Legislature(1997 - 1998)
04/18/1997 03:21 PM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HOUSE LABOR AND COMMERCE STANDING COMMITTEE April 18, 1997 3:21 p.m. MEMBERS PRESENT Representative Norman Rokeberg, Chairman Representative John Cowdery, Vice Chairman Representative Bill Hudson Representative Joe Ryan Representative Tom Brice Representative Gene Kubina MEMBERS ABSENT Representative Jerry Sanders COMMITTEE CALENDAR SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 189 "An Act relating to sale of tobacco and tobacco products; and providing for an effective date." - MOVED CSSSHB 189(L&C) OUT OF COMMITTEE HOUSE BILL NO. 134 "An Act relating to regulation of barbers and hairdressers; extending the termination date of the Board of Barbers and Hairdressers; and providing for an effective date." - MOVED CSHB 134(L&C) OUT OF COMMITTEE HOUSE BILL NO. 218 "An Act relating to regulation and examination of insurers and insurance agents; relating to kinds of insurance; relating to payment of insurance taxes and to required insurance reserves; relating to insurance policies; relating to regulation of capital, surplus, and investments by insurers; relating to hospital and medical service corporations; and providing for an effective date." - HEARD AND HELD * HOUSE BILL NO. 199 "An Act relating to the property, transactions, and obligations of spouses; relating to the augmented estate; amending Rule 301, Alaska Rules of Evidence; and providing for an effective date." - MOVED HB 199 OUT OF COMMITTEE HOUSE BILL NO. 116 "An Act relating to workers' compensation self-insurance." - HEARD AND HELD (* First public hearing) PREVIOUS ACTION BILL: SSHB 189 SHORT TITLE: RESTRICT TOBACCO SALES/POSSESSION SPONSOR(S): REPRESENTATIVE(S) COWDERY JRN-DATE JRN-PG ACTION 03/12/97 640 (H) READ THE FIRST TIME - REFERRAL(S) 03/12/97 640 (H) LABOR & COMMERCE, JUDICIARY 04/03/97 922 (H) SPONSOR SUBSTITUTE INTRODUCED- REFERRALS 04/03/97 922 (H) READ THE FIRST TIME - REFERRAL(S) 04/03/97 922 (H) L&C, JUDICIARY 04/09/97 (H) L&C AT 3:15 PM CAPITOL 17 04/09/97 (H) MINUTE(L&C) 04/10/97 (H) L&C AT 3:15 PM CAPITOL 17 04/10/97 (H) MINUTE(L&C) 04/18/97 (H) L&C AT 3:15 PM CAPITOL 17 BILL: HB 134 SHORT TITLE: BARBERS AND HAIRDRESSERS SPONSOR(S): RULES BY REQUEST OF BUDGET AND AUDIT COMMITTEE JRN-DATE JRN-PG ACTION 02/13/97 333 (H) READ THE FIRST TIME - REFERRAL(S) 02/13/97 333 (H) LABOR & COMMERCE 03/21/97 (H) L&C AT 3:15 PM CAPITOL 17 03/21/97 (H) MINUTE(L&C) 04/18/97 (H) L&C AT 3:15 PM CAPITOL 17 BILL: HB 218 SHORT TITLE: OMNIBUS INSURANCE REFORM SPONSOR(S): LABOR & COMMERCE BY REQUEST JRN-DATE JRN-PG ACTION 03/27/97 872 (H) READ THE FIRST TIME - REFERRAL(S) 03/27/97 872 (H) LABOR & COMMERCE 04/04/97 (H) L&C AT 3:15 PM CAPITOL 17 04/04/97 (H) MINUTE(L&C) 04/18/97 (H) L&C AT 3:15 PM CAPITOL 17 BILL: HB 199 SHORT TITLE: COMMUNITY PROPERTY SPONSOR(S): REPRESENTATIVE(S) RYAN, Therriault JRN-DATE JRN-PG ACTION 03/18/97 736 (H) READ THE FIRST TIME - REFERRAL(S) 03/18/97 737 (H) L&C, JUDICIARY 04/18/97 (H) L&C AT 3:15 PM CAPITOL 17 BILL: HB 116 SHORT TITLE: WORKERS COMPENSATION SELF-INSURANCE GROUP SPONSOR(S): REPRESENTATIVE(S) KOTT, Hudson, Foster, Berkowitz, Hodgins, Kelly, Dyson, Davis, Phillips, Kohring, Ogan, Green, Elton JRN-DATE JRN-PG ACTION 02/05/97 243 (H) READ THE FIRST TIME - REFERRAL(S) 02/05/97 243 (H) LABOR & COMMERCE 02/07/97 277 (H) COSPONSOR(S): KOHRING 02/13/97 349 (H) COSPONSOR(S): OGAN 02/17/97 376 (H) COSPONSOR(S): GREEN 02/21/97 430 (H) COSPONSOR(S): ELTON 02/26/97 (H) L&C AT 3:15 PM CAPITOL 17 02/26/97 (H) MINUTE(L&C) 04/18/97 (H) L&C AT 3:15 PM CAPITOL 17 WITNESS REGISTER CASEY SULLIVAN, Legislative Administrative Assistant to Representative John Cowdery Alaska State Legislature Capital Building, Room 416 Juneau, Alaska 99801 Telephone: (907) 465-3879 POSITION STATEMENT: Explained CSSSHB 189. JONATHAN BLATTMACHR, Partner (Attorney at Law) Milbank, Tweed, Hadley and McCloy One Chase Manhattan Plaza New York City, New York 10005 Telephone: (212) 530-5066 POSITION STATEMENT: Testified in support of HB 199. BOB MANLEY, Attorney at Law Hughes, Thorsness, Powell, Huddleston and Bowman 324 East Cook Anchorage, Alaska 99501 Telephone: (907) 263-8251 POSITION STATEMENT: Testified in support of HB 199. DOUGLAS BLATTMACHR, President and Chief Executive Officer Alaska Trust Company 840 "K" Street Anchorage, Alaska 99501 Telephone: (907) 278-6775 POSITION STATEMENT: Testified in support of HB 199. RICH HOMPESCH, Attorney at Law 119 North Cushman Fairbanks, Alaska 99701 Telephone: (907) 452-1700 POSITION STATEMENT: Testified in support of HB 199. LINDA HULBERT, Insurance Agent New York Life Insurance Company 110 Cushman Street Fairbanks, Alaska 99701 Telephone: (907) 452-4400 POSITION STATEMENT: Testified in support of HB 199. REPRESENTATIVE PETE KOTT Alaska State Legislature Capitol Building, Room 204 Juneau, Alaska 99801 Telephone: (907) 465-3777 POSITION STATEMENT: Sponsor of HB 116. STEVE WISDOM, President Alaska State Homebuilders Association P.O. Box 4184 Homer, Alaska 99603 Telephone: (907) 235-6045 POSITION STATEMENT: Testified in support of CSHB 116(L&C). BARBARA HUFF-TUCKNESS, Director Legislative and Governmental Affairs Teamsters Local 959 4300 Boniface Parkway Anchorage, Alaska 99504 Telephone: (907) 269-4236 POSITION STATEMENT: Testified in support of CSHB 116(L&C). BILL TAYLOR Alaska State Homebuilders Association 2340 Loren Circle Anchorage, Alaska 99516 Telephone: (907) 345-0371 POSITION STATEMENT: Testified in support of CSHB 116(L&C). RENEE MURRAY 605 West 42nd Street Anchorage, Alaska 99503 Telephone: (907) 561-8796 POSITION STATEMENT: Testified in support of CSHB 116(L&C). LINDA HALL, Representative Alaska Independent Insurance Agents and Brokers 3111 "C" Street Anchorage, Alaska 99516 Telephone: (907) 561-1250 POSITION STATEMENT: Testified against CSHB 116(L&C). RICHARD BLOCK Alaska National Insurance Company 360 West Benson, Suite 300 Anchorage, Alaska Telephone: (907) 563-5121 POSITION STATEMENT: Testified against CSHB 116(L&C). MARIANNE BURKE, Director Division of Insurance Department of Commerce and Economic Development P.O. Box 110805 Juneau, Alaska 99811-0805 Telephone: (907) 465-2515 POSITION STATEMENT: Testified against CSHB 116(L&C). JOHN GEORGE, Lobbyist National Association of Independent Insurers 3328 Fritz Cove Road Juneau, Alaska 99801 Telephone: (907) 789-0172 POSITION STATEMENT: Testified on CSHB 116(L&C). PAUL GROSSI, Director Division of Workers' Compensation Department of Labor P.O. Box 25512 Juneau, Alaska 99802-5512 POSITION STATEMENT: Testified on CSHB 116(L&C). ROBIN WARD Alaska State Homebuilders Association Box 91443 Anchorage, Alaska 99509 Telephone: (907) 562-3770 POSITION STATEMENT: Testified in support of CSHB 116(L&C). ACTION NARRATIVE TAPE 97-44, SIDE A Number 001 VICE CHAIRMAN JOHN COWDERY called the House Labor and Commerce Standing Committee to order at 3:21 p.m. Members present at the call to order were Representatives Hudson, Ryan, Brice and Cowdery. Representative Kubina and Chairman Rokeberg arrived at 4:00 p.m. SSHB 189 - RESTRICT TOBACCO SALES/POSSESSION Number 067 VICE CHAIRMAN COWDERY announced the first order of business would be SSHB 189, "An Act relating to sale of tobacco and tobacco products; and providing for an effective date." Number 099 CASEY SULLIVAN, Legislative Administrative Assistant to Representative John Cowdery, Alaska State Legislature, came before the committee to explain the bill. He informed the committee members there is a proposed committee substitute (CS). The legislation will limit public access to tobacco products. He said the CS creates an affidavit for employees and increases the penalties for selling tobacco to minors. It also includes a section that will allow only the sales clerk to have access to any tobacco products prior to sale. Self service tobacco displays will be banned. Mr. Sullivan said page 2, line 7, states, "the sale occurs in a manner that allows only the sales clerk to have access to the cigarettes, cigars, tobacco, or products containing tobacco prior to sale;". He said this will not limit how retail premises or tobacco shop stores present tobacco products. If anyone wishes to buy tobacco products, they must go through an employee. MR. SULLIVAN said also included in the CS is a section that will further require employees to card people who employees believe to be under 27 years of age. Secondly, the retail businesses shall require the sales clerk to sign a form stating that they understand it is illegal to sell tobacco to persons under the age of 19. He said they believe this will put more responsibility on retail employees who sell tobacco products. MR. SULLIVAN explained there is also change regarding the penalties. In the previous version of the bill, selling, giving or exchanging tobacco to minors had a fine of up to $300. In the CS, the fines are the same as contributing alcohol to a minor. The first violation is a class A misdemeanor, a $5,000 fine. If a second infraction occurs within five years, the person will be guilty of a class E felony, a $50,000 fine. Number 264 REPRESENTATIVE TOM BRICE asked if the age should be increased from 19 to 21. VICE CHAIRMAN COWDERY said he hasn't requested that with his bill. Number 289 REPRESENTATIVE BILL HUDSON made a motion to adopt CSSSHB 189(L&C), 0-LS0711, Version B, for the purpose of discussion. VICE CHAIRMAN COWDERY asked if there was an objection. Hearing none, CSSSHB 189(L&C) was adopted. VICE CHAIRMAN COWDERY referred to Section 3, regarding the effective date of July 1, 1997, and said he would like to propose a conceptual amendment to change it to 90 days. Number 339 REPRESENTATIVE BRICE pointed out the committee would need to strike Section 3. He then made a motion to delete on page 3, line 6, Section 3. VICE CHAIRMAN COWDERY asked if there was an objection. Hearing none, it was so ordered. Number 399 MR. SULLIVAN said Chairman Rokeberg had a question