Legislature(1995 - 1996)
04/21/1995 09:35 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
MINUTES
SENATE FINANCE COMMITTEE
APRIL 21, 1995
9:35 A.M.
TAPES
SFC-95, #40, Side 1 (000-575)
SFC-95, #40, Side 2 (560-1000)
CALL TO ORDER
Senator Rick Halford, Co-chair, convened the meeting at
approximately 9:35 a.m.
PRESENT
Co-chair Halford and Senators Phillips, Sharp, and Rieger
were present. Co-chair Frank and Senators Donley and
Zharoff came shortly after the meeting began.
Also Attending: Joe McCormick, Executive Director for the
Commission on Postsecondary Education; Senator Taylor; Ken
Erickson, Legislative Aid to Senator Pearce; Elmer
Lindstrom, Special Assistant to the Commissioner of the
Department of Health & Social Services; Marvene Coggins,
Legislative Aid to Representative Toohey; and Susan Taylor,
Fiscal Analyst, Legislative Finance Division.
Teleconference: Vernon Sales, Executive Vice President, Key
Trust Co. for Alaska, Representing Alaska Banks Association,
and testifying on SB 131.
SUMMARY INFORMATION
SJR 21 ANWR SPECIAL REVENUE FUND
Testimony was given in support of SJR 21 by Ken
Erickson,
Legislative Aid to Senator Pearce. SJR 21 was REPORTED
OUT
of committee with "no recommendations" and zero fiscal
notes from the Department of Revenue and the Office of
the Governor.
SB 123 POSTSECONDARY EDUCATION PROGRAMS
Discussion was had with Joe McCormick, Executive
Director for the Commission on Postsecondary Education.
It was agreed to hold for further discussion.
SB 131 INVESTMENTS BY FIDUCIARIES
Testimony was given by Vernon Sales by teleconference.
SB 131
was REPORTED OUT of committee with "no recommendations"
with
a zero fiscal note from the Department of Commerce and
Economic Development.
HB 108 USE PFD'S TO RECOVER WELFARE OVERPAYMENT
Discussion was had with Elmer Lindstrom, Special
Assistant to
the Commissioner of the Department of Health & Social
Services. HB 108 was REPORTED OUT of committee
with three zero fiscal notes from the Department of
Revenue, and the Department of Health & Social
Services (Public Assistance & AFDC) with a "do pass"
by Co-chairs Halford and Frank and Senators Rieger,
Phillips, Donley and Sharp. Senator Zharoff
signed "no recommendations".
SB 70 PUBLIC SCHOOL FOUNDATION PROGRAM
Working Draft 9-LS0652\0 was ADOPTED and amended to
reflect a language change on pages 4 and 14. Changing
the word percentage to "factor". A new working
draft was ordered and
will be brought back to the committee at the next
meeting.
Senator Taylor and Joe McCormick gave testimony.
SENATE JOINT RESOLUTION NO. 21
Proposing amendments to the Constitution of the State
of Alaska creating a special fund related to the
use of federal mineral revenue sharing payments due
the state from certain federal leases on the coastal
plain of the Arctic National Wildlife Refuge.
Ken Erickson, Legislative Aid to Senate President Drue
Pearce joined the committee. He testified that SJR 21 would
place before the voters of the State of Alaska at the next
general election, an amendment to the state constitution
which would create the Arctic National Wildlife Refuge
Special Revenue Fund. This fund would consist of all state
share royalties from any future development from the coastal
plain of the Arctic National Wildlife Refuge, except for the
50% share already required by the state constitution, to be
placed in the Alaska Permanent Fund. The state legislature
could only appropriate money in this fund for assistance or
aid to a municipality under a program of state aid to local
government, established by laws embodied in AS 29.60.100 -
AS 29.60.375 or for the support of school construction and
school major maintenance programs established by law as
currently embodied in AS 14.11.007 - AS 14.11.135. If
ratified by the citizens of Alaska, this resolution would
create a dedicated fund. Senator Pearce believes that it is
essential that Alaskans be given the opportunity to put this
mechanism in place now, before ANWR exploration and
development is a reality. When fields are developed and
revenues are flowing to the General Fund, the pressure to
use the royalties for other purposes will be overwhelming.
