Legislature(1997 - 1998)
02/24/1998 03:40 PM Senate STA
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE STATE AFFAIRS COMMITTEE
February 24, 1998
3:40 p.m.
MEMBERS PRESENT
Senator Lyda Green, Chairman
Senator Jerry Ward, Vice-Chairman
Senator Mike Miller
Senator Jim Duncan
MEMBERS ABSENT
Senator Jerry Mackie
COMMITTEE CALENDAR
SENATE BILL NO. 76
"An Act relating to long-term plans of certain state agencies and
recommendations regarding elimination of duplication in state
agency functions."
- MOVED CSSB 76(STA) OUT OF COMMITTEE
SENATE BILL NO. 322
"An Act relating to the Alaska children's dividend fund; and
providing for an effective date."
- MOVED SB 322 OUT OF COMMITTEE
SENATE BILL NO. 326
"An Act relating to the requirements for the registration of sex
offenders; and providing for an effective date."
- BILL POSTPONED
CS FOR HOUSE BILL NO. 334(FIN) am
"An Act relating to waiver of tuition and fees for certain family
members of a peace officer or a fire fighter killed in the line of
duty; and providing for an effective date."
- HEARD AND HELD
PREVIOUS SENATE COMMITTEE ACTION
SB 76 - See State Affairs minutes dated 2/19/98.
SB 322 - No previous action to report.
HB 334 - See State Affairs minutes dated 2/19/98
WITNESS REGISTER
Representative Pete Kelly
State Capitol
Juneau, Ak 99801-1182
POSITION STATEMENT: Presented HB 334
Ms. R.J. Nelson
Nenana Fire Chief
Nenana, Ak 99760
POSITION STATEMENT: Commented on HB 334
Mr. Melvin Vostry
PO Box 70
Palmer, Ak 99645
POSITION STATEMENT: Commented on HB 334
Mr. Craig Lewis
Fairbanks Region EMS
3522 Industrial Avenue
Fairbanks, Ak 99701
POSITION STATEMENT: Commented on HB 334
Mr. Steve O'Connor
231 S. Binkley
Soldotna, Ak 99669
POSITION STATEMENT: Commented on HB 334
Captain Ted Bachman
Department of Public Safety
5700 Tudor Road
Anchorage, Ak 99507
POSITION STATEMENT: Commented on HB 334
Mr. Scott Calder
PO Box 75011
Fairbanks, Ak 99707
POSITION STATEMENT: Commented on HB 334 and SB 322
Mr. Jack Fargonli
Office of Management and Budget
PO Box 110020
Juneau, Ak 99811-0020
POSITION STATEMENT: Commented on SB 76
Mr. Jim Baldwin
Department of Law
PO Box 110300
Juneau, Ak 99811-0300
POSITION STATEMENT: Commented on SB 76
Ms. Cheryl Frasca
2415 LaHonda Drive
Anchorage, Ak 99517
POSITION STATEMENT: Supported SB 76
Mr. Brian Andrews
2327 Meadow Lane
Juneau, Ak 99801
POSITION STATEMENT: Supported SB 322
Mr. Steve Brantner
1 Sealaska Plaza suite 301
Juneau, Ak 99801
POSITION STATEMENT: Commented on SB 322
Ms. Deborah Vogt
Department of Revenue
PO Box 110405
Juneau, Ak 99811-0405
POSITION STATEMENT: Commented on SB 322
ACTION NARRATIVE
TAPE 98-8, SIDE A
Number 001
CHAIRMAN GREEN called the Senate State Affairs Committee to order
at 3:40 and called HB 334 as the first order of business.
HB 334 - TUITION WAIVER FOR POLICE WIDOW/CHILD
REPRESENTATIVE KELLY came forward, saying he had already presented
his bill and would defer to the teleconference testimony.
CHAIRMAN GREEN asked the sponsor if he originally chose a broad
definition of police officer or if the definition had been
broadened in the process. REPRESENTATIVE KELLY replied it had been
broadened either in the finance committee or on the floor. CHAIRMAN
GREEN said she was pondering the inclusion of a U.S. Marshall.