about signage on a retail premises that sells tobacco. He said AS 43.70.075 (f) discusses that a person who holds a license endorsement under this section shall post on the licensed premise a warning sign as described in the subsection. He said the sign should measure 6 inches by 18 inches and must have lettering at least 1.5 inches high which should read, "The sale of tobacco products to a person under age of 19 is illegal." VICE CHAIRMAN COWDERY pointed out that there is also a mandatory fine of a minimum of $300. REPRESENTATIVE HUDSON asked if there is a cap on the amount that can be fined. VICE CHAIRMAN COWDERY pointed out the language is the same language regarding selling alcohol to a minor. Number 588 REPRESENTATIVE JOE RYAN asked Vice Chairman Cowdery if he wanted to raise the age from 19 to 21. VICE CHAIRMAN COWDERY responded that it is his intent to leave the age at 19. He also indicated there were no witnesses signed up to testify. Number 624 REPRESENTATIVE RYAN made a motion to moved CSSSHB 189(L&C), as amended, out of committee with individual recommendations and a zero accompanying fiscal note. Hearing no objection, CSSSHB 189(L&C), as amended, was moved out of the House Labor and Commerce Standing Committee. HB 134 - BARBERS AND HAIRDRESSERS Number 683 VICE CHAIRMAN COWDERY announced the committee would hear HB 134, "An Act relating to regulation of barbers and hairdressers; extending the termination date of the Board of Barbers and Hairdressers; and providing for an effective date." He indicated there is a House Labor and Commerce committee substitute. He also noted the bill had been heard twice before and that there were no witnesses signed up to testify. Number 825 REPRESENTATIVE HUDSON moved and asked unanimous consent to adopt CSHB 134(L&C), 0-LS0546, Version E. Hearing no objection, it was so ordered. Number 748 REPRESENTATIVE HUDSON made a motion to move CSHB 134(L&C), dated 4/14/97, Version E, out of committee with individual recommendations and a zero fiscal note. Hearing no objection, CSHB 134 (L&C) was moved out of the House Labor and Commerce Standing Committee. VICE CHAIRMAN COWDERY called for an at-ease at 3:35 p.m. He called the meeting back to order at 3:39 p.m. HB 218 - OMNIBUS INSURANCE REFORM VICE CHAIRMAN COWDERY announced the next bill to come before the committee would be HB 218 "An Act relating to regulation and examination of insurers and insurance agents; relating to kinds of insurance; relating to payment of insurance taxes and to required insurance reserves; relating to insurance policies; relating to regulation of capital, surplus, and investments by insurers; relating to hospital and medical service corporations; and providing for an effective date." He said the bill was held over from April 4. He explained the committee would adopt a proposed committee substitute. The bill then would be held so everybody could have a chance to review it before it is heard again on April 23. REPRESENTATIVE RYAN made a motion to adopt CSHB 218(L&C), Version 0-LS0850/B, dated 4/17/97. Hearing no objection, it was so ordered. VICE CHAIRMAN COWDERY announced CSHB 218(L&C), dated 4/17/97, would be held until the following Wednesday. HB 199 - COMMUNITY PROPERTY Number 865 VICE CHAIRMAN COWDERY announced the committee would hear HB 199, "An Act relating to the property, transactions, and obligations of spouses; relating to the augmented estate; amending Rule 301, Alaska Rules of Evidence; and providing for an effective date," sponsored by Representative Ryan. Number 889 REPRESENTATIVE RYAN informed the committee that HB 199 will allow an option in Alaska of people by signing a good faith agreement to take some or all of their assets and place them in community property status. The basic law of Alaska will remain individual property and this is strictly an option. He informed the committee that there are advantages to taking this option. Representative Ryan said, "If you have some assets with unrealized gains and you know that if you sell these assets you're going to pay the maximum capital gain tax of 28 percent and you decide rather than do that, you have a good relationship, you plan on living together until you die - you're wife and husband. When one of the partners dies, the basis is what for the value of the asset is that in which it was purchased and any appreciation of that, on behalf of the estate of the person who died, has no tax liability. So that asset can be sold, the gains realized without paying the federal government any taxes. Also, for the surviving spouse, their half of the estate, their half of the wealth of that assets gets the same step up in basis with no tax liability. So this is a provision in the law that goes back to I think 1932, with the Simons case that was argued before the supreme court that community property states now enjoy. Unfortunately, most community property states, there are nine of them, make community property mandatory. There are a lot of people, especially in this day and age, who don't for some reason or another don't spend their lives together and when they get divorced, there is a lot of acrimony because of the value of the assets and what the distribution splits will be and so forth. Community property provides -- to have community property provides that each partner in the marriage owns half of whatever is there. So that if there were a disillusion of a marriage, the judge would award 50 percent here, 50 percent here, it's a done deal. There is no reason for anybody to sit and argue about what the value is or that one partner should get more than the other or less than the other or however these things go in family law. This is a thing of community property - says, `Boom, you get half and half' and there is no other way you can do anything about it. We've talked to Judge Karen Ott and she says that she already does a lot of litigation on this because people come from other states that are community property states and they have acquired an asset in that state so that when a divorce comes along, the court already deals with community property because the property having been acquired under community property or if there is a dissolution of marriage, it still has to be divided as community property. So the courts are well familiar with this. It's not going to cause a problem to anyone. "We can allow, thorough the passage of this legislation, people who live in the other 41 states that don't have a community option to create a trust in Alaska under the generous trust laws that we just passed and signed by the Governor April 1, to take assets and to put them in a trust in Alaska and denominate the `miscommunity' property so that they will, in fact, have the advantage of a step up in basis and we will have the advantage of managing those assets and/or at least administrating them which I believe will be a good opportunity to bring capital to Alaska for investment and, if nothing else, the management and the administration fees will be quite substantial. So what we're doing is we're bringing in environmentally clean business. We have no downsides. We're going to put a lot of people to work. If you don't particularly like the state planning attorney and/or accountants, then you may have a problem with this bill, but other than that you ought to remember these people make substantial amounts of money and they're going to spend it in the communities where they live and that is going to go to provide jobs in many other related businesses. So we have everything to gain on this piece of legislation and really nothing to lose because we're not requiring anybody to do anything. We're offering people a choice. With that, I conclude my testimony. There are some people that are much more knowledgeable about this than I, I think on teleconference, and perhaps they can explain it a little better." Number 1170 JONATHAN BLATTMACHR, Partner (Attorney at Law), Milbank, Tweed, Hadley and McCloy, testified via teleconference from Anchorage. He informed the committee he is a member of the Alaska, California and New York Bars and practices in all three jurisdictions. He said the thinks Representative Ryan did an excellent job of explaining the bill. It is purely a voluntary system. If the husband and wife care to they can enter into the agreement and they can designate all of their assets or specify which ones they want treated as community property. That means they will own 50/50 and in the event of death or divorce, it will pass 50/50 to each of them. When they die, the surviving spouse will receive an exceptionally good tax break. He said it is a great thing to enact. Number 1231 BOB MANLEY, Attorney at Law, testified via teleconference from Anchorage. He noted he is member of an Anchorage law firm, Hughes, Thorsness, Powell, Huddleston and Bowman and has been working in the estate planning and probate area for approximately 20 years. He said he thinks HB 199 is a great bill because freedom and flexibility of property ownership will be provided. People can opt in to the community property regime and take advantage of the income tax benefits. He said by passing the bill, the legislature would be providing freedom and flexibility of arrangements to people because they could say in a community property agreement that property will be divided in some other fashion or in divorce court if that ever happened (indisc.). People are being given more options. Mr. Manley said it will be good for commerce in Alaska because he thinks it will bring in more trust activity. He referred to the Trust Act and said there is a requirement that any community property trusts for non-Alaskan residents have an Alaska trustee with some portion of the administration in Alaska. Alaska should see more activity in the trust area and the formation of new trust companies. He urged the committee to support the legislation. Number 1330 DOUGLAS BLATTMACHR, President and