02/03/2004 01:30 PM Senate L&C
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ALASKA STATE LEGISLATURE
SENATE LABOR AND COMMERCE STANDING COMMITTEE
February 3, 2004
1:30 P.M.
TAPE(S) 04-3, 4
MEMBERS PRESENT
Senator Con Bunde, Chair
Senator Ralph Seekins, Vice Chair
Senator Hollis French
Senator Gary Stevens
MEMBERS ABSENT
Senator Bettye Davis
COMMITTEE CALENDAR
SENATE BILL NO. 273
"An act relating to the Alaska seafood marketing institute, the
seafood marketing assessment, the seafood marketing tax, and the
seafood product tax; and providing for an effective date."
HEARD AND HELD
HOUSE BILL NO. 305
"An act relating to the calculation and payment of unemployment
compensation benefits; and providing for an effective date."
HEARD AND HELD
SENATE BILL NO. 276
"An act relating to the Alaska insurance guaranty association;
relating to joint insurance arrangements and assessments to the
association; relating to the powers of the Alaska industrial
development and export authority concerning the association; and
providing for an effective date."
HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 273
SHORT TITLE: ASMI BOARD/ SEAFOOD TAXES & ASSESSMENTS
SENATOR(S): STEVENS G BY REQUEST OF SALMON INDUSTRY TASK FORCE
01/23/04 (S) READ THE FIRST TIME - REFERRALS
01/23/04 (S) L&C, FIN
02/03/04 (S) L&C AT 1:30 PM BELTZ 211
BILL: HB 305
SHORT TITLE: UNEMPLOYMENT COMPENSATION BENEFITS
REPRESENTATIVE(S): LABOR & COMMERCE
05/07/03 (H) READ THE FIRST TIME - REFERRALS
05/07/03 (H) L&C, FIN
05/09/03 (H) L&C AT 3:15 PM CAPITOL 17
05/09/03 (H) MOVED OUT OF COMMITTEE
05/09/03 (H) MINUTE(L&C)
05/10/03 (H) L&C RPT 4DP 2NR
05/10/03 (H) DP: CRAWFORD, GUTTENBERG, DAHLSTROM,
05/10/03 (H) ANDERSON; NR: LYNN, ROKEBERG
05/15/03 (H) FIN RPT 6DP 3NR
05/15/03 (H) DP: KERTTULA, BERKOWITZ, FOSTER,
05/15/03 (H) MEYER, HARRIS, WILLIAMS; NR: HAWKER,
05/15/03 (H) STOLTZE, MOSES
05/15/03 (H) FIN AT 8:30 AM HOUSE FINANCE 519
05/15/03 (H) MOVED OUT OF COMMITTEE
05/15/03 (H) MINUTE(FIN)
05/16/03 (H) TRANSMITTED TO (S)
05/16/03 (H) VERSION: HB 305
05/17/03 (S) READ THE FIRST TIME - REFERRALS
05/17/03 (S) L&C, FIN
05/19/03 (S) L&C AT 8:00 AM BELTZ 211
05/19/03 (S) HEARD & HELD
05/19/03 (S) MINUTE(L&C)
02/03/04 (S) L&C AT 1:30 PM BELTZ 211
BILL: SB 276
SHORT TITLE: ALASKA INSURANCE GUARANTY ASSOCIATION
SENATOR(S): RULES BY REQUEST OF THE GOVERNOR
01/23/04 (S) READ THE FIRST TIME - REFERRALS
01/23/04 (S) L&C, FIN
02/03/04 (S) L&C AT 1:30 PM BELTZ 211
WITNESS REGISTER
Senator Gary Stevens
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Sponsor of SB 273.
Mr. Ray Riutta, Executive Director
Alaska Seafood Marketing Institute (ASMI)
311 N. Franklin
Juneau AK 99801
POSITION STATEMENT: Supports SB 273.
Mr. Brent Paine, Executive Director
United Catcher Boats (UCB)
Anchorage AK
POSITION STATEMENT: Opposes SB 273.
Ms. Donna Parker
F/v Sea Storm
No address provided
POSITION STATEMENT: Supports SB 273 with changes.
Mr. Bruce Schactler, Marketing Chairman
United Fishermen of Alaska
211 4th Street, Suite 110
Juneau, AK 99801-1172
POSITION STATEMENT: Commented on SB 273.
Representative Tom Anderson
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Sponsor of HB 305.
Commissioner Greg O'Claray
Department of Labor & Workforce
Development
PO Box 21149
Juneau, AK 99802-1149
POSITION STATEMENT: Supports HB 305.
Mr. Bill Kramer, Chief
Unemployment Insurance Program
Department of Labor & Workforce
Development
PO Box 21149
Juneau, AK 99802-1149
POSITION STATEMENT: Supports HB 305.
Mr. Don Etheridge
American Federation of Labor - Congress of Industrial
Organizations (AFL-CIO)
710 West 9th Street
Juneau, AK 99801
POSITION STATEMENT: Supports HB 305.
Ms. Pam LaBolle, President
Alaska State Chamber of Commerce
nd
217 2 St., Ste 201
Juneau AK 99801
POSITION STATEMENT: Opposes HB 305.