This new fund will be an important resource to help local
governments meet their obligations in years to come.
Municipal Assistance and State Revenue Sharing has been cut
approximately 50% in the last ten years while municipalities
have been required to take on ever increasing
responsibilities. This legislation is supported by the
Alaska Municipal League.
Senator Sharp MOVED to adopt SJR 21 with individual
recommendations and accompanying fiscal notes. Without
objection SJR 21 REPORTED OUT of committee with fiscal notes
from the Office of the Governor, zero amount; and Dept of
Revenue zero amount in 1996, and $2.2 in 1997. The
committee signed "no recommendation".
SENATE BILL NO. 123
"An Act relating to student loan programs, interstate
compacts for postsecondary education, and fees for
review of postsecondary education
institutions; and providing for an effective date."
Joe McCormick, Executive Director for the Commission on
Postsecondary Education testified before the committee that
SB 123 provides three broad objectives for the Alaska
Student Loan Program: 1) to improve customer service, 2) to
strengthen the financial viability of the program, and 3) to
improve overall program administration. He went through the
bill, section by section. To improve customer service, the
bill will expand the loan limits in the program for degree
granting institutions. The graduate limits, which are
currently at $6500, would increase to $9500 per year. The
undergraduate limit, which is currently at $5500, would
increase to $8500. Section 3, requires that Alaska Student
Loan Funds be only used for career education programs that
operate on a physically sound basis, that have operated for
at least two years, and that have entered and executed a
program participation agreement with the college. This will
insure financial stability of the schools participating in
the program. Section 4 revises the borrowing maximum term
of repayment. This will allow for extended repayment terms
for larger loan limits. Students are borrowing more and more
each year. Historically, there has been a 10-year repayment
period. We are recommending that the period be extended to
15 years. The grace period of 12-months, has been reduced
to 6-months, with a minimum of $50 repayment per month. The
time period, whereby a loan goes into default, has been
expanded from 120 days to 180 days, this will allow an
additional 2 months to work with the borrower before going
into default. Section 16, 21 and 27, would provide that
families who have a need to borrow from both the Alaskan
Student Loan Program, and the Alaska Family Education Loan
Program, may do so. Under current law, participation in
both programs is not allowed. Mr. McCormick said that to
obtain the second objective of increasing the financial
viability of the program, it is recommended that: 1) there
is an appropriate interest rate assessment during the
qualifying deferment period. Loan deferment for military
service or returning to school allows for a no-interest time
frame. The bill proposes eliminating the interest free
loans. Section 14 would allow the commission to set a loan
origination fee in a range of 0% to 5%, as an offset against
losses due to death, disability, default, and/or bankruptcy.
Section 17 would prohibit incarcerated individuals from
receiving Alaska Student Loans. Section 18 would give
delinquent student loans a priority, second to child
support, in a wage garnishment proceeding. These provisions
would increase the financial viability of the loan program
overall. Lastly, there are technical amendments eliminating
costly and unnecessary mailings to borrowers. It would
require that illegally obtained loans be paid in full and on
demand. It would remove an arbitrary cap on the loan volume
from one year to the next. The goal is to insure that this
loan program is financially solvent, now and in the future,
so that Alaskan's can participate in this program when it
comes time for them to pursue postsecondary educational
opportunities.
Senator Sharp asked how the loans are tracked for repayment?
Mr. McCormick stated that it is easier for the commission to
track dollar amounts opposed to the number of years, since
many students have interruptions in the educational process.
He said that the Family Education Loan (FEL) program would
share the same dollar cap that the Alaska Student Loan (ASL)
program would have. The combined cap is $158,000 because
the parent would be borrowing under the FEL program.
Section 21 refers to the Teachers Scholarship Loan (TSL),
which is not part of the ASL or the FEL. It is a separate
loan. Senator Sharp stated that he is not willing to
provide for bigger loan debts and longer payback periods.
