Legislature(2003 - 2004)
02/27/2004 09:06 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
February 27, 2004
9:06 AM
TAPES
SFC-04 # 23, Side A
SFC 04 # 23, Side B
CALL TO ORDER
Co-Chair Gary Wilken convened the meeting at approximately 9:06 AM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Con Bunde, Vice Chair
Senator Ben Stevens
Senator Lyman Hoffman
Senator Donny Olson
Also Attending: DOUG LETCH, Staff to Senator Gary Stevens;
JACQUELINE TUPOU, staff to Co-Chair Green; CHRIS ROBINSON,
Executive Director, Special Education Service Agency; PAT DAVIDSON,
Director, Division of Legislative Audit; LINDA HALL, Director,
Division of Insurance, Department of Community and Economic
Development; PAUL F. LISANKIE, Director, Division of Workers
Compensation, Department of Labor and Workforce Development;
Attending via Teleconference: From offnet sites: DOUG GRIFFIN,
Director, Alcoholic Beverage Control Board, Department of Revenue;
MIKE BARRY, Chair, Board of Directors, Alaska Industrial
Development and Export Authority, Department of Community and
Economic Development; CRAIG NORDTVEDT, Alaska Insurance Guarantee
Association; From Anchorage: DUANE GUILEY, Finance Officer, Special
Education Service Agency;
SUMMARY INFORMATION
SB 194-LIQUOR DELIVERED TO HOTELS/CRUISE SHIPS
The Committee heard from the sponsor, the Alcoholic Beverage
Control Board, and an industry representative. The bill was held in
Committee.
SB 289-EXTENDING THE SPECIAL ED SERVICE AGENCY
The Committee heard from the sponsor, the Division of Legislative
Audit and the Special Education Service Agency. The bill was
reported from Committee.
SB 276-ALASKA INSURANCE GUARANTY ASSOCIATION
The Committee heard from the Department of Community and Economic
Development, the Alaska Industrial Development and Export
Authority, the Alaska Insurance Guarantee Association and the
Department of Labor and Workforce Development. The bill was held in
Committee.
SENATE BILL NO. 194
"An Act authorizing delivery of up to two bottles of distilled
spirits to a cruise ship passenger or hotel guest."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated this bill, sponsored by Senator Gary
Stevens, "allows a licensed, packaged store in Alaska to deliver up
to two bottles of distilled spirits in a gift basket to a hotel
guest or cruise ship passenger."
DOUG LETCH, Staff to Senator Gary Stevens, read the sponsor
statement into the record as follows.
SB 194, "An Act authorizing delivery of up to two bottles of
distilled spirits to a cruise ship passenger or hotel guest",
is a straightforward bill that brings distilled spirits on par
with wine or champagne. Current Alaska liquor laws allow a
package store to deliver not more than two bottles of wine or
champagne in a gift basket with a floral arrangement to a
cruise ship passenger or a hotel guest. When this statutory
change was made, distilled spirits were inadvertently omitted
from the bill.
SB 194 corrects this omission by allowing a package store to
deliver not more than two bottles of distilled spirits in a
gift basket with a floral arrangement to a cruise ship
passenger or a hotel guest.
Senator Hoffman asked about the initial legislation that
inadvertently overlooked the inclusion of distilled spirits.
DOUG GRIFFIN, Director, Alcoholic Beverage Control Board,
Department of Revenue, testified via teleconference from an offnet
site that the initial statute was enacted in 1999. He recalled that
Senator Torgerson sponsored this bill at the request of an
entrepreneur in Seward who wanted to provide this service, although
no provision to do so existed. Mr. Griffin noted only one permit
has been issued to date and was issued to the Seward business. He
emphasized that the Board was conscious of the need to control
access to alcohol and prevent widespread delivery and to avoid
situations such as taxicabs "shuttling" alcohol to parties, etc.
Senator Hoffman noted the sponsor expressed that this was provision
was inadvertently omitted and asked if the witness shared this
observation.
Mr. Griffin was unsure, noting the original legislation was drafted
at the direction of Senator Torgerson and the issue of distilled
spirits never arose.
Senator Olson wanted assurance that this was an inadvertent
omission rather than purposeful.
BERMAN OBALDIA, Still Spirits, testified via teleconference from an
offnet location that the intent is to allow passengers of cruise
ships to purchase alcohol in the event such products were not
readily available at their home location to share with family and
friends.
Co-Chair Green asked how beer is related to this statute.
Mr. Letch responded that beer is not considered a distilled spirit.
Co-Chair Wilken suggested that this could therefore be another
unintended omission.
Mr. Letch commented that he had given the matter consideration as
well.
