Legislature(1993 - 1994)
02/02/1994 01:15 PM JUD
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HOUSE JUDICIARY STANDING COMMITTEE February 2, 1994 1:15 p.m. MEMBERS PRESENT Rep. Brian Porter, Chairman Rep. Jeannette James, Vice-Chair (arrived 2:25 p.m.) Rep. Pete Kott (arrived 1:30 p.m.) Rep. Gail Phillips Rep. Joe Green Rep. Jim Nordlund (arrived 1:35 p.m.) MEMBERS ABSENT Rep. Cliff Davidson OTHER LEGISLATORS PRESENT Rep. Mark Hanley Rep. Sean Parnell Rep. Gene Therriault COMMITTEE CALENDAR HB 277: "An Act relating to public employees defending and indemnifying public employees with respect to claims arising out of conduct that is within the scope of employment." HEARD AND HELD IN COMMITTEE *HJR 48: Proposing amendments to the Constitution of the State of Alaska relating to revenues from natural resources, the Alaska permanent fund, the appropriation limit and the budget reserve fund; and providing for an effective date for the amendments. HEARD AND HELD IN COMMITTEE (* First public hearing.) WITNESS REGISTER STEVE TERRY, Director Human Resources Anchorage Telephone Utility 600 Telephone Avenue Anchorage, Alaska Phone: 561-3000 POSITION STATEMENT: Testified in favor of HB 277 SUSAN COX Department of Law P.O. Box 110300 Juneau, Alaska 99811-0300 Phone: 465-3603 POSITION STATEMENT: Assisted the sponsor in drafting HB 277 BRAD THOMPSON Risk Management Department of Administration P.O. Box 110218 Juneau, Alaska 99811 Phone: 465-2180 POSITION STATEMENT: Assisted the sponsor in drafting HB 277 ROGER CREMO, Attorney 425 G Street Anchorage, Alaska 99501 POSITION STATEMENT: Testified in favor of HJR 48 (Spoke via offnet from Hawaii) REP. MARK HANLEY Alaska State Legislature State Capitol, Room 515 Juneau, Alaska 99811 Phone: 465-4939 POSITION STATEMENT: Testified and explained the House Finance version of HJR 48 DARREL REXWINKEL, Commissioner Department of Revenue P.O. Box 110400 Juneau, Alaska 99811-0400 Phone: 465-2300 POSITION STATEMENT: Testified regarding HJR 48 JIM KELLY Alaska Permanent Fund Corporation P.O. Box 25500 Juneau, Alaska 99811 Phone: 465-2047 POSITION STATEMENT: Testified regarding HJR 48 PREVIOUS ACTION BILL: HB 277 SHORT TITLE: INDEMNIFICATION OF PUBLIC EMPLOYEES BILL VERSION: SPONSOR(S): REPRESENTATIVE(S) PORTER JRN-DATE JRN-PG ACTION 04/07/93 1070 (H) READ THE FIRST TIME/REFERRAL(S) 04/07/93 1070 (H) STATE AFFAIRS,JUDICIARY,FINANCE 01/18/94 (H) STA AT 08:00 AM CAPITOL 102 01/18/94 (H) MINUTE(STA) 01/25/94 (H) STA AT 08:00 AM CAPITOL 102 01/25/94 (H) MINUTE(STA) 01/26/94 2157 (H) STA RPT CS(STA) 4DP 3NR 01/26/94 2157 (H) DP: KOTT, G. DAVIS, B. DAVIS, ULMER 01/26/94 2157 (H) NR: OLBERG, VEZEY, SANDERS 01/26/94 2157 (H) -2 ZERO FISCAL NOTES (ADM, ADM) 1/26/94 02/02/94 (H) JUD AT 01:15 PM CAPITOL 120 BILL: HJR 48 SHORT TITLE: RESTRUCTURE PERMANENT FUND BILL VERSION: SPONSOR(S): FINANCE JRN-DATE JRN-PG ACTION 01/11/94 2032 (H) READ THE FIRST TIME/REFERRAL(S) 01/11/94 2032 (H) JUDICIARY, FINANCE 02/02/94 (H) JUD AT 01:15 PM CAPITOL 120 ACTION NARRATIVE TAPE 94-15, SIDE A Number 000 The House Judiciary Standing Committee was called to order at 1:28 p.m. A quorum was present at 1:30 with the arrival of Rep. Kott. Chairman Porter announced that the committee would take up HB 277 first. HB 277 - INDEMNIFICATION OF PUBLIC EMPLOYEES Number 025 REP. BRIAN PORTER, Prime Sponsor of HB 277, explained to the committee that HB 277 was currently in conceptual form and that he planned on briefing the committee on the concept and then next week will have it redrafted. Rep. Porter said currently the state and most municipalities have a policy that provide indemnification for their employees if they are working within the scope of their employment and have not exceeded some level of behavior, generally described as gross negligence or an intentional act. REP. PORTER explained there are a lot of public employees who, every time the mayor, city council, or governor changes, have this concern as to whether or not this policy that exists everywhere is going to be maintained, or whether for this one particular instance that policy might just be set aside for one person because of personality conflicts and things like that. He concluded that basically the bill will establish formal indemnification versus policy, which is the current practice. Number 091 STEVE TERRY, Director, Human Relations, Anchorage Telephone Utility (ATU), testified in support of HB 277. Mr. Terry explained that it is critical that public