Legislature(2003 - 2004)
04/10/2003 09:00 AM Senate FIN
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* first hearing in first committee of referral
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MINUTES
SENATE FINANCE COMMITTEE
April 10, 2003
9:00 AM
TAPES
SFC-03 # 44, Side A
SFC 03 # 44, Side B
CALL TO ORDER
Co-Chair Gary Wilken convened the meeting at approximately 9:00 AM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Con Bunde, Vice Chair
Senator Robin Taylor
Senator Ben Stevens
Senator Lyman Hoffman
Senator Donny Olson
Also Attending: SENATOR TOM WAGONER; SUSAN COX, Chief, Assistant
Attorney General, Civil Division, Department of Law; BRAD THOMPSON,
Director, Division of Risk Management, Department of Administration
Attending via Teleconference: From Kenai: LARRY SEMMENS, Finance
Director, City of Kenai; From Anchorage: RANDY HOFFBECK, Petroleum
Property Assessor, Tax Division, Department of Revenue
SUMMARY INFORMATION
SB 136-RESIDENTIAL PROPERTY TAX EXEMPTION
The Committee heard from the sponsor, the Department of Revenue and
the City of Kenai. The bill was held in Committee.
SB 120-CLAIMS BY STATE-EMPLOYED SEAMEN
The Committee heard from the Department of Law and the Department
of Administration. The bill was held in Committee.
SENATE BILL NO. 136
"An Act increasing an optional exclusion or exemption from
municipal taxation for residential property."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated this bill "raises the amount that a
municipality may exempt residential property from taxation from
$10,000 to $50,000."
SENATOR TOM WAGONER read the sponsor statement into the record as
follows.
SB 136 amends current statutes to provide for an exemption of
up to $50,000 on residential property, to give local
governments flexibility in taxing decisions.
Under current law, municipalities may exempt up to $10,000 of
the assessed value of any single residential property. This
authorization has been law since 1974.
Five municipalities offer this exemption:
· Bristol Bay Borough
· Kenai Peninsula Borough
· Fairbanks North Star Borough
· North Slope Borough
· City of Valdez
In 2002, the voters of the Kenai Peninsula rejected an
initiative that would have restricted food items from sales
taxes. Argument in opposition to the initiative was that the
sales tax was a mechanism for obtaining fees from visitors.
The logic of that was disputed when it was pointed out that
residents pay the same tax.
Providing the local governments the ability to increase the
property tax exemption up to $50,000 allows the local
government flexibility so they could still collect sales taxes
from visitors and then provide tax relief from residents.
Senator Wagoner clarified that the tax exemptions would not be
implemented without voter approval. He shared that this legislation
was offered at the request of the Kenai Peninsula Borough.
Co-Chair Green cited a portion of the analysis statement in the
Department of Community and Economic Development fiscal note as
follows.
…That subsequent effect on state oil and gas property tax
revenue is hard to calculate, which is why the fiscal note
shows an indeterminate amount…Therefore, we cannot accurately
project what effect this legislation would have on state
property tax revenues.
Co-Chair Green surmised that any advantage to a borough resident
property owner would result in an equal disadvantage to the State
through the loss of revenue.
Senator Wagoner admitted this was a possibility but assured that if
the Kenai Peninsula Borough were to increase the exemption with the
intent to increase the mill rate to recoup revenue lost by that
exemption increase, he would "be the first one to come out
publicly" in opposition of the proposal. He stressed the purpose of
this legislation is to allow a municipality to provide tax relief
in the event of excess revenues.
LARRY SEMMENS, Finance Director, City of Kenai, testified via
teleconference from Kenai in opposition to the bill on behalf of
the administration of the City. He referenced written testimony he
had submitted [copy on file.] He added that the mayor had written a
letter "to our delegation" [copy not provided] in opposition to the
bill at the request of the City Council, although the City Council
has not issued an official opinion on the matter, as it has not yet
had an opportunity to meet on the issue.
Co-Chair Wilken interjected that the Kenai Peninsula Borough has
adopted a resolution in support of the legislation, although the
City government is opposed.
Senator Olson clarified that the witness' statements reflect the
witness' opinion and do not necessarily represent the views of the
City Council, as it had not issued an opinion to date.
Mr. Semmens affirmed but noted the City Council had directed the
mayor to speak in opposition. He reiterated that the Council had
not had an opportunity to adopt a resolution.
Mr. Semmens read his written testimony into the record as follows.