Chief Executive Officer, Alaska Trust Company, testified via teleconference from Anchorage. He said his organization totally supports HB 199. Mr. Blattmacher said he and his wife just moved back to Alaska and would like to have the option of their property being considered as community property to take advantage of the taxing. Number 1355 REPRESENTATIVE HUDSON said he believes this has a selective option capability as well. He asked if he is correct in saying that a couple could select any portion of their assets to be owned by this community allowance. MR. BLATTMACHR said that is correct. They could opt for any amount, any particular piece of property or all of their property. REPRESENTATIVE HUDSON asked if this occurs in any other state. MR. BLATTMACHR explained in other states where they have it, the spouses can elect out. They can elect for certain assets to be elected out, but HB 199 provides for an election which provides much less turbulence with respect to property rights and provides a lot more flexibility. In the states where community property currently exists, a husband and wife may agree to a separate the property regime rather than have community property for all their assets or for specifically identified ones. Number 1425 VICE CHAIRMAN COWDERY asked whether the property could include escrows or stocks. MR. BLATTMACHR explained it can include any assets such as stocks, bonds, a home, commercial real estate, et cetera. He noted one of the great advantages is that often people who have real estate have taken depreciation deductions which are provided for under the income tax law. By the time the first spouse dies, the basis is extremely low and yet the survivor will still have a very large potential income tax liability. He said, "If the husband died, and the husband and wife have owned the asset and half is included in the husband's estate, the wife is stuck with her extremely low basis. In fact it can, in a tax sense, actually be less than zero. But by electing for it to be community property, when the first spouse dies, 100 percent of the inheritance profit is forgiven, so the surviving spouse can turn around and sell it without any capital gains tax at all." Number 1507 RICH HOMPESCH, Attorney at Law, testified via teleconference from Fairbanks. He noted he has been an attorney in Alaska for almost 13 years and practices in the area of probate, estate planning and taxation. Mr. Hompesch said when he was in law school and first learned about the difference in income tax treatment between community property and non-community property, he never did understand the reason why there is such a difference and nobody has been able to explain it to him. Mr. Hompesch said he thinks there is an injustice in the tax code. Surviving spouses in Alaska will pay more income taxes than surviving spouses in California, Washington and the other community property states. He said HB 199 corrects this injustice and allows Alaskans to elect certain (indisc.) community property. Mr. Hompesch said in his estate practice, about 85 percent of time he represents women who are surviving spouses. This legislation will help those women save in income taxes. He noted the clients that he has discussed this bill with like it. Mr. Hompesch urged the committee to pass HB 199. Number 1600 LINDA HULBERT, Insurance Agent, New York Life Insurance Company, testified via teleconference from Fairbanks. She noted she was an educator in Alaska for 20 years and has been a life insurance agent for the last 8 years. Ms. Hulbert told the committee that she spends a lot of her time helping people plan for retirement, in that she writes wills to help them plan to protect themselves against risk. Many times there aren't a lot of assets and there is the concern about what is going to happen to the second spouse. With life expectancies extending, what is going to be there to help a second spouse upon the death of a spouse. She said the bill presents a tremendous opportunity to help both people with significant assets and those people who do not have many assets. Ms. Hulbert said she would like to urge the committee to pass the legislation because she feels it is very important for all Alaskans, no matter what their income level is. VICE CHAIRMAN COWDERY asked whether anybody else wished to testify. There being no further witnesses to testify, he called for a brief at-ease at 3:55 p.m. The meeting was called back to order at 4:00 p.m. Number 1673 REPRESENTATIVE BRICE made a motion to move HB 199 out of committee with the zero fiscal notes and individual recommendations. Hearing no objection, HB 199 was moved out of the House Labor and Commerce Standing Committee. HB 116 - WORKERS COMPENSATION SELF-INSURANCE GROUP Number 1698 VICE CHAIRMAN COWDERY announced the committee would hear HB 116, "An Act relating to workers' compensation self-insurance." REPRESENTATIVE HUDSON made a motion to adopt CSHB 116, dated 4/16/97, Version H, for the purpose of discussion. Hearing no objection, it was so ordered. CHAIRMAN NORMAN ROKEBERG called for an at-ease at 4:01 p.m. He called the meeting back to order at 4:05 p.m. He said the committee has adopted the committee substitute for HB 116. Number 1775 REPRESENTATIVE PETE KOTT, sponsor of the measure, came before the committee. He said he would explain the changes in the CS. The changes were made after numerous hours of discussion with the various entities. The first change is on page 2, line 1, where language was deleted that established a filing fee of $500. The approval has now been given to the director to establish that filing fee. On page 2, line 31, language was deleted that allowed the director to prescribe the amount of the security and included an amount of $450,000. He noted this used to be prescribed by the director. REPRESENTATIVE KOTT said, "Page 3, line 27, used to have an estimated standard annual premium of $250,000 and $500,000 for subsequent years. We've doubled that from $250,000 to $500,000 for the first year and added conditional $250,000 for subsequent years and that deals with the premiums. Then over to page 4, lines 5 and 7, we're requiring now the administrators and the service companies to carry errors and omission insurance - not in the original bill. And page 4, line 31, this is an inclusion that basically suggests that the group will be subject to the premium tax imposed on other domestic carriers. The next change is on page 7, line 9. In the original bill there was language that groups had to give notice when a member terminated or cancelled and to continue to carry that member for 30 days unless the member obtained substitute insurance. The new CS removes that language. On page 8, line 5, there is language included to allow the group to request a 60 day extension on the deadline because often times they are fairly comprehensive and they just allow some flexibility. Then over on page 9, line 27, we've added a requirement that the director must approve the refunds before those monies are refunded to the members. Then on page 10, starting on line 6, this language was added making it clear that the 25 percent imposed in this section is in addition to the 25 percent required under 20.47.030 (A)(10). The amendment that you have addresses this particular area." CHAIRMAN ROKEBERG asked whether that is the amendment the committee members have. REPRESENTATIVE KOTT said, "Yeah, there seemed to be some confusion, if I just might divert, that you could in fact use that 25 percent to allow it to go toward the premiums and this makes it clear that this is not used toward premiums." Number 2029 REPRESENTATIVE HUDSON asked whether the amendment is included in the CS. REPRESENTATIVE KOTT said it is not in the CS. He said that the intent wasn't clearly captured. The amendment makes it certain. Representative Kott said, "On page 10, line 18, (indisc.) with the workers compensation so -- insurance guarantee fund. This is a new section that requires the groups to establish a workers' comp self- insurance guarantee fund. Each member is to make a one time deposit of 5 percent into the fund. The member can receive that 5 percent back once they leave the group." Number 2062 REPRESENTATIVE RYAN asked whether the purpose of the guarantee fund is if somebody can't meet their obligations. REPRESENTATIVE KOTT responded, "It could be used to meet the group's obligations or the -- yeah, the group's obligation. It's a group fund." Number 2103 REPRESENTATIVE KOTT referred to page 11, lines 5 and 6, "This specifies that 25 percent of the funds paid under subsection 160 and the guarantee funds may be used to make up inefficiencies and that gets back to that earlier section - 5 percent. And page 11, lines 26 and 27 reduces the penalties from the previous amount and they were $1,000 and $10,000 and it's been reduced to $500 and $5,000." REPRESENTATIVE HUDSON asked what it was before. REPRESENTATIVE KOTT responded, "It was $1,000 - civil penalty may not exceed $1,000 for each act or violation and may not exceed $10,000 in the aggregate." Number 2156 REPRESENTATIVE RYAN asked whether that will be the penalties for all insurers or just for this group. REPRESENTATIVE KOTT responded that he believes it is just for this group. He then referred to page 12, lines 2 and 3 and said, "Again, the penalties were again reduced and it used to be on line 2, it was $10,000 now it's reduced to $5,000, and on line 3 it was $100,000 and it was reduced to $25,000." Number 2190 REPRESENTATIVE GENE KUBINA asked why the penalties are being reduced. REPRESENTATIVE KOTT said with the higher amount the intent of penalties are to ensure that the group complies. Once that is satisfied, then there is no need to adjust it any higher. He said he didn't want to put so much of a burden on the group that it perhaps would cause insolvency or bankruptcy. It is very similar to other states. He noted in the original version of the bill