employers send the message to its employees, especially those employees who must make difficult and controversial decisions, that the employer will stand behind the employees when their actions are in the scope of their duties. Those employees that must make decisions, particularly of the employment nature, are being increasingly challenged legally and are resulting in substantial and often staggering awards. He said that individuals are increasingly being named as defendants or codefendants in addition to the deep pocketed employer, and attorney fees for that individual can run as high as $200,000, not to mention the jury's verdict, punitive damages, etc. MR. TERRY emphasized that it is not a theoretical problem; it has happened to him at ATU in a termination case. Number 194 SUSAN COX, Department of Law, Attorney General's Office, and BRAD THOMPSON, Risk Management, Department of Administration, were asked to answer questions from the committee. Number 249 REP. PORTER discussed with Ms. Cox a question posed by a city manager in Southeast Alaska, that if an employer has terminated an employee, are they then not required to provide the indemnification. The question was, would this not perhaps induce an employer to terminate an employee when they might not otherwise have done so. just to avoid indemnification? Rep. Porter said they toyed with the idea of saying termination for just cause, and asked Ms. Cox about exempt employees who may be terminated for unjust cause, rather than any kind of normal consideration that's used to represent employees. Number 249 MS. COX replied that it's possible to draft a bill if it isn't so drafted that a former employee can be subject to the same indemnification and defense if a claim arises out of their former employment, which is currently the practice of the state. Number 284 REP. PHILLIPS asked that the issue of a time frame also be addressed. Number 294 MS. COX replied that generally indemnification lasts as long as the case lasts, and there is a two-year tort statute of limitations. Number 309 REP. GREEN noted there was a zero fiscal note and asked if there were any costs to the state. Number 318 MR. THOMPSON responded that the state is currently self- insured up to $5 million, and they are already indemnify employees, and HB 277 would codify existing practice, so there would be no change in the costs. MS. COX added that it may affect what a municipality may experience if they don't have this as their existing policy. Number 330 REP. GREEN followed up by asking if there was a cost. He commented that certain benefits are taxable, and asked if indemnification would create a tax problem for people who are protected there under. He also asked if HB 277 would provide for public employees a situation that is above and beyond that which is provided in the private sector. Number 352 MS. COX replied that she had never heard of any tax liabilities with indemnification. MR. THOMPSON explained that most private sector employees of a substantial nature through either a self-insurance program or through a commercial insurance policy would have the same provision for their employees. Number 362 REP. PORTER asked if it was a fair statement that what HB 277 will say represents a reflection of existing law in terms of a requirement for an employer to be responsible for the acts of his or her employees. Number 373 MS. COX replied that the legislation doesn't affect the circumstances in which the employer is liable for the acts of the employee; it only discusses situations in which the employee is sued, when the employer will take care of that. Ms. Cox explained that the bill reflects essentially the state's existing policy and practice with respect to state employees. She said whether the state is required to do that is an open question, and the state probably doesn't have a duty of common law to do it, but it has long been the existing practice of the state of Alaska to afford that protection to all state employees. Ms. Cox went on to say that there are a great many thousand state employees that are covered by existing collective bargaining agreements and so the state has contracted for that requirement with them, but for those not covered by collective bargaining (and those would be the ones covered by this bill), it's something that the state does because they think it's right, but not necessarily because they are legally required to. Number 396 REP. PHILLIPS asked, when the