02/11/2016 09:00 AM Senate STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| SB127 | |
| SB128 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 128 | TELECONFERENCED | |
| *+ | SB 127 | TELECONFERENCED | |
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
SENATE STATE AFFAIRS STANDING COMMITTEE
February 11, 2016
9:02 a.m.
MEMBERS PRESENT
Senator Bill Stoltze, Chair
Senator John Coghill, Vice Chair
Senator Charlie Huggins
Senator Lesil McGuire
Senator Bill Wielechowski
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
SENATE BILL NO. 127
"An Act relating to actions by insurers based on credit history
or insurance score; and providing for an exception to
consideration by an insurer of credit history or insurance
score."
- HEARD & HELD
SENATE BILL NO. 128
"An Act relating to the Alaska Permanent Fund; relating to
appropriations to the dividend fund; relating to income of the
Alaska Permanent Fund; relating to the Earnings Reserve Account;
relating to the Alaska Permanent Fund dividend; making
conforming amendments; and providing for an effective date."
- HEARD & HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 127
SHORT TITLE: INSURER'S USE OF CREDIT HISTORY/SCORES
SPONSOR(s): SENATOR(s) HUGGINS
01/19/16 (S) READ THE FIRST TIME - REFERRALS
01/19/16 (S) STA, L&C
02/11/16 (S) STA AT 9:00 AM BUTROVICH 205
BILL: SB 128
SHORT TITLE: PERM. FUND: DEPOSITS; DIVIDEND; EARNINGS
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
01/19/16 (S) READ THE FIRST TIME - REFERRALS
01/19/16 (S) STA, FIN
01/26/16 (S) STA AT 9:00 AM BUTROVICH 205
01/26/16 (S) Heard & Held
01/26/16 (S) MINUTE(STA)
01/28/16 (S) STA AT 9:00 AM BUTROVICH 205
01/28/16 (S) Heard & Held
01/28/16 (S) MINUTE(STA)
02/02/16 (S) STA AT 9:00 AM BUTROVICH 205
02/02/16 (S) Heard & Held
02/02/16 (S) MINUTE(STA)
02/04/16 (S) STA AT 9:00 AM BUTROVICH 205
02/04/16 (S) Heard & Held
02/04/16 (S) MINUTE(STA)
02/04/16 (S) STA AT 5:30 PM BUTROVICH 205
02/04/16 (S) Heard & Held
02/04/16 (S) MINUTE(STA)
02/11/16 (S) STA AT 9:00 AM BUTROVICH 205
WITNESS REGISTER
LAUREN RASMUSSEN, Staff
Senator Huggins
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Provided an overview of SB 127.
LAURIE WING-HEIER, Director
Division of Insurance
Alaska Department of Commerce, Community, and Economic
Development
Juneau, Alaska
POSITION STATEMENT: Explained the reason for presenting SB 127.
TIM MAUDSLEY, President
Alaska USA Insurance Brokers
Anchorage, Alaska
POSITION STATEMENT: Testified in support of SB 127.
KRISTIE BABCOCK, Agent
State Farm Insurance
Kenai, Alaska
POSITION STATEMENT: Testified in support of SB 127.
ARMAND FELICIANO, Vice President-Government Affairs
Property Casualty Insurers Association of America
Sacramento, California
POSITION STATEMENT: Testified in support of SB 127.
CINDA SMITH, Senior Counsel
GEICO Insurance
Washington, D.C.
POSITION STATEMENT: Testified in support of SB 127.
JEFFREY KINSEY, Actuary
State Farm Insurance
Bloomington, Illinois
POSITION STATEMENT: Testified in support of SB 127.
CRAIG RICHARDS, Attorney General
Alaska Department of Law
Juneau, Alaska
POSITION STATEMENT: Addressed legal questions regarding SB 128.
BILL MILKS, Assistant Attorney General
Alaska Department of Law
Juneau, Alaska
POSITION STATEMENT: Addressed legal questions regarding SB 128.
MEGAN WALLACE, Attorney
Legislative Legal Services
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Addressed legal questions regarding SB 128.
ACTION NARRATIVE
9:02:08 AM
CHAIR BILL STOLTZE called the Senate State Affairs Standing
Committee meeting to order at 9:02 a.m. Present at the call to
order were Senators Wielechowski, Huggins, and Chair Stoltze.
SB 127-INSURER'S USE OF CREDIT HISTORY/SCORES
9:02:28 AM
CHAIR STOLTZE announced the consideration of SB 127.
SENATOR CHARLIE HUGGINS, Alaska State Legislature, bill sponsor,
explained that SB 127 proposes that the component of credit
history be a factor in determining what an individual pays. He
revealed that Alaska is the only state that allows credit
scoring for initializing a policy, but credit scoring cannot be
used for renewal.
9:04:18 AM
LAUREN RASMUSSEN, Staff, Senator Huggins, Alaska State
Legislature, Juneau, Alaska, provided an overview of SB 127
follows:
When Alaskan consumers apply for a new auto or
homeowner's insurance policy, companies take several
variables into consideration to assess risk. A few
examples are your motor vehicle record, good student
discount, age, marital status, and credit history. Now
this is not your FICO credit score, your credit
history can look at payment history, credit
utilization, and bankruptcies. Insurers do not look at
the consumer's income, so it doesn't matter if you are
low or high income.