Co-Chair Wilken asked if bill should be held in Committee to allow
for and amendment
Mr. Letch indicated this would be acceptable.
Amendment #1: This amendment inserts a new bill section on page 1,
line 4 to read as follows.
Section 1. This Act shall be known as the Gary Stevens two-
pack act of 2004."
Senator Olson moved for adoption
Senator Olson WITHDREW the amendment.
Co-Chair Wilken asked if Mr. Griffin would be willing to work with
the sponsor to address the inclusion of provisions for beer in the
legislation.
Mr. Griffin affirmed he would.
Co-Chair Wilken ordered the bill HELD in Committee.
SENATE BILL NO. 289
"An Act extending the termination date of the special
education service agency; and providing for an effective
date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated this bill, sponsored by Co-Chair Green,
"extends the termination date of the Special Education Service
Agency (SESA) until June of 2013, an additional nine years."
JACQUELINE TUPOU, staff to Co-Chair Green, testified as follows.
The Alaska Legislature had established the Special Education
Service Agency in '86. And the purpose of it was to help
schools and infant learning programs that had children with
severe disabilities where they had no local expertise to
provide that for them. They make it possible for those
districts that either a low or remote attendance or, for
instance if you were in a school district that had one blind
child, or one disabled child. It enables those students to
receive those services in their community. Those students
would otherwise have to leave their families and communities
and go into costly residential treatment programs, which would
be at a huge cost to the State. So as intended by the
Legislature, they deliver student-specific services
specifically to small school districts, but they have lots of
programs that are available statewide, such as workshops,
courses, library, newsletter, and a website, that all schools
have available to them.
We recognize at this time that the availability of the
personnel that have specialization in student disabilities has
really decreased. At the same time, the incidences of students
that have these severe disabilities has really increased,
causing a lot of problems in different states.
We have this bill before you that will extend the SESA
education service agency for another nine years until June 30,
2013.
CHRIS ROBINSON, Executive Director, Special Education Service
Agency, testified that he was available to respond to questions.
PAT DAVIDSON, Director, Division of Legislative Audit testified to
the report published December 18, 2003 auditing the Agency [copy on
file]. She relayed that during the course of conducting this audit
the Division found that almost all school districts gave statements
in support of SESA operations and the continuation of the Agency,
as well as requests for increased funding of the Agency. She stated
that based on the findings of the audit, the Division issued a
recommendation to extend the termination date for four years to the
year 2008.
Ms. Davidson spoke to recommendations included in the report,
mostly to address efficiency issues; primarily a recommendation to
expand the use of teleconferencing "between the SESA expertise and
the school districts". She noted this would result not only in cost
savings, but would also provide more services to school districts,
a request expressed by the districts. She suggested that through
the utilization of teleconferencing services, the Agency would have
increased contact with school districts. She predicted that over
the next four to six years, the Agency would substantially change
its delivery of services, which could be assessed at the time the
recommended four-year extension neared completion.
Ms. Davidson characterized efficiency issues identified in the
audit as "minor", including a recommendation that managers pursue
the availability of the "e-government discount" for
telecommunications expenses. She said the report also encourages
SESA to stress its status as a State agency rather than a not-for-
profit organization in securing lower prices with vendors as well
as in filing paperwork with the federal Internal Revenue Service.
Ms. Davidson said the Audit found that representatives of the
Department of Education and Early Development and the Governor's
Council on Disabilities and Special Education were not attending
SESA meetings. She stressed this is a crucial element of State
oversight of SESAs operations.
Senator Olson asked what specific changes were necessary to measure
the delivery of services.
Ms. Davidson replied that pilot programs must be implemented to
start delivering those services. She explained that specialists
were helping onsite instructors and teachers.
Senator Olson asked if the current activities are ineffective.
Ms. Davidson corrected they are very effective; however the audit
suggests that the contact could be increased. She noted the
availability of video conferencing equipment currently used for
telemedicine.
Senator Olson noted the legislation provides a nine-year extension
and asked the consequences of the longer extension.
Ms. Davidson gave two reasons for a shorter extension. She admitted
that the existence of a federally mandated program is an argument
for a longer extension, although a four-year extension allows the
legislature to review SESA operations. She qualified that the
longer extension could be granted and the legislature could request
periodic audits in addition to the automatic audits conducted when
an entity reaches completion of its current term. She stated,
however, that statutory changes to programs are usually offered in
conjunction with extensions under the theory that legislation would
pass easier to avoid sun-setting the entity.
Co-Chair Green noted she was troubled by the amount of time taken
and required of SESA to receive extensions. She remarked that a
nine-year extension would provide the organization stability in the
knowledge that it would continue.
