CS FOR SENATE BILL NO. 289(FIN) am An Act relating to technical and vocational education and to employment assistance and training; and providing for an effective date. MARY JACKSON, STAFF, SENATOR JOHN TORGERSON, explained that the bill would establish a new Alaska Technical and Vocational Education Program, which would be funded through an employee credit on the Unemployment Insurance Trust Fund. The new credit is one-tenth of one percent and is patterned after the credit currently in place for the Statewide Employment Program (STEP). The new program would be administered by the existing Alaska Human Resource Investment Council (AHRIC), which is charged with the responsibility of determining the priorities for grant submittal and distributions on an annual basis. The revenue from that source is expected to be about $4.3 million annually. Entities eligible to receive grants are those that are authorized by and are physically located in the State of Alaska. The first year revenues (about $3.2 million dollars) are directed to specific entities because the AHRIC would not have had the opportunity to formulate regulations to solicit grant applications. Those funds are directed to the University of Alaska (52% = $1.725 million), Kotzebue Technical Center (16% =$516,000) and Alaska Vocational Technical Center (32% = $1.032 million). Ms. Jackson continued, the bill would also provide for the AHRIC to act as the lead State planning and coordinating entity for Alaska. The State would then be in position to receive funds from the federal government for technical and vocational education programs. After the first year, grants would be awarded to programs in Alaska run by technical and vocational entities that hold valid authorization to operate. The AHRIC will award grants to entities that have sufficient accounting systems, secured private sector contribution commitments for matching purposes, and who's grant application purpose is listed first on the list of priorities adopted by the AHRIC. AHRIC will adopt a priority list each year based on economic, employment, and other relevant data in order to maximize employment opportunities for participants. Ms. Jackson pointed out that the bill would establish intent language directing the AHRIC to undergo an internal review to improve its efficiency and minimize its membership. It would require a report to the 22nd Legislature on that review and also on the developed guidelines for implementing the new grant program. Ms. Jackson stated that the bill would revise some program elements of the existing STEP by adding clarifying language on grant fund use for relocation assistance, tools and other gear, and support services, including allowances. Representative J. Davies referenced the diagram contained in member's packets indicating .2% - Attachment #1 and asked how that number had been determined. [Copy on File]. Ms. Jackson noted that the account was established on Page 3; Page 30 indicates establishment of the employee contribution; Page 4 contains the same verbiage that is in the existing State Training Employment Program (STEP) where the 2/10th was established. Vice Chair Bunde referenced the current STEP funding and asked if that referred to the current amount that the employee and employer were having deducted. Ms. Jackson replied those are the current averages. (TAPE CHANGE, HFC 00 - 130, Side 2). Ms. Jackson explained that it would not increase the deductions. Representative Phillips inquired if the sponsor had an amount in mind for the Intent Language in Section #1. Ms. Jackson stated that they did not. She noted that the first board was a stand alone, five-person board. The Legislature appointed it through the Governor and is subject to ratification. The Senate Finance Committee (SFC) decided to go with the existing group, however, she commented since the membership is so large, there should be common provisions put into effect. Ms. Jackson referenced the Alaska Human Resource Investment Council (AHRIC) and noted that grants after the first year would be awarded according to regulations developed by AHRIC. The revenue from that source is expected to be about $8.6 million dollars annually. TIM NAVARRE, (TESTIFIED VIA TELECONFERENCE), KENAI, testified in support of the legislation. He noted that it would provide a better-trained and educated work force from which to draw upon as an employer. Potentially, that could reduce the draw on the trust fund for unemployment. Mr. Navarre suggested that there would be concerns regarding future increases. DWIGHT PERKINS, DEPUTY COMMISSIONER, DEPARTMENT OF LABOR AND WORKFORCE DEVELOPMENT, noted the position paper included in members packets as submitted by Commissioner Flanagan. [Copy on File]. Mr. Perkins advised that the Department strongly supports the intent of the bill, however, are opposed to the diversion of funds from the Unemployment (UI) Trust fund to achieve that goal. The Department is not opposed to some sort of tax to support vocational technology education. It is true that there is currently a diversion of .1% of employed UI contributions in the STEP, which was established in legislation in 1989. STEP, however, is closely tied to the UI program; eligibility for service is restricted to workers who have contributed to UI by working for a contributing employer; the statutory purpose of the program is to reduce claims against unemployment benefits and reduce unemployment costs. When not reappropriated to the STEP account, unexpended funds have always been deposited back into the corpus of the UI Trust Fund. Representative Phillips asked if any of the UI funds were used for relief sent to Bristol Bay a couple years ago. Mr. Perkins replied that those funds were not sent directly from the Trust Fund. He pointed out that there are large unemployment pockets having a need and it becomes an infusion of funds into those communities. Vice Chair Bunde commented that the STEP draw was for those people whom had paid into the UI program and had become unemployed. He proposed that using that money to train people would help prevent future danger of unemployment. Representative Bunde suggested that it was a type of "user fee". Mr. Perkins replied that, currently, in order to qualify for STEP funds, only private employers pay into it. Many folks would not be eligible for those funds. In response to Co-Chair Therriault, Mr. Perkins noted that Alaska is one of five states in which the employee participates in the unemployment insurance side of the equation. In Alaska, it is referred to as a 20/80 plan. The employee pays 20% and