Legislature(1993 - 1994)
04/07/1994 08:00 AM House STA
| Audio | Topic |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE STATE AFFAIRS STANDING COMMITTEE
April 7, 1994
8:00 a.m.
MEMBERS PRESENT
Representative Al Vezey, Chairman
Representative Pete Kott, Vice Chairman
Representative Bettye Davis
Representative Gary Davis
Representative Harley Olberg
Representative Jerry Sanders
Representative Fran Ulmer
MEMBERS ABSENT
None
COMMITTEE CALENDAR
HB 543: "An Act relating to unvented gas space
heaters in residential buildings."
MOVED FROM COMMITTEE AS CSHB 543(STA) WITH DO
PASS RECOMMENDATIONS
HB 531: "An Act relating to the existence and
functions of certain multimember state
bodies, including boards, councils,
commissions, associations, or authorities;
and providing for an effective date."
MOVED FROM COMMITTEE AS CSHB 531(STA) WITH NO
RECOMMENDATIONS
HB 410: "An Act relating to real estate appraisers
and the Board of Certified Real Estate
Appraisers."
MOVED FROM COMMITTEE AS CSHB 410(STA) WITH NO
RECOMMENDATIONS
HB 514: "An Act relating to risk based capital for
insurers; and providing for an effective
date."
HELD IN COMMITTEE
HB 420: "An Act relating to limited liability
companies; amending Alaska Rules of Civil
Procedure 20 and 24; and providing for an
effective date."
HELD IN COMMITTEE
HB 393: "An Act relating to the unincorporated
community capital project matching grant
program; and providing for an effective
date."
HELD IN COMMITTEE
HB 530: "An Act relating to certain study,
publication, and reporting requirements by
and to state agencies; relating to certain
fees for reports; and providing for an
effective date."
NOT HEARD
WITNESS REGISTER
DAVID WALSH, Director
Division of Insurance
Department of Commerce & Economic Development
P.O. Box 110805
Juneau, AK 99811-0805
Phone: 465-2515
POSITION STATEMENT: Supported HB 514
REPRESENTATIVE GENE THERRIAULT
Alaska State Legislature
Alaska State Capitol, Room 421
Juneau, AK 99811-0460
Phone: 465-4797
POSITION STATEMENT: Sponsor of SSHB 420
MIKE MONAGLE, Supervisor, Corporate Information
Division of Banking, Securities, and Corporations
Department of Commerce & Economic Development
P.O. Box 110808
Juneau, AK 99811-0808
Phone: 465-2570
POSITION STATEMENT: Answered questions on CSSSHB 420
BOB MANLEY, Working Group Chairman
Alaska State Bar Association
324 East Cook
Anchorage, AK 99501
Phone: 263-8251
POSITION STATEMENT: Commented on CSSSHB 420
PETER BRAUTIGAN
2170 Belmont
Anchorage, AK 99517
Phone: 276-1592
POSITION STATEMENT: Answered questions on CSSSHB 420
BRYAN DURRELL, Attorney
Bogle & Gates
1031 West 4th, Suite 600
Anchorage, AK 99501
Phone: 257-7828
POSITION STATEMENT: Answered questions on CSSSHB 420
JOE RYAN, House State Affairs Committee Aide
Representative Al Vezey, Chairman
Alaska State Capitol, Room 102
Juneau, AK 99811-0460
Phone: 465-3719
POSITION STATEMENT: Reviewed information for HB 393
CRYSTAL SMITH
Alaska Municipal League
217 Second St., Suite 200
Juneau, AK 99801
Phone: 586-1325
POSITION STATEMENT: Commented on HB 393
PREVIOUS ACTION
BILL: HB 543
SHORT TITLE: UNVENTED GAS HEATERS IN RESIDENTIAL BLDGS
SPONSOR(S): STATE AFFAIRS
JRN-DATE JRN-PG ACTION
03/30/94 3074 (H) READ THE FIRST TIME/REFERRAL(S)
03/30/94 3074 (H) STATE AFFAIRS
04/05/94 (H) STA AT 08:00 AM CAPITOL 102
BILL: HB 531
SHORT TITLE: ELIMINATE SOME STATE MULTIMEMBER BODIES
SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR
JRN-DATE JRN-PG ACTION
03/11/94 2728 (H) READ THE FIRST TIME/REFERRAL(S)
03/11/94 2728 (H) STATE AFFAIRS
03/11/94 2728 (H) -7 ZERO FNS (DCRA,2-DCED,CORR,
2-DOE
03/11/94 2728 (H) DNR) 3/11/94
03/11/94 2729 (H) GOVERNOR'S TRANSMITTAL LETTER
03/29/94 (H) STA AT 08:00 AM CAPITOL 102
BILL: HB 410
SHORT TITLE: REAL ESTATE APPRAISERS
SPONSOR(S): LABOR & COMMERCE BY REQUEST
JRN-DATE JRN-PG ACTION
01/28/94 2177 (H) READ THE FIRST TIME/REFERRAL(S)
01/28/94 2177 (H) L&C, STATE AFFAIRS, FINANCE
02/17/94 (H) L&C AT 03:00 PM CAPITOL 17
02/17/94 (H) MINUTE(L&C)
02/18/94 2453 (H) L&C RPT CS(L&C) 6DP
02/18/94 2454 (H) DP: HUDSON, PORTER, SITTON,
MULDER
02/18/94 2454 (H) DP: WILLIAMS, GREEN
