Legislature(1995 - 1996)

03/20/1996 09:20 AM Senate FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
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                             MINUTES                                           
                    SENATE FINANCE COMMITTEE                                   
                          20 March 1996                                        
                            9:20 A.M.                                          
  TAPES                                                                        
                                                                               
  SFC-96, #43, Sides 1 & 2                                                     
  SFC-96, $44, Side 1                                                          
                                                                               
  CALL TO ORDER                                                                
                                                                               
  Senator  Rick Halford,  Co-chair,  convened  the meeting  at                 
  approximately 9:20 A.M.                                                      
                                                                               
  PRESENT                                                                      
                                                                               
  In  addition to    Co-chairman  Halford, co-chairman  Frank,                 
  Senators Phillips,  Sharp, Donley, Rieger  and Zharoff  were                 
  present when the meeting was convened.                                       
                                                                               
  Also Attending: Mr. Robert Storer, Chief Investment Officer,                 
  Treasury  Division, Department  of Revenue;  Mr.  Jim Kelly,                 
  Research  and   Liaison  Officer,   Alaska  Permanent   Fund                 
  Corporation, Department  of Revenue; Peter A.  Bushre, Chief                 
  Financial  Officer,  Alaska   Permanent  Fund   Corporation,                 
  Department  of   Revenue;  Joe  Thomas,   State  Accountant,                 
  Division of Finance,  Department of Administration;  Mr. Don                 
  Wanie,  Director,   Division  of   Finance,  Department   of                 
  Administration; Mr. Byron Mallot, Executive Director, Alaska                 
  Permanent  Fund Corporation,  Department  of Revenue;  Nancy                 
  Weller,  Department of  Health  and  Social Services;  Marie                 
  Sansone,  Assistant  Attorney  General,   Natural  Resources                 
  Section, Civil  Division, Department  of Law;  Janice Adair,                 
  Director, Division  of Environmental  Health, Department  of                 
  Environmental  Conservation;  Mr.  Dwight  Perkins,  Special                 
  Assistant, Officer of the Commissioner, Department of Labor;                 
  Mr.  Randy Welker, Auditor,  Legislative Audit Division; Mr.                 
  Mike  Greany, Director,  Legislative  Finance Division;  and                 
  aides to committee members.                                                  
                                                                               
  Elizabeth Kerttula, Assistant  Attorney General, Oil,  Gas &                 
  Mining Section, Civil Division, Department  of Law testified                 
  via teleconference.                                                          
                                                                               
  SUMMARY INFORMATION                                                          
                                                                               
                                                                               
       SENATE BILL NO. 303                                                     
       "An Act relating  to management  of the budget  reserve                 
  fund; and      providing for an effective date."                             
                                                                               
  Testimony was given  by Mr. Bob  Storer, Mr. Jim Kelly,  Mr.                 
  Pete  Bushre, Mr.  Don Wanie  and Mr. Joe  Thomas.   Mr. Jim                 
  Kelly advised  that  he would  do  an analysis  and  provide                 
                                                                               
                                                                               
  specific plan to the committee regarding  this bill.  SB 303                 
  was HELD in committee for further discussion.                                
                                                                               
       SENATE BILL NO. 199                                                     
       "An Act relating to environmental audits and health and                 
  safety    audits to determine  compliance with certain laws,                 
  permits, and   regulations;  and  amending  Alaska Rules  of                 
  Appellate Procedure      202, 402, 602, 603, 610, and 611."                  
                                                                               
       CS FOR SENATE BILL NO. 199(RES)                                         
       "An Act relating to environmental audits and health and                 
  safety    audits to determine  compliance with certain laws,                 
  permits, and   regulations."                                                 
                                                                               
  Testimony  was given  by Senator  Leman sponsor  of SB  199.                 
  Further  testimony  in objection  to the  bill was  given by                 
  Nancy Weller, Marie Sansone, and teleconference testimony by                 
  Beth  Kerttula.   Janice  Adair  testified briefly  and will                 
  continue   testimony   tomorrow   via  teleconference   from                 
  Anchorage.    SB  199  was HELD  in  committee  for  further                 
  discussion on tomorrow's calendar.                                           
                                                                               
                                                                               
       SENATE BILL NO. 303                                                     
                                                                               
       "An Act relating  to management  of the budget  reserve                 
  fund; and      providing for an effective date."                             
                                                                               
  Mr. Bob Storer, Chief Investment Officer, Treasury Division,                 
  Department of Revenue was invited to join the committee.  He                 
  paraphrased  the  last  question   yesterday  that  did  the                 
  permanent fund have  residual cash or  some element of  cash                 
  component in their portfolio and he felt the  Permanent Fund                 
  could answer this  question in more  detail.  He noted  that                 
  the  Division's  cash  flow  accounts  they aggregate  which                 
  minimizes the  amount of  cash on  hand but  manages towards                 
  cash flows that allow them to take more risk in reaching for                 
  incremental return in the cash flow portfolio.                               
                                                                               
  Mr.  Jim  Kelly,   Research  and  Liaison  Officer,   Alaska                 
  Permanent Fund  Corporation, Department  of Revenue and  Mr.                 
  Peter Bushre, Chief Financial Officer, Alaska Permanent Fund                 
  Corporation, Department of Revenue were  invited to join the                 
  committee.                                                                   
                                                                               