REPRESENTATIVE KELLY responded that his intent was to include them.
SENATOR MILLER asked then why only one type of federal agent would
be covered and REPRESENTATIVE KELLY said it was his understanding
that the amendment adopted did cover FBI agents and border patrol
agents as well.
CHAIRMAN GREEN asked if the sponsor had an estimate of the number
of people the bill would currently cover and REPRESENTATIVE KELLY
estimated that number to be 800 police and 4,000 firefighters.
MS. R.J. Nelson, Fire Chief of the Nenana Volunteer EMS Department
testified via teleconference from Nenana. She mentioned she had a
personal interest in the bill as she has family and friends who are
police officers and her husband is a firefighter. She urged the
inclusion of Emergency Medical Technicians (EMTs), which she called
the third factor in public safety. EMT's play a major role in
public safety and respond with police and firefighters to all
different types of emergency situations. She said generally the
triad of police, fire and EMS responders are at the scene of
vehicle accidents and proposed that this bill would cover only two
of these three responders in the case that they were all killed in
the course of responding to an accident. MS. Nelson mentioned that
on occasion only EMT's respond to certain situations. She concluded
that she supported the bill, but urged its amendment to include EMS
providers or the introduction of another bill offering them the
same benefits.
MR. MELVIN VOSTRY, with the Mat-Su EMS section of the Department of
Public Safety, agreed with the previous speaker. He said often the
perception is that police and firefighters are the ones in danger,
but having been both a firefighter and an EMS responder, he
attested to the fact that it is equally, if not more, hazardous to
your health. He believes EMS providers should be included in this
or another bill. He said paramedics fall into the same category,
only with a different licencing provision, and should also be
covered. CHAIRMAN GREEN responded that there is a problem with the
bill title and the committee was pondering how this might be
resolved.
MR. CRAIG LEWIS, the Fairbanks Director of the Interior Region
Emergency Medical Service, expressed his support of the bill and
encouraged its passage. At the same time, he urged the committee in
the strongest terms to give the same recognition and benefits to
EMS providers, either through an amendment or in another bill. He
also stated that EMS providers are in the same danger as their
police and fire department counterparts. MR. LEWIS reported that
EMT's get shot, stabbed, assaulted and beat up. He emphasized the
danger and risk associated with their job of responding to any
incident with injuries as well as any threat of biological and
chemical agent releases. He said more than 60 million Americans use
EMS services in a given year and in Fairbanks, EMS providers
responded to twice as many calls as firefighters in 1997. He
stressed the fact that EMS providers are killed in the line of duty
and deserve the same treatment as other emergency service workers.
CHAIRMAN GREEN observed that EMS providers would not fit in this
bill due to the title, she proposed the idea of a new committee
bill to deal with them.
Number 273
SENATOR WARD Noted that anyone with written testimony might send
this as well as written requests for such a bill to the State
Affairs Committee.
MR. STEVE O'CONNOR, Assistant Chief of Central Emergency Services
for the central peninsula, and an EMS provider with 26 years
experience, agreed with the comments of MR. LEWIS. He clarified
that EMS comprises EMT's and paramedics, both of whom should be
covered in a companion bill.
CAPTAIN TED BACHMAN of the Alaska State Troopers mentioned to the
committee that the bill's definition of resident would
inadvertently exclude some people who have not been residents of
the state for one year prior to the incident. He said police, fire
and EMS departments hire people from out of state and, in the case
of an accident, he would hate to see someone excluded due to the
wording of this definition. He suggested that the wording be
changed so, on line 25 after the words armed services, it would
read: "or who was a full time employee of . . . " REPRESENTATIVE
KELLY said it seems a simple amendment and CHAIRMAN GREEN said it
would be addressed in committee.
MR. SCOTT CALDER testified via teleconference from Fairbanks and
echoed the remarks of the previous speakers, saying it is
appropriate for the committee to submit new legislation to include
EMS personnel. He said he did have a concern regarding the
inclusion of civil authorities in the category of military
personnel. He believed it might be important to make a distinction
between the two categories.