02/18/94 2454 (H) -ZERO FISCAL NOTE(DCED) 2/18/94
03/17/94 (H) STA AT 08:00 AM CAPITOL 102
03/17/94 (H) MINUTE(STA)
BILL: HB 514
SHORT TITLE: RISK BASED CAPITAL FOR INSURERS
SPONSOR(S): LABOR & COMMERCE
JRN-DATE JRN-PG ACTION
02/28/94 2551 (H) READ THE FIRST TIME/REFERRAL(S)
02/28/94 2551 (H) L&C, STATE AFFAIRS, JUDICIARY
03/24/94 (H) L&C AT 03:00 PM CAPITOL 17
03/28/94 2996 (H) L&C RPT CS(L&C) 5DP
03/28/94 2997 (H) DP:PORTER, SITTON, MULDER,
GREEN,HUDSON
03/28/94 2997 (H) -ZERO FISCAL NOTE (DCED) 3/28/94
03/28/94 2997 (H) REFERRED TO STATE AFFAIRS
04/07/94 (H) STA AT 08:00 AM CAPITOL 102
BILL: HB 420
SHORT TITLE: LIMITED LIABILITY COMPANIES
SPONSOR(S): REPRESENTATIVE(S) THERRIAULT,Mulder,James
JRN-DATE JRN-PG ACTION
01/31/94 2206 (H) READ THE FIRST TIME/REFERRAL(S)
01/31/94 2206 (H) L&C, JUDICIARY, STATE AFFAIRS
02/24/94 2522 (H) SPONSOR SUBSTITUTE
INTRODUCED-REFERRALS
02/24/94 2522 (H) L&C, JUDICIARY, STATE AFFAIRS
03/08/94 (H) L&C AT 03:00 PM CAPITOL 17
03/09/94 2676 (H) L&C RPT 1DP 3NR
03/09/94 2676 (H) DP: MULDER
03/09/94 2676 (H) NR: WILLIAMS, SITTON, HUDSON
03/09/94 2676 (H) -ZERO FISCAL NOTE (DCED) 3/9/94
03/09/94 2703 (H) COSPONSOR(S): MULDER
03/18/94 (H) JUD AT 01:15 PM CAPITOL 120
03/21/94 (H) MINUTE(JUD)
03/23/94 (H) JUD AT 01:00 PM CAPITOL 120
03/30/94 (H) JUD AT 01:15 PM CAPITOL 120
03/31/94 (H) STA AT 08:00 AM CAPITOL 102
03/31/94 3106 (H) COSPONSOR(S): JAMES
04/06/94 3153 (H) JUD RPT CSSS(JUD) NEW TITLE
4DP 1NR
04/06/94 3153 (H) DP: GREEN, JAMES, PORTER,
NORDLUND
04/06/94 3153 (H) NR: KOTT
04/06/94 3153 (H) -PREVIOUS ZERO FISCAL NOTE
(DCED) 3/9/94
04/06/94 3153 (H) REFERRED TO STATE AFFAIRS
04/07/94 (H) STA AT 08:00 AM CAPITOL 102
BILL: HB 393
SHORT TITLE: UNINCORPORATED COMMUNITY CAP PROJECT GRAN
SPONSOR(S): REPRESENTATIVE(S) MOSES
JRN-DATE JRN-PG ACTION
01/21/94 2125 (H) READ THE FIRST TIME/REFERRAL(S)
01/21/94 2125 (H) CRA, STATE AFFAIRS, FINANCE
02/08/94 (H) CRA AT 01:00 PM CAPITOL 124
02/08/94 (H) MINUTE(CRA)
02/22/94 (H) MINUTE(CRA)
02/28/94 2545 (H) CRA RPT CS(CRA) 3DP 2NR 1AM
02/28/94 2545 (H) DP: BUNDE, TOOHEY, OLBERG
02/28/94 2545 (H) NR: WILLIS, WILLIAMS
02/28/94 2545 (H) AM: DAVIES
02/28/94 2545 (H) LETTER OF INTENT WITH CRA
REPORT
02/28/94 2546 (H) -4 ZERO FNS (DCRA,ADM,LAW,DOT)
2/28/94
02/28/94 2546 (H) REFERRED TO STATE AFFAIRS
03/29/94 (H) STA AT 08:00 AM CAPITOL 102
04/07/94 (H) STA AT 08:00 AM CAPITOL 102
BILL: HB 530
SHORT TITLE: REQUIRED REPORTS OF STATE AGENCIES
SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR
JRN-DATE JRN-PG ACTION
03/11/94 2727 (H) READ THE FIRST TIME/REFERRAL(S)
03/11/94 2727 (H) STATE AFFAIRS, FINANCE
03/11/94 2727 (H) -16 ZERO FNS (5-ADM, 2-DCED,
2-DOE, DEC,
03/11/94 2727 (H) DNR, DMVA, 2-DPS, REV, DOT)
3/11/94
03/11/94 2727 (H) GOVERNOR'S TRANSMITTAL LETTER
03/29/94 (H) STA AT 08:00 AM CAPITOL 102
04/07/94 (H) STA AT 08:00 AM CAPITOL 102
ACTION NARRATIVE
TAPE 94-45, SIDE A
Number 000
CHAIRMAN AL VEZEY called the meeting to order at 8:01 a.m.
Members present were REPRESENTATIVES KOTT, SANDERS and
OLBERG.
CHAIRMAN VEZEY noted the meeting was on teleconference with
Anchorage.
HB 543 - UNVENTED GAS HEATERS IN RESIDENTIAL BLDGS
Under bills previously heard, CHAIRMAN VEZEY opened HB 543
for discussion. He stated when HB 543 was previously
discussed, it appeared the wrong statute was being amended.
He clarified the Department of Public Safety administers the
Plumbing Code and the Mechanical Code due to its authority
referenced in AS 18.60.000, and AS 28.05.011. The
mechanical code is adopted by regulation and updated every
three years. He stated HB 543 would amend the mechanical
code to allow unvented space heaters, by putting in statute
the standards set out by the National Standards Institute
Accreditation Program, for unvented gas heaters.
Number 045
REPRESENTATIVE HARLEY OLBERG moved to pass CSHB 543 from
committee with individual recommendations.
CHAIRMAN VEZEY added the adoption of version K, CSHB 543 to
the motion. He asked the committee secretary to call the
roll.
IN FAVOR: REPRESENTATIVES VEZEY, KOTT, SANDERS, OLBERG.