Under current law, credit history is included in
underwriting new policies, but must be removed, as
Senator Huggins had mentioned, when calculating a rate
for policy renewal, which usually happens about every
two years. It should be noted that consumers can elect
to include their credit history at the time of policy
renewal, but as you will hear in later testimony, this
is an extremely time consuming process and ultimately
confusing for the consumers. The process of removing
credit history often results in consumers seeing an
increase in their rates and further leads to market
disruption known as "churning," where a consumer will
go from one company to another looking for lower
rates; they in turn would not have the benefits of
long term policyholders.
SB 127 will also require insurers to make exceptions
to a consumer's rate when the consumer's credit is
adversely effected by extraordinary circumstances.
9:06:33 AM
SENATOR HUGGINS pointed out that requiring exceptions due to
extraordinary circumstances was an important consideration for
SB 127.
MS. RASMUSSEN explained that the extraordinary circumstances
clause would apply to both new insurance policies and renewal
policies, acting mostly as a safeguard for consumers. She noted
the examples of the extraordinary life circumstances were in
Sec. 3 of SB 127 and included: serious illness, injury to the
consumer or immediate family member, death of a family member,
military deployment overseas, divorce, or involuntary
unemployment.
She summarized that SB 127 simply fixes a discrepancy in the
law. She noted that Alaska was the only state to require
insurers to remove the credit history when rewriting a policy.
She added that SB 127 has no fiscal impact on the State of
Alaska.
9:08:36 AM
LAURIE WING-HEIER, Director, Division of Insurance, Alaska
Department of Commerce, Community, and Economic Development,
Juneau, Alaska, asserted that SB 127 was an emotional bill where
its intent would provide a "fix." She said her office receives
numerous phone calls from the industry and consumers. She
revealed that consumers are most often surprised when they
receive their second billing with a rate increase from an
insurance company. She noted that some rate increases were up to
100 percent. She explained that the rate increases were not due
to anything like having an accident, covering a teenage driver,
buying a car, or buying a new home. She specified that the rate
increase were due to the way that Alaska's law reads in the
application of credit score. She explained that many consumers
resort to "churning" by either going to a new insurance company
or signing a form to order their credit history and score again.
She revealed that business relationships are often destroyed due
to the rate increases.
9:10:35 AM
CHAIR STOLTZE asked if "churning" was a pejorative term for
overcharging people for fees.
MS. WING-HEIER explained that the term "churning" is the process
of consumers leaving one market for another due to pricing and
the pricing being a reflection of the use of credit scoring
because it cannot be used on renewal. She specified that
"churning" was not because of dissatisfaction with the market or
the service being received, but because a consumer cannot use
their credit scoring for the preferred rate upon product
renewal.
SENATOR HUGGINS remarked that "churning" forces consumers to
look at other agencies and the downside from the act does not
allow individuals to develop relationships with their insurance
company or agent. He specified that developed relationships
allow consumers to reap the benefits from their positive
lifestyle. He added that a provision in the bill takes
unforeseen circumstances for consumers into account too.
9:12:37 AM
MS. WING-HEIER explained that insurance agents are having their
commissions cut due to the added step of renewal because of the
law not allowing the automatic use of an individual's credit
score. She reiterated that a credit score can be used for new
business, but not for renewal.
SENATOR WIELECHOWSKI asked what the thinking was for allowing
insurance companies credit score access just for the first time
and not for renewal.
MS. WING-HEIER answered that statistics prove that the use of
credit scoring correlates to a better claims history that
ultimately leads to a lower premium on auto and homeowners
insurance.
9:14:30 AM
SENATOR MCGUIRE joined the committee meeting.
9:16:29 AM
SENATOR WIELECHOWSKI asked if lower income or wealthy
individuals have lower credit ratings.
CHAIR STOLTZE asked Senator Wielechowski to define "wealthy."
SENATOR WIELECHOWSKI replied that he would like the witness to
answer.
CHAIR STOLTZE responded that Senator Wielechowski asked the
question. He asked how Senator Wielechowski would define
"wealthy" in fairness to the witness.
SENATOR WIELECHOWSKI replied that he would use $100,000 as the
annual income that defines "wealthy."
MS. WING-HEIER explained that the credit score does not have
anything to do with income.
SENATOR WIELECHOWSKI asked if either low income or wealthy
individuals tend to have lower credit ratings.
MS. WING-HEIER answered that the data was not tracked because
income was not part of credit scoring.
9:17:57 AM
SENATOR WIELECHOWSKI explained that he was addressing the bill's
impact on his constituents. He noted that he has a lot of lower-
income constituents in his district. He asked how much more an
individual pays if they have a "poor" or "average" credit
history.
MS. WING-HEIER replied that an individual with a poor credit
history would be treated as "neutral."
SENATOR WIELECHOWSKI asked Ms. Wing-Heier to verify that an
individual with a poor credit history will be paying more than a
person with a good credit rating.
MS. WING-HEIER answered yes.
SENATOR WIELECHOWSKI asked what the rate difference was between
an individual with a poor credit rating and a good credit
rating.