Mr. McCormick responded that the University of Alaska
represents 70% of the borrowing. The $5500 loan limit has
been set in loss since 14 years ago. In that 14 year period
the university has increased its tuition by over 250%, so
there have been increases for a period of time in 14 years
in what it costs the student to go to school, but there has
been no adjustment to the loan limits during that same
period of time. Senator Sharp said that Alaska has more
students, and if there is more money loaned, the multiplier
creates a tremendous impact on the revolving fund.
Senator Rieger asked about the trigger for an institution
whose default rate is over 150%. Mr. McCormick responded
that the program's default rate as of June 30, 1994, was
19.6%. If the default rate went above 30%, it would be
triggered. Senator Rieger asked what sorts of institutions
are exceeding 30% default rates? Mr. Mccormick responded
that the short-term programs that offer training
opportunities of less than 9 months in length have the
higher default rates. Those default rates range from 26%-
50%.
Senator Rieger stated his biggest objection is from 1% to
5%. Mr. McCormick responded that 5% was a middle ground of
the maximum of 8%. He said that the system would not
tolerate more than 5%. The important point that is being
made, is that a range is being set. The bill does not say
that every year a 5% fee will be charged, but rather, that
an assessed fee will be between 0%-5% depending on the level
of death, disability, and default experience of the program.
As the default rate is brought down, the origination could
be brought down from 5%. The rate will be 5% within the
first few years because the losses to the loan fund have not
been offset in the past. Over time, as the losses are
recovered, the origination fee will go down.
Senator Rieger spoke to the 30% default issue, stating that
to raise the interest for the new student because the old
loan was not repaid by the preceding student does not seem
fair. Mr. McCormick stated that he does not support the use
of a default rate as a criterion to determine whether or not
a school participates in the loan program. The default rate
experience reflects a combination of occurrences with the
students who attended those programs. There may be a good
school with a good program, but high unemployment in that
particular field of study. Upon graduation, if the student
is not able to find employment, naturally, the payback is
put off. He supports raising the standards for
participation of schools, before allowing participation in
Alaska Student Loans. For example, the provisions in this
bill that say they should be physically sound, and that they
should have operated for at least two years, are ways to
avoid the bad experiences that this loan program has had in
the past. He is confident that such action is more positive
than an arbitrary default rate.
There was discussion on a Pete Marwick study regarding
outsourcing.
Mr. McCormick stated than in administering the size of this
loan program, along with the distance from the mainstream of
the student loan industry, it isn't feasible. He noted his
concerns in outsourcing to a servicer in another area within
the United States, it may be, 1) risky, 2) may not be doable
(not from this end, but from the host end) because the
system may not be adjustable to accommodate a very small
loan program which is located a long way from their market
area. It is for these reasons that it is being done in-
house.
Senator Sharp did not want the bill to move out, he
questions the amendment, which he did not have time to
analyze. He asked for clarification regarding the loan and
if the student is out-of-state versus in-state. Mr.
Mccormick responded that the program could be out-of-state,
and the student is physically present in this state. For
example, there are programs available to students on
military bases in Fairbanks and in Anchorage offered by
Wayland Baptist University. That is a program that is out-
of-state, but the student is physically present in the state
of Alaska. He also stated that there are programs available
outside the state of Alaska. The program excludes non-
residents. Alaskan students can go to school anywhere and
receive the Alaska Student Loan.
Senator Zharoff asked how this would effect existing loan
programs with an effective date of July 1, 1995. Mr.
McCormick responded that it will effect those funds not yet
disbursed, but on prior loans there would be no effect. For
those students who have borrowed money and are in repayment,
as their loans go into deferment, there will be no interest
added. By changing this law to read, "interest on the loan
during deferments," it would have no impact on prior loans,
only loans made on or after July 1, 1995. The promissory
notes and their preexisting conditions must be honored.
Senator Zharoff referred to total disability. Mr. McCormick
noted that for those students who do not medically meet the
definition of total disability, they will not be exempt from
making payments on the loans taken out after July 1, 1995.
For those who are 50% disabled and have taken out their
loans prior to July 1, 1995, they would qualify for medical
deferments. It is felt that this is a misuse of the
program, and Mr. McCormick indicated that it would be
advantageous to discontinue this deferment.