ABSENT: REPRESENTATIVES B. DAVIS, G. DAVIS, ULMER
MOTION PASSED
HB 531 - ELIMINATE SOME STATE MULTIMEMBER BODIES
CHAIRMAN VEZEY opened CSHB 531 for discussion. He noted the
committee had CSHB 531 version J, before them which
incorporated the amendment adopted the previous Thursday.
He stated CSHB 531 provides the Museum Collections Advisory
Committee (MCAC) can meet by teleconference, gives them a
threshold of $5,000 for purchase consultation, and provides
their duties are to act in the general acquisition and
deaccession policies of the museum. The original HB 531
eliminated the MCAC.
Number 111
REPRESENTATIVE OLBERG moved to adopt version J, CSHB 531.
Number 115
CHAIRMAN VEZEY, hearing no objection, adopted version J,
CSHB 531.
Number 118
REPRESENTATIVE OLBERG moved to move CSHB 531 from committee
with individual recommendations.
(REPRESENTATIVE ULMER joined the meeting at 8:05 a.m.)
Number 120
CHAIRMAN VEZEY asked the committee secretary to call the
roll.
IN FAVOR: REPRESENTATIVES VEZEY, KOTT, ULMER, SANDERS,
OLBERG.
ABSENT: REPRESENTATIVES B. DAVIS, G. DAVIS
MOTION PASSED
HB 410 - REAL ESTATE APPRAISERS
CHAIRMAN VEZEY opened HB 410 for discussion. He noted the
committee had before them a CSHB 410(STA) work draft, which
expands the scope of the Financial Institution Reform
Recovery Enforcement Act (FIRREA) of 1989. CSHB 410(STA)
would bring Alaska standards for education and other
training requirements in line with FIRREA. Alaska would not
exceed the federal standards for real estate appraisers.
Number 160
REPRESENTATIVE FRAN ULMER inquired if the change in
education and training standards was because there was a
problem created with the existing regulations.
CHAIRMAN VEZEY replied no, the Labor & Commerce Committee
had proposed a committee substitute which reduced the
educational requirements in real estate appraiser licensing
to match federal standards. The State Affairs proposal
would reduce all of the requirements, both education and
training.
Number 170
REPRESENTATIVE ULMER asked why.
CHAIRMAN VEZEY answered the question should be why not. A
federal standard is being adopted for part of Alaska's
requirements which are in excess of our current
requirements. Federal standards which are less than our
current requirements are not being adopted.
Number 179
REPRESENTATIVE ULMER asked if there had been any testimony
from the board of real estate appraisers on the change. Did
they agree or disagree.
(REPRESENTATIVE B. DAVIS joined the meeting at 8:08 a.m.)
CHAIRMAN VEZEY was not aware of their testimony.
REPRESENTATIVE ULMER expressed that Alaska would assume the
federal standards are at the right level. She questioned
whether the state ever agrees with federal standards without
first checking whether they are good or bad. She assumed
the board set the standards at another level for a reason.
She stated she would be interested in knowing why the board
set the training requirements differently from the federal
standards; if there was a good reason then we may not want
to do it and if there wasn't a good reason, then maybe we do
want to do it.
Number 195
CHAIRMAN VEZEY commented he believed Alaska's current
regulations go back prior to FIRREA. CSHB 310(STA) proposes
Alaska move its standards in line with the rest of the
country.
Number 207
REPRESENTATIVE OLBERG mentioned CSHB 410(STA) also addresses
the fact that the federal standards continually change. He
noted the second paragraph of the sponsor statement as an
example of the range of hour changes from consecutively 75,
105 to 120. If a state standard was to be fixed, every time
the federal standard changed, the state would be out of
compliance. The state is always in compliance if it is the
same as the federal standard.
Number 223
CHAIRMAN VEZEY stated CSHB 410(STA) would bring the
educational and training requirements into compliance with
the federal requirements. Alaska's requirements would
continue to follow federal standards.
CHAIRMAN VEZEY asked if there was a motion to adopt CSHB
410(STA), version O.
REPRESENTATIVE OLBERG so moved.
Number 242
CHAIRMAN VEZEY, hearing no objection, CSHB 410(STA) was
adopted.
Number 244
REPRESENTATIVE OLBERG moved to move CSHB 410(STA) with
individual recommendations.
Number 250
CHAIRMAN VEZEY asked the committee secretary to call the
roll.
IN FAVOR: REPRESENTATIVES VEZEY, KOTT, ULMER, B. DAVIS,
SANDERS, OLBERG.
ABSENT: REPRESENTATIVE G. DAVIS
MOTION PASSED
HB 514 - RISK BASED CAPITAL FOR INSURERS
CHAIRMAN VEZEY opened HB 514 sponsored by the House Labor &
Commerce Committee, for discussion.
(REPRESENTATIVE ULMER left the meeting at 8:15 a.m.)
Number 277
DAVID WALSH, DIRECTOR, DIVISION OF INSURANCE, DEPARTMENT OF
COMMERCE & ECONOMIC DEVELOPMENT, addressed HB 514. He noted
the presence of Katie Campbell, Life and Health Actuary, who
had the primary responsibility of composing HB 514. He
stated HB 514 had a zero fiscal note and the support of
regulators, the industry (particularly domestic), and
national consumer groups.
MR. WALSH stated historically, insurance company solvency
has been regulated based upon a template. This template is
a general outline, whereby it can apply to State Farm, or
the Alaska Timber Exchange. He noted this template has
proven inadequate as a predictor of insurance company
solvency or as an early warning system for a company nearing
trouble.
MR. WALSH stated risk based capital has been developed over
the last 4-5 years by national insurance regulators, as well
as consumer groups in the industry. Risk based capital is a
formula based upon the different levels of risk an
individual company may have. For example, an auto company
that writes drag racing policies would have a higher level
of exposure than a company writing only personal passenger
auto policies. Risk based capital would set up a formula
for various kinds of risks that results in a number. The
average number a good solid company would have is around 580
percent of risk based capital. Alaska domestic companies
are between 900-24,000 percent of risk based capital.