MS. WING-HEIER reiterated that there was a correlation that
those with a good credit history, which is estimated to be 80
percent of the population, would receive a preferred rate. She
pointed out that the problem occurs when an individual with a
good credit history does not receive a preferred rate and pays a
higher premium at renewal. She explained that the intent was to
focus on the 80 percent that were effected during renewal. She
said the 20 percent that were never getting the preferred rate
in the first place would not effected.
SENATOR WIELECHOWSKI asked what the difference was and how much
more do the people with the preferred credit rating pay under
the way the law was currently written and how much would be
saved from the legislation.
MS. WING-HEIER answered that the rates and premiums depend on
the underwriting criteria for an individual: age, type of car,
home value, and where an individual lives.
9:20:11 AM
SENATOR HUGGINS asked how long an initial policy was typically
written for auto insurance.
MS. WING-HEIER answered six months to a year.
SENATOR HUGGINS asked how long an initial policy was written for
home insurance.
MS. WING-HEIER answered a year.
SENATOR HUGGINS explained that his constituents have asked why
credit history was used for an initial policy and not for
renewal.
9:21:56 AM
MS. WING-HEIER called attention to a recent article where
Alaska's national insurance ranking was marked down due to the
state's credit-score policy for underwriting.
9:23:59 AM
CHAIR STOLTZE commented that how much an individual makes should
not be used for underwriting insurance. He remarked that some of
the most responsible people he knows make less money.
MS. WING-HEIER reiterated that insurance companies maintain
their concern regarding the state's credit-scoring law
pertaining to renewals.
9:25:08 AM
SENATOR MCGUIRE stated that when the law was passed by Senator
Cowdery eight or nine years ago, her understanding was that
credit history could not be used as a means for deciding auto
insurance rates. She stated that she understood the notion of
unfairness when people shop insurance companies due to the
absurd result when renewing. She set forth that if the law were
applied evenly in a way that she believed she had voted on where
credit was not taken into account, there wouldn't be the
disparity at all. She asked how Ms. Wing-Heir interpreted the
law and its implementation.
9:27:07 AM
MS. WING-HEIER replied that the law as it was written was that
credit scores could be used on new business, but not on renewal.
She specified that 80 percent of new business policy holders
were given a preferred rate because of their credit score and
then their rates go up 50 to 60 percent at renewal.
SENATOR MCGUIRE replied that she did not know if allowing the
use of a person's credit rating was a political compromise. She
asked Ms. Wing-Heier to verify that the use of a credit rating
was statutory and not regulations that were interpreted. She
said Alaskans were right to be angry when entering a contract
with an insurance company and unfairly have an increase in their
rates six months to a year later. She set forth that a person
with a good driving record being penalized due to a poor credit
rating was not fair.
9:29:36 AM
MS. WING-HEIER replied that the current law applies to new
business, not renewal. She added that SB 127 addresses
extenuating life circumstances that impacts credit scores as
well.
SENATOR MCGUIRE explained that she was trying to get at the
point of what the statute said versus the regulations that were
promulgated to effectuate the statute.
MS. WING-HEIER replied that she was not aware of regulations,
strictly statutes.
CHAIR STOLTZE announced that the bill would not be moved during
the meeting and the intent was to hear the public testimony. He
said there would be time to explore statutes at the next
meeting.
9:31:07 AM
TIM MAUDSLEY, President, Alaska USA Insurance Brokers,
Anchorage, Alaska, stated that Alaska USA has submitted a letter
of support for SB 127. He specified that SB 127 would remove the
requirement for insurers to eliminate the credit-based insurance
score from the rating process after two years. He specified that
the change would provide consumers with a fair and accurate rate
on insurance renewals and eliminate confusion due to policy
cancellation and burden of changing carriers to maintain
preferred insurance rate discounts. He summarized that SB 127
would hopefully open the Alaska insurance market to additional
carriers, increase competition, and greatly benefit consumers.
He disclosed that Alaska is the only state that with a provision
that stripped credit out of renewals, a provision that deterred
additional insurance companies from entering the Alaska
insurance market.
9:34:09 AM
KRISTIE BABCOCK, Agent, State Farm Insurance, Kenai, Alaska,
remarked that SB 127 offers a solution to her customers'
difficulty with the current law affecting higher insurance rates
during renewal. She asserted that certain credit components were
a very accurate and high indicator in assessing the risk a
client presents to an insurance company. She detailed that
credit components have nothing to do with income, past
bankruptcy, or foreclosures. She specified that the credit
components pertained to certain characteristics that represented
a person's current life situation along with dozens of other
characteristics, including one's driving record. She noted that
clients have paid higher rates due to inadvertently missing a
waiver submission during the time of renewal.
9:42:09 AM
CHAIR STOLTZE pointed out that the committee had received
numerous written testimony from State Farm Insurance. He asked
if Ms. Babcock served the purpose of consolidating the testimony
of State Farm Insurance.
MS. BABCOCK answered that her comments were a good reflection of
the frustrations faced by State Farm agents and customers.
9:43:22 AM
ARMAND FELICIANO, Vice President-Government Affairs, Property
Casualty Insurers Association of America, Sacramento,
California, testified in support of SB 127.