  Mr.  Kelly said  that it  would be  up  to the  committee to                 
  decide whether they wanted  the money to managed by  them or                 
  not.   Commissioner Condon  said there  was  a concern  with                 
  liquidity.   The  way the  fund  is managed  now it  has  to                 
  provide a certain  amount of liquidity.   He said that  they                 
  were able to  manage some  other funds with  the same  asset                 
  allocation that was used  for the Permanent Fund.   It would                 
                                                                               
                                                                               
  be  difficult  to manage  the  money  with  the  same  asset                 
  allocation because the  exact amount of money  that would be                 
  coming in or going out could not be predicted with any great                 
  accuracy.  There are  frequent periods of up to  three years                 
  running  where  the   stock  market  does  not   return  any                 
  opportunities for gains.                                                     
  He said there were two issues:   one, if the Division is not                 
  managed as part  of the Permanent  Fund with the same  asset                 
  allocation   that   would   mean   separate   accounts,   no                 
  accountants,  an  organization  very   similar  as  what  is                 
  currently being  provided by  Treasury; and  two, if  merged                 
  with the Permanent Fund  would it have a negative  effect on                 
  the Permanent  Fund itself.   Answers need to be  found.  He                 
  asked Mr. Bushre to explain the cash flow chart and material                 
  received from auditors as to how a new account is treated.                   
                                                                               
  Mr. Bushre said that this cash flow chart was a tool used at                 
  the  Corporation to help  plan short term  cash needs twelve                 
  months  out  into the  future.   There  is an  allocation to                 
  equity managers of $189,000 which can  be called upon at any                 
  time.  The  fundamental difference  between the  Corporation                 
  and the  Treasury Division is that the  Corporation has only                 
  one disbursement each year  and that is the dividend.   That                 
  amount  is  known  to  the penny  many  months  before  it's                 
  distribution and the day  of distribution is known.   If the                 
  entire  CBR were  to  be transferred  to the  Permanent Fund                 
  Corporation  for management the Commissioner of Revenue made                 
  clear that it  would be expected that the Corporation manage                 
  the general fund  liquidity.  That would  take an investment                 
  in   additional   resources   that   would   replicate   the                 
  capabilities of the Treasury Division.   The CBR is used for                 
  the short term  cash needs of the general fund.  As revenues                 
  come  into the  general fund  then the  CBR is  replenished.                 
  Currently all of this  cash is in the same bank  in the same                 
  account.  The transfers merely become a bookkeeping entry in                 
  the State's access  system.  The Corporation's cash  is held                 
  at  a  different bank.   Different  funds  would have  to be                 
  transferred daily  in order to  cover any shortfalls  in the                 
  general  fund and it  would be necessary  to maintain enough                 
  liquidity to meet the  calls.  Unlike the Dividend  there is                 
  no  advance  warning  of how  much  could  be  needed.   The                 
  Permanent Fund with only one  liability, which is known, has                 
  the luxury of  being able to  invest everything that is  not                 
  needed  for  current  cash  disbursement  requirements  into                 
  longer termed securities.   Therein lies the reason  for the                 
  additional  2%   in  the  projected   returns.     Financial                 
  statements should not  be published  which show the  public,                 
  legislators and their staff that the Permanent  Fund is $2.5                 
  billion  larger  that  it really  was.    Separate financial                 
  statements would have to be published.  The assets being co-                 
  mingled together would require a fairly extensive allocation                 
  between the two funds for purposes of publication.                           
                                                                               
  Senator  Sharp  asked  if  there  was not  already  separate                 
                                                                               
                                                                               
  publications regarding the  Science & Technology Fund.   Mr.                 
  Bushre said the assets of the  Science & Technology Fund and                 
  the Mental  Health  Trust that  are published  are merely  a                 
  percentage ownership in  the assets  of the permanent  fund.                 
  They are not split  out from the financial statement  of the                 
  Permanent  Fund.    They  are small  in  comparison  to  the                 
  Permanent Fund.   These would  not be small  and they  would                 
  have to  go through and  allocate every single  security and                 
  property to the two different funds.                                         
                                                                               
  Senator Frank asked  that if  $1.5 billion with  a long  run                 
  expectation  were  assigned  to  the   fund  would  that  be                 
  something that  could be co-mingled and handled  in the same                 
  fashion others  are and  would that  make  sense from  their                 
  prospective?  Mr. Bushre said  the investment horizon of the                 
  Permanent  Fund,  Mental  Health Trust,  and  the  Science &                 
  Technology Fund exceeds thirty  years.  It is a  question of                 
  fiduciary risk and ultimately it would have to be decided by                 
  the board of trustees.  If  a disaster occurred, for example                 
  a sharp  drop in  oil, and  those funds  were needed,  there                 
  would be advanced warning and they are  in liquid securities                 
  which can  be sold.   The  problem is,  co-mingled with  the                 
  Permanent  Fund,  if conditions  were  not good  for selling                 
  securities, the  securities would be  sold at a  loss, which                 
  would mean having  to sell more  securities than normal  and                 
  the permanent fund would suffer  the consequences along with                 
  the  Constitutional  Budget  Reserve.     It  could  have  a                 
  devastating effect on Permanent Fund  income.  Senator Frank                 
  referred to the cash flow  chart and asked if it showed  the                 
  maturing,  fixed income securities  and Mr. Bushre indicated                 
  that it did.   These  are maturities expected  to retain  in                 
  short term cash and  not immediately re-invest in long  term                 
  fixed income securities.   They may be used for  some of the                 
  outflow operations or  perhaps manager  funding.  These  are                 
  short  term  cash  needs  only  on  this  particular  chart.                 
  Senator Frank asked  what the average maturity of  the fixed                 
  income portfolio was.  Mr. Bushre  said the duration is 5.17                 
  years and the weighted average life of the portfolio is 8 to                 
  9 years.   He explained  that duration is  a measurement  of                 
  cash flow expressed in years.   Mr. Kelly indicated that the                 
  financial statement showed net purchases for the first seven                 
  months,  January of this year, of $608,000 million.   One of                 
  the points of the  cash flow projection is to  indicate that                 
  the Permanent  Fund keeps the amount  of money as cash  at a                 
  small amount.   Senator Frank  asked if maturing  securities                 
  could provide cash  if there was a  call on the CBF  funds.                  
  Mr. Bushre said that maturities and income could provide all                 
  or  some of  the cash depending  on the amount  of the call.                 
  Currently, those maturities  and the  income stream are  re-                 
  invested at  higher rates of return.   If it is  expended it                 
  will have an  impact on the  earnings of the Permanent  Fund                 
  for that  fiscal year  and  for the  long term.   Mr.  Kelly                 
  further explained that in a normal  month there is about $80                 
  million of cash  flow or income.   These are the  maturities                 
                                                                               