Co-chair Frank spoke to Amendment #1, which is a product
produced by the budget subcommittee within the Dept of
Education. The WAMI program has a contractual obligation to
the University of Washington which requires an increased
payment for overhead. The commission said they were not
able to charge the students who benefit from the program,
and this amendment would allow for that. He felt it was a
responsible approach to enable the WAMI program to survive.
Senator Frank MOVED for adoption of the amendment. Senator
Phillips OBJECTED. He asked if Mr. McCormick had a position,
which he did not. Senator Rieger has an amendment to the
amendment. Senator Sharp OBJECTED. He stated that for the
number of students that benefit from all the universities
compared to the number of students that benefit from WAMI,
there is no comparison. He stated that the program is
supporting 6-8 students and costing hundreds to thousands of
dollars. The least they can do is absorb some of the cost
from the special education. Senator Frank stated that his
amendment was not intended to harm WAMI. There was further
discussion regarding this issue.
It was agreed to hold the bill and come back to it at a
later time.
End Tape #40, Side 1
Begin Tape #40, Side 2
SENATE BILL NO. 131
"An Act relating to investments by fiduciaries."
Vernon Sales, Executive Vice President, Key Trust Co for
Alaska, representing Alaska Bankers Association, spoke by
teleconference to the committee. He stated that the purpose
of SB 131 is to provide more investment opportunities for
the Alaskan consumer. The investment opportunities are
defined by: 1) expanding on current state statutes in
reference to common funds by including the term,
"affiliate", and 2) using new language to the state statute
to specifically allow for the use of mutual funds. Mutual
funds are investment pools that are created to accept sums
of money in various amounts, from individuals in
institutions. These funds are then made available across
state lines throughout the country. Common funds are
conceptually the same, they accept large sums of money but
they are normally not made available across state lines. By
adding the word affiliate into the common trust fund code,
the banks could offer to Alaskans the same funds that are
currently available to customers in Washington, Oregon and
Utah. The proposed changes expand the opportunity for
investments for consumers in Alaska.
Senator Sharp asked if the bank trust fiduciaries are
allowed to invest trust funds into equity stock at this
time? Mr. Sales responded that State statutes would allow
specifically for common stocks, it does not specifically
name mutual funds. He stated that mutual funds spread the
risks, and provide for diversification.
Senator Rieger stated that his concern related to the bill
restricting other entities being fiduciaries and trustees.
In studying the bill, it turns out that it is nothing more
than a clean up of financial institution trusts. He feels
it is worth passing.
Senator Phillips MOVED to adopt SB 131 with individual
recommendations. No objections being heard, SB 131 was
REPORTED OUT of committee with "no recommendations" and a
zero fiscal note from the Dept Commerce & Economic
Development.
HOUSE BILL NO. 108
"An Act relating to claims on permanent fund dividends
for defaulted public assistance overpayments."
Marveen Coggins, Legislative Aid to Representative Toohey,
testified that HB 108 gives the Dept of Health & Social
Services authority to collect delinquent public assistance
overpayments by administrative garnishment of an
individual's permanent fund dividend. Frequently, persons
who did receive overpayment have agreed to repay the debt,
but despite repeated request for payment, the debt is
ignored. Currently, outstanding delinquent debts are in
excess of one-half million dollars. HB 108 will allow for a
less expensive, more expedient administrative procedure.
Recovery of the debt would be pursued in the same manner
that delinquent student loans are pursued. The Department
supports HB 108. There are two revenue generating fiscal
notes from the Dept of Health & Social Services and the Dept
of Revenue.
Elmer Lindstrom, Special Assistant to the Commissioner of
the Dept of Health & Social Services joined the committee.
He stated that over time, the amount of money generated by
the program would decline. The first amount is reflective
of backlogged claims that this bill would allow the Dept to
collect. He stated that amount of individuals effected in
FY 96 is 75. AFDC claims from 60 to 90 in 2001. There are
12,000 families receiving public assistance in Alaska.
Senator Sharp asked if the permanent funds would be
subsidizing the Dept of Health & Social Services. Mr.
Lindstrom assured the committee that this bill is the same
as any other garnishment situation. It is the individuals
dividend that is garnished, not taken off the top of the
pool of funds available for dividends, as is the case of
those that are indicated on the dividend check stub.