9:44:11 AM
SENATOR HUGGINS stated that he was proud to hear Alaskans
stepping forward to address the state's insurance renewal issue.
9:44:53 AM
CINDA SMITH, Senior Counsel, GEICO Insurance, Washington, D.C.,
testified in support of SB 127.
9:46:12 AM
JEFFREY KINSEY, Actuary, State Farm Insurance, Bloomington,
Illinois, testified in support of SB 127.
9:47:06 AM
CHAIR STOLTZE closed public testimony.
SENATOR MCGUIRE asked that a question be answered at a future
committee meeting regarding the use of credit scores to assess
individual health insurance policies.
CHAIR STOLTZE commented that any discussion about the Affordable
Care Act should be on the record as well.
SENATOR MCGUIRE replied that her question does not pertain to
the Affordable Care Act and specified as follows:
The point is that each individual line of insurance is
a cost to a family unit, they are not discriminatory
in their budgeting. If credit is taken into account in
a certain couple of lines, I want to know which lines
and which lines it isn't, so just kind of a
comprehensive overview.
9:48:38 AM
SENATOR WIELECHOWSKI referenced a 2007 report by the Federal
Reserve that blacks and Hispanics have lower credit scores on
average. He said his intent was to try and figure out the impact
of SB 127 on his constituents. He noted that East Anchorage and
Bartlett are the top two most diverse high schools in the U.S.
9:49:33 AM
CHAIR STOLTZE held SB 127 in committee.
SB 128-PERM. FUND: DEPOSITS; DIVIDEND; EARNINGS
9:50:21 AM
CHAIR STOLTZE announced the consideration of SB 128.
9:51:00 AM
CRAIG RICHARDS, Attorney General, Alaska Department of Law,
Juneau, Alaska, stated that the legal opinions regarding SB 128
were not considered to be a critical driver issue for the
administration. He specified that the issue with SB 128 would
only arise if a Constitutional Budget Reserve (CBR) reverse-
sweep did not occur. He said even though he has not gone back
every year, there has never been a situation where there was not
a reverse sweep.
CHAIR STOLTZE asked Attorney General Richards to define a
"sweep."
ATTORNEY GENERAL RICHARDS explained as follows:
If you have funds in the general fund that are not
fully used at the end of the year, the constitution
provides that those funds are subject to being swept
into the CBR as a mechanism to sort of require savings
into the CBR, and as a mechanism to have that not
happen when the CBR sweep would occur, the Legislature
has periodically or routinely done what is called a
"reverse CBR sweep" every year where they, by three-
quarters vote. Say that funds that would be subject to
the constitutional sweep, we go ahead and appropriate
that all back to the original place. So even if funds
are subject to the sweep, the reverse sweep would undo
it effectively.
CHAIR STOLTZE observed that the sweeps were done in conjunction
with the Office of Management and Budget (OMB). He detailed that
a sweep is not just a legislative initiative, but rather a joint
understanding and effort with a lot of involvement from the
administration.
ATTORNEY GENERAL RICHARDS emphasized that the sweeps have
historically occurred with a generic statement with a couple
lines without a detailed fund itemization. He pointed out that
the number of accounts that were uncontroversially subject to
sweeps were in the neighborhood of a couple of hundred,
including: the Mental Health Trust, bond reserve accounts, oil
and gas tax credit account, and the School Trust Account.
9:54:03 AM
CHAIR STOLTZE noted that the Power Cost Equalization (PCE) fund
was subject to the sweep.
ATTORNEY GENERAL RICHARDS continued as follows:
Power Cost Equalization is a little different, so I'll
get to that one next. So these are things that are
subject to the reverse sweep every year and there's
never been a problem, it's never been an issue and
it's just sort of occurred as a matter of course. Now
we can't predict a hundred percent that is always
going to happen, but we just think particularly when
you look at the history of the legislature respecting
rules based and customary framework around the
Permanent Fund, we have a high degree of confidence
that the legislature will continue to respect the
Earnings Reserve Account, even if it were subject to a
sweep, not saying it is, and that just like they have
with Mental Health Trust funds that it is highly
probable that a reverse-sweep would always occur in
such a manner as to protect the ERA.
Now the only way we think we find ourselves in a
situation where there can even really be a legitimate
challenge is if in fact that reverse sweep didn't
happen. So let's talk about this very low probability
event, let's say that occurs. Now that is the only
situation where there is going to be a legal
challenge, we'd have to change what we are currently
doing pretty dramatically. Now if that happens, we
believe, and we'll let the "brainiacs" go at it here
in a minute here on their different reasons why, we
believe that the Supreme Court has basically said that
even if there wasn't a reverse sweep, it was brought
in inclusive across a plethora of all of the hundreds
of state accounts that would be subject to it, that
the ERA would not be subject to it for the same reason
that, well the Supreme Court has said it isn't and
it's the same reason that the Power Cost Equalization
account has not been viewed as subject to the reverse
sweep and for some reason our pension funds aren't
subject to the reverse sweep.
