Legislature(1995 - 1996)
02/01/1996 03:31 PM STA
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SENATE STATE AFFAIRS COMMITTEE February 1, 1996 3:31 p.m. MEMBERS PRESENT Senator Bert Sharp, Chairman Senator Randy Phillips, Vice-Chairman Senator Loren Leman Senator Jim Duncan MEMBERS ABSENT Senator Dave Donley COMMITTEE CALENDAR SENATE CONCURRENT RESOLUTION NO. 2 Relating to reimbursement of expenses for residents who travel to the capital city to attend legislative sessions or to testify before legislative committees. SENATE BILL NO. 231 "An Act relating to title insurance; and providing for an effective date." SENATE BILL NO. 217 "An Act relating to eligibility for the longevity bonus; and providing for an effective date." PREVIOUS SENATE COMMITTEE ACTION SCR 2 - See State Affairs minutes dated 1/26/95. SB 231 - No previous senate committee action. SB 217 - No previous senate committee action. WITNESS REGISTER Jamie Parsons, Chairperson Alaska Committee 9218 Emily Way, Juneau, AK 99801¶(907)789-9201 POSITION STATEMENT: testified on SCR 2 Senator Steve Rieger State Capitol, Juneau, Alaska, 99801-1182¶(907)465-3879 POSITION STATEMENT: prime sponsor of SB 231 Roger Floerchinger, President Yukon Title Company, Inc 3241 Riverview Dr., Fairbanks, AK 99709¶(907)456-3474 POSITION STATEMENT: opposed to SB 231 Joe Faulhaber, Broker Realty, Inc. 105 Adak Ave., Fairbanks, AK 99701¶(907)452-5186 POSITION STATEMENT: opposed to SB 231 Bryan Merrell, Vice President & Chief Title Officer First American Title Company of Alaska Underwriter, First American Title Insurance Company 510 W. Tudor Rd., Ste. 1, Anchorage, AK 99503¶(907)562-0510 POSITION STATEMENT: opposed to SB 231 Cliff Groh, Attorney Alaska Land Title Association 2550 Denali St., Ste. 1700, Anchorage, AK 99503¶(907)272-6474 POSITION STATEMENT: opposed to SB 231 Jan Nauman P.O. Box 210506, Auke Bay, AK 99821¶(907)790-4370 POSITION STATEMENT: testified on SB 231 Michael Price, Attorney Alaska Land Title Association 2550 Denali, No. 1700, Anchorage, AK 99503¶(907)272-6474 POSITION STATEMENT: opposed to SB 231 Steve Jewett First American Title Insurance Company of Alaska 510 W. Tudor, No. 101, Anchorage, AK 99503¶(907)562-4510 POSITION STATEMENT: testified on SB 231 Tim Hurley Western Alaska Land Title Company P.O. Box 864, Kodiak, AK 99615¶(907)486-4433 POSITION STATEMENT: opposed to SB 231 Mary Ann Rowe, President Kachemak Bay Title 3691 Ben Walters Lane, #1, Homer, AK 99603¶(907)235-8196 POSITION STATEMENT: opposed to SB 231 Jeff Blake, President Alaska Land Title Association Pacific Rim Title Insurance Company 307 E. Northern Lights, Anchorage, AK 99503¶(907)274-2562 POSITION STATEMENT: testified on SB 231 Don Koch, Chief Marketing Surveillance, Division of Insurance Department of Commerce & Economic Development P.O. Box 110805, Juneau, AK 99811-0805¶(907)465-2577 POSITION STATEMENT: testified on SB 231 Connie Sipe, Director Division of Senior Services Department of Administration 3601 C St., Ste. 380, Anchorage, AK 99503-5984¶(907)563-5654 POSITION STATEMENT: representing Governor-prime sponsor of SB 217 ACTION NARRATIVE SCR 2 REIMBURSEMENT FOR TRAVEL TO CAPITAL CITY TAPE 96-7, SIDE A Number 001 CHAIRMAN SHARP called the Senate State Affairs Committee to order at 3:31 p.m. and brought up SCR 2 as the first order of business before the committee. The chairman called Senator Randy Phillips to testify. Number 030 SENATOR RANDY PHILLIPS, prime sponsor of SCR 2, stated that the resolution is basically a suggestion to the City & Borough of Juneau to reimburse travel expense to Juneau for purposes of testifying before committees and meeting with their legislators. Senator Phillips related information contained in the Sponsor's Statement. Number 063 SENATOR LEMAN voiced three areas of concern: 1) would there be full or partial reimbursement for expenses; 2) would buying a block of airline seats be an option; 3) how would this affect the effort to keep air fares reasonable? Number 108 SENATOR RANDY PHILLIPS responded he envisions that the City & Borough of Juneau, Legislative Affairs Agency, and the Legislative Council will work out the details. Hopefully, they can get a block of tickets or a special rate from the Airline, and give people an airline ticket if they have a legitimate reason for coming to Juneau to talk to their legislators. The point is access. CBJ is already spending money on access: they've spent up to $200,000 on Gavel to Gavel . Number 145 JAMIE PARSONS, Chairperson of the Alaska Committee, stated the mission of the Alaska Committee is to enhance Juneau as Alaska's Capital City. Mr. Parsons stated for the record that the Alaska Committee raises its' own funds for operational expenses. Several things the committee supports are: two-way video-teleconferencing, Gavel to Gavel television coverage of legislative meetings and floor sessions and coordinating educational materials, technology education, and transportation access through the new GPS (Global Positioning System) navigational guidance. The Alaska Committee is also working to secure additional competitive airline service to Juneau and working with the existing carrier to accommodate