                                                                               
  that  will  happen in  the  Permanent Fund  between  now and                 
  February 1997.  Mr.  Bushre said this would not  be expended                 
  or held in cash reserves.  Senator Frank asked if this would                 
  be the principal  portion of the  securities as they  become                 
  mature.  And was this the  total or just that which was  not                 
  being  re-invested?   Mr. Kelly  indicated that  it was  the                 
  total.                                                                       
                                                                               
  Mr.  Bushre  referred   to  the  net  amount   of  principal                 
  maturities that  have been  earmarked for  other uses  other                 
  than being immediately reinvested.  Senator Frank  concurred                 
  that this was an appropriate plan at  this time.  Mr. Bushre                 
  said that if it were known that there would be a larger cash                 
  disbursement requirement those principal maturities would be                 
  invested on a much shorter term.  Presently the money is re-                 
  invested in securities that have 8  to 9 year maturities and                 
  those securities pay a higher rate of return.  Senator Frank                 
  and Mr. Bushre discussed how the rate of return was reached.                 
  Mr. Bushre indicated  that the money  was had before and  it                 
  was returning money to the  combined, co-mingled pool of the                 
  two funds.  The combined earnings of this pool would have to                 
  be less if  money is taken out  of the pool.   Senator Frank                 
  felt it would increase the rate of  return same as one would                 
  get  a higher rate of return  on stocks as compared to fixed                 
  income.  Mr. Bushre  referred to the   example of having  to                 
  sell the stocks at a  loss but Senator Frank felt  there was                 
  enough turnover in the fixed income portfolio to accommodate                 
  any  request.   Mr.  Kelly  said  that there  would  be more                 
  analysis done  based on  the amount  of money  the committee                 
  would like the Corporation to do.                                            
                                                                               
  Senator  Rieger asked  if borrowing  from the CBRF  to cover                 
  cash flow shortages was because of legislative appropriation                 
  which authorizes that to be done and  could it be done if it                 
  was not authorized?                                                          
                                                                               
  Mr. Don Wanie, Director, Division  of Finance, Department of                 
  Administration was invited  to join the committee.   He said                 
  that  if  they  did  not  have  the   authorization  in  the                 
  appropriations  act  payments would  be  stopped.    Senator                 
  Rieger asked  if the CBRF was drawn  on because it was there                 
  and  convenient and if it were not there could the cash flow                 
  still be managed?  He said there was plenty of other cash in                 
  the general fund that  would be available if the  CBRF could                 
  not be drawn on.                                                             
                                                                               
  Mr.  Joe  Thomas,  State Accountant,  Division  of  Finance,                 
  Department   of  Administration  was  invited  to  join  the                 
  committee.  He  said within the  general fund were  multiple                 
  accounts  and  sub-funds  which  have  been  set  aside  and                 
  restricted  for  specific  uses.    When talking  about  the                 
  general fund, as far as having to borrow from the CBRF, only                 
  that  one sub-fund  is  looked at,  being  the general  fund                 
  itself.   Senator Rieger  referred to  the enterprise  fund.                 
                                                                               
                                                                               
  Mr. Thomas said this was a separate  group of funds.  Within                 
  the general fund itself there  are several general fund sub-                 
  groups,  such  as,  the  Railbelt  Energy Fund,  Power  Cost                 
  Equalization, and others.   That  money has been  restricted                 
  for a  specific use and  is therefore unavailable.   Senator                 
  Rieger asked if  it was  unavailable for borrowing  purposes                 
  and  how  restricted was  it  for borrowing  for  short term                 
  liquidity  purposes.   Mr.  Thomas said  for the  purpose of                 
  borrowing  from  the  CBRF  it  was considered  unavailable.                 
  Monies could  be borrowed  from the  fund if  it was  really                 
  necessary but then what would happen when the bills come due                 
  for the  other funds  and how  would they  be paid.   It  is                 
  therefore deemed not available.  Senator Rieger said that it                 
  was good to see good cash management and the main thrust  is                 
  to  not  have  $2.2  billion  sitting around  for  immediate                 
  liquidity on the off  chance $100,000 of it might have to be                 
  taken.  Mr. Thomas said that a list of the sub-fund could be                 
  provided.  Senator Frank requested a cash flow list be done,                 
  too.                                                                         
                                                                               
