Legislature(2005 - 2006)SENATE FINANCE 532
04/15/2005 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB131 | |
| SB16 | |
| SB158 | |
| SB88 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 66 | TELECONFERENCED | |
| += | HB 67 | TELECONFERENCED | |
| += | SB 130 | TELECONFERENCED | |
| + | SB 131 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | SB 16 | TELECONFERENCED | |
| += | SB 88 | TELECONFERENCED | |
| += | SB 112 | TELECONFERENCED | |
| += | SB 158 | TELECONFERENCED | |
| += | SB 147 | TELECONFERENCED | |
MINUTES
SENATE FINANCE COMMITTEE
April 15, 2005
9:06 a.m.
CALL TO ORDER
Co-Chair Green convened the meeting at approximately 9:06:30 AM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Bert Stedman
Senator Lyman Hoffman
Senator Fred Dyson
Senator Donny Olson
Also Attending: SENATOR CHARLIE HUGGINS; JANE ALBERTS, Staff to
Senator Con Bunde; GREY MITCHELL, Director, Division of Labor
Standards & Safety, Department of Labor and Workforce Development;
DOUG LETCH, Staff to Senator Gary Stevens; JEFF OTTESEN, Director,
Division of Program Development, Department of Transportation and
Public Facilities; KATHIE WASSERMAN, Alaska Municipal League
Attending via Teleconference: From Offnet Sites: JOHN SEDOR,
Anchorage Society for Human Resource Management; KAREN ROGINA,
President & CEO, Alaska Hospitality Alliance; JACK AMON, Co-Owner,
Marx Brothers Café and Marx Brothers Café Catering, and Member,
Alaska Hospitality Alliance; From Anchorage: STEVE BOYD, Alaska
Chapter, National Electrical Contractors Association
SUMMARY INFORMATION
SB 131-WAGE & HOUR ACT: EXEC/PROF/ADMIN/SALES
The Committee heard from the bill's sponsor, the Department of
Labor and Workforce Development, and took public testimony. One
amendment was adopted and the bill reported from Committee.
SB 16-POWERS/DUTIES DOTPF/TRANSPORTATION PLAN
The Committee heard from the bill' sponsor and the Department of
Transportation and Public Facilities. The bill reported from
Committee.
SB 158-MUNI TAX ON STATE CONSTRUCTION CONTRACTS
The committee heard from the bill's sponsor, the Department of
Transportation and Public Facilities, and took public testimony.
The bill reported the bill from Committee.
SB 88-POLICY ON GENERAL FUND REVENUE SHORTFALL
The Committee heard from the bill's sponsor and reported the bill
from Committee.
SB 112-TAX ON REAA RESIDENTS
This bill was scheduled but not heard.
SB 147-SPORT FISHING FACILITY REVENUE BONDS
This bill was scheduled but not heard.
CS FOR SENATE BILL NO. 131(L&C)
"An Act amending the Alaska Wage and Hour Act as it relates to
the employment of a person acting in a supervisory capacity or
in an administrative, executive, or professional capacity;
relating to definitions under the Alaska Wage and Hour Act and
providing definitions for persons employed in administrative,
executive, and professional capacities, for persons working in
the capacity of an outside salesman, for persons working in
the capacity of a salesman employed on a straight commission
basis, and for persons that perform computer-related
occupations; and providing for an effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
JANE ALBERTS, Staff to Senator Con Bunde, the bill's sponsor, read
from the sponsor statement as follows.
Alaska's Wage and Hour Act (AS 23.10.050 - 23.10.150)
establishes the provisions for overtime compensation. AS
23.10.055 sets forth exemptions to the Wage and Hour Act. One
of these exemptions is "an individual employed in a bona fide
executive, administrative or professional capacity or in the
capacity of an outside salesman or a salesman who is employed
on a straight commission basis".
As currently defined in our administrative code, the
definitions of "executive capacity," "administrative
capacity," and "professional capacity" are confusing and
difficult to interpret. In order to determine if someone is an
executive, administrative or professional employee, you have
to use what is known as the "long test." In addition to
numerous other factors, the long test includes a calculation
of the employee's time spent on "non-exempt work" (i.e. work
that is not executive, administrative or professional). If an
employee spends more than 20 percent (40 percent in retail or
service establishments) of their time on non-exempt work, they
become subject to the Wage and Hour Act and can qualify for
overtime. The ambiguity within the definitions, including the
implementation of the 80/20 test, has lead to numerous wage
and hour lawsuits, causing great expense to employers and
employees.
HB 182 deletes the 80/20 test and sets forth definitions which
are much more understandable. The simplicity provided by the
new definitions will lead to greater compliance with the
statute. It is in the best interests of both the employer and
employee that the statutes are straightforward, practical and
easy to follow.
HB 182 also clarifies another area of confusion in the Wage
and Hour provisions. Currently, a person acting in a
"supervisory capacity" is exempt from payment of overtime, but
not exempt from the full Wage and Hour Act. The definition of
"supervisory capacity" in the regulations is also ambiguous
and difficult to interpret. HB 182 removes this exemption from
statute. There are two reasons for deletion of the provision.
The first reason is that due to the uncertainty in
interpretation of the definition, the statue is currently
unworkable. Secondly, the new definitions of "executive
capacity" and "administrative capacity" would subsume a person
working in a supervisory capacity. Therefore, there is no need
to have a separate provision.