Co-Chair Wilken asked if other entities have been given nine-year
extensions.
Ms. Davidson responded that the previous extension of SESA was ten
years.
Co-Chair Wilken shared that he was intrigued by Commissioner
Sampson's assertion that SESA was unable to conclude that video
conferencing would become "the norm" at this time, given the over
80 sites with this capacity.
Ms. Davidson relayed that it would require a substantial change in
the method in which SESA delivers services. She furthered that
without "history" in the process, the Commissioner was unwilling to
"recognize that as the new norm for service delivery without more
experience."
DUANE GUILEY, Finance Officer, Special Education Service Agency,
testified via teleconference from Anchorage that he was available
to answer questions.
Mr. Robinson expressed that an extension of only four years would
have a negative impact on recruitment of staff. He told of the
several specialists vacancies, with up to six more anticipated,
based on the average tenure of 9.8 years. He detailed his 20 years
in this field and 14 years recruiting specialists for SERA. He
informed of the national shortage of qualified specialists,
cautioning, "it is not a seller's market". He remarked on the
difficulty in convincing specialists to relocate to Alaska without
certainty that the program would continue. He indicated that if the
agency were understaffed, financial consequences would occur.
Mr. Robinson also pointed out that other recommendations contained
in the audit appear to be long term and in conflict with a short-
term sunset date on the Agency.
Co-Chair Wilken asked the witness to address the reluctance to
commit to a videoconference process.
Mr. Robinson responded that only a minority of schools in the State
has videoconference capability. He speculated that focus on
utilizing these could result in an uneven distribution of services.
He also reminded that many efforts to implement a videoconferencing
system have been unsuccessful and stressed that SESAs capacity to
utilize the systems relies on "end user capacity". He was uncertain
whether schools in some villages could comply. He qualified,
however, that the Board of SESA has indicated intent to utilize
teleconferencing systems, especially for training purposes. He was
skeptical that videoconferencing could ever replace all onsite
visits. He explained the need for the specialists to understand not
only the student, but also the environment surrounding the student.
Mr. Robinson spoke to the benefits of allowing students to remain
in their homes and attend their local schools, rather than be
moved, as is done in other states.
Co-Chair Wilken pointed out that the first videoconferencing
systems were installed ten years prior, and agreed that many were
disappointed in its performance. However, he noted that the
original technology did not involve fiber optic cables, as are
currently available and significantly improved performance.
Co-Chair Wilken noted a spreadsheet titled, "SESA Outreach Methods
by School District" [copy on file] that listed each school district
and asked if any of the sites have been identified for
videoconferencing programs.
Mr. Robinson answered yes and referenced a spreadsheet titled,
"Student-Specific Consultations Caseload Count, FY 2004 2nd
Quarter" [copy on file]. He told of a competitive grant awarded to
SESA to develop an Alaska Autism Resource Center. He stressed that
this contract was "highly technology intensive" and specifically
proposed the use of videoconferencing to maximize an "under-funded
contract given the State need for information and assistance in
autism." He told of contracts with General Communications
Incorporated (GCI) to implement videoconferencing services in the
Bering Strait, Chugiak, Lower Kuskokwim, Lower Yukon, Northwest
Arctic, and Southwest Region school districts.
Co-Chair Wilken knew of a demand for autism spectrum disorders
services in Fairbanks, although no services were available. He
expressed intent to discuss the matter further at a later date.
Mr. Robinson informed that the Center is a resource to Fairbanks
and other communities. He told of the high attendance at a recent
two-day course and seven conferences.
Co-Chair Wilken asked whether the Legislature should mandate
attendance of Department of Education and Early Development and
Governor's Council on Disabilities and Special Education
representatives at SESA board meetings.
Mr. Robinson detailed the collaboration and working relationship
between SESA, the Department and the Council. He attributed the
lack of attendance to the multiple competing responsibilities and
high turnover rates of the particular staff. He surmised that
because SESA functions successfully, it is not a "problem area" and
therefore not of concern for the Department or the Council.
Co-Chair Wilken again asked whether attendance should be mandatory.
Mr. Robinson responded it should not, noting that "the point has
been made" and that both agencies were represented at the SESA
meeting held in February. He predicted the board would become more
assertive in its response to any future nonattendance.
Co-Chair Green offered a motion to report the bill from Committee
with individual recommendations and accompanying fiscal note.
There was no objection and SB 289 MOVED from Committee with zero
fiscal note #1 from the Department of Education and Early
Development.
SENATE BILL NO. 276
"An Act relating to the Alaska Insurance Guaranty Association;
relating to joint insurance arrangements and assessments to
the association; relating to the powers of the Alaska
Industrial Development and Export Authority concerning the
association; and providing for an effective date."
