HOUSE BILL NO. 378 "An Act eliminating certain taxes under AS 21.09 on premiums from the sale of workers' compensation insurance; relating to the establishment, assessment, collection, and accounting for service fees for state administration of workers' compensation and worker safety programs; establishing civil penalties and sanctions for late payment or nonpayment of the service fee; and providing for an effective date." PAUL GROSSI, DIRECTOR, DIVISION OF WORKERS' COMPENSATION, DEPARTMENT OF LABOR testified in support of the legislation. He explained that the legislation eliminates the premium tax on workers' compensation insurance polices, enacts a user fee and establishes a special account for funding workers' compensation and safety programs. Currently, all employers are required to cover their employees for workers' compensation. Employers can use a workers' compensation insurance policy, which requires a premium tax. Larger employers could also self-insure. A self ensured employer does not pay a fee or tax. Public entities can form a Joint Insurance Arrangement to cover their liabilities. The legislation eliminates the premium tax. The premium tax collected $3.5 million dollars in 1998. The fee that the legislation would enact is designed to collect approximately $3.5 million dollars. This would be used to fund the Division of Workers' Compensation and the Occupational Safety and Health Division (OSH). The fee will start at 3.3 percent and graduate down to 2.6 percent. Self-insurers would be phased in. Eventually everyone would pay at the same rate, according to their use of the system. Employers would pay according to their amount of injuries. He stressed that the legislation would provide an incentive for a safer work place and requires all employers to pay at the same rate. He added that the legislation would reduce the dependence on general funds. Mr. Grossi pointed out that Alaska is one of only six states that fund their programs through general funds. Thirty-four states pay for their programs through special accounts. Ten states use a combination. Sixteen states have a similar mechanism to the legislation. Mr. Grossi acknowledged that there is opposition to the legislation. He pointed out that the opposition has come from employers that have not had to pay under the current system. Vice Chair Bunde questioned if school districts oppose the legislation. He noted that self-insurers pay for the liability on claims. Mr. Grossi responded that self-insurers don't pay for administration of the workers' compensation system: hearings to resolve disputed cases and work place safety programs. In response to a question by Representative Phillips, Mr. Grossi explained that employers pay based on their number of claims times the multiplier. Discussion ensued regarding support for the legislation. Mr. Grossi acknowledged that the Alaska Municipal League and the city of Anchorage have testified against the legislation. Representative Austerman questioned what the affect would be of exempting the public sector. Mr. Grossi explained that the total liability for municipalities is approximately $270 - $300 thousand dollars or 10 percent of the total. Co-Chair Therriault observed that the administrative cost would be shared over a wider pool. He questioned the impact on small business. Mr. Grossi stated that small business should pay less because the pool is larger. Vice Chair Bunde concluded that the cost of administration would be spread but that the Division would not receive more funding. He recounted testimony that the Division of Workers' Compensation is not supportive of workers. He questioned the net gain of the legislation. Mr. Grossi responded that if workers' compensation remains a general fund program it would be subject to reductions. The Division has received $500 thousand dollars in cuts over recent years. Combined with inflation this is approximately 40 percent less than what was available in 1998. He acknowledged that service has been reduced but pointed to budget reductions as the cause. The legislation was not designed to increase revenue. Representative Austerman questioned the cost to municipalities. Mr. Grossi responded that municipalities would pay 2.6 percent of claims. Single employers currently pay their workers' compensation liabilities. DWIGHT PERKINS, DEPUTY COMMISSIONER, DEPARTMENT OF LABOR AND WORKFORCE DEVELOPMENT provided information on the legislation. He noted that the city and borough of Juneau had $716,490 dollars in workers' compensation claims in 1998. Based on a phased in approach the city and borough of Juneau would pay $5,911 dollars the first year and $18,629 thousand dollars on the fourth year, if their safety record did not change. He emphasized that the Division is having a hard time keeping their doors