Enacting this bill will eliminate ambiguities, align Alaska
more closely with other states and reduce the number of
frivolous lawsuits, while protecting workers' rights to
receive overtime.
[NOTE: References to HB 182 should be correctly interpreted as
references SB 131]
Ms. Alberts informed the Committee that a forthcoming amendment
would address the application of the proposed law.
Co-Chair Green noted that Senator Bunde, although absent, has
provided the forthcoming amendment.
Senator Hoffman asked for further information about which states
Alaska would be aligned were this legislation adopted.
Ms. Alberts deferred to Mr. John Sedor of the Anchorage Society for
Human Resource Management.
JOHN SEDOR, Anchorage Society for Human Resource Management (ACHRM)
testified via teleconference from an offnet site and noted that the
ACHRM, which represents 200 business members, as well as the
Society for Human Resource Management Alaska State Council, with
approximately 250 business members, support this legislation. In
response to Senator Hoffman's question, he stated that this bill
would, foremost, align Alaska with federal system guidelines.
Currently, Alaskan private employers and employees must comply with
two sets of overtime standards: federal standards and State
standards. This bill would move Alaska toward a single unified
system for overtime, consistent with the federal Fair Labor
Standards Act (FLSA). Thirty-two of the fifty-one jurisdictions in
the nation, including the District of Columbia, defer solely to the
federal standard. Eight others defer to a standard known as the
"short test" rather than "the 80/20 test" that is applied in
Alaska. In effect, were this legislation adopted, Alaska would
mirror or be consistent with 40 of the 51 jurisdictions. Alaskan
employers and employees would benefit by not having to apply two
different standards to exempt executive, administrative and
professional employees' hours each week.
Co-Chair Green understood that this information is included in
Members' packets.
Mr. Sedor affirmed that this information is included in a handout
titled "State by State Overtime Comparison, completed Spring, 2004
By: John M. Sedor" [copy on file].
Co-Chair Green stated that a breakout of states' standards is
included in the handout.
Senator Dyson surmised that the onus of adhering to the current
standard has "more impact" on small enterprises than larger ones.
Mr. Sedor replied that currently, any business "regardless of size"
that has exempt employees and desires to conduct business in the
State, must comply with two sets of standards. To that point, any
business operating in Alaska as well as in other jurisdictions is
required to establish a separate process for addressing Alaska's
set of exempt employees standards. Smaller businesses are
"especially impacted because the increased cost of administration
is more difficult to bear on a small business than a larger
business".
Senator Dyson acknowledged the administrative impacts mentioned by
Mr. Sedor, and further questioned this issue's impact on small
businesses' manpower allocations in that an employee of a small
business might be required to work in a "supervisory and leadership
role" in addition to conducting "routine and manual labor duties"
due to a limited employee base. Applying the exempt standard in
this scenario is difficult.
Mr. Sedor concurred that the existing statutory language is
especially impacting to small businesses. People who are employed
at an executive, administrative or professional exempt level "are
hired to accomplish duties … and complete tasks". The time it might
take to do something should be "irrelevant in the actual business
model". The current law forces both sides into either maintaining
"journals or requiring time entries that say" that the person spent
six minutes making a pot of coffee, twelve minutes driving to the
store; eight minutes reviewing people's work for the day; or two
minutes opening the door. This legislation would move the existing
mode of interpreting the exempt status "from a time-based
unmanageable system" toward a system of a "primary or duties-based
test where people are employed to do duties and that is what the
courts would consider in determining whether or not they are
exempt".
Senator Dyson acknowledged the response.
Senator Olson asked whether this legislation would align with FLSA.
Mr. Sedor replied that certain aspects of Alaska's overtime
standards differ from the federal standard. The federal standard is
40 hours a week whereas the Alaska standard is eight hours a day or
40 hours a week. This legislation would substantially move Alaska
closer to the FLSA exempt definitional standards in regards to
executive, administrative, and professional employees. Employers
would only be required "to apply one test rather than two and that
test is a duties based test". The State however would not be one of
the 32 states that defers entirely to the federal FLSA. This
legislation would provide an answer to the question "what is unique
about overtime in Alaska?" The answer, in his perspective, is that
Alaska pays higher wages than the rest of the nation. Therefore, to
qualify for an exemption, Alaskan businesses must compensate an
exempt administrative, executive or professional employee with a
rate that is "two times the minimum" wage. Therefore, an exempt
employee's salary in Alaska would be higher than the federal exempt
wage requirement.
Senator Olson asked whether the business community supports that
salary requirement.
Mr. Sedor responded that members of both the Anchorage Society for
Human Resource Management and the Society for Human Resource
Management Alaska State Council support this legislation.
In response to a question from Co-Chair Green, Mr. Sedor specified
that he had concluded his remarks and would be available to answer
any further questions.
Amendment #1: This amendment inserts new language in the bill
title, following the word "occupations;" on page one, beginning on
line seven, as follows.
directing retrospective application of the provisions of this
Act to work performed before the effective date of this Act
for purposes of claims filed on or after the effective date of
this Act, and disallowing retrospective application for
purposes of claims for that work that are filed before the
effective date of this Act;
In addition, a new bill section is inserted on page five, following
line 30 as follows.
Sec. 6. The uncodified law of the State of Alaska is amended
by adding a new section to read:
APPLICATION AS TO WORK PERFORMED BEFORE THE EFFECTIVE
DATE OF THIS ACT. (a) This Act applies retrospectively to work
performed before the effective date of this Act for purposes
of any claim or proceeding based on AS 23.10.050 - 23.10.150
(Alaska Wage and Hour Act) that is filed on or after the
effective date of this Act.