Ms. Linda Hall, Director
Division of Insurance
Department of Community & Economic Development
PO Box 110800
Juneau, AK 99811-0800
POSITION STATEMENT: Supports SB 276.
Mr. Kevin Smith, Executive Director
Alaska Municipal League - Joint Insurance Association (AML-JIA)
807 G Street
Anchorage AK 99501
POSITION STATEMENT: Commented on SB 276.
Mr. Jeff Bush, Deputy Director
Alaska Public Entity Insurance (APEI)
431 N. Franklin, Ste. 301
Juneau AK 99801
POSITION STATEMENT: Commented on SB 276.
Mr. Mike Klawitter, Director
Risk Management
Anchorage School District
POSITION STATEMENT: Commented on SB 276.
ACTION NARRATIVE
TAPE 04-4, SIDE A
SB 273-ASMI BOARD/ SEAFOOD TAXES & ASSESSMENTS
CHAIR CON BUNDE called the Senate Labor and Commerce Standing
Committee meeting to order at 1:30 p.m. Present were Senators
Seekins, French and Chair Bunde. Senator Davis was excused.
Senator Stevens arrived at 1:31 p.m. The first order of business
to come before the committee was SB 273.
SENATOR GARY STEVENS, sponsor of SB 273, said the Joint
Legislative Salmon Task Force had worked on this bill and it had
also been discussed in his marketing subcommittee. He commented:
Very quickly it was apparent to all of us that the
Alaska Seafood Marketing Institute (ASMI) is the focus
of marketing for Alaska seafood. It's a very important
element in the industry and whatever we do to it, we
didn't want to damage it any more than it has been.
But because of the loss of funding, primarily through
salmon, the loss of the value of salmon as well as the
volume, that has had an impact on ASMI. So we looked
at the bottom line. We realized that ASMI - I believe
and the committee believed, as well as the task force
- that we need to keep around $7 million coming into
ASMI annually - plus assuming another $2 million will
come in from the federal funding, as well - in order
to allow ASMI to do the job it is supposed to do -
which is to market seafood products from Alaska. They
are the generic marketer and do a very important job.
SENATOR STEVENS said one of the most contentious elements in SB
273 is the reduction in the size of the board from 25 members to
nine. His own experience on large membership boards and
observations at ASMI's twice-yearly meetings illustrate how
difficult it is for 25 members to make decisions and move ahead.
Nine is not a magic number, but he could defend nine members as
being efficient and the number could always be increased.
Second, ASMI needs to bring in $7.3 million annually to function
properly. Currently, salmon fishermen have a 1 percent tax.
Knowing the industry is in crisis, he argued to the salmon
fishermen that it should be reduced to .5 percent; but almost to
a person, they supported marketing and didn't want to reduce
their tax.
SENATOR STEVENS recapped that SB 273 changes the board from 25
to nine members, keeps the 1 percent salmon tax, establishes the
.3 of 1 percent processors' tax as mandatory instead of
voluntary and levies a new tax on all other seafood products.
The 1 percent salmon tax brings in $1.672 million, the
processors' tax would bring in $3.112 million and all other
species would bring in $2.610 million. He advised the committee
to keep an eye on the bottom line and not reduce taxes below $7
million. ASMI's current $4.5 million budget is less than it
needs to do an adequate job.
CHAIR BUNDE asked Senator Stevens to expand on the controversy
surrounding the size of the board.
SENATOR STEVENS elaborated that there are many elements in the
fishing industry, all wanting to know how they are represented.
If all were represented, the board would have 125 people instead
of 25.
You have to assume that a board of nine or whatever
the number might be...that the governor appoints and
we approve, would really be looking at the whole
industry.... I think you have to have a board that
represents the whole state and when they're appointed
realize they are statesmen, in a way, and not just
representing their own particular interests....
He suggested the best solution for getting the board down to
nine members, and one that he has already talked over with the
administration, is for the governor to ask for all the current
members to resign and then establish an entirely new board.
CHAIR BUNDE reminded the committee that ASMI's constitutionality
had been an issue in the past and asked if there had been
discussion about SB 273's constitutionality.
SENATOR STEVENS said he hadn't heard anything about that issue.
SENATOR SEEKINS asked if the board members were appointed or
nominated by the governor for legislative approval.
SENATOR STEVENS replied that board members are appointed by the
governor.
CHAIR BUNDE added that the board members are not confirmed by
the Legislature.
SENATOR SEEKINS said he didn't know why the word "nominee" on
page 1, line 14, is used if the nominee wasn't subject to some
sort of approval. He then surmised it was because the
nominations were made by people other than the governor. He
asked why salmon is taxed at 1 percent and all other seafood
products are taxed at only .3 of 1 percent.
SENATOR STEVENS replied that the current tax structure taxes
salmon at 1 percent because salmon fishermen are aware of the
importance of marketing and see no reason to reduce it.
SENATOR SEEKINS asked if he had received any feedback from the
"others" who were going to have a mandatory tax.
