HOUSE STATE AFFAIRS STANDING COMMITTEE April 7, 1994 8:00 a.m. MEMBERS PRESENT Representative Al Vezey, Chairman Representative Pete Kott, Vice Chairman Representative Bettye Davis Representative Gary Davis Representative Harley Olberg Representative Jerry Sanders Representative Fran Ulmer MEMBERS ABSENT None COMMITTEE CALENDAR HB 543: "An Act relating to unvented gas space heaters in residential buildings." MOVED FROM COMMITTEE AS CSHB 543(STA) WITH DO PASS RECOMMENDATIONS HB 531: "An Act relating to the existence and functions of certain multimember state bodies, including boards, councils, commissions, associations, or authorities; and providing for an effective date." MOVED FROM COMMITTEE AS CSHB 531(STA) WITH NO RECOMMENDATIONS HB 410: "An Act relating to real estate appraisers and the Board of Certified Real Estate Appraisers." MOVED FROM COMMITTEE AS CSHB 410(STA) WITH NO RECOMMENDATIONS HB 514: "An Act relating to risk based capital for insurers; and providing for an effective date." HELD IN COMMITTEE HB 420: "An Act relating to limited liability companies; amending Alaska Rules of Civil Procedure 20 and 24; and providing for an effective date." HELD IN COMMITTEE HB 393: "An Act relating to the unincorporated community capital project matching grant program; and providing for an effective date." HELD IN COMMITTEE HB 530: "An Act relating to certain study, publication, and reporting requirements by and to state agencies; relating to certain fees for reports; and providing for an effective date." NOT HEARD WITNESS REGISTER DAVID WALSH, Director Division of Insurance Department of Commerce & Economic Development P.O. Box 110805 Juneau, AK 99811-0805 Phone: 465-2515 POSITION STATEMENT: Supported HB 514 REPRESENTATIVE GENE THERRIAULT Alaska State Legislature Alaska State Capitol, Room 421 Juneau, AK 99811-0460 Phone: 465-4797 POSITION STATEMENT: Sponsor of SSHB 420 MIKE MONAGLE, Supervisor, Corporate Information Division of Banking, Securities, and Corporations Department of Commerce & Economic Development P.O. Box 110808 Juneau, AK 99811-0808 Phone: 465-2570 POSITION STATEMENT: Answered questions on CSSSHB 420 BOB MANLEY, Working Group Chairman Alaska State Bar Association 324 East Cook Anchorage, AK 99501 Phone: 263-8251 POSITION STATEMENT: Commented on CSSSHB 420 PETER BRAUTIGAN 2170 Belmont Anchorage, AK 99517 Phone: 276-1592 POSITION STATEMENT: Answered questions on CSSSHB 420 BRYAN DURRELL, Attorney Bogle & Gates 1031 West 4th, Suite 600 Anchorage, AK 99501 Phone: 257-7828 POSITION STATEMENT: Answered questions on CSSSHB 420 JOE RYAN, House State Affairs Committee Aide Representative Al Vezey, Chairman Alaska State Capitol, Room 102 Juneau, AK 99811-0460 Phone: 465-3719 POSITION STATEMENT: Reviewed information for HB 393 CRYSTAL SMITH Alaska Municipal League 217 Second St., Suite 200 Juneau, AK 99801 Phone: 586-1325 POSITION STATEMENT: Commented on HB 393 PREVIOUS ACTION BILL: HB 543 SHORT TITLE: UNVENTED GAS HEATERS IN RESIDENTIAL BLDGS SPONSOR(S): STATE AFFAIRS JRN-DATE JRN-PG ACTION 03/30/94 3074 (H) READ THE FIRST TIME/REFERRAL(S) 03/30/94 3074 (H) STATE AFFAIRS 04/05/94 (H) STA AT 08:00 AM CAPITOL 102 BILL: HB 531 SHORT TITLE: ELIMINATE SOME STATE MULTIMEMBER BODIES SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR JRN-DATE JRN-PG ACTION 03/11/94 2728 (H) READ THE FIRST TIME/REFERRAL(S) 03/11/94 2728 (H) STATE AFFAIRS 03/11/94 2728 (H) -7 ZERO FNS (DCRA,2-DCED,CORR, 2-DOE 03/11/94 2728 (H) DNR) 3/11/94 03/11/94 2729 (H) GOVERNOR'S TRANSMITTAL LETTER 03/29/94 (H) STA AT 08:00 AM CAPITOL 102 BILL: HB 410 SHORT TITLE: REAL ESTATE APPRAISERS SPONSOR(S): LABOR & COMMERCE BY REQUEST JRN-DATE JRN-PG ACTION 01/28/94 2177 (H) READ THE FIRST TIME/REFERRAL(S) 01/28/94 2177 (H) L&C, STATE AFFAIRS, FINANCE 02/17/94 (H) L&C AT 03:00 PM CAPITOL 17 02/17/94 (H) MINUTE(L&C) 02/18/94 2453 (H) L&C RPT CS(L&C) 6DP 02/18/94 2454 (H) DP: HUDSON, PORTER, SITTON, MULDER 02/18/94 2454 (H) DP: WILLIAMS, GREEN 02/18/94 2454 (H) -ZERO FISCAL NOTE(DCED) 2/18/94 03/17/94 (H) STA AT 08:00 AM CAPITOL 102 03/17/94 (H) MINUTE(STA) BILL: HB 514 SHORT TITLE: RISK BASED CAPITAL FOR INSURERS SPONSOR(S): LABOR & COMMERCE JRN-DATE JRN-PG ACTION 02/28/94 2551 (H) READ THE FIRST TIME/REFERRAL(S) 02/28/94 2551 (H) L&C, STATE AFFAIRS, JUDICIARY 03/24/94 (H) L&C AT 03:00 PM CAPITOL 17 03/28/94 2996 (H) L&C RPT CS(L&C) 5DP 03/28/94 2997 (H) DP:PORTER, SITTON, MULDER, GREEN,HUDSON 03/28/94 2997 (H) -ZERO FISCAL NOTE (DCED) 3/28/94 03/28/94 2997 (H) REFERRED TO STATE AFFAIRS 04/07/94 (H) STA AT 08:00 AM CAPITOL 102 BILL: HB 420 SHORT TITLE: LIMITED LIABILITY COMPANIES SPONSOR(S): REPRESENTATIVE(S) THERRIAULT,Mulder,James JRN-DATE JRN-PG ACTION 01/31/94 2206 (H) READ THE FIRST TIME/REFERRAL(S) 01/31/94 2206 (H) L&C, JUDICIARY, STATE AFFAIRS 02/24/94 2522 (H) SPONSOR SUBSTITUTE INTRODUCED-REFERRALS 02/24/94 2522 (H) L&C, JUDICIARY, STATE AFFAIRS 03/08/94 (H) L&C AT 03:00 PM CAPITOL 17 03/09/94 2676 (H) L&C RPT 1DP 3NR 03/09/94 2676 (H) DP: MULDER 03/09/94 2676 (H) NR: WILLIAMS, SITTON, HUDSON 03/09/94 2676 (H) -ZERO FISCAL NOTE (DCED) 3/9/94 03/09/94 2703 (H) COSPONSOR(S): MULDER 03/18/94 (H) JUD AT 01:15 PM CAPITOL 120 03/21/94 (H) MINUTE(JUD) 03/23/94 (H) JUD AT 01:00 PM CAPITOL 120 03/30/94 (H) JUD AT 01:15 PM CAPITOL 120 03/31/94 (H) STA AT 08:00 AM CAPITOL 102 03/31/94 3106 (H) COSPONSOR(S): JAMES 04/06/94 3153 (H) JUD RPT CSSS(JUD) NEW TITLE 4DP 1NR 04/06/94 3153 (H) DP: GREEN, JAMES, PORTER, NORDLUND 04/06/94 3153 (H) NR: KOTT 04/06/94 3153 (H) -PREVIOUS ZERO FISCAL NOTE (DCED) 3/9/94 04/06/94 3153 (H) REFERRED TO STATE AFFAIRS 04/07/94 (H) STA AT 08:00 AM CAPITOL 102 BILL: HB 393 SHORT TITLE: UNINCORPORATED COMMUNITY CAP PROJECT GRAN SPONSOR(S): REPRESENTATIVE(S) MOSES JRN-DATE JRN-PG ACTION 01/21/94 2125 (H) READ THE FIRST TIME/REFERRAL(S) 01/21/94 2125 (H) CRA, STATE AFFAIRS, FINANCE 02/08/94 (H) CRA AT 01:00 PM CAPITOL 124 02/08/94 (H) MINUTE(CRA) 02/22/94 (H) MINUTE(CRA) 02/28/94 2545 (H) CRA RPT CS(CRA) 3DP 2NR 1AM 02/28/94 2545 (H) DP: BUNDE, TOOHEY, OLBERG 02/28/94 2545 (H) NR: WILLIS, WILLIAMS 02/28/94 2545 (H) AM: DAVIES 02/28/94 2545 (H) LETTER OF INTENT WITH CRA REPORT 02/28/94 2546 (H) -4 ZERO FNS (DCRA,ADM,LAW,DOT) 2/28/94 02/28/94 2546 (H) REFERRED TO STATE AFFAIRS 03/29/94 (H) STA AT 08:00 AM CAPITOL 102 04/07/94 (H) STA AT 08:00 AM CAPITOL 102 BILL: HB 530 SHORT TITLE: REQUIRED REPORTS OF STATE AGENCIES SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR JRN-DATE JRN-PG ACTION 03/11/94 2727 (H) READ THE FIRST TIME/REFERRAL(S) 03/11/94 2727 (H) STATE AFFAIRS, FINANCE 03/11/94 2727 (H) -16 ZERO FNS (5-ADM, 2-DCED, 2-DOE, DEC, 03/11/94 2727 (H) DNR, DMVA, 2-DPS, REV, DOT) 3/11/94 03/11/94 2727 (H) GOVERNOR'S TRANSMITTAL LETTER 03/29/94 (H) STA AT 08:00 AM CAPITOL 102 04/07/94 (H) STA AT 08:00 AM CAPITOL 102 ACTION NARRATIVE TAPE 94-45, SIDE A Number 000 CHAIRMAN AL VEZEY called the meeting to order at 8:01 a.m. Members present were REPRESENTATIVES KOTT, SANDERS and OLBERG. CHAIRMAN VEZEY noted the meeting was on teleconference with Anchorage. HB 543 - UNVENTED GAS HEATERS IN RESIDENTIAL BLDGS Under bills previously heard, CHAIRMAN VEZEY opened HB 543 for discussion. He stated when HB 543 was previously discussed, it appeared the wrong statute was being amended. He clarified the Department of Public Safety administers the Plumbing Code and the Mechanical Code due to its authority referenced in AS 18.60.000, and AS 28.05.011. The mechanical code is adopted by regulation and updated every three years. He stated HB 543 would amend the mechanical code to allow unvented space heaters, by putting in statute the standards set out by the National Standards Institute Accreditation Program, for unvented gas heaters. Number 045 REPRESENTATIVE HARLEY OLBERG moved to pass CSHB 543 from committee with individual recommendations. CHAIRMAN VEZEY added the adoption of version K, CSHB 543 to the motion. He asked the committee secretary to call the roll. IN FAVOR: REPRESENTATIVES VEZEY, KOTT, SANDERS, OLBERG. ABSENT: REPRESENTATIVES B. DAVIS, G. DAVIS, ULMER MOTION PASSED HB 531 - ELIMINATE SOME STATE MULTIMEMBER BODIES CHAIRMAN VEZEY opened CSHB 531 for discussion. He noted the committee had CSHB 531 version J, before them which incorporated the amendment adopted the previous Thursday. He stated CSHB 531 provides the Museum Collections Advisory Committee (MCAC) can meet by teleconference, gives them a threshold of $5,000 for purchase consultation, and provides their duties are to act in the general acquisition and deaccession policies of the museum. The original HB 531 eliminated the MCAC. Number 111 REPRESENTATIVE OLBERG moved to adopt version J, CSHB 531. Number 115 CHAIRMAN VEZEY, hearing no objection, adopted version J, CSHB 531. Number 118 REPRESENTATIVE OLBERG moved to move CSHB 531 from committee with individual recommendations. (REPRESENTATIVE ULMER joined the meeting at 8:05 a.m.) Number 120 CHAIRMAN VEZEY asked the committee secretary to call the roll. IN FAVOR: REPRESENTATIVES VEZEY, KOTT, ULMER, SANDERS, OLBERG. ABSENT: REPRESENTATIVES B. DAVIS, G. DAVIS MOTION PASSED HB 410 - REAL ESTATE APPRAISERS CHAIRMAN VEZEY opened HB 410 for discussion. He noted the committee had before them a CSHB 410(STA) work draft, which expands the scope of the Financial Institution Reform Recovery Enforcement Act (FIRREA) of 1989. CSHB 410(STA) would bring Alaska standards for education and other training requirements in line with FIRREA. Alaska would not exceed the federal standards for real estate appraisers. Number 160 REPRESENTATIVE FRAN ULMER inquired if the change in education and training standards was because there was a problem created with the existing regulations. CHAIRMAN VEZEY replied no, the Labor & Commerce Committee had proposed a committee substitute which reduced the educational requirements in real estate appraiser licensing to match federal standards. The State Affairs proposal would reduce all of the requirements, both education and training. Number 170 REPRESENTATIVE ULMER asked why. CHAIRMAN VEZEY answered the question should be why not. A federal standard is being adopted for part of Alaska's requirements which are in excess of our current requirements. Federal standards which are less than our current requirements are not being adopted. Number 179 REPRESENTATIVE ULMER asked if there had been any testimony from the board of real estate appraisers on the change. Did they agree or disagree. (REPRESENTATIVE B. DAVIS joined the meeting at 8:08 a.m.) CHAIRMAN VEZEY was not aware of their testimony. REPRESENTATIVE ULMER expressed that Alaska would assume the federal standards are at the right level. She questioned whether the state ever agrees with federal standards without first checking whether they are good or bad. She assumed the board set the standards at another level for a reason. She stated she would be interested in knowing why the board set the training requirements differently from the federal standards; if there was a good reason then we may not want to do it and if there wasn't a good reason, then maybe we do want to do it. Number 195 CHAIRMAN VEZEY commented he believed Alaska's current regulations go back prior to FIRREA. CSHB 310(STA) proposes Alaska move its standards in line with the rest of the country. Number 207 REPRESENTATIVE OLBERG mentioned CSHB 410(STA) also addresses the fact that the federal standards continually change. He noted the second paragraph of the sponsor statement as an example of the range of hour changes from consecutively 75, 105 to 120. If a state standard was to be fixed, every time the federal standard changed, the state would be out of compliance. The state is always in compliance if it is the same as the federal standard. Number 223 CHAIRMAN VEZEY stated CSHB 410(STA) would bring the educational and training requirements into compliance