Legislature(1995 - 1996)
03/20/1996 09:20 AM Senate FIN
| Audio | Topic |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
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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