And
CS FOR SENATE BILL NO. 276(L&C)
"An Act relating to the Alaska Insurance Guaranty Association;
relating to the powers of the Alaska Industrial Development
and Export Authority concerning the association; and providing
for an effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated this bill "increases the Alaska Insurance
Guarantee Association's ability to pay workmans' comp claims of
insures that become insolvent."
Co-Chair Wilken noted bill would not be passed out of Committee at
this hearing. He announced the original version of the bill would
be discussed first, followed by discussions of the changes proposed
in the Senate Labor and Commerce committee substitute.
Co-Chair Wilken directed attention to a spreadsheet titled, "Alaska
Insurance Guarantee Association, Workers' Compensation Account,
Cash Flow Projection as of 12/31/2003" [copy on file] prepared by
the Division of Insurance.
LINDA HALL, Director, Division of Insurance, Department of
Community and Economic Development, testified as follows.
I would like to give a brief explanation of the situation that
has caused the need for some form of funding mechanism to
clear the deficit in the Alaska Insurance Guarantee
Association.
The Alaska Insurance Guarantee Association is formed under
statutes. Its members are insurance companies who write
property casualty business in Alaska. The purpose of the
Association is to minimize financial loss to the claimants or
policyholders when there is an insolvency of an insurance
carrier. Assessments are done by the guarantee association to
provide funds to pay the claims of insolvent insurers. The
guarantee fund does not have money set aside to do that; it's
called a "post loss assessment". So there's no money-they
don't bank money in case there's an insolvency. They do
assessments after they receive claims from an insolvent
insurance company.
In July of 2003, Freemont Indemnity was declared insolvent by
the Los Angeles Superior Court and while they had not actively
written workers' compensation for almost three years, our
original claims were estimated to have long-term payouts of
approximately $60 million. When Freemont originally stopped -
their certificate was pulled in Alaska - they had
approximately 27 percent of the Alaska marketplace. The
magnitude of that Freemont insolvency far surpassed any prior
insolvency and exceeded the resources of the Association,
which is the creation then of the cash flow deficit.
Insolvencies are not new in Alaska in the insurance industry.
There have been insolvencies for 20 years. Currently today,
there are three other insolvent insurance workers'
compensation carriers in the Guarantee fund. Nationally there
have been 46 insolvencies over the last three years, so this
is not a unique Alaska problem. I would also submit to you
that as of February 12, we had another insolvency of an
insurance company. They in fact had not written business here
actively since 1991, so this is 13 years old [and] adds
another $1.6 million to claims that need to be handled in the
Guarantee Association.
When there are insufficient funds in the Association, the
current statute allows for the pro rating of claims payments.
In August, as the director of the Division of Insurance, I
received a formal letter from the Guarantee Association
indicating since they were not anticipating having sufficient
monies to pay claims in full, they would be pro rating
payments to injured workers. Everyone involved felt that that
is a very objectionable solution and an objectionable action.
But when there was no money, there was no money. It would mean
that injured workers would receive less than their - some pro
rated amount of their weekly wage payments; medical providers
would be paid a portion of their bill. As of February 2 of
this year, there are 598 open claims in the Guarantee
Association from the four insolvent carriers. So we're dealing
with a substantial number of injured workers.
The other piece to that however, the workers' compensation
obligation is that of the employer, who generally satisfies
that obligation with the purchase of a workers' compensation
policy. When the carrier becomes insolvent, the claims are
transferred to the Guarantee fund of the State. When the
Guarantee fund has no funds to continue to pay claims, the
obligation for those benefits will fall back to the employers.
These are employers who, in good faith, purchased a workers'
compensation policy to meet their obligation. They now are
going to be faced with an additional, unanticipated costs-the
cost of those workers' compensation benefits. Again, as of
February 2 of this year, we have 380 Alaskan employers who are
exposed to this potential financial obligation.
I believe on the second page of the handout I've provided you,
there's a chart giving you some idea of the magnitude of those
claims. Generally, we find most businesses in Alaska - not all
by any means - are small employers. The prospect of a small
employer receiving back benefits totaling $100,000 for an
injured worker, it's fairly daunting.
The pro ration of claims was averted by a couple [of] loans
the Guarantee fund received. [The] California Office of the
Liquidator provided a $5 million loan: $4.5 million from the
estate of Freemont [and] $.5 million from the estate of Paula
Insurance, another insolvent carrier. In December, [the State
of] Pennsylvania provided $2.6 million as a distribution of
assets from the Reliance estate. Between assessments that are
currently allowed under statute and loan proposals, we did
have enough money that we have not, to date, had to pro rate
claims or stop paying them totally.