  Senator Rieger asked if  when the question was taken  to the                 
  board of trustees and their concern was about liquidity were                 
  they concerned  about coming up  with $2.2 billion  on short                 
  notice?  Would they have been concerned if there  had been a                 
  99% chance that a draw within the next six months would  not                 
  exceed $200,000?   Mr. Kelly  indicated that every  decision                 
  they  make  is  based  on  probability.    Mr.  Bushre  also                 
  indicated  that  there  was no  distinction  made  between a                 
  short-term fund being retained by  the Department of Revenue                 
  and a  longer-term fund  with a  99% probability  of it  not                 
  being called  upon and being managed by  the Permanent Fund.                 
  The  question  presented to  the  Corporation was  the whole                 
  CBRF.   The whole CBRF is  called upon to manage  the short-                 
  term liquidity of  the general fund.   There are no  current                 
  resources available  to do this  and the  operations of  the                 
  Treasury Division would have to be replicated in order to do                 
  it correctly.  Senator  Rieger said that they would  have to                 
  dig into  the general  fund and  see what  is there and  how                 
  realistic it would be  to give authorization for that  to be                 
  the short-term liquidity  source.  What does  the enterprise                 
  fund consist of?   Mr.  Thomas indicated that  this fund  is                 
  legally set  aside in another  fund group and  therefore not                 
  available.  The enterprise fund  consists of the agriculture                 
  fund, clean water fund, international airports,  residential                 
  energy  conservation and  various loan  funds are  included.                 
  Senator Rieger asked  if a draw  would be documented with  a                 
  note.  Mr.  Thomas said he would have  to check into whether                 
  it is legal to borrow from other funds or not.                               
  Co-chairman Halford asked if there  were no an appropriation                 
  from the CBR  and it were a choice of issuing or not issuing                 
  checks could the money in the  Railbelt Energy Fund be used?                 
  Mr. Thomas indicated that money has  been appropriated.  Co-                 
  chairman Halford said  that the money has  been appropriated                 
  to the general fund.  Mr. Thomas said that this was  a legal                 
                                                                               
                                                                               
  question  but it probably would  be available to be expended                 
  if  there were  a shortfall.   Co-chairman  Halford said  if                 
  there were  no CBR  language in  the budget  that series  of                 
  funds that totals over  $600 million would be the  source of                 
  the  budget.  Mr. Thomas indicated there  is a list of funds                 
  which have been deemed to legally  be set aside which cannot                 
  be touched even if they  are within the general fund.   That                 
  list can be provided also.                                                   
                                                                               
  Senator Phillips   said he  felt there was  a reluctance  to                 
  manage the  money because  they needed  more people  and the                 
  length of the investment  horizon.  The problems have  to be                 
  solved.   He suggested the Corporation manage  the money and                 
  let Treasury run it.  Mr. Kelly said that the Permanent Fund                 
  Corporation  and  Treasury would  have  to get  together and                 
  offer a recommendation to  the committee.  If the  intent is                 
  to maximize the  return on the  CBR a recommendation can  be                 
  worked out for the best way to accomplish that.                              
                                                                               
  Mr. Bushre said that when the question was first proposed to                 
  the Corporation in the form of SB 303 it appeared to  be the                 
  whole  CBRF  and there  was not  the  possibility of  such a                 
  division of the two  agencies.  The whole CBRF  carries with                 
  it a  liquidity management task  and the Corporation  is not                 
  geared up to  do that.   These are additional  possibilities                 
  that are being discussed.                                                    
                                                                               
  Senator Frank commented  on the financial statement  for the                 
  Permanent Fund.   He felt that the  Permanent Fund's natural                 
  turnover provides  a  tremendous amount  of  liquidity  that                 
  could be used and  any unexpected draw on the  CBRF could be                 
  much more  easily accommodated within the context of a fixed                 
  income portfolio.                                                            
                                                                               
  (tape SFC-96 #43 switched to side 2)                                         
                                                                               
  Mr.  Storer said that half  of their fixed income securities                 
  are  managed  for the  retirement  system  and some  of  the                 
  endowment  funds  are  managed identically  to  the  way the                 
  Permanent Fund would manage them and have basically the same                 
  characteristics.   The other half are the cash flow accounts                 
  which  are  being  aggregated  so they  can  be  managed  as                 
  aggressively as possible.  Senator Frank  asked if the funds                 
  could be co-mingled for management purposes so that if there                 
  was an  unexpected draw  on the CBRF  the retirement  fund's                 
  maturing securities  could be  used?   Mr. Storer  indicated                 
  that the retirement fund could not  be borrowed from.  There                 
  is no flexibility to be able  to access the entire liquidity                 
  of all of the fixed income securities.                                       
                                                                               
  Senator Rieger  said that  there are  two situations:   one,                 
  there is an appropriation in  the general appropriations act                 
  which  allows use  of  the CBR  and;  two, there  is  not an                 
  appropriation that allows use.  If there is an appropriation                 
                                                                               
                                                                               
  it  should  cover   any  eventuality.     If  there  is   no                 
  appropriation it cannot be used anyway.  It would not matter                 
  how much  would  be sent  to the  Corporation because  there                 
  would always be notice  if there was going to be  any use of                 
  those  funds or not.  Mr. Kelly  said the problem is already                 
  being faced with  the Earnings Reserve Account,  which could                 
  be appropriated today and the Corporation could be forced to                 
  return tomorrow.                                                             
                                                                               