legislative needs and fares. We are also monitoring the Juneau Access Study, which deals with surface access to northern Lynn Canal. The City & Borough of Juneau is also working to improve housing. Number 255 MR. PARSONS stated in closing that the Alaska Committee will continue to work on all issues relating to access, and that the committee does seek the legislature's input and ideas. CHAIRMAN SHARP stated that, there being no further discussion on SCR 2, the committee would go on to the next item of business. SB 231 TITLE INSURANCE Number 275 CHAIRMAN SHARP brought up SB 231 as the next order of business before the Senate State Affairs Committee and called Senator Rieger to testify. Number 280 SENATOR RIEGER, prime sponsor of SB 231, began by directing committee members' attention to a letter (from Jan Nauman) in their bill packets from an individual who had a narrow brush with having to pay for three title insurance policies within the space of a few weeks for some residential property. That letter is just the most recent in a string of correspondence his office has received over the years questioning the requirement for and the pricing of title insurance. In the past, one could get a discount on rates paid for title insurance policies when a piece of property was refinanced or when two title policies were issued upon the same piece of property. This changed several years ago, when the Division of Insurance handed down a directive denying any ability to discount, with the exception of a less than 20% discount. Senator Rieger noted that the actual title insurance is just a small fraction of the amount which the consumer pays in premium to the agent. Claims paid are around 4-5% of the amount paid in premiums. However, the Division of Insurance has been approving rates which cover a large amount of additional work, such as title searches, which are activities that the Federal Trade Commission (FTC) has found do not involve insurance. SENATOR RIEGER stated that SB 231 would address the issue in two ways: first, to attempt to prescribe a lower fee for a refinance. The second would be to repeal the Division of Insurance's rate- fixing policy, so that relief to the customer could come through market competition. Senator Rieger believes the latter approach would be preferable. So he would not object if Section 1 was removed, but thinks that approach should be out there for discussion. Number 365 ROGER FLOERCHINGER, President, Yukon Title Company, Inc., stated that if SB 231 is adopted, it will have negative consequences for anyone who owns, wants to purchase, or seeks to refinance a home. SB 231 will prohibit title insurance companies from charging more than $75 to issue a title insurance policy to the same person or the person's lender within 15 years and removes existing prohibition on title insurance companies discounting their published rates. But title insurance companies cannot issue a title policy for $75; that amount will not cover the title companies' cost. If those kinds of policies cannot be sold, except at a loss, title insurance agencies will be unwilling to issue them. Mr. Floerchinger contends that refinancing of existing homes will be the most affected, and refinancing may become unavailable. Number 395 MR. FLOERCHINGER stated that the second portion of SB 231, which modifies the rules regarding the rates title insurers are allowed to charge, would simply make tariff rates the highest allowable rate. Mr. Floerchinger thinks that in certain types of markets, competition is not an effective market regulator. He stated that, since there are a limited number of underwriters, it is important that those underwriters retain adequate reserves to cover potential losses. Over the last decade, the number of title insurance companies issuing title insurance policies has dropped from seven to two in Alaska. While there are several title insurance agencies, the policies they offer are issued by just two insurance underwriters. Mr. Floerchinger foresees the loss of independent agencies from the market in Alaska, with all the consequences one would expect from a monopoly. Because of this scenario, every state strictly regulates the title insurance industry. He stated that SB 231 would impose an arbitrary fixed limit on the price of one product, while removing existing regulatory constraints in other areas. Mr. Floerchinger asserted that the status quo works, and stated that SB 231 is a bad idea and will have precisely the opposite effect of that intended. Number 408 SENATOR LEMAN stated he understands the concern about competition. But he noted that in 1989 representatives of Alascom explained to him why intrastate competition would be bad for Alaskans. He didn't believe them at the time, and is glad there is competition. He finds it hard to understand why we can't translate that same thought into all businesses. Senator Leman asked Mr. Foerchinger why, since such a small fraction of the business is for insurance purposes, the service portion of the business shouldn't be competitive. Number 427 MR. FOERCHINGER responded that the margins of profit are already marginal. The way the bill is written, it will not allow