with the federal requirements. Alaska's requirements would continue to follow federal standards. CHAIRMAN VEZEY asked if there was a motion to adopt CSHB 410(STA), version O. REPRESENTATIVE OLBERG so moved. Number 242 CHAIRMAN VEZEY, hearing no objection, CSHB 410(STA) was adopted. Number 244 REPRESENTATIVE OLBERG moved to move CSHB 410(STA) with individual recommendations. Number 250 CHAIRMAN VEZEY asked the committee secretary to call the roll. IN FAVOR: REPRESENTATIVES VEZEY, KOTT, ULMER, B. DAVIS, SANDERS, OLBERG. ABSENT: REPRESENTATIVE G. DAVIS MOTION PASSED HB 514 - RISK BASED CAPITAL FOR INSURERS CHAIRMAN VEZEY opened HB 514 sponsored by the House Labor & Commerce Committee, for discussion. (REPRESENTATIVE ULMER left the meeting at 8:15 a.m.) Number 277 DAVID WALSH, DIRECTOR, DIVISION OF INSURANCE, DEPARTMENT OF COMMERCE & ECONOMIC DEVELOPMENT, addressed HB 514. He noted the presence of Katie Campbell, Life and Health Actuary, who had the primary responsibility of composing HB 514. He stated HB 514 had a zero fiscal note and the support of regulators, the industry (particularly domestic), and national consumer groups. MR. WALSH stated historically, insurance company solvency has been regulated based upon a template. This template is a general outline, whereby it can apply to State Farm, or the Alaska Timber Exchange. He noted this template has proven inadequate as a predictor of insurance company solvency or as an early warning system for a company nearing trouble. MR. WALSH stated risk based capital has been developed over the last 4-5 years by national insurance regulators, as well as consumer groups in the industry. Risk based capital is a formula based upon the different levels of risk an individual company may have. For example, an auto company that writes drag racing policies would have a higher level of exposure than a company writing only personal passenger auto policies. Risk based capital would set up a formula for various kinds of risks that results in a number. The average number a good solid company would have is around 580 percent of risk based capital. Alaska domestic companies are between 900-24,000 percent of risk based capital. Therefore, Alaska domestic companies are small, but very well capitalized and strong. He stated the strength of a company does not come through in the traditional way of analyzing solvency. Therefore, when they seek credit, the solvency laws do not allow them to present themselves in as strong of light as the company actually exists. He pointed out risk based capital will help Alaskan companies to expand and grow. They will be allowed to have an investment policy which will return a higher yield, thereby resulting in lower rates and growth in the domestic industry. MR. WALSH stated the second feature of risk based capital is how it works as a warning system if the number decreases. Number decreases will be easy to detect. HB 514 requires when a company reaches 200 percent of risk based capital, twice the minimum amount it needs to stay solvent, they have to administer a rehabilitation plan. At 150 percent the Division of Insurance has to administer a plan. At 100 percent the Division of Insurance closes the company. He believed these provisions will help insure problems that have happened outside will not effect Alaskan consumers again. He noted the triggers where action is required. MR. WALSH estimated the standards were presently before 30 states and they would most likely pass. Risk based capital will become the national standard as of the end of 1995. He emphasized they suggested HB 514 this year because Alaska's domestic companies are so strong that it is to their advantage to start operating under risk based capital this year. HB 514 has the unanimous support of the Alaska industry. The Division of Insurance strongly supports HB 514. Number 370 CHAIRMAN VEZEY considered HB 514 to be a major change. He asked how long current standards had been in place. Number 373 MR. WALSH answered since statehood, and in other states before that. Number 374 CHAIRMAN VEZEY commented there is good reason for the change, but HB 514 is a radical departure from current practice. Number 378 MR. WALSH agreed. Number 382 CHAIRMAN VEZEY asked if risk based capital had not yet been adopted by any of the 30 states considering it. Who composed the proposal? Number 384 MR. WALSH answered he did not know if the other states had adopted the proposal yet. The proposal in HB 514 came from the National Association of Insurance Commissioners, made up of the 50 states, plus the five territories and other jurisdictions in the United States. The National Conference of State Legislators and their subgroup, the National Committee of Insurance Legislators, also contributed. Number 394 CHAIRMAN VEZEY asked how many years they had worked on risk based capital. Number 395 MR. WALSH responded 4-5 years. Number 396 CHAIRMAN VEZEY stated the proposal must have came together fairly recently, noticing the filing date. Number 397 MR. WALSH stated the final life and health formula was adopted in December. They waited to introduce the proposal to ensure Alaska's domestic industry and other major companies had an opportunity to comment. They suggested one amendment that House Labor & Commerce (L&C) adopted, which added a public hearing requirement, so as the formula changes the division is assured of a procedure to Alaskanize it. HB 514 was only recently introduced; however, a lot of work was done on it by the national association, the Alaska domestic industry, and the Division of Insurance. Number 412 CHAIRMAN VEZEY noticed the L&C committee substitute. He asked the role of a public hearing in the review of an organization's financial status. Number 418 MR. WALSH answered the public hearing would be for any changes in the formula that were proposed for addition. HB 514 states the national formula will be used as the main solvency