Legislature(2003 - 2004)

04/15/2003 09:04 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                              MINUTES                                                                                         
                     SENATE FINANCE COMMITTEE                                                                                 
                          April 15, 2003                                                                                      
                              9:04 AM                                                                                         
                                                                                                                                
                                                                                                                                
TAPES                                                                                                                       
                                                                                                                                
SFC-03 # 49,  Side A                                                                                                            
SFC 03 # 49,  Side B                                                                                                            
SFC 03 # 50,  Side A                                                                                                            
                                                                                                                              
CALL TO ORDER                                                                                                               
                                                                                                                                
Co-Chair Lyda  Green convened the meeting at approximately  9:04 AM.                                                            
                                                                                                                                
PRESENT                                                                                                                     
                                                                                                                                
Senator Lyda Green, Co-Chair                                                                                                    
Senator Gary Wilken, Co-Chair                                                                                                   
Senator Con Bunde, Vice Chair                                                                                                   
Senator Robin Taylor                                                                                                            
Senator Ben Stevens                                                                                                             
Senator Lyman Hoffman                                                                                                           
Senator Donny Olson                                                                                                             
                                                                                                                                
Also Attending:   RON MILLER, Executive Director,  Alaska Industrial                                                          
Development  and Export Authority;  STEVE VAN SANT, State  Assessor,                                                            
Division  of  Community  and  Business  Development,  Department  of                                                            
Community   and  Economic   Development;   ROBERT  FLINT,   Attorney                                                            
representing  Teck  Cominco  Alaska;  MIKE BARRY,  Chair,  Board  of                                                            
Directors, Alaska Industrial Development and Export Authority;                                                                  
                                                                                                                                
Attending  via  Teleconference:    From an  offnet  location:  STEVE                                                          
BRANCHFLOWER,  Director,  Office  of  Victims'  Rights,  and  former                                                            
Director of  the Medicaid Fraud Control  Unit, Department  of Health                                                            
and  Social  Services;  RANDALL  SCHLAPIA,  Unit  Manager,  Provider                                                            
Review and Rate Setting,  Division of Medical Assistance, Department                                                            
of Health  and Social  Services; JACK NIELSON,  Executive  Director,                                                            
Medicaid Rate  Advisory Commission, Division of Medical  Assistance,                                                            
Department  of Health and  Social Services;  DON KITCHEN,  Assistant                                                            
Attorney  General,  Medicaid  Provider   Fraud,  Office  of  Special                                                            
Prosecutions and Appeals, Criminal Division, Department of Law;                                                                 
                                                                                                                                
SUMMARY INFORMATION                                                                                                         
                                                                                                                                
HB  75-APPROP: OPERATING BUDGET/LOANS/FUNDS                                                                                     
HB  76-APPROP:MENTAL HEALTH BUDGET                                                                                              
                                                                                                                                
The  Committee  adopted a  committee  substitute  incorporating  the                                                            
recommendations of the budget subcommittees.                                                                                    
                                                                                                                                
HB 112-AIDEA : BONDS & MUNICIPAL TAX EXEMPTION                                                                                  
                                                                                                                                
The  Committee heard  from  the Alaska  Industrial  Development  and                                                            
Export  Authority,   the  Department   of  Community  and   Economic                                                            
Development  and   Teck  Cominco  Alaska.  The  bill   was  held  in                                                            
Committee.                                                                                                                      
                                                                                                                                
SB  41-MEDICAL CARE: CRIMES,COSTS,AUDITS                                                                                        
                                                                                                                                
The Committee heard from  the sponsor, the Office of Victims Rights,                                                            
and the Department of Law.  An amendment was considered, amended and                                                            
adopted and the bill reported from Committee.                                                                                   
                                                                                                                                
                                                                                                                                
     CS FOR SS FOR HOUSE BILL NO. 75(FIN) am(brf sup maj fld)                                                                   
     "An  Act  making appropriations   for the  operating  and  loan                                                            
     program  expenses of  state government,  for certain  programs,                                                            
     and to capitalize  funds; and providing for an effective date."                                                            
                                                                                                                                
     AND                                                                                                                        
                                                                                                                                
     CS FOR SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 76(FIN)                                                                       
     "An Act making appropriations for the operating and capital                                                                
     expenses of the state's integrated comprehensive mental health                                                             
     program; and providing for an effective date."                                                                             
                                                                                                                                
                                                                                                                                
Senator  Taylor moved  for adoption  of CS HB  75, 23-GH1002\X  as a                                                            
working draft.                                                                                                                  
                                                                                                                                
There was no objection  and the committee substitute Version "X" was                                                            
ADOPTED as a working draft.                                                                                                     
                                                                                                                                
Co-Chair  Wilken moved for  adoption of CS  HB 76, 23-GH1004\Q  as a                                                            
working draft.                                                                                                                  
                                                                                                                                
Without objection  the committee substitute Version  "Q" was ADOPTED                                                            
as a working draft.                                                                                                             
                                                                                                                                
AT EASE 9:07 AM / 9:08 AM                                                                                                       
                                                                                                                                
Co-Chair Wilken chaired the remainder of the meeting.                                                                           
                                                                                                                                
                                                                                                                                
     CS FOR HOUSE BILL NO. 112(FIN)                                                                                             
     "An  Act relating  to the  authority of  the Alaska  Industrial                                                            
     Development  and  Export  Authority  to issue  bonds  and to  a                                                            
     municipal tax exemption  for certain assets and projects of the                                                            
     Alaska  Industrial   Development  and  Export  Authority;   and                                                            
     providing for an effective date."                                                                                          
                                                                                                                                
                                                                                                                                
This  was the first  hearing  for this  bill in  the Senate  Finance                                                            
Committee.                                                                                                                      
                                                                                                                                
Co-Chair  Wilken  stated  this  bill,  requested  by  the  Governor,                                                            
contains  two  sections.  He  explained,   "Section  1  extends  the                                                            
statutory  authority  of AIDEA  [Alaska Industrial  Development  and                                                            
Export  Authority] to  issue  bonds not  to exceed  $10 million  for                                                            
development  of projects until July  1, 2007. Section 2 repeals  the                                                            
sunset provision  and permanently  provides  for a tax exemption  to                                                            
the DeLong Mountain transportation system."                                                                                     
                                                                                                                                
RON MILLER,  Executive Director, Alaska  Industrial Development  and                                                            
Export Authority  (AIDEA)  and Alaska Energy  Authority (AEA),  read                                                            
testimony into the record as follows.                                                                                           
                                                                                                                                
     This  bill would extend  AIDEA's general  bonding authority  to                                                            
     July  1,  2007  and  without  this   extension  we  would  need                                                            
     legislative  authorization to  issue bonds to develop  projects                                                            
     under  $10 million.  We'd  also be  restricted  from using  any                                                            
     bonds  to finance the purchase  of loan participations  without                                                            
     legislative authorization.                                                                                                 
                                                                                                                                
     Examples  of bond issues that  we've had in the past  that fell                                                            
     within this exception  are bond series 1995A, $8,500,000 of tax                                                            
     exempt  funds, for loan participation  made to the Kodiak  Fish                                                            
     Wheel  Company for fish  byproduct processing  plant,  [and] $7                                                            
     million   AIDEA  revolving  fund  bonds  series   1991Am  which                                                            
     provided tax exempt  funds for the expansion and improvement of                                                            
     the Unalaska Marine Center.                                                                                                
                                                                                                                                