the industry to increase those rates in instances where it's justified. SB 231 only allows for decreases in the rates. Something like this would put the small guys out of business. He doesn't think that title insurance will become unavailable in Alaska, but he does think that one will find an environment where insurance is only provided by national companies, probably examined and underwritten outside the state of Alaska. He does not think there will be independent companies offering the services currently offered. Number 450 SENATOR LEMAN asked if it would be possible to free up part of the industry, allowing the market to establish its' own rate, with perhaps the exception of the actual title insurance portion. Number 456 SENATOR RIEGER thinks that would be a reasonable approach to the issue: that there is an insurance component and a service component. The reason for the filing of a rate and then having the ability to go lower was that sometimes the closing process can be a highly charged, emotional situation and he wanted to prevent excessive rates. But he is open to discussion on that point. Number 470 JOE KAULHABER, Principal Real Estate Broker, Realty, Inc., stated though he is representing himself before the committee, he has a resolution from the Greater Fairbanks Board of Realtors opposing SB 231. SENATOR RANDY PHILLIPS noted that committee members have a copy of that resolution in their bill packets. MR. FAULHABER stated that he doesn't have any answers; the problem is a complex one. But he is concerned that the bill as presented would be very disruptive to the real estate industry. Formerly, he had his own escrow division within his company. It was very expensive and it didn't work very well, because it was mixing a marketing function with an accounting function. When the title companies in Fairbanks became sophisticated enough to take that function over, that was actually the first year Mr. Faulhaber experienced profitability in his own business. If this bill is passed, he believes the title insurance companies would be hampered to the point where services delivered to the unsophisticated residential customer would diminish significantly. MR. FAULHABER informed the committee that the first thing a real estate company does when marketing a property is to ask a title company for an abstracted title. Prior to the current good service, it used to take 90-120 days to get a preliminary commitment for title insurance. It was not uncommon to have five and six-month closings. This causes a lot of suffering. As Senator Rieger noted, selling or buying a personal residence is a very emotional experience. The biggest suffering is often unnecessary because it's something that could have been handled, but it comes in the form of a surprise. MR. FAULHABER thinks that if rates are deregulated to allow negotiation, commercial clients, who are more sophisticated, would negotiate their rates down, while consumer rates for houses would go up. Those rates probably wouldn't be negotiated. Once again, the people who could least afford to pay the most would be paying a larger pro rata share. Number 505 BRYAN MERRELL, Vice President and Chief Title Officer, First American Title Company of Alaska, Underwriter for First American Title Insurance Company, stated that if SB 231 passes, it will radically change the way the business of title insurance is conducted in the state by deregulating rates. To his knowledge, not a single state has enacted a similar statute. Currently, title insurance agencies are required to treat all customers equally, which puts all title insurance agents and underwriters on a level playing field. Mr. Merrell thinks that the only customers who would be able to negotiate rates under SB 231 would be the larger- volume customers. He does not think it will be the average homeowner who will benefit. MR. MERRELL noted that other rates in real estate transactions are negotiable, including the survey, the appraisal, the engineer's report, well and septic inspections, lender's origination fees, and the interest rate on the mortgage. While the costs of these components are almost never successfully negotiated for the typical homeowner's real estate transaction, they are always negotiated in a large commercial transaction involving a real estate developer. Mr. Merrell thinks the effect of SB 231 would be to allow significant reductions in rates charged to large commercial customers and real estate developers, while the rates charged to the homeowner would likely increase to offset the loss of revenue resulting from negotiating commercial rates. The maximum rate created by SB 231 will not prevent this inevitable outcome. If this bill is passed, the title insurance industry will remain a regulated industry. The Division of Insurance will continue to have the obligation to prevent the lack of regulation from creating failure in the industry. MR. MERRELL stated that the $75 fee to add an additional insured to a policy would not give the type of insurance that lenders are seeking when they come to the title companies for a refinance policy. Adding the insured will not protect a party who is either buying a new