Increasing the residency exemption to $50,000 is poor public
policy because it shifts the burden of support of local
governments from the majority of voters (homeowners) to a
small minority of business owners. This will allow decisions
to be made by people who do not pay the bill. It will also
promote a lack of interest on the part of the residents and
voters; after all, someone else will be paying, so who cares.
We are starting to see intense interest from the voters in the
affairs of the State. Why? Because there is talk of needing
more money, of people having to pay for the services they get.
This is a positive development. People will have in interest
in their government if they have to pay for what they are
getting. Increasing the residency exemption will promote
apathy and it will result in a more unequal distribution of
the bearing the burden of the cost of local government.
The theory that businesses can pass this higher cost back to
their customers (homeowners) may be true in some
municipalities. In Kenai, this is not true. Competitive forces
from outside the municipal boundaries may make it impossible
to pass increased costs to customers. Businesses will have to
pay the higher costs from already shrinking profits, or choose
to locate their businesses elsewhere.
In Kenai, we are experiencing a severe economic downturn due
to the closure of Kmart, poor commercial fishing seasons and
rumors of layoffs at Agrium. The budget situation guarantees
that Kenai will not adopt the $50,000 exemption because it
would cost over $200,000 annually. The problem with not
adopting the exemption is that this will provide another
reason for new housing development to be made outside the
City. The City's residential development is already strangled
by the State's rural loan program that provides low interest
loans for housing outside of the City.
While the exemption is voluntary for each municipality, it is
clear that there will be pressure to adopt the exemption when
the area's outside the City adopt it.
I hope that you will consider the impacts of this bill and not
pass it out of your committee.
Co-Chair Wilken asked the date the $10,000 exemption amount was
established
Senator Wagoner answered, 1974.
Co-Chair Wilken referenced a spreadsheet and requested an
explanation.
RANDY HOFFBECK, Petroleum Property Assessor, Tax Division,
Department of Revenue, testified via teleconference from Anchorage
detailed the information contained in a spreadsheet titled
"Estimated annual Loss in State Revenues Due to Proposed Increased
Allowance for Residential Exemption". [Copy on file]
AT EASE 9:18 AM / 9:19 AM
[Note: It was established that the Committee was working off a
different spreadsheet and the witness was requested to repeat his
overview once this spreadsheet was distributed.]
Mr. Hoffbeck listed the figures pertaining to the Kenai Peninsula
Borough, referenced as lettered columns, as follows.
Current 10K Exemption
A. Total Local Assessed Value-Prior to Residential Exemption:
$3,990,563,602
B. Residential Exempt $ @ $10K (Actual-Reported): $101,524,300
C. Taxable Value (C = A - B): $3,889,039,302
D. Borough/City Wide Mill Rate (TY 2000): 9.500
E. Revenue Generated (E = C x D/1000): $36,945,873
Proposed 50K Exemption
F. Local Assessed Value-Prior to Residential Exemption (F=A):
$3,990,563,602
G. Residential Exempt $ @ $50K (Estimated @500%): $507,621,500
H. Taxable Value (H=F-G): $3,482,940,102
I. Borough/City Wide Mill Rate Necessary for New Exemption (I
= J/H): 10.608
J. Revenue Generated (J = E): $36,945,873
Revenue Loss: 9.500 ($3,857,923)
Mr. Hoffbeck noted the estimated residential exemption amount with
a $50,000 exemption allowance was calculated by multiplying the
amount of the current exemptions claimed by five. He stated this
makes the assumption that residents currently receiving a $10,000
exemption would receive a $50,000 exemption.
Mr. Hoffman explained the adjusted mill rate was determined as the
increase necessary to generate the same amount of revenue as
currently generated under the $10,000 exemption program.
Estimated Loss in State Revenue
K. Value of AS 43.56 Property: $660,927,900
L. Change in Mill Rate (L = I - D): 1.108
M. Effect on State Portion of AS 43.56 (M = K x L): $732,084
Mr. Hoffbeck identified AS 43.56 Property as "oil and gas
property".
Mr. Hoffbeck explained the change in mill rate as the difference
between the current mill rate and the estimated increased mill rate
instituted by the Borough to offset revenues lost due to the
increased exemption. He detailed the process whereby the State
collects taxes on oil and gas property at a mill rate of 20.0, less
the mills collected by the local municipality. Therefore, he stated
the increased mills collected by the Kenai Peninsula Borough would
result in same amount of decreased revenues to the State.