he arbitrarily came up with a number. Number 2225 REPRESENTATIVE BRICE asked Representative Kott if he knows what the penalties are for the same type of violations under the regular workers' compensation (indisc.). REPRESENTATIVE KOTT responded that he isn't sure what they are. Number 2246 REPRESENTATIVE KOTT referred to page 12, line 6, and said, "We've defined `knowingly' as basically the same -- the definitions are basically the same definition as used in the criminal code. I might add on line 1, page 12, the word `knowingly' was added. It was felt that in order to impose a civil penalty of this nature, at least the group should be aware that they did in fact commit a violation of the cease and desist order. That's back on page 12, line 1. I overlooked this one, but the word `knowingly' was inserted. And page 13, line 21, we removed the word `unincorporated' from the definition of workers' comp self- insurance group. The reason for that is that some of these groups could in fact be incorporated. Page 13, line 23, we changed the minimum number of employers from five and upped it to ten. Mr. Chairman, I believe that concludes the changes. I might add that the drafter - we just confirmed before coming down here Section 2 of the new CS is not required now - page 13. REPRESENTATIVE HUDSON referred to page 13, line 23, and said that has been increased from five to ten. That places a little higher standard on acquisition to this treatment. REPRESENTATIVE KOTT said that is correct. He said, "I'll just kind of recap now what the bill contains based on my original objective and that is to make whole any one employee that has a workers' comp claim to make sure that they are paid and made whole as best as we can. And now what we have in this whole mix to ensure that happens is that you can use the surplus from prior fiscal years. You have an administrative fund that can be used. We have the fund that was created in 24.47.160 (a), which is -- in the earlier fund we talked about the 25 percent, we have the guarantee fund, we have assessments, we have a $450,000 security and you have the joint several liability of the members. Then if all else fails which after all these layers, I can't that it would, we have the $1 million in aggregate assets." Number 2467 REPRESENTATIVE RYAN said at the last hearing on the bill he remembers asking about the amount of money that was going to be used as a fall back position. He referred to the $1 million and said he asked about liquidity versus assets. Assets can't necessarily be liquidated at their value and it would take a period of time to get them converted to liquid assets. Representative Ryan said he had thought he heard that they would come back to the committee with liquid assets. He also said he believes that the director of the Division of Insurance and a number of other people had said that $1 million wasn't really sufficient and that they were going to see if they could pool more assets and come up with a higher basis. REPRESENTATIVE KOTT indicated that the discussion did take place. He pointed out that what has been added to the bill is a 5 percent fund, a 25 percent fund and also $450,000 surety, cash or bond. He said he doesn't know what they would amount to if they were added up, but it would be close to $1 million in cash or liquid assets. He stated that as the legislature has addressed some of the issues with workers' comp over the years, you also have to recognize that some of the serious worker's comp claims are not resolved on a monthly basis. Sometimes it takes several years to resolve a claim, and when it is resolved, often times you find that you're not paid in one lump sum. It is disbursed over several years. He said he believes the amount is an appropriate amount. TAPE 97-44, SIDE B Number 001 REPRESENTATIVE KOTT continued, "I'm not sure if they establish the interest penalty, if you will, on workers' comp, but on a regular insurance claim, you know it takes several years to make the adjustment. And while you're in these serious workers' comp claims, if there are any, you're still collecting from your members the annual premiums. That's been increased. Don't mean that there is a number of safeguards now that this bill did not possess when it first hit this committee from a monetary perspective." Number 027 REPRESENTATIVE COWDERY questioned how payment will be issued to the hospital if there is a claim. REPRESENTATIVE KOTT responded that he would defer the question to some of the people in the audience. He said it is his understanding that the administrator would be setting up this fund. Number 087 REPRESENTATIVE COWDERY said he would like to make sure the question is answered as to when an injury occurs, how will the treating physician be assured of payment. REPRESENTATIVE KOTT said he assumes it would be no different than what currently happens. He noted he might be wrong. Number 121 STEVE WISDOM, President, Alaska State Homebuilders Association (ASHA), came before the committee to testify. He noted he lives in Homer. Mr. Wisdom informed the committee members that currently 32 other states have legislation that allows self-insurance pools and 14 other states have models that his organization is looking at. He referred to the question of why the ASHA wants to do this. The first reason is most homebuilders have ten or fewer employees on their payroll. Larger insurance companies don't pay attention to the small employer as they don't have the loss control specialist in the field to work with the small employer. If a loss comes up, they pay the loss and, in many cases, the small employer has to find a new carrier the next year. Self-insurance pools require all participants to be completely involved in the workers' compensation issue such as on-site safety programs. MR. WISDOM said another reason is to reduce costs. Studies looking at self-insurance pools, specifically within the homebuilders associations in the 14 other states, the cost to the builder has been reduced between 30 percent and 40 percent which is from actively working the loss control. There are also savings involved in that if there is someone injured, they have immediate follow-up. He said a side benefit to passing the bill is a safer workplace for the worker because the employer becomes heavily involved in putting safety programs in place. He noted there is also the peer pressure involved. MR. WISDOM referred to the last hearing on the bill and said the Division of Insurance raised four major questions. One was the guarantee fund which is now addressed in the CS. Another was the premium tax which has also been addressed in the CS. The third is the number of employers that would be involved to bring the base up and that has been addressed. The division was also concerned with the assets and the liquidity of the assets, the $1 million, which has also been addressed. He pointed out their major concern is a safe workplace and their employees. He noted employees are a major asset to small firms. Number 318 BARBARA HUFF-TUCKNESS, Director, Legislative and Governmental Affairs, Teamsters Local 959, testified via teleconference from Anchorage in support of HB 116. She said, "In reviewing this bill, we believe that by allowing groups of employers to pool their resources together for the purpose of providing workers' compensation coverage for their employees, this bill will accomplish several things." MS. HUFF-TUCKNESS said, "First, we believe this bill will help reduce the cost of workers' compensation by reducing the cost and we've got a mitigating reason out there as always. Money saved could be utilized to improve wages and benefits for employees. These savings can also be used to provide more job opportunities in the state which would create a more stable work environment for many Alaskan workers, for example, the Alaska Truckers Association. And in talking with several individuals within that group, there seems the way the set up in the current system - those larger companies out there within the Trucking Association would (indisc.) better break than some of the smaller companies and we believe that there is a theory here in pooling those companies together would more realistically spread some of those costs. Secondly, as a self-insured group, we believe there would be a great incentive, on behalf of the group participants, to focus on safety as was mention (indisc.) speaker. This incentive itself will reduce the cost of workers' compensation coverage. We believe the group would tend to look closer at safety and the importance of the safety programs." MS. HUFF-TUCKNESS continued, "It has been proven that workers who are properly trained in safety work smarter on the whole and for that reason have much fewer, if any, accidents which results in a reduced number of claims, thereby reducing the cost of workers' compensation. The concept applied here, and I'm not going to use the phenology that they are the same because definitely there are some differences. But I think the concept is somewhat similar to the health and welfare plans whereby groups of employers and/or many groups of unions have pooled their resources (indisc.) buying power for purposes of providing health care coverage. This has worked well and has provided a substantial savings to the plan, plus allowing expansion of benefits based on more available dollars out there." MS. HUFF-TUCKNESS continued, "Additionally, and I don't want to say that we walked into this I guess with blinders on because there were a lot of discussion - a lot of issues that had been raised to share with the committee. There were concerns that the group would not be able to cover the cost of compensation claims if there was a catastrophic accident, especially during the first year of this start-up of this group, whether it's with the homebuilders, the trucking association or any other viable non-profit organization out there. In fact I might