Legislature(1997 - 1998)
05/01/1998 09:10 AM Senate FIN
| 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
MINUTES
SENATE FINANCE COMMITTEE
1 May, 1998
9:10 a.m.
TAPES
SFC 98 # 148, Side A (000-590)
Side B (590-000)
CALL TO ORDER
Senator Bert Sharp, Co-Chair, convened the meeting at
approximately 9:10 a.m.
PRESENT
In addition to Co-Chair Sharp, Senators Pearce, Donley,
Adams, Parnell and Phillips were present when the meeting
was convened.
Also Attending: Senator LYDA GREEN; Senator TIM KELLY;
Representative NORM ROKEBERG; Representative PETE KOTT; CURT
PARKAN, Deputy Commissioner, Department of Transportation
and Public Facilities; ALAN WILSON, Homebuilders
Association; BRUCE HOCKMAN, Towers Perrin Insurance Company;
DICK BLOCK, Block and Associates; MIKE GREANY, Director,
Division of Legislative Finance and aides to committee
members and other members of the Legislature.
via Teleconference: From Anchorage: JOHN STEINER, Assistant
Attorney General, Transportation Section, Civil Division,
Department of Law; PAUL BOWERS.
SUMMARY INFORMATION
Co-Chair Sharp announced the committee would take up HB 210
first, then HB 197 and then start HB 116 about 10:00 a.m.
Other bills on the agenda would be heard if time permitted.
He noted SB 350 was not ready yet, as the interested parties
were still working on a draft CS for the committee to
consider.
HOUSE BILL NO. 210
"An Act relating to the extension of contracts for the
sale and delivery of in- bond merchandise at
international airports."
This was not the first hearing the committee had on this
bill. Co-Chair Sharp invited the sponsor, Representative
NORM ROKEBERG to join the committee and speak to the
legislation. Representative Rokeberg made the following
comments:
"Good Morning Mr. Chairman and thank you for taking this up
expeditiously. Mr. Chairman, after our meeting yesterday, I
had occasion to talk to Commissioner Perkins because of the
testimony the committee received yesterday and was
[undecipherable] representative of the Department of
Transportation and Public Facilities would be here today to
basically recant their testimony from yesterday about this
legislation. I peer over my shoulder...Mr. Parkan is here."
"And then Mr. Chairman other than that, rather than debating
the merits of the house bill that was passed two years ago,
the committee wanted to take up the amendment at their
discretion. But if we could have some testimony from the
department I'd appreciate it."
Co-Chair Sharp asked if the amendment Representative
Rokeberg was referring to was Amendment #2. That was
confirmed. Co-Chair Sharp called upon CURT PARKAN, the
Deputy Commissioner from the Department of Transportation
and Public Facilities to come to the table. Mr. Parkan
introduced himself and spoke as follows:
"With regard to [HB] 210 I don't have really much of a
comment to make other than the department does not oppose
this legislation. I believe the comments that were made
yesterday by the director of statewide aviation represented
a concerns that we do have with regard to a policy that
would allow a person to have exclusive use of public
resources forever. I think though that what is represented
in this bill is substantially similar to regulations that we
have drafted as a result of HB 543 a couple years ago."
Senator Donley requested that when the sponsor of a bill had
an amendment to offer, his or her name be noted on the
amendment. He felt that it would be helpful if the co-
chairs wanted a committee member to offer a motion on an
amendment, if it were so noted. When the amendments were
blank it was confusing for him. He noted that sometimes
amendments were submitted by the administration and he would
like those to also be noted accordingly. Co-Chair Sharp
told Senator Donley the amendment before the committee was
from the bill's sponsor. Representative Rokeberg affirmed.
[There was some discussion between committee members that
was undecipherable.]
Co-Chair Sharp remembered the committee had discussed the
amendment at the last meeting but that it had not been put
on the table.
Senator Parnell requested a brief explanation on what the
amendment would try to accomplish. Representative Rokeberg
gave this explanation:
"Mr. Chairman, Senator Parnell, if you recall the testimony
last year on this bill where we were endeavoring to extend
the length of the duty free contractual lease - space lease
at the international airport, in order that they can make
substantial lease-hold improvements and they were asking for
an extension of their lease terms to be amortize those
improvements."
"The Section two that's the committee substitute before you,
speaks to the title fundamentally and just says that there's
a agreed to extension provision in the lease that it can be
exercised only. But I thought that in as much as this
particular situation still is pertinent at the airport, that
another method could be used without running into the
constitutional stumbling blocks that we discussed last year
on the bill."
"That is to say if they - this amendment gives the
commissioner discretion to enter into a modification of the
contract revision if in fact there is a substantial
improvement and then the increase in rent could be adjusted
if they attributable to those improvements. In other words,
they could give the investor a break on their improvements
if in fact they generated the increased revenue. As an
incentive to make the improvements because what happens
under this contract is that the higher the revenues and
gross sales of the duty-free shops the greater revenues the
state gets."
"So therefore, it's to the state's benefit and it's in the
statute now, that the state generate increased revenues.
The higher the revenues the higher the rent."
"So this would be incentive to make improvements in display
cases and other major investments to add additional and
better quality merchandise to the store. Thereby increasing
revenues to the contractee and the state. And this would
allow the commissioner if he say fit, to generate a formula
for modification of rent to incentivize those particular
investments. It's a common commercial type device."
Senator Parnell clarified that it would allow the
commissioner to make the provisions during the contract term
or only on the extension of the contract. Representative
Rokeberg responded that the intention would be to allow the
provision midstream in the contract.
Senator Torgerson asked if the leasehold improvements would
then become part of the facility. He noted that the
representative mentioned cabinets and merchandise, but felt
that was a marketing decision and true leasehold
improvements would apply better to adding walls and other
structural changes. Representative Rokeberg responded that
the reversionary interest in the leasehold improvements
should be spoken to in the lease rather than statutes. He
didn't think it would be appropriate to provide for that in
statute, but should be spelled out in the lease document.
Senator Torgerson understood that, but wanted to make sure
the intent was not to apply to merchandise for sale. He
pointed out that Representative Rokeberg's testimony
indicated the leasehold improvements applied to glass
cabinets or merchandise. He wanted to make sure it wasn't
the bill's intent to be that broad. The representative
clarified that he meant to say "display of merchandise" not
the merchandise itself.
Senator Torgerson wanted to hear the commissioner's opinion
on the amendment. Mr. Parkan appreciated Representative
Rokeberg's intention to allow the department flexibility.
He deferred to the Department of Law for an opinion on the
legality of the requirement. He noted the DOL had the
greatest concern last year when the bill was first
introduced. He offered JOHN STEINER, Assistant Attorney
General in the Transportation Section, was on-line from
Anchorage and could testify.
Co-Chair Sharp called upon Mr. Steiner to speak at the
request of Senator Torgerson. Mr. Steiner spoke as follows:
"The - there is some concern with the - see there are two
aspects of concern here. One is the concept of a mid-stream
adjustment and the other is sort of the lack of definition
within the actual proposed language."
"First of all, let me say that the concept in general of
granting this kind of a reduction in rent is actually in the
solicitation for the current bid. However, it was limited
to only a situation for the very first year in
[undecipherable] you get a larger initial improvement. And
it was only in the event that the improvements were $1
million or more. Under the language here, it is not at all
clear what a substantial investment might be, what
constitutes improvement whether they be a glass display
cases, which would remain the property of the concessionaire
or whether it would be the movement of walls."
