Legislature(1995 - 1996)
04/21/1995 09:35 AM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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.