tool in Alaska. He pointed out over the next few years there will be some minor adjustments to the formula. A formal public hearing, required by regulation, would be required before any of the adjustments could be adopted by the Division of Insurance. He stated the public hearing requirement is a very good change and they have sent it to the national association as a suggestion for the national model. Their job is to protect consumers and ensure their actions are not counter-productive to the development of Alaska's market. (REPRESENTATIVE ULMER returned at 8:25 a.m.) Number 434 CHAIRMAN VEZEY clarified HB 514 would allow Alaskan companies to issue more policies, recognizing they have a stronger capital base than current regulations permit. How would this help the consumers? MR. WALSH responded the biggest problem currently in Alaska is availability, not affordability. Over the last few years, he stated, Alaska has had four carriers with 85 percent of the auto market - Geico, Nationwide, Allstate, and State Farm. This market concentration does not lead to lower prices and product innovation. They have been working to bring new companies into the Alaskan market place. Safeco entered into Alaska as of April 1, 1994, already causing prices to drop as a result of the competition. There are three carriers with 80 percent of the market in health insurance - Great West, Aetna, and Blue Cross. More access and more companies are necessary for prices to remain low for consumers and choices are available. MR. WALSH believed HB 514 would help in two ways: 1) non- Alaskan companies that are writing here will be able to operate what is going to become the national standard, risk based capital; 2) the small Alaska domestic industry will have a better competitive advantage because their strength will be more apparent. MR. WALSH noted there is only one admitted carrier for taxi cabs, and virtually no admitted carriers for aviation. Number 481 CHAIRMAN VEZEY characterized HB 514 as relaxing the financial standards of the underwriting companies. How would it help consumers? MR. WALSH responded HB 514 would not relax any standards. Those companies who write higher risk insurance and tend to have an overly aggressive investment policy with their capital and surplus will be penalized by HB 514. He noted HB 514 would provide a more accurate picture of the status of a company. The National Insurance Consumers Organization have examined risk based capital and they are very supportive of HB 514. Number 509 CHAIRMAN VEZEY inquired why the insurance industry was not present to express their opinion. Number 524 MR. WALSH said, to the division's knowledge, the industry is very supportive of HB 514. He stated the Division had met with or talked on the phone with the management of all the Alaskan companies and all the legislative lobbyists or representatives of the other writers in Alaska. Number 535 CHAIRMAN VEZEY stated he recognized HB 514 would have a magnitude of impact of great import, therefore it would be held in committee for further review. He appreciated the research done to make the proposal. CHAIRMAN VEZEY called a recess at 8:34 a.m. The meeting resumed at 8:44 a.m. Members present were REPRESENTATIVES KOTT, OLBERG and ULMER. (REPRESENTATIVE G. DAVIS joined the meeting at 8:43 a.m.) CSSSHB 420: "An Act relating to limited liability companies; and providing for an effective date." CHAIRMAN VEZEY opened SSHB 420 for discussion. REPRESENTATIVE GENE THERRIAULT, SSHB 420 sponsor, read the following sponsor statement: "The limited liability company is a relatively new, hybrid form of business structure that combines the tax advantages of a partnership and the liability safeguards of a corporation. Although a combination of these two business structures is currently allowed in statute through formation of an S corporation, this structure has limitations that are avoided by LLCs. For example, S corporations do not allow ownership by certain types of shareholders. "Under current law, corporate earnings are subject to double taxation throughout the payment of corporate taxes and personal taxes after distribution of dividends. LLCs avoid this double taxation by allowing earnings to flow through to individual owners in the same manner partnership income is handled. Although businesses can be organized through an S corporation to avoid double taxation and encompass some of the advantages of partnerships, they do not enjoy all the advantages of partnerships when it comes to allocating income and deductions. "One of the greatest advantages is, as the name implies, the limited liability offered by the LLC structure. With LLCs as with regular corporations, only the company's assets and not the owner's personal assets, are at risk in business- related lawsuits. In partnerships, so-called limited partners enjoy such protection, but general partners do not. And limited partners face restrictions on how active they can be in the business. LLCs are designed to protect all the members while imposing no limits on their involvement in operation of the business. "Thirty-four states now permit limited liability companies, and passage in most of the remaining states is expected. Wyoming passed the first LLC Act in 1977. Other states slowly followed suit until 1988, when the Internal Revenue Service issued Rev. Rul. 88-76, which classified a Wyoming LLC as a partnership for federal tax purposes, even though none of the members or managers were personally liable for any of the debts of the company. Following the ruling, formation of LLCs burgeoned, with two states adopting LLC Acts in 1990, four in 1991, 10 in 1992 and more than 20 states introducing measures in 1993. "LLCs have tended to be family businesses, professional service firms, venture capital companies, real estate and business start ups I believe the LLC will provide these business owners with an efficient and flexible