Therefore, Alaska domestic companies are small, but very
well capitalized and strong. He stated the strength of a
company does not come through in the traditional way of
analyzing solvency. Therefore, when they seek credit, the
solvency laws do not allow them to present themselves in as
strong of light as the company actually exists. He pointed
out risk based capital will help Alaskan companies to expand
and grow. They will be allowed to have an investment policy
which will return a higher yield, thereby resulting in lower
rates and growth in the domestic industry.
MR. WALSH stated the second feature of risk based capital is
how it works as a warning system if the number decreases.
Number decreases will be easy to detect. HB 514 requires
when a company reaches 200 percent of risk based capital,
twice the minimum amount it needs to stay solvent, they have
to administer a rehabilitation plan. At 150 percent the
Division of Insurance has to administer a plan. At 100
percent the Division of Insurance closes the company. He
believed these provisions will help insure problems that
have happened outside will not effect Alaskan consumers
again. He noted the triggers where action is required.
MR. WALSH estimated the standards were presently before 30
states and they would most likely pass. Risk based capital
will become the national standard as of the end of 1995. He
emphasized they suggested HB 514 this year because Alaska's
domestic companies are so strong that it is to their
advantage to start operating under risk based capital this
year. HB 514 has the unanimous support of the Alaska
industry. The Division of Insurance strongly supports HB
514.
Number 370
CHAIRMAN VEZEY considered HB 514 to be a major change. He
asked how long current standards had been in place.
Number 373
MR. WALSH answered since statehood, and in other states
before that.
Number 374
CHAIRMAN VEZEY commented there is good reason for the
change, but HB 514 is a radical departure from current
practice.
Number 378
MR. WALSH agreed.
Number 382
CHAIRMAN VEZEY asked if risk based capital had not yet been
adopted by any of the 30 states considering it. Who
composed the proposal?
Number 384
MR. WALSH answered he did not know if the other states had
adopted the proposal yet. The proposal in HB 514 came from
the National Association of Insurance Commissioners, made up
of the 50 states, plus the five territories and other
jurisdictions in the United States. The National Conference
of State Legislators and their subgroup, the National
Committee of Insurance Legislators, also contributed.
Number 394
CHAIRMAN VEZEY asked how many years they had worked on risk
based capital.
Number 395
MR. WALSH responded 4-5 years.
Number 396
CHAIRMAN VEZEY stated the proposal must have came together
fairly recently, noticing the filing date.
Number 397
MR. WALSH stated the final life and health formula was
adopted in December. They waited to introduce the proposal
to ensure Alaska's domestic industry and other major
companies had an opportunity to comment. They suggested one
amendment that House Labor & Commerce (L&C) adopted, which
added a public hearing requirement, so as the formula
changes the division is assured of a procedure to Alaskanize
it. HB 514 was only recently introduced; however, a lot of
work was done on it by the national association, the Alaska
domestic industry, and the Division of Insurance.
Number 412
CHAIRMAN VEZEY noticed the L&C committee substitute. He
asked the role of a public hearing in the review of an
organization's financial status.
Number 418
MR. WALSH answered the public hearing would be for any
changes in the formula that were proposed for addition. HB
514 states the national formula will be used as the main
solvency tool in Alaska. He pointed out over the next few
years there will be some minor adjustments to the formula.
A formal public hearing, required by regulation, would be
required before any of the adjustments could be adopted by
the Division of Insurance. He stated the public hearing
requirement is a very good change and they have sent it to
the national association as a suggestion for the national
model. Their job is to protect consumers and ensure their
actions are not counter-productive to the development of
Alaska's market.
(REPRESENTATIVE ULMER returned at 8:25 a.m.)
Number 434
CHAIRMAN VEZEY clarified HB 514 would allow Alaskan
companies to issue more policies, recognizing they have a
stronger capital base than current regulations permit. How
would this help the consumers?
MR. WALSH responded the biggest problem currently in Alaska
is availability, not affordability. Over the last few
years, he stated, Alaska has had four carriers with 85
percent of the auto market - Geico, Nationwide, Allstate,
and State Farm. This market concentration does not lead to
lower prices and product innovation. They have been working
to bring new companies into the Alaskan market place.
Safeco entered into Alaska as of April 1, 1994, already
causing prices to drop as a result of the competition.
There are three carriers with 80 percent of the market in
health insurance - Great West, Aetna, and Blue Cross. More
access and more companies are necessary for prices to remain
low for consumers and choices are available.
MR. WALSH believed HB 514 would help in two ways: 1) non-
Alaskan companies that are writing here will be able to
operate what is going to become the national standard, risk
based capital; 2) the small Alaska domestic industry will
have a better competitive advantage because their strength
will be more apparent.
MR. WALSH noted there is only one admitted carrier for taxi
cabs, and virtually no admitted carriers for aviation.
Number 481
CHAIRMAN VEZEY characterized HB 514 as relaxing the
financial standards of the underwriting companies. How
would it help consumers?
MR. WALSH responded HB 514 would not relax any standards.
Those companies who write higher risk insurance and tend to
have an overly aggressive investment policy with their
capital and surplus will be penalized by HB 514. He noted
HB 514 would provide a more accurate picture of the status
of a company. The National Insurance Consumers Organization
have examined risk based capital and they are very
supportive of HB 514.
Number 509
CHAIRMAN VEZEY inquired why the insurance industry was not
present to express their opinion.
Number 524
MR. WALSH said, to the division's knowledge, the industry is
very supportive of HB 514. He stated the Division had met
with or talked on the phone with the management of all the
Alaskan companies and all the legislative lobbyists or
representatives of the other writers in Alaska.
Number 535
CHAIRMAN VEZEY stated he recognized HB 514 would have a
magnitude of impact of great import, therefore it would be
held in committee for further review. He appreciated the
research done to make the proposal.
