HOUSE BILL NO. 290 "An Act extending the termination date of the Real Estate Commission; and providing for an effective date." 1:59:24 PM LAURA STIDOLPH, STAFF, and REPRESENTATIVE KURT OLSON, read from a prepared statement: Before you today is HB290, this legislation extends the termination date of the Real Estate Commission to June 30, 2018. Each year the Division of Legislative Audit reviews state boards and commissions to determine if they should be reestablished per AS 24.44. The Division of Legislative Audit reviewed the activities of the Real Estate Commission. The purpose of this audit was to determine whether there is a demonstrated public need for the board's continued existence and whether it has been operating in an effective manner. As the members noted in their review of the audit in their packets, it is the opinion of our auditors, the board is serving the public's interest by effectively licensing real estate brokers, associate brokers, and salespeople. As the members also may have noted from the audit, there were two recommendations. First, the commission's chair and the DCCED Division of Administrative Services director should work together to procure a masters, errors & omissions policy. Second, the Division of Corporation, Business, and Professional Licensing should take action to ensure cases are actively investigated. To speak to the recommendations, Kris Kurtis of Legislative Audit is here, Sara Chambers Director of the Division of Corporations, Business and Professional Licensing with the Department of Commerce, Community & Economic Development, and Nancy Davis, the Chair of the Commission is online from Sitka. In closing, the Real Estate Commission serves an important role by improving operations and industry practices by modifying and adopting regulations. Thank you for your support of this legislation. Representative Kawasaki asked about the original audit recommendation. He wondered why the board extension was only two years. Ms. Stidolph replied that the audit recommended that the commission procure a master errors and omissions insurance policy and if accomplished recommended a 6 year extension. If the policy was not acquired, a four year extension was suggested. She related that the sponsor decided to reduce the extension to two years because the policy was an important part of the commission's statutory requirement that should be obtained in a reasonable amount of time. Representative Guttenberg asked why the commission did not obtain the policy. Ms. Stidolph responded that in 2008, HB 357 (Real Estate Licensees/Recovery Fund) [CHAPTER 113 SLA 08 06/26/2008] the House Labor and Commerce Committee sponsored a bill that changed the real estate surety fund. She delineated that the fund was changed to the Real Estate Recovery fund that allowed consumers via an administrative hearing to receive up to $15 thousand in damages. The legislation mandated that each realtor would have to obtain the insurance policy in order to protect the public. However, a clause in the bill stated that if the commission did not obtain the umbrella policy coverage, individual salespersons did not have to procure the policy either. Since 2010, when the bill regulations were written, disagreement ensued about whether the regulations were "too prescriptive." The regulations stated that the maximum premium for the insurance policy was $300, which was too low. She commented that after six years of bureaucratic wrangling the solution to require the commission to obtain the masters policy was warranted. 2:04:55 PM Vice-Chair Saddler wondered whether there were any other measures that addressed the situation. Ms. Stidolph indicated that there was currently SB 158 in the House Labor and Commerce Committee, which dealt with real estate broker licenses. The committee was offering an amendment to repeal the provision in HB 357 that mandated the commission to obtain the umbrella policy. Vice-Chair Saddler asked for clarification. Ms. Stidolph further explained that each individual would be required to obtain the policy until the commission obtained the policy. Vice-Chair Saddler asked what the timeline was and how it comported with the two year extension of the commission. Ms. Stidolph indicated that the repeal would occur in 2018. The date granted the industry time to obtain the insurance and gave the real estate commission more time to procure the policy. Vice- Chair Saddler asked what would happen in the 2 year timeline with adoption of the amendment. Ms. Stidolph answered that all real estate salesperson and brokers would operate under the policy within two years and in 2.5 years a master policy would be obtained by the commission. 