investment vehicle that allows both limited liability, and federal income tax treatment as a partnership. SSHB 420 is based on a prototype American Bar Association draft, with changes to conform the bill specifically to Alaska." REPRESENTATIVE THERRIAULT stated he provided a proposed CSSSHB 420 for the committee to consider. They have been working extensively with the Alaska Bankers Association and the tax and business law sections from the Alaska Bar Association to "Alaskanize" the language. He noted the length of CSSSHB 420, and stated it includes a large section which outlines how corporations are to be formed and operate in Alaska. Framework for a new business structure is being created, rather than altering existing statutes. Number 613 CHAIRMAN VEZEY commented the "so-called corporate shield has been pierced so many times that it is now like a screen door." Why will an LLC establish a shield protecting individuals from the liability of a business structure of activities. (REPRESENTATIVE OLBERG left the meeting at 8:48 a.m.) Number 622 REPRESENTATIVE THERRIAULT deferred the question to the witnesses at the Anchorage teleconference site who may better answer. He stated CSSSHB 420 would not provide any more of a shield than a corporation. The same level of personal asset protection provided in a corporate structure would now be provided through the LLC structure. LLC structure has the advantage over a corporation, whereby double taxation would not exist. Number 631 CHAIRMAN VEZEY asked how it would differ from a subchapter S corporation. Number 633 REPRESENTATIVE THERRIAULT answered there are restrictions on what type of entities can be shareholders in a subchapter S corporation, which do not apply in the LLC structure. (REPRESENTATIVE OLBERG returned at 8:50 a.m.) Number 642 MIKE MONAGLE, SUPERVISOR, CORPORATE INFORMATION, DIVISION OF BANKING, SECURITIES, AND CORPORATIONS, DEPARTMENT OF COMMERCE & ECONOMIC DEVELOPMENT (DCED), answered questions on CSSSHB 420. He said the DCED participates with the International Association of Corporation Administrators and over the last 10 years LLC legislation has been a real "hot topic" among the states. The IRS has granted more and more private letter rulings and treated the states favorably for tax purposes, therefore there is a rush towards LLC organizations in the last 3-4 years. He noted the anticipation that by the end of 1995 all 50 states will have LLC legislation before them. DCED receives 3-4 inquires a week, from other states, wanting to know if Alaska recognizes the LLC structure. Therefore, he believed business opportunity exists and Alaska businesses will benefit to organize under the LLC structure. Number 661 REPRESENTATIVE ULMER asked how many existing companies in Alaska would shift over to the LLC structure. MR. MONAGLE stated he did not know. He did not believe an existing corporation would switch over because of the difficulty. Large corporations have shareholders and LLCs have managers, or members that manage. Therefore, it would not be feasible to replace boards of directors with one manager, or a group of shareholders to make the decisions. MR. MONAGLE mentioned "ma and pa type corporations," previously formed as an S corporation, may elect to go with a LLC. They would not have as many restrictions. He noted about 1,100 domestic corporations form a year, most of which are small. A fair number of the small corporations would be subchapter corporations devoid the tax situation. Number 681 CHAIRMAN VEZEY clarified subchapter S corporations are established under federal law. MR. MONAGLE affirmed CHAIRMAN VEZEY. Number 685 CHAIRMAN VEZEY questioned if and where they were recognized under Alaska statute. Federal only? MR. MONAGLE responded he believed Department of Revenue recognizes the exemption granted by the IRS. TAPE 94-45, SIDE B Number 000 CHAIRMAN VEZEY, in comparing a subchapter S corporation to an LLC, pointed out the state adopting federal law versus the federal IRS adapting to state law. He questioned if there was not a great deal more uncertainty. Number 014 MR. MONAGLE answered part of the reason there was not an exodus to the LLC structure initially was because of the question as to what the IRS might do. Wyoming being the state with a private letter ruling. He believed there has been no public letter rulings by the IRS granting blanket exemption for LLCs. Number 026 CHAIRMAN VEZEY inquired what he meant by a blanket exemption. Number 027 MR. MONAGLE replied if one formed subchapter S corporation, recognized as tax exempt, the IRS has not said that they will blanket recognize every state that comes forth with a LLC Act. IRS reviews each state and then makes a ruling. He noted this as another reason for not having a mass exodus to the LLC structure. He believed within the next five years the IRS would provide a blanket ruling due their indication. Number 053 CHAIRMAN VEZEY mentioned MR. MONAGLE's statement that they received three-four outside interest calls. He asked weekly or monthly. MR. MONAGLE answered weekly. Number 059 CHAIRMAN VEZEY inquired if three-four viable business enterprises a week would be actually considering entering a vague IRS status, or do they not know what is in Alaska. Number 063 MR. MONAGLE responded they are already formed as a LLC in their own state. They inquire as to how they will be treated in Alaska. Their structure needs to be recognized to not put their limited liability at risk. Number 081 CHAIRMAN VEZEY clarified they are not aware of the Alaska's status. MR. MONAGLE answered most do not know. Most calls are from comptrollers and service companies. Number 086 REPRESENTATIVE ULMER asked what kind of companies are considering doing business in Alaska, whereby LLC status is critical for them. Number 089 MR. MONAGLE replied what kind of business they are is usually not discussed. They question where Alaska's legislation is. Calls