property or lending against the property after the date of the policy. The current charge to add an insured to a policy under the current rate schedule is $50, so SB 231 would actually increase that cost. MR. MERRELL stated that currently, competition among title insurance companies is based upon services rendered. We would like competition to continue upon those lines, and not on rates. We would like to keep the playing field level with the current rate schedule. Number 555 CLIFF GROH, Alaska Land Title Association, stated he has been associated with the title insurance industry for 30 years as an attorney. Mr. Groh said that SB 231 will not solve the problems of the title insurance industry. To solve Senator Rieger's problem of refinancing houses, you should confer with the industry and the Division of Insurance. There is a model Title Insurance Act. The legislature should consider that possibility. SB 231 is approaching the problem backwards. The reason the industry is regulated is to ensure that there will be enough money to pay the companies that are taking the risks, and enough money to pay the underwriters. Mr. Groh suggested just dealing with the question of refinancing. He does not believe that SB 231 is workable, because the underwriters will not let the agents set the rates. TAPE 96-7, SIDE B Number 585 JAN NAUMAN stated she is present to inform the committee of the consumer's side of the title insurance issue. She noted that the letter to which Senator Rieger referred was from her. She stated that her experience with the title insurance company was very different from that portrayed by the previous testifiers. Ms. Nauman repeated to the committee her experience, as outlined in her letter. All three transactions on the same piece of property required three different title insurance policies. She was told that, not only was she purchasing three consecutive title insurance policies, but that each policy voided the prior policy. MS. NAUMAN stated that the title insurance company wanted $970 for what they freely admitted was two-minutes worth of work, at which point she got rather excited. As a consumer, the most frightening part to her is that the existing tariffs do not cause title insurance to be administrated equitably. Her second problem is with the fact that the reissuing of title insurance causes the consumer to be damaged: if one purchases a house for a higher price, then one has title insurance for the whole transaction; the subsequent purchase of a loan or a rollover of a loan causes the purchaser to be insured for a lesser amount. The third thing she has a problem with is that the existing statutes allow collusion to exist between title insurance companies and banks. When she was asked for her third title insurance payment, the title insurance company claimed to be an agent of the bank. Since both she and the bank already had insurance, what was that third policy for? Ms. Nauman stated that her experience was disappointing, and whatever the changes made in statute, hopefully consumers won't be left hanging out to dry like she was. Number 508 MICHAEL PRICE, Attorney, Alaska Land Title Association, testifying from Anchorage, stated he speaks in opposition to SB 231. He informed the committee that there are only two national underwriters in Alaska. There are approximately 20 Alaskan companies, that he thinks will be impacted negatively by SB 231. He related settlement costs of a recent refinancing in which he was involved, in which title insurance composed only 10% of the refinancing costs. Mr. Price stated that the base title insurance rates have not changed since 1968. Number 463 SENATOR RIEGER asked Mr. Price if the base rate to which he is referring is a percentage of the mortgage. MR. PRICE responded that it is a dollar-per-thousand figure. SENATOR RIEGER thinks that the thousands of dollars of a typical mortgage must have changed since 1968. MR. PRICE responded that the value of property has changed, but not the rate charged by the title insurance industry. Number 455 STEVE JEWETT, First American Title Insurance Company of Alaska, testifying from Anchorage, stated that every commitment his company offers has a liability factor also. Sometimes lenders will actually use offers for a report or a policy of some sort. Number 445 TIM HURLEY, Western Alaska Land Title Company, testifying from Kodiak, stated opposition for SB 231. He doesn't think the bill's consequences have been researched, nor does he think it will effectively address the needs of the industry users. Number 430 MARY ANN ROWE, President, Kachemak Bay Title, testifying from Homer, does not think SB 231 has been thoroughly analyzed. She thinks the bill will have severe negative effects on the real estate and mortgage industry. She thinks the current regulations do work. Ms. Rowe stated that if the industry is deregulated, underwriters will no longer be able to afford underwriting in Alaska. She does not think the cost for title insurance is out of line with the product the consumer receives, and that SB 231 would be a lose-lose situation in all cases. Number 395 JEFF BLAKE, Pacific Rim Title Insurance, President of Alaska