  Mr.  Bushre  in reply  to Senator  Rieger  said that  if the                 
  Legislature  appropriates   an   amount   from   the   CBRF,                 
  theoretically it could be  kept for a short time  because it                 
  would be expended at some point during the fiscal year.  The                 
  problem  arises  in managing  the  liquidity of  the general                 
  fund.   There is not an amount that is appropriated for that                 
  and  the demands are daily.  There  is no advance warning as                 
  to what that demand  will be and it may go on day after day.                 
  Senator Rieger said Treasury could ask  for a chunk of money                 
  they could use for liquidity.                                                
                                                                               
  Mr. Bushre  said that  if the  CBRF is  co-mingled with  the                 
  Permanent Fund there is an investment pool.  The  investment                 
  pool  members, the  Permanent Fund  and the CBRF  will share                 
  proportionately in the returns.   The Permanent Fund will be                 
  the largest member of the pool and consequently will have to                 
  share  in  any lower  rates  in return  proportionately that                 
  would be generated by the cash requirements of the CBRF.  If                 
  the Permanent Fund represented 80% of the pool then it would                 
  get 80% of the lower  return as well as the higher  returns.                 
  Senator Frank said he didn't think  it was the intention for                 
  the  Permanent Fund to assume  a lesser rate  of return.  An                 
  amount  of money  should not  be assigned that  would change                 
  management, asset allocation  or anything else.   The amount                 
  that should be assigned  would be the amount which  will not                 
  reasonably  be  expected  to  be   required  for  cash  flow                 
  purposes,  cash  needs,  and  only  in  the  event  of  some                 
  unforeseen circumstance would the Permanent Fund be asked to                 
  return  money  to the  Treasury.   In  that case  the normal                 
  turnover  would allow that  to be  accommodated.   Mr. Kelly                 
  said they would do an analysis and work with Treasury to see                 
  if they can  come up with  a plan that  the committee  would                 
  want.                                                                        
                                                                               
  Senator Zharoff said that the price  of oil has increased to                 
  where there is going to be an additional $70 million between                 
  now and the end of this fiscal  year.   He is concerned with                 
  the accessibility of money that is  needed and not having to                 
  go  borrow it and  the flexibility under  which the agencies                 
  can operate in  order to  respond to the  needs.  There  are                 
  several long  range fiscal planning plans before us, but the                 
  majority has yet to put a plan forth  to address these needs                 
  other than to cut.                                                           
                                                                               
  Senator Frank  said  that everyone  is  saying they  need  a                 
                                                                               
                                                                               
  higher rate  of return  and that  is what  the committee  is                 
  trying to do.                                                                
                                                                               
  Senator Zharoff said that he hoped to  see a flow chart or a                 
  side-by-side  chart   showing  a   comparison  between   the                 
  Permanent Fund and  Treasury so that one  could actually see                 
  whatever  includes a risk,  the interest on the return.   If                 
  one takes the CBR money and  invests it then it will not  be                 
  put into  high risk.   Mr.  Kelly  said that  if one  wanted                 
  higher return  there would  be higher  risk.  Senator  Frank                 
  said they wanted the same return and risk that the Permanent                 
  Fund   has.     Co-chairman  Halford   indicated  that   the                 
  Administration, the Democratic  proposal and the  Republican                 
  proposal all assume at least the increase to over 7%.                        
                                                                               
  Mr.  Bushre  said  if  the  CBRF  was  co-mingled  with  the                 
  Permanent  Fund  the CBRF  would  then have  a proportionate                 
  share of every investment the Permanent  Fund has.  It would                 
  have  exactly  the same  risk  profile, the  same investment                 
  horizon and the same return.  Senator Halford indicated that                 
  is what needed  to be accomplished  and for at least  three-                 
  quarters of the balance that might  work very well and still                 
  maintain  a $500,000  plus cushion.   He said  the committee                 
  would wait for more information back from the Administration                 
  and  the  Permanent  Fund Corporation  and  HELD  SB 303  in                 
  committee.                                                                   
                                                                               
                                                                               
       SENATE BILL NO. 199                                                     
                                                                               
       "An Act relating to environmental audits and health and                 
  safety    audits to determine compliance  with certain laws,                 
  permits, and   regulations;  and  amending  Alaska Rules  of                 
  Appellate Procedure      202, 402, 602, 603, 610, and 611."                  
                                                                               
  Testimony was  given by  Senator Loren  Leman sponsor  of SB
  199.   He stated  that this is  an idea he  learned from his                 
  duties on the  Energy Council.   Fourteen other states  have                 
  enacted environmental and health and  safety audits which is                 
  an  incentive  program  to people  in  business  who conduct                 
  audits of their  actions and  if they  find deficiencies  to                 
  identify them,  make  corrections and  come into  compliance                 
  with  the  law.     Three  commissioners  and   their  staff                 
  conceptually  agree  with this  bill.   There  are  two main                 
  elements in the bill:   one, the audits are  privileged; and                 
  two, limited  immunity against  prosecution.   The bill  has                 
  conditions  when  the   immunity  applies.    Many   of  the                 
  suggestions   made   by   the   administration   have   been                 
  incorporated.  In  the area that is  the present committee's                 
  jurisdiction are the fiscal  notes.  This bill  provides for                 
  streamlining government and making government more  friendly                 
  to business so they can operate  better.  There should be  a                 
                                                                               
