 22, "... the applicant may recover damages resulting from the breach, including incidental but not consequential damages, less any amount saved as a result of the breach." Number 1357 MR. PETERSON replied they were speaking of a dollar amount transaction. In the example of lumber sold to a Japanese buyer who had the bank issue the letter of credit, if that applicant had planned to sell the lumber to another party but lost the benefit of that contract, that would be consequential damages and are avoided by this provision. Incidental damages might be the applicant's expenses involved in shipping the product over there; those would be incidental to the basic transaction and it could collect that somehow if the deal went wrong. Thirdly, he addressed the language, "less any amount saved as a result of the breach". If, for example, the price has gone wrong and therefore the applicant has saved money by the failure of this contract, or hasn't lost the full dollar value of the original contract, that would be subtracted from any damages the applicant could recover. CHAIRMAN ROKEBERG noted this could be currency fluctuations and he would also suspect it to be a duty of mitigation. He asked if there isn't normally a duty to mitigate. MR. PETERSON said that assuming there is the possibility to mitigate or one makes reasonable efforts. CHAIRMAN ROKEBERG said, "Right, and (indisc.) brokering or the cost of securing a new buyer (indisc.) product. MR. PETERSON answered probably. Number 1490 REPRESENTATIVE MURKOWSKI noted she thought there was no duty to mitigate, but if you did then you could... MR. PETERSON note he did not remember the no duty to mitigate provision, questioning if it is in the same section, Sec. 45.05.111. CHAIRMAN ROKEBERG commented he thought there would be a duty to mitigate. Number 1530 REPRESENTATIVE MURKOWSKI noted Section 13, lines 12 through 16, which read: Sec. 45.05.111. Remedies. (a) ... The claimant is not obligated to take action to avoid damages that might be due from the issuer under this subsection. If, although not obligated to do so, the claimant avoids damages, the claimant's recovery from the issuer is reduced by the amount of damages avoided. The issuer has the burden of proving the amount of damages avoided. ... MR. PETERSON stated he believed there is discussion of that provision in the official commentary he has provided. Number 1598 CHAIRMAN ROKEBERG indicated the legislation had had a thorough hearing the previous session. Chairman Rokeberg confirmed there were no further questions for Mr. Peterson. He asked Mr. Peterson to give the chairman's regards to Mr. Kurtz, and thanked them both for their work on behalf of the state as uniform law commissioners. Confirming no one else wished to testify, he stated the public hearing on HB 79 is closed. Number 1715 REPRESENTATIVE HALCRO made a motion to move HB 79 out of committee with the attached zero fiscal note and individual recommendations. There being no objection, HB 79 moved out of the House Labor and Commerce Standing Committee. ADJOURNMENT Number 1742 CHAIRMAN ROKEBERG adjourned the House Labor and Commerce Standing Committee meeting at 4:48 p.m.