Senate Bill 276 - and you've asked me to speak, Mr. Chairman,
to the original bill, which I will do - the goal was to find a
funding mechanism to avert the disastrous outcome to injured
workers and employers. We attempted to find a method of
securing a stream of funds without requesting a bailout of the
industry by the State. With the fiscal issues being faced by
Alaska, we looked for something other than general fund
revenues to fill this gap.
The philosophy behind the original bill was that all employees
and employers across the state are involved in workers'
compensation regardless of how that obligation is met; whether
its through insurance, whether its through self insured, or
whether its through other funding mechanisms. The proposal in
this bill spread the cost of the funding across the entire
workers' compensation environment.
There is no question a proposed solutions are not popular. As
first consideration, I don't know anybody who steps up and
says, "oh, let me pay." But we do have a painful problem and
in the long run and in the short run I thing the solutions are
painful. The Guarantee fund is a safety net. Not only the
Alaska Legislature has adopted this safety net, but every
other state in the country has adopted as public policy the
creation of a guarantee fund whose goal is to protect
claimants and policy holders. The mechanism to provide that
safety net is the assessment capability.
As a general overview of the Guarantee fund, I would like to
point out one aspect of it that will become clearer as I talk
about specific bill proposals. There are three accounts in the
Guarantee fund. One is workers' compensation, one is auto and
one is labeled "other". "Other" includes everything except, of
course, work comp and auto. Each separate account is assessed
when there is an insolvency of a carrier writing that line of
business. As an example, when Reliance was declared insolvent
about two and one half years ago, they wrote workers'
compensation, they wrote general liability, so two accounts
were assessed for those lines of business.
SB 276 proposes three things. One is an increase and a change
in the methods of assessment. The first piece of that would be
to increase the current two percent cap to four percent in the
account where there is a shortage of funds to pay claims. In
this particular case that would be the workers' compensation
fund. If that did not produce sufficient monies to pay claims,
the other two accounts could also then be assessed up to a
maximum of two percent. These provisions expand the current
statutory provisions for assessments. Taking this approach
however, is not unique in other states and is not unique in
Alaska.
SFC 04 # 23, Side B 09:54 AM
Ms. Hall continued as follows.
Any insolvency should mean any insolvency could be spread over
all lines of property casualty business. Today in Alaska, we
have the "other" account, and I'm going to call it a bucket,
because it's an easier term. Today currently, we have a [one-
half] percent assessment in that other account. That means
every policy - your homeowners policy, general liability,
boats, commercial property, anything that's not work comp and
auto - that is with an admitted insurer, is being assessed
today a half a percent to cover the cover the insolvency -
primarily the insolvency of a medical malpractice insurer.
So I would submit to you that it's very unpopular to discuss
somebody's auto policy for the insolvency of a workers'
compensation company. We do that today. Your homeowners'
policy is being assessed for an insolvency of a [medical
malpractice insurance] carrier. So it's not something that is
particularly unusual even under our statute today.
The second piece of the assessment process in the original
bill proposes to assess other entities that are not
traditionally assessed. This is probably even more
controversial than the first provision. It is to assess the
self-insures and the JIAs [Joint Insurance Arrangement]. These
entities do not receive the benefits of the Guarantee fund. We
have considered bringing them into the Guarantee fund. We have
looked at other states who have self-insured Guarantee Funds.
The latter has not been particularly successful; there are no
legs to enforce payment into those funds. It's also my
personal point of view - we have no oversight ability in the
Division of Insurance of those entities. With a traditional
insurance company, if we see signs of financial distress, we
can stop them from doing business here. We can pull their
certificate of authority. We can't do that with a self-insured
or the JIAs. So it's something that I think is appropriate to
bring them under the Guarantee Fund statute. I realize they
did not create this situation; they are not part of the
Guarantee Fund.
What we looked at was finding the broadest possible base to
make this assessment to make it not as cumbersome to anybody.
The traditional theory of insurance is to spread the risk.
Senator Hoffman interjected to ask the amount the self-insured
would be assessed under the original legislation.
Ms. Hall listed the total funds for the self insured, including the
State, and the JIAs would have been approximately $1 million.
Senator Hoffman asked the assessment percentage.
Ms. Hall answered two percent of the cost of all claims as reported
to the Department of Labor and Workforce Development. She noted
that because these entities do not have policies they do not pay
premiums.
Senator Bunde noted that the three insurance accounts (workers'
compensation, auto and other) would be assessed and asked the
percentage of the contribution would be assessed to the workers'
compensation account.