Mr. Hoffbeck qualified the amounts listed on this spreadsheet
reflect a scenario whereby the Borough increases the exemption to
the maximum amount allowable and also offsets the lost revenues
with an increased mill rate.
"Local" Effect of Increased Mill Rate
N. Value of non-AS 43.56 Property (N = H - K): $2,822,015,012
O. Change in Mill Rate (O = L): 1.108
P. Effect on "Local" Portion of AS 43.56 (P = N x O):
$3,125,839
Revenue Loss: $3,857,923
[Data pertaining to the remaining four municipalities are
contained on the spreadsheet on file.]
Mr. Hoffbeck qualified this information does not pertain to State
revenue, rather details the mill rate increase necessary to offset
the lost revenues incurred if the exemption was increased. He noted
this would be collected from other property owners.
Co-Chair Wilken asked if the "other property owners" are business
property owners as well as those residential property owners
benefiting from the $40,000 additional exemption.
Mr. Hoffbeck affirmed.
Co-Chair Green asked for a definition of "Local" as indicated on
the spreadsheet.
Mr. Hoffbeck responded this indicates all taxpayers within the
Kenai Peninsula Borough.
Senator Wagoner commented that the figures contained in the
spreadsheet assume the Kenai Peninsula Borough would "need" to
increase the mill rate. He expressed this is not the intent of the
Borough, and instead Borough "would not be increasing the mill
rate".
Senator Wagoner referenced information from the Kenai Peninsula
Borough Tax Assessor disputing the data presented by the Department
of Revenue [copy not provided.]
Senator Wagoner charged that assuming that the Kenai Peninsula
Borough would increase the mill rate "so we can come up with these
figures, to me is an erroneous statement because that is not their
intent."
Co-Chair Wilken asked if the State must make up the difference
between the $732,084 (column M) and the revenue loss of $3,857,923.
Senator Wagoner clarified the spreadsheet lists the amount of
reduced revenue to the State in taxes on oil and gas properties due
to an increased mill rate imposed by the Borough. He stressed this
would only occur in the event the Borough increased the mill rate.
Senator Taylor asked if revenue to the State would be reduced under
this legislation regardless of whether the Borough mill rate is
increased and that only the amount would vary depending on the
amount of a mill rate change.
Senator Wagoner disagreed and asserted the State revenue would
remain the same if the mill rate were not increased.
Senator Taylor pointed out that under existing law the $10,000
exemption reduces the amount of taxable property within the
Borough.
Senator Wagoner clarified the exemption does not reduce the amount
of taxable property but rather the value of the taxable property.
Senator Wagoner remarked that the assumption is that the Borough
would increase the exemption to $50,000, the maximum allowed under
this legislation; however he surmised the Borough might increase
the exemption only to $15,000. He shared he was unsure the actual
intention of the Borough.
Senator Taylor expressed that a residential property owner would
advocate to the Borough to increase the exemption to the maximum
amount allowable.
Senator Wagoner agreed, but said this would be the decision of the
Borough. He predicted that if this legislation passes, considerable
discussions on the matter would occur at the Borough and Municipal
levels of government. One topic, he stated would be the amount of
the exemption.
Co-Chair Wilken announced the amount of $50,000 should be
referenced for discussion purposes.
Senator Taylor questioned how the Kenai Peninsula Borough could
resist the pressure to reduce taxes $36 million. He surmised
residents would vote for the full exemption. He stated that other
tax increases would subsequently be necessary, although these
increases would not be distributed equally among all taxpayers
because of the $50,000 exemption.
Senator Wagoner corrected the actual revenue reduction for the
Borough would be $3.8 million.
Co-Chair Wilken stressed the need to better understand this issue.
Senator Hoffman asked what is currently exempted under existing
law.
Senator Wagoner replied that the exemption is available for the
primary residences of all property owners in the Borough. He noted
an application must be submitted annually to participate in the
exemption.
Senator B. Stevens referenced the notation to the Kenai Peninsula
Borough data on the spreadsheet indicating, "Used Nikiski Mill Rate
minus the 2.3 mill levy for fire service district" and asked what
services are provided.
Senator Wagoner noted the services vary by service area and that he
would provide further information.
Senator B. Stevens noted this would affect residents in the Borough
based upon the location of their property within the Borough.
Co-Chair Wilken ordered the bill HELD in Committee.