                                                                               
  savings in government.  The fiscal notes  are not based on a                 
  sound analysis of what the bill will accomplish.                             
                                                                               
  Co-chairman  Halford  and Senator  Leman  discussed negative                 
  fiscal notes for the bill.                                                   
                                                                               
  Nancy Weller, Division of Medical  Assistance, Department of                 
  Health  and  Social   Services  was  invited  to   join  the                 
  committee.  The  Department is concerned that the  bill does                 
  not  sufficiently  cover the  certification  requirements of                 
  health care facilities.  She requested that the committee on                 
  line 8,  after "license"  add "or  certification..." so  the                 
  sentence  would  read,  "as  a  requirement  for  obtaining,                 
  maintaining or  renewing  a  license  or  certification...".                 
  Certification is  a federal  requirement under federal  law.                 
  It  is  done  on  contract  with  the  federal  health  care                 
  financing  administration  in  order to  allow  health  care                 
  facilities to bill  for services  for medicare and  medicaid                 
  recipients.                                                                  
                                                                               
  Senator Zharoff said  that the Department of  Transportation                 
  fiscal note made reference to the same section.                              
                                                                               
  Marie Sansone, Assistant Attorney General, Natural Resources                 
  Section, Civil Division,  Department of  Law was invited  to                 
  join the  committee.  She  indicated that the  Department of                 
  Law's  concerns regarding this bill relate to the breadth of                 
  the privilege  and definition.   The  bill has been  divided                 
  into three parts:  first,  the definitional section which is                 
  extremely  broad; second, the  evidentiary privilege is also                 
  extremely broad;  third, the  immunity provisions  which are                 
  quite  detailed.    The immunity  provisions  are  much more                 
  narrow in scope  than the privilege and  full of ambiguities                 
  and inconsistencies.  The bill  applies to all environmental                 
  and  occupational health  and  safety laws  and they  may be                 
  federal, state  or municipal.   She defined  audit and  said                 
  under  this bill it could  be conducted randomly, routine or                 
  regular, but of great concern was that it could be performed                 
  spontaneously or in response to a particular event.  This is                 
  an open invitation to initiate audits after any awareness of                 
  a  violation or  any sense of  a violation  in an  effort to                 
  conceal all information relating to  that violation.  Audits                 
  may  be initiated  by  employee  or  independent  contractor                 
  associated with a  particular facility  whether or not  they                 
  have authority to  undertake corrections or commit  funds to                 
  make corrections.  There is a concern with the definition of                 
  audit report.   In the  law of evidence  a communication  is                 
  privileged, the underlying evidence is not.  Under this bill                 
  that evidence is privileged and will not be discovered or be                 
  able to  be used in evidence.   The privilege can  be waived                 
  expressly, in writing or by  entering into a confidentiality                 
  agreement.    The  department has  the  following  concerns:                 
  because  of the privilege they anticipate  they will spend a                 
  great deal more  attorney time in negotiating,  drafting and                 
                                                                               
                                                                               
  reviewing  permits,  leases, contracts,  licenses  and other                 
  documents to make sure of adequate compliance information is                 
  being   gathered   and   maintained  to   meet   the   State                 
  responsibilities  in  both  its  regulatory and  proprietary                 
  capacity.   Considerable time for negotiating,  drafting and                 
  reviewing the confidentiality  agreements will be spent.   A                 
  great  deal  of  time  is  spent  presently  advising  state                 
  agencies on  public records  and on  whether information  is                 
  confidential  or  not.   Under the  bill  the State  and its                 
  employees  are  subject   to  damages  if  they   violate  a                 
  confidentiality agreement or penalties stipulated.   Because                 
  many of the provisions  of the bill are ambiguous  much time                 
  will be spent litigating and  appealing issues about whether                 
  or not the immunity applies or not, whether or not there has                 
  been substantial injury.                                                     
                                                                               
  Senator   Phillips  asked   if   the   department  had   any                 
  alternatives  to the  objections.   Marie  Sansone indicated                 
  they provided  Senator Leman  with information  and material                 
  regarding their concerns.   Legal  issues were reviewed  and                 
  Senator Leman did make quite  a few corrections in  response                 
  to the concerns.   The greatest concern is with  the breadth                 
  of the privilege  and the definitions.   Co-chairman Halford                 
  indicated that the  department did come in  with information                 
  and offered a different  approach to looking at  the federal                 
  privilege.                                                                   
                                                                               
  Marie  Sansone  said  they provided  draft  language  to the                 
  Department  of  Environmental  Conservation  that  addressed                 
  their  concerns.    However,  this   bill  applies  to  many                 
  departments because many  departments have environmental  or                 
  health  and  safety  responsibilities.   The  bill  does not                 
  provide exception for evidence  that is otherwise impossible                 
  to obtain and it cannot be  obtained without undue hardship.                 
  The State therefore will be  unable to successfully litigate                 
  a  number of cases without great expense.  Specifically this                 
  refers to  contaminated sites  and   who is responsible  for                 
  what portion of the contamination and how much of the clean-                 
  up  costs  they  should  be   allocated.    The  information                 
  generated during an audit is very relevant to that  question                 
  and without  this information the State will end up assuming                 
  a greater share of  clean-up costs and it will  be difficult                 
  to  arrive  at fair  allocations  of liability.    The audit                 
  provision  may  also jeopardize  a  number of  our state-run                 
  programs  in the  Department  of Environmental  Conservation                 
  such as  air quality  and drinking  water programs.   Others                 
  would include the Alaska Oil  & Gas Conservation Commission,                 
  the  Department  of Labor,  occupational  safety and  health                 
  program.    These   programs  have  minimum  standards   for                 
  enforcement.    The  Department   of  Labor  has   mandatory                 
  penalties and  the immunity  provisions of  this bill  would                 
  conflict with that.   She said the department would  have to                 
  work  with state and federal agencies  to figure out whether                 
  this bill adversely  impacts the state programs.   There may                 
                                                                               