"Now, I would hasten to add that in a solicitation, the
department already has the ability to do this very thing, to
set up the contract in such a way that it would put in a
midstream incentive for additional improvements if the
department saw that the result would be a net increase of
revenues. However, having a contract in place - if there
were a contract in place that already specified a limited
opportunity for this and no other opportunity for this kind
of thing to allow it midstream without having noticed that
in the original solicitation for the contract would be of
competitive concerns and might well actually draw a claim
that there was a material change [undecipherable]
contractor, which had not been an opportunity provided to
the other bidders. So there is a legal concern in that
regard."
"There - as far as the specific language, there are concerns
especially when it's not tied to an existing solicitation,
with regard not only to what is substantial, what is an
improvement, but also when it could take place. Under the
language here, the word subsequent to award would appear to
cover even the very initial improvements, which it would be
assumed that any contractor would have to make under any
circumstances. It's unclear whether it's a modify, which
could mean take them up, take them down or whether it's
required to the contractor concur with those modifications."
"The phraseology of - on the increase of the contractor's
income, it's also unclear whether it - or the increase in
[undecipherable] whether we're talking just the increase
percentage rate, which I believe is what Representative
Rokeberg had in mind, or actually the increase of payment
itself. In other words, whether this would eliminate any
possibility of the department - or allow elimination of the
possibility of the department increasing revenues to the
department or simply increasing the percentage rate apply."
"And the last thing is that it deals with - talks about the
contractor's income. It's unclear whether that would be
gross income or net income. The contracts generally always
deal in terms of gross revenues rather than income."
"Those are concerns about how this statute is specifically
set up. However, it is also true that the department could
design a solicitation under the boundaries of this
amendment. Or frankly without the amendment they could do
it, which would allow this very thing under the terms
specifically established in the solicitation for the
contract."
"If the committee sees fit to entertain - of adopting this,
the DOL would recommend that it be specified that this would
be true to only to the extent that the possibility were
under terms established in a solicitation for a contract and
according to standards supplied in that solicitation. That
would enable the bidders to comment on those terms and put
it all in a public process so everyone would know what kinds
of modifications might be available under what
circumstances."
Senator Pearce had a general question. She wanted to know
the leasehold improvement policies of other venues, such as
SEA-TAC, Portland, or any airports owned by counties. Mr.
Parkan responded saying they had done a cursory review of
other airports and found that every one was a little bit
different. What was unique about the State Of Alaska was
the constitutional requirements for access, notice
requirements and equal protection. Therefore leases were
extended at other airports differently. They did not
require the public notice that Alaska did.
Senator Pearce wanted to learn the industry standard. She
felt that most of the major improvements made on leasehold
properties were financed. She spoke of her experience
working in banks making loan packages for airport hangers
that were on state-owned, leased property. The lease
arrangement was taken into account, she said. It seemed to
her that the prudent leaseholder would make financial
improvement arrangements into the lease contract.
She felt the standards that would be set by this legislation
went on with no way for the airport, if there was a higher
and better use for that land, to make a change. Because of
that, she wanted to know what other airports did
differently. Mr. Parkan said he had been referring to
Section 2, which addressed duty-free leases. Section 1,
which dealt with land leases, he felt the trend in other
airports was to have shorter, fixed terms for the leases,
for the very reason Senator Pearce voiced.
Senator Pearce countered, asking who owned the huge
facilities at SEA-TAC, such as the Alaska Airlines hangers.
If the airport expanded and needed that space, would the
airlines be paid for their facilities, she asked how it
would work. Mr. Parkan replied that the way the leases
worked in many cases was at the end of the lease term, the
improvements reverted to the airport. The airport would
then own those improvements. Then if the airport decided to
expand and needed the space occupied by the hangers, they
could do so with the shorter leases, he explained.
That was different that the arrangements in Alaska,
according to Mr. Parkan. Senator Pearce asked if none of
Alaska's leases were set up as described for SEA-TAC. Mr.
Parkan said there were a couple leases that were that way.
He gave an example of the Federal Express lease. There was
further discussion between Senator Pearce and Mr. Parkan
about which leases in Alaska were set up in which manner.
Senator Torgerson said he would propose an amendment to the
amendment when the committee was ready.
Representative Rokeberg wished to reply to Senator Pearce's
question about airport leases in other states. While what
Mr. Parkan said was true, Representative Rokeberg stated
that Alaska's airport situation couldn't be compared to
airports in other states. Major airports in the Lower 48
did have short-term leases because they had a captured
market. There was more demand for lands surrounding those
airports then actual land. Therefore, they generally ran
five-year rollovers and rent was increased above fair market
value.
Anchorage and Fairbanks had a completely different situation
he stressed. Here the state wanted to try to encourage
development by inviting air cargo companies and others to
invest in Alaskan airports. He felt the one reason Federal
Express agreed to it's lease arrangement was because they
were glad to have a longer term lease when they were already
accustom to those types of improvement reversions. That
didn't mean another investor would do that, he warned.
Senator Torgerson agreed with what the sponsor said. He
felt the only thing lacking from the legislation was the
approval of the department before they had any reduction to
the lease arrangement. When he asked the sponsor about
this, Representative Rokeberg responded that it would be an
automatic process that improvements wouldn't happen before
departmental approval. The senator felt that it needed to
be specified since it wasn't clear as he read the amendment
and listened to DOL.
Therefore he was offering an amendment to amendment #2,
which would change line 11. After the word "improvements"
language would be inserted to read, "improvements, approved
by the department..." He read the entire sentence into the
record.
Co-Chair Sharp instructed that there first needed to be a
motion to adopt Amendment #2. Senator Torgerson moved to
adopt Amendment #2.
Representative Rokeberg interjected that he had no objection
to the amendment to the amendment.
Senator Torgerson moved to Amend Amendment #2 as detail
above. Without objection, Amendment #2 was amended.
There was no objection or discussion on Amended Amendment #2
and Co-Chair Sharp ordered it adopted.
Senator Adams noted he had two amendments for consideration.
Co-Chair Sharp wanted to ensure the CS had been adopted.
Senator Adams pointed out that if the CS had not been
adopted, Senator Torgerson would need to withdraw action
taken on Amendment #2 and re-offer after the CS was formally
before the committee.
Senator Torgerson withdrew his amendment to Amendment #2 and
withdrew Amendment #2. Co-Chair Sharp noted no objection to
the withdrawal of Amendment #2 and ordered it withdrawn.
Senator Torgerson moved to adopt as a working draft, the "K"
version CS for HB 210. It was adopted without objection.
Senator Torgerson moved to adopt Amendment #2 and moved to
amend Amendment #2 as previously detailed. Without
objection, Co-Chair Sharp ordered adoption of the amendment
to Amendment #2 and the adoption of Amended Amendment #2.
Senator Adams moved for adoption of Amendment #3. Co-Chair
Sharp objected and Senator Adams spoke to his amendment. He
reminded the committee they had discussed it the other day.
It would provide that a lease not exceed 55 years and
pointed out language on page 1, line 13, which said "the
commissioner shall approve application for new leases..."
He explained that if that language was not inserted, it
would allow leases to go on forever. Another area the
committee had problems as listening to DOL testimony, was
the constitutionality of this section if not changed. He
referred to the presentation of Mr. Steiner talking about
Article 2 Section 6 and Article 8 Sections 2 and 10.
Senator Adams spoke of his desire to allow leaseholders to
collect capitalization and investment on their particular
lease holdings.
Co-Chair Sharp spoke to his objection, which was that he
felt the amendment would change existing law that was just
passed two years ago to attempt to solve the problem of lack
of enthusiasm to renew leases to present leaseholders who
had made improvements.