SENATOR STEVENS replied that one of the responses was:
You know, I've never put money into ASMI, so I can't
complain about what ASMI is doing and actually I
wouldn't mind it if some of my taxes went to ASMI,
because then I would have expectations of what ASMI
does with that money and I could have some demands on
how that money is spent.
Other responses from various processing firms and fishermen
indicated they don't want any new taxes.
SENATOR SEEKINS reflected that the salmon industry is more
distressed than the rest, yet they [salmon fishermen] are paying
the most. He asked if other segments of the industry need the
marketing support as well or is this assessment meant to be
industry's contribution to the salmon marketing effort.
SENATOR STEVENS clarified that even though fishermen of other
species have not been taxed, the processors of those species
have. He estimated that twice as much money would be coming to
ASMI from the processors than from salmon fishermen and almost
half again as much from fishermen of other species.
1:47 p.m.
SENATOR HOLLIS FRENCH asked Senator Stevens to elaborate on the
elimination of the geographic distribution requirement for board
members.
SENATOR STEVENS replied that other fishing organizations in the
state, like the North Pacific Fisheries Management Council
(NPFMC), operate with fairly small boards and don't
geographically divide up the state for their board membership.
By dividing the state geographically, the board could
conceivably end up with all salmon fishermen on it instead of
other parts of the industry being represented. "If you really
try to be totally representational by gear type, by fisheries,
by geographical area, that way leads to insanity."
SENATOR FRENCH surmised that another danger might be having a
nine-member board whose members are all from the Lower Cook
Inlet and asked what in the bill would keep that from happening.
SENATOR STEVENS replied that that responsibility is on the
shoulders of the governor who does the appointing.
MR. RAY RIUTTA, Executive Director, Alaska Seafood Marketing
Institute (ASMI, said ASMI supports SB 273 and thanked everyone
for their efforts to help identify the problems it is facing. He
related how ASMI has become extremely dependent on federal
grants and how the value of [wild] salmon has decreased while
the world markets have been flooded with farmed salmon. Funding
that comes from the industry to ASMI has decreased in proportion
to that decrease in value. Federal grants have been taking up
that slack for a number of years, but one grant for $1 million
ends this year and won't be repeated. Another grant for $2
million is carrying ASMI through this year and partially into
next year, but its continuance beyond that is in question.
MR. RIUTTA projected that ASMI would receive $2 million to $3
million in federal grants to fund its market access program
(export program overseas) and very little other money to support
domestic marketing operations. He said the board figures ASMI
needs a $10 million to $11 million annual budget. ASMI is not
asking for an increased budget, but a stable budget that doesn't
fluctuate wildly with the swings of the fisheries market. With
the estimated $2 million in federal funds, it needs $7 million
to $8 million of additional baseline funding. The white fish
industry is having the same problems as the salmon industry did
10 years ago. Part of the across-the-board assessment is to help
address that problem.
SENATOR SEEKINS asked if the red meat scare had any effect on
demand for seafood.
MR. RIUTTA replied that it is too early to measure, but people
are increasingly moving from red meat to seafood. The
marketplace for seafood has great opportunities in the months
ahead.
MR. BRENT PAINE, Executive Director, United Catcher Boats (UCB),
Anchorage, said they had been in existence for 11 years and are
primarily based in Seattle. They represent most of the catcher
vessels that fish for Pollock and cod and half their vessels
fish for crab in the Bering Sea. There are 63 member vessels
from the roughly 112 catcher boats that fish the Bering Sea for
pollock and cod and the 300 vessels that fish for crab. UCB is
primarily involved with fisheries at the federal level and less
at the state level, since National Marine Fisheries Service is
the primary manager of their fishery.
UCB strongly opposes increased taxation on their fleet for
marketing services by ASMI for ground fish at this time. He
informed them that the pollock fleet in the Bering Sea harvests
roughly 600,000 metric tons of pollock a year and they would be
responsible for paying almost half of the increased taxation or
almost $1 million.
Members' concerns include not knowing what the money would be
used for and that it would address problems in the salmon
industry, not in the white ground fish industry. They don't like
filling in the gap to solve the falling revenues of salmon
fishermen. Marketing of their products is done at a private
level through the producers of the final product made from the
fish that they catch.
MR. PAINE bewailed the fact that this measure is taxation
without representation because most of the Bering Sea fishermen
are not Alaskan residents. Further, shrinking the size of the
board doesn't allow for representation of all fisheries that are
being taxed.
MR. PAINE pointed out that the UCB is made up of fishermen and
not marketing experts and he felt that the board needed to be
made up of professional marketing people, not necessarily
fishermen or processors.
SENATOR SEEKINS asked him to repeat what percentage of his fleet
is Alaska owned.
MR. PAINE replied that the fleet that fishes in the Bering Sea
is probably about 95 percent non-Alaskan.
2:00 p.m.
MS. DONNA PARKER, F/V Sea Storm, said she and her husband fish
for pollock and cod and also own a gillnetter in Southeast
Alaska. She is the former fisheries liaison with ASMI and helped
draft the original legislation.