(b) This Act does not apply to work performed before the
effective date of this Act for purposes of any claim or
proceeding based on AS 23.10.050 - 23.10.150 that is filed
before the effective date of this Act.
Co-Chair Wilken moved on behalf of Senator Bunde, to adopt
Amendment #1.
Co-Chair Green objected for explanation
Ms. Alberts explained that this amendment would provide the
effective date for the application of the new primary duty-based
standards. The current 80/20 State standard would be applied to any
claim brought before that date and the new primary duties-based
standard would be applied to any claim submitted after the
effective date.
9:20:22 AM
Mr. Sedor affirmed Ms. Alberts' remarks. A two-year "rolling week-
by-week" statute of limitations applies to overtime lawsuits. This
amendment specifies that, after the effective date, the rules
specified in SB 131 would be applied to the entire claim for events
up to two-years. This would allow one rule to be applied to the
claim rather than having a debate about which weeks would be argued
under the current standards and which weeks would be argued under
the new standards. This is "an extremely practical approach to this
issue".
Co-Chair Green removed her objection and noted that this amendment
would incur a title change.
There being no other objection, Amendment #1 was ADOPTED.
9:22:43 AM
KAREN ROGINA, President & CEO, Alaska Hospitality Alliance,
testified via teleconference from an offnet site to voice the
Alliance industry's support of this legislation. She asked that the
Committee also support the bill. Not only is this an important bill
for the hospitality industry, it is important to all employers with
exempt employees, as it would apply a single set of standards,
which would be easier to understand and comply with. Because the
current Alaska exemption status is time-based, an employee's
eligibility is determined by how the employee spends their time.
This bill would change the definition of exempt status to one based
on primary duties. This would better reflect "real life workplace
roles". Business owners and operators should be able to rely on
exempt workers to deliver results without being required "to
micromanage" exactly those employees are spending their time.
Oftentimes, a business owner or operator is not on site and is,
therefore, "unable to ascertain just what their employees are
doing. Instead they must manage by results achieved." Labor
attorneys would support the fact that "this is one of the most
litigated areas of wage and hour law".
Ms. Rogina shared an example of a wage and hour dispute, which
involved a prominent Kenai Peninsula hotel and its food and
beverage director who "was considered exempt". The director oversaw
a $750,000 budget and was responsible for hiring, firing, staffing,
and the overall food, beverage, and catering responsibilities of
the hotel. Upon that person's termination, she produced a "log"
that detailed "by the minute how she spent her time each day". Due
to a combination of "the seasonality changes" inherent to the
hospitality industry and the employer's desire to provide year-
round employment, there are times during the year when that
employee could have bused a table or seated guests. However, her
primary duties, for the most part, were those of an exempt
employee. This lawsuit cost the employer thousands of dollars and
almost put the hotel out of business. The hotel was "at a total
loss of being able to prove otherwise" as it had not kept track of
how the person had spent her time "by the minute" since she was a
salaried employee. As a consequence of that lawsuit, the hotel now
hires only hourly employees. That is the impact of the current
standard on the industry. It is detrimental to employees as well,
as, absent "a clearer definition of who is exempt and who is not",
employers are denying their executive, professional, and management
staff access to such things as better health insurance benefits
that could otherwise be offered to them because "they are not a
segregated group that could be classified differently". In
conclusion, this legislation would benefit both employees and
employers.
9:25:42 AM
JACK AMON, Co-Owner, Marx Brothers Café and Marx Brothers Café
Catering, and Member, Alaska Hospitality Alliance, testified via
teleconference from an offnet site in support of the bill. The
proposed changes regarding the exempt employee definition would be
"a great step forward in modernizing Alaska's labor laws to more
accurately reflect the current workplace"; specifically in regards
to exempt employees in the hospitality and food service industries
and in small businesses where both the employer and the employees
"wear many hats". Alaska's 80/20 definition "is so onerous and
restrictive that it has forced most operators to keep all
employees, including those who head departments or supervise
others, hourly. This results in negative impacts to both the
employer and the employee" who might be the highest skilled and
highest paid worker. As benefit costs increase, employers have been
required to change their benefit plans to the effect that an
employee must be salaried in order to qualify.
Mr. Amon noted that two of his twelve restaurant employees would
qualify as salaried employees as opposed to hourly employees under
the new standards proposed in this bill. In his opinion, an
employee with the authority to hire and fire and who is responsible
for the work of others should be considered managers regardless of
whether they work from behind a stove or behind a desk. He warned
that this legislation might be interpreted by some as an
opportunity through which employers could "cheat hardworking
employees out of legitimate overtime; however, nothing could be
further from the truth. In order to run a successful business, "it
is essential" that quality employees are properly compensated for
their skills. Such employees know that their skills are in demand
and would not remain with an employer who attempted to take
advantage of them. "The flexibility" offered by this legislation
would allow "compensation arrangements" that would be beneficial to
both the employee and the employer.