open due to budget reductions. He pointed out that the change would take $1.5 million dollars off budget in FY01 and an additional $2 million dollars the following year. Payment is only on services. Most other states require users to pay. Representative Phillips clarified that the state of Alaska has never charged for processing workers' compensation claims. Mr. Perkins suggested that businesses take advantage of the consultation side of the OSH program. Co-Chair Therriault referred to the fiscal notes. He observed that there would be a decrease in revenues from the deletion of the insurance tax. This would be offset from OSH and workers' compensation funds. He questioned the cost for an assessment fee under Risk Management. REMOND HENDERSON, DIRECTOR, DIVISION OF ADMINISTRATIVE SERVICES, DEPARTMENT OF LABOR AND WORKFORCE DEVELOPMENT explained that the state of Alaska would also pay the fee. Mr. Grossi explained that the cost would be spread across agencies as interagency receipts. Mr. Perkins explained that the estimated cost from state employee claims is $75.8 thousand dollars in FY01. After the phase in (forth year) this would be $238.9 thousand dollars. He added that this amount would be charged off proportionately to federal receipts that the state receives. Representative J. Davies questioned if interagency receipts would be based on each department's claims. Tape Change, HFC 00 - 68, Side 2 Representative Foster noted that municipalities and schools pool together for self-insurance. He questioned if air taxis are combined into self-insured pools. Mr. Grossi clarified that there are no self-insurance pools of air taxis. In response to a question by Representative Foster, Mr. Grossi acknowledged that there would be an additional cost to the state of Alaska, but emphasized that there would also be a reduction of $1.5 million dollars in general fund support. LEANDRA ESTEP, MANAGER, JOINT INSURANCE ASSOCIATION (JIA), ALASKA MUNICIPAL LEAGUE, ANHCHORAGE spoke in support of a municipal exemption. She stressed that municipalities have already take substantial cuts in state support. She expressed concern that a user fee would be assessed on every dollar paid on claims. This would include medical benefits, attorney fees, defense costs, and contractual fees. Every employer pays into the Second Injury Fund. The city and borough of Anchorage paid between 5 and 6 percent into the Second Injury Fund over the last several years. She proposed that the user fee only be paid on indemnity claims. Medical- only claims should be exempted, since they are not generally denied or litigated. In response to a question by Vice Chair Bunde, Ms. Estep explained that the municipalities pay injured employees. State support is given when cases are litigated and through hearing officers. The state also receives notice of claims and assigns a case number. Vice Chair Bunde questioned why the claim would be filed with the state. Ms. Estep explained that there is a statutory requirement that the state be notified of all injuries. GLEN SMITH, RISK MANAGER, MUNCIPALITY OF ANCHORAGE provided information regarding self-insurance. He pointed out that the Alaska Municipal League was created in response to increased insurance costs. He gave a brief history of self- insurance legislation and activities. The 45 percent loss ratio for the Alaska Municipal League is lower than any other industry in Alaska. He discussed the loss ratio. The premium an individual pays is based on the combined loss ratio. Self-insured entities do not make a profit on their programs. The municipality of Anchorage pays for third party administration of claims. He maintained that it should not cost as much to litigate a claim as to process a claim. In response to a question by Representative J. Davies, Mr. Smith noted that there are 3,900 municipal employees. There were 453 workers' compensation claims and $1.9 million dollars in claims payments in 1998. He estimated that $3.4 million dollars in claims would be paid for 1999. In response to a question by Representative Foster, Mr. G. Smith observed that the municipality of Anchorage would pay $30 thousand dollars a year based on the legislation. He estimated that there would be a proposal to cap property tax on the November ballot. KEVIN SMITH, RISK MANAGER, ALASKA MUNICIPAL LEAGUE stated that the League opposes the bill and wishes to have the public sector excluded. He noted that the JIA was created in 1986 to allow public entities to self-insure. There are a number of cities and schools within the JIA program. Mr. K. Smith pointed out that self-insurers buy insurance with a large deductible. There is a premium payment on the reinsurance. He explained that an additional amount is paid to the Second Injury Fund. Mr. K. Smith stated that the legislation represents