     [The]  following  requirements  within  our  statutes  are  not                                                            
     affected  by HB 112: all development projects  over $10 million                                                            
     for  which   bonds  are  to  be  issued  would  still   require                                                            
     legislative  authorization  prior  to  issuing the  bonds,  and                                                            
     prior  to issuing bonds over  $6 million, AIDEA is required  to                                                            
     receive  approval  from  the  local  government  in  which  the                                                            
     project is  to be located. That provision will  not be affected                                                            
     by this bill, and  all development projects for which bonds are                                                            
     to be  issued require AIDEA to  make findings that the  project                                                            
     is economically and financially feasible.                                                                                  
                                                                                                                                
     What this  bill does is gives us another tool  in our portfolio                                                            
     for  financing projects.  It simply addresses  a timing  issue.                                                            
     Without  this authorization,  we  may have to  wait [until  the                                                            
     next  legislative  session] for  legislative  authorization  to                                                            
     issue bonds.                                                                                                               
                                                                                                                                
Co-Chair Wilken requested  the witness speak to the relevance of the                                                            
provision in Section 2 of the bill.                                                                                             
                                                                                                                                
Mr. Miller  noted this language  was inserted  by the House  Finance                                                            
Committee  and  relates  to  a permanent  extension  of  the  DeLong                                                            
Mountain Transportation  System (DMTS)  tax exemption. He  explained                                                            
this publicly  owned system  of AIDEA  is connected  to the  Red Dog                                                            
Mine. He qualified  that the current  membership of the AIDEA  board                                                            
of directors has not taken  a position on this issue, the historical                                                            
precedence  of AIDEA has  "assumed that  AIDEA development  projects                                                            
are not  subject to property  taxes; however  private users  and the                                                            
local political subdivision  may enter into agreements providing for                                                            
payments in  lieu of taxes." He informed  that Teck Cominco  Alaska,                                                            
owner of the Red  Dog Mine, and the Northwest Arctic  Borough have a                                                            
pilot agreement for payment  in lieu of taxes. He furthered that the                                                            
DMTS  and Teck  Cominco's use  of that  system was  exempt from  tax                                                            
evaluation  until the  year 1999,  at which time  an assessment  was                                                            
made and  the legislature  in 2000 provided  a tax exemption  with a                                                            
sunset provision that expires in the current year.                                                                              
                                                                                                                                
Co-Chair  Wilken  suggested that  Members  pose questions  first  to                                                            
Section 1, as the two sections address different issues.                                                                        
                                                                                                                                
Senator  Taylor asked  if the current  $10 million  limitation  is a                                                            
"workable number" or whether  it is too low or too high. He recalled                                                            
that  when  this limitation  was  originally  imposed,  no  specific                                                            
reason was given for determining the $10 million amount.                                                                        
                                                                                                                                
Mr.  Miller  replied  that  AIDEA  would not  be  hindered  by  this                                                            
limitation amount. He stated  that this AIDEA could function without                                                            
this extension for another  year, although passage would benefit the                                                            
Authority. He  explained that if a project of less  than $10 million                                                            
were proposed  during  the upcoming  months and  this authorization                                                             
were not granted,  the project would be delayed until  the following                                                            
legislative session.                                                                                                            
                                                                                                                                
Senator Hoffman asked if  any of the bonds have "failed for payment"                                                            
that were issued under the current limitation.                                                                                  
                                                                                                                                
Mr. Miller answered no.                                                                                                         
                                                                                                                                
Senator Bunde asked if  in the event of catastrophic failures, would                                                            
the  State  bear the  "ultimate  responsibility"  for  honoring  the                                                            
bonds.                                                                                                                          
                                                                                                                                
Mr. Miller  responded  this would depend  upon the  type of  bond in                                                            
question, explaining that  neither the faith nor credit of the State                                                            
or AIDEA  is involved for  a conduit bond.  He furthered that  AIDEA                                                            
has sufficient resources to secure the bonds it issues.                                                                         
                                                                                                                                
Co-Chair Wilken next addressed  Section 2 of the bill. He detailed a                                                            
photograph  showing  the  mine,  a  road  and  docking  and  storage                                                            
facilities,  and clarified  that the  road shown  is the subject  of                                                            
discussion [copy on file].                                                                                                      
                                                                                                                                
Co-Chair  Wilken referenced  a handout  titled, "Red  Dog Mine  full                                                            
Value  Issue History"  distributed by  the State  Assessor [copy  on                                                            
file]  and  reminded  of  the legislative   property  tax  exemption                                                            
granted in  the year 2000  for three years.  He noted the  exemption                                                            
period is approaching termination.                                                                                              
                                                                                                                                
STEVE VAN SANT,  State Assessor, Division of Community  and Business                                                            
Development, Department  of Community and Economic Development, told                                                            
of assessment  undertaken  in 1998 of the  Northwest Arctic  Borough                                                            
for full  value determination  purposes  as required  by law,  which                                                            
included the Red  Dog Mine. At that inspection, he  informed that he                                                            
collaborated with tax assessors  from the City and Borough of Juneau                                                            
and  the  Fairbanks   North  Star   Borough  to  ensure   consistent                                                            
evaluations  of mining facilities  throughout  the State. He  stated                                                            
that during  this review, it was discovered  that certain  assets of                                                            
approximately  $154 million should have been included  in prior full                                                            
value determinations but  were not.  He shared this information with                                                            
the Northwest  Arctic Borough attorney  and informed him  that these                                                            
items, which  include the value of  a portion of the road,  the dock                                                            
facilities,  and two storage  facilities, would  be included  in the                                                            
1998 assessment. Mr. Van  Sant noted this determination was appealed                                                            
to the  commissioner  of the Department  of  Community and  Economic                                                            
Development based  on the argument that the cost to  the Borough, at                                                            
that time,  would have  been approximately  $1.2 million in  funding                                                            
for   education.   He  pointed   out   that  the   figure   includes                                                            
approximately $600,000  in State funding. He recalculated the amount                                                            
to be approximately  $300,000 at present  that would "return  to the                                                            
State" resulting in the zero fiscal note for this legislation.                                                                  
                                                                                                                                
Senator Bunde  asked if the $300,000  includes education  foundation                                                            
formula funding.                                                                                                                
                                                                                                                                
Mr. Van Sant affirmed.                                                                                                          
                                                                                                                                
Senator Bunde  clarified this amount  is not currently appropriated                                                             
elsewhere in the State.                                                                                                         
                                                                                                                                
Mr. Van Sant affirmed.                                                                                                          
                                                                                                                                
Co-Chair Wilken  pointed out that this bill requires  that the State                                                            
Assessor exclude the value  attributable to the assets of AIDEA from                                                            
the full value  determination for  the Northwest Arctic Borough.  He                                                            
asked that  because  AIDEA is a  State agency  whether these  assets                                                            
would be exempt anyway.                                                                                                         
                                                                                                                                
Mr. Van  Sant  agreed that  AIDEA assets  are exempt  from  property                                                            
taxation.  However,  he emphasized  that the  private  use of  those                                                            
assets  by  a  company  or  individual,  which  he  referred  to  as                                                            
"possessory interest,"  is taxable under the Alaska Constitution and                                                            
statute.  He gave an  example of  space located  at the Ted  Stevens                                                            
International  Airport that  is leased by  Alaska Airlines  in which                                                            
the airlines is assessed taxes.                                                                                                 
                                                                                                                                
Co-Chair  Wilken clarified  that the  ownership is  not taxable  but                                                            
rather the ability to use and generate income from that use.                                                                    
                                                                                                                                
Mr. Van Sant affirmed and  noted that several State court cases have                                                            
upheld this.  He listed  parties involved  in these cases  including                                                            
Alaska Industrial Air,  Kodiak SeaLand, Golden Heart Utility, Kodiak                                                            
Island Borough and the Fairbanks North Star Borough.                                                                            
                                                                                                                                
Co-Chair Wilken  asked if the inclusion  of the possessory  interest                                                            
values for property  tax purposes is a standard practice  in Alaska.                                                            
                                                                                                                                