She suggested making all the assessments in SB 273 voluntary and
felt that the duties of the board should be expanded to all
seafoods on a species by species basis. Finally, language in SB
273 proposes to tax the boat, the permit, the quota and all the
deck hands and she favored an assessment on the vessel only
because:
Having been a fisherman for many years in Kodiak, I
know how it filters down to the back deck. These costs
are taken off of the top, so we would pay for it at
that point - on the expenses of the boat, then taken
off the top in terms of expenses for the quota and by
the time it got down to us who are on the back deck,
we already would have paid for two or three times. So,
I think that language should be amended to be a
specific assessment to the vessel.
CHAIR BUNDE responded that Senator Stevens was making notes of
her concerns for further discussion.
MR. BRUCE SCHACTLER, Marketing Chairman, United Fishermen of
Alaska, said he is also president of the United Salmon
Association. He felt the tax proposal was fair and had heard the
white fish industry vigorously asking for money to begin
addressing the marketing problems they foresee in their
industry. While he supported a smaller board, Mr. Schactler felt
that the issue should be dealt with in separate legislation,
because it wasn't connected to taxation at all.
CHAIR BUNDE thanked everyone for their testimony and asked
Senator Stevens to notify him when he was ready to hear the bill
again.
SENATOR STEVENS thanked ASMI members for their input and
reiterated that the real goal is to establish stable long-term
funding so that ASMI can continue to operate into the future.
HB 305-UNEMPLOYMENT COMPENSATION BENEFITS
CHAIR CON BUNDE announced HB 305 to be up for consideration.
2:13 p.m.
REPRESENTATIVE TOM ANDERSON, sponsor of HB 305, said it provides
an 8.2 percent increase in the maximum weekly unemployment
benefit amount. The increase would be phased in a three-year
period and minimizes impact to employers and employees. Alaska
th
currently ranks 47 in the nation with a maximum benefit of
th
$248. Alaska would rank 28 if the benefit was fully increased
to $308 in 2006. He reminded the committee members that this
would not take effect for several years. In 2005, the maximum
benefit for base period wages exceeding $26,750 will increase
and in 2006, the maximum weekly benefit amount will increase for
Alaskan's whose base period wages exceed $29,750. In 2007, wages
will be $32,750.
REPRESENTATIVE ANDERSON concluded by saying that unemployment
insurance promotes economic stability and creates a balance for
those who are not working.
CHAIR BUNDE reminded the committee that the business community
was being impacted with increased workers' compensation
assessments, as well.
TAPE 04-3, SIDE B
CHAIR BUNDE asked where Alaska stands among other states in
terms of qualification for benefits.
REPRESENTATIVE ANDERSON deferred to the commissioner.
COMMISSIONER GREG O'CLARAY, Department of Labor and Workforce
Development, said Governor Murkowski recently launched his
Alaska hire program that pressures employers to meet and exceed
the 90 percent Alaskan hire rule and the importance of the
unemployment benefits are often overlooked. He further apprised
the committee that:
Over $150 million went on the street in unemployment
benefits that stayed within Alaska's boundaries. That
kept skilled workers here that could afford to remain
in Alaska at those rates. I think it's important to
remember we haven't had an increase in several years
and this particular bill does push out the negative
impact or the rate increases some two years from the
effective date of the new benefits....
CHAIR BUNDE asked if it was possible for someone to draw Alaska
unemployment benefits in another state.
COMMISSIONER O'CLARAY deferred to Bill Kramer, Chief,
Unemployment Insurance Program.
MR. BILL KRAMER, Chief, Unemployment Insurance Program, replied
that Alaska is part of the National Interstate Benefit
Agreement. He explained that a client who has an unemployment
claim based on wages he earned while working in Alaska may move
about the country and continue to draw benefits based on wages
he earned while he was in Alaska.
CHAIR BUNDE asked if he knew how many people do that.
MR. KRAMER replied that about 17 percent of the benefits
annually go to interstate clients.
CHAIR BUNDE asked where Alaska ranked among other states for
eligibility for the unemployment insurance program.
MR. KRAMER replied that the department tracks the recipient rate
and that Alaska ranks within the top 20 percent.
SENATOR SEEKINS asked if someone files for unemployment in a
state other than Alaska, are they paid at the Alaska rate.
MR. KRAMER replied that claims are based on Alaska's
unemployment insurance law and an individual would be paid based
on the wages earned while in Alaska.
CHAIR BUNDE commented: "So, it logically follows that if we're
th
47, they might want to move to someplace that was a little
higher on the scale than that."
SENATOR SEEKINS asked the commissioner if the zero fiscal note
is still accurate.
COMMISSIONER O'CLARAY replied that the fiscal note is still
zero. He added that the State of Washington ranks second in the
United States for its maximum weekly benefit.
What usually occurs when an Alaskan worker in the
construction trades, as an example, moved or relocated
in the Washington area, they would choose to return to
work in order to get at this [Washington state's]
benefit rather than ours. That's the concern that I
have in terms of the construction workers - is that we
are losing valuable trained workforce - that end up
staying south when our construction season starts. And
so, it's going to lead to a shortage at some point
among our trained journeymen. We're already looking at
a 20 percent replacement factor in our journeymen
construction workers over the next five years....