REPRESENTATIVE KELLY commented on the death of an EMS person who is
also a firefighter but acting in the capacity of an EMS provider,
some testimony had suggested this person would not be covered under
the bill and REPRESENTATIVE KELLY did not believe this to be true.
SENATOR DUNCAN suggested that the definition of resident is used
elsewhere in statute and has been carefully crafted and argued in
court. He remarked they might want to be careful in changing it, so
as not to cause problems for the bill. He advised consulting the
legal department before changing it. SENATOR DUNCAN said he was not
sure, but that it may open up a can of worms.
CHAIRMAN GREEN asked if the change could be made to "who was
employed" rather than "resident." REPRESENTATIVE KELLY replied that
this is a policy call and as with many benefits, a period of time
is required in order to qualify. He said he does not know that this
is a gross inequity and he wants to make sure not to cause further
problems.
CHAIRMAN GREEN asked if he would like to bring the bill back on
Thursday and REPRESENTATIVE KELLY agreed.
SB 76 - STATE LONG-TERM PLANNING
SENATOR PARNELL presented SB 76, which, he said, fosters government
that gets results and encourages communication between the
Legislature and the Administration. He said this legislation amends
the Executive Budget Act to foster results-based government. He
explained the bill empowers the Legislature to establish mission
statements and desired results for the Administration. SENATOR
PARNELL stated that the guts of the bill mandates the legislature
allocate the state's resources for effective and efficient public
service by clearly identifying desired results, setting priorities,
assigning accountability and using methods for measuring, recording
and reporting results. SENATOR PARNELL commented that for too long
the system has been mushy and that because of this, discussions of
policy never even occur. He hopes this bill will set forth a state
policy where the focus on is getting results.
MR. JACK FARGNOLI, representing the Office of Management and Budget
(OMB) stated that his testimony is essentially unchanged from his
comments previously. He said he could not agree more with the
concept of the bill but is concerned with some legal issues and
fears it may be difficult to meld Legislative and Executive efforts
into an orderly budget. MR. FARGNOLI also said the bill's timing is
premature and he expressed concern with the vague usage of the term
"mission statement." He does not know exactly how the process of
issuance of these mission statements would occur or what the intent
behind this provision is. JACK FARGNOLI said his understanding is
the Legislature fulfills its plenary powers in the enactment of
legislation and the Governor fulfills his plenary powers in the
process of providing guidance for these laws. He said something in
between these might be desirable, but he's unable to tell from the
bill. MR. FARGNOLI expressed uncertainty of what would be left in
statute and worry over the resulting confusion he envisions. He
proposed this area of the bill needs to be firmed up and said he
would leave discussion of the legal issues to MR. JIM BALDWIN from
the Department of Law. CHAIRMAN GREEN asked for clarification of
his primary concern and he explained it was the phrase "issue a
mission statement." He said he did not know if this was meant to be
a statutory process and how it would be handled. His concern is the
possible problem resulting from a mission statement conveyed from
the Legislature that is contradictory to a department's existing
mission statement in statute.
MR. JIM BALDWIN, from the Department of Law, began by saying he
likes the concept of results-based budgeting and has seen it gain
widespread national support. He explained that the problem with the
bill is constitutional. Article 2, section 13, of the Alaska
Constitution limits what can be done in an appropriation bill. He
said it is unclear whether the intent of the bill is to have this
mission statement included in the appropriation's bill, and said
this would cause a problem as an appropriation bill must be
confined to appropriations. He said this confinement provision is
fairly unique to Alaska and makes it difficult to relate other
states' experience to ours. He concluded that this is such a good
concept, he would not want to see it bogged down in a debate over
the meaning and effect of intent statements in the budget. MR.
BALDWIN said his reading of the word issue in the bill, with the
knowledge that the job of the Legislature is to enact legislation,
says the issuance of a mission statement would affect an agency's
mission by affecting what law it operates under. MR. BALDWIN said
a mission statement might be enacted into law, which is within the
power of the Legislature, or that it might be done by regulation
with a collaboration of both Legislative and Administration input.