                                                                               
  be situations where the federal agencies initiate efforts to                 
  withdraw approval  of the State  programs.  Another  area of                 
  conflict is federal law does not provide for this privilege.                 
  In a federal  case or mixed  federal and state case  federal                 
  law would be followed.  That would create  extra time having                 
  to be  spent on trying to  sort out which rules  of evidence                 
  apply, what is fair or  not and an attorney bringing a  case                 
  will have to  spend quite  a bit of  time analyzing  whether                 
  there is any federal remedy possible.   That would give them                 
  greater advantage in accessing information.                                  
                                                                               
  Elizabeth Kerttula,  Assistant Attorney General, Oil,  Gas &                 
  Mining  Section,  Civil  Division,  Department  of  Law  was                 
  invited to testify  via teleconference.  Just  recently some                 
  audit  and  financial  figures were  received  to supplement                 
  information  to  the committee.   The  State pays  about one                 
  quarter of the  expenses on the pipeline.  This  is a unique                 
  situation  as a result  of a  settlement on  how to  run the                 
  pipeline.   One of the things the  State has available to it                 
  is the ability  to object  when it thinks  those costs  have                 
  been imprudently made.  The State does object frequently and                 
  currently they are in the middle of litigation over the 1995                 
  tariff cases.   (temporary cut-out  of teleconference)   $82                 
  million right  now is  in contention.   The  State currently                 
  relies on audits performed by  Aleyska and carrier companies                 
  in these cases and they cost  about $25 million.  If SB  199                 
  is  enacted  in its  current form  the  State will  not have                 
  access  to  these audits  and they  would  have to  bear the                 
  burden  of that  $25  million and  it  would jeopardize  the                 
  entire case for the $82 million.  The state has the right to                 
  object to  the imprudent  cost but  it will  also through  a                 
  monkey-wrench  into the  system  of being  able  to get  the                 
  underlying information.   Why should Alaskan's have  to bear                 
  the burden  for something  they did  not have  the right  to                 
  control?    She  hoped the  committee  would  understand the                 
  impact to the tariff cases.                                                  
                                                                               
  Senator  Rieger  related  a   hypothetical  case  wherein  a                 
  document was found  without a  warrant but also  a copy  was                 
  found  legally  somewhere  else.    Is  the  document  still                 
  admissable?     Marie  Sansone   said   that  the   criminal                 
  prosecutors may not be  able to use the document  because of                 
  the warrantless  search but civilly, administratively or for                 
  private litigation the document could be used.   She further                 
  stated  that  the  audit  report  would  include  everything                 
  generated  in  connection with  the  audit.    A  number  of                 
  specific items are mentioned such  as, photographs, data and                 
  interviews.   There is  a catch-all for  anything related to                 
  the audit  and there are also provisions  for the corrective                 
  action  plan itself.   The  corrective action plan  would be                 
  very difficult to  implement without the involvement  of the                 
  State regulatory agencies because typically it would involve                 
  the regulated person to obtain a permit or  approval, update                 
  their permit, make reports.  It is very hard to see how this                 
                                                                               
                                                                               
  would work without triggering the confidentiality agreements                 
  and running into  conflicts with  the public processes  that                 
  are  used  for permitting  an  approval and  for maintaining                 
  these records.  There would be  many instances that it would                 
  be impossible to  implement the  audit without running  into                 
  the actual need to make the documents public but that is the                 
  conflict that is set  up in this bill that it  would have to                 
  then be done under claims  of confidentiality and negotiated                 
  out  and  it  will be  an  extremely  cumbersome  way to  do                 
  business.   She  mentioned that  under existing  law  when a                 
  company undertakes an environmental audit and they feel they                 
  need to  protect information because of  potential liability                 
  exposure they will  use the attorney-client privilege.   The                 
  work product doctrine protects materials  that are generated                 
  in connection with litigation  or threatened litigation  and                 
  there is also  an evidence  rule that  protects evidence  of                 
  subsequent  remedial   measures.     Industry  already   has                 
  available a number of tools when they feel  that they may be                 
  into a very sensitive area they can frequently protect a lot                 
  of the  highly sensitive  information.   They also  have the                 
  trade secret protection.                                                     
                                                                               
  (switch to tape SFC-96, #44, side 1)                                         
                                                                               
  Senator Phillips said that fourteen  states have passed this                 
  bill.   Co-chairman Halford  indicated that  fourteen states                 
  have some  degree  of  immunity  for  audit.    The  federal                 
  government has some  degree of immunity under a whole series                 
  of court cases.                                                              
                                                                               