Now the theory that the Supreme Court might change
their mind and change the status and classification of
the ERA, as I understand it is basically that the
governor's plan would change the character of the
account by having a situation where we are having
production taxes going in, so we have a new insource
and we are now going to take money out of the ERA
under the plan for something other than dividends and
somehow these two events occurring either individually
or in conjunction would change the character of the
account in a way that the Supreme Court might view it
differently. Well, we don't think that's likely
because look at history, under that logic that means
that when the Legislature appropriated $3 billion into
the pension funds, under that logic then suddenly our
pension accounts would be subject to the CBR sweep,
suddenly the Power Cost Equalization, which has funds
flowing both ways through it, would now be subject to
the CBR sweep and we just think that is a legally
mandated or a practical outcome.
The final thing is if we have two really low
probability events occur, one is the Legislature
changes the way it does the reverse sweep as would
impact the ERA, so that you then have the genesis for
a legal challenge, and the Supreme Court changes its
point of view and now says the ERA is subject to the
sweep, if these two low probability events occurred in
sequence in such as we had to change, we would change
at that time, because we would have a decision, the
decision would have clarity and we would design the
system around whatever the Supreme Court said. So
that's a long way of saying that we think it is highly
unlikely that the Earnings Reserve Account will ever
be in a situation where it is subject to a sweep and
if it does, then at that time, just like that decision
will make the Power Cost Equalization fund subject to
it, it would make our retirement assets potentially
subject to it, we'll deal with it if that really low
probability event occurs.
9:57:42 AM
CHAIR STOLTZE pointed at that Attorney General Richards can
create law based on his opinion whereas the Legislature has to
go through three constitutional readings, a majority vote, and a
signature by the governor. He asked that Attorney General
Richards clarify that the PCE and the pension funds were not
subject to sweep.
ATTORNEY GENERAL RICHARDS replied that the Department of Law's
position has always been that the PCE fund and pension funds
were not subject to sweep and subjecting them to a sweep would
only occur if the court doctrine changed.
CHAIR STOLTZE pointed out that Attorney General Richards'
positions and opinions become law.
ATTORNEY GENERAL RICHARDS replied that his opinions do under
rare circumstances, but not on the subject that he was currently
addressing.
9:59:19 AM
BILL MILKS, Assistant Attorney General, Alaska Department of
Law, Juneau, Alaska, explained that the Power Cost Equalization
(PCE) fund sort of fits exactly with the Department of Law's
view regarding an ERA sweep. He specified that Section 17(d)
[Article 9 of the Alaska Constitution] regarding the CBR
specifically identifies funds that were subject to sweep as
funds in the general fund. He set forth that the Alaska Supreme
Court decision in Hickel v. Cowper specifically says there are
funds which are general fund or other funds available for
appropriation. He asserted that the court specifically said the
17(d) sweep or payback provision was for general fund accounts,
not other funds. He said the ERA was a specific example of an
account available for appropriation, but not subject to a sweep.
He pointed out that the PCE fund was a fund within the Alaska
Energy Authority that the Legislature decided statutorily for
the fund not to be in the General fund. He noted that the
Supreme Court ruling in Hickel v. Cowper commented that its
position or role was not to change words in the constitution or
suggest other ways the constitutional provisions could be
written. He said the Supreme Court specifically addressed
general fund accounts subject to sweep and non-general funds not
subject to sweep. He set forth that the ERA was not subject to
the sweep based on the decision from the Supreme Court saying it
was not.
MR. MILKS said a concern was raised that the court would change
its mind because SB 128 would change the ERA where the account
would be used for general government appropriations. He remarked
that that the posed issue could be raised on any bill that
started to use the ERA for general appropriations. He said the
Department of Law does not think the court would change its mind
because the statute had not been changed and the ERA was not a
general fund account. He summarized that the Supreme Court knew
exactly in Hickel v. Cowper when it said that the ERA was fully
available for legislative appropriation and not subject to
sweep.
10:02:40 AM
He said a second issue was raised that SB 128 would change the
ERA into a general fund account because oil and gas production
taxes and additional royalties would be put into the account. He
set forth that SB 128 does not change the statute that the ERA
is a non-general fund account. He specified that the expressed
language in the constitution says "general fund" and without a
statute change, the ERA was not in the general fund. He remarked
that the Hickel case reaffirmed that the courts are going to
analyze the CBR language in the constitutional provisions. He
said the Department of Law does not think the court would change
its mind based on the theory that additional monies put into a
non-general account can be captured and brought back in a sweep.
He concurred with Attorney General Richards that sweeping the
ERA would mean the PCE fund and pensions could be swept as well.
He said the ERA was a statutory state savings account that the
legislature has the full constitutional power to appropriate
from, to the general fund and other accounts. He summarized that
making the ERA a de facto general fund account for legal reasons
was very problematic.
10:06:39 AM
CHAIR STOLTZE responded that he would go the opposite way than
Mr. Milk did. He remarked that having both the attorney general
and judiciary declaring that the legislature had broad power to
create de facto dedicated funds was unusual.
ATTORNEY GENERAL RICHARDS replied that an important distinction
exists between a dedicated fund and one that was subject to the
CBR fund.
CHAIR STOLTZE specified that he said de facto dedicated fund.