He offered the committee a copy of the Florida bill as an example
of how another state has approached this collaborative method.
MR. BALDWIN discussed other issues within the bill. He mentioned
the truth in budgeting provision and said this would be a problem
if it were enacted into law. He remarked that the Administration
has no trouble with being truthful in budgeting, but said it is a
matter of definition as to when a deficit is a deficit. He observed
that the Governor's power to submit a budget derives from the
Constitution and he questions the validity of a statute that tells
the Governor how to characterize his own budget. He believes this
is a matter of separation of powers, and this appears to be an
attempt to define a purely Executive power by statute. MR. BALDWIN
said the repeal in section 10 of the bill is appropriate and
consistent with a court ruling which determined that statute
invalid.
CHAIRMAN GREEN noted that enacting a mission statement into law
might be problematic, as she assumes mission statements are
somewhat fluid over time.
MR. BALDWIN said the establishment of a mission statement is a
blend of Executive and Legislative powers and one of the concerns
is that the bill does not specify whether the process could be
characterized as top down or meeting in the middle. He would
anticipate problems with a top down process in such a complex
issue. He stated that some aspects of a mission statement may not
be amenable to being put into statute. He also noted the possible
dilemma that would result from a mission statement that conflicts
with statute.
SENATOR WARD asked if the Florida bill is currently law. MR.
BALDWIN did not know, but said he was interested by it because of
the collaborative process it employs in creating mission
statements. He found it on the Internet. SENATOR WARD said the
process does not work unless there is cooperation.
MS. CHERYL FRASCA, a former budgeteer, came forward to speak to the
value of the Legislature expressing its expectations regarding the
information on performance and results that is being requested in
SB 76.
TAPE 98-8, SIDE B
Number 001
MS. FRASCA emphasized the importance of having the Legislature work
with the Governor for a framework and a process to use information
to make better budget decisions. She wanted to lend support for
legislation that will lay out this framework.
SENATOR PARNELL appreciated this discussion. He indicated that the
Legislature is the policy making body of the state and is a coequal
power, not a top down body. With respect to the Executive branch,
he said this is not an attempt to step on their veto power and
rule-making power, only to say that the Legislature is going to
establish policy. SENATOR PARNELL answered the question raised
about the issuance of a mission statement, saying he purposefully
left the bill flexible in an attempt to establish a collaborative
process and foster discussion with the agencies.
SENATOR PARNELL believed MR. BALDWIN thought a mission statement
would be included in an appropriation bill due to the word
"legislation" appearing on page 2, line 12. SENATOR PARNELL
suggested this word should be changed to "Legislature." He said his
bill is flexible enough to put missions and desired results in
statute or be enacted as intent language.
CHAIRMAN GREEN asked what would happen if there was a conflict
between a department's statutory responsibilities and a given
mission statement. SENATOR PARNELL replied that departments'
missions are somewhat defined in statute and mission statements
must be in compliance with that law or the law could be changed. He
said there could be no conflict. SENATOR PARNELL did say the
activities used to achieve the mission are up to the Executive
Branch.
CHAIRMAN GREEN asked about the issue regarding truth in budgeting
and SENATOR PARNELL responded that he had no answer for MR.
BALDWIN's question regarding the constitutionality of these
sections. He said he found it rather interesting and the intent was
only to ensure that what the Legislature hears in December mirrors
the bill they see in January. SENATOR PARNELL noted in the past
those two paths have diverged, but said he is not wed to these
sections.
CHAIRMAN GREEN commented that she sees the intent of the bill and
likes it. SENATOR WARD asked SENATOR PARNELL if he had looked at
the Florida bill. SENATOR PARNELL had not but said MR. BALDWIN's
description of the process of the bill whereby the Governor sets
the mission statement and the Legislature follows along, seems the
reverse of the Alaska Constitution and the Legislature's role of
setting policy. He said to him that appears to be a top down
approach. SENATOR PARNELL observed that it seemed as if the
Administration was offering the Florida bill as a solution. He said
when he was working on the bill initially he had asked for
cooperation from a top official in the Governor's office, he had
incorporated every requested change from them into a work draft
that was subsequently rejected. In light of that, he plans to work
within the committee process on this bill.