9:28:37 AM
GREY MITCHELL, Director, Division of Labor Standards & Safety,
Department of Labor and Workforce Development spoke in support of
the bill, as it "would streamline the complex set of criteria for
establishing overtime exemptions". One example of the 80-percent
test is that under the current regulations, there is a fallback
test, which requires only a 60-percent test when applied to service
and retail establishments. However, there is a provisional
requirement that the employee earn at least two times the federal
minimal wage for the first 40 weekly work hours. Thus, while a
minimal salary provision currently exists, it only pertains to the
service and retail industries and only when applied to the 60-
percent rather than 80-percent test. The Division's staff has
occasionally experienced difficulty in explaining this to employers
and employees. The proposed legislation would assist the Division
in alleviating the often difficult "burden" of explaining the
existing 80/20 Exempt Status Test to both employees and employers.
Senator Stedman understood that this is a complex issue that even
larger employers have trouble deciphering. Currently, employers
could be subject to litigation involving "a revolving multi-year
timeframe".
Mr. Mitchell affirmed that this issue "has caused litigation".
Years could pass before an employer might "find themselves at odds
with the requirements". Sometimes, employees know the rules and
start spending more than 20-percent of their time making coffee and
other non-managerial duties and deliberately "put their employers
in a difficult position, based on the complexity of the current
definitions".
Co-Chair Green asked whether this legislation would also simplify
regulations.
Mr. Mitchell replied that the legislation would remove the burden
of issuing regulations because it would allow the Department "to
simply adopt the federal regulatory definitions".
Senator Olson, observing that no one has spoken against the bill,
asked the reason that "it took so long" for it to be presented.
Mr. Mitchell replied that he could not provide the answer to the
question.
Senator Olson noted that he had experience in the retail service
area, and to that point, asked the reason that the 60/40 percent
standard rather than the 80/20 standard is applied to that
industry. Furthermore, he inquired whether this is addressed in the
bill.
Mr. Mitchell responded that the 40-percent test was established as
a fall-back from the 80-percent standard as a result of concerns
raised by those affected industries. The concerns being voiced
today echo those earlier concerns. It is difficult to adhere to the
current standards in those businesses where you need the manager to
jump in and perform production related tasks in order to manage the
business.
In response to a question from Co-Chair Green, Senator Olson stated
that he is in support of the legislation.
Co-Chair Green voiced support for it as well.
Co-Chair Wilken moved to report SB 131, as amended, from Committee
with individual recommendations and accompanying fiscal notes.
There being no objection, CS SB 131 (FIN) was REPORTED from
Committee with previous zero Fiscal Note #1, dated March 14, 2005
from the Department of Labor and Workforce Development.
CS FOR SPONSOR SUBSTITUTE FOR SENATE BILL NO. 16(TRA)
"An Act relating to the powers and duties of the Department of
Transportation and Public Facilities; repealing the
requirement for a long-range program for highway construction
and maintenance; and repealing a requirement that public
facilities comply with energy standards adopted by the
Department of Transportation and Public Facilities; and
providing for an effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
DOUG LETCH, Staff to Senator Gary Stevens, the bill's sponsor,
informed the Committee that this legislation would either eliminate
or update several obsolete statutes relating to the powers of the
Department of Transportation and Public Facilities. Specifically
the bill would remove the burden of conducting a cost benefit
analysis for each of the Department's projects, regardless of size.
This cost-effectiveness analysis requirement has provided
opportunities for project opponents to sue the State. The bill
contains several key provisions that would change the powers and
duties of the Department to bring those statutes in line with the
Department's practice of today. There is widespread support for
this legislation, as indicated by the letters of support included
in the Member's backup material. He asked that any technical
questions regarding this legislation be directed to the Department.
9:35:51 AM
Senator Stedman understood that one of the bill's provisions would
exclude the cost effective analysis for local service area
projects. He asked for further information in this regard.
9:36:24 AM
JEFF OTTESEN, Director, Division of Program Management, Department
of Transportation and Public Facilities, stated that the language
in question is located in Section 5, subsection (e), page six,
beginning on line five of the bill. Subsection (e) reads as
follows.
(e) In evaluating new highways, airports, terminals, ferries,
and other major components for inclusion in the plan, the
commissioners shall prepare a cost-effectiveness analysis
using a consistent methodology. A cost-effectiveness analysis
is not required for a project that involves the rehabilitation
and maintenance of an existing transportation system or that
primarily serves local transportation needs.
Mr. Ottesen clarified that the cost benefit analysis would not be
required for the rehabilitation and maintenance of a variety of
existing projects or that are essentially local in nature such as
local roads, local trails, buses, and vans for senior centers.
Conducting such analyses is currently a burden on the Department.
Senator Stedman asked for further information regarding the "local"
exemption; specifically whether it would pertain to such things as
roads on islands.
Mr. Ottesen responded that the bill's sponsor, working in
conjunction with the Department, deliberately drafted a short bill
with the determination that the specifics would be addressed in
regulations. "Generally speaking, a local road would be
transportation within a borough that basically moves people from
one part of a borough to another, be it on an island or be it on a
part of the mainland". This would include National Highway System
(NHS) routes, major airports, and major port facilities that
connect the State. The cost effectiveness requirement would be
required on any "major new facilities, with new being the key word
here, that are not local in nature. The trouble with the current
statute, which was developed in 1977, is that it is now being used
as a club to halt projects. It applies to anything". The cost
benefit analysis requirement applies to projects approved by the
Legislature, projects approved by voters, or even a transit van for
a senior citizen center. It also applies to such things as training
programs and other things to which determining how to develop a
cost benefit analysis would be difficult. The goal is to exempt
local roads and activities from "this burdensome" cost benefit
analysis.