state contracts out to bargaining units, does that become a bargaining point or is it an assumed benefit? Number 402 MS. COX responded that it is negotiated, so as a result, there is not total consistency. Number 420 REP. PHILLIPS asked if HB 277 would supercede the agreements. Number 424 MS. COX said HB 277 would only apply to those not covered by collective bargaining. Number 436 REP. NORDLUND discussed a provision in the bill in which the employee has to notify the employer within ten days, and said it seems too short of a time period. Number 440 REP. PORTER noted that it goes on to say unless good cause for the employee's failure to provide timely or proper notice. Number 445 MS. COX indicated that there is generally a twenty day time period for answering a complaint, but the ten days would only start running from the time of receiving the complaint, and as a practical matter, most often the employer most likely would get notice by other means, as well as from the employee. REP. PHILLIPS asked if anyone explored (she said she was playing the devil's advocate on this) not acts of intentional or willful, but acts of stupidity. Number 477 REP. PORTER replied that the normal terms of responsibility are that if you have an intentional act that's obviously the worst, then the next level down is gross negligence, which usually is just outrageous behavior, then there is simple negligence, and HB 277 covers simple negligence, which is an unintentional mistake. Number 499 REP. NORDLUND asked if you could terminate an employee to avoid liability. Number 512 MS. COX said that one solution would be to make clear that the obligation of defense applies to former employees if the claim pertains to something that occurred during their employment, and then there is no advantage to terminating an employee to get out of this obligation. Number 529 REP. KOTT asked Mr. Thompson, if the employee wants to continue legal action, but the employer doesn't want to, would HB 277 require the employer to continue with the action? Number 548 MR. THOMPSON replied that he could think of only one occasion where an individual was named that didn't want to participate in the settlement. He said in HB 277 they hope to address that, with a good faith effort in notification, cooperating in the defense, and participation in the settlement, so it would be an obligation for the employee to participate with the employer in a good faith settlement. Number 562 MS. COX said she would address the issue in the next draft of HB 277. Number 583 REP. PORTER asked for any other questions; and hearing none, closed the hearing on HB 277 until further notice. He then brought up HJR 48. HJR 48 - RESTRUCTURING THE PERMANENT FUND Number 584 ROGER CREMO, an Anchorage attorney whose proposal led to the introduction of HJR 48, testified via teleconference from Anchorage regarding the plan. Mr. Cremo said the purpose of the amendment was to avoid the consequences of unsustainable budgets. He said HJR 48 provides a system that is designed for a government that uses its wealth rather than its broad taxing power to finance operations and capital improvements. Mr. Cremo pointed out that current funding practices can't continue because of fluctuating oil prices, and the amendment would change that by putting all natural resource revenues that have accumulated in various reserves into the permanent fund. MR. CREMO said the amendment defines a maximum sustainable level of six percent of the market value of the fund, and there has to be a transitional period in the amendment that gradually lowers the percentage to six over a period of years. MR. CREMO continued with several points supporting HJR 48, including the fact that all resource derived monies would be placed in the permanent fund, thereby increasing its wealth; the money must be invested and reinvested; and the income of the fund be retained in the fund, which would prevent the money from being spent. He then said he was available for questions. Number 785 REP. NORDLUND questioned the use of the word "geometrically" and asked why it was used and what it means. Number 790 MR. CREMO replied that he looked for a mathematical progression, which would be arithmetic or geometric. He explained that using a geometrical progression would cause much larger jumps as the progression approaches six percent, and levels and smooths off until the year 2006, the end of the period of the plan, unless the legislature changes