  Marie Sansone said that among the fourteen states some  have                 
  pursued the privilege and some the immunity.  The only state                 
  that has included occupational health  and safety law is the                 
  state of Texas.  The federal EPA has adopted a formal policy                 
  concerning  audits  and   there  are  federal  cases   which                 
  recognize  a type  of  privilege  called  the  self-critical                 
  analysis privilege that requires the  court to weigh various                 
  factors  to  decide  whether or  not  that  privilege should                 
  apply.   It provides  what should be  considered relative to                 
  audits, how  disclosures of  violations will  be treated  in                 
  terms of not  making referrals for criminal  prosecution and                 
  penalty  reductions.   Co-chairman  Halford  asked  how this                 
  related to the  series of  cases at the  federal level  that                 
  define the self-critical analysis privilege.   Marie Sansone                 
  said that the EPA  audit policy would be more  specific than                 
  the federal cases.                                                           
                                                                               
  Janice  Adair, Director,  Division of  Environmental Health,                 
  Department of Environmental Conservation was invited to join                 
  the  committee.     There  are  some  concerns   about  this                 
  legislation  as   testified  before  the   Senate  Resources                 
  Committee.  Limited immunity is what is practiced now.  When                 
  something is disclosed the department will not take civil or                 
  administrative action but  will work  with the permittee  to                 
                                                                               
                                                                               
  bring  the  facility  into compliance.    The  definition of                 
  environmental health  and safety  law in  this bill  is very                 
  broad which is what is reflected in their fiscal notes.   It                 
  is not known which  laws in DEC are impacted by this.  It is                 
  presumed that  air, water quality, contaminated  sites would                 
  be included but what is less clear are those laws within DEC                 
  that deal with public health concern, such as drinking water                 
  and  seafood  processing  that  have  built-in  concepts  of                 
  continuous monitoring or auditing to insure  compliance with                 
  the laws to  protect the consumers.   There would be  a need                 
  for some legal services which DEC does pay for through RFA's                 
  to the Department of Law.  There  are concerns about how the                 
  audits  are done, who can conduct  them and the scope of the                 
  audit report.  If  this bill is to replace  the inspectional                 
  duties on the department it must  be known that these audits                 
  are being done  credibly, and by  someone who knows how  the                 
  facility works, how it  should work, what the laws  are that                 
  are  involved.   The  definition of  the  audit report  is a                 
  concern because  it  is  extremely broad  and  the  fact  it                 
  includes   the   corrective   action   plan   becomes   very                 
  problematic.  That is when the department wants to work with                 
  the facility to insure that whatever they have identified as                 
  the  necessary  corrective  action will  in  fact  solve the                 
  problem.  There  would be a report  to DEC that there  was a                 
  violation found and that  report would not be  privileged or                 
  confidential.    It  would  be  available for  the  public's                 
  review, but the  corrective action plan would  be privileged                 
  or if disclosed would be confidential.   The public would be                 
  aware of  a  problem but  would not  know how  it was  being                 
  corrected.    EPA did  testify  before the  Senate Resources                 
  Committee  that  this  bill,  if  passed as  written,  could                 
  negatively  impact   the  Department's  ability   to  retain                 
  delegation for the state clean  air program, solid waste and                 
  perhaps  drinking  water.    The  department  questions  the                 
  advisability of providing immunity or privilege for criminal                 
  activity.  The information that would disclose this activity                 
  would  be  privileged.     If   someone  were  harmed   that                 
  information  would  be  kept  from  them.    Establishing  a                 
  privilege for environmental audits is unnecessary.  There is                 
  a limited immunity  already when  something is disclosed  to                 
  the department but it would be very problematic to not allow                 
  the public, especially a  member of the public who  had been                 
  harmed by that action from receiving the information.                        
                                                                               
  Senator Sharp said that there are members of the public from                 
  special interest groups that live off certain cases that get                 
  money back from  the State of Alaska when  they file.  There                 
  is also a problem with voluntary compliance and that being a                 
  potential  for  prosecution  under   regulations  now  being                 
  developed by  the department  of air  quality.   In  certain                 
  instances it  is impossible  to achieve  what is  specified.                 
  Why does  the DEC  continue to  promulgate regulations  they                 
  know  cannot  be enforced  without  making criminals  out of                 
  people.  Janice Adair said that she was referring to members                 
                                                                               
                                                                               
  of the public that might be harmed  by a violation and would                 
  not be able  to obtain the necessary  documentation to prove                 
  that the company or the  facility knowingly engaged in  that                 
  action that  led to  that  harm.   This  does not  apply  to                 
  special interest groups.   There are several locations where                 
  drinking  water  has  been  contaminated  through  petroleum                 
  products  or  diesel, underground  storage tanks  and above-                 
  ground  storage tanks.    Either a  public  water system  or                 
  individual water systems have been contaminated.  Individual                 
  water wells have been contaminated  through sewage either on                 
  the ground or leaking septic tanks.   Senator Sharp asked if                 
  these individuals would have  been submitting voluntary self                 
  audits?   Janice Adair answered that through  this bill they                 
  could and it would  be privileged and  no one could get  the                 
  information and  there would  be someone  that would  be out                 
  economically,  reestablishing  a  drinking  water system  or                 
  supply is very  expensive if it can  be done at all.   Under                 
  the privileged  section of  the bill  the information  would                 
  kept confidential.                                                           
                                                                               
  Co-chairman Halford HELD SB 199  in committee until tomorrow                 
  morning.  Janice Adair will  testify via teleconference from                 
  Anchorage.                                                                   
                                                                               
                                                                               
  ADJOURNMENT                                                                  
                                                                               
  The meeting was adjourned at approximately 11:05 A.M.                        
                                                                               

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