SENATOR SEEKINS sought to clarify whether the change in rate
would have a fiscal effect on employees of the State of Alaska.
COMMISSIONER O'CLARAY replied that was correct, but the rate
increase would happen in 2006.
CHAIR BUNDE added that employers would feel the full impact in
2010 and that employees would be impacted with a 0.4 percent
increase.
COMMISSIONER O'CLARAY replied that was correct, but 0.4 percent
is not a major increase.
SENATOR SEEKINS said the state would be impacted fiscally in
2006. He explained that in the previous session this bill had a
significant fiscal note and now the fiscal note for the same
bill is zero. He pondered:
In my mind, I was just trying to figure out, if the
State of Alaska were anticipating no one from state
employment drawing unemployment, then I understand
that it could have a zero fiscal impact. I'm not
trying to be argumentative, but just trying to qualify
it. I see zeros across the board all the way through
2009, but yet I see an increase in the rate. Is the
State of Alaska exempt from that rate increase or does
the state participate in that rate increase and,
therefore, result in a fiscal note? That's the only
thing I am trying to determine.
MR. KRAMER replied that Senator Seekins' thinking is accurate.
The State of Alaska pays dollar for dollar for any
benefits that are paid out on their former employees'
behalf. So, starting in, depending on when this bill
is effective, if it's effective next January 2005, as
the department pays out unemployment benefits to
individuals whose claims are based on their wages from
the State of Alaska, the State of Alaska will receive
a bill - dollar for dollar - for any benefits that we
pay out. So, there will be some increase in the cost
of their benefits, because we will be paying out a
higher benefit amount for them.
SENATOR SEEKINS wondered if the fiscal note should be revised
for accuracy and clarity.
CHAIR BUNDE noted that the bill's sponsor was taking note of
that question. He asked the next person to testify, Don
Etheridge.
MR. DON ETHERIDGE, Alaska Federal of Labor - Congress of
Industrial Organizations (AFL-CIO), supported HB 305 saying:
This is our third year trying to get something moved
through to help the unemployed of our state to be able
to remain here.
He related how a laborer who just transferred to Alaska from
Washington State was getting ready to move back there because he
can survive much better on Washington unemployment payments when
he is out of work. "Half my list is talking about moving to
Washington and starting to go to work, now."
MR. ETHERIDGE urged the committee to move an immediate effective
date rather than January 2005, but said he could live with HB
305 the way it is if it is allowed to move out of committee now.
SENATOR SEEKINS asked Mr. Etheridge to comment on the huge
disparity in the construction trades' wages in the State of
Alaska versus the State of Washington, because:
At one time, the incentive was for people to remain in
the workforce because of the disproportionately higher
wage rate that they received up here. Is that still
there?
MR. ETHERIDGE replied that wages are not as disproportionate as
they used to be and some areas of the country have wages that
are higher than Alaska's. He reiterated that:
We are comparable with the state of Washington on most
of our construction trades.... There is not a big
incentive for them to stay here anymore when they can
go down there and make almost as much an hour on the
paycheck and benefits and then draw a lot more on
unemployment when they aren't working.
He pointed out that tax rates are the major difference.
MS. PAM LABOLLE, President, Alaska State Chamber of Commerce,
said qualifications and benefits of the unemployment insurance
program have historically been confusing. Few states provide a
benefit for dependents and Alaska does. Nearly half of the
claims in Alaska include a dependent benefit and the extra $72
per week puts Alaska in the middle of the pack; the increase
would put Alaska in the top 10 percent. Further, she said the
increase would cost employers $8 million.
MS. LABOLLE said in the past the Chamber of Commerce has
supported the first year increase and half of the second
increase in the past. She painted the employers' big picture by
pointing out that the minimum wage increased last year and a
significant workers' compensation increase started just this
month, an average increase of 21 percent.
MS. LABOLLE agreed that the Department of Labor would have a
zero fiscal note, because it just administers the program, but
felt strongly that the state [as an employer] should provide a
fiscal note. She informed the committee that Washington State is
overhauling its [unemployment] tax structure because companies,
like Boeing, are leaving in part or considering leaving totally.
Alaska, on the other hand, is trying to create a business
friendly climate.
MS. LABOLLE stated that the unemployment insurance program was
created for people who become unemployed through no fault of
their own. Forty-six states provide for a complete denial of
benefits for the duration of a claimant's unemployment until he
gets another job, earns a certain level of wages and applies
again. Of the other four states, Alaska's policy is the most
liberal.
SENATOR SEEKINS asked her to briefly comment on last year's task
force on this issue.
MS. LABOLLE responded that the Alaska State Chamber of Commerce
was asked to join a working group last year, but because of
various scheduling problems, didn't make any of the three
meetings. It was not because of unwillingness to attend.
SENATOR FRENCH asked if other states have a separate dependent
provision like Alaska's.
MS. LABOLLE replied that Alaska pays $24 per dependent child up
to three children and is one of twelve states that do that.
About 44 percent of claimants in 1999 or 2000 received dependent
benefits.
SENATOR FRENCH commented that he had just entertained his 15-
year old son over the weekend in Juneau and, "Twenty-four
dollars would barely get you through the first pizza party."