There was no further discussion and Co-Chair Sharp requested
a roll call. Amendment #3 failed by a vote of 2-3.
Senators Pearce and Adams cast yea votes. Senators Donley
and Parnell were absent.
Senator Adams said that with the failure of Amendment #3, he
wanted to note for the record that this particular
legislation had the potential of being unconstitutional by
the fact of the articles he listed before. With that he
moved for adoption of Amendment #4. Senator Torgerson
objected for the purpose of discussion. Senator Adams spoke
to the amendment; saying that the language said the leases
could not extend beyond 55 years. His amendment would add
the provision, "for each land lease" and he felt that the
department should look at each land lease. He explained
that a company might have a multitude of contracts, one in
Anchorage, one in Kotzebue, etc. and that the department
should review each lease holders' contract. That is what
this amendment would accomplish, he stated.
Co-Chair Sharp read the amendment language and asked if this
would limit to one lease extension. Senator Adams replied
by reading the language. "... The commissioner shall
approve the application for new land leases or one extended
term..." He felt if each land lease titles were reviewed,
there needed to be proper language. He offered the
committee could have the DOL or the DOT&PF representatives
speak to the matter.
Representative Rokeberg wished to comment on the amendment.
He said if the senator's intent was to allow for extensions
within an existing lease and then only allow one new lease,
the language was erred. Senator Adams replied that his
intention was to allow the department to look at each of the
land leases, because one leaseholder might have multiple
lease holdings around the State Of Alaska. He was also
interested in the leaseholders capitalizing on their
investment.
Representative Rokeberg had concerns about the language not
meeting the intent of the amendment. He suggested an
amendment to the amendment. Under the current language, the
statute would allow only one extension of the lease. He
felt the wording needed to be moved to accomplish that.
Senator Adams concurred with the intention Representative
Rokeberg surmised. He said the amendment was in a format
drafted by Legal Services.
Representative Rokeberg stated he had been in this business
for 25 years, he wrote the bill and suggested if Senator
Adams wished to accomplish his intent, the language should
be adjusted. He detailed the changes. Page 1 line 14,
should contain the words, "an application for one new lease"
and the extended term would be inside an existing lease.
There was further discussion on the exact wording changes to
be made.
Senator Phillips clarified the change to be, page 1 line 14,
before the word "extended" delete the word, "an" and insert
the word "a". It was determined that this was grammatically
incorrect and no change should be made here. Representative
Rokeberg read the amended language to be, "...the
commissioner shall approve the application for one new land
lease or an extended term..."
Senator Adams moved to amend Amendment #4 page 1 line 14 as
detailed above. Co-Chair Sharp clarified the exact language
of the amendment to the amendment, which would change "a" to
"one" before "new land lease..."
Senator Pearce didn't understand how that would work with
the language on page 2, lines 1 and 2. Senator Adams asked
Mr. Steiner to assist.
Mr. Steiner said the DOL would find the change of "a" to
"one" preferable. He agreed with Senator Pearce, that it
would appear to be inconsistent with the changes proposed
for page two. He felt it would appear that the intent would
be for each particular lease, one extension could be granted
and it would then become important how many prior leases had
been held.
Representative Rokeberg asked Mr. Steiner if the intentions
of Senator Adams would be carried out by this language. Mr.
Steiner said it would, but that one question would still
remain vague. The word "an" before "extended term" could
mean a one-time only extension or it could mean for each
application there could be another application for an
extended term. While it was clear there could only be one
new land lease, it was not clear to him whether the intent
of the Legislature would be for a single opportunity for
extension only.
Senator Adams asked that if the change was made to page one,
if the language on page 2 would also need to be changed to
make the legislation read correctly. He asked if on page 2,
lines 1 and 2, after the word "leasing", "and without
regards to the number of leases, prior leases or lease
extensions for the same land..." needed to be deleted. Mr.
Steiner affirmed that recommendation.
Representative Rokeberg suggested the amendment be made
conceptual to allow the drafter to make the proper
adjustments. As the language read currently, he didn't feel
it was clear as to the Legislature's intent.
There was no further discussion on the Amendment to
Amendment #4 and Co-Chair Sharp ordered it adopted.
Senator Parnell objected to the amended amendment. Because
it was commonly known that the lease would go no longer than
110 years, the way it was currently drafted he thought it
was limited to only 55 years. Representative Rokeberg
corrected him that the total would be 110 years. Senator
Parnell asked Representative Rokeberg's intent with respect
to the amendment. Representative Rokeberg again voiced his
advice to the committee to make sure the drafter be given
the authority to write the language to ensure the intent be
carried out. He didn't want people to need to guess what
the statute said.
Mr. Steiner said he might have misunderstood the question.
As he understood it, this would allow extension of a given
lease up to 55 years and a request for a new lease for an
additional 55 years. To the extent that a new lease was
granted, the total tenancy would be 110 years under two
separate leases, he said.
Senator Parnell thought he understood what they were trying
to get at.
Representative Rokeberg requested Senator Adams make his
amendment conceptual. Senator Adams response was
undecipherable, but Co-Chair Sharp's statement was that the
amendment would be made conceptual.
There was no objection to adopting Amended Amendment #4 as a
conceptual amendment and it was approved. Co-Chair Sharp
suggested that once the amended CS came back before the
committee, they add an item three and make it clear that the
cumulative and consecutive total years of the lease
contracts could not extend 110 years.
Senator Adams felt that in order to make the language read
according to what the attorney said was acceptable, the
language from page 2 lines 1 and 2 needed to be deleted. He
re-read the language to be deleted.
Representative Rokeberg objected to the removal of that
language because typically the airports did enter into
shorter-term leases and for those, he felt it was important
to allow multiple extensions within the 55-year period. He
thought this portion needed to be part of the conceptual
allowances given to the drafter.
Senator Adams didn't mind letting the drafter work on the
language and offered no further changes.
Co-Chair Sharp said he would grant the drafter leeway for
ultimate clarification to meet the intent. He would work
with the drafter to do what it took to clarify the language.
Representative Rokeberg voiced appreciation for the work the
committee was doing on the bill, but objected to the
amendments for the record only.
Co-Chair Sharp ordered the bill held in committee.
HOUSE BILL NO. 197
"An Act relating to libraries."
Co-Chair Sharp noted the bill had been heard in committee
the week before but was held because of considerable
concerns about establishing new regulations and mandating
certain requirements for libraries across the state. Since
then, a new CS had been drafted which he hoped would
alleviate the problems.
Senator Torgerson moved for adoption of CS HB 197, version
"F" as a working draft. Senator Adams objected, asking for
an explanation. He wanted to know how it compared to the
present statute and how it would affect communities with the
"in-kind" services.
Co-Chair Sharp said it was addressed in the changes proposed
on page 2 lines 19 and 20. He referred back to the previous
bill and noted that it didn't change anything from the
original bill.
Senator Adams found the language he was looking for on page
2 lines 13-28 and removed his objection. The CS was adopted
without further objection.
Senator Donley felt the CS was a big step forward. He did
still have a few concerns he wished to address in an
amendment on page 2 line 16 by deleting "...less than $5000
or..."
Senator Adams had a question that the sponsor was saying,
from zero to $7000. Senator Donley affirmed.
Co-Chair Sharp named the change Amendment #1 and ordered it
adopted since there was no objection.
Senator Torgerson offered a motion to report CS HB 179,
version "F" as amended from committee with accompanying
fiscal notes. There was no objection and Co-Chair Sharp so
ordered.
