HOUSE BILL NO. 494 An Act relating to the disbursement of money by the state, including employment compensation, unemployment payments, and permanent fund dividends, and to bank investments and deposits by the state; and providing for an effective date.    SUE STANCLIFF, STAFF TO REPRESENTATIVE KOTT, explained that HB 494 relates to the disbursement of money by the state including unemployment payments and Permanent Fund dividends, and bank investments and deposits by the state. The bill would change how the state disburses funds and it has the potential of saving the state considerable money in the reduction of check fraud, reissuing lost or stolen checks, postage, check printing costs, bank fees and reduced labor costs. Ms. Stancliff commented that the sponsor would work with the administration to refine the legislation. Statistics provided by the administration indicate that as of 2003, electronic deposits executed 89% of the state payroll. She noted that the issue of vendors poses a difficulty. The department has almost 50,000 vendors and currently only 500, or 1.3%, are using electronic payment. Ms. Stancliff expressed that the sponsor would like to see vendor payments increased, and believes it is achievable even though labor- intensive. Ms. Stancliff explained that the payroll and first check issuance must be by a warrant. The committee substitute will address that issue and build in flexibility. KIM GARNERO, DIRECTOR, DIVISION OF FINANCE, DEPARTMENT OF ADMINISTRATION, expressed concern regarding the mandatory language in Section 19 of the current version. She stated that the department would work with the sponsor on the bill, which benefits the way the state does business. She shared the history of electronic payments, noting that wire transfers have been used for decades and are both expensive and labor intensive. She said that all of the big state revenues including royalties and large tax payments, and most of the $1.7 billion received from the federal government last year come in electronically. She explained that currently 67% of public assistance payments and 90% of pension payments to retirees are made electronically. Electronic payments to vendors began in 1999 and it has about doubled each year. Ms. Garnero provided examples of agencies that use electronic deposit for payment. The Department of Revenue, Treasury Division, is developing an Automated Clearinghouse (ACH) origination software to either send or receive payments that will likely be a payment system for Medicaid. In response to a question by Vice-Chair Meyer, Ms. Garnero clarified that the state is paying by electronic deposit almost $1 billion per year to vendors and contractors. Vice-Chair Meyer asked if it could be made a requirement for vendors. Ms. Garnero replied that the state has tried to expand to vendors without success. In rural areas of the state, the post office or grocery store often serves as a bank. Workers Compensation electronic payments would not in state's best interest. Ms. Garnero stated it would be difficult to make electronic deposit mandatory. Vice-Chair Meyer wondered if the state could include a preference for Electronic Data Interchange (EDI) when it puts work out to bid. Ms. Garnero affirmed that the department could add the preference to procurements because of a continuing relationship with the contractors. Representative Hawker expressed strong support for the bill. He noted that "the heart" of the bill is Section 19. He questioned an account established by a state agency and an electronic payment card. Ms. Garnero was unable to respond. JOHN FOCHT, VICE PRESIDENT OF PREPAID CARD PRODUCTS, US BANK, VIA TELECONFERENCE, MILWAUKEE, explained that the bank delivers electronic products in five states, to more than 100,000 recipients. He explained the methodology, which is a debit card for VISA or Mastercard. Instead of setting up a checking or savings account, the bank establishes a funding account. The state then creates a direct deposit file (ACH), and that amount is deposited to the card. The cardholder can go to an ATM anywhere in the world and access the money. Representative Hawker asked if those states using the product for their state programs are pleased with it. Mr. Focht replied yes, and added that Iowa, one of the five states, made it mandatory that benefits to child support recipients are by electronic deposit. The other three states have made the program voluntary, and 25% have opted for the card. Mr. Focht said the model is working in Colorado, Washington, Minnesota, Iowa and Oregon. Representative Hawker asked if Mr. Focht has any experience in controlling misappropriation or fraud. Mr. Focht admitted that he does not have expense reduction information from the five states regarding fraud, returned checks, or stop payments. As the financial institution, US Bank has taken on responsibilities that include managing and minimizing fraud. Representative Hawker asked the cost to the state for the product. Mr. Focht replied that there is tremendous cost savings through reduced check production and mailing, reduced handling of lost checks, and reduced fraudulent activity. The state is not billed for any of the services, but it has higher costs due to increased electronic deposits, which he feels is a minor offset to cost reduction. US Bank benefits from the deposits until the actual money is spent, because payroll is not withdrawn entirely or spent immediately. His bank also makes money by the merchants' discount on VISA and Mastercard, with merchants paying a small fee to the bank whenever the card is used. Fees are assigned to the cardholder, but for the most part, the card can be used without charge. Representative Fate asked if there could be a judgment against the card in case of indebtedness. Mr. Focht clarified that because the bank authorizes transactions, it wouldn't authorize above the amount on the card. The bank would deal directly with overdrafts by the client, which could happen. PETER E. BROWN, KEY BANK ALASKA AND VICTORY CAPITAL MANAGEMENT, VIA TELECONFERENCE, ANCHORAGE, expressed that the administration would achieve economies through this legislation. He felt that latitude is needed to make disbursements in the old manner, but that electronic payments should be used whenever possible and practical. Instead of a difficulty imposed on rural bush residents, it could be a boon if the recipient is able to transact with a merchant over the telephone or the Internet with a card. He said that the technology not too distant. Representative Hawker requested that Mr. Brown work with the sponsor to craft language addressing the exception problems from the industry perspective. Mr. Brown replied that he and his staff would assist. Representative Hawker commented on the need for community input on changes that would not compromise cost efficiency to the state. HB 494 was heard and HELD in Committee for further consideration.