Mr. Van Sant affirmed  and told of a workshop held  in 1980 with all                                                            
assessors  in Alaska in which  methods established  by the  State of                                                            
California method were  adopted. He explained this provision applies                                                            
to  assessment  for  the use  by  a  taxable  entity  for use  of  a                                                            
nontaxable  property,  including State,  federal,  city and  borough                                                            
lands and Native allotments.                                                                                                    
                                                                                                                                
Co-Chair  Wilken asked if  all city and  borough governments  assess                                                            
these interests and the consequences of those who do not.                                                                       
                                                                                                                                
Mr.  Van Sant  responded  that  all local  governments  follow  this                                                            
methodology,  although   the Municipality   of  Anchorage  does  not                                                            
exclusively.    As  a  result  of  the  Municipality   of  Anchorage                                                            
practices,  he stated that  the State has  identified an  additional                                                            
$155 million to the full value of assets.                                                                                       
                                                                                                                                
Senator Taylor pointed  out that the State of Alaska does not assess                                                            
tax on property.                                                                                                                
                                                                                                                                
Mr.  Van  Sant  affirmed  but  clarified  that  the  State  annually                                                            
calculates the full value  for each community to be used for revenue                                                            
sharing and education funding.                                                                                                  
                                                                                                                                
Senator Taylor  understood the State  performs an evaluation  of the                                                            
assessed value of all real  property in Alaska, which is utilized by                                                            
other  State agencies  to  determine the  amount  of required  local                                                            
support.  He noted  that the State  allows exemptions  for  property                                                            
owners over  the age of 65, although  does not allow exemptions  for                                                            
other property owners. He remarked this is a unique system                                                                      
                                                                                                                                
Mr. Van Sant explained  the full value "equalizes  the playing field                                                            
for all municipalities",  noting that the Municipality  of Anchorage                                                            
assesses   almost  all  real   and  personal   property,  with   few                                                            
exemptions,  while the Fairbanks North  Star Borough does  not asses                                                            
personal  property.  Therefore,  he said  the State  calculates  all                                                            
optional exemptions  for each local  government. He emphasized  that                                                            
the State does  not require municipalities and boroughs  to actually                                                            
levy the taxes.  He furthered that  other states employ this  method                                                            
for their formula funding calculations.                                                                                         
                                                                                                                                
Co-Chair Wilken  asked if other boroughs  formed, whether  the State                                                            
Assessor  would include the  value of possessory  interest  of mines                                                            
located within those boroughs.                                                                                                  
                                                                                                                                
Mr.  Van  Sant  answered  this  would  occur   and  reiterated  that                                                            
possessory  interest  has  been  determined  for  mines  located  in                                                            
existing boroughs.                                                                                                              
                                                                                                                                
Co-Chair  Wilken referenced  the  Fort Knox  mine  in the  Fairbanks                                                            
North Star  Borough and asked  if the possessory  interest  has been                                                            
assessed for the road between the Steese Highway and the mine.                                                                  
                                                                                                                                
Mr. Van Sant replied  that the road as well as the  right-of-way for                                                            
the  power  line, which  is  owned  by the  Golden  Valley  Electric                                                            
Association, is assessed.  He furthered that the federal land permit                                                            
for the road  at Greens Creek in the  City and Borough of  Juneau is                                                            
also assessed.                                                                                                                  
                                                                                                                                
Senator Taylor asked about the power line to the Fort Knox mine.                                                                
                                                                                                                                
Mr. Van Sant  explained that because  the mine is the single  source                                                            
user of the right-of-way,  a possessory interest has been evaluated.                                                            
                                                                                                                                
Senator  Taylor clarified  that because  only  one customer  exists,                                                            
that customer must pay a tax on the power line right of way.                                                                    
                                                                                                                                
Mr. Van Sant affirmed.                                                                                                          
                                                                                                                                
Senator Olson  asked the affect of  this reassessment of  possessory                                                            
interest on AIDEA projects.                                                                                                     
                                                                                                                                
Mr. Van Sant pointed out  that other mine facilities pay these taxes                                                            
as a cost of business,  although he was unable to respond to whether                                                            
harm is caused.                                                                                                                 
                                                                                                                                
Senator  Olson commented  that imposition  of  the additional  taxes                                                            
would  not benefit  the  Red Dog  Mine.  He stated  that  profitable                                                            
entities  are  able  to  pay  the taxes,  but  those  that  are  not                                                            
profitable would "fall by the wayside".                                                                                         
                                                                                                                                
Mr. Van  Sant responded  that the  matter consists  of a  taxability                                                            
issue and an evaluation  issue. He explained that  if a project were                                                            
not  feasible,  the  evaluation  would  be  affected;  however,  the                                                            
taxability of the possessory interest remains.                                                                                  
                                                                                                                                
Co-Chair Wilken  recalled discussion  regarding Teck Cominco  Alaska                                                            
payment  in lieu  of taxes  and asked  whether this  relates to  the                                                            
taxability of this property.                                                                                                    
                                                                                                                                
Mr.  Van  Sant replied  it  does  not  and  detailed  motor  vehicle                                                            
registration  fees colleted in lieu  of property tax. He  reiterated                                                            
the need to assess property comparably across the State.                                                                        
                                                                                                                                
Senator  B. Stevens  asked if  AIDEA financing  is  involved in  the                                                            
Greens Creek Mine and the Fort Knox Mine.                                                                                       
                                                                                                                                
Mr. Miller responded that  AIDEA is not involved in the Greens Creek                                                            
Mine  operation  and  has  invested  approximately  $71  million  in                                                            
financing in the Fort Knox Mine.                                                                                                
                                                                                                                                
Senator B. Stevens  asked the portion of the Fort  Knox project that                                                            
AIDEA is involved.                                                                                                              
                                                                                                                                
Mr. Miller  described  the tax-exempt  bonds issued  for a  leaching                                                            
project.  He  specified   that  AIDEA  has  no  investment   in  the                                                            
infrastructure, road or power line.                                                                                             
                                                                                                                                
Senator B. Stevens  asked therefore, why a project  that receives no                                                            
AIDEA financing with another that does receive AIDEA financing.                                                                 
                                                                                                                                
Mr. Van Sant responded  that AIDEA financing is irrelevant. Instead,                                                            
he emphasized  the matter relates  to the taxability of the  private                                                            
entity utilizing tax-exempt property.                                                                                           
                                                                                                                                
Senator B. Stevens questioned  the comparison of possessory interest                                                            
of airport  facilities used  by airlines to  the use of the  road by                                                            
the Red  Dog Mine.  He  explained that  Alaska Airlines  leases  the                                                            
property  and pays  a fee  for sole  use of  the  property; and  has                                                            
discretion  to prohibit other parties  from using that property.  He                                                            
asked if  another entity  would be required  to negotiate with  Teck                                                            
Cominco Alaska  to use the DMTS in the event another  enterprise was                                                            
developed, such as coal mining.                                                                                                 
                                                                                                                                
Mr. Van Sant understood  negotiations would be made  with both AIDEA                                                            
and Teck  Cominco Alaska.  He stressed that  the most recent  Alaska                                                            
Supreme  Court decision  on the  matter ruled,  "A nonexclusive  use                                                            
lease was still taxable due to the extent of the possession."                                                                   
                                                                                                                                
Mr. Miller interjected  that negotiations would be  made with AIDEA,                                                            
the owner of the road.                                                                                                          
                                                                                                                                
Mr.  Miller clarified  his  earlier  statements  that  AIDEA "  debt                                                            
participates"  in Fort Knox  although it does  not "own any  of that                                                            
project".                                                                                                                       
                                                                                                                                
Senator Olson  spoke of the interest in the success  of Teck Cominco                                                            
Alaska by Governor  Murkowski and  others. He asked if extension  of                                                            
the tax exemption would allow resource development to continue.                                                                 
                                                                                                                                