SENATE BILL NO. 120
"An Act relating to the state's sovereign immunity for certain
actions regarding injury, illness, or death of state-employed
seamen and to workers' compensation coverage for those seamen;
and providing for an effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken pointed out this bill was introduced by request of
the Governor and, "requires the Alaska Marine Highway System (AMHS)
crew members work-related injuries or illnesses to be covered under
the State Workers' Compensation Act. Currently this coverage is
provided through the federal jurisdiction of the Jones Act."
SUSAN COX, Chief, Assistant Attorney General, Civil Division,
Department of Law testified this bill would assert the State's
sovereign immunity in cased involving injuries, illness or death of
employees of the State who are seamen. She informed that, for
litigation purposes these workers are currently covered by
traditional maritime remedies of maintenance and care, unearned
wages as well as the Jones Act. This legislation, she stated, would
instead provide workers' compensation coverage to effectively
provide a uniform system of remedy for State employees who are
injured on the job.
Ms. Cox noted this would be accomplished by amending AS 09.52.50,
the statute that waives the State's sovereign immunity to be sued
in court. She told of a 1990 Alaska Supreme Court decision on State
of Alaska versus Robert Brown involving the Department of Public
Safety, which determined that the State's workers' compensation law
could not be applied as the exclusive remedy for seamen because the
State had unconditionally waived it's immunity to be sued and was
therefore subject to federal maritime remedies in the Jones Act.
However, she pointed out this decision also ruled that if the State
desired to withdraw its consent to sue, it could do so and provide
workers' compensation by amendment the aforementioned statute. She
informed that this approach was utilized by other states, including
Texas and North Carolina, and has been addressed at the federal
level as well.
Ms. Cox pointed out this legislation would not impact privately
employed seamen, only those employed by the State.
Ms. Cox further noted this legislation would not only affect AMHS
employees, as the Department of Public Safety, the Department of
Fish and Game and other departments also employ some workers who
qualify as seamen. However, she stated that most seamen employed
by the State work in the AMHS.
Ms. Cox stated that between 1983 and 1991, the AMHS ferry employees
were covered by workers' compensation as a result of collective
bargaining agreements with three unions. She detailed the
agreements, which provided workers' compensation coverage in lieu
of traditional maritime remedies and Jones Act litigation. In 1991,
she informed, the Alaska Supreme Court ruled that arrangement, as a
result of collective bargaining, was not enforceable and that the
unions could not waive their individual members' rights under
federal law. She stated that the only option to substitute workers'
compensation for State-employed seamen would therefore be through
legislation.
Ms. Cox expected this change would save the State money reporting
that currently seaman injured or ill on a vessel, regardless of
whether the injury or illness was caused by work, is entitled to
certain no-fault remedies. She listed these remedies as including
payment of wages until the conclusion of the voyage without
reduction to sick leave accounts; payment of the approximately $45
daily stipend, also called maintenance, until recovery and
resumption of work; and continued payment of maintenance to augment
sick leave payments until work is resumed. She compared this to
workers' compensation practices whereby most illnesses are not
covered unless occupational diseases, concluding that this
legislation would result in the use of sick leave for payment of
wages during most illnesses incurred by seamen.
Ms. Cox pointed out that workers' compensation would treat seamen
with injuries "more favorably" in that workers would collect
workers' compensation insurance rather than the $45 per day
maintenance payment. She reported the insurance payments are closer
to the amount of the employee's regular wages and no deductions
would be taken from the employee's leave account. Therefore, she
stated that workers' compensation is more beneficial for injured
employees who do not intend to sue the State for damages than other
no fault remedies provided under maritime law.
Ms. Cox qualified that the range of possible damages allowed under
the Jones Act is greater for those employees who do sue the State
for damages due to work-related injuries. However, she stressed
that the employee must prove fault or negligence on the part of the
employer and are subject to affirmative defenses, such as
comparative negligence. She furthered that the employee must hire
an attorney and pay a contingent fee. She noted that both sides in
a litigation matter incur expenses and she expected that the
absence of litigation provided in the workers' compensation program
would also save the State money.
Ms. Cox stated that State-employed seamen have benefits that many
privately employed seamen do not, including sick leave, annual
leave, health insurance, disability benefits, etc.
Ms. Cox concluded that the effective date of this legislation
provides that the changes would affect new injuries or illnesses
occurring after July 1, 2003. She noted the three-year statute of
limitations for bringing claims or lawsuits under the Jones Act and
therefore, litigation would continue for a few years.
Senator Bunde asked the amount of claims and the cost of litigation
of the current system versus the anticipated financial impact of a
change to workers' compensation coverage.