ATTORNEY GENERAL RICHARDS explained that a dedicated fund was
essentially one that does not go to the general fund and was not
subject to regular appropriation by the legislature. He pointed
out that the dedicated fund prohibition long predated the CBR
rule in the constitution and was separate and distinct.
10:08:12 AM
CHAIR STOLTZE stated that the Permanent Fund's premise was
predicated on making an exception to the dedicated fund rule for
making appropriations. He remarked that he had not seen the
Attorney General's office and the Department of Law get together
and want to expand legislative power as was asserted.
MR. MILKS specified that the Permanent Fund's principal was the
exception to the dedicated fund and could not be appropriated
from; however, voters approved a constitutional provision that
provided the legislature with wide flexibility to appropriate
from the Permanent Fund's income, resulting in the legislature
establishing a separate statutory account, the ERA.
10:10:55 AM
MEGAN WALLACE, Attorney, Legislative Legal Services, Alaska
State Legislature, Juneau, Alaska, stated that the ERA is
composed solely of income generated from the Permanent Fund. She
said SB 128, along with the governor's proposed operating
budget, seeks to add additional revenue to the ERA by
transferring the balance of the CBR fund to the Statutory Budget
Reserve (SBR) fund and then appropriate $3 billion to the ERA.
She said Legislative Legal Services' opinion is that the
proposed change in composure of the ERA creates potential issues
pertaining to the sweep under Article 9, Section 17(d). She set
forth that the question was whether the legislature can
purposely put general fund money into the Permanent Fund
temporarily to avoid a separate constitutional mandate and by
doing that whether they can retrieve that money that is supposed
to be held temporarily in the Permanent Fund. She said the ERA
is a statutory account in the Permanent Fund. She pointed out
that Article 9, Section 15, relating to the Permanent Fund
provision, only mentions two things: principal and income of the
Permanent Fund. She asserted that the constitution and the
amendment that established the Permanent Fund did not expressly
take into the adding of additional funds to the Permanent Fund
and the Supreme Court did not address the issue in the Hickel v.
Cowper case. She added that the Office of the Attorney General
had previously issued opinions that the placement of additional
monies into the Permanent Fund was not retrievable. She
summarized that an issue may arise if additional revenue and
general fund monies were eventually transferred into the ERA.
10:14:28 AM
CHAIR STOLTZE stated that there was a discussion by the
assistant attorney general about a dissection of the intent of
the voters. He said he did not recall if there was specific
debate amongst voters regarding earnings and sub-accounts, the
focus was on saving money. He asked if the Supreme Court
actually dissects what voters said and meant or just the
verbiage.
MS. WALLACE replied that she was not sure that the Supreme Court
reached the level of discussion that addressed what voters said
or meant. She surmised that the Supreme Court may consider
legislative history and voting record.
CHAIR STOLTZE asked Ms. Wallace to verify that based on Ms.
Wallace's legal research that the courts have not dissected and
analyzed specific public intent.
MS. WALLACE answered not that she was aware of. She said she
would have to reread the beginning of the Hickel v. Cowper case
to see if the Supreme Court went as far as public intent.
CHAIR STOLTZE conceded that sometimes the public has a different
opinion than what they say and think when testifying in
committee.
MS. WALLACE noted that part of the reason that Legislative Legal
Services raised an issue as to whether or not the placement of
additional funds into the Permanent Fund through the ERA were
retrievable goes back to the Permanent Fund section of the
constitution that states the principal should be used only for
income-producing investments. She said when more money is placed
into the Permanent Fund's principal, more income would be
generated and the issue pertains to not having an expressed
provision that allows for the temporary placement of money in
the Permanent Fund to then be used for general funds
expenditures or financing operation costs. She specified that
appropriations out of the ERA and what the appropriations were
used was not an issue. She reiterated that the larger issue
pertained to the temporary placement of funds into the Permanent
Fund itself.
10:17:33 AM
SENATOR WIELECHOWSKI said he appreciated and trusted Ms.
Wallace's opinion. He conceded that no one knows what a court
would decide, which creates a huge amount of instability. He
asked Ms. Wallace to verify that the legislature has tried in
the past to put money into the Permanent Fund and an attorney
general had been very clear that money could not be placed into
the Permanent Fund. He cited an opinion on the Permanent Fund
from Attorney General Avrum Gross, dated August 31, 1977. He
asked Ms. Wallace to provide additional historical information.
MS. WALLACE noted that she had written a memo to Senator
Wielechowski regarding Attorney General Gross's opinion in 1977
[addresses an extra appropriation to the Permanent Fund] in
addition to other attorney general opinions that affirmed the
1977 opinion. She pointed out that the legislature in the past
had loaned some money to the Permanent Fund where the initial
intent was to get the money back, but after some issues arose
the legislature ultimately forgave the loan and the money stayed
in the Permanent Fund and became a part of the principal.
10:19:34 AM
ATTORNEY GENERAL RICHARDS pointed out that the attorney general
opinion in 1977 predated the existence of the ERA and
specifically addressed how to handle the Permanent Fund corpus.
He confirmed that his office has the same opinion as in 1977
that funds going into the Permanent Fund principal are not
subject to be pulled out by general appropriation. He specified
that the ERA was created after the 1977 opinion and was a
creature of statute subject to appropriations.