Mr. Miller replied  that repeal of the tax exemption  would increase                                                            
the operating  costs for the Red Dog Mine. He pointed  out that Teck                                                            
Cominco Alaska pays AIDEA  a tonnage fee for the use of the DMTS and                                                            
that a tax  would be an additional  cost for utilizing the  road and                                                            
port.                                                                                                                           
                                                                                                                                
Mr. Van Sant furthered  that the Municipality of Anchorage granted a                                                            
five-year  economic exemption  to the property  used by the  seafood                                                            
plant,  which is allowable  under  AS 29.45.050.  He expressed  that                                                            
such exemptions  are permitted  to encourage  economic development,                                                             
although the State considers the full value of the assets.                                                                      
                                                                                                                                
Senator  Hoffman noted  the  Fort Knox  Mine project  is  completely                                                            
privately owned  while AIDEA owns  the road and port of the  Red Dog                                                            
Mine project.                                                                                                                   
                                                                                                                                
Senator Taylor asked if  the success of a business affects the value                                                            
of the possessory interest.                                                                                                     
                                                                                                                                
Mr. Van Sant  explained that the appraiser  assesses the  real value                                                            
of the  property  not the  business venture.  He  qualified this  is                                                            
problematic,  exampling a  hotel that might  be unprofitable  due to                                                            
poor  management or  because  "the business  just  isn't there".  He                                                            
stated that  failure of a business  to success does not necessarily                                                             
diminish the  value of that property;  however, if the value  of ore                                                            
dropped significantly,  the  value of the  property would likely  be                                                            
affected.                                                                                                                       
                                                                                                                                
Senator Taylor  asked if assessment  of closed canneries  located in                                                            
Southeast  Alaska should  be  assessed at  highest  and best  market                                                            
value rather than  at the current use of the property.  He clarified                                                            
that a  cannery facility  could be difficult  to sell as a  cannery,                                                            
although it could be easier sold as a resort.                                                                                   
                                                                                                                                
Mr. Van  Sant agreed  and stated  that if  a higher  value use  were                                                            
possible, an assessor would  give that consideration. He pointed out                                                            
that some facilities have  significant equipment, the value of which                                                            
is dependent upon the stability of the industry market.                                                                         
                                                                                                                                
Senator  Taylor commented  that several  seafood  plants and  lumber                                                            
processors  no longer in operation  have decreased significantly  in                                                            
value.                                                                                                                          
                                                                                                                                
Senator Taylor  asked the amount of  increased revenue to  the State                                                            
if the State were  to exempt a pipeline and other  equipment related                                                            
to the oil industry from local taxation.                                                                                        
                                                                                                                                
Mr.  Van   Sant  replied   that  the  Alyeska   Pipeline   generates                                                            
approximately  $260  million in  property  taxes annually  and  that                                                            
approximately $40 of that amount is paid to the State.                                                                          
                                                                                                                                
Senator  Taylor understood  the dependence  of  some communities  on                                                            
this income  to subsidize  property tax revenue.  He indicated  this                                                            
matter should be reviewed  to "level playing fields" for communities                                                            
that do not receive income from a large industry.                                                                               
                                                                                                                                
ROBERT FLINT,  Attorney representing Teck Cominco  Alaska, testified                                                            
that the Red Dog Mine operated  for ten years with parties under the                                                            
assumption  that the public facility  was not to be included  in the                                                            
fair value determination  for the Northwest Arctic Borough. He noted                                                            
that the  Borough  contested the  1999 determination,  although  the                                                            
issue became irrelevant  after action by the legislature in the year                                                            
2000 to allow the exemptions.                                                                                                   
                                                                                                                                
                                                                                                                                
SFC 03 # 49, Side B 09:52 AM                                                                                                    
                                                                                                                                
                                                                                                                                
Mr.  Flint  qualified,  however,  that  the legal  issues  over  the                                                            
assessment remain.  He listed two issues for which  the challenge to                                                            
the assessment  is based, one being  that the user of a public  road                                                            
or  facility  who pays  a  toll  does  not thereby  acquire  a  real                                                            
property interest  in that public  facility. He differentiated  this                                                            
from a  leasehold interest  a private  entity might  have in  public                                                            
property. He exampled the  55-year lease of State land or land owned                                                            
by the  Alaska Railroad,  which is stated  is common and always  has                                                            
been subject to taxation.  He pointed out that in leasehold interest                                                            
situations, the  leaser has the authority to subcontract  use of the                                                            
public  facility,  compared  to the  DMTS,  in  which use  by  other                                                            
parties would  be negotiated with  AIDEA. He added that payment  for                                                            
use of the road  would be made to AIDEA rather than  to Teck Cominco                                                            
Alaska.                                                                                                                         
                                                                                                                                
Mr. Flint continued with  the second argument against the assessment                                                            
that  if such  possessory  interest  existed the  proper  assessment                                                            
method of that  interest would result in zero value  because "a full                                                            
lease payment  was made for the entire value". He  admitted that the                                                            
court  ruled  against this  argument  in  litigation  involving  the                                                            
Golden Valley Electric Association.                                                                                             
                                                                                                                                
Mr. Flint stressed  he does not expect  the Legislature to  act as a                                                            
board of equalization  or court of  appeals to decide these  issues.                                                            
Rather,  he   said  the  matter  is   public  policy  for   economic                                                            
development   in   remote  areas   where   an  absence   of   public                                                            
infrastructure  is a "strong inhibiting factor". He  pointed out the                                                            
DMTS was  publicly  financed to  encourage resource  development  in                                                            
this area. He  noted that extensive infrastructure  exists along the                                                            
railbelt  that is utilized  by many parties,  facilitating  economic                                                            
development  in that  region.  He expressed  that  the provision  in                                                            
Section  2   of  the  committee  substitute   "would  appropriately                                                             
eliminate what  would otherwise be a discrimination  between a built                                                            
up area and a remote area."                                                                                                     
                                                                                                                                
Mr. Flint  next  agreed that  the taxation  situation  is a  formula                                                            
driven fair value  determination in that whatever  amount is paid in                                                            
either taxes  or a pilot  agreement, do not  affect the formula.  He                                                            
remarked that  the primary purpose  of Teck Cominco Alaska  projects                                                            
is to  provide jobs  and the secondary  purpose is  to create  a tax                                                            
base for the local community.  He reported that in the current year,                                                            
Teck Cominco  Alaska would  pay $5,850,000  to the Northwest  Arctic                                                            
Borough under  the pilot agreement.  He compared this to  the amount                                                            
that  would   be  collected  in  the   event  property  taxes   were                                                            
established  and a mil rate imposed  similar to other boroughs,  and                                                            
calculated that  Teck Cominco Alaska would pay no  more and likely a                                                            
lesser amount.                                                                                                                  
                                                                                                                                
Co-Chair Wilken asked if  the pilot agreement is payment for the use                                                            
of the road but not the port or storage facilities.                                                                             
                                                                                                                                
Mr. Flint replied  the contract includes  use of all facilities  and                                                            
amounts to approximately $17 million annually.                                                                                  
                                                                                                                                
BOB JACKO,  President, Teck Cominco  Alaska testified from  a mining                                                            
perspective   the  primary   consideration   is  "predictabity   and                                                            
consistency".  He noted that changes impact the financial  stability                                                            
of  any property.  He  listed  location  as another  consideration,                                                             
similar to the location  of a restaurant or hotel. He explained that                                                            
the existence  of a  road and port  facility near  the Red Dog  Mine                                                            
"opens up that  whole region" and  provides an advantage  to promote                                                            
economic development.  He informed that in the years  2000 and 2001,                                                            
a significant  competitor was investigating ore deposits  nearby and                                                            
utilized   the  Red  Dog   Mine  airstrip,   exploration  camp   and                                                            
accommodations.   He  stated  that  if  significant   deposits  were                                                            
located,  the competitor  would  begin operations  and subsequently                                                             
utilize the  DMTS. He attributed this  possibility to the  existence                                                            
of the DMTS that would enable such operations.                                                                                  
                                                                                                                                