Ms. Hall responded that the workers' compensations account is the
smallest by a significant margin. She stated the workers'
compensation account currently generates approximately $4.2 million
based on a two percent assessment. She compared this to the auto
and other accounts, which are "more closely aligned in total
premium volume" and would each generate approximately $7.5 million.
Senator Bunde commented that the beneficiaries of this proposal
would pay the smallest amount, and those who are not beneficiaries
would pay the largest amount. He agreed that the broadest possible
base must be utilized for a successful resolution.
Ms. Hall continued with her testimony as follows.
Generally, I've been asked, "is this fair" in speaking to the
self-insured and JIAs. Our point was to spread the cost as
equally as possible and at this point we have an ugly
situation. I'm not sure if fairness enters the equation at
this point. Is it fair for an injured worker to have at least
a minimum a termination of benefits? Is it fair for an
employer to get back a $100,000 claim? Is the whole concept of
the Guarantee Fund fair? I'm not sure any of it's fair. I
think there has to be a safety net. I think there has to be a
policy.
The last component of the bill would, as a final safety net,
propose to allow AIDEA [Alaska Industrial Development and
Export Authority] to provide guarantees for the Association to
obtain loans to meet their cash requirements.
The Guarantee Fund currently under statute has authority to
borrow but they're not a viable commercial loan prospect. They
have no assets. The only assets they have are a stream of
future assessments, which in current estimates are probably
needed until about 2008. There was a substantial amount of
work done exploring other options, from bonds to loans. When
you approach a commercial lender to talk about a loan to
somebody who's knowingly not going to have any money to start
paying it back until 2008, they don't get a very positive
response.
At any rate, the third part of this would be to allow AIDEA to
do a guarantee of loan, which would ultimately be paid back.
Maximum principle balance outstanding at any one time would be
$30 million.
We worked with some financial experts to find the most
economical, efficient way to provide access to money to pay
claims. I believe you indicated, Senator Wilken, that Mike
Barry is on the phone. Mr. Barry is the chair of AIDEA and he
has worked with me very diligently to help me understand the
intricacies of the financial world and to find ways to provide
funding.
My close typically, which won't be today, is that this bill
contains some painful, expensive and very unpopular
provisions. I don't think the provisions are nearly as painful
as the consequences of no action. I would urge you to focus on
the overall need to find a funding mechanism and to consider
what will happen if we take no action.
Senator Bunde reiterated conversation that occurred in the Senate
Labor and Commerce Committee, in which it was determined that a
"perfect storm" caused the current crisis. He asked the witness to
address the potential for another situation in which the Guarantee
Fund would be unable to absorb insolvencies.
Co-Chair Wilken also asked the witness to reference the
aforementioned table and explain how it relates to the future.
Ms. Hall informed that medical compensation claims remain open
indefinitely. She qualified that settlements typically address
portions of workers' compensation benefits, although the medical
provisions remain open. She noted the spreadsheet provides
estimates of incoming assessments according to current statutory
requirements and "outgoes" for the claims that are currently in the
Guarantee Fund. She stated these figures are based on reserves "to
the best of the ability of the people who work with claims reserves
and actuarial analysis." She pointed out that the figures are
subject to changes as claims are settled and as injured workers
heal and return to work. She furthered that the data on the
spreadsheet reflects the projections of the amount required
incoming and outgoing claims for a calendar year. She said the
information assumes an increase in payments, which also indicates
an increase in assessments as premiums increase.
Ms. Hall then remarked that the current crisis was "precipitated by
the magnitude of the Freemont insolvency" i.e. the market share
held by that company." She noted that other insolvencies have
occurred that the Guarantee Fund has been able to sustain over a
number of years. She informed that only three insurance companies
have a market share near the significance of that Freemont
Indemnity had when it became insolvent. She had no reason to
surmise that any of the current carriers have financial distress
and that they are stable, solvent companies. She therefore did not
anticipate another situation, but would not guarantee that it would
never again occur.
Senator Hoffman referenced the witness' earlier comments about
notification of the necessity of pro rating benefit payments. He
asked if the payments were actually pro rated and if so, why.
Ms. Hall answered that pro rating did not occur and again indicated
the loans and distributions from solvent states, which provided
adequate funding to pay those claims. However, she warned that the
Guarantee Fund would run out of money.
Senator Hoffman asked whether it was envisioned in August 2003 that
the Guarantee Fund would be depleted.
Ms. Hall replied that the managers of the Guarantee Fund
anticipated such and subsequently notified her. She again told of
efforts of the Association and the Division to secure funding to
ensure that the pro ration of claims did not occur. She clarified
that statute allows for the pro ration of claims if the Guarantee
Fund becomes depleted or is predicted to do so. She noted that the
Fund had sufficient funds to pay claims through the year 2003 and
into a portion of 2004.