Land Title Association, testifying from Anchorage, repeated comments made in a letter written to Cliff Groh, which he believes was forwarded to the committee. Mr. Blake informed the committee that New Mexico has enacted a law similar to what SB 231 intends, but the rates do go up and down to try to keep agents in the state. Mr. Blake also commented that two of his jobs disappeared when underwriters left the state. He stated that on a refinancing, the insurance that's issued at that point insures the lien of a specific security instrument. If that instrument is reconveyed and satisfied, it doesn't transfer over. Number 363 DON KOCH, Chief of Market Surveillance, Division of Insurance, Department of Commerce & Economic Development, stated they have some concerns with the legislation. The first concern is with the repealer section, which would repeal the rate standards for title insurance. Those standards basically say that the rates shall not be excessive, shall not be inadequate, and shall not be unfairly discriminatory. It then provides for establishing a title rate as a maximum. The trouble the division would have with that is that there would be no way to tell what that maximum should be. There would be no standard with which to establish a rate. If the public was to see a rate there as a maximum, the natural assumption would be that since the Division of Insurance has approved it, that is the approved rate. But that rate may not meet any of the standards we're talking about. MR. KOCH stated that the second concern with the repealer is the unfair discrimination. There is also an unfair discrimination section in our Unfair Trade Practices Act, which does not go away. So that creates a dilemma, because the title rate would have those standards removed, but they would still exist in the Unfair Trade Practices Act, which would arguably still apply. Mr. Koch thinks this issue needs to be addressed. Number 337 MR. KOCH stated that the division's paramount concern as regulators is the solvency of the insurers. There are currently only two title insurers writing title insurance policies in the state. There are ten title insurers admitted to do business in the state. There have been a progression of companies "hopping out of here". An additional concern of deregulation of rates is the potential for the creation of a monopoly, or a monopoly in certain areas. The division would have trouble dealing with that. Number 315 MR. KOCH stated that there is a provision in the FTC Act that basically says the search and examination portion of the title insurance operation is not the business of insurance. What some states have done is to deregulate the search and examination portion of the rate. Currently in Alaska, the way the law is structured, the entire rate is subject to filing. This has created a dilemma for some time. The division has been trying to develop a methodology with which to test existing standards. The division has held numerous meetings with the industry, and we have had hearings. The hearings resulted in the order in 1992 where we said all the discounts are disapproved because the division had no way to support anything we were being told. There is no support. As long as those two rates come together in the way they currently do under our statute, it will probably remain almost an impossibility to develop a reasonable standard. Number 304 MR. KOCH stated it is currently the belief of the division that the title insurer portion of the rate, about 10-12%, is inadequate for their needs. The 88-90% of the rate that goes to the title insurance agent for title insurance pieces of the operation is probably excessive. The reason for this belief is that the examinations we've done to test the rebate statutes found that there is a very heavy subsidy for non-title services, such as escrow settlement and closing operations. The subsidies found in the Anchorage bowl area ranged from 29-64%. That meant that the escrow charges were not meeting the cost of delivering that service. They are integrated services, you can't have one without the other. He is merely pointing out that if you push down one button, another one will pop up someplace, and he's not sure what the ultimate cost will be. He doesn't raise issue with the statement that the overall cost of operating a title agency is marginal, but the allocations within the structure of those agencies are probably priced in such a way that there is probably too much coming in from the title side, and too little coming in from the escrow side. Mr. Koch stated he is providing the committee with an article he wrote a few years ago that was published in the journal of insurance regulation. It is a primer on title insurance for the regulator. It addresses some regulatory concerns. Number 270 CHAIRMAN SHARP stated that the committee would be gathering all the information available. Number 260 MR. KOCH stated that two possible options would be to preserve the rate structure for the title insurance portion. The other would be to develop a rate structure for the title insurer that considers everything they need to remain in business, and apply a similar methodology to the title