add, and I don't know with an after- thought here driving over here this afternoon, even looking at the anticipation of the gap I find coming on board with the various contractors that would be involved in that whether it would be through and AGC or a TAGS organization out there which they do currently already have set up. This will all be another opportunity for them, down the road, to look at reducing costs as well." MS. HUFF-TUCKNESS continued, "But our concerns definitely were with the amount of monies covering the premiums in this area because although we represent unionized workers out there, in general, the concern being that the be enough money to cover whatever claims, whether union or nonunion. With the proposed premium amount established in the CS, the inclusion of the what I term an `umbrella insurance policy,' those pros in the area are probably more knowledgeable referring to the excess insurance - I believe that's the way it's referred to in the bill." MS. HUFF-TUCKNESS referred to the requirement that an additional 25 percent of each member's premium be paid in addition to the required premium amount and said there seems to be sufficient guarantees to protect the injured worker and ensure ongoing coverage with those existing or ongoing claims. She urged the committee to move the bill. Number 551 BILL TAYLOR, representing Alaska State Homebuilders Association, came before the committee to testify. He noted he is a homebuilder in Anchorage and the name of his company is Callin (ph.) Builders. He gave committee members an annual report from New Mexico, which is a state that has model legislation. Mr. Taylor said the report is actually a financial statement of the group after they have been in business for a number of years. He pointed out the financial stability of the group. MR. TAYLOR said they have tried to address the concerns by raising the initial premium requirement from $250,000 to $500,000 in response to numerous concerns about protecting the potential claimant and protecting the group from insolvency. He said they have also tried to increase the amount of oversight from the director. There has been a lot of discussion about start-up risk. Mr. Taylor said he thinks that if the start-up risk hasn't been eliminated, it has been neutralized to the point where it shouldn't be a significant concern. He said there are four layers of protection. The first is 70 percent of the premium income goes to loss reserve. He noted that in the New Mexico report, their loss reserves is upwards of $11 million. This fund can generate a tremendous amount of money in a relatively short period of time. Mr. Taylor referred to the assessment to the members and said the liquidity of the initial requirements has been improved considerably. He said if there is a catastrophic claim, the payment will come in a delayed manner which gives more time to accumulate reserves. Number 686 MR. TAYLOR explained the next layer is the $450,000 surety bond. That is straight cash, dollars in the bank that the director of the Division of Insurance has access to. The final layer is the guarantee fund. He said they have required 5 percent of the initial premium deposit and $500,000. That guarantee fund has been funded with a $25,000 bullet. MR. TAYLOR informed the committee he would like to propose one amendment on 6, line 16, in Section 21.47.060., add a new section (C), "The board of trustees shall follow the prudent man rule of investing when investing money held in reserves for losses." He said they just want to assure that the board of trustees, who are responsible for placing the reserve money, certificates of deposit and treasury bond and bills, follow the prudent man rule of investing. That assures that when the board of trustees allocates these funds for various investments follows the prudent man rule. CHAIRMAN ROKEBERG asked Mr. Taylor to put his proposed amendment in writing. Number 814 MR. TAYLOR said another point he would like to make is that the director has virtual control over the self-insured groups through the amount, the form and which insurance company is to be used for aggregate, surplus or excess insurance. He said that concludes his testimony. REPRESENTATIVE RYAN pointed out that we live in a politically correct world and the term now is "prudent person." Number 860 REPRESENTATIVE COWDERY asked if the reserves are paid back to the members as dividends. MR. TAYLOR said his understanding is those funds have to be held. There is an actuarial equivalent of an amount of money that must remain in place for a given group of potential insurers. Once that minimum has been met then the surplus can be given back to the members in the form of dividends. So there is the net income and the required minimums. That sort of goes into another pool that can be returned to the group. REPRESENTATIVE COWDERY asked how the assurance will be made that when a person goes to a doctor, how that doctor will be paid. MR. TAYLOR said they would follow the same rules that other compensation carriers play by. He said if someone has a claim, all of his employees know that their carrier is the self-insured group and would report that to the medical facility on their application for treatment. He said they would be a bona fide carrier and would be licensed by the state of Alaska. Mr. Taylor noted that the employer is required, by statute, to post their workers' compensation information in an obvious place. So the worker, in theory, should have that information instantly available to them. Number 1042 REPRESENTATIVE COWDERY questioned how payment will be made to the individual who has a temporary disability. He also questioned how it would be made if there is a permanent disability. MR. TAYLOR explained there is what is called a third party administrator (TPA) that the group contracts with to make all the claims paying mechanisms work. He noted the TPA is a professional group that would be hired by the self-insured group. CHAIRMAN ROKEBERG asked Mr. Taylor how many members are in the New Mexico organization. MR. TAYLOR said he believes they started out with approximately 343 participants and they are now over 1,000. CHAIRMAN ROKEBERG questioned how many homebuilders are in Alaska. MR. TAYLOR responded that there are 893 firms. CHAIRMAN ROKEBERG asked if TPA would determine the amount of premium assessments to each member based on their employees and their loss record history. MR. TAYLOR indicated the TPA has the expertise, the actuarial sciences and the required assessments that would be needed. Number 1151 REPRESENTATIVE COWDERY said he would assume the 893 firms would support the legislation. He asked if there are any subcontractors, trucking associations, etc., who would also support the bill. MR. TAYLOR said the legislation enables those groups to form their own pools. The truckers, miners truckers, electrical workers, etc., could form their own groups. REPRESENTATIVE RYAN asked if all the groups could form under an umbrella. MR. TAYLOR indicated they could if they elected to do that. He pointed out that he thinks what has been successful in other states is that groups of "like kind" sort of form their own separate pool. Mr. Taylor said his understanding is that this would allow, for example, the miners and the builders to form a group if they elected to. Number 1364 RENEE MURRAY was next to testify via teleconference from Anchorage. She informed the committee she is a retired vice president of Wetzel Services. She noted she is not representing anyone. Ms. Murray stated she has worked in the insurance industry for 40 years, 20 of which was spent working for insurance companies and the last 20 she spent working in the self-insurance and third party claims administration business. Ms. Murray pointed out she has nothing to gain by the passage of the bill other than the benefits that she believes would adhere to the general public through cost savings experienced by the entities that could band together as self-insurers grow. MS. MURRAY said that generally, group self-insurance would greatly reduce the individual insurance costs over time and these savings would eventually reduce consumer costs and should benefit everyone. She said she thinks the bill is an excellent bill with substantial safeguards and guarantees. She said she can't imagine why there would be any legitimate opposition other than perhaps that of insurance companies who stand to lose their substantial premium dollars. She noted in her career she has almost never seen a self- insured entity opt to return to a standard insurance market because the cost savings were so great, and those few instances when that did occur they generated a return to the self-insurance market at a later date. Number 1356 MS. MURRAY said she has one suggestion for a change in the bill and that is, in her opinion, the net worth of the group should be increased to between $3 million and $5 million as an additional guarantee. With that exception, she stated she is very much in favor of the passage of the bill. CHAIRMAN ROKEBERG asked if that would be the individual net worth or the cumulative net worth of the group. MS. MURRAY responded the net worth of the group. Number 1399 LINDA HALL, Representative, Alaska Independent Insurance Agents and Brokers, testified via teleconference from Anchorage. Ms. Hall stated she just received the CS and isn't prepared to discuss the changes that have occurred. She said as Representative Kott went through the changes there were some questions she had. Ms. Hall said she would limit her testimony to questions. She said, "One is the requirement for an E and O coverage. I -- this is not necessarily an appropriate coverage for these types of groups. I'm not sure what the intent of requiring E and O (error and omission) coverage is. There may be a requirement for fiduciary liability, but I'm not sure that the E and O requirement is particularly