CHAIR BUNDE set HB 305 aside and encouraged the sponsor to
consider the enforcement issues and to try to find middle ground
between labor and the chamber.
SB 276-ALASKA INSURANCE GUARANTY ASSOCIATION
CHAIR CON BUNDE announced SB 276 to be up for consideration.
MS. LINDA HALL, Director, Division of Insurance, recapped:
The Alaska Insurance Guaranty Association (AIGA) is
formed under Alaska statute - the purpose is to
minimize financial loss to policyholders and
claimants. Assessments are made through that guaranty
association to pay the claims of insolvent insurers.
In July 2003, Fremont Insurance was declared insolvent
by the Los Angeles Superior Court and even though they
had actively written business for approximately two
and a half years, they left $60 million in claims and
outstanding claims reserves. When they were an active
insurer in our state, they insured 27 percent of our
workers' compensation premium. The magnitude of this
insolvency far surpassed any prior insolvency and
dramatically exceeds the resources of the association.
There are actually three other insolvent insurance
companies in the Guaranty Fund right now. Those are
Reliance, Paula and Legion. So, the problem we have
was created with the massive insolvency of Fremont,
but we're still dealing with four insolvent workers'
compensation insurers.
I am asked regularly for the causes, what happened,
how did it get here, and they become very technical. I
would put forth that generally there are many factors
that cause insolvencies in insurance companies - poor
management is high on that list, lack of adequate
reserving for future claims, and there are allegations
that they have lower income due to price discounting.
In the case of Fremont, we saw a rapid growth that was
unable to be sustained. There have been no allegations
of fraudulent behavior, misappropriation of funds -
the types of things we read about in some of the large
national funds. I would throw that out.
When there are insufficient funds in the Guaranty
Association to pay claims, statute allows for the
prorating of payments to claimants. That has a great
impact on the beneficiaries of the payments from the
Guaranty Fund. That prorating today, I just checked
statistically yesterday, as of 2/4/04, there are still
open claims of 580 injured workers being handled by
the Guaranty Association. There were originally
approximately 700 Fremont claims; approximately 200 of
those have been settled and finalized, but we still
have almost 600 injured workers whose claims are being
handled.
When a claim is prorated, that injured worker will get
a prorated amount of their weekly wage payment; they
will get a prorated amount to pay for medical
benefits. So, the worker will suffer with the result
of that pro-ration. Ultimately, the workers
compensation obligation is an obligation of the
employer. If there are insufficient funds to pay the
claims of the injured workers, that statutory
obligation will revert to the employer. So, we have
currently - and I checked these statistics yesterday,
also - we have currently, claims of 380 employers
being handled by the Guaranty Association. So, we have
a potential impact of 380 employers who purchase a
workers' compensation policy in good faith, who now
will get that obligation back. I think that has the
potential for a pretty dramatic impact on some of our
small businesses that are certainly not prepared for
that kind of unanticipated financial cause.
CHAIR BUNDE asked if receiving only a prorated benefit could be
viewed as a breach of contract [because workers' compensation
law says an injured worker can't sue his employer] and allow the
injured worked actionable cause against his employer.
MS. HALL deferred the liability question to Mr. Lisankie and
continued to brief the committee:
We are in very uncharted territory. Not only has that
never occurred here, to the best of our research
ability, it has never occurred any place in the
country. So, procedurally, we're really aren't sure
what would happen. In likelihood, those injured
workers would apply first to the workers' compensation
board to enforce that statutory obligation. So, in
that process we would have some forms of litigation
whether it was through the Workers' Compensation Board
or through the courts for the employer to take back
that responsibility for payments.
CHAIR BUNDE said the committee would like expanded information
on what the liability would likely be if the Legislature chose
not to take any action [going to pro-ration].
MS. HALL informed the committee that for the month of January,
the division received a $2.1 million claims payment and that is
the size of the obligation for that month. The payments get
smaller as they are projected out in time, because of
settlements and workers going back to work. The magnitude of the
problems is estimated to reach its maximum [more than $20
million] in 2008. That is the obligation that would go back to
employers, however it is prorated.
2:50 p.m.
MS. HALL said the goal of SB 276 is, "To find a method of
securing a stream of funds without a bailout of the
industry...."
SB 276 attempts to utilize the traditional philosophy of
insurance, which is to spread the risk across a large number of
people and to spread the cost of the current crisis across a
large population. This is not a popular proposal, because no one
wants to pay more.
MS. HALL likened the Guaranty Fund to a safety net to protect
policyholders and claimants in the event of a insolvency. It has
covered insolvencies for 20 years and works well in other
states. She said the policy question the Legislature must decide
is, "Do we want to have that safety net in place for the
protection of our claimants and our policyholders?"
The Guaranty Fund has three accounts: workers' compensation,
automobile and "others" and SB 276 changes how assessments are
done.
The first piece of the funding proposal will be to
deal with the assessments as they stand today.