BRAD THOMPSON, Director, Division of Risk Management, Department of
Administration, informed that the Division administers the self-
insurance program for the State agencies and operations, including
workers' compensation coverage for State employees as well as the
first $1 million coverage for claims of State-employed seamen
covered under the federal maritime laws.
Mr. Thompson directed attention to the fiscal note, which indicates
significant cost saving would occur in the future. He emphasized
that the savings amount is not specified due to the "method of
funding the risk management program." He explained the program is
funded on a "cash flow basis…for the claims expected to be paid in
the next fiscal period," noting that the outstanding claims are
"far greater than the sums that we put into the appropriation for
that next fiscal period." He stated that were the program funded in
the annual manner in which private insurance operates, the premium
rates would be reduced with enactment of this legislation.
Mr. Thompson referenced a collection of spreadsheets with an
accompanying analysis [copies on file.] He stressed this data
reflects only claims resulting in an expense to the State from
illnesses and injuries. He detailed the analysis as follows.
An analysis of AMHS crew claims costs compared to those
provided under the Alaska Workers Comp Act (AWCA) for all
other state employees.
The enclosed Excel workbook contains detailed breakouts of the
actual incurred loss (cost to date plus anticipated expense)
by each individual AMHS vessel for the past six fiscal years.
To objectively analyze the AMHS employee's injury experience
to the state's overall employee injury rate, both frequency
(number of claims) and severity (loss cost) are averaged and
compared on a per 100 FTE (full time equivalent) basis.
Additional analysis was performed between AMHS and the five
state agencies with the highest workers' compensation loss
experience - to provide comparison to similar physically
demanding jobs.
AMHS shows a five year average loss rate of 41 claims per 100
FTE's in comparison the state overall workers' compensation
injury rate of 8, with the highest five agencies showing
average loss experience of 10 claims per 100 FTE's.
On a cost per 100 FTE's analysis; AMHS actual claims
experience during the last five years shows an average cost of
$197,065 compared to the top five state agencies averaged cost
of $64,145 during the same period.
The most significant difference is the award for the non-
economic damages, not provided under workers compensation
remedies and that life illnesses that are alleged to manifest
during a voyage are covered under the Jones Act.
Mr. Thompson reported that this legislation would result in an
approximate savings of $850,000 in future years.
Senator Bunde asked whether a comparison was made against the
period of time when the employees were covered under workers'
compensation insurance in accordance with the bargaining unit
agreements.
Mr. Thompson replied that because the information is co-mingled
with claims submitted by other Department of Transportation and
Public Facilities employees, such a comparison has not been
undertaken.
Senator Hoffman asked why this change to workers' compensation
coverage was not implemented in the past given the predicted
significant savings.
Ms. Cox responded the matter has been considered for several years,
although it has been "in need of a sponsor". She furthered that
although the 1990 Alaska Supreme Court decision "suggested" this
change is allowable, uncertainty over the federal constitutionality
was not settled until recently.
SFC 03 # 44, Side B 09:49 AM
Senator Taylor asked what information the fiscal note is based
upon. He asked whether evidence of a savings exists and when this
savings would be realized.
Mr. Thompson referenced the spreadsheets showing a five-year
historical average comparison of the rate of claims and cost per
claims of MHS employees to other State employees, which
demonstrates. He qualified that the duties performed by MHS
employees is different than other Department of Transportation and
Public Facilities employees and the employees of the four other
comparison agencies, but pointed out that Department of Labor and
Workforce Development statistics indicate similar numbers of
Occupational Safety and Health Administration (OSHA) reports of
non-fatal injuries.
Senator Taylor asked if State policy requires MHS employees file
notification of injuries regardless of whether costs are incurred.
Mr. Thompson replied that recently enacted regulations require such
reporting, although this process is under implementation.
Therefore, he noted the data does not reflect the incidents that
had no expense.
Ms. Cox added that federal and international law requires reporting
of all work-related injuries, in part, to accurately track safety
issues. She noted the higher incidences of claims for MHS employees
because illnesses and non-work related injuries are reported as
well.
Senator Taylor understood the difficulty in comparing apples to
oranges.
Ms. Cox agreed and stated that many incidences do not result in a
claim.
Senator Taylor commented on the State workers' compensation system
and opined that it is inadequate in protecting workers injured on
the job.
Co-Chair Wilken noted a response would come later.
Co-Chair Wilken ordered the bill HELD in Committee.
ADJOURNMENT
Co-Chair Gary Wilken adjourned the meeting at 09:56 AM
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