CHAIRMAN VEZEY called a recess at 8:34 a.m. The meeting
resumed at 8:44 a.m. Members present were REPRESENTATIVES
KOTT, OLBERG and ULMER.
(REPRESENTATIVE G. DAVIS joined the meeting at 8:43 a.m.)
CSSSHB 420: "An Act relating to limited liability
companies; and providing for an effective date."
CHAIRMAN VEZEY opened SSHB 420 for discussion.
REPRESENTATIVE GENE THERRIAULT, SSHB 420 sponsor, read the
following sponsor statement:
"The limited liability company is a relatively new, hybrid
form of business structure that combines the tax advantages
of a partnership and the liability safeguards of a
corporation. Although a combination of these two business
structures is currently allowed in statute through formation
of an S corporation, this structure has limitations that are
avoided by LLCs. For example, S corporations do not allow
ownership by certain types of shareholders.
"Under current law, corporate earnings are subject to double
taxation throughout the payment of corporate taxes and
personal taxes after distribution of dividends. LLCs avoid
this double taxation by allowing earnings to flow through to
individual owners in the same manner partnership income is
handled. Although businesses can be organized through an S
corporation to avoid double taxation and encompass some of
the advantages of partnerships, they do not enjoy all the
advantages of partnerships when it comes to allocating
income and deductions.
"One of the greatest advantages is, as the name implies, the
limited liability offered by the LLC structure. With LLCs
as with regular corporations, only the company's assets and
not the owner's personal assets, are at risk in business-
related lawsuits. In partnerships, so-called limited
partners enjoy such protection, but general partners do not.
And limited partners face restrictions on how active they
can be in the business. LLCs are designed to protect all
the members while imposing no limits on their involvement in
operation of the business.
"Thirty-four states now permit limited liability companies,
and passage in most of the remaining states is expected.
Wyoming passed the first LLC Act in 1977. Other states
slowly followed suit until 1988, when the Internal Revenue
Service issued Rev. Rul. 88-76, which classified a Wyoming
LLC as a partnership for federal tax purposes, even though
none of the members or managers were personally liable for
any of the debts of the company. Following the ruling,
formation of LLCs burgeoned, with two states adopting LLC
Acts in 1990, four in 1991, 10 in 1992 and more than 20
states introducing measures in 1993.
"LLCs have tended to be family businesses, professional
service firms, venture capital companies, real estate and
business start ups I believe the LLC will provide these
business owners with an efficient and flexible investment
vehicle that allows both limited liability, and federal
income tax treatment as a partnership. SSHB 420 is based on
a prototype American Bar Association draft, with changes to
conform the bill specifically to Alaska."
REPRESENTATIVE THERRIAULT stated he provided a proposed
CSSSHB 420 for the committee to consider. They have been
working extensively with the Alaska Bankers Association and
the tax and business law sections from the Alaska Bar
Association to "Alaskanize" the language. He noted the
length of CSSSHB 420, and stated it includes a large section
which outlines how corporations are to be formed and operate
in Alaska. Framework for a new business structure is being
created, rather than altering existing statutes.
Number 613
CHAIRMAN VEZEY commented the "so-called corporate shield has
been pierced so many times that it is now like a screen
door." Why will an LLC establish a shield protecting
individuals from the liability of a business structure of
activities.
(REPRESENTATIVE OLBERG left the meeting at 8:48 a.m.)
Number 622
REPRESENTATIVE THERRIAULT deferred the question to the
witnesses at the Anchorage teleconference site who may
better answer. He stated CSSSHB 420 would not provide any
more of a shield than a corporation. The same level of
personal asset protection provided in a corporate structure
would now be provided through the LLC structure. LLC
structure has the advantage over a corporation, whereby
double taxation would not exist.
Number 631
CHAIRMAN VEZEY asked how it would differ from a subchapter S
corporation.
Number 633
REPRESENTATIVE THERRIAULT answered there are restrictions on
what type of entities can be shareholders in a subchapter S
corporation, which do not apply in the LLC structure.
(REPRESENTATIVE OLBERG returned at 8:50 a.m.)
Number 642
MIKE MONAGLE, SUPERVISOR, CORPORATE INFORMATION, DIVISION OF
BANKING, SECURITIES, AND CORPORATIONS, DEPARTMENT OF
COMMERCE & ECONOMIC DEVELOPMENT (DCED), answered questions
on CSSSHB 420. He said the DCED participates with the
International Association of Corporation Administrators and
over the last 10 years LLC legislation has been a real "hot
topic" among the states. The IRS has granted more and more
private letter rulings and treated the states favorably for
tax purposes, therefore there is a rush towards LLC
organizations in the last 3-4 years. He noted the
anticipation that by the end of 1995 all 50 states will have
LLC legislation before them. DCED receives 3-4 inquires a
week, from other states, wanting to know if Alaska
recognizes the LLC structure. Therefore, he believed
business opportunity exists and Alaska businesses will
benefit to organize under the LLC structure.
Number 661
REPRESENTATIVE ULMER asked how many existing companies in
Alaska would shift over to the LLC structure.
MR. MONAGLE stated he did not know. He did not believe an
existing corporation would switch over because of the
difficulty. Large corporations have shareholders and LLCs
have managers, or members that manage. Therefore, it would
not be feasible to replace boards of directors with one
manager, or a group of shareholders to make the decisions.
MR. MONAGLE mentioned "ma and pa type corporations,"
previously formed as an S corporation, may elect to go with
a LLC. They would not have as many restrictions. He noted
about 1,100 domestic corporations form a year, most of which
are small. A fair number of the small corporations would be
subchapter corporations devoid the tax situation.
Number 681
CHAIRMAN VEZEY clarified subchapter S corporations are
established under federal law.
MR. MONAGLE affirmed CHAIRMAN VEZEY.
Number 685
CHAIRMAN VEZEY questioned if and where they were recognized
under Alaska statute. Federal only?
MR. MONAGLE responded he believed Department of Revenue
recognizes the exemption granted by the IRS.