insurance agent. The division will flesh out those alternatives and give the committee more concrete information. Number 245 CHAIRMAN SHARP stated he would look forward to that information. He noted that testimony has indicated that the market availability for title insurance services has dwindled considerably in the past ten years. He would not want to see a monopoly develop. Number 238 SENATOR LEMAN asked Mr. Koch if the challenge is more with the insurers, about there being a danger of a monopoly developing. Is the division not able to disaggregate the costs sufficiently. Are the services so intertwined with the insurance that they can't be separated? Number 226 MR. KOCH responded that there are some states that do not regulate what the title agencies do. However, the one thing that must be realized is that there is a greater diversity in how states deal with title insurance than any other kind of insurance. The monopoly that we are initially concerned with is the monopoly that could occur in the title agent market. Another concern is that the search and examination portion is considered by the FTC to be their turf. Because of that, the title industry gets downright paranoid when they hear "FTC". If the last two insurers in the state feel like we're under the looking glass from the FTC, they might start to think a little differently about whether they want to stay in a state the size of Alaska. It is also significant to note that 88- 90% of title insurance premiums stay in Alaska. The division did find that for the most part, none of the title insurance agencies believed in the discounts. They were simply used to gain a temporary niche in the market place. Number 156 SENATOR RIEGER asked Mr. Koch if the division has a position or inclination that the amount of discount currently allowed for refinancing is excessively low. MR. KOCH stated the division believes that the refinancing rate should be subject to some kind of discount, but we haven't allowed any, except for short-term discounts. We don't know where the number should be. We have told title insurers and people who call us that it is the division's intent that short-term discounts, which are 20%, should also apply to refinancing. Some agencies have not interpreted it that way, but we have tried to correct that interpretation. So that 20% discount is available, though he is not sure that is enough of a discount for a refinancing. CHAIRMAN SHARP thanks Mr. Koch for his testimony and stated that SB 231 will be set aside for at least two to three weeks. The committee will try to give ten days to two weeks notice on rescheduling of the bill. SB 217 INCOME LIMITS FOR LONGEVITY BONUS SENATOR SHARP brought up SB 217 as the next order of business before the Senate State Affairs Committee and called a representative of the administration to give an overview of the legislation. The chairman announced that no action will be taken on the bill at this date. Number 090 CONNIE SIPE, Director of the Division of Senior Services, Department of Administration, representing the prime sponsor, stated that SB 217 would change the longevity bonus statute to eliminate Alaska Senior Citizens with high incomes. Ms. Sipe related information contained in the sponsor's statement. One of the things the administration decided while trying to make budget reductions that affected seniors, was that we should try to make reductions in a way that would impose the least hardship on seniors. SB 217 is in addition to the phase-out program, it does not replace the phase-out program. The income limitation is not needs based. The bill will probably affect 1,500-2,000 people. If a senior's income drops, that senior can become eligible again for a longevity bonus. The second portion of SB 217 would address bonus recipients who spend little of the year in Alaska. TAPE 96-8, SIDE A Number 001 MS. SIPE continued with the administration's overview of SB 217. She stated that about half of the feedback the administration has received regarding the legislation has been supportive. Many of the people who have been in support of the legislation have suggested lowering the income ceiling. Though there has been both support and opposition, she believes SB 217 was the best proposal, and that it could be simply administered. Administration on an honor basis is the intention. The longevity bonus program has always been administered on an honor basis, with only those people who gave us indication to believe they were defrauding the program, or those people who were reported for fraud being investigated. This program is run with three clerks. Number 038 CHAIRMAN SHARP asked if the program can really be processed by three people. MS. SIPE responded that the program processes, every single month, a bonus sign-off from every single person. We have to physically open the envelopes and enter the data into the computer. We will create one more computer field, and we feel we can handle that. We can send two extra sheets of paper in any one envelope for the same amount of postage. She thinks the administration could handle it with no additional resources if the legislation is kept as simple as it is currently