the employer pay 80%. If there were an increase in the weekly benefit amount, the corpus of the fund would need to be made up. The concern is if the corpus of the fund begins to draw down, and if the employer side of the equation increases, would they be interested in an increased weekly benefit amount. RON HALL, DEPUTY DIRECTOR, EMPLOYMENT SECURITY DIVISION, DEPARTMENT OF LABOR AND WORKFORCE DEVELOPMENT, replied to questions asked by Representative G. Davis. He noted that that the chart represents a reversed axle and would not originate from the trust fund. The bill would not add an additional deduction into the employee paycheck, but instead, the corpus would drop. To recover those funds, the tax rate of the employers would have to increase. The employers are responsible to pay for this increase. Co-Chair Mulder asked the amount of money currently in the fund. Mr. Hall replied that in October 1999, there was $211 million dollars. Co-Chair Mulder asked the percentage of solvency. Mr. Hall explained that it would take about two years for the formula to set in. The formula reacts over a three-year cycle and if there is a large economic down pour, the solvency rate could drop fast. It takes two to three cycles for that to happen. The solvency rate formula is established by a federal standard. Right now the State is at .98% of that standard. He added that we should be at 1% of the standard. Co-Chair Mulder believed that was a healthy number. Mr. Hall explained that if the State dropped to .8%, there would be sanctions imposed. Co-Chair Mulder asked at what level could a tax be imposed. Mr. Hall replied that the proposed legislation would impose a tax to the employer. It would take two years for that to occur. Co-Chair Mulder asked what could trigger a tax. Mr. Perkins interjected that a draw down could happen. TOM WYLIE, ACTUARY, UNEMPLOYMENT INSURANCE TRUST FUND, DEPARTMENT OF LABOR AND WORKFORCE DEVELOPMENT, noted that there are two parts of the calculation of the UI tax rates. The first part looks at benefit costs in relation to payroll. That provides a certain percentage which is called the "average benefit cost rate". That is the percentage rate which is divided between the employer and the employee and provides the 2.14% and .54% number. After that calculation is done, then the tax rate calculation looks at the amount of money and calculates according to a solvency rate schedule whether the fund appears to be in good or bad shape in comparison to the statewide payroll. In response to Co-Chair Mulder's question as to when the trust fund becomes solvent, Mr. Wylie noted that is the stage where the trust fund is looked at. When the amount of money in the UI Trust Fund falls below 3% of taxable total payroll in the State, then a tax is added on to the employers tax rate. If the Trust fund balance falls below 3.3% of total payroll in the State, it is considered more solvent than it needs to be and the employers tax rate is reduced by the solvency adjustment. Co-Chair Mulder inquired about applying that concept to today. Mr. Wylie replied that today, the trust fund is at approximately 3.15%, which is a bit higher than it needs to be. Discussion followed between Mr. Wylie and Co-Chair Mulder regarding the solvency percentage. Mr. Wylie noted that the calculation states that if the Trust Fund solvency is between 3%-3.3% of payroll, it is okay and we would not need a tax. He noted that the State is currently at 3.15%. Co-Chair Mulder asked what the 3% would constitute. Mr. Wylie replied that 3% of total payroll tends to be right around $200 million dollars. That changes during the course of the year and during the winter months when unemployment rates are higher. For tax rate purposes, the State looks at the Trust Fund balances at the end of September. This is a State standard and added that there is no national standard compared to the Alaska standard. All the states have a different way to set solvency. The tax rate moves based on the assumption of whether it is a good rate or not. The federal government has a solvency rate which they call an average high cost multiplier. That calculation is applied to every state. In response to Co-Chair Mulder, Mr. Wylie noted that the average high cost is 1%. It is a different type of calculation than the one previously explained. Co-Chair Mulder asked how would that translate to the State of Alaska's calculation. Mr. Wylie replied that the federal calculation on our tax rate came out to .98, just under 1%, which is considered the proper average high cost multiplier that the federal government uses. Co-Chair Mulder asked the flexibility. Mr. Wylie replied that the federal government is not that complicated. If a state is at 1% or above, they are okay and if below, they are not. He reiterated that above is good, below is not. JIM SAMSON, (TESTIFIED VIA TELECONFERENCE), FAIRBANKS, spoke in opposition to the legislation. He noted that he had the responsibility of distributing the Unemployment Trust Fund in 1986-1987, during the lowest point in the account. He stated that the Trust Fund should not be used to pay for the programs outlined in SB 289. Mr. Samson noted that he supported adequate funding for the Tech Center and full funding for the University, however, disagreed that the funding should come out of the Trust Fund that was set up to pay benefits to workers during temporary unemployment. He understood that by taking 2/10 of 1%, and diverting it into another fund would be unfair to every Alaskan employee. He stressed that the burden would not be fairly distributed by that method of tax. WENDY REDMAN, VICE PRESIDENT, STATEWIDE SERVICES, UNIVERSITY OF ALASKA, FAIRBANKS, voiced support for the proposed legislation. She acknowledged that an alternative source of funding would be better. Ms. Redman noted that since the State general fund should be supportive of all training programs, the State should keep people employed. Given that the State is not at that place yet, one of the best things that the State could do is to provide training to people to be better able to hold jobs. Given the last decade of flat funding for vocational programs throughout the State, the University is in trouble trying to respond to the current training needs existing in Alaska. Ms. Redman explained that there has not been a capital appropriation for instructional equipment in almost a decade. In trying to respond to some of the high tech programs needed throughout the State, there is not enough money to make the up-front investment. CS SB 259 (JUD) was HELD in Committee for further consideration.