Senator Hoffman noted that statute allows for the pro ration of
funds and asked why pro rationing did not occur.
Ms. Hall responded that sufficient funding became available shortly
after notification of the shortage from the Association. She
stressed that no state has ever prorated workers' compensation
claims and that other states assisted in ensuring this would not
occur in Alaska.
Senator Hoffman wondered why the witness was testifying that the
payments must be pro rated, when they were in fact not pro rated.
Ms. Hall replied that statute does not mandate that pro rationing
occur, but rather allows it to occur. In this instance, she stated,
assistance was received from other states and the pro rationing was
not necessary.
Co-Chair Wilken returned to the spreadsheet and asked if the
current assessment rate were increased from two percent to four
percent if the figures would be doubled.
Ms. Hall affirmed.
Co-Chair Wilken asked if the Fund would still be short
approximately $20 million if the assessment percentage were
increased from two to four percent.
Ms. Hall answered that the Guarantee Fund would have a cumulative
deficit in the year 2008 of $20, which would be the maximum amount.
At this point, she stated the trend would reverse and the
assessment income would exceed the "outgo".
Co-Chair Wilken requested an updated chart to demonstrate a four
percent assessment, as well as another column to indicate the
inclusion of self-insures and the JIAs. He added another funding
source as an assessment on the "other" insurance account and
requested data reflecting this source also be included for
comparison.
Senator Bunde noted the witness testified that the Guarantee Fund
would be depleted and he surmised this would occur "much sooner
than later", likely in April 2004.
Ms. Hall relayed updated information indicates the Fund would have
sufficient monies until June 2004.
Senator Olson spoke of the overall affect of this situation on
small businesses. He warned that if too much pressure were placed
on small business to contribute to the Guarantee Fund in the form
of increasing the two percent assessment to four percent, and the
assessment of self-insures, small businesses would become insolvent
as well.
Ms. Hall shared this concern. She informed that as of January 1,
2004, the Division approved a "very needed" rate increase in
workers' compensation that added an additional two percent to each
premium that applied even to small businesses. She told of separate
legislation that would reform the workers' compensation program to
reduce costs. She stated this issue was addressed separately
because of the importance of acquiring funding in a timely manner.
Senator Olson asked if consideration had been given to exempting
smaller businesses.
Co-Chair Wilken shared that the workers' compensation premium for
his business rose 23 percent this year.
Co-Chair Green asked if increases to the auto and other insurance
account groups would be "passed on" to consumers.
Ms. Hall answered the costs would be passed along to consumers and
noted this practice is allowed in statute.
Co-Chair Green pointed out that this proposal would not only
increase costs to small businesses but homeowners, vehicle owners,
etc., as well.
Ms. Hall affirmed.
Senator Bunde asked what portion of the funding would be generated
from self-insured entities, such as municipalities and school
districts.
Ms. Hall replied that an assessment on the total group would be
approximately $1 million.
MIKE BARRY, Chair, Board of Directors, Alaska Industrial
Development and Export Authority, Department of Community and
Economic Development, testified via teleconference from an offnet
location that AIDEA supports this bill as well as the other
legislation to reform the workers' compensation program. He pointed
out that SB 276 would resolve the temporary funding crisis,
although the other legislation is necessary to avoid future crises.
CRAIG NORDTVEDT, Alaska Insurance Guarantee Association, testified
via teleconference from an offnet site that the Association
considers pro rationing of benefits as a last option. He relayed
that the Association has not recommended implementation of pro
rationing for the current year only because it has been advised
that the Legislature is investigating additional funding. However,
he warned that the Association must consider pro rationing on an
annual basis anytime the Guarantee Fund has inadequate funds to pay
claims for the entire year.
Senator Bunde understood the concept of pro rata payment of
benefits to injured workers. He also perceived another situation in
which an employer inadvertently breeches its obligation to provide
benefits to injured workers and could be sued for payment by an
injured worker who has received pro rata payments.
Ms. Hall deferred to Mr. Lisankie.
PAUL F. LISANKIE, Director, Division of Workers Compensation,
Department of Labor and Workforce Development, informed that the
Workers' Compensation Act provides that employers are required to
provide insurance. He surmised the issue would become whether an
employer who purchased workers' compensation insurance would be
recognized as complying with its obligation in good faith. He
preferred that a judgment would be made that there was no failure
to provide insurance.
Senator Bunde noted injured workers currently are prohibited from
suing their employers under the provisions of the workers'
compensations laws. He asked if in an instance of pro rata payment
of benefits as the result of the insurer's insolvency whether
lawsuits would be permitted.