Senator Stedman opined that, "by that definition, all the roads in
Southeast Alaska would be excluded" from the exemption, as none of
the roads are tied together. The majority of the roads are on
islands.
Mr. Ottesen clarified that the NHS connection definition would
apply to a variety of roads in Southeast Alaska. In Ketchikan it
would apply to the ferry from the airport to town; in Juneau it
would apply to Egan Drive between the airport and downtown. Most of
the other roads in Juneau and similar roads across the State "would
be excepted".
Senator Olson inquired to the two accompanying zero fiscal notes:
Fiscal Note #1, dated March 22, 2005 from the Department of Public
Safety and zero Fiscal Note #2, dated March 21, 2005 from the
Department of Transportation and Public Facilities. It would be
expected that this legislation would save the State money.
Mr. Ottesen responded that there would be cost savings in that
"more money would be spent on pavement and less money spent on
process". The amount of money that the Department is allocated is,
in its entirety, reflected in the budget; however, now it is being
divvied up "to support economists and planners to conduct
processes" rather than building projects.
Co-Chair Green understood therefore that the funds would be more
project specific.
Mr. Ottesen responded that the total amount received would not
change.
Senator Dyson questioned whether, "aside from the standards that
are applied to really minor sorts of things", some federal
standards in regards to such things as thermal and lighting
analysis on highways are really inappropriate because of such
things as the State's environment and population densities.
Mr. Ottesen responded that the State's responsibility in regards to
thermal standards and lighting standards were incorporated in
statute in the 1970s at a time when the nation was undergoing its
first energy crisis. The Department was designated as the entity to
have that oversight; however, over time, the Department's role in
"the building world" has diminished and the Department no longer
conducts building projects for municipalities or schools for Rural
Educational Attendance Areas. National entities rather than the
Department set standards, which are then adopted by local building
codes. The Department's role in that entire arena has simply
evaporated yet the statute remains the same. This legislation is an
attempt to conduct some housekeeping."
Co-Chair Wilken moved to report the bill from Committee with
individual recommendations and accompanying fiscal notes.
There being no objection, CS SSSB 16 (TRA) was reported from
Committee with zero Fiscal Note #1, dated March 22, 2005 from the
Department of Public Safety and zero Fiscal Note #2, dated March
21, 2005 from the Department of Transportation and Public
Facilities.
9:42:54 AM
SENATE BILL NO. 158
"An Act prohibiting the imposition of municipal sales and use
taxes on state construction contracts and certain
subcontracts; and providing for an effective date."
This was the second hearing for this bill in the Senate Finance
Committee.
SENATOR CHARLIE HUGGINS, the bill's sponsor, explained that
business conducted in this State should occur in a stable and
predictable climate. "A known" incident that "highlights the
difficulty" encountered when this is not the case was when a
subcontractor, conducting an approximate $400,000 State contract,
was levied a $20,000 tax assessment from a local community.
Senator Huggins continued that that incidence is becoming "a
trend", as addressed in an Alaska Municipal League correspondence
[copy not provided], which noted that three communities have
adopted "a policy of collecting sales taxes from subcontractors
doing business in their community regardless of the funding
source". Those communities have retained legal representation in
this regard. He warned that while the practice might be limited
today, without being addressed, it could become a statewide issue.
The potential cost of this practice "would place an undue burden on
the State; it would be "unfair to contractors" were the Legislature
"not to correct that situation". The solution proposed in this bill
is simple: it would work for all parties; it would create a stable
business environment; it would protect the State; and would clarify
the rules in this regard going forward. "It is not punitive and
does not seek to recoup any monies".
9:46:09 AM
STEVE BOYD, Alaska Chapter, National Electrical Contractors
Association (NECA), testified via teleconference from Anchorage,
and noted that he was available to answer questions.
9:46:21 AM
KATHIE WASSERMAN, Alaska Municipal League, spoke against the bill.
She stressed that, "no municipality in the State taxes a contractor
on a State job. This issue is about the tax imposed on a
subcontractor, hired by the contractor". This legislation could
expand the exemption to such things as the hotel bed tax or the
meal tax charged to contractors while performing a State job. It
could also "be extended to include a subcontractor hired by the
subcontractor that is hired by the contractor. Sales tax is a local
provision" and, therefore, "local governments should exert local
control over those taxes. Restrictions on local sales taxes"
currently exist through the local election process. The State has
curtailed its municipal support that came in the form of such
things as revenue sharing and capital matching grants while local
community expenses relating to such as fuel and the Public
Employees' Retirement System and the Teachers' Retirement System
(PERS/TRS) have increased "dramatically". "Tax revenue is one of
the few remaining revenue streams left to communities". Even
thought the State is exempt from municipality property taxes, State
"properties receive the same benefits and services as local
property" taxpayers do. The decision as to whether or not to tax
subcontractors should be made by the municipality. Were the
imposition of such a tax to have "a detrimental affect on the
economy of the community", local elected officials should initiate
changes to those ordinances.
Ms. Wasserman stated that the terms "consistency" and "stability"
have been used throughout this legislation's proceedings, "yet the
State has chosen not to impose any State taxes". That decision has
been left to local communities. It would be impossible to
incorporate a consistent taxation methodology as the more than 190
communities that do tax have "different needs, different resources,
different locations; there is not and cannot be consistency in
taxing". Oil companies that operate globally must familiarize
themselves with different tax structures in each locale. "A
nationwide tax would be more consistent, probably make things
easier for oil contractors, but would it be great for the State of
Alaska?"