SENATOR WIELECHOWSKI asserted that there was obvious concern in
Attorney General Richards' office about the transfer of money
from the CBR to the Permanent Fund because the bill proposes
that the money be transferred from the CBR to the SBR and then
to the Permanent Fund. He asked why the money was to be
transferred in the proposed circuitous manner.
ATTORNEY GENERAL RICHARDS replied that until the issue came up,
he was unaware of the proposed transfer. He disclosed that the
transfer process was a budgetary decision and was not one that
had legal significance. He remarked that the proposed transfer
was an artifice of how the budget was put together. He said a
direct transfer from the CBR to the ERA as an appropriation
would be fine.
10:20:56 AM
CHAIR STOLTZE noted previous testimony by Attorney General
Richards and Mr. Milks that voters had discerned and parsed
their opinion on sub-accounts, but their next testimony was that
the whole discussion predated [the ERA].
SENATOR MCGUIRE remarked that based on both the opinion
predating the ERA and sound law, the testimony had narrowed down
exactly right where the issue was not the corpus. She opined
that the issue was the ERA, the definition of income, and what
goes into the ERA.
She explained that when looking at solutions, she did not have a
goal to entirely solve a gap of $5.2 billion because she
questioned the size and cost of government. She remarked that SB
128 was good, but a little bit risky. She asserted that her plan
[SB 114] kept all of the elements in place that have had long
running opinions, CBR, and ERA exactly where they are. She said
the ERA can be both shared in dividends and shared in the amount
going to the government itself. She stated that the risk in SB
128 was not inappropriate, but the income going into the ERA was
a novel issue that would probably have to be decided in court.
She said the committee, Legislature, and executive branch has to
decide if the state wants to take on the risk proposed in SB
128.
10:23:37 AM
ATTORNEY GENERAL RICHARDS conceded that he was a good enough
lawyer to know that he "can't fence a phantom" and he "can't
prove a negative."
SENATOR MCGUIRE answered right.
ATTORNEY GENERAL RICHARDS remarked that someone can always come
up with a legal theory that calls into question what you are
trying to do and the response is always, "I don't think that's
how the court would rule." He said he obviously could not
affirmably say how the court would rule. He specified that what
he was trying to do was put context around the decision process
and why the administration was not concerned about the risk. He
set forth that the same risk theoretically applied across a
whole series of state accounts, like the PCE fund and other
pension funds where the funds were dealt with through the
reverse sweep. He asserted that the custom around the Permanent
Fund makes it more likely that the reverse sweep would be used
as a mechanism to protect the ERA. He said in the very low
probability event that the ERA was not subject to a reverse
sweep, than a court decision would provide guidance. He
summarized that the risk from such low probability events strung
together should not be a driver in the decision making process
because the Legislature has shown a demonstration and history
that they are very likely to follow.
10:25:22 AM
SENATOR WIELECHOWSKI noted that David Teal, Legislative Finance
Director, has also expressed concern. He said the combination of
Mr. Teal, Legislative Legal Services, and the old attorney
general opinions made it very clear that there was concern.
ATTORNEY GENERAL RICHARDS replied that he was not dismissing or
diminishing Mr. Teal's or Legislative Legal's opinion. He
specified that the same expressed concern exists through a whole
series of state accounts that were dealt with by using the
reverse-sweep mechanism. He set forth that the administration
has a high confidence level that the reverse-sweep mechanism as
a threshold matter would protect the plan for the decades going
forward.
10:27:14 AM
CHAIR STOLTZE pointed out that the issue regarding SB 128 was
non-partisan and noted that both Legislative Legal Services and
Legislative Finance have spoked out against the bill.
ATTORNEY GENERAL RICHARDS agreed that there might be a
difference of opinion of how the law might be applied. He
revealed that he has not heard any difference of opinion as to
the robustness of the historical practice of the reverse sweep.
CHAIR STOLTZE asserted that what was done in the past is not
always right.
10:29:29 AM
SENATOR MCGUIRE reiterated that Attorney General Richards'
argument was sound and the risk was not inappropriate. She noted
a higher level of scrutiny would be applied and explained as
follows:
This issue is going to raise up to a higher level than
maybe we've seen in a couple of decades and that's
where I am concerned about the potential challenge
that comes. I think you are already seeing posts about
starting a citizens' referendum on whatever it is we
do, whether it's your plan or mine, or a combination,
so you're going to have that factor. You're going to
have an extreme political microscopic focus on this
because historically the Earnings Reserve Account has
only statutorily been dedicated to paying out
dividends, that's frankly the point, and people when
it concerns their money that's going into their pocket
they get, rightly, they become alert and aware. So I
think there will be an unprecedented focus on whatever
it is that we do and I think every element of it will
be critiqued and challenged and I think that,
particularly when it comes to the sweep and the CBR,
because historically those are places where minority
interests are protected. So it's almost like a
layering of constitutional issues, in my opinion. But
I also don't want to say too much on the record
because I will say this that if it's the plan we go
with, I want to defend it fully because I want the
state to be in a good economic position. I do think
that you have made sound arguments on the reverse
sweep and you are right, there's nothing that we've
said here on the record that challenges that mechanism
that has been, if not articulated in custom and
practice, it's survived the test of time and it has
even survived in arguably dedicated funds that could
also be somewhat controversial when you think about
the impact of the PCE, when you think about the impact
of the pension fund, those also have very significant
financial impacts on Alaskans. So I can see it, I mean
I can see it surviving and I will leave it at that and
again say continue to put more and more on the record
because I think it will be challenged if it is what
survives.