2:07:25 PM KRIS CURTIS, LEGISLATIVE AUDITOR, ALASKA DIVISION OF LEGISLATIVE AUDIT, reported that the audit recommended a 6 year extension because at the time Legislative Audit understood that the commission could procure the policy by January 2016. She spoke to the recommendations. The first recommendation regarded obtaining the master policy and the second recommendation requested that the Division of Corporations, Business, and Professional Licensing (DCBPL) chief investigator take action to ensure cases were investigated and completed in a timely manner. She noted 29 cases of "significant periods of inactivity" in a sample of 36. Representative Kawasaki asked when the next audit was required with only a two year extension. Ms. Curtis relayed that the division would conduct the audit in the spring or summer of 2017. Representative Kawasaki asked about the cost of the audit. Ms. Curtis responded that the audit would be succinct and short having just completed an audit. However, she was unable to guarantee the possibility of a short audit. Representative Kawasaki cited the audit report that identified 36 of the 235 open investigative cases and that 29 of the cases had periods of inactivity ranging from 124 to 1,669 total days. He noted that some cases were closed due to the length of investigation. He thought the situation appeared "problematic." He wondered why the investigations took so long. Ms. Curtis replied that the finding was consistently discovered within DCBPL. She communicated that in the current case "excessive time lags were due to inadequate monitoring and insufficient oversight to ensure investigations were completed timely." Representative Kawasaki thought the DCBPL was not serving the "major public purpose" of the board. He expressed concern with the excessive timelines. Regardless of the issues, he announced that he would offer a conceptual amendment that would increase the extension "by a couple of years." 2:12:30 PM Representative Guttenberg offered that he was "troubled" by both recommendations. He wondered what the "mechanical problem" was that kept the commission from obtaining the master policy. Ms. Curtis explained that she had heard various different reasons why the policy was not obtained but that "no one could really answer the why." She recently discovered that the original legislation was "flawed" and not in line with a policy that actually was possible to procure. She added that "no one could really pinpoint" why it took since 2008 and still no real progress was made to procure the policy. She shared that recently the commission and the division, in response to the audit made great effort towards obtaining the policy. Representative Guttenberg asked about the second recommendation regarding the timing and inactivity of the investigations. He wondered whether a correlation existed between the functioning of the board and the two recommendations. Ms. Curtis clarified that he was asking whether the "efforts of the board impacted the recommendations." Representative Guttenberg deduced that regarding the first recommendation the commission was "unfocused" and decide what to do in the face of a muddled statute and recently sprang into action because of the sunset. The second recommendations had to do with the inactivity regarding complaints. He wondered whether the board was "functional." Ms. Curtis responded that the board was functioning and able to serve the public interest. She commented that Legislative Audit would not recommend the extension if the audit determined the board was not functional. She noted that the investigative lags were "reflective" of a "lack of good case management" and constantly experienced the problem. She reminded the committee that the audit was "looking backward" and currently the issue could have been resolved. 2:17:38 PM Vice-Chair Saddler asked whether the licensing fees covered the commission's costs and investigations. Ms. Curtis responded in the affirmative and confirmed that the board had a surplus of $274 thousand as of March 2015. Vice-Chair Saddler wondered how much of the surplus would remain after the master policy was obtained and whether the cost would affect the licensing fees. Ms. Curtis expected that some indirect costs would be incurred in obtaining the policy but the expense would not impact the surplus. Vice-Chair Saddler asked whether the indirect costs were due to the policy premium. Ms. Curtis answered that the licensee would pay the premiums to the board under the umbrella policy. Vice-Chair Saddler reiterated whether the surplus would pay the premiums. Ms. Curtis replied that the licensees would participate and collectively pay for the policy. She suggested that Vice-Chair Saddler clarify the question for the department. Vice-Chair Saddler mentioned the audit's unfavorable findings of the investigator. He asked whether the investigator was a staffer or contractor. Ms. Curtis responded that the investigators were employees of the DCBPL and sometimes an investigator was assigned to a specific board and others were shared among boards. Vice- Chair Saddler had heard in the past that some investigators were independent contractors. Ms. Curtis answered in the negative. 2:20:52 PM SARA CHAMBERS, ADMINISTRATIVE OPERATIONS MANAGER, DIVISION OF CORPORATIONS, BUSINESS AND PROFESSIONAL LICENSING, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT, Co-Chair Thompson understood that the division was "in charge" of investigators and investigations. Ms. Chambers answered in the affirmative. Co-Chair Thompson asked why the problem with investigators repeatedly happened over the years. Ms. Chambers confirmed that the