Ms. Wasserman reminded the Committee that the majority of
Department of Transportation and Public Facilities (DOT) projects
are conducted in either Anchorage or Fairbanks. The concern about
large taxation on DOT projects therefore should be alleviated
because neither of these two communities imposes sales taxes. In
addition, most airport projects occurring in the Sate are typically
92 percent to 100 percent funded through Federal Aviation Agency
(FAA) funds rather than State funding. In conclusion, AML is
requesting that the Legislature "trust local communities to do what
is right for our shared constituents".
Senator Olson inquired as to how local communities address road
maintenance issues such as broken asphalt that might result from
heavy equipment used in DOT contract projects.
Ms. Wasserman responded that the community where she resides has
had to deal with such issues. In one case, the community had to
address boardwalk damage with community general maintenance
funding. Demands to the contractor for money to fix the damage
would be inappropriate as all he had done was to "run the
equipment" for a contracted project down the Boardwalk.
Unfortunately the Boardwalk construction was inadequate for that
type of use.
Senator Olson inquired as to what other, oftentimes inadvertent,
burden communities might have had to address in regards to
subcontractors or contractors.
Ms. Wasserman replied that typically when a contractor conducts
work in a community, a certain amount of administrative work must
be conducted by the city. This is usually not accounted for in the
project expenses. It is acknowledged that the workers on the
project do contribute to the local economy via such things as meal
taxes and bed taxes, and other support of local businesses.
However, "there is still a very big revolving seed of money where
the majority of the money and the payroll" moves between the agency
to the large contracting corporations. "The cities a lot of times
certainly do not come out as well as other entities".
9:52:18 AM
Senator Olson noting that during the April 13, 2005 hearing on this
bill, he had asked Steve Boyd of the Alaska Chapter of NECA,
whether a local building permit is required, as that building
permit fee would assist in supporting associated city expenses. The
reply from Mr. Boyd was that no local building permit was required
for the contract work. To that point, he inquired to the reason
that for the permit exemption.
9:52:39 AM
Ms. Wasserman understood that State projects are typically exempt
from the permitting process.
Senator Olson pointed out however, that the contractor is a private
entity.
Ms. Wasserman surmised that when a contractor is working on a State
project, the State exemption would apply.
Senator Stedman stated that many communities have imposed a maximum
tax limitation, of, for example, $1,000 or $500, as the total
amount of tax that could be collected on a single sale. Therefore
$1,000 might be the total tax amount collected on a one million
dollar State contracted project occurring in a community with a
local five percent sales tax. However, it should be noted that some
communities do not have a limit. That is a local prerogative.
Senator Stedman theorized a scenario in which the contractor might
pay the tax on the entire project; however, due to the fact that
most projects have multiple subcontractors, it might be feasible
that each of those subcontractors would also be required to pay the
local sales tax on work relating to that project. This would raise
the issue of multiple layer or "double" taxation. While he agreed
that the sales tax issue should be a decision of local governments,
at some point, there is a concern when dealing with large capital
projects that a local sales tax might be charged numerous times on
the same project.
9:54:51 AM
Ms. Wasserman appreciated the concern; however, countered that DOT
could take the position "that this doesn't work for us", and, as a
result, were negative affects to occur on the community then it
could address the situation and make changes. Another option, which
she believed would not occur as such jobs are sought after, is that
contractors could decide not to accept jobs in various communities.
In conclusion, the decision should be left to the community rather
than DOT or the contractors.
Co-Chair Green opined that the local community could also refuse a
project if they felt that "the detriment to the community would be
greater than the appeal".
Senator Hoffman stated that the issue of double taxation could also
apply to the purchase of, for instance, a case of apples. That
product would be subject to multiple taxes ranging from the airport
tax levied on the carrier delivering it to the community, the gas
tax charged to the transporter delivering it from the airport to
the store, or, it could be transported from the airport to the
store in a rented vehicle to which a local tax would be applied.
The store would than collect the local tax from the consumer who
purchased the apples. It could be difficult to separate the various
taxes in order to specify that only one tax would be levied.
Co-Chair Green expressed that there is a "distinction" between the
imposition of a local tax on a purchase of a product such as an
apple and "the State paying millions of dollars for local projects
… which money does not go to the project". That is the issue being
addressed in this legislation.
9:57:40 AM
Senator Dyson observed that "the sales tax on the services that a
subcontractor provides"… differs "in order of magnitude" from the
taxes placed on the sale of consumer goods such as apples. He
agreed with Co-Chair Green's comment that the action of imposing a
local tax on State resources that are being used to construct
something of "significant value to the local community … sounds
like the local community is looking for another way to bite the
hand that is feeding" it or "providing a huge resource at very
little direct cost to that community".
Co-Chair Wilken moved to report the bill from Committee with
individual recommendations and accompanying fiscal note.
There being no objection, SB 158 was REPORTED from Committee with
zero fiscal note #1, dated April 6, 2005 from the Department of
Commerce, Community and Economic Development.
9:59:40 AM
SENATE BILL NO. 88
"An Act relating to the policy of the state regarding the
source of funding used to cover a shortfall in general fund
revenue."