come from all over the country. Number 094 REPRESENTATIVE ULMER questioned who is considering coming to Alaska to do business. Number 095 MR. MONAGLE clarified they call to inquire about Alaska's legislation, therefore he was assuming they were doing studies or making business decisions. Number 099 REPRESENTATIVE ULMER questioned if they were discussing the "ma and pa" type businesses. Number 103 MR. MONAGLE replied he did not think so. States that developed LLCs first were those who do a lot of resource development. He mentioned Colorado and Wyoming as examples. He stated most of Alaska's corporations which deal with mineral extraction are Canadian owned. Therefore, if they have already formed a LLC in another state, it would be an attractive alternative to be able to come and enjoy the same protection in Alaska as they do in their own state. (REPRESENTATIVE SANDERS returned to the meeting at 8:59 a.m.) Number 118 REPRESENTATIVE THERRIAULT mentioned his wife is an attorney dealing with business practice in Fairbanks, and she has also had two-three people per month inquire about forming a business and the possible structures they can form under. He believed, by suggestion of their accountant, these people have questioned whether the LLC form is available in Alaska. He stated it was his intent to add the LLC structure to the list of choices. Number 150 BOB MANLEY, WORKING GROUP CHAIRMAN, TAX and BUSINESS LAW SECTIONS, ALASKA STATE BAR ASSOCIATION, commented on CSSSHB 420. He reiterated CSSSHB 420 was drawn from the American Bar Association Prototype Act, with significant influence from the banking community, corporations, and other interested persons. He stated he read in the Wall Street Journal last week, that 38 states have now adopted LLC legislation. He noted the California State Senate just passed LLC legislation by a 39-0 vote and the Governor is expected to sign shortly. MR. MANLEY stated LLCs blend corporate and partnership tax and operational characteristics. LLCs provide a flexible operating system and a federal income tax advantage to the members. LLCS provide a state planning advantage. LLCs facilitate foreign investment, because nonresident aliens may not be subchapter S corporation shareholders. Double taxation is avoided. MR. MANLEY mentioned LLCs will mostly replace subchapter S corporations and partnerships. He directed to the question of how many companies will change over to LLCs. He answered few, if any regular corporations will change over because the transactual and tax cost of changing would be too significant. Some partnerships, however, will change over. MR. MANLEY directed to the question about the uncertainty of tax classification. He answered the IRS does not like to issue blanket rulings. He noted that the Alaska version of the Uniform Limited Partnership Act adopted in 1992, the IRS has still not issued a ruling as to whether it will be classified as a partnership for tax purposes. IRS moves at its own pace and speed. He stated their working group has already opened informal communication with the IRS and they have indicated they will open a revenue ruling project. Therefore, any uncertainty as to tax classification should be resolved promptly. Number 224 CHAIRMAN VEZEY commented under the current corporate structure, the "corporate shield" is getting thin. Corporate officers now go to jail and boards of directors are now held liable. He asked how current structure would compare to shield provided by the LLC structure. Number 238 MR. MANLEY answered he did not believe the LLC would offer any greater shield. While the operating systems may be a little bit different, people will still be "tagged" in some circumstances, for their own individual acts. Number 256 CHAIRMAN VEZEY mentioned anyone who sits on a board of directors, needs to give consideration to a director's liability insurance policy. Number 263 MR. MANLEY responded, "absolutely." Even with a person serving on a nonprofit volunteer board handling significant amounts of money, is very important to maintain liability insurance. He noted Alaska's corporate code allows corporations to indemnify members to the board of directors. LLC structure does likewise. Number 278 CHAIRMAN VEZEY asked if all partners in an LLC would need to carry a partners liability insurance policy. Number 281 MR. MANLEY answered a LLC can be operated either member- managed or manager-managed. In a manager-managed LLC, he believed it would be appropriate for the manager to secure directors and officers insurance or an equivalent. In a member-managed LLC, he believed some businesses may opt not to because they had previously operated with partners without any protection. He noted protection is prudent. Number 300 PETER BRAUTIGAN, CORPORATE SHAREHOLDER, commented on CSSSHB 420 from the Anchorage teleconference site. He stated his practice entails business and transactional tax planning, along with significant estate planning. He sees the LLC as a viable alternative for many clients. LLC structure is being considered in ventures proposed in Alaska that have been organized in other states. LLCs are important for commerce in the long run. There are no limitations as to the number of investors, thereby trusts and other partnerships can be involved in the LLC. LLCs also allow participation in management, which would not regularly be allowed under a limited partnership theory. MR. BRAUTIGAN addressed the question regarding the corporate veil. He answered the LLC would not provide anymore protection for its investors than a corporation already has. Typically, there are numerous clients who do not maintain their corporations, thereby making it more difficult for them to be protected from liability. He noted as long as the corporation is maintained, the corporate veil will protect the investors' personal assets from the liabilities. MR. BRAUTIGAN stated the types of businesses interested in