appropriate." MS. HALL indicated she has concerns about the guarantee fund. One of the earlier major objections to the bill was the lack of participation in a guarantee fund. This particular language in the CS does not address what type of guarantee fund this would be. She questioned whether all groups that fall under this chapter would participate in a single guarantee fund or if each group would have a separate fund and whether there would be the ability to assess from one self-insurance group to another. She said there are a number of questions that need to be addressed on that issue. Number 1487 MS. HALL stated she takes serious objection to the reduction in the penalties in the bill. As a member of the insurance industry, they are subject to substantial penalties. She said she would like to see how the penalties in the bill compare to the penalties of the insurance industry. Not only are insurance practitioners subject to civil penalties, they are also subject to criminal penalties. She said she would think the same requirements should be placed on any type of self-insurance group. She again noted she hasn't had a chance to review the CS, but her philosophical objection to the removal of large premium dollars from the insurance marketplace is still a major concern. Alaska is a very small marketplace and the bill would detract from the ability of all businesses who might not qualify for a special interest group to purchase coverage at a reasonable price. Number 1543 CHAIRMAN ROKEBERG asked if Ms. Hall if she believes the passage of the legislation would have a negative impact on the availability of workers' compensation insurance to other people who couldn't join groups like this in the state of Alaska. MS. HALL said she absolutely feels that way. As she testified in February, we have a very small marketplace, we've had a good track record and we are continuing to attract good strong insurance companies to the market which increases competition for all Alaskan businesses. If the available premium volume is eroded through self-insurance groups, insurance companies will no longer find Alaska an attractive place to do business and, therefore, that competitive edge that we're now feeling will be lost. Number 1593 REPRESENTATIVE HUDSON said, "One of the lines of question here was what if a member who is on workers compensation is traveling to another state. Under the current workers' compensation that is handled by traditional carriers such as yourself, what kind of bona fides are provided to the insured so that he or she can get attention out of the state of Alaska?" MS. HALL indicated she hasn't adjusted workers' compensation, but suggest Ms. Murray would probably be able to answer. Number 1642 MS. MURRAY stated, "This law is subject to all of the regulations and controls of the Alaska Workers' Compensation Act, and that act covers - for multiple states. You have a right to choose which state. If you're an Alaska worker working say in the state of Washington and are injured there, you can elect which state that you wish to chose your coverage from. This would be exactly the same because the coverage for this is no different than coverage for any other." Number 1701 RICHARD BLOCK, Alaska National Insurance Company, came before the committee to address the bill. He said there are three principle areas from his reading of the CS that suggest the bill still has very serious problems. He said his company still opposes the bill. One problem is there isn't a change in the underlying problem in the requirement that there be cash liquidity capital funds to be able to operate for the first several years required in this bill. He said there is talk about the $1 million, but that is not $1 million that goes to this group. It's the $1 million of net worth in the participants of this group. MR. BLOCK said that we have heard that there are several layers of resources available in the event of failure of the organization to be able to pay claims. He said he isn't sure that it is appropriate to be designing a program around alternatives to failure. Those programs are the assessment of the members which he would propose is not an easy thing to reach if there were members whose financial conditions change or who had the net worth but not the case. Secondly, they are talking about a $450,000 bond, but that bond as he reads the language is not readily cash and accessible as perhaps a capital cash account would be. He referred to the guarantee fund and said he would have to plead a little bit of inability to respond completely on that fund because apparently now there is a separate guarantee fund proposed with $25,000 in it or 5 percent of premium for group self-insurance only. Number 1856 MR. BLOCK referred to the New Mexico annual report and said he would suggest that if Alaska adopts this bill and this was started in Alaska, you wouldn't see a report like this. He said this is because there are no provisions for auditing with a certified audit for this group in the same manner the New Mexico report is done. There is the requirement of a certified audit, but it is limited to three or four specific items such as claim reserves, bad debts and honoring premium reserves and one other item. It is not a complete financial audit. He said in the New Mexico report there is an equity, there is retained earnings, there is also a surplus provided. No such provision is required in the bill before the committee. In other words, if there is a profit it is proposed that the profit from each year be returned to the members so that you never really get to the point where you build up a surplus as is demonstrated in a New Mexico approach. There is no requirement in the bill that there be an initial surplus. MR. BLOCK stated, "It is these kinds of failures to establish a financially responsible enterprise that gives us great pause. And while I appreciate Renee Murray's support for the loss control and for the expense saving and for the economies that can be gained by having an industry sponsored group, with which largely I agree, I also respect Renee Murray's observation that you need a much stronger capital base underpinning this thing for it to be assured of success." MR. BLOCK explained the second major point is that there is still failures to reach equity with the other insurance type of mechanisms. For example, they did put in the premium tax which is a progressive step given this new guarantee association, but they took portions of it back by saying they get a credit for 50 percent of their assessment to the guarantee association. An unidentified speaker indicated that was taken out. MR. BLOCK apologized for not seeing the latest version. He said there are also numerous technical problems and it is a non-workable type of plan. Mr. Block stated the points by the Labor Union and Mr. Wisdom in that there is desirability in having a mechanism where people of common interest or common industry can come together and provide loss control and an economic incentive to work together is an allottable one and it has worked successfully in Alaska with several groups. Number 2088 REPRESENTATIVE RYAN said, "I understand that presently (indisc.) companies do this kind of work have a pool, neither wet or day, for someone who can't perform (indisc.) bankruptcy. And they will then cover all the claims and assess themselves later to cover the cost of the expenses and to bring this pool back up to where it's supposed to be. Is there any provision here for participation for that kind of pooling?" MR. BLOCK said Representative Ryan is referring to the Property and Casualty Guarantee Association. He said the way that operates is if a property or casualty insurance carrier should become insolvent and unable to pay its claims then the Guarantee Association is activated. It is activated by assessing all other property and casualty insurers to pay the net loss in claims that is left by the defaulting insurance company. Mr. Block referred to the question of is there a mechanism in the bill and said apparently what has been done is a guarantee association has been created made up of self insurance groups such as what the homebuilders would establish. He said it would be hard for him to understand what happens if it is the homebuilders that go insolvent and there are no other groups formed. There would be no place to go for assessment. Mr. Block noted the Guarantee Association covers all property and casualty insurers including workers' compensation insurers. Number 2229 REPRESENTATIVE KUBINA asked Mr. Block whether he is correct in that he represents Alaska National Insurance Company. MR. BLOCK indicated that is correct. REPRESENTATIVE KUBINA said one thing that has been portrayed to him is that Alaska National Insurance Company is quite a monopoly in Alaska as far as workers' compensation. He said, "We either have to get insurance through you or you rewrite the insurance." MR. BLOCK responded that he has heard that statement was made. He said he would set the record straight. "Alaska National Insurance Company is an important market in this state. Since its formation in 1980, has provided a stable and growing underwriting presence for workers' compensation as well as other lines. Right now, other than the special interest insurance companies such as the timber exchange and ERIKA (ph.), and I think those are the only two, are in the Municipal League's Group. We are the only Alaskan based insurance company writing workers' compensation, we are not the only carrier, but the only carrier that is dependent upon a book of Alaska business for our success. So we've always been here and always provided a market." MR. BLOCK continued, "On the other hand, we are subject to competing for business with all the other carriers that do come up to this state and there are numerous other companies that come here including the industrial indemnity, which has been a market