This was the second hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken, the bill's sponsor, stated that in the time since
the April 5, 2005 first hearing on this legislation he has been
encouraged by the comments, suggestions, and ideas that individuals
have shared with him. During those conversations, it has been
realized that "this is a very flexible plan … that can be used as
needed when needed". He acknowledged that "it is strange" to be
discussing this legislation during a time when the State's oil
revenues are increasing. However, it is encouraging that "we don't
have our head in the sand". No one should ignore the projected
future oil revenues the State could receive as reflected on what he
referred to as the "sensitivity chart", on page five of the "Senate
Bill 88 A Bridge to Development A Policy on General Fund Revenue
Shortfall" handout [copy on file] discussed during the April fifth
hearing.
Senator Stedman summarized that the plan proposed in this
legislation would, were the State to experience a revenue
shortfall, split the draw that might historically have occurred on
"the State's savings account", the Constitutional Budget Reserve
(CBR), between the CBR and the Earnings Reserve Account (ERA) of
the Permanent Fund. While the principal of the Permanent Fund is
protected, the Legislature has the Statutory authority to
appropriate money from the ERA after dividends and inflation
proofing have occurred. Over the past several years, a total of
approximately five billion dollars has been drawn from the CBR to
address the State's funding shortfall. The CBR balance today is
approximately $2.4 billion. Were the State to continue having a
funding deficit, the draw on the CBR might lower the balance to "a
threshold of approximately one billion dollars. This is of concern
to the Administration". While there is debate in regards to what
appropriate balance should be maintained in the CBR, "clearly at
some point, the State needs to have an adequate cash reserve to use
in cash managing its week-to-week business relationships". Rather
than incorporating language into regulation or Statute, this
legislation would "recommend a policy for the Legislature to follow
to extend the life of the CBR" by "jointly and equally" drawing on
both the ERA and the CBR. The intent is to extend the life of the
CBR with the hope that the State could reach the point where
revenue from a gas pipeline or oil field expansions could provide
additional revenue to the State. "On the surface" this is good
policy … some decision should be made. While he had supported the
Percent of Market Value (POMV) plan legislation that had been
discussed the previous year as a means through which to address the
State's fiscal dilemma, the Legislature had not adopted it.
Therefore another plan must be pursued through which to address the
continuing problem. Compromises along the way would occur.
Senator Stedman shared that his concern with this proposal is that
neither a maximum CBR or ERA draw amount limit is specified nor has
a "trigger point" or a specified CBR balance been identified upon
which time the draw would be split between the two accounts.
Nonetheless, he would not oppose advancing the bill because he felt
that the "debate needs to go forward". It would be in the best
interest of the State to further discuss and debate the merits of
the bill. "Clearly the numbers" and the sponsor's presentations are
very "enlightening. The impact is minimal" in comparison to that of
imposing a State income or sales tax "on the individual wealth of
the Alaskan residents".
Senator Stedman suggested that, in the "finer points of a long
range fiscal plan", consideration be given to incorporating a
trigger point of, for example, a $2.5 billion CBR balance being the
point at which any draw would be equally split between the CBR and
the ERA. Thus the ERA would not be utilized were the State to
experience "the good fortune" of such things as economic expansion,
additional resource development revenues, and budgetary controls
that negated the need for a CBR draw and its balance remained above
the specified threshold. He considered the "Permanent Fund the
source of capital of last resort for virtually everything in the
State". It is estimated that the CBR would contain funds for
approximately another ten years; therefore the State must develop a
plan that would fund State operations until at least the year 2015.
10:07:16 AM
Senator Stedman desired that the State's policy decisions relating
to this bill would include a maximum ERA draw amount. This issue
would require more work than the issue of designating a CBR trigger
balance. "The point is that" it would be very easy for Legislators
to appease constituents by presenting "more proposals for capital
spending than the State could possibly fund … and it is also easier
to let the budget grow than to hold it back". Easily accessible
funding could serve to increase the State's operating budget to a
point that would not be in the best financial interest of the
State.
Senator Stedman concluded therefore that incorporating a maximum
limit on the ERA draw in addition to establishing a CBR Trigger
mechanism balance would be worthwhile efforts in regards to this
bill. When this issue moves from this Committee to the Senate Rules
Committee, it should be accompanied by a clear message to the
people in the State "that the Legislature is serious about dealing
with this fiscal issue". The State's fiscal issue has been
discussed for years and cannot be ignored, even now when the price
of North Slope crude oil is in the range of $48 a barrel. High oil
prices would provide additional time in which the issue can be
addressed.
10:09:54 AM
Senator Dyson concurred with Senator Stedman's remarks and also
echoed Senator Stedman's compliments regarding the efforts exerted
by Senator Wilken in the development of this legislation and his
"clear" portrayal of the State financial situation going forward.
Senator Dyson stated that as the solutions to the State's fiscal
crisis are discussed, it would be his desire that in addition to
the inclusion of such things as a "trigger point" on the CBR
balance and "stringent restraints" on State spending, that prior to
utilizing ERA funds, consideration be given to incorporating a
general State tax. He would support "a consumption tax of some
sort". A paradigm shift is occurring and these discussions are
alerting the public that the State could not continue "with
business as usual". Tough decisions must be made.
Senator Dyson stated that, while he would object to a motion to
move this bill from Committee, the discussion is valuable.
In response to a question from Co-Chair Green, Senator Dyson
restated that he would object to moving the bill from Committee.