written. If more hardship exemptions are made or more verifications are required, then it would get more difficult. Number 064 CHAIRMAN SHARP asked Ms. Sipe if dividends received from regional (native) corporations are tax exempt from federal income taxes and would not be included in gross income. MS. SIPE responded that is a question she has asked the drafting attorney, and she is waiting for a reply. Veteran's benefits and disability benefits are not taxable, so they wouldn't be included in gross income. SENATOR LEMAN thinks native corporation dividends would not be taxed. SENATOR RANDY PHILLIPS asked Ms. Sipe if administration will be based on faith. MS. SIPE responded that is how the program is currently run. There has been audit after audit, and very little fraud is found among this population. Senior citizens tend to be really honest. SENATOR RANDY PHILLIPS commented it was one thing to prove you're 65 and living in the state. It is another thing to prove income. People are more secretive about income than age. Number 109 MS. SIPE replied that people will not be asked to disclose their income, but to declare themselves above or below a limit. SENATOR RANDY PHILLIPS asked how she's going to prove something like that. MS. SIPE responded that one of the side benefits of the limit that the governor set, was that it is felt that at that income level there is less incentive to want to hedge. SENATOR RANDY PHILLIPS commented it would be interesting to see how many people hedge on PFD applications. He thinks it is about 10%. MS. SIPE replied that her division has worked with the PFD Division and done cross-runs, and they don't find that percentage in the longevity bonus program. SENATOR RANDY PHILLIPS thinks it will be harder to prove whether or not someone's cheating on the income requirements than on presence- in-the-state requirements. He has a hard time accepting the so- called honor system, based on these income levels. CHAIRMAN SHARP commented maybe that's because Senator Phillips is so young. He asked Ms. Sipe about the second part of the bill regarding required presence in the state. MS. SIPE responded that if a person is out more than 90 days in a row, they are out of the program. But the program currently does not have a cumulative time requirement, like in the permanent fund dividend program. Number 170 CHAIRMAN SHARP asked for confirmation that the benefit will be tied strictly to income, and not net worth. MS. SIPE replied that is correct. She also mentioned that a side- benefit of the income requirement in SB 217 would result in almost a two-million dollar savings impact in the public assistance budget. The hold-harmless state replacement of lost federal supplemental social security income to the lowest income elders in our state would no longer be necessary. The Social Security Act allows states to set up programs that benefit seniors, disabled, etcetera, as long as there is any kind of means or asset test. That impact was not planned when we were working on this bill. We were looking at what we could do to contribute to the budget situation. Number 188 CHAIRMAN SHARP asked if the administration explored the possibility or received input on acceptability of an across-the-board reduction. MS. SIPE responded that was considered, but we felt that would take $25 or $50 or whatever from some people who were among the neediest of seniors. CHAIRMAN SHARP stated he hears from many people who tell him they would rather take equal cuts, than dividing and conquering on one end or the other of the benefit. Number 210 SENATOR RANDY PHILLIPS commented that in earlier testimony, Ms. Sipe stated SB 217 was not meant to be a needs-based test. But now you say something different. MS. SIPE replied that what she was saying is that she has been asked if people with less than $60,000 or $80,000 are considered needy in Alaska. We do not. The governor's philosophical approach was not to say that was a level of need. It is to find a comfortable area where we feel that most people with that income would not be harmed by the loss of the longevity bonus. You will see from the fiscal note that that benefit to public assistance came in later. It happens to be a side-benefit of this decision, but it was not done in order to make the program needs based. In fact, we are still waiting for written verification from the federal agencies that even income limits as high as $60,000 and $80,000 meet their tests. They have only told us that verbally. Number 245 CHAIRMAN SHARP stated he wants to review other possible one-time monies received by individuals or families that possibly should be considered in the $60,000 or $80,000 income limit. He's still waiting to hear back from IRS officials. The chairman announced that SB 217 will be set aside. SENATOR RANDY PHILLIPS asked the chairman if he is receiving a longevity bonus. CHAIRMAN SHARP responded he won't be 65 until 1998, so reduction and termination of the longevity bonus is already in the cards for him. He announced that SB 217 will be brought up again when more information is received. Number 265 CHAIRMAN SHARP adjourned the Senate State Affairs Committee meeting at 5:21 p.m.