Mr. Lisankie commented that in the United States many opportunities
exist for filing lawsuits.
Co-Chair Green asked if funds were "infused" to the Guarantee Fund
system, whether the problem would be solved or if an ongoing need
for assessment changes would remain.
Ms. Hall responded that the system must be changed to ensure this
situation does not reoccur in the future.
Co-Chair Green asked if the calculations provided in the backup
material provide for the repayment of the loans made by other
states to Alaska. She wanted to know whether repayment is expected
or if the funds were grants or settlements.
Ms. Hall replied that the funds received from the State of
Pennsylvania were an "early distribution of assets" and repayment
is not necessary. She furthered that the funds received from the
State of California are intended for repayment. She explained the
distribution of assets remaining in the Freemont Indemnity estate,
of which Alaska would be entitled to a portion. She clarified that
the assets are not "dollar for dollar," otherwise the carrier would
not be insolvent.
Co-Chair Green asked if the federal government operates a fund
comparable to the State Guarantee Fund. She recalled instances of
major life insurance carriers becoming insolvent and other carriers
"stepped in".
Ms. Hall was unaware of such a federal program. She noted the State
operates two separate guarantee funds: the fund in question, which
is a property casualty fund, and another life health guarantee
fund. She stated that each state operates two such funds. She told
of a national association, but qualified it does not provide
funding. She qualified that the matter has been discussed on
national and regional levels.
Co-Chair Green clarified the life health assessment would not be
included in the proposed solution to the workers' compensation
situation.
Ms. Hall affirmed.
Senator Bunde spoke to prevention of a similar situation in the
future noting a provision in this bill would allow the fund to
receive a loan from the Alaska Industrial Development and Export
Authority (AIDEA). He furthered that the other legislation would
realize cost savings beneficial to both injured workers and
employers.
Co-Chair Wilken requested an updated chart showing the information
he earlier described relating to a four percent assessment and
assessments to JIAs and self-insured entities, to be used for
comparison.
Ms. Hall indicated she would provide this.
Senator Olson asked if self-insured pertains to self-employed small
business owners who are not required to purchase workers'
compensation insurance for themselves.
Ms. Hall answered no and defined self-insured as "companies who
apply to the Department of Labor and Workforce Development for
exemption and they have to meet certain financial criteria to do
that."
Co-Chair Wilken asked for an explanation of the changes contained
in the Senate Labor and Commerce committee substitute.
Senator Bunde remarked the changes are based on the premise applied
to insurance, that the risk payments must be spread over a large
group of people. He relayed that during Senate Labor and Commerce
Committee hearings, he listed attentively as the director explained
the problem with the Guarantee Fund and outlined the need to
include other participants in the solution. He learned that if the
auto and other accounts were assessed, the costs would be passed to
consumers. He relayed intent to "cut out the middle man. We could
make life less stressful for those who are trying to do business in
Alaska to avoid what I had heard mentioned earlier from Senator
Olson that businesses being driven into bankruptcy because they
can't afford their insurance payments". Therefore, he decided to
spread the expense to all Alaskans, who are potential recipients of
the benefits of the Guarantee Fund, through the use of the excess
earnings of the permanent fund. He informed that the excess
earnings are already used to pay dividends, administrative costs,
inflation proofing of the fund, and to pay hold harmless
provisions.
Co-Chair Wilken noted the committee substitute also removes the
assessment of self-insured entities and JIAs.
Senator Bunde opined that because these entities are receiving no
direct benefit from the Guarantee Fund, they should no be required
to contribute.
Senator Bunde added that the committee substitute retains the
ability to access AIDEA loans in the event of another insolvency
crisis.
Co-Chair Wilken asked whether this legislation should be held to
await action on the other bill reforming the workers' compensation
program.
Senator Bunde answered this bill, SB 276, should not be held and
that a solution should timely. He noted the other legislation
proposes significant changes to the current system and may require
additional consideration.
Co-Chair Green asked if a supplemental appropriation would be
required for FY 04.
Ms. Hall responded that the original version of SB 276 includes a
fiscal note for FY 04 supplemental funding.
Senator Bunde referenced the letter of intent adopted by the Senate
Labor and Commerce Committee that indicates payments are not
required all at once.
Co-Chair Wilken announced this bill would receive another hearing
after the following week.
Senator Bunde asked the witness if the Senate Labor and Commerce
committee substitute were so substantially different that it would
not solve the problem.
Ms. Hall answered it is not so different and that it would solve
the problem.
Co-Chair Wilken ordered the bill HELD in Committee.
ADJOURNMENT
Co-Chair Gary Wilken adjourned the meeting at 10:35 AM
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