Tape #148 Side B, 10:00 a.m.
SENATE CS FOR CS FOR HOUSE BILL NO. 116(JUD)
"An Act relating to workers' compensation self-
insurance."
Co-Chair Sharp noted this was the first hearing for this
bill in the Senate Finance Committee. The bill sponsor was
not yet present and the committee took a short recess at
10:05 a.m.
REPRESENTATIVE PETE KOTT was invited to join the committee
and speak to the legislation. His testimony was as follows:
"I appreciate your taking the opportunity to hear this
measure...
"Mr. Chairman, members of the committee, what this proposal
does is allow a group to set up a mechanism for self
insuring workers comp."
"Probably the best way to help you with the understanding of
the bill is - walk you through it. Show how it's set up in
the provisions of the bill. Again, this is a proposal that
allows a group to establish workers comp self insurance
group. And the best way to understand it again is to walk
you through it."
"In order to set up this group, there are certain
requirements that must be met. And this is during the
application period to the Director of Insurance. There must
be proof, compliance with the remaining sections of the
bill. There are articles of the group that are afforded to
the director. The - there is an agreement that must be
forwarded to the director - director approved by the
director regarding the administrator of the group. And that
provision and arrangement between the group and the
individual administrator. There must be proof of payment to
the group by each member not less than 25 percent of that
member's first year's annual premium. That becomes
important a little bit later, but we're talking about at
least so keep that in mind. We're not at a maximum, we're
at a minimum threshold."
"In order to obtain and maintain that particular certificate
or application, the group must prove that they have a
combined net worth of at least $1 million. There must be a
security that is filed in the amount of $450,000 and that
can be in the form of a bond, indemnity or other mechanism,
only approved by the division. There must be specific and
aggregate insurance in the amount that is acceptable to the
director and I think there'll be some additional testimony a
little bit later on to give you an understanding of the
specific and aggregate insurance and how important that
concept is to the overall scheme."
"Again, there must be an annual premium of at least $1
million and the more the members and based on the actuarial
determination of what each member will have to pay, that
amount will fluctuate higher and not lower."
"There is a - must be an indemnity agreement jointly
severally binding to the group and each member. This is
pretty much standard procedure when you look at the other
states who have implemented similar procedures."
"There is a fidelity bond [undecipherable] and mission
insurance policy for the administrator and professional
liability insurance policy for the trustees that guide the
group through their efforts. There's also a fidelity bond
in errors in mission insurance policy for the service
company itself in the event that there's some corruptness we
are protected there."
"At this point, when all the data is assimilated and
provided to the director, then the director must take some
action on it and based on an evaluation and then either
reject it with cause, or approve the application."
"Mr. Chairman, members of the group - members of the
committee, the group is operated by a board of trustees.
This is a responsible way to do it. They are in fact
responsible for the collection and disbursement of funds.
All be it, taxes or payments to injured workers."
"A - Once they are established segregate the fund mechanism
into two distinct categories. One is the claims fund, which
at least 70 percent of the premiums enter into that fund.
The other fund is the administrative fund, which is
generally going to be looked at as no greater than 30
percent. Now both of these can be adjusted but it must be
adjusted based on the approval of the director of
insurance."
"In Section 21.47.070 of the bill it details how employers
may join the group after the certificate has been issued and
also termination procedures. So we set out some guidelines
based on this group being certificated on how another
employer can join the group and how one can terminate their
membership in the group."
"The group is subject to an audit by an independent CPA.
That audit provision and final analysis is then filed with
the director."
"In Section 21.47.110, the group is subject to the required
contribution provisions of the second party injury fund."
"21.47.130, the group is required to adhere to the uniform
classification system experience rating plan, which is the
plan that is currently used to determine your individual
worker's comp rates. That rating process as it is
determined how much each individual member will pay is also
subject to an annual audit to make sure that there's nothing
wrong-doing going on with the amount that is being applied
to each member."
"Section 21.47.140, there's a - that section deals with
refunds and it is expected that at some point this group
will be in a position to refund any excess monies over and
beyond what is needed to maintain the personal injury fund
in the administrative account. Now this may not occur for
several years, but it its expected based on the other states
who have implemented similar procedures that it will occur.
So that's the reason why that particular section was
included. And again, the refund is approved by the
director."
"In 21.47.150, that deals with the premium payments and the
reserves. Again there must be a[n] established premium
payment plan. That plan must establish and maintain the
actuarial appropriate loss reserves. And those reserves
must be at least enough to pay out known claims and
associate expenses and those claims that are incurred but
perhaps not yet reported."
"In Section 21.47.160. the group is required to establish a
workers compensation self-insurance guarantee fund. That
basically is five percent of the first year's premium.
Based on the initial amount of money that we're looking at
to get this group going for the first year of a million
dollars that would be $50,000 if that were the base. Again
that's the minimum amount that would be required."
"In Section 21.47.170, it deals with deficits and
insolvancies. If the group is unable to meet it's legal
liabilities and their other obligations and maintain - which
would require them to maintain sufficient reserves and the
group must immediately make up that deficiency and levy an
assessment upon the group. That's the first major category
that they must look to if there are any insolvency's or
deficiencies or deficits in the ability to pay."
"The section further sets up procedures to make up those
deficits. It goes through a litany of issues and how to
make up those deficits. If the group does not make up its
required deficits to meet the obligations, then it is
considered to be insolvent. If this were to occur, then the
director shall levy an assessment upon its members in the
amount determined by the director necessary to discharge its
liabilities to the group - for the group - to the members
that may be affected through workers compensation claims
against the group."
"Now that particular section was included because I think it
was necessary and it gave some comfort that if this were to
ever happen, and I think there'll be some testimony a little
later on that will indicate and clearly show that this would
not happen except under such a rare case, one in hundreds of
thousands that it's probably not necessary but it did at
least raise the level of comfort for many that had been
involved in this process along the way."
"In Section 21.47.180, we have the penalty section. The
penalty section is pretty much standard with the other self-
insurance groups around the country. And this provides for
a civil penalty to be applied to either an individual member
or the group if there are any wrongdoing. If somebody
commits fraud or whatever the case might be. But if there's
any violation within the act they are subject to a civil
penalty."
"And finally in Section 21.47.190, there is a provision
there that will allow the director to revoke a certificate
and there are reasons for that revocation."
"Mr. Chairman, I do have a handout I'd like to at least pass
around to the members for your perusal. What this handout
is, is the model act that was supported by the National
Association Insurance Commissioners. It was passed in '93.
So the NAIC is - has endorsed this. It is their product."
"And just briefly, I want to illustrate that we have not
departed substantially from the model act that is being
employed by the other states who have used this particular
mechanism to set their workers comp rates. And I'd like to
use as a way of illustrating this, the page numbers on the
top of the right corner of each individual page. And I'm
using the fax page so I will start off with page three under
subsection "H". Everybody with me? In this particular
case, it calls for a minimum of five employers. Generally
we're looking at quite a bit more than that in this
particular state. We have set a fairly low minimum."
"On the next page, on page four, section "B", where it talks
about to obtain and maintain a certificate of approval,
under "B-1" it says a combined net worth of at least a
million dollars. And that's essentially where we're at. So
we meet that threshold with this particular bill. In "B"
subsection two, it talks about a security in the form an
amount prescribed by the commissioner. And in fact, that's
what we have in this bill as well, where we have determined
that a $450,000 security was appropriate."