Mr. Jacko stressed  that Teck Cominco Alaska has never  assumed sole                                                            
responsibility  for  the DLMS  and has  made efforts  to ensure  the                                                            
system is available  for multiple users. He exampled  fuel transfers                                                            
to the Village  of Noatak undertaken  to offset fuel shortages,  the                                                            
use of the  facilities to transport  materials to expand  the church                                                            
in Noatak  and build a pastor's  home, as  well as the transport  of                                                            
three homes  to Noatak. He furthered  that buildings no longer  used                                                            
by the Red Dog Mine have been relocated to villages.                                                                            
                                                                                                                                
Mr. Jacko  shared that employees  of the Red  Dog Mine who  serve on                                                            
the Noatak Indian Reorganization  Act (IRA) Council investigated the                                                            
possibility  of connecting  the DMTS  to the  village. He  expressed                                                            
that Teck Cominco Alaska  supports this venture, as it would benefit                                                            
the region.  However,  he pointed  out  Teck Cominco  Alaska is  not                                                            
authorized  to approve this venture,  which must be negotiated  with                                                            
AIDEA.                                                                                                                          
                                                                                                                                
Mr. Jacko  reported  that the primary  extraction  from the Red  Dog                                                            
Mine is zinc,  which is receiving the lowest prices  since the Great                                                            
Depression.                                                                                                                     
                                                                                                                                
Co-Chair Wilken  relayed that in the  summer of 1999 he visited  the                                                            
mine  as a  member of  a deferred  maintenance  task  force. He  was                                                            
"dumbstruck"  at the extent of the  facilities and the benefit  they                                                            
provide to  the area. He stated he  utilizes this as a model  of the                                                            
benefits that resource  development could provide to other Alaskans.                                                            
                                                                                                                                
Senator  Olson  spoke of  a  "recent betrayal"  to  the legislative                                                             
minority  as a result of  changes to taxes  to the oil industry.  He                                                            
stated  these  changes  were made  based  on  the premise  that  one                                                            
legislature is  not bound by the actions of an earlier  legislature.                                                            
He asked if  the witness shares similar  concerns with the  possible                                                            
change to existing agreements.                                                                                                  
                                                                                                                                
Mr. Jacko  agreed  and expressed  the elimination  of the  exemption                                                            
would have a financial  impact on Teck Cominco Alaska.  He explained                                                            
that  the  Borough's  revenue  would  decrease  approximately   $1.2                                                            
million, which would have  a "ripple effect and it will come to us."                                                            
He stressed  the heavy reliance of  the Borough on multiple  funding                                                            
sources  and that  the reduction  from  one source  would force  the                                                            
Borough to  generate additional funds  from another, primarily  Teck                                                            
Cominco Alaska.                                                                                                                 
                                                                                                                                
Senator  Olson asked  if Teck Cominco  Alaska  is considering  other                                                            
business ventures.                                                                                                              
                                                                                                                                
Mr.  Jacko told  of a  draft Environmental  Impact  Statement  study                                                            
underway  on a  proposed project  located  near Delta  Junction.  He                                                            
continued that  the company owns additional land around  the Red Dog                                                            
Mine  location,  although  the  low  price  of  zinc  makes  current                                                            
development unfeasible.                                                                                                         
                                                                                                                                
Senator Olson asked who maintains the road.                                                                                     
                                                                                                                                
Mr. Jacko responded that Teck Cominco Alaska maintains the road.                                                                
                                                                                                                                
Senator  Olson  asked if  any  State  funds are  utilized  for  this                                                            
purpose,  particularly  in the  event  of major  damage,  such as  a                                                            
washout. He indicated earlier  discussion regarding a car dealer who                                                            
does not  pay the maintenance  expenses on  roads used to  transport                                                            
the vehicles it sells.                                                                                                          
                                                                                                                                
Mr. Jacko responded that  if significant major damage occurred, Teck                                                            
Cominco Alaska  would request  funding for  the repairs from  AIDEA,                                                            
the amount of  which would be added to the outstanding  capital debt                                                            
and repaid through toll fees.                                                                                                   
                                                                                                                                
Co-Chair Wilken shared  a core section of ore from the Red Dog Mine,                                                            
directing attention to the high concentration of ore.                                                                           
                                                                                                                                
Co-Chair Wilken  reminded that the  matter of the DMTS arose  during                                                            
the legislative  session in the year 2000 in discussions  on SB 248,                                                            
relating  to AIDEA  and rural  development.  He noted  a  conference                                                            
committee  inserted  the  exemption  into that  legislation  and  he                                                            
referenced  May  3, 2000  minutes  from  that  committee  expressing                                                            
intent  that  time was  needed  to  negotiate  with the  Borough  to                                                            
resolve  the issue.  He asked  the efforts  of past  three years  to                                                            
recognize the assessor's full value determination.                                                                              
                                                                                                                                
Mr. Flint  answered that  he had been making  efforts to appeal  the                                                            
assessment.                                                                                                                     
                                                                                                                                
Co-Chair  Wilken  recalled a  similar  matter involving  the  Golden                                                            
Heart, which  has subsequently  been decided  by the Alaska  Supreme                                                            
Court.                                                                                                                          
                                                                                                                                
Mr. Flint  commented that  the Borough has  no assessment  structure                                                            
and that the payments are made through the pilot agreement.                                                                     
                                                                                                                                
Co-Chair  Wilken detailed  the process of  appealing assessments  of                                                            
his property,  first to the  Fairbanks North  Star Borough,  then to                                                            
the court  if a satisfactory  agreement is  not reached. He  pointed                                                            
out the legislature  is not part of  this process and asked  why the                                                            
DMTS   issue  has   not  been   addressed  through   regular   court                                                            
proceedings.                                                                                                                    
                                                                                                                                
Mr. Flint elaborated on  the absence of a property tax structure and                                                            
ordinance  in  the   Northwest  Arctic  Borough  and   therefore  no                                                            
procedure  to protest  an assessment  exists. He  noted the  Borough                                                            
challenged  the assessment  and  reiterated the  perceived  economic                                                            
development  policy  issue, in  which the  legislature  is a  proper                                                            
forum for  discussion. He  noted the court  is not the proper  forum                                                            
for addressing economic development policies.                                                                                   
                                                                                                                                
Co-Chair  Wilken asked  how the  matter  could be  addressed in  the                                                            
court system to avoid the issue arising every five years.                                                                       
                                                                                                                                
Mr. Van Sant told  of the appeal process in which  the Borough could                                                            
appeal  to the  Department  of Community  and  Economic Development                                                             
commissioner  then appeal  further to the  court. He qualified  that                                                            
the Borough could  not make a judicial appeal at present  due to the                                                            
exemption;  however, if the  exemption expired,  an appeal  could be                                                            
made in the year 2004.                                                                                                          
                                                                                                                                
Senator  Taylor  suggested   the Borough   must  first  institute  a                                                            
property tax and assess the amount of that tax.                                                                                 
                                                                                                                                
Mr.  Van  Sant corrected  that  from  the  "State  perspective"  the                                                            
Borough has  the authority  to levy a tax  after completing  certain                                                            
procedures.                                                                                                                     
                                                                                                                                
Senator Taylor readdressed  the matter of assessing the value of the                                                            
sections of the Alyeska Pipeline that are not taxed.                                                                            
                                                                                                                                