Currently, there is a statutory cap of 2 percent of
assessments made on the line of business - work comp,
auto or other and we're proposing that that line of
business cap be increased to 4 percent. That
generates, obviously, double the 2 percent cap. Right
now we generate $4.2 million; with our 2 percent
assessment it would obviously double. That is a
projection. We have $2.4 million - I just mentioned in
January the expenditures were $2.1 million. So, we're
only generating at best with that four months worth of
payments of claims.
The second piece of the assessment would be to allow
assessing the other two unaffected funds up to a
maximum of 2 percent. These two provisions expand the
current statutory assessment base just for the cost of
the whole crisis. Neither increasing the assessment to
pay for the loss of others nor assessing the accounts
involved is a popular solution. The Guaranty Fund,
again, functions as a safety net and the premise is
that the cost of the safety net is spread across the
insured population.
MS. HALL explained that the proposed approach, although it's
controversial, is not unique to this state [18 other states have
one guaranty fund within their property casualty account] and
that Alaska already has a .5 percent assessment for homeowners,
commercial property, boat and whatever because of the insolvency
of one insurance company [primarily] that wrote medical
malpractice.
The second piece of SB 276 is the assessment of other entities
that are not currently part of the assessment pool, which
includes self-insureds and joint insurance arrangements. The
division has considered either bringing them into the fund or
starting a separate guaranty fund for self-insureds. However,
that idea has been tried in other states, but hasn't worked
because there is no "hammer" to collect assessments.
MS. HALL informed the committee that her division has oversight
of traditional insurance companies, but not for any of the
entities she is proposing to assess. That means if she concluded
that a financial statement wasn't stable, she couldn't stop the
company from continuing to do business.
Therefore, I don't think it's fair to put them in this
Guaranty Association. I do recognize that these
entities did not create the crisis but, again, the
general philosophy of this whole proposal [is] to
spread the cost of risk to the broadest possible
population.
She has been asked if doing that is fair and her response has
been that it may not be fair, but she didn't know if it was fair
for the injured worker to suffer a loss of benefits or for a
small business employer to get the cost of the claim back. She
continued to explain:
The third component of this legislation is the ability
to allow [the] Alaska Industrial Development & Export
Authority (AIDEA) to provide guarantees for the
Guaranty Association to obtain loans. The Guaranty
Association by statute currently has the ability to
borrow, but they are not really a viable commercial
loan prospect. They don't have any assets. Their only
asset is the stream of assessments that by the current
cash flow projections is going to be used up until
2010. So, we've got six where that would not be
available to pay back loans. So on its own, they are
not a commercial viable prospect. Legislation does cap
the maximum outstanding principal balance at any one
time at $30 million.
We've worked with financial experts to find the most
efficient cost effective manner of finding funds and
this seemed to be the best route as we've looked at
that. We have explored various options with commercial
lenders, with other states - insurance companies have
been willing to step forward and talk about making
loans to the Guaranty Association. As we evaluated the
cost of all of those - and cost is of concern, because
that repayment cost will still be part of the
assessment process, this seemed to be the most viable
of all those options....
In closing...SB 276 contains painful, expensive
unpopular provisions. I do not believe, however, that
the provisions are as painful as doing nothing. I
think that the outcomes of doing nothing and allowing
prorating and allowing injured workers without
immediate access to their payments they have been
getting every two weeks, to have employers potentially
out of business because they cannot afford this
obligation is more painful - more painful to the
economy.
I would urge you to focus on the overall major issue
at hand. If we allow ourselves to get sidetracked by
each of the individual components of the bill, we have
groups that oppose this piece, but not this piece, I
don't think we're going to find a solution....
MS. HALL said in the six months since this problem was brought
to her attention, she has not found any other viable solutions
brought to her, but she is willing to talk about anything that
would work.
CHAIR BUNDE noted that she had spread the assessment over the
widest possible base of employers only and asked if spreading it
over the general public had been considered.
MS. HALL replied no and she wasn't sure of how that would be
accomplished. She tried to keep the assessment within the
industry.
3:05 p.m.
SENATOR SEEKINS asked why insurance for health and life have
separate guaranty associations.
MS. HALL replied that those are separate funds in every state.
SENATOR SEEKINS asked how much money the State of Alaska has in
the separate guaranty accounts.
MS. HALL replied that they don't keep cash in the accounts and
don't assess until there is a loss [post-loss assessment].
SENATOR SEEKINS asked if that meant they would start being
assessed now.
MS. HALL replied that the maximum 2 percent assessments started
in August 2003 as soon as this problem became known. The 2004
[for the whole year] assessment was made in January. This is the
only way prorating was averted.
SENATOR SEEKINS asked if the assessment included homeowners and
auto.
MS. HALL replied no, only a workers' compensation account can be
assessed.
TAPE 04-4, SIDE A
SENATOR SEEKINS asked what cash reserves AIDEA has and what the
rate of return is, if they are invested.
MS. HALL answered that AIDEA doesn't make loans.
CHAIR BUNDE asked the committee to hold their questions so that
people on-line could testify. He noted that this bill would be
heard again.
SENATOR FRENCH asked if there was a sunset provision, assuming
this bill is adopted and solves the crisis.