SENATOR PARNELL said he had two small changes. SENATOR WARD moved
the change from legislation to Legislature on page 2, line 12 as
amendment #1. Without objection, it was so ordered.
SENATOR PARNELL said page 6, lines 22-24 the words "goals and
objectives" should be deleted and replaced with "missions and
desired results." He said "missions and desired results" would also
replace the words "goals and objectives" at the end of line 23.
SENATOR WARD moved the above change as amendment #2 and without
objection, it was so ordered.
SENATOR WARD then made a motion to move CSSB 76(STA) from committee
with individual recommendations and accompanying fiscal notes.
Without objection, it was so ordered.
SB 322 - CHILDREN'S DIVIDEND FUND
SENATOR DUNCAN presented his bill which establishes an Alaska
Children's Dividend Trust. This Children's Trust permits children
between the ages of 0 - 18 to deposit their Permanent Fund
Dividends (PFD) in a tax-deferred trust account for college or
vocational education expenses. Children under the age of 18, or
their parents on their behalf, could participate in the program
through a check off on the dividend application form and would
receive quarterly balance statements. SENATOR DUNCAN said, later,
withdrawals would be allowed for post-secondary or vocational
education purposes. These withdrawals could be taken twice yearly
at which time taxes would become due. Expecting that the student
would be taxed at the 15 per cent rate, SENATOR DUNCAN demonstrated
that they might receive an overall benefit of approximately $14,700
in 18 years based on certain assumptions of fund growth. SENATOR
DUNCAN commented that this demonstrated the advantage of having
this tax deferred status.
CHAIRMAN GREEN asked why the age 18 was chosen when some children,
like her, graduate from high school at an earlier age. SENATOR
DUNCAN replied that age 18 is not necessarily the magic number and
agreed with CHAIRMAN GREEN that it might be changed to reflect
whenever a child graduated from high school.
SENATOR DUNCAN said at college age the child has an option to take
payments as a lump sum, or in different ways over the course of 1 -
7 years. Tax rates would vary according to how the distribution was
made, but overall there would be a benefit, according to SENATOR
DUNCAN. To qualify for this tax deferred status the fund would be
structured as a "Rabbi trust," like the state's deferred
compensation plan. SENATOR DUNCAN said there are no assurances that
this fund would in fact be given tax-deferred status by the
Internal Revenue Service (IRS). He said the fund would have to be
already in place and structured carefully before the IRS could make
that determination. SENATOR DUNCAN said it is his understanding
that at some point a tax attorney would need to be hired to advise
whether the fund is likely to be approved by the IRS. SENATOR
DUNCAN mentioned the bill also contains a provision for withdrawal
of the funds for non-educational purposes when a person reaches the
age of majority. He said funds could also be withdrawn for other
reasons, such as serious medical problems, before the age of
majority.
SENATOR WARD asked about the fiscal note, and if any consideration
had been given to the idea that the fund itself could pay the start
up costs. SENATOR DUNCAN replied that he would allow the Department
of Revenue to address that question. He did mention that the first
year there would be no participants in the program. SENATOR DUNCAN
does not agree with the cost in the fiscal note for the first year
but did point out that in subsequent years the fund pays for
itself. He said they could talk about the first year cost. He
mentioned that other tax attorney opinions had been much less
expensive, however, he did not know if they were equal in
complexity to this issue.
SENATOR WARD asked again about a mechanism to recoup whatever cost
is incurred and SENATOR DUNCAN said he believed it could be done if
it is a major concern.
CHAIRMAN GREEN recalled a ballot consideration she had proposed and
said the immediate reaction from the Division of the Permanent Fund
was fear of the IRS deciding that the structure of the Permanent
Fund itself was questionable. She said there was discussion that if
the fund was changed it may be in jeopardy and she had, at that
time, asked for further inquiries and never received any response.