Mr.  Van  Sant   reiterated  his   earlier  response  that   of  the                                                            
approximately  $260 million  generated  in property  taxes from  the                                                            
pipeline, approximately $40 is received by the State.                                                                           
                                                                                                                                
Co-Chair Wilken stated  that specific data is published annually and                                                            
noted  that  several  boroughs  do  not collect  the  full  20  mils                                                            
assessed, and that the balance is received by the State.                                                                        
                                                                                                                                
Senator  Taylor  expounded  upon  original  legislative  debate  and                                                            
remarked that  possessory interest was not the intent.  He commented                                                            
on the collection  of taxes from Greens  Creek Mine by the  City and                                                            
Borough of Juneau  for the use of the State-owned  road on Admiralty                                                            
Island.  He expressed concern  about future  similar road  projects,                                                            
suggesting  they  should  established   as  nonexclusive.  He  asked                                                            
whether  possessory  interest   could  be  determined  for  a  party                                                            
utilizing a State-owned road to conduct business.                                                                               
                                                                                                                                
Mr. Van Sant  answered no and stated  the possessory interest  would                                                            
apply  in the  event  of  a payment  for  an  exempt use  of  public                                                            
property.                                                                                                                       
                                                                                                                                
Senator  Taylor  spoke  about authority  granted  to  AIDEA  through                                                            
legislation  to issue bonds  of up to $29  to construct a  Bradfield                                                            
toll road  and up to $50  million to construct  the Whittier  Tunnel                                                            
toll road.  He asked  if AIDEA funds  were utilized  to construct  a                                                            
toll road whether commercial  use of that road would be subject to a                                                            
possessory interest.                                                                                                            
                                                                                                                                
Mr. Van Sant responded  that if the private entity has exclusive use                                                            
of the road,  some possessory interest  would probably be  attached.                                                            
                                                                                                                                
Senator  Taylor  repeated  that  when  the  DMTS  was  established,                                                             
legislators never  assumed that utilization of the  facilities would                                                            
be a taxable entity for the Borough.                                                                                            
                                                                                                                                
MIKE   BARRY,  Chair,   Board   of  Directors,   Alaska   Industrial                                                            
Development  and Export Authority  testified  that the Red  Dog Mine                                                            
project is  the most successful effort  of AIDEA to create  economic                                                            
development.  He contended  that not  all possessory  interests  are                                                            
"equal",  as alluded  to  by Mr.  Flint.  Mr. Barry  told  of the  a                                                            
facility  constructed  at  on leased  State-owned  land  at the  Ted                                                            
Stevens  Anchorage  International  Airport  utilizing  AIDEA  issued                                                            
bonds  borrowed  by  Federal  Express.  He  explained  that  Federal                                                            
Express  pays  property  taxes  on  this  property  because  it  has                                                            
exclusive possessory interest  that grants the company all rights to                                                            
that facility.  On the contrary, he remarked, the  Red Dog Mine does                                                            
not have exclusivity of the DMTS.                                                                                               
                                                                                                                                
Mr. Barry  also informed  of plans  for expansion  of the DMTS  port                                                            
facility to  foster significant future  development, including  coal                                                            
extraction.  In studying  this project,  he relayed  it was  learned                                                            
that  the  creation  of  a  fuel  oil  terminal   to  serve  the  17                                                            
communities  of the Northwest Arctic  region, would be feasible.  He                                                            
expressed  that  the  cost  of fuel  oil  to  rural  communities  is                                                            
"probably  the single greatest  determent  to economic development"                                                             
due to the high operating costs.                                                                                                
                                                                                                                                
Mr. Barry next  spoke to the seafood processing facility  located in                                                            
Anchorage,  pointing  out that  the  Municipality of  Anchorage  has                                                            
several  options for  offsetting the  revenue lost  by granting  the                                                            
facility a  property tax exemption.  He stressed that the  Northwest                                                            
Arctic Borough,  however has "no other  avenues" to collect  funding                                                            
for education  programs.  He emphasized  the matter  is not  whether                                                            
other  taxpayers  within  the  Borough   would  bear  the  financial                                                            
responsibility,  but  rather  that  children  would not  receive  an                                                            
education.                                                                                                                      
                                                                                                                                
Mr. Barry warned  of the economic  impacts that elimination  of this                                                            
exemption  would create in  the region. He  stressed that  potential                                                            
investors  must consider  all  operating  expenses  compared to  the                                                            
global  economy.  He  pointed  out  that  Teck  Cominco  Alaska  has                                                            
contracted  with  AIDEA  to  pay all  the  costs  to  construct  and                                                            
maintain the  DMTS, as well as pay  the Borough in lieu of  taxes to                                                            
fund  education.  He  remarked  that  the  tax exemption   therefore                                                            
demonstrates that Alaska supports "positive development."                                                                       
                                                                                                                                
Senator  Bunde  asked  if  an  acceptable  compromise  would  be  an                                                            
extension of the exemption rather than a permanent exemption.                                                                   
                                                                                                                                
Mr.  Barry responded  that  approximately  37 years  remains on  the                                                            
"bond  life" of  the DMTS  debt  and that  the extension  should  be                                                            
granted at least  until the debt is paid. He indicated  that studies                                                            
indicate  the DMTS  would have  a significantly  longer useful  life                                                            
than the terms of the debt.                                                                                                     
                                                                                                                                
Senator B.  Stevens asked  the party that  would own the DMTS  after                                                            
the debt is paid.                                                                                                               
                                                                                                                                
Mr. Barry answered AIDEA.                                                                                                       
                                                                                                                                
Co-Chair Wilken  asked the position of the AIDEA Board  of Directors                                                            
on this issue.                                                                                                                  
                                                                                                                                
Mr. Barry informed  the Board would  meet at the end of the  current                                                            
month and would address the issue.                                                                                              
                                                                                                                                
Co-Chair Wilken asked the best way to resolve this matter.                                                                      
                                                                                                                                
Mr. Barry responded that  a long term exemption would be in the best                                                            
interest of AIDEA  and of economic development, as  "the world would                                                            
know what  the facts are  going to be." He  cautioned that  it would                                                            
not be beneficial  to "tie up the  resources" of the Borough,  which                                                            
has "meager resources"  nor the operator "that's under  a great deal                                                            
of  stress in  the global  market  today"  to undergo  a  litigation                                                            
process.                                                                                                                        
                                                                                                                                
Co-Chair Wilken  asked if the pilot agreement, which  expires in the                                                            
year 2012, is available for renegotiation if necessary.                                                                         
                                                                                                                                
Mr. Barry was not familiar with the terms of the agreement.                                                                     
                                                                                                                                
Senator Taylor  assumed if  the exemption  were not extended,  AIDEA                                                            
would seriously consider  whether to finance additional improvements                                                            
in the area.                                                                                                                    
                                                                                                                                
Mr. Barry responded  that the matter  would be considered,  although                                                            
he  could not  predict  to  what extent.  He  stressed  the  biggest                                                            
problem would  be the uncertainty  that a  removal of the  exemption                                                            
would create.                                                                                                                   
                                                                                                                                
Senator B.  Stevens asked  the terms of the  agreement for  the DMTS                                                            
between  AIDEA   and  Teck  Cominco   Alaska.  He  understood   that                                                            
possessory  interest stipulates an  exclusive use and asked  if such                                                            
is contained in the DMTS agreement.                                                                                             
                                                                                                                                
Mr. Barry replied  that a toll use  agreement is a more appropriate                                                             
characterization  of the  contractual agreement.  He furthered  that                                                            
Tech Cominco Alaska  has agreed to pay fees to AIDEA  for the use of                                                            
the DMTS, which  over the life of the facilities would  amortize the                                                            
full cost of construction and operation of the facilities.                                                                      
                                                                                                                                