MS. HALL replied that she has considered a sunset provision, but
she wanted to make sure that the mechanism they use solves not
only the current crisis, but provides sufficient ability to
handle another crisis down the road.
SENATOR FRENCH commented:
Maybe it's my background as a prosecutor, but when I
see a $60 million hole in the ground that really
developed before your watch began, my approach might
be to throw somebody in the hole, if I'm being asked
to fill it.
He wanted to see some reassessment of the decisions that were
made that got the state into this mess.
MS. HALL added that one of the division's major focuses is an
analysis of the situation. She said that Alaska veered higher
than the national average for a couple of years in the
discounting area, but was lower in a number of years. The
state's loss ratios have tracked in many ways, although for the
last three years it has significantly outpaced national loss
averages. Put together with rates and discounting, there has
been an overall effect.
MS. HALL said she meets quarterly with regulators around the
country and discusses things like solvency regulations. Alaska
defers to the state of domicile of an insurer for the oversight
of every insurance company that does business in Alaska annually
but today, the division is much more aware of the combined
impact of discounting, reserving practices and the rate making
process.
CHAIR BUNDE said he joined Senator French in asking her for an
expanded suggestion for a solution.
MR. KEVIN SMITH, Executive Director, Alaska Municipal League -
Joint Insurance Association (AML-JIA), said the JIA is a self
insurance program for 140 Alaskan cities, boroughs and school
districts that would ordinarily be considered too small to self
insure on their own, but as a group are able to take a self
insured retention in workers' compensation of $300,000 and
purchase excess insurance above that.
AML-JIA pays an actuary to calculate the estimated losses in the
self-insured retention layer. The estimate is a best guess
figure and, if the guess is too low, the JIA already has a
mechanism to assess its own membership to come up with the cash.
The AML-JIA is not entitled to and does not expect or need
access to the Alaska Guaranty Fund.
MR. SMITH said he estimated that $1 million of the proposed
assessment would come from the self-insured employers - $317,000
from the State of Alaska and about $500,000 from local
governments and school districts. About $90,000 would come from
the AML-JIA and be due in this fiscal year with no prior notice.
He said the AML-JIA does not have the funds that an insurance
organization, which shows profits to stockholders, does.
AML-JIA's goal is to run on a narrow margin. It would have to
ask for additional monies from local governments that are
already struggling with retirement issues, the increasing cost
of health insurance, diminishing revenue sharing and municipal
assistance and increased costs in workers' compensation.
MR. SMITH said he did not think asking for a user fee from
people who can't use the fund is good public policy.
Is it fair? No, it's not fair. It's not even right.
Essentially, this money would have to come from the
classrooms; this money would come from police
departments; this money would come from snow removal
budgets and I would ask that we eliminate the self-
insureds and the joint insurance arrangements from the
bill.
SENATOR SEEKINS said that most entities in the AML have the
ability to raise taxes locally.
MR. SMITH replied that is theoretically correct and that is why
joint insurance arrangements are restricted to public entities
only [and not entities like tribes, for example].
SENATOR SEEKINS reasoned that if those employers had to share in
this unexpected burden along with the private sector, they would
have a mechanism to recover those losses.
MR. SMITH replied that would depend on the size of the
community. Some communities, like Koyuk, would have to figure
out how to survive.
SENATOR SEEKINS asked if those same entities were asking the
non-public employees of the State of Alaska to jointly help them
address the PERS and TRS shortages.
MR. SMITH replied that was beyond his scope to comment on.
SENATOR GARY STEVENS asked where a school district that was at
its cap already could get funds.
MR. SMITH responded that he is not a school finance expert, but
in that case, it would seem that securing those funds would have
to be taken from the classroom.
CHAIR BUNDE thanked him for his testimony.
MR. JEFF BUSH, Deputy Director, Alaska Public Entity Insurance
(APEI), said he represents 27 Rural Education Attendance Areas
(REAAs) and school districts and 12 municipalities. Based on
National Council on Compensation Insurance (NCCI) estimates,
local government workers' comp premiums could go up 22 - 32
percent. The proposal in SB 276 talks essentially about a tax on
top of that premium increase.
MR. BUSH emphasized the fact that school districts don't have
the power to tax, making it difficult to come up with extra
money. "So, it would, in fact, come out of the classroom and
many of our school districts around the state are struggling
right now...."
He added that many municipalities don't have powers of taxation,
because they are in the unorganized borough.
MR. BUSH said APEI would be charged approximately $32,000 this
year if SB 276 passes. He joined Mr. Smith in saying that
assessing APEI is not fair because it does not participate in
the [Guaranty Fund] program and their local funding would go to
subsidizing the program. He asked the committee to delete
sections of the bill that apply to joint insurance arrangements
and self-insureds.
MR. MIKE KLAWITTER, Director, Risk Management, Anchorage School
District, said SB 276 would cost the school district $127,000 in
unexpected and unfunded assessments or about 2.5 teaching
positions. He pointed out that the district could not use the
[Guaranty] fund in any way.
CHAIR BUNDE thanked Mr. Klawitter for his testimony and said he
would hold the bill for further work. There being no further
business to come before the committee, he adjourned the meeting
at 3:27 p.m.
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