Senator Rieger questioned why this bill is necessary,
because the existing law sounds as though it covers this
situation. Mr. Lindstrom responded that with the federal
tie-in with AFDC, it requires specific statutory authority.
Senator Sharp MOVED HB 108 with individual recommendations.
Without objections HB 108 was REPORTED OUT of committee with
a "do pass" recommendation and three fiscal notes. Dept of
Revenue, zero; Dept of Health & Social Services, zero, $3.4
revenue; and Dept of Health & Social Services (AFDC), zero,
$16.4 revenue.
SENATE BILL NO. 70
"An Act relating to the public school foundation
program; and providing for an effective date."
Senator Taylor was asked to join the committee. He
acknowledged the help and assistance he received by Dr. Nat
Cole, for his help in writing the last revision into the
foundation formula. His expertise was invaluable in this
effort. He also thanked Linda Snow at the Legislative
Finance Division for the excellent job she did and the hard
work administered, in developing the earlier drafts and
spread sheets needed to explain this proposal. He expressed
the appreciation and complete cooperation of Duane
Guiley, Director, School Finance, and especially his staff
member, Eddy Jeans. He testified that the proposal revises
the foundation funding formula in an attempt to create a
more equitable plan based on a community's ability to pay.
Those school districts with a tax base are asked to come to
the table on an equal basis. The plan requires a local
contribution of the equivalent of a 5 mill tax levy. Where
such a levy would generate more than the school district's
basic need, the excess is recaptured to be distributed in
the form of supplemental equalization aid around the state.
Our regional education attendance areas which have no tax
base, to speak of, would be required to put up 100% of any
eligible federal impact aid, as their local contribution in
lieu of taxes. The key to this proposal is the addition to
the foundation formula of a supplemental equalization aid
provision. The plan requires school districts to fund
additional contributions, using the formula based on 2.5
mills and calculated on the district's average daily pupil
membership, and the property evaluations of all school
districts in the state. In return for the local
contribution, the state would provide matching money based
on a calculation also using average daily membership and
property values. Communities that already make a local
contribution, equal to that required by this plan, will see
an increase in state aid from what we are calling the power
equalizer. Those communities which would be required to
increase their local effort, would be rewarded with
additional matching dollars from the supplemental
equalization plan. By way of example, Juneau's FY-96 local
contribution is budgeted at $12.8 million. That is $12.8
million more than the local contribution required under this
proposal. Juneau would see an increase in state funding of
$1.3 million under this plan. Anchorage's estimated local
contribution for FY-96 is $74.6 million under the current
law. This plan before the committee would require a local
contribution of just under $79 million. That is a $4
million increase. However, that increased local contribution
would generate an additional $10 million in supplemental
state aid. The spreadsheets are based on the latest
property evaluation numbers available to the Dept of
Education. Spreadsheets use the current $61.0 unit value.
The comparisons are based on estimates for FY-96 under the
existing law and under this plan. The bottom line is that
the contribution of state and local resources available to
education under this plan would exceed that available under
current law by $27 million. By requiring the 5 mill
equivalency and 100% of eligible federal match, as a local
contribution, combined with other elements of SB 70, this
plan would actually reduce state spending by more than $35
million, while increasing the number of dollars available to
education statewide.
Senator Phillips MOVED to adopt CSSB 70, version "O" dated
4/19/95.
Senator Rieger asked to make a motion to amend the motion
that was before the committee. There was debate as to the
amendment.
OBJECTION was removed and the CS working draft "O" was
ADOPTED.
Senator Taylor noted a technical change on page 4 and 14,
replacing the word, "percentage" to "factor".
Co-chair Halford asked where the funds are coming from?
Senator Taylor explained that the spreadsheets reveal the
funds coming from two districts: North Slope Borough and
Valdez. Both of which have been blessed with a tax base
that is extraordinary compared to any other community in the
state. The amendment is saying that those communities
should pay the same level of taxation that each of the other
communities in the state are contributing towards education.