Senator  B. Stevens  reiterated  his understanding  that  possessory                                                            
interest is contingent upon exclusive rights.                                                                                   
                                                                                                                                
Mr. Barry stated the DMTS agreement is nonexclusive.                                                                            
                                                                                                                                
Co-Chair Wilken announced  his intent to hold the bill in Committee.                                                            
                                                                                                                                
Senator  Bunde  indicated  Amendment  #1, which  he  sponsored,  was                                                            
submitted to him by Teck  Cominco Alaska as a compromise between the                                                            
"need for predictability  and a total exemption".  This amendment he                                                            
stated would extend the exemption to the year 2012.                                                                             
                                                                                                                                
Co-Chair  Wilken   assured  resolution  to  this  matter   would  be                                                            
forthcoming.                                                                                                                    
                                                                                                                                
Senator Taylor  expressed that rather than dealing  with the DMTS as                                                            
an isolated  case, he would  consider State  policy on taxation  "to                                                            
equalize  across the  board and  across  the State  the manners  and                                                            
methods of taxation and exemptions there from that we give."                                                                    
                                                                                                                                
Senator  Bunde informed  that  while he  supports the  Red Dog  Mine                                                            
project the exemption  is not without cost and he  therefore opposes                                                            
a permanent  exemption. He explained  that currently, the  exemption                                                            
costs  other  school  districts  approximately  $300,000  per  year,                                                            
equaling approximately $60,000 per school district.                                                                             
                                                                                                                                
                                                                                                                                
SFC 03 # 50, Side A 10:40 AM                                                                                                    
                                                                                                                                
                                                                                                                                
Co-Chair Wilken commented  that it is not beneficial to the industry                                                            
or to the Northwest  Arctic Borough to reargue the  issue every five                                                            
years.                                                                                                                          
                                                                                                                                
[The bill was subsequently HELD in Committee.]                                                                                  
                                                                                                                                
RECESS 10:42 AM / 2:05 PM                                                                                                       
                                                                                                                                
                                                                                                                                
     CS FOR SPONSOR SUBSTITUTE FOR SENATE BILL NO. 41(JUD)                                                                      
     "An  Act  relating  to  medical care  and  crimes  relating  to                                                            
     medical  care, including  medical care  and crimes relating  to                                                            
     the   medical   assistance   program,   catastrophic    illness                                                            
     assistance,  and  medical  assistance  for  chronic  and  acute                                                            
     medical conditions."                                                                                                       
                                                                                                                                
                                                                                                                                
This  was the first  hearing  for this  bill in  the Senate  Finance                                                            
Committee.                                                                                                                      
                                                                                                                                
[Note: Due to an audio  malfunction a portion of the meeting was not                                                            
recorded.]                                                                                                                      
                                                                                                                                
Co-Chair  Green, sponsor,  read  her testimony  into  the record  as                                                            
follows.                                                                                                                        
                                                                                                                                
     Why do we need SB 41?                                                                                                      
     ·  The cost of the Medicaid  program in Alaska has increased an                                                            
        average  of 20% per  year since  1999,  growing the  program                                                            
        from $396  million  in FY  99 to $936  million  in FY 04  (a                                                            
        total increase of $540 million over 5 years).                                                                           
                                                                                                                                
     ·  We have  limited ability  to  contain the  majority of  cost                                                            
        factors  driving these  increases,  such as  the  increasing                                                            
        number of eligible  recipients, the increased  use of health                                                            
        services,  and the rising  costs of  prescription drugs  and                                                            
        long-term care.                                                                                                         
                                                                                                                                
     ·  There is  evidence  that waste,  fraud and  abuse of  public                                                            
        funds  used  to  deliver  Medicaid  and  Medicare   services                                                            
        exists,  both   in  Alaska   and  throughout   the   nation.                                                            
        Estimates of  7% for waste  and 10%  for abuse are  commonly                                                            
        held perceptions.                                                                                                       
                                                                                                                                
     ·  Alaska  has no specific  laws  tailored  toward health  care                                                            
        crimes, making it difficult  to prosecute dishonest Medicaid                                                            
        providers  and  keep  them  from  continuing  to  abuse  the                                                            
        system.                                                                                                                 
                                                                                                                                
     ·  The Division  of Legislative Audit  recently released  their                                                            
        audit  on  the  Division  of  Medical  Assistance   Internal                                                            
        Control Over  Medicaid Payments.   Two recommendations  from                                                            
        the audit are addressed by this legislation:                                                                            
                                                                                                                                
          o Recommendation No. 7 states:  "DMA's director                                                                       
             should provide for a full-time, ongoing service                                                                    
             provider audit function."                                                                                          
                                                                                                                                
          o Recommendation No. 12 states:  "The legislature                                                                     
             should consider adopting specific criminal                                                                         
             statutes related to Medicaid fraud to enhance the                                                                  
             Medicaid Fraud Control Unit's effectiveness."                                                                      
                                                                                                                                
     According to the audit, 46 other states have some form of                                                                  
     criminal Medicaid fraud statutes.                                                                                          
                                                                                                                                
     What does SB 41 Do?                                                                                                        
                                                                                                                                
     ·  It  requires  DHSS   to  contract  for  annual  independent                                                             
        financial  audits  to  identify  errors,  overpayments,  and                                                            
        criminal violations within the Medicaid program.                                                                        
                                                                                                                                
     ·  These audits  complete the communication  loop between  DHSS                                                            
        and Law:                                                                                                                
                                                                                                                                
          o All audits will be provided to the Attorney General                                                                 
             for possible criminal investigation.                                                                               
          o The Attorney General will notify DHSS of any                                                                        
             criminal charges brought against a Medicaid                                                                        
             provider.                                                                                                          
          o All criminal charges will result in a complete review                                                               
             of outstanding claims with DHSS.                                                                                   
                                                                                                                                
     · It establishes the crime of medical assistance fraud                                                                     
        defined with  the culpable  mental state  of "knowingly  and                                                            
        recklessly".  It  classifies the level of  crime as a felony                                                            
        or misdemeanor  based upon  the aggregate  value of  charges                                                            
        similar to existing theft statutes.                                                                                     
                                                                                                                                
     · It provides a definition of "medical purpose" in relation                                                                
        to  prescribing  a controlled  substance.    The  definition                                                            
        provides a  framework within  which  a prosecuting  attorney                                                            
        can argue  whether a practitioner  prescribed  a drug  for a                                                            
        medical purpose or for another purpose.                                                                                 
                                                                                                                                
     · It allows the commissioner to exclude a person convicted of                                                              
        medical assistance  fraud from participation  in the medical                                                            
        assistance  program for a  period up  to 10 years  following                                                            
        their unconditional discharge from sentence served.                                                                     
                                                                                                                                
Senator  Taylor asked  if  this legislation  provides  for a  "paper                                                            
audit" or just a field audit.                                                                                                   
                                                                                                                                
Co-Chair  Green  responded  that this  requires  that  at least  .75                                                            
percent of the total number  of providers are audited each year. She                                                            
stated this is more than  the current number of audits conducted and                                                            
also provides a "higher  level of investigation". She furthered that                                                            
the legislation  would require the Department to follow  up on audit                                                            
findings and also  requires communication between  the Department of                                                            
Law  and the  Department of  Health  and Social  Services  regarding                                                            
providers  that  have  been  prosecuted  and  found  to  be  not  in                                                            
compliance.  She   informed  that  in  the  past,   lapses  in  this                                                            
communication  have  occurred   between  the  two  departments.  She                                                            
stressed   that   this   legislation   would   stop   the   Medicaid                                                            
participation of those providers found guilty of Medicaid fraud.                                                                
                                                                                                                                