CHAIRMAN GREEN said it appears to be a subject no one wants to get
into. SENATOR DUNCAN replied that this is a different matter, her
proposed constitutional amendment would have changed the purpose of
the dividend, and he does not see this bill having any impact at
all in that way, as it only provides a dispersement option to a
person receiving a dividend and does not change the Permanent Fund
Dividend program itself at all.
CHAIRMAN GREEN mentioned that the question will arise if it is
government's role to be the keeper of a trust on behalf of anyone.
SENATOR DUNCAN replied that the state already holds money in trust
in retirement funds and he believes it to be a legitimate
government role if they were to pass a law allowing it. SENATOR
DUNCAN said a trust could be managed by the Department of Revenue
or even a private firm, this trust is only set up as a government
trust in order to obtain tax-deferred status.
CHAIRMAN GREEN asked if a person deposited their dividend directly
into a limited private trust account if tax deferred status could
be achieved. SENATOR DUNCAN responded that he was not qualified to
answer that question but likely someone in the audience could.
CHAIRMAN GREEN noted that this bill has a fairly limited title and
wondered if SENATOR DUNCAN anticipated other groups rushing in
attempting to be covered. SENATOR DUNCAN replied that he hoped not,
if the bill is to achieve its goal of a tax deferred trust for
education of the children of the state, it must be kept narrow. He
said if other groups are added, it might endanger the ability to
get a favorable IRS ruling.
MR. BRIAN ANDREWS, along with MR. STEVE BRANTNER, came forward and
urged support for SB 322. MR. ANDREWS restated what the bill would
do and offered his opinion that if the fund was carefully
structured in the form of a Rabbi trust it would receive a
positive revenue ruling from the IRS. He explained that the tax
deferred status of such a trust is based upon positive IRS rulings
dealing with the doctrines of constructive receipt, economic
benefits and forfeitability. MR. ANDREWS said it should be noted
that the IRS has recently loosened up the provisions of the Rabbi
trust by now allowing for up-front funding and various forms of
disbursement. It should also be noted that the Taxpayer Relief Act
of 1997 also established an educational IRA account a person can
deposit after-tax dollars in but, when distributed, yields tax-free
proceeds for the purpose of higher education.
MR. ANDREWS stated that this fund would be self-funding and would
not affect general fund expenditures. He believes the popularity of
the fund would provide economies of scale that would make it cost
effective when compared to private individual accounts. His opinion
was that the relevant general fund expenditures would include
modifying the PFD application and the costs associated with
developing a legal opinion, which he is not sure could be generated
by the attorney general or legislative counsel. He mentioned costs
ranging from 10,000 - 100,000 dollars for this outside counsel, and
assumed a figure of 40,000 to 50,000 would be reasonable.
MR. ANDREWS calculated some possible pay-out scenarios of the
trust, saying overall, the benefits of the program far outweigh the
costs of a legal opinion, in his estimation. He also noted the
intangible benefit to Alaskans in which parents are able to
establish a savings program for higher education costs without
first having to handle the money. MR. ANDREWS concluded that the
committee should pass the bill.
CHAIRMAN GREEN asked what the reason was for retaining legal
counsel. MR. ANDREWS clarified that participants would not have to
pay tax or the deposits to the fund or its earnings. SENATOR DUNCAN
restated this and added that taxes would only be paid on any
withdrawal at the time of withdrawal, and the purpose of the
opinion is to ascertain that the trust meets the requirements of a
Rabbi trust and could be tax deferred. He remarked that it takes
the IRS to make that determination.
CHAIRMAN GREEN asked if this could not be accomplished by sending
a letter to the IRS and SENATOR DUNCAN replied that he had sent
them many letters.
SENATOR DUNCAN asked for Mr. ANDREWS to respond to CHAIRMAN GREEN's
question about why the fund couldn't be managed by a private firm.
MR. ADAMS said it is due to the concept of economic benefit and the
fact that a participant in this type of trust cannot receive an
economic benefit. The trust money would have to remain an asset of
the state, within the Department of Revenue, in order that the
argument could be made that participants do not have an economic
benefit.
SENATOR DUNCAN mentioned that Deferred Compensation is another
example of where the state holds money in trust for people and MR.