"On the next page, page five, and it's periphrasis number
three, where it talks about specific and aggregate excess
insurance in the amount in a form and in an amount as
prescribed by the commissioner. We also have that contained
within the language of this bill. In periphrasis number
four talks about an annual estimated premium of at least
$250,000, which each subsequent year being a half million
dollars. We have met and exceeded that threshold by
establishing a million dollars of annual premium for every
year. So we don't segregate that amount. It's the same
year after year."
"You also see in subparagraph five and indemnity agreement.
We also have included that. And again, that is been pretty
consistent throughout the states in using that particular
concept."
"You'll see in six and seven, where it talks about the
fidelity bond, the administrative and service company as I
mentioned, we do have a provision in the bill that covers
that. Skipping over and if you peruse the in-between pages
you'll see that it's very, very similar to what we have in
the bill."
"But skipping over to page eleven where I think these are
the issues that have been debated substantially. In Section
18, where it talks about the premium payment and reserves it
says there each group shall establish to the satisfaction of
the commissioner, a premium payment plan, which shall
include. We have that. Initial payment plan and
subparagraph periphrasis number one, of at least 25 percent.
That's what is required by each member to get going before
this group can get off the ground for each member to show
that they will be able to provide the 25 percent of their
annual premium up front."
"And then in subparagraph periphrasis number two, payment of
the balance of each member in a monthly or quarterly
installment. What our plan calls for is monthly, so we have
eliminated the quarterly so there's a consistent flow of
funds coming into the premium - coming in the form of a
premium to either and or the administrative account and the
pay-out account for claims."
"You'll notice in section 19 it talks about deficits and
solvency's. We've basically extracted the same procedures
if there was a deficit or insolvency occurring within this
group."
"Mr. Chairman, members of the committee, that basically
compares the plan that we have before you with the NAIC
model plan. And of course every plan is just that. There
are some deviations. Other states have taken different
approaches. They've lowered increase and I just wanted to
point out that in most every case with this plan, we have in
fact made it more stringent."
"Just for the [undecipherable] and clarification of the
committee, I'd be - the program itself when implemented
would not change historically what is occurred in the
payment of monies out to those injured workers in the form
of workers comp. An injured worker would file a claim and
the same process would essentially occur if the group were
solvent, which I expect under every circumstance they would
be, the premiums would in fact cover that particular workers
comp claim. And of course with the premiums you have the
reinsurance both the specific and aggregate that would also
kick in under certain circumstances."
"If the group were insolvent then you would use a surplus
from the fiscal year other than the current year. You can go
to the administrative funds, there is additional premiums a
self-insurance guarantee fund, assessments by the - of the
membership and any other method approved by the director and
of course as a catch all, you still have the security of
$450,000. So there's enough build in protection that would
ensure that the injured party would receive their eventual
payment."
"And again you have to recognize that under any workers comp
claim, whether it's generally a small or a large one,
particularly the large ones because generally the small ones
of five and six to ten thousand dollars there's generally
not much rendition as far as debate over whether or not it
should be paid or not. It's pretty fairly simple but the
larger ones generally take quite a bit of time, I think two
to three years is not unusual, and during that two to three
year period, of course the premiums of this group will
continue to flow to the administrator. And we also have
provision in the bill that those premiums can be invested
under the prudent man concept to ensure that there is growth
within the both the administrative and the premium pool."
"Now you might be asking yourself the question why there are
there so many requirements that are basically left up to the
- requirements placed on the group that are left up to the
approval of the director. And I just want to cover just a
couple of and again, the group applying for the self-
insurance must be - must receive a certificate of approval
from the director. And again there's a litany of things
they must meet. The joint and several liability of the
members is in fact approved by the director. The fidelity
bond and errors and missions and performance bond is in fact
approved by the director. The certificate may be revoked by
the director. The director can examine the books at any
time. The board of trustees must pay all the workers
compensation benefits, 70 percent again of the premiums must
be used for the payment of those claims. Anything that
would bring that premium pool down below 70 percent if there
were a reason must again be approved by the director. The
annual audited financial statements are submitted to the
director. The director may require other reports as he or
she feels necessary. The director may require additional
premium payments from a member. Refunds are made only after
approval from the director. The reserve plan must be
approved by the director. Workers compensation self-
insurance guarantee fund must be established as required.
Of course there's provisions regarding any deficits that
must be made up and much of that is at the direction of
director. The director may impose penalties for non-
compliance as I mentioned earlier and of course the director
has the final authority and revocation of any certificate
that was issued earlier. So there's a number of
requirements here that are placed before the director that
ensures that there is a lot of centralization within the
Division of Insurance."
"I'll cut off my testimony right here, Mr. Chairman, members
of the committee and there are probably some technocrats in
the audience that will answer some of the specifics but
certainly when we get down to the aggregate specific
insurance that's a critical component because it is a - it's
a failsafe mechanism that a lot of people don't understand
completely. But it is an important and integral part of
this part of this. And the other thing I want to mention
again, is that we are establishing a minimum threshold of 25
percent and that must be at least a million dollars in
premium for that first year."
"I do have some other numbers here that I received from the
Division of Workers Comp that I may use a little bit later.
But I think based on looking at the pages, and there were -
this is primarily dealing with the homebuilders and their
loses for a period of five years from '92 to '96, when you
add it up at the end and take out the self insurance that
would have been in here inappropriately for Spenard
Builders, the total losses for this group could in fact been
paid by an insurance group that would have been established
under this particular plan."
"So with that Mr. Chairman, I'll turn it over to you and
[undecipherable] answer any questions or yield to the next
person."
There were no questions of the sponsor and Co-Chair Sharp
called upon a representative of the Homebuilders Association
to testify. ALAN WILSON came to the table and said:
"I am a general building contractor located here in Juneau.
I think there's several representatives from the
homebuilders today who will be speaking in addition to
myself. I'm going to keep my testimony just short and brief
and give you guys a few of the reasons why we have supported
this legislation and that we - the reason we believe in it
and feel that it will be one more ingredient that helps
lower the cost of housing in this state."
"There's about eight or nine of these and I'll just kinda go
through them quickly: more direct control over insurance
administrative costs; higher degree over claims reserves,
which by the way is where a great deal of the money is made
in this business. Self-audits can be done without negative
repercussions, and to this we're referring to safety
inspections. Pools are successful because they reduce their
accident rate and they do this by having in-house safety
people that will go out to the members at no charge. No
repercussions in that there's no penalties if you're found
to have an unsafe job site, they work with the employer to
correct those and work with the employees as well to make
the overall project a much safer place to conduct business."
"Another item, control over aggressive investigation of
fraud. Proactive claims management, by this we mean just
not writing a check. A lot of times, with claims in big
companies, it's much easier to just pay the claim. With
small pools, we all have a vested interest in this. We know
each other and it's much easier to detect fraud when it does
arise."
"Reduction of attorney's fees, quicker return to work for
the claimants. And again if the employee and the employer
are communicating one on one the accident happens, gets
reported right away to the insurance company and you're
working with the employee getting him back to work, getting
him rehabbed. He's less apt to be disgruntled and stretch
these claims out for a longer period of time. Again, better
communication between the employer and the employee, which
is another key aspect of it."
"Then too, self-insured funds can be more readily adapted to
the industry itself and we feel that that's another key to
the success of the - what would become our homebuilders
self-insurance fund."
"Again, motivation in this is to put us in control or in
control of another piece of the puzzle that goes into home
construction and again lowering the cost of housing in this
state. Thank you for your time. If there's any questions,
I'd be glad to answer those."