Co-Chair Green asked whether the reason for that position was to
allow the Committee to conduct further the work on it as Senator
Dyson's desire to not move the bill from Committee was in conflict
with his earlier remarks in support of developing legislation
through which to address the State's fiscal gap.
10:12:09 AM
Senator Dyson opined that a "better product" could be developed
that would meet his and Senator Stedman's concerns. While he
"guessed" that the bill would move forward, it would do so without
"his support at this time".
Co-Chair Green asked Co-Chair Wilken whether his desire is for the
legislation to move forward at this time or whether the suggestions
presented by Senator Stedman and Senator Dyson be further
considered by this Committee.
10:12:45 AM
Co-Chair Wilken responded that due to the amount of other
legislation that the Committee must address during the limited time
remaining in this Legislative session and the fact that he did not
expect this bill to be adopted by the Legislature this year or even
the following year, his desire would be to move it from the
Committee at this time. This "very flexible" policy legislation
could be revisited and adjustments could be made were the need to
arise. He noted that the bill could be returned to the Committee
for further consideration and that he is receptive to some of the
suggestions that were offered. In view of the favorable fiscal
situation that the State is currently experiencing, it is his
determination that this legislation would not be awarded much
forward momentum. Were the decision made to keep the bill in
Committee, he doubted it would receive another hearing this
Session.
Co-Chair Green commented that in 1997, 1999, and 2002, she had been
"very involved" in efforts to protect the Permanent Fund Dividend
and incorporate inflation proofing of the Fund in the State's
Constitution. This purpose was to protect the Fund from being "the
focus of the conversation" when addressing the State's fiscal
challenge. It is frustrating that those efforts did not come to
fruition. Nonetheless, language that is worthy of mentioning in Co-
Chair Wilken's aforementioned presentation is the line item on page
25 that states that this legislation "strengthens the Alaska's bond
rating and saves millions of dollars". "There's a terrible irony in
the State's" funding, bonding, and revenue scenarios because "we do
not use anything from the Permanent Fund earnings"; that money "is
not considered part of the State's revenue stream … Therefore, it's
not part of the State's fiscal plan, it doesn't reflect as well as
it should on" the State's bond rating. However, people who "survey"
the State's debt situation determine that the State has minimal
debt. Nonetheless, they point out that "the State does not have a
fiscal plan, which really means you don't have an income tax". This
is being mentioned as, today, April 15th, is the date that
individual's federal income tax is due. She declared that she does
not support a State income tax and for that reason alone, she is in
favor of this legislation. The State must determine how to improve
its ability, "in times of need", to bond for a needed project by
being able to show that the Permanent Fund is a component of the
State's portfolio. Currently, that is not the case. It is "awful"
that the State must be required to show "on paper" that the
Legislature could use Permanent Fund earnings, even though the
Legislature already has the authority to do so. "It's not
prohibited, it's allowed, it's provided and … nothing in this
should constitute a limitation on that right or charge".
10:17:12 AM
Co-Chair Green voiced appreciation for Co-Chair Wilken' development
of legislation that would remove "pressure" on both systems. This
legislation, "more than anything" protects the CBR. "It ends the
conversation of 'oh, how horrible that you have to take money from
the CBR'".
10:17:37 AM
Senator Dyson voiced appreciation for Co-Chair Green's remarks and
clarified that his comments should not be misconstrued, as he
"clearly" understands that the Permanent Fund was established to
provide funding when the day came that oil revenues were
insufficient to fund State operations. Nothing more would be
required to allow "the Legislature to access the ERA for support of
government". Accusations that he is "much too idealistic or naïve"
occur when he shares his position that the three sources of State
income: revenues, the CBR, and the ERA, should be accessed in that
order rather than being viewed as equals. The CBR should be used
for the short-term and the ERA for the long-term. He would support
utilizing "the ERA to support a level of government that the State
requires when revenues are insufficient and the CBR approaches"
some determined minimal threshold.
AT EASE 10:19:35 AM / 10:19:45 AM
Co-Chair Wilken reiterated his earlier comment that, "the beauty of
this is that it provides a great deal of flexibility for this
Legislature and all Legislatures that will follow until we can
build a bridge to development". The details would be developed over
time, as currently sufficient funds are available; however, there
would be a need to complete the task within four, six, or ten
years. That is what this legislation "is all about". He again
voiced appreciation for the support that the legislation has
received. It is a flexible plan and would provide one more tool
through which to balance the State's budget, "with minimal impact
to families and those people who choose to invest" in the State.
Co-Chair Green asked regarding the use of the word "policy" in
Section 1(b), line five, page one of the bill; specifically whether
a "policy" differs from being a mandate or a requirement or the
word "shall", in that it is a suggestion.
Co-Chair Wilken responded that, in this sense, the term "policy" is
a suggestion: it could be ignored, changed, or whatever the
Legislature seated at the time, might feel appropriate.
Co-Chair Wilken moved to report the bill from Committee with
individual recommendations and accompanying fiscal note.
Senator Dyson objected.
A roll call was taken on the motion.
IN FAVOR: Senator Olson, Senator Hoffman, Co-Chair Wilken, and Co-
Chair Green
OPPOSED: Senator Dyson and Senator Stedman
ABSENT: Senator Bunde
The motion to report the bill from Committee PASSED (4-2-1).
SB 88 was REPORTED from Committee with Department of Revenue zero
Fiscal Note #1, dated February 15, 2005.
ADJOURNMENT
Co-Chair Green adjourned the meeting at 10:22 AM.
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