ANDREWS noted that those monies are also, technically, assets of
the state. CHAIRMAN GREEN asked if all of those instances are based
on an employee/employer relationship and SENATOR DUNCAN replied
they are. MR. ANDREWS added that Rabbi trusts can be structured to
accommodate independent contractors as well.
MR. STEVE BRANTNER commented that deferred compensation plans,
sometimes called "golden handcuffs" are structured along the same
lines, where money will be kept as an asset of the corporation
until some triggering event allows dispersement. He believes this
same structure should apply here, and noted recent rulings have
said this structure is possible without the employer/employee
relationship. MR. BRANTNER restated the fact that the money would
have to remain an asset of the state. He said he also believes that
all ongoing administrative costs could be absorbed by the program
itself and this would be reasonable and appropriate.
SENATOR WARD asked how this would impact eligibility for public
assistance or medical assistance if dividends continue to be held
harmless. MR. BRANTNER replied that throughout the course of the
period in which those assets are held in trust the treatment would
be the same. The build up of the value of the trust would not have
any effect on the gain or loss of any benefits.
SENATOR WARD asked if he had a copy of the Rabbi trust and MR.
BRANTNER said it consists of several sections of the IRS code and
it is not just one particular document. SENATOR WARD asked if they
had a copy of the code and MR. BRANTNER replied that there is no
particular section of the code that establishes a Rabbi trust, but
rather it comes from a court interpretation of the code. SENATOR
WARD said he knew this and was showing how some people had already
spent a lot of money to do this privately. MR. ANDREWS commented
that if an individual wanted to do this, they would run into the
obstacle of whom the holder of the trust would be. He restated that
the State is the only candidate able to hold the trust without
constructive receipt. He said that is why the bill is written
narrowly, giving it a higher probability of a favorable ruling from
the IRS.
Ms. DEBORAH VOGT, representing the Department of Revenue, said this
bill will affect both the Permanent Fund and Treasury Divisions of
the department and would require some training and the preparation
of forms for program enrollment. She said they would also solicit
and print an information page in the dividend application packet
and post information on the division's web site. She reported the
ongoing cost to the division would be $16,000 to add a page to the
dividend packet, but said it would not take long before all this
could be paid from the participants. MS. VOGT said the treasury
division would set up and manage the fund, performing
administrative and record keeping functions that would cost about
10,000 dollars initially and 10,000 each year thereafter. MS. VOGT
also quoted a 1.5 basis point fee for external management, based on
the assumption that 35 per cent of the fund would be invested in
equity. She said also some personal services costs for the treasury
division would be allocated to the trust fund, although no new
personnel would need to be hired. MS. VOGT projected the cost of
the legal opinion to be 100,000 dollars and proposed it would
happen in two phases: the initial determination that competent
attorneys believe the trust would meet tax deferral status, which
she estimated at a cost of 60,000 dollars, and then the process
itself with the IRS, to which she assigned an estimated cost of
40,000 dollars. MS. VOGT said the cost could be debated but they
would want the best opinion available and she believes it will cost
a fair amount of money to get that. She said the Legislature might
find it appropriate for the trust to pay those costs, but the costs
are reflected as general fund dollars in the fiscal note submitted.
MS. VOGT explained that, regardless of the source of the money, the
appropriation ought to be a continuing appropriation as it often
takes a fair number of years to get a ruling from the IRS. She
would assume the program would go forward if the initial ruling
from counsel was favorable, and she imagined this could be obtained
in this legislative session. She said the department would then go
forward with the plan in the next dividend year with the caveat
that the fund had not been ruled on by the IRS and, in the case of
a negative ruling, the dividends would have to be refunded.
TAPE 98-9, SIDE A
Number 001
MS. VOGT said, assuming only 5,000 participants in fiscal year
2000, the cost to participants for funding some of the set up costs
and all of the ongoing cost would cost the participants the
equivalent of 57 basis points as compared to a general mutual fund
charge of 100 basis points for fund management. She said this cost
would diminish quite quickly as more participants joined the
program.