for us for years. Nationwide is moving up as a group. INA or Cigna has always been an important group. Eagle is a newer company and is a vigorous competitor for certain segments of business and I could go on. And the fact of the latter is that say within the last five years, Alaska National has written somewhere between 25 and 30 percent of the market which means that between 70 and 75 percent of the market is written by other insurance companies. I don't have the 1996 figures because the cumulative industry-wide data won't be available probably for another couple of months. But in 1995, which is the last data that I have as to all the other carrier writings, our market share has been reduced and my sense of it is that it's being reduced because of the vigorous competition from other carriers. Now what about the other 70 or 75 percent? Does Alaska National in any way participate in that? With one exception, which I have to explain for a technical reason, the answer is absolutely no, and the reason for that is that we do not do reinsurance. Alaska National does not reinsure other insurance carriers. It's not the business that we do. So that business written by INA, Industrial Indemnity, Nationwide, Eagle, et cetera, et cetera, is written by those companies for their own account...." TAPE 97-45, SIDE A Number 001 MR. BLOCK continued, "... based on its size determines for itself what that level of catastrophic exposure might be. And for example, in our company we may say that we're prepared to accept what $200,000 or $300,000 of a loss, whereas the INA may be more than willing to accept a million dollars of a loss. It's ludicrous to think that INA or Industrial Indemnity is gonna turn around and reinsure with us when we're prepared to accept much lower loss levels than they are. So I don't know where the idea came from, but it is totally and utterly ludicrous. Now there is one technical area, which I will explain very quickly Mr. Chairman, and that is every insurance company writing workers' comp in the state of Alaska does reinsure, pro rata to its writings, the assigned risk pool. So that if someone gets an assigned risk policy, that is shared pro ratably by all of the writers based on their voluntary writings and to that extent, we share in that in the same way all other carriers do and I hope that explains it in such that rests." Number 102 CHAIRMAN ROKEBERG asked Mr. Block whether his firm buys reinsurance. MR. BLOCK indicated it does buy reinsurance. CHAIRMAN ROKEBERG asked Mr. Block whether the bill, as he reads it, provides for reinsurance. MR. BLOCK said there are some terminology problems. If they are self-insuring, they would not be buying reinsurance. They would be buying excess insurance and the bill does provide for excess and aggregate. CHAIRMAN ROKEBERG asked whether that is equivalent to reinsurance. MR. BLOCK indicated it would be similar. CHAIRMAN ROKEBERG asked whether it is readily available in the national underwriting market. MR. BLOCK responded that he isn't prepared to say that it is readily available. He said it is sometimes difficult to find that and it is even more difficult it on a long-term continuing basis. He said, "It is also difficult to find it, the lower retentions you have." The risk of losing that aggregate excess reinsurance exposes the group to the necessity of maybe terminating the group or accepting a whole lot of high risk. Number 430 MARIANNE BURKE, Director, Division of Insurance, Department of Commerce and Economic Development, came before the committee to give her testimony. Ms. Burke said, "I think those who have testified before me have alluded to cash ability to pay the claims, and although there have been some changes to this proposed legislation, the cash is still not there. There has been discussion about the layers of protection, I would point out to the committee that we will still have that inception when this group starts business -- $87,500 to pay claims. This is by the formula in the bill itself which requires a minimum of $500,000 in premium of which 25 percent must be available up front." REPRESENTATIVE BRICE questioned what the number was. MS. BURKE responded, "The first year's premium must be $500,000 of which 25 percent must be available up front, that's 125,000. The proposed legislation stipulates that 70 percent will be available for claims. The math of that is $87,500. The remaining monies, $37,500, is for administrative costs including the purchase of the reinsurance, which has been discussed at length and I won't cover that again, the cost of the TPA, the organization to administer this group, pay the claims, the audit costs, any costs for rating agencies, advisory organizations, audit, actuarial opinions or any of the other costs associated with administering a group such as this. Again, it's cash. We have had testimony to the fact that there is a $450,000 bond or surety. I would point the attention to page 3, line 19 and 20, which specifically say this is payable only -- payable upon the failure of the group to pay workers' compensation benefits that it is legally obligated to pay. In other words, they're insolvent. So they go insolvent before this $450,000 layer of protection is there. The reinsurance is provided for, but keep in mind we've only got a total of $37,500 to cover all of those costs." MS. BURKE said there is a guarantee fund established in the new version. She said she would emphasize that by definition a guarantee fund is a group you can go to and say, "Everybody, pony up your share to cover this shortfall." A group of one, if it is already insolvent wouldn't be able to meet this. She noted there would be $25,000. Ms. Burke said there is a lack of cash to pay the claims. Number 724 CHAIRMAN ROKEBERG asked Ms. Burke if she has had any communications with the Homebuilders Association since the last meeting on this bill. MS. BURKE responded that Mr. Grossi was kind enough to fax her a copy of the proposed CS. She said when she saw it she asked for a conference call. The Alaska State Homebuilders' Association offered to meet with her and Mr. Grossi to discuss the CS. She said she was committed to talk to another insurance company that is going to move the state of Alaska, which had been committment for over two months. She said the conference call was arranged for a day earlier and everybody was on the conference call and the CS was discussed. Ms. Burke stated she has not met with or discussed the issues with them since that conference call Thursday, a week ago. She informed the committee she has provided the Alaska State Homebuilders' Association with a memorandum summarizing things that Mr. Grossi from the Division of Workers' Compensation and the Division of Insurance feel are essential for this type of concept to work. She stated she firmly supports the concept of the bill, but it simply is not adequately funded. CHAIRMAN ROKEBERG asked Ms. Burke to provide the committee with the memorandum. Number 827 REPRESENTATIVE KOTT said he has heard over and over that there are not enough liquid dollars available to pay claims. Everybody seems to be coming in on that angle. The bill has been adjusted tremendously. He said, "You've mentioned some of the areas that are taken care of in the bill, but I also must point out that you talk about the claims fund account, the 70 percent for the losses, that is a minimum at least. The annual payment of premiums is at least -- there is a 25 percent account that was established as well which was not mentioned in the $450,000, if you ever get to that point, would be available. (Indisc.--coughing) cash. Beyond all the rhetoric and the smoke, what is the bottom line dollar amount that you would consider satisfactory?" MS. BURKE said this issue was discussed on the conference call and she told them that the similar groups in the state of Alaska requires, by an act of this legislation, $1,500,000. She informed Representative Kott that in the memorandum she proposed an alternative funding mechanism that they might be able to consider. If they do not want to be a reciprocal, perhaps they could look at a different funding mechanism. She said she gave them some suggestions. Ms. Burke informed the committee she hasn't had a chance to talk to them since then. She noted the Homebuilders Association received the memorandum that Thursday morning because she had promised a fast turnaround. Number 930 CHAIRMAN ROKEBERG referred to $1,500,000 and asked if that would be in the form of net worth or on deposit. MS. BURKE explained the group itself would have a net worth of $1,500,000 which would be in the form of a $300,000 deposit with a bank in the state of Alaska. It's usually in the form of a tri- party agreement between the director of the Division of Insurance, the self-insured group and the bank. The money wouldn't be used unless all three parties agree to what it should be used for. The remainder is in a net worth, usually in the form of approved investments that are very specifically addressed in the insurance codes - the type of acceptable investments and the percentage of those investments that you can hold at any one time. CHAIRMAN ROKEBERG said, "Is this making it into a reciprocal group then. I mean kind of defacto or are you setting the same liquidity and asset standards as you would for a reciprocal?" MS. BURKE said, "We also, Mr. Chairman, proposed a different mechanism for them that would help meet our concerns." Number 1031 REPRESENTATIVE RYAN asked whether the investment would be in capital assets or would it be investing liquid assets. He said there would be $300,000 in a bank account and then $1.2 would be invested. He also asked, "How would these things be if the need arose to convert them to liquid assets?" MS. BURKE explained it is very specifically spelled out in the insurance code that certain assets are considered nonadmitted such as a building or something that is