TAPE 94-45, SIDE B
Number 000
CHAIRMAN VEZEY, in comparing a subchapter S corporation to
an LLC, pointed out the state adopting federal law versus
the federal IRS adapting to state law. He questioned if
there was not a great deal more uncertainty.
Number 014
MR. MONAGLE answered part of the reason there was not an
exodus to the LLC structure initially was because of the
question as to what the IRS might do. Wyoming being the
state with a private letter ruling. He believed there has
been no public letter rulings by the IRS granting blanket
exemption for LLCs.
Number 026
CHAIRMAN VEZEY inquired what he meant by a blanket
exemption.
Number 027
MR. MONAGLE replied if one formed subchapter S corporation,
recognized as tax exempt, the IRS has not said that they
will blanket recognize every state that comes forth with a
LLC Act. IRS reviews each state and then makes a ruling.
He noted this as another reason for not having a mass exodus
to the LLC structure. He believed within the next five
years the IRS would provide a blanket ruling due their
indication.
Number 053
CHAIRMAN VEZEY mentioned MR. MONAGLE's statement that they
received three-four outside interest calls. He asked weekly
or monthly.
MR. MONAGLE answered weekly.
Number 059
CHAIRMAN VEZEY inquired if three-four viable business
enterprises a week would be actually considering entering a
vague IRS status, or do they not know what is in Alaska.
Number 063
MR. MONAGLE responded they are already formed as a LLC in
their own state. They inquire as to how they will be
treated in Alaska. Their structure needs to be recognized
to not put their limited liability at risk.
Number 081
CHAIRMAN VEZEY clarified they are not aware of the Alaska's
status.
MR. MONAGLE answered most do not know. Most calls are from
comptrollers and service companies.
Number 086
REPRESENTATIVE ULMER asked what kind of companies are
considering doing business in Alaska, whereby LLC status is
critical for them.
Number 089
MR. MONAGLE replied what kind of business they are is
usually not discussed. They question where Alaska's
legislation is. Calls come from all over the country.
Number 094
REPRESENTATIVE ULMER questioned who is considering coming to
Alaska to do business.
Number 095
MR. MONAGLE clarified they call to inquire about Alaska's
legislation, therefore he was assuming they were doing
studies or making business decisions.
Number 099
REPRESENTATIVE ULMER questioned if they were discussing the
"ma and pa" type businesses.
Number 103
MR. MONAGLE replied he did not think so. States that
developed LLCs first were those who do a lot of resource
development. He mentioned Colorado and Wyoming as examples.
He stated most of Alaska's corporations which deal with
mineral extraction are Canadian owned. Therefore, if they
have already formed a LLC in another state, it would be an
attractive alternative to be able to come and enjoy the same
protection in Alaska as they do in their own state.
(REPRESENTATIVE SANDERS returned to the meeting at 8:59
a.m.)
Number 118
REPRESENTATIVE THERRIAULT mentioned his wife is an attorney
dealing with business practice in Fairbanks, and she has
also had two-three people per month inquire about forming a
business and the possible structures they can form under.
He believed, by suggestion of their accountant, these people
have questioned whether the LLC form is available in Alaska.
He stated it was his intent to add the LLC structure to the
list of choices.
Number 150
BOB MANLEY, WORKING GROUP CHAIRMAN, TAX and BUSINESS LAW
SECTIONS, ALASKA STATE BAR ASSOCIATION, commented on CSSSHB
420. He reiterated CSSSHB 420 was drawn from the American
Bar Association Prototype Act, with significant influence
from the banking community, corporations, and other
interested persons. He stated he read in the Wall Street
Journal last week, that 38 states have now adopted LLC
legislation. He noted the California State Senate just
passed LLC legislation by a 39-0 vote and the Governor is
expected to sign shortly.
MR. MANLEY stated LLCs blend corporate and partnership tax
and operational characteristics. LLCs provide a flexible
operating system and a federal income tax advantage to the
members. LLCS provide a state planning advantage. LLCs
facilitate foreign investment, because nonresident aliens
may not be subchapter S corporation shareholders. Double
taxation is avoided.
MR. MANLEY mentioned LLCs will mostly replace subchapter S
corporations and partnerships. He directed to the question
of how many companies will change over to LLCs. He answered
few, if any regular corporations will change over because
the transactual and tax cost of changing would be too
significant. Some partnerships, however, will change over.
MR. MANLEY directed to the question about the uncertainty of
tax classification. He answered the IRS does not like to
issue blanket rulings. He noted that the Alaska version of
the Uniform Limited Partnership Act adopted in 1992, the IRS
has still not issued a ruling as to whether it will be
classified as a partnership for tax purposes. IRS moves at
its own pace and speed. He stated their working group has
already opened informal communication with the IRS and they
have indicated they will open a revenue ruling project.
Therefore, any uncertainty as to tax classification should
be resolved promptly.
Number 224
CHAIRMAN VEZEY commented under the current corporate
structure, the "corporate shield" is getting thin.
Corporate officers now go to jail and boards of directors
are now held liable. He asked how current structure would
compare to shield provided by the LLC structure.
Number 238
MR. MANLEY answered he did not believe the LLC would offer
any greater shield. While the operating systems may be a
little bit different, people will still be "tagged" in some
circumstances, for their own individual acts.
Number 256
CHAIRMAN VEZEY mentioned anyone who sits on a board of
directors, needs to give consideration to a director's
liability insurance policy.
Number 263
MR. MANLEY responded, "absolutely." Even with a person
serving on a nonprofit volunteer board handling significant
amounts of money, is very important to maintain liability
insurance. He noted Alaska's corporate code allows
corporations to indemnify members to the board of directors.
LLC structure does likewise.
Number 278
CHAIRMAN VEZEY asked if all partners in an LLC would need to
carry a partners liability insurance policy.
Number 281
MR. MANLEY answered a LLC can be operated either member-
managed or manager-managed. In a manager-managed LLC, he
believed it would be appropriate for the manager to secure
directors and officers insurance or an equivalent. In a
member-managed LLC, he believed some businesses may opt not
to because they had previously operated with partners
without any protection. He noted protection is prudent.