SENATOR MILLER said he is generally supportive of this program but
wondered what might happen if a participant died or moved from the
state. DEBORAH VOGT hadn't thought about this last question but
assumed any money deposited in the fund would be left there until
the individual turned 18 and then would have dispersement choices.
In the case of death, she assumes there would be a beneficiary form
like is used for deferred compensation and this form would be filed
with the other records.
SENATOR WARD asked if there was anything in the bill that allowed
an educational institution to preencumber any of these funds. MS.
VOGT replied no, her understanding of the legal requirements of a
fund of this nature mandated it be an asset of the state which
could not be encumbered by another party. SENATOR WARD asked if
anything in the legislation would preclude a child from attending
a private school and MS. VOGT said at the time of dispersement the
money could be used for any educational purpose. She also noted
that any money left in the trust would have to be dispersed at the
age of 25. SENATOR WARD said he was thinking in terms of the fact
that his granddaughter would be incurring costs for 18 years of
private school and was wondering if this would help with that.
CHAIRMAN GREEN remarked it would only be available to reimburse.
SENATOR MILLER asked what would happen if an individual dropped out
of school. MS. VOGT said if an individual was not in school the
proceeds would be dispersed to them. SENATOR DUNCAN interjected
that the bill does not force anyone to go to school.
CHAIRMAN GREEN mentioned that she was looking over the list of
agencies that can attach a permanent fund dividend and asked if
this list included the Department of Corrections garnishing
juveniles who are liable due to destroyed property. MS. VOGT said
the Legislature has made incarcerated people and felons ineligible
for the dividend. The equivalent amount that would be paid to those
ineligible in the form of dividends then goes to the Departments of
Corrections, and Public Safety, and victims' assistance.
CHAIRMAN GREEN questioned if this was the bill she was referring
to. She wanted to be sure there was a trigger mechanism for this
payment. CHAIRMAN GREEN asked if MS. VOGT had an opinion on the
bill and she responded she did not. She thinks the big question
will be whether or not the trust qualifies for tax deferred status.
She has expressed her reservations about this to SENATOR DUNCAN and
said, in her experience, she has never seen anything written about
Rabbi trusts outside the employer/employee relationship. She
proposed that is why the tax counsel might be so costly. She noted
the concept breaks new ground and the IRS is not likely to decide
on it quickly.
JIM BALDWIN said it is difficult to estimate the cost of the tax
opinion and said if he has erred, he erred on the high side so as
to not leave the program short. SENATOR DUNCAN added this issue is
specific and might be compared to other cases and wondered why the
opinion would be so expensive. MS. VOGT said the only similar issue
she is aware of is the Advanced College Tuition (ACT) program which
has piggybacked on the experience of several other states,
resulting in less expense for Alaska. SENATOR DUNCAN concluded he
did not want to short change the program but said her reservations
are likely lessened after hearing of other Rabbi trusts occurring
outside of the employer/employee relationship. MS. VOGT agreed.
MR. SCOTT CALDER from Fairbanks said he saw no compelling reason to
address this issue. He observed that, currently, parents can invest
money for their children for education. He mentioned their is no
guarantee of achieving tax deferred status and it is possible it
might cost hundreds of thousands of dollars to find this out. He
said this draws attention away form the desirability of parents
saving or investing on behalf of their children and seems like it
discourages private financial planning. MR. CALDER said it makes no
sense that it would be a state asset in the short tem but not in
the long term. He expressed his overall skepticism with the bill,
and suspicion of the IRS, asking if the committee might find the
time to protect the people from that organization rather than spend
money seeking their opinion.
CHAIRMAN GREEN asked again about teenagers getting in trouble and
being held liable for property damage. SENATOR DUNCAN said he
assumes any future dividend could be withheld from the trust and
CHAIRMAN GREEN wanted to make sure that mechanism was in place.
DEBORAH VOGT said she imagined there would be a court order binding
on the individual, requiring action by them and not the division.
CHAIRMAN GREEN remarked she did not want this to be overlooked.
SENATOR DUNCAN moved SB 322 out of committee with individual
recommendations and accompanying fiscal notes.
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