a cost shift from private insurance companies to the public sector. The state represents the largest portion of the shift. Mr. K. Smith disagreed that claims would be reduced by the legislation. He emphasized that there is sufficient incentive to reduce costs under the current program. He maintained that the legislation would provide a disincentive. He suggested that the Workers' Compensation Board would have a conflict since it would be supported from payments to claimants. He maintained that safety incentives do not work. Mr. K. Smith suggested the addition of language on page 3, line 20: "except a municipality, a municipal school district, or regional education attendance area". He added that subsection 6(g) on page 4 should be deleted: (g) Notwithstanding AS 21.76.020(a), a joint insurance arrangement established under AS 21.76 is subject to the provisions of this section and regulations adopted under this section and, if self-insured, shall pay the annual service fee on behalf of its members. Vice Chair Bunde asked how many communities are uninsured. Mr. K. Smith clarified that workers' compensation is required by the state of Alaska. There are communities that are having difficulty making payments. The number that is not purchasing some protection is small at this time. He estimated that the number would increase with reductions to municipalities. Representative Foster questioned who would be covered by the legislation if public entities were exempted. Mr. K. Smith explained that private entities would still pay. He maintained that the public sector runs efficiently. Representative Phillips noted that $17,000 - $56,000 dollars a year would be assessed to the Alaska Municipal League. She asked how the additional fee would be assessed to the communities and school districts in the JIA. Mr. K. Smith noted that there are 141 members, of which 20 are school districts. He noted that rates for the coming year have been established and did not know how the increase would be addressed. He spoke in support of a delayed effective date. Representative Phillips observed that the effective date is January 1, 2001. Co-Chair Therriault pointed out that the JIA has a significant reserve and assets of $15 million dollars. Since, JIA is never exposed to more than $250 thousand dollars on any loss; it would take more large losses in a single year than have been experienced in the past twelve years to exhaust their resources. Representative J. Davies questioned the number of employees covered by JIA. Mr. K. Smith responded that there are approximately 2,500 employees covered by the JIA. DON SHANNON, ALASKA SAFETY ADVISORY COUNCIL, FAIRBANKS testified in support of the legislation. He noted that Alaska's on the job injury rate is 4 to 5 times higher than other states. He stressed that the legislation would reduce injury. He stated that he was not concern with the Workers' Compensation Board's ability to settle claims fairly if the legislation is in affect. DON ETHERIDGE, LOBBYIST, AFL/CIO testified in support of the legislation. He maintained that the legislation would stabilize the Divisions of Workers' Compensation and OSH. The only way public employees can be covered is through the state Division of Occupational Safety and Health. ANDREW (BEAR) PIEKARSKI, BUSINESS MANAGER, DISTRICT COUNCIL OF LABORS, AND MEMBER, WORKERS' COMPENSATION BOARD, ANCHORAGE spoke in support of the legislation. He observed that funding is going down and there is a large turnover in state hearing officers. He observed that many companies do not have workers' compensation. He maintained that a lot of out-of-state companies operating in Alaska do not have workers' compensation programs. Vice Chair Bunde questioned if the legislation would capture entities that do not have workers' compensation. Mr. Piekarski responded that a stable funding source would help. Co-Chair Therriault noted that the Office of Management and Budget provided members with a fiscal note (copy on file.) Mr. Henderson explained that the fiscal note shows the cost to each state agency by funding source. Vice Chair Bunde questioned the cost per agency. Mr. Henderson reiterated that the cost per agency is based on injuries. Mr. G. Smith stressed that each municipality would be considered as several employers. Representative Phillips MOVED to report CSHB 378 (L&C) out of Committee with the accompanying fiscal note. Vice Chair Bunde OBJECTED for purpose of discussion. There being NO OBJECTION, it was so ordered. CSHB 378 (FIN) was REPORTED out of Committee with "no recommendation" and five fiscal impact notes: one by the Office of the Governor; one by the University of Alaska; two by the Department of Labor and Workforce Development, dated 2/16/00; and one by the Community and Economic Development, dated 2/16/00.