Number 300
PETER BRAUTIGAN, CORPORATE SHAREHOLDER, commented on CSSSHB
420 from the Anchorage teleconference site. He stated his
practice entails business and transactional tax planning,
along with significant estate planning. He sees the LLC as
a viable alternative for many clients. LLC structure is
being considered in ventures proposed in Alaska that have
been organized in other states. LLCs are important for
commerce in the long run. There are no limitations as to
the number of investors, thereby trusts and other
partnerships can be involved in the LLC. LLCs also allow
participation in management, which would not regularly be
allowed under a limited partnership theory.
MR. BRAUTIGAN addressed the question regarding the corporate
veil. He answered the LLC would not provide anymore
protection for its investors than a corporation already has.
Typically, there are numerous clients who do not maintain
their corporations, thereby making it more difficult for
them to be protected from liability. He noted as long as
the corporation is maintained, the corporate veil will
protect the investors' personal assets from the liabilities.
MR. BRAUTIGAN stated the types of businesses interested in
LLCs are entities from other states that have LLC
legislation. Specifically, mining ventures, fishing
operations, and entities that want to invest through trust
or other partnerships.
Number 362
CHAIRMAN VEZEY questioned director liability versus LLC
partner liability. He stated individual members of boards
of directors are held liable particularly for taxes. How
would this transfer over to a LLC partnership.
Number 370
MR. BRAUTIGAN clarified CHAIRMAN VEZEY was questioning the
100 percent penalty imposed by the IRS, Section 6672 of the
Internal Revenue Code. This section states if a director,
officer, or manager of the corporation directs funds to
someone other than the IRS, relating to withholding taxes,
they can be held responsible for the payment of those taxes.
This same rule under federal law would apply to a LLC. He
was not aware of them being held liable for other taxes of a
corporation.
Number 383
CHAIRMAN VEZEY agreed he had been referring to withholding
taxes. He questioned if the manager did not make a
withholding payment, and members of the board are fiducially
responsible, how would it translate to a LLC.
MR. BRAUTIGAN answered under current federal law a person
who is responsible for making the withholding payments, who
wilfully failed to pay them to the IRS, can be held
responsible for the payments. Therefore, the same law
applies to both a regular corporation under current status
and to the LLC members.
Number 400
CHAIRMAN VEZEY stated his interpretation is that the boards
of directors are expected to exercise responsible oversight,
and failure to do that is usually interpreted as intentional
neglect.
MR. BRAUTIGAN responded, from his experience with Section
6672, there has to be a flagrant disregard for the rules
before the IRS will hold a person responsible. The IRS
frequently claims flagrant violations; however, it usually
ends up that the person either did not have the
responsibility or did not willfully make the payment to
someone other than the IRS.
MR. BRAUTIGAN stated the example that he now sits on a board
of directors; however, he does not have the authority to
sign checks. Therefore, he could not be held responsible.
Number 415
CHAIRMAN VEZEY clarified this analogy would extend over to
the LLC.
MR. BRAUTIGAN responded "absolutely."
Number 418
REPRESENTATIVE THERRIAULT addressed the potential impact to
the state treasury from the loss of corporate taxes. He did
not believe this loss would be experienced. Because of the
difficulty involved in transferring from the corporate
structure to the LLC structure, he did not expect any
corporations to make a structural change. Businesses that
would most likely choose the LLC structure he felt would be
those which would have chosen subchapter S or partnership
structure on which there are no state corporate taxes
applied. Therefore, the state treasury should not be
impacted. When a business reaches the size where it would
have paid any kind of significant corporate taxes, he
believed that business would still want a pure corporate
structure.
Number 436
CHAIRMAN VEZEY commented corporate taxes are a misnomer
because they do not just apply to corporations, they apply
to any business entity. If the business has a profit
operating under a business license, it would be subject to
the corporate tax. He assumed that a LLC retaining earnings
would be subject to the same tax.
REPRESENTATIVE THERRIAULT replied the business would be
treated just as a partnership would for taxes.
Number 447
CHAIRMAN VEZEY questioned how a LLC would ever accumulate
capital and retained earnings.
Number 450
BRYAN DURRELL, CERTIFIED PUBLIC ACCOUNTANT and LAWYER, BOGLE
& GATES, answered questions on CSSSHB 420. He stated taxes,
under Alaska state law, the only income taxes are assessed
against regular or C corporations. S corporations made the
special election under the federal Internal Revenue Code to
be taxed as if they were akin to a partnership, a flow
through tax where the profits and losses are allocated to
the shareholders. S corporations and partnerships are not
subject the Alaska income tax, only C corporations.
MR. DURRELL addressed CSSSHB 420 where a LLC would be
formed. He stated there would be an option of the
organizers to structure it either as a corporation subject
to tax, or as a partnership. He believed most will opt for
partnership structure for the primary tax advantage. An LLC
organized as a partnership would not be subject to tax.
Income would be allocated to the members and they would not
have to pay taxes on it.
Number 492
CHAIRMAN VEZEY clarified for a LLC, partnership, or an S
corporation to accumulate capital or retained earnings, the
individual partners would have to pay the taxes on the
retained earnings.
Number 497
MR. DURRELL affirmed CHAIRMAN VEZEY. The individual members
of the LLC would pay taxes on any allocable share of the
profits. Whether they were retained earnings or capital, or
if they were distributed it would not matter.
Number 501
REPRESENTATIVE ULMER inquired, in trying not to have a
significant revenue impact to Alaska, which kinds of
companies may opt to use the LLC structure in the future,
thereby potentially reducing state revenues. She noted the
mining and fishing companies trying to avoid state corporate
income taxes.
Number 519
MR. DURRELL responded he did not believe there would be any
significant loss of tax revenues to the state. Mining and
fishing companies which have worked within the corporate
structure, could use the LLC structure. He noted they would
replace their corporate structure they currently have with
the LLC structure. A joint venture structure would be
replaced.