LLCs are entities from other states that have LLC legislation. Specifically, mining ventures, fishing operations, and entities that want to invest through trust or other partnerships. Number 362 CHAIRMAN VEZEY questioned director liability versus LLC partner liability. He stated individual members of boards of directors are held liable particularly for taxes. How would this transfer over to a LLC partnership. Number 370 MR. BRAUTIGAN clarified CHAIRMAN VEZEY was questioning the 100 percent penalty imposed by the IRS, Section 6672 of the Internal Revenue Code. This section states if a director, officer, or manager of the corporation directs funds to someone other than the IRS, relating to withholding taxes, they can be held responsible for the payment of those taxes. This same rule under federal law would apply to a LLC. He was not aware of them being held liable for other taxes of a corporation. Number 383 CHAIRMAN VEZEY agreed he had been referring to withholding taxes. He questioned if the manager did not make a withholding payment, and members of the board are fiducially responsible, how would it translate to a LLC. MR. BRAUTIGAN answered under current federal law a person who is responsible for making the withholding payments, who wilfully failed to pay them to the IRS, can be held responsible for the payments. Therefore, the same law applies to both a regular corporation under current status and to the LLC members. Number 400 CHAIRMAN VEZEY stated his interpretation is that the boards of directors are expected to exercise responsible oversight, and failure to do that is usually interpreted as intentional neglect. MR. BRAUTIGAN responded, from his experience with Section 6672, there has to be a flagrant disregard for the rules before the IRS will hold a person responsible. The IRS frequently claims flagrant violations; however, it usually ends up that the person either did not have the responsibility or did not willfully make the payment to someone other than the IRS. MR. BRAUTIGAN stated the example that he now sits on a board of directors; however, he does not have the authority to sign checks. Therefore, he could not be held responsible. Number 415 CHAIRMAN VEZEY clarified this analogy would extend over to the LLC. MR. BRAUTIGAN responded "absolutely." Number 418 REPRESENTATIVE THERRIAULT addressed the potential impact to the state treasury from the loss of corporate taxes. He did not believe this loss would be experienced. Because of the difficulty involved in transferring from the corporate structure to the LLC structure, he did not expect any corporations to make a structural change. Businesses that would most likely choose the LLC structure he felt would be those which would have chosen subchapter S or partnership structure on which there are no state corporate taxes applied. Therefore, the state treasury should not be impacted. When a business reaches the size where it would have paid any kind of significant corporate taxes, he believed that business would still want a pure corporate structure. Number 436 CHAIRMAN VEZEY commented corporate taxes are a misnomer because they do not just apply to corporations, they apply to any business entity. If the business has a profit operating under a business license, it would be subject to the corporate tax. He assumed that a LLC retaining earnings would be subject to the same tax. REPRESENTATIVE THERRIAULT replied the business would be treated just as a partnership would for taxes. Number 447 CHAIRMAN VEZEY questioned how a LLC would ever accumulate capital and retained earnings. Number 450 BRYAN DURRELL, CERTIFIED PUBLIC ACCOUNTANT and LAWYER, BOGLE & GATES, answered questions on CSSSHB 420. He stated taxes, under Alaska state law, the only income taxes are assessed against regular or C corporations. S corporations made the special election under the federal Internal Revenue Code to be taxed as if they were akin to a partnership, a flow through tax where the profits and losses are allocated to the shareholders. S corporations and partnerships are not subject the Alaska income tax, only C corporations. MR. DURRELL addressed CSSSHB 420 where a LLC would be formed. He stated there would be an option of the organizers to structure it either as a corporation subject to tax, or as a partnership. He believed most will opt for partnership structure for the primary tax advantage. An LLC organized as a partnership would not be subject to tax. Income would be allocated to the members and they would not have to pay taxes on it. Number 492 CHAIRMAN VEZEY clarified for a LLC, partnership, or an S corporation to accumulate capital or retained earnings, the individual partners would have to pay the taxes on the retained earnings. Number 497 MR. DURRELL affirmed CHAIRMAN VEZEY. The individual members of the LLC would pay taxes on any allocable share of the profits. Whether they were retained earnings or capital, or if they were distributed it would not matter. Number 501 REPRESENTATIVE ULMER inquired, in trying not to have a significant revenue impact to Alaska, which kinds of companies may opt to use the LLC structure in the future, thereby potentially reducing state revenues. She noted the mining and fishing companies trying to avoid state corporate income taxes. Number 519 MR. DURRELL responded he did not believe there would be any significant loss of tax revenues to the state. Mining and fishing companies which have worked within the corporate structure, could use the LLC structure. He noted they would replace their corporate structure they currently have with the LLC structure. A joint venture structure would be replaced. MR. DURRELL mentioned the example of the organization of the Greens Creek Mine, originally the largest silver mine in the United States. A joint venture was originally selected to organized by because it would give them pass through tax benefits. Mining companies could make