Senator Taylor reflected that presently there are
communities that contribute less to the school districts
than others. When averaging daily membership (total number
of children attending school) and dividing that number into
the tax base of each community, the results show that
Anchorage is much lower than Juneau, Ketchikan and several
other communities, that have a greater level of community
tax base. When those communities say they are paying high
taxes, they are right.
Joe McCormick, Executive Director for the Commission on
Postsecondary Education made reference to the spreadsheet
fax dated 4/20/95. The spreadsheets show the actual
comparison of what would occur under this proposal. It
covers every district. The first two pages on the right
hand column labeled "E"(existing law -combined state and
local resources) and on page 3 and 4, it answers:
supplemental equalization aid; basic foundation aid based on
a $61.0 unit; and the combination thereof; what the 5 mill
requirement would generate from each community; the local
share that would be required to obtain supplemental
equalization aid; the capture column,"K", and what would be
required locally, over and above what is currently being
contributed for communities to meet the requirement of the
bill. The figures shown indicate those communities not
currently contributing what would be contributed under this
bill. Communities zeroed out are either REAA's or
communities that already contribute more than required.
Pages 5 and 6, indicate the additional local revenue
required to meet 5 mills and local share. He indicated that
there were not many communities in this category that would
have to put in more money, but in each case, that increased
local contribution generates additional supplemental aid
with the exception of the two communities of the North Slope
Borough and Valdez.
Co-chair Halford asked how the recapture works. Senator
Taylor responded that the when the money has been
transferred into the state fund, through the power equalizer
formula, the state fund then redistributes the money. That
is where those monies come from that are matched. For
example, when Anchorage puts forth $4 million of additional
local funds, they will receive $10 million.
Mr. McCormick stated that there is a fiscal analysis of the
impact of this legislation in the form of a spreadsheet. He
stated that it refers to draft "M" on the spreadsheet, but
it actually refers to draft "O". Co-chair Halford inquired
to the amount the state currently contributes to education
in the communities that will be seeing a reduction in state
aid, such as Valdez and the North Slope Borough? Senator
Taylor responded that the North Slope Borough receives $9
million for basic education. North Slope contributes 35%
and the state contributes $3 million over that for a total
of $12 million. North Slope spends over this amount, and he
indicated that it was in the $20 million range. With this
plan, they would not be receiving as much from the state.
Mr. McCormick noted that there is a provision requiring a
contribution of 100% of eligible federal impact aid
(currently it is 90%) as against the basic cost of
education. The reason for the 90% used in the past, was to
provide an incentive for the district doing the paperwork.
Co-chair Halford inquired as to the mechanism drawing the
money back into the formula from communities who have the
huge oil investments? Mr. McCormick responded that Section 1
of the bill states that the public school foundation account
is established. It adds, "municipal contributions made
under AS 14.17.025(i)", and on page 2 of the bill, it gives
the formula for the 5 mill equivalency. That is the
mechanism which requires the municipality to actually send
the check. There are alternatives to that requirement. The
state could allow a year for transition and forgive the
requirement, but that the state will not fund them, they
would be endorsing their educational system. That alone
would be dropped back to a $60.0 funding level. This will
still generate income over and above what is currently being
spent on education in all the other tax paying districts in
the state because the amount has been saved that was not
sent out to the districts who can afford it. The funds then
would be redistributed throughout the state. Senator Taylor
did express that it is a circle against state revenue.
Senator Taylor noted that the State of California was faced
with a similar problem several years back. They were faced
with a differential between rich and poor tax districts.
This led to the Sonoma Case. In Alaska, we had a similar
case, whereby Mat-Su Borough sued the state 3 years ago.
Every time funding is short, there are disparities within
the state. He has concerns that the state will lock into
two years of flat funding, which he says is happening right
now. If one of the districts brings forth a suit like the
Sonoma suit, and we are ordered by the courts to go back and
adjust the formula, in an even more disproportionate amount
than it is now, it could be disastrous. By adopting this
formula, it should prevent a situation like the Sonoma Case
from happening.
Senator Phillips MOVED to adopt the change of "percentage"
to factor on page 4, lines 14 and 16, and on page 14. No
objection being heard the amendment was ADOPTED into the
working draft.
ADJOURNED
The meeting was adjourned at approximately 11:00 a.m.
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