Senator Adams compared the changing of the threshold from $5
million to $1 million and asked Mr. Wilson if he felt it
would protect the injured workers within his organization.
Mr. Wilson replied that he thought the amount of premium
really had no bearing on protecting the worker. What would
protect the worker, he believed was whether or not the re-
insurance was in place and the excess insurances were there.
Co-Chair Sharp next called upon BRUCE HOCKMAN, of Towers
Perrin Reinsurance Company in Pennsylvania, to testify. Mr.
Hockman spoke as follows:
"Effectively, I've been brought here to review the piece of
legislation that's in front of the body and to provide some
comment on it as it relates to facilities operating around
the country generally speaking as it relates to pooling of
self-insurance."
"My background allows me to bring some message to you from a
number of different areas. My career started about 28 years
ago in the insurance industry in workers compensation claims
with Liberty Mutual, the largest writer workers comp in the
country. Had a bit of a benefit late in the seventies, I
worked for Dick Thornburg as he was governor in Pennsylvania
and ran the Bureau of Workers Compensation during his first
four-year term. Then went with the largest insurance
company in the State of Pennsylvania, largest workers
compensation writer, that being the Pennsylvania
Manufacturer's Association and then became it's president.
And joined Towers Perrin in January of 1996. My specialty
is workers compensation and risk financing, which covers the
whole gamut of individual self-insurance, captive insurance,
risk pooling and workers compensation as a specialty."
"When I reviewed the bill and I reviewed the bill not as it
related to any one particular group although it was the
homebuilders that asked me to come up and review this for
them as we provide services for homebuilders in other
jurisdictions involved in this type of situation. I was
looking at it to see what type of mechanism was provided,
what level of state intervention and oversight it provided
and what opportunities it provided for people to do the
business of risk sharing."
"The first thing I did was to go back to the NAIC model,
which Representative Kott had provided earlier to you to see
where the levels of deviation were. And then to get an
understanding of the system here in Alaska to see how this
whole process fit."
"Routinely, the whole issue of group self-insurance comes
into play in one of two directions. It's either an
extension of the individual self-insurance privilege to
which most members of this size would not otherwise qualify.
Now this body has already provided that individual employers
can seek an exemption for the privilege of self-insurancing
in Alaska if they meet certain privileges, or certain
financial conditions. And that's been well established for
some time."
"As a practical matter, the next group down that may be well
established in their own right and in their business lives,
could not become individually self-insured because of the
standards that were set aside as far as net worth, numbers
of employees, whatever the case may be."
"The question was not then historically whether or not self-
insurance should be provided, the question was, is there a
facility to allow smaller employers to have the same rights
and privileges as a singular large employer as it relates to
the liabilities of workers compensation. So it's a very
simple question. The statute of workers compensation says
here's what the benefits are. Injured workers should get
their benefits on time in the amount prescribed, get as well
as they can after an injury and get back to work and be part
of the economy. And the workers compensation system doesn't
have to be any more complicated than that."
"The other side is who's responsible for that. And it's the
employer. Now what are the employer's choices? They can
insure with a licensed insurance company in the State Of
Alaska or they can become individually self-insured."
"This piece of legislation takes something not away from
either of those two. But kind of extends the latter
privilege, which is a privilege due individually self-insure
and to say that while any one member of any trade
association established for more than five years, that is
homogeneous in nature. And I was taken by the mission
statement that you work with and for other reasons. But
it's a logical approach. And what are we trying to do here?
Trying to take a group of people who all do the same thing
for a living who know the risks [undecipherable] of that
business who have an incredible knowledge of their employee
base. And they're going to try to handle liabilities that
are set forth in workers compensation."
"And that's - I come to the conclusion straightforwardly
that this bill meets all of those qualifications. And how
do I say that? Well, I say it partly from experience. I see
what's worked in other jurisdictions. I see what hasn't
worked in other jurisdictions. I go back to the history of
pooling, back probably into the late seventies in some
jurisdictions and found why it didn't work at all."
"Well one of the ways it doesn't work is because it was an
exodus away from - seemed to be an exodus away from the
insurance industry. Things weren't right. Prices were too
high. Availability wasn't good. People were going into
assigned risk plans and having surcharges. So the whole
program was going away from something, not going to
something. Not trying to build something, but trying to
leave something. Well, that's always a bad idea. I mean,
trying to build a mechanism where you don't know where
you're going is probably going to get you someplace where
you didn't intend to be. And quite frankly, that's what
happened in a lot of jurisdictions. It became under funded.
People thought they could get into to business of managing
risk and they weren't prepared for it. The whole logic was,
I want to do something cheaper than what I'm doing now. And
it was misplaced and those programs blew up."
"But legislators and regulators and business people learn
from mistakes and over the years we have facilities across
this country that start with the appropriate level, which is
let's understand the risk, let's finance it appropriately
and let's manage it for long term. Straight and narrow, I
would stop quite frankly by saying if you bring some people
together who know their business and know the risks, give
them the necessary guidelines to protect the rights and
privileges of their workers, which is why you have a workers
compensation statute in the first place, and give it the
oversight over the long term, things are going to work."
"On the converse, if you say philosophically we just don't
believe this is going to happen. Philosophically we don't
think there should be another opportunity to manage risk.
Well you can put whatever words and phrases you want in any
legislation and to provide a vehicle without effective use
of that vehicle over the long term. And I've seen it happen
both ways."
"So I would stop there. I don't think this has to do be
complicated by any stretch of the imagination but I would
certainly welcome the opportunity to respond to any
questions that you may have or any changes in the bill. I
was working from a version that had a "Z" attached to the
end of it, which is what I saw when I came in here. I hope
that's still the same version that you're working with and
I'd be more than happy to help you."
Senator Donley wanted to know if Mr. Hockman had the
opportunity to deal with any self-insurance organizations
similar to what was proposed in this bill. Mr. Hockman had.
He stated there were about 22 funds that were specifically
engaged in or around the business of homebuilders. Some of
the funds started as pooled arrangements and migrated on to
something else. He gave an example of Georgia, a very
competitive environment. It was now known as one of the
most homogeneous groups and it's members provided $58
million of annual premium and had a membership of
approximately 70 percent of the homebuilders in the state,
he told the committee. Another example he gave was New
Mexico, which ended up building a trust. He said these
mechanisms, as they became larger, had different investing
and tax opportunities. They could therefore migrate from
one place to another, but the genesis was all the same.
They started as a pool of individual group self-insured
members, he explained.
Senator Donley asked if this plan had the same elements that
other successful plans had. Mr. Hockman suggested that in
half of the other jurisdictions the elements were less
strict as far as the minimum requirements than proposed in
this bill.
Senator Adams asked in layman's terms, when changing the
minimum threshold from $5 million to $1 million, what were
the advantages and any disadvantages? He also wanted an
explanation of joint and several liabilities, because some
of the members were not educated in that field. Mr. Hockman
responded by saying:
"The premium size issue - let's start with a dollar. That
dollar in workers compensation has to cover a whole bunch of
things. The two biggest components are the amount of money
that's going to go to an injured worker for wage replacement
or disability rating and the medical providers: hospital,
doctors, physical therapists, whatever the case may be. And
that's generally known as the loss portion. And the second
biggest pieces are the expenses: buildings, employees,
taxes, whatever the case may be."