it. Number 830 REP. NORDLUND asked if there was any possibility of ambiguity using the term geometrical, and if it could be defined in the legislation. Number 835 MR. CREMO responded that neither the legislature or the courts would find any ambiguity in the definition, but it would not be a problem to define it in the bill. Number 842 REP. GREEN said he thought a definition might tend to confuse the public and suggested using a table to show the percentages over the ten years. Number 850 MR. CREMO reflected that it was a reasonable suggestion, but wondered if it would open it up to the legislature to change the numbers. Number 860 REP. PORTER said that if he understood Rep. Green's suggestion, it wasn't necessarily putting it into the constitution, but putting it into the document from which the public would be voting on this proposal. Number 865 MR. CREMO asked the chairman if the legislature could control the document that is used to make the explanation to the public. Number 869 REP. PORTER responded that he believed the legislature would have some input on who writes the explanation, and he believed that selection would be made carefully and would probably be someone from the House or Senate Finance Committee. TAPE 94-15, SIDE B Number 000 REP. PORTER asked if there were any other questions for Mr. Cremo. Hearing that there would be questions in the future, he asked Mr. Cremo if he would be available at a later date to do so. Mr. Cremo responded that he would be available. Number 087 REP. PHILLIPS asked if there was opposition to the plan and if the committee could hear that side. Number 096 REP. PORTER replied that if anyone knows who the opponents are, invite them to the table. Number 121 REP. MARK HANLEY, Vice Chair of the House Finance Committee, testified regarding the House Finance version of HJR 48 and suggested that after Finance reviews the bill that it come back to House Judiciary to make a final review of the constitutional and judicial aspects of the bill. He said what he wanted to do was give an explanation of the approach Finance is looking at, and he thought it needed serious considerations as a long term plan. REP. HANLEY said under the proposal all oil and resource revenues would go into the permanent fund first, and out of the fund would come a set percentage, which is where the geometrical plan comes in, taking 20 percent in the first year of an average of over about five years of the earnings. He explained that the withdrawal, plus nonresource revenues, would be what's available to pay for all things, the operating budget, capital budget and the permanent fund dividend program. REP. HANLEY discussed the spreadsheet and how the figures were arrived at and answered questions from the committee about the figures. Number 506 REP. HANLEY said there was one question about the plan in the case of a disaster, which was, will we have a pot of money available for the emergency? Number 520 REP. HANLEY stressed that in his opinion if the residents of Alaska feel this plan will eliminate the permanent fund dividend (PFD), they won't support the legislation. He also stressed that it is not the intent of the plan to eliminate the PFD. Number 549 REP. G. PHILLIPS stated some concerns and gave an example of being six years down the line and we are at a position where only six percent is going into the budget. She said her concern relates to entitlement growth, population growth, and everything that will cause this side of the budget to be so unbalanced, and to the side that would put money into natural resource development and keep the whole thing going. Rep. Phillips said one of the great fears she has is that as we cut down to that certain level, we're going to have so much of the whole program tied up in entitlement funding that we will not have money to continue resource development. Number 569 REP. HANLEY said that was a concern of a lot of people, and the plan shifts money to build up the principal of the permanent fund, but under any scenario the cash available would be about the same; however, up to this point, the Cremo plan was growing faster than the traditional method. He said those problems would always be there, but under current spending we will eventually face a large deficient, and then what will we do. Number 598 REP. GREEN commented that the plan doesn't make or lose money, and forces the legislature to do what they have to do, and will generate more money in the long run. Number 