their investments in Alaska more efficient using a LLC because they would still have the pass through tax benefits, and the limited liability aspect would be an added attraction. He explained in order to go into a project like Greens Creek, they have to form a corporate subsidiary which holds the joint venture interest in order to get limited liability. The result is a half a dozen publicly held corporations, each with fully owned subsidiaries, and each are joint venture partners. Under the new format, the corporations can avoid the intermediary fully owned subsidiary. In an LLC, they can have a membership interest without any impact on tax revenues to the state. Number 558 CHAIRMAN VEZEY asked if REPRESENTATIVE ULMER wanted to hold CSSSHB 420 for further review. REPRESENTATIVE ULMER affirmed CHAIRMAN VEZEY. Number 563 REPRESENTATIVE THERRIAULT asked when CSSSHB 420 would be reheard and if it would make the deadline for moving house bills to house rules. Number 566 CHAIRMAN VEZEY answered CSSSHB 420 would not make the deadline because it would be reheard next Thursday. He noted the companion bill in the Senate. Number 567 REPRESENTATIVE THERRIAULT pointed out the Senate bill had been held waiting the arrival of CSSSHB 420. Number 570 CHAIRMAN VEZEY noted CSSSHB 420 as a major piece of legislation and believed there would not be a problem getting a waiver for the internal rule. Senate bills will be heard until April 20. If he requested it, he believed a one-week extension would be granted. CHAIRMAN VEZEY held CSSSHB 420 in committee. (REPRESENTATIVE ULMER left the meeting at 9:31 a.m.) HB 393 - UNINCORPORATED COMMUNITIES CAPITAL PROJECT GRANT CHAIRMAN VEZEY opened HB 393 for discussion. He stated information had been prepared to answer questions about financing additional cities. He asked JOE RYAN for an explanation of the report. Number 595 JOE RYAN, STATE AFFAIRS COMMITTEE AIDE, explained the report on HB 393. He stated there had been concern from the Fairbanks North Star Borough as to whether it would lose revenue if HB 393 went into effect. He discussed the concern with Judi Slajer, Chief Financial Officer, Fairbanks North Star Borough, who felt there would be an approximate 10 percent loss, or perhaps $120,000 less moneys. MR. RYAN stated the report (on file) illustrates what the allocations would be. He understood the legislative function would be that two programs will be set up, whereby certain amounts of funds will be allocated to the rural program and other amounts will be allocated to the other programs. The report breaks down what each community would be eligible to receive, examining grant number, population, matching amount and grant, if HB 393 goes into effect. MR. RYAN stated he was unable to answer whether the percentage of grant would be reduced for the smaller communities. He noted a 30 percent reduction for the larger communities. Number 619 CHAIRMAN VEZEY clarified the report illustrates how the program would distribute if HB 393 became law. He noticed there was not a comparison of current status. Number 624 MR. RYAN commented there have been several people out sick from different departments, therefore he has had difficulty getting comparative data. Number 631 CHAIRMAN VEZEY stated the extra grants to the unincorporated communities within boroughs would be allocated out of the total program receipts. MR. RYAN clarified the allocation is made by the legislature. He stated the distribution formula is based upon population figures, with central pie. If the population in a borough was reduced or not counted, they would proportionately receive less money. Additional communities figured in individually would subtract from the total population figure, thereby the share of the pie for the larger community would proportionately reduce. Number 641 CHAIRMAN VEZEY estimated the formula appears to allocate in boroughs about $10 per citizen. For example, presently if Salcha represented 400 people in the Fairbanks North Star Borough (FNSB), the borough would receive $4,000. Under HB 393, if Salcha was eligible, it would receive $25,000, reducing the money available in the pool. Number 645 MR. RYAN added the population of the FNSB would be reduced. (REPRESENTATIVE KOTT left the meeting at 9:39 a.m.) Number 658 REPRESENTATIVE GARY DAVIS agreed HB 393 would reduce the amount to the borough; however, in most cases the borough would already have a project they were funding in that unincorporated area. MR. RYAN pointed out HB 393 hinges on legislative appropriation because, from his understanding, there will be two appropriations. Number 674 CRYSTAL SMITH, ALASKA MUNICIPAL LEAGUE, commented on HB 393. She stated there are two concerns about HB 393: 1) funding within a borough would shift from the borough to the unincorporated communities - organized to unorganized government structure; and 2) in the absence of additional funding and the letter of intent from the Community & Regional Affairs Committee, the effect of adding several unincorporated communities would be to reduce every incorporated community's share of the total appropriation. She noted there is a net need for additional funds, or a net decrease for municipal governments. HB 393 is another example of a disincentive to the organization of local government. (REPRESENTATIVE OLBERG left the meeting at 9:40 a.m.) (REPRESENTATIVE KOTT returned to the meeting at 9:40 a.m.) Number 692 CHAIRMAN VEZEY clarified HB 393 would be a good policy if the legislature was looking for a method to go to something other than organized boroughs. Number 693 MS. SMITH stated she would not say that, but HB 393 is another disincentive for people to organize or keep organized. Number 695 CHAIRMAN VEZEY recognized the joint session starting at 9:45 a.m. HB 393 was held in committee. ADJOURNMENT CHAIRMAN VEZEY adjourned the meeting at 9:43 a.m. BILLS NOT HEARD HB 530 - REQUIRED REPORTS OF STATE AGENCIES