"There's a rate that's established in Alaska that has to be
filed by a licensed rating organization. And that rate has
to be filed for each individual classification. And by
classification, I mean you've got builders here, you've got
real estate agents, you've got secretaries, you've got
bankers, you've got timber people and each one of those has
a separate classification because each one of those has a
different risk level attached to it. It's not likely that a
banker is going to be falling off a roof because not a lot
of banking is done on a roof. So there's a different risk
factor related to that than for a roofer or a logger. So
that rate will be different. But whether the rate is high
or low is immaterial as much as that the rate is adequate to
cover the expected losses and expenses, the two buckets that
I talked about."
"So if you assume then that a dollar is the right number to
cover all the losses and expenses contained in that dollar,
you can also assume that $5 million is the right number to
contain all the losses and expenses in that number. Except
for the area of expense. There are certain fixed expenses
that you know once you buy a building, you're going to have
that same expense of running the building whether you have a
million dollars in premium or five million. So there are
certain fixed expenses that as a percentage of the premium
are going to get small as the premium gets larger. You buy
one sofa for your living room. Whether your living room was
twice the size and 20 square feet or 15 square feet, you
only needed one sofa so you're expense was the same."
"Losses generally move the other direction. You would
expect to have if your premium was five times - was $5
million versus a million, you'd expect to see
proportionately larger of losses contained in that five
million because that's the biggest portion of the rate
level."
"The joint and several issue is something that is specific
to pooling. And absolutely it is paramount to a successful
program. It's the biggest commitment that a business owner
can make to sit side by side with a peer, but yet a
competitor in the business of home - doing whatever they're
doing because by the nature of this association, it has to
be a homogeneous group of people. By definition they're all
doing the same thing and probably competing with each other
in active business. But for the purpose of controlling the
workers compensation costs, they're willing to sign a
contract saying that I will sign on to protect you and you
will sign on to protect me for all of the liabilities of the
pool whether or not I shared in - I presented those
liabilities, if I didn't have any losses whatsoever, I'm
going to share severally and jointly in all the liabilities
presented to the pool."
"Absent that agreement, self-insurance pooling has no beam
period. I mean that's the first commitment..."
Tape #149 Side A, 10:50 a.m.
"...That's the insurance company's problem. That's all -
it's a different process of risk sharing. This is peculiar
to this nature of risk financing and it is critically
important."
There were no further questions of Mr. Hockman.
Co-Chair Sharp then called upon DICK BLOCK of Block and
Associates. Mr. Block testified as follows:
"Good morning Mr. Chairman and members of the committee.
Thank you very much. For purposes of the record, my name is
Richard Block. I am here for the firm of Block and
Associates, but I'm actually and my firm are here on behalf
of a domestic insurance company that is the primary writer
of workers compensation in the State Of Alaska, Alaska
National Insurance Company."
"Perhaps it might be useful some of the people around the
table will recall that I've been in Juneau and around this
table many times before and know a little of my background.
But for the benefit of those that don't know me as well, I
bring a certain amount of experiential background in this
field that may be of value for you to know about. I have
been involved in the insurance industry since about 1968.
So that's about 30 years as an attorney, as a general
council, as an assistant general council and as
administrative officer for an insurance company. A large
national insurance company that was primarily responsible
for writing workers compensation."
"I came to Alaska in 1975 and my primary role here at that
time was to council the state government on dealing with
workers compensation issues and also to deal with medical
malpractice issues. And that's relevant to this discussion
because what the state did at that time, was form a response
- form a legislative response to what was then a very
serious problem."
"I was then asked to become the director of the Division of
Insurance, which position I held until for three years here
in Juneau. And left - leaving that position formed a
consulting firm, which I still operate and which is still
providing council to large risks, governmental and private
and including on issues very similar to this. And that is
how can I as an individual or we as a group or as an
association of governmental entities, reduce our cost of
workers compensation insurance through some imaginative
alternative insurance mechanism to the standard insurance
company mechanisms."
"And then also was responsible for the formation of Alaska
National, which is now one of the larger writers in the
state and was its president for six years. And so I do have
a great deal of familiarity with this issue, great deal of
familiarity with the industry, great deal of familiarity
with the problem, which I believe the homebuilders seek to
solve and a familiarity with how alternative mechanisms
work. But I also think I have some local knowledge about
the marketplace in this state and what would be satisfactory
here and elsewhere."
"It's been a little bit frustrating for me and for the
people that I speak for to see this bill move along as
deliberately as it has in the face of some very specific
information that's been provided to the various committees
over the time that this has been passing through the
Legislature that has come from people opposed to the bill
that have pointed out why there are serious problems with it
and have documented that in footnoted testimony and so
forth. And also a little frustrating to see that even
though there's been very substantial opposition from the two
most cognizant state divisions, that this bill keeps moving
along."
"Let me explain if I can. It must be a failure on my part
or on the part of those that are trying to point out the
problem to adequately demonstrate really what the
fundamental problem is. And it is not the amount of premium
that it's going to write. And it is not all the backup
financial underpinnings that they keep tacking onto it.
There's a fundamental thing that has not been addressed."
"And perhaps I might explain what it is I'm driving at by
asking you to join me in a little imaginative experiment.
And that is to ask each of you to assume that you would like
to form jointly around this table, some form of business
enterprise. You have done a feasibility study and a
business report and have determined that because of the
front end costs, because of the risks involved, because of
the nature of your business, because of how long it's going
to take to build up to a break even point, that you're going
to need an underlying capital base of a million dollars."
"Now the way a normal private enterprise would go about that
is they would in some way, form an enterprise, maybe a
corporation and they would raise a million dollars before
they would start - before they would sell one unit of
product or service. So you decide among yourselves that
each of you would like to participate. And you say,
[pointing to members around the committee table] 'I have a
certain amount of net worth,' and you say, 'I have a certain
amount of net worth, and I'm willing to make a
contribution.' But your net worth is made up out of land
that you own someplace, and yours is fine art objects and
someone else's is made up of pick-up trucks and tools and
equipment. And so you say, 'I don't have the cash to
actually put in, but I'll take my proportion of the share of
stock, and what I will give you in lieu of that, what I will
give you in exchange for that, is a promise - a promise that
if anything goes wrong in this corporation, you can come and
get money from me and I'll help you pay the deficit between
the earnings or the revenue stream and the expenses that
we've incurred.'"
"Now I ask you from an accounting standpoint, if what you
doe is you issue the stock in exchange for this promise,
what is the net worth of the corporation? If you exchange
the stock for these letters of promise, is the net worth,
the combined net worth of all of you as you promised it to
be? Or is it the combined net worth of your liquidation
value when you sell your pick-up trucks or your art or your
tools? Or is the net worth what we argue that it is, that
in fact, it's zero even though these promises are sitting
out there?"
"Now the problem that we've tried to present here is that
the proponents of this bill are attempting to establish an
incredibly risky enterprise with no capital contribution.
And their argument is it doesn't matter because we have all
of these other things in place. We're looking for the
million-dollar premium, 25 percent of which will be paid up
front. We are looking for reinsurance. We are looking for
a guarantee fund. We are looking for bonds. But the fact
is that you start out with nothing in the till. And workers
compensation is probably the most risky of all businesses in
the insurance industry to undertake because of the long
tail, because of the exposures, because of the potential for
catastrophic losses. And that is the grommet of our
concern."
"Now, Senator Adams has asked several times, what is the
impact of increasing the minimum premium requirement from
500,000 to a million. And interestingly enough the answers
that have come are one, it really doesn't matter and that
the increase in a million dollars is simply a reflective of
increased exposure. And therein lies the problem. It's
like saying, I've started my enterprise like you gentlemen
and ladies starting your enterprise, with needing a million
dollars and in trying to make it up by increasing the number
of units of things you sell, which increase the burden on
your operation."