10:31:59 AM
SENATOR COGHILL stated that the retirement system was probably
more constitutionally protected than the PCE, something that
probably was not good based on Article 12, Section 7. He
conceded that the state was probably living in danger with the
PCE fund knowing that it was a dedicated fund. He said the only
thing he was struggling with was whether the ERA was in the
Permanent Fund's corpus. He explained that his understanding was
that the ERA has been outside of the Permanent Fund corpus,
therefore the ERA was sweepable. He opined that the state may
have stood in danger for many years in which case the state has
a larger problem of violating the constitution.
MR. MILKS replied that the PCE fund was not a general fund. He
explained that the constitutional-sweep provision identifies
general funds and the administration does not have concern about
the ERA being subject to the sweep because the fund is not in
the general fund.
SENATOR MCGUIRE agreed that the ERA was clearly not part of the
Permanent Fund corpus. She concurred that the ERA was
statutorial and not a constitutional creation. She said the
Hickel opinion has been unchallenged and establishes that the
ERA earnings are not sweepable. She set forth that the question
regarding the ERA pertained to comingling and asked if the
administration agreed.
10:34:42 AM
ATTORNEY GENERAL RICHARDS answered that he agreed and specified
that he did not agree that the comingling changes the nature of
the ERA.
SENATOR MCGUIRE replied that she understood that Attorney
General Richards did not believe that the comingling changes the
nature of the ERA. She pointed out that the law was very sound
with respect to the distinction between the constitutionally
created corpus, the ERA, and the earnings that have come into
the ERA as not being sweepable. She set forth that the next
level pertained to the comingling of assets and specified as
follows:
The next level is this new creation, this sovereign
wealth fund, not a percentage of market value using
existing structures or some of the other proposals,
the new idea where you are comingling assets together
in an earnings structure. The question that we've been
trying to get at is whether or not that would be a
challenge, the sweep-ability of those additional
assets that you comingle.
ATTORNEY GENERAL RICHARDS replied as follows:
As my final word, I'm just going to come back to what
I've said now several times which is this issue is a
matter of relevance for legal challenge, only even
arises if we don't do the reverse sweep.
SENATOR MCGUIRE responded right.
ATTORNEY GENERAL RICHARDS summarized as follows:
It's a pretty low probability that we even ever can
get to the legal issue based upon the practices of
this body, in my view.
10:36:09 AM
MS. WALLACE summarized Legislative Legal Services' concerns as
follows:
I think that I would just want to rearticulate that
it's our office's opinion that the risk is twofold:
it's not only that there's a risk that some of the
money that is transferred or placed in the ERA might
be deemed sweepable by the Supreme Court, but also
that the placement of that additional revenue and
transfer of money of the CBR and SBR when it's placed
into the Permanent Fund whether or not that is
retrievable and it's our office's opinion that that
risk is more significant than whether you have to pay
back a sweepable amount or a sweep that didn't occur.
10:37:02 AM
CHAIR STOLTZE commented that the committee did not get to a
decisive conclusion on SB 128, but good information was put on
the table.
[SB 128 was held in committee.]
10:39:47 AM
There being no further business to come before the committee,
Chair Stoltze adjourned the Senate State Affairs Committee at
10:39 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 127 Sponsor Statement.pdf |
SSTA 2/11/2016 9:00:00 AM |
SB 127 |
| SB 127 Sectional Analysis by Sponsor.pdf |
SSTA 2/11/2016 9:00:00 AM |
SB 127 |
| SB 127 Fiscal Note - DCCED-DOI 02-05-16.pdf |
SSTA 2/11/2016 9:00:00 AM |
SB 127 |
| SB 127 Backup Document - Credit-Based Insurance Scores Consumer Brochure - American Insurance Association.pdf |
SSTA 2/11/2016 9:00:00 AM |
SB 127 |
| SB 127 Support Email - Brenda Pearce 2-4-16.pdf |
SSTA 2/11/2016 9:00:00 AM |
SB 127 |
| SB 127 Support Email - Bob McVitty 2-9-16.pdf |
SSTA 2/11/2016 9:00:00 AM |
SB 127 |
| SB 127 Support Email - Stan Tebow 2-8-16.pdf |
SSTA 2/11/2016 9:00:00 AM |
SB 127 |
| SB 127 Support Letter - NAMIC 1-25-16.pdf |
SSTA 2/11/2016 9:00:00 AM |
SB 127 |
| SB 127 Support Letter - Win Fowler GEICO 2-5-16.pdf |
SSTA 2/11/2016 9:00:00 AM |
SB 127 |
| SB 127 Support Letter - State Farm.pdf |
SSTA 2/11/2016 9:00:00 AM |
SB 127 |