MR. DURRELL mentioned the example of the organization of the
Greens Creek Mine, originally the largest silver mine in the
United States. A joint venture was originally selected to
organized by because it would give them pass through tax
benefits. Mining companies could make their investments in
Alaska more efficient using a LLC because they would still
have the pass through tax benefits, and the limited
liability aspect would be an added attraction. He explained
in order to go into a project like Greens Creek, they have
to form a corporate subsidiary which holds the joint venture
interest in order to get limited liability. The result is a
half a dozen publicly held corporations, each with fully
owned subsidiaries, and each are joint venture partners.
Under the new format, the corporations can avoid the
intermediary fully owned subsidiary. In an LLC, they can
have a membership interest without any impact on tax
revenues to the state.
Number 558
CHAIRMAN VEZEY asked if REPRESENTATIVE ULMER wanted to hold
CSSSHB 420 for further review.
REPRESENTATIVE ULMER affirmed CHAIRMAN VEZEY.
Number 563
REPRESENTATIVE THERRIAULT asked when CSSSHB 420 would be
reheard and if it would make the deadline for moving house
bills to house rules.
Number 566
CHAIRMAN VEZEY answered CSSSHB 420 would not make the
deadline because it would be reheard next Thursday. He
noted the companion bill in the Senate.
Number 567
REPRESENTATIVE THERRIAULT pointed out the Senate bill had
been held waiting the arrival of CSSSHB 420.
Number 570
CHAIRMAN VEZEY noted CSSSHB 420 as a major piece of
legislation and believed there would not be a problem
getting a waiver for the internal rule. Senate bills will
be heard until April 20. If he requested it, he believed a
one-week extension would be granted.
CHAIRMAN VEZEY held CSSSHB 420 in committee.
(REPRESENTATIVE ULMER left the meeting at 9:31 a.m.)
HB 393 - UNINCORPORATED COMMUNITIES CAPITAL PROJECT GRANT
CHAIRMAN VEZEY opened HB 393 for discussion. He stated
information had been prepared to answer questions about
financing additional cities. He asked JOE RYAN for an
explanation of the report.
Number 595
JOE RYAN, STATE AFFAIRS COMMITTEE AIDE, explained the report
on HB 393. He stated there had been concern from the
Fairbanks North Star Borough as to whether it would lose
revenue if HB 393 went into effect. He discussed the
concern with Judi Slajer, Chief Financial Officer, Fairbanks
North Star Borough, who felt there would be an approximate
10 percent loss, or perhaps $120,000 less moneys.
MR. RYAN stated the report (on file) illustrates what the
allocations would be. He understood the legislative
function would be that two programs will be set up, whereby
certain amounts of funds will be allocated to the rural
program and other amounts will be allocated to the other
programs. The report breaks down what each community would
be eligible to receive, examining grant number, population,
matching amount and grant, if HB 393 goes into effect.
MR. RYAN stated he was unable to answer whether the
percentage of grant would be reduced for the smaller
communities. He noted a 30 percent reduction for the larger
communities.
Number 619
CHAIRMAN VEZEY clarified the report illustrates how the
program would distribute if HB 393 became law. He noticed
there was not a comparison of current status.
Number 624
MR. RYAN commented there have been several people out sick
from different departments, therefore he has had difficulty
getting comparative data.
Number 631
CHAIRMAN VEZEY stated the extra grants to the unincorporated
communities within boroughs would be allocated out of the
total program receipts.
MR. RYAN clarified the allocation is made by the
legislature. He stated the distribution formula is based
upon population figures, with central pie. If the
population in a borough was reduced or not counted, they
would proportionately receive less money. Additional
communities figured in individually would subtract from the
total population figure, thereby the share of the pie for
the larger community would proportionately reduce.
Number 641
CHAIRMAN VEZEY estimated the formula appears to allocate in
boroughs about $10 per citizen. For example, presently if
Salcha represented 400 people in the Fairbanks North Star
Borough (FNSB), the borough would receive $4,000. Under HB
393, if Salcha was eligible, it would receive $25,000,
reducing the money available in the pool.
Number 645
MR. RYAN added the population of the FNSB would be reduced.
(REPRESENTATIVE KOTT left the meeting at 9:39 a.m.)
Number 658
REPRESENTATIVE GARY DAVIS agreed HB 393 would reduce the
amount to the borough; however, in most cases the borough
would already have a project they were funding in that
unincorporated area.
MR. RYAN pointed out HB 393 hinges on legislative
appropriation because, from his understanding, there will be
two appropriations.
Number 674
CRYSTAL SMITH, ALASKA MUNICIPAL LEAGUE, commented on HB 393.
She stated there are two concerns about HB 393: 1) funding
within a borough would shift from the borough to the
unincorporated communities - organized to unorganized
government structure; and 2) in the absence of additional
funding and the letter of intent from the Community &
Regional Affairs Committee, the effect of adding several
unincorporated communities would be to reduce every
incorporated community's share of the total appropriation.
She noted there is a net need for additional funds, or a net
decrease for municipal governments. HB 393 is another
example of a disincentive to the organization of local
government.
(REPRESENTATIVE OLBERG left the meeting at 9:40 a.m.)
(REPRESENTATIVE KOTT returned to the meeting at 9:40 a.m.)
Number 692
CHAIRMAN VEZEY clarified HB 393 would be a good policy if
the legislature was looking for a method to go to something
other than organized boroughs.
Number 693
MS. SMITH stated she would not say that, but HB 393 is
another disincentive for people to organize or keep
organized.
Number 695
CHAIRMAN VEZEY recognized the joint session starting at 9:45
a.m. HB 393 was held in committee.
ADJOURNMENT
CHAIRMAN VEZEY adjourned the meeting at 9:43 a.m.
BILLS NOT HEARD
HB 530 - REQUIRED REPORTS OF STATE AGENCIES
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