625 REP. JAMES said this plan assumes we are not going to do anymore than is already being done in resource development. Number 636 REP. HANLEY disagreed, saying there is no limit on development and we are only limited in spending. Number 662 REP. NORDLUND said he felt it was a minimalist proposal, and if adopted, doesn't necessarily mean we have to cut spending. And under either the traditional plan or the Cremo plan the legislature will be faced with a hard decision in either case. Number 672 DARREL REXWINKEL, Commissioner, Department of Revenue, expressed that it is good news that the legislature is talking about the problem; however, he was not there to speak for or against the proposal. He cautioned that there is a lot of financial information floating around based on various revenue forecasts that differ. He discussed various other observations and expressed concern that the six percent payout could cause the permanent fund balance to drop. REP. PORTER said that not all investments would be made in common stock. Number 740 COMMISSIONER REXWINKEL responded that they have a diversified portfolio, and cited various estimates on expected returns on investments. Number 795 REP. NORDLUND asked Commissioner Rexwinkel if he would put more faith in return on market investments versus the value of the price of oil in future years. Number 800 COMMISSIONER REXWINKEL replied that there is a lot of uncertainty with both the market and oil. Number 849 JIM KELLY, Permanent Fund Dividend Corporation, testified and referred the committee to a paper he prepared entitled "20 Questions and Answers on the Cremo Plan." Mr. Kelly said it is very clear that this plan will stabilize revenues, and there will be much more stability if the budget is based on five years, or in this case a three year plan, and it would increase the permanent fund under any circumstances; however, the legislature will have less money to spend under the plan. MR. KELLY discussed the assumptions used and said there are all kinds of things that could happen in either direction, and the fund has kept up with inflation and growth. TAPE 94-16, SIDE A Number 000 MR. KELLY said if the conservative estimates turn out to be the case, you will end up with significantly less money. He discussed inflation, and if you are paying out more, then you are not protecting the fund, but with less you are. He discussed the impact on PFD's and said they would rise dramatically because the principal is going to rise dramatically, which will produce less money for the legislature unless the statute is changed. MR. KELLY agreed with Rep. Hanley that if residents don't know what's going to happen to PFD's, no one will support HJR 48. He said there is no doubt that the plan will get the legislature where they want to go, but it could take 15 to 20 years. Number 220 REP. PORTER asked if PFD's could be capped at a certain amount. Number 232 MR. KELLY stated that he thought people would want to know what's going to happen to the PFD or they won't vote for the plan. MR. KELLY recommended changing the section that calls for a seven member board, and said he thought the six member board was working fine now. Mr. Kelly said the real suggestion he wanted to make was on the six percent withdrawal rate. He said it gives the legislature no assurance you are protecting the permanent fund because in bad years with inflation you are very likely going to be eating it up. He suggested a possible change of using a different number, dropping six to four, which would still provide less money. He said, however, that a better solution would be to say the amount withdrawn every year is not to exceed the real growth of the fund, defined as all the new money that comes in, subtracting inflation, and that's what you would have. MR. KELLY endorsed the concept of the proposal and concluded his testimony. Number 392 REP. GREEN asked, if we don't have any kind of cap, what happens in a high inflation year? Number 408 MR. KELLY replied that actually it would be significant inflation over a five year period, and that's a lot of inflation and could probably minimize that problem by the feature of averaging it out. Number 422 Discussion continued about growth of the fund, inflation proofing, PFD's and the percentage of growth in real dollar terms. REP. PORTER concluded the hearing on HJR 48 and held the resolution for further hearings. ADJOURNMENT CHAIRMAN PORTER adjourned the hearing at 3:35 p.m.