Senator  Taylor relayed  that "a  member of  the medical  community"                                                            
indicated  to him  that an  occasional  comparison  of a  provider's                                                            
claims to other claims  would identify any irregularities that would                                                            
warrant a complete  audit. Senator Taylor requested  assurances that                                                            
the Department would conduct these reviews.                                                                                     
                                                                                                                                
Co-Chair Green assured this was her understanding.                                                                              
                                                                                                                                
STEVE BRANCHFLOWER, Director,  Office of Victims' Rights, and former                                                            
Director of  the Medicaid Fraud Control  Unit, Department  of Health                                                            
and Social  Services, testified via  teleconference from  an off net                                                            
site that he was available to answer questions.                                                                                 
                                                                                                                                
RANDALL SCHLAPIA,  Unit Manager, Provider  Review and Rate  Setting,                                                            
Division  of Medical  Assistance,  Department of  Health and  Social                                                            
Services testified  via teleconference from an offnet  location that                                                            
he was also available to answer questions.                                                                                      
                                                                                                                                
JACK   NIELSON,   Executive   Director,   Medicaid   Rate   Advisory                                                            
Commission,  Division of  Medical Assistance,  Department of  Health                                                            
and Social  Services  testified via  teleconference  from an  offnet                                                            
location that he was also available to answer questions.                                                                        
                                                                                                                                
DON KITCHEN,  Assistant Attorney General,  Medicaid Provider  Fraud,                                                            
Office  of Special  Prosecutions  and  Appeals,  Criminal  Division,                                                            
Department  of Law,  testified  via  teleconference  from an  offnet                                                            
location that he was also available to answer questions.                                                                        
                                                                                                                                
Senator  Olson asked  the percentage  of the  audits conducted  that                                                            
have resulted in questionable or egregious practices.                                                                           
                                                                                                                                
Mr.  Branchflower  responded that  between  July 1998  and  December                                                            
2002, during his tenure  at the Medicaid Fraud Unit, the Division of                                                            
Medicaid Assistance  contracted with  a national accounting  firm to                                                            
conduct  164 audits  at  a cost  of  $477,250. As  a  result of  the                                                            
findings of  the audits, he informed  that $2,741,126 was  recovered                                                            
and returned  to the State.   He further  told of eight outstanding                                                             
cases at the time  he left the Unit, with an additional  $18 million                                                            
identified as  overpayments. He concluded that the  audits were cost                                                            
effective and he therefore encouraged passage of the bill.                                                                      
                                                                                                                                
Senator Taylor  repeated Senator Olson's question  of the percentage                                                            
of  audits resulting  in  identification  of fraud  or questionable                                                             
practices.                                                                                                                      
                                                                                                                                
Mr. Branchflower replied  that 85 percent of the audits did not find                                                            
conduct that  would merit criminal  prosecution, although  in almost                                                            
all the cases,  some overpayment was  identified. He stated  that in                                                            
some instances,  substantial overpayment was identified  and because                                                            
no criminal wrongdoing  was determined, these cases were referred to                                                            
the  Division  of  Medical  Assistance  for  the  initiation  of  an                                                            
administration  recovery, as required under federal  regulations. He                                                            
was unaware of the status of the administrative recovery cases.                                                                 
                                                                                                                                
Senator Taylor clarified  that approximately 75 to 80 percent of the                                                            
audits found some overpayment  was made and the remaining 15 percent                                                            
warranted an additional criminal investigation.                                                                                 
                                                                                                                                
Mr. Branchflower affirmed.                                                                                                      
                                                                                                                                
Senator Olson  asked the number of providers charged  were appealing                                                            
the findings of their audit.                                                                                                    
                                                                                                                                
Mr. Branchflower  told of two doctors  convicted and imprisoned  who                                                            
are currently appealing their cases.                                                                                            
                                                                                                                                
Senator  Olson   asked  if  the  sponsor  received   input  on  this                                                            
legislation from health care providers.                                                                                         
                                                                                                                                
Co-Chair  Green answered that  she has received  "very little"  such                                                            
input.                                                                                                                          
                                                                                                                                
Amendment  #1: This  amendment  changes  the definition  of  "claim"                                                            
under Sec.  47.05.290. Definitions.,  in Section 3 of the  committee                                                            
substitute  on page 6  lines 4 -  8. The amended  language reads  as                                                            
follows.                                                                                                                        
                                                                                                                                
                (2) "claim" includes a request for payment for                                                                  
     medical assistance  services under applicable  state or federal                                                            
     law  or regulations,  whether the request  is in an  electronic                                                            
     format or paper format, or both;                                                                                           
                                                                                                                                
This amendment  also  inserts "or  medical services",  and  replaces                                                            
"available  to  a  medical  assistance  recipient"  with  "that  may                                                            
qualify  for reimbursement  under AS  47.07 or AS  47.08" on  page 7                                                            
lines 6 and 7 in Section  3 of the committee substitute. The amended                                                            
language of Sec. 47.05.290. Definitions., reads as follows.                                                                     
                                                                                                                                
                (17) "services or medical services" means a health                                                              
     care benefit that  may qualify for reimbursement under AS 47.07                                                            
     or  AS   47.08,  including  health   care  benefits   provided,                                                            
     attempted  to be provided, or claimed to have  been provided to                                                            
     another,  by a medical  assistance provider,  or "services"  as                                                            
     defined in AS 11.81.900;                                                                                                   
                                                                                                                                
Co-Chair Green moved for adoption.                                                                                              
                                                                                                                                
Co-Chair Wilken objected for an explanation.                                                                                    
                                                                                                                                
ANNE  CARPENETI,  Assistant  Attorney  General,  Criminal  Division,                                                            
Department of Law, noted a typographical error in the amendment.                                                                
                                                                                                                                
Co-Chair  Green offered a  motion to amend  the amendment to  insert                                                            
"assistance"  following "medical"  in Sec. 47.05.290(17)  to read as                                                            
follows.                                                                                                                        
                                                                                                                                
                (17) "services or medical assistance services" means                                                            
     a health care benefit  that may qualify for reimbursement under                                                            
     AS 47.07 or AS 47.08,  including health care benefits provided,                                                            
     attempted  to be provided, or claimed to have  been provided to                                                            
     another,  by a medical  assistance provider,  or "services"  as                                                            
     defined in AS 11.81.900;                                                                                                   
                                                                                                                                
The amendment was AMENDED without objection.                                                                                    
                                                                                                                                
Ms.  Carpeneti  then  spoke  to  the  amendment,   noting  that  the                                                            
clarification  of a definition of "claim" is preferable  in criminal                                                            
statute,  as the common  definition  of the word  is different  than                                                            
that applied to a Medicaid claim.                                                                                               
                                                                                                                                
Ms.  Carpeneti furthered  that  the  clarification  of "services  or                                                            
medical services"  is necessary because  other services may  qualify                                                            
for reimbursement  under the law, but are not necessarily  available                                                            
to a Medicaid eligible recipient. She exampled oxygen bottles.                                                                  
                                                                                                                                
Co-Chair Wilken clarified the witness supported the amendment                                                                   
                                                                                                                                
Ms. Carpeneti affirmed.                                                                                                         
                                                                                                                                
There was no objection and the amended Amendment #1 was ADOPTED.                                                                
                                                                                                                                
Senator Taylor offered  a motion to report the committee substitute,                                                            
as  amended, from  Committee  with  individual  recommendations  and                                                            
accompanying fiscal note.                                                                                                       
                                                                                                                                
Without  objection  CS SS  SB 41  (FIN)  MOVED from  Committee  with                                                            
fiscal note #1 for $66,500  from the Department of Health and Social                                                            
Services.                                                                                                                       
                                                                                                                                
ADJOURNMENT                                                                                                                 
                                                                                                                                
Co-Chair Gary Wilken adjourned the meeting at 02:20 PM.                                                                         

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