"A million dollars of premium is not a million dollars in
asset. It's a million dollars of exposure to additional
risk. That means more people are subjected - a million
dollars worth of losses you're exposing to instead of
$500,000 worth of losses. That's the problem here is we
keep increasing the exposure and trying to stop-gap it with
other things and we still have started with nothing in the
till. And that is the critical issue."
"The issues raised by the gentleman from Towers Perrin, who
has extensive credentials and is a lot similar to mine in
many respects, says, well, and I agree with him, that the
Legislature should encourage competition, not only
competition among insurance companies that meet the
standards for insurance companies but should allow
innovation."
"And this is where my experience in helping form the Medical
Indemnity Corporation of Alaska back in 1976 is useful to
look at because there was a serious situation, a crisis that
needed to be addressed. The insurance industry wouldn't
respond and the physicians needed some sort of response.
And the Legislature made a response. What was that
response? It was form an alternative mechanism, but
capitalize it adequately. And those that are around the
table that were here then will remember that we required
that there be $3 million plus an additional $3 million that
was a standby fund in case that was needed put up by the
State Of Alaska. Now I'm not arguing the state should fund
this, but what I'm saying is there's got to be a recognition
that you've got to start out with money in the till because
the Medical Indemnity Corporation, like any insurance
enterprise that starts out is going to lose money. The
startup expenses are great. The losses have to be posted
and reserved even though the premium may not be there that
day. And there has to be a cushion for that."
"And I believe there are others. I believe the director of
insurance has done a more intimate financial analysis and
can demonstrate how in fact there are these front end costs
that are going to cause an invasion of the capital if the
capital were there, simply because it's the nature of
starting a new insurance enterprise - any enterprise,
whether it's an insurance company, or a pool, or a
government risk management mechanism. They all have the
same financial characteristics."
"So this has been the nature of our concern. Now we have
some subsidiary concerns too. I'm concerned about some of
the amendments that have come in as a result of the
judiciary [Senate Judiciary Committee, committee substitute]
bill. There's reference to the fact that this is a
homogeneous group. My review of the bill, says that
provision's been taken out and know its any people can come
together and form a new group. I don't think that's my
reading of the bill."
"So this is our primary concern. I have one last concern
that I'd like to share with you and then I will be available
for questions. And that is, what is the impact on the
marketplace of an enterprise like this? I told you up front
that I represent an insurance company. As an insurance
company, we always would prefer to see fewer competitors
than more. But by and large, that's really not our concern.
I mean I'm not concerned that there are other people coming
in and writing insurance because that happens now and it's
happened in the marketplace in the State Of Alaska during
the 23 years that I've been here. Carriers have come in and
carriers have left and carriers have come back and carriers
have left. And it does have an impact on the marketplace
that isn't as healthy as it might be, but we live with it."
"But what happens when you have someone come in the
marketplace and they are forced to leave, not because of
competitive or because of market driven issues, but because
they're financially unable to stick it out. What that does,
is it leaves a group of employers in the state having to
scramble at a time when they're least able to scramble for
new replacement coverage and probably at a time when the
rates are starting to move up and the pressure on
competition - I mean the pressure on the marketplace is
stiffer than it is right now."
"The gentleman from Towers Perrin made an interesting
observation and I'd like to just remind you of it. He
pointed out that some of these - some of these groups in
other states have been successful and indeed he's correct.
They have been successful. And the one he cited and the one
I cited to you at a previous hearing in New Mexico are
successful because they're incredibly large. They work
extremely well when they have large numbers. We don't have
those large numbers."
"But the other thing he said was some of them worked and
some of them didn't but where the ones that were successful
was when there was for whatever reason, there was
restrictions in the normal marketplace. It was tough to get
workers compensation insurance so it was natural to kind of
move over into a market that could absorb that. In the
State Of Alaska now, and I expect for well into the near
future, we're in a very competitive market. We have a
number of people writing and the prices are moving down
rapidly and the homebuilders know that. They've seen it in
their own rates. This is not a good time to start an
enterprise that asks the homebuilders to expose their net
worths to the losses of their competitors because there are
alternatives available that are far less risky, far less
expensive and just provide the same adequate protection."
"With that I stand open for questions, Mr. Chairman."
Senator Donley referred to the million dollars, which was
much more than the Uniform Act required as a start-up
premium to increase exposure. He questioned whether the
whole idea was to expand the base and spread the risk,
saying that was what insurance companies did. The more
policies that could be written, the greater the reduction of
the risk because the risk was spread out over a greater
number of clients. He felt that just increasing exposure
was not necessarily accurate because the chance for a
catastrophic event was spread out over a much larger client
base.
Mr. Block agreed with part of what the senator was saying.
The greater the exposure base, the more the risk was spread
out, he conceded. However, he countered, the problem was it
wasn't a matter of how many people were covered, but a
matter of length of time. It wasn't known whether that
initial major loss would come on day one of operation or on
the last day of the policy year. He continued stating the
problem as living with the exposure and a greater exposure
when covering more workers. Therefore, there was a greater
chance for invasion of the capital, he explained. That was
why the law and regulations affecting insurance companies
required that the more business written, the more capital
the company be expected to have. There needed to be an
ongoing ratio because, he stressed, it was known that the
capital was invaded, even by the best of companies.
Senator Donley had another question. He said as long as
there was reinsurance and the director as provided in the
bill approved the reinsurance, didn't that prevent the
problems? He felt the reinsurance would also cover the
increased exposure. Mr. Block responded that the senator's
observation was correct, as long at the reinsurance was one
hundred percent. In other words, if a financially
responsible insurance company covered every dollar of
exposure it wouldn't make any difference.
However, he argued that was not the reinsurance proposed in
this bill. This plan called for the reinsurance to be
excess or aggregate insurance. Some of the information he
had heard about the planned excess insurance contemplated
would be excess of $900,000 of losses for the $1 million
premium. What that meant, he explained, was the reinsurance
would not pay a dime until the enterprise had paid out or
incurred $900,000 in losses. The loss fund drafted in the
bill was only $700,000 - 70 percent of the million-dollar
premium. The remaining 30 percent would go toward
administrative costs. That was his concern.
Senator Donley felt the director of the DOI should address
the reinsurance concern because the bill allowed such
discretion to the director. Mr. Block had two responses to
the suggestion. He said he agreed that a conscientious,
knowledgeable and politically insensitive director could
make the right decisions. However, in his experience, he
knew there were directors of different capabilities and
dedication. He felt that if the Legislature allowed that
latitude that would leave a conscientious director in a
vulnerable position.
Senator Donley suggested the director was in the same
situation with domestic insurance companies. The cash
requirements were even less than the premium level required
in this bill. Mr. Block disagreed and detailed the
requirements for an insurance company to do business in
Alaska. He continued voicing his opinion on why he
disagreed with the legislation and the risks involved.
Co-Chair Sharp noted the members were due in the Senate
Chambers. He ordered the bill held in committee until the
next day, when they would hear testimony from the DIV and
others who had signed up.
He announced the schedule for the near future. The
committee would meet on Saturday at 9:00 a.m. to take up SB
350. After the floor session at 10:00, the committee would
reconvene to hear SB 352. At 1:00 p.m. they would begin
working on the capital budget and continue through Sunday.
They would then address the AIDEA bill on Monday.
ADJOURNMENT
Co-Chair Sharp adjourned the meeting at approximately
11:10 a.m.
SFC-98 (32) 5/01/98 am
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