not readily liquid, but investments, cash, certificates of deposit, bonds, treasuries, things like that are considered admitted assets. She said they might have $10 million worth of assets in land and buildings, but that wouldn't count towards the $1 million. REPRESENTATIVE RYAN said, "We talked about reinsurance and I think it was mentioned risk pooling, I'm not sure what the term was that was used, you mentioned $37,000 left over from the interest premium to cover this multitude of expenses. If they want to go out and get the reinsurance premium, what the premium be for the reinsurance they would have to buy to cover - make their operation reasonable." MS. BURKE indicated she can't answer that question because she doesn't know how much reinsurance they would propose. She said she would have to review what their experience factors were. That is in many ways a negotiated cost. You go out and shop for reinsurance. Number 1187 REPRESENTATIVE RYAN asked Ms. Burke that under this law, she would set the premium tax. He questioned how much it would be. MS. BURKE indicated the legislation makes the premium tax the same as any other insurer in Alaska which is 2.7 percent. Number 1210 REPRESENTATIVE KUBINA said a lot of what he has heard today is a reiteration of a previous meeting. He suggested putting the bill into a subcommittee. Representative Kubina said he is surprised that the Homebuilders Association hasn't been in Ms. Burke's office to discuss the differences. CHAIRMAN ROKEBERG said because of the circumstances revolving how the House currently works, he is reluctant to put it into a subcommittee, but he thinks the message should be clear from the committee what the committee would like done with the bill. Number 1267 REPRESENTATIVE RYAN indicated he is neither in favor or against the bill. He said his only concern is that if this operation comes into effect, it can operate as solvently as other people who are doing insurance in this state. Representative Ryan said he doesn't want to see something that is designed to fail. He would like to see them have the opportunity, but he also has a responsibility that before legislation is passed it has a good chance of succeeding. Number 1485 JOHN GEORGE, Lobbyist, National Association of Independent Insurers, said he hasn't testified on the bill before because his clients don't write a whole lot of workers' compensation insurance, but they do write a lot of auto, homeowner and fire insurance. He noted he is a former director of the Division of Insurance, but prior to that he was the first risk manager for the state of Alaska. He said he brought the state into self-insurance for workers' compensation, property and liability. Before that, he worked in risk management in the oil industry and formed captive insurance companies and did self-insurance. MR. GEORGE said when he left state employment, the first thing he did was cut a contract with the Municipal League to help them form the JIA, a pooling for municipalities. Mr. George stated he is a proponent of self-insurance, pooling, etc. He believes a lot of the things the Homebuilders' Association are saying are true in that by them paying careful attention to safety and loss control programs they can control their costs. They ought to be doing that. Contractors particularly, but small businessmen in general tend to do things creatively to get by and resist OSHA regulations. He said he thinks there is a high likelihood that there will be assessments of members of the Alaska State Homebuilders' Association, to the extent that they can pay those. It would probably work. MR. GEORGE said, "I remind you in 1985 and 1986 when the building industry went in the tube, there were contractors leaving town. Now had that program been in effect, those people would still be subject to assessment, but where are they? Well they went bankrupt. Are they still subject to assessment after they go bankrupt? No, they left town. You can't find them. Who is going to pay? The ones that are left. The 10 percent that survived would end up paying the claims for the 90 percent who left town, went bankrupt, aren't here anymore. So I think there are some real concerns about this joint several liability and assessment in a bad economy. As long as things are growing, we got lots of contractors, it might work. But I can see some real problems with a small group. I mean if you had every contractor in the state, you've only got 800, that's smaller than New Mexico and in bad times you're going to have a whole lot less than 800 and they won't have the money to pay the assessments." Number 1485 PAUL GROSSI, Director, Division of Workers' Compensation, Department of Labor, was next to come before the committee. CHAIRMAN ROKEBERG asked, "The PERA lacks audit provisions - does that trouble you?" MR. GROSSI indicated that troubles him. He noted that not only the audit of the group troubles him, but the individual members of the group should be audited. There should be a financial statement for each individual member so that the director of the Division of Insurance can properly judge how viable this group is. Mr. Grossi said he isn't against the bill in concept. They think it's a good idea because of the stress on safety and claims loss. He stated the big problem is that it is under capitalized. There is not enough money to pay claims. There is $87,000 and one injury could make them become insolvent. He noted concern that the $1 million may not be liquid assets. There is $450,000 which may or may not be enough and the only other source of money is the $25,000 in the guarantee fund. They are going in the right direction, but they just are quite there as far as funding the payment of claims. Number 1598 ROBIN WARD, Alaska State Homebuilders Association, came before the committee to give her testimony. She said her association feels that the concept that Ms. Burke has set out will probably create a barrier as to ever being able to make a group like that work with that kind of cash requirement. Ms. Ward said she really does feel that there is enough cash for a couple of reasons. One is that not only do you have the 25 percent, there is the additional deposit, so there is $87,500 times two. That is only for three months. She said they have to make quarterly payments. So there will be another $87,500 at the beginning of the fourth month. By the beginning of the ninth month there will be another $87,500 on top of that. By the end of the first year, there will be a fair amount of cash. Ms. Ward said they have reinsurance and they can negotiate it so that they only pay $5,000 of a claim. She said they understand it is expensive. They may have to put some money into their reinsurance, but in the bill the director has the right to prescribe the form, the amount and the insurance company that they would use for reinsurance or excess insurance. Ms. Ward said they understand that for the first year they will have to have expensive reinsurance because they have to cover what they don't have in claims cash available. She said they do feel there will be enough cash with the reinsurance. Number 1677 MS. WARD explained the amendment requires the director to work with the association to determine how much is refunded. Those reserves won't be returned until the director gives them permission to do that. The guarantee fund is set up so that the 5 percent is initial. Ms Ward noted there are other assessments required by the director and she would assume the director would create regulations so that there will be further assessments. She noted they do expect that have more than just one in the group. CHAIRMAN ROKEBERG asked Ms. Ward why they don't allow a dividend to the membership and just provide an actuarial approved lowering of the premium. MS. WARD stated that is what they are hoping will happen, but Mr. Block mentioned that in New Mexico there was surplus. CHAIRMAN ROKEBERG said you have to have a certain amount of retainer. MS. WARD said that is correct and it is prescribed by the director. Number 1739 REPRESENTATIVE RYAN said he would like to see a spread sheet of how it would work and one for how things are currently working. He said he isn't currently convinced that this thing is going to work, but he wants to see it work. MS. WARD noted her organization has been approached by several reinsurance agencies who are ready to work with them. Number 1781 CHAIRMAN ROKEBERG said, "I am also concerned about even though you raised from five to ten the number of people to join the group, I think that's something that works against you, if you will. You might want to consider even increasing that. It would give you a higher level of assets to work with and the higher amount of premium base, particularly initially -- because I want to put on the record the fact that even though the Homebuilders as an organization are spearheading this, there is interest on the part of a large number of other business organizations in the state. So the applicability of this bill is not just to a group of people and businesses that may have relatively high net worths comparatively. It could be to other business that would have marginally lower net worths as a rule and, therefore, we need to look at that and that into consideration. So the committee's charge here is to make sure this works for everybody in the state if we're going to go forward with this, so you need to keep that in mind. And I would ask that because this bill has only one -- is there any further questions of Ms. Ward? Thank you very much, Ms. Ward." CHAIRMAN ROKEBERG said rather than sending the bill to subcommittee, he would like the bill sponsor to work with everybody involved. He said he believes in the concept of the bill, but is concerned about the substance of it as it is presently structured. ADJOURNMENT Number 1892 CHAIRMAN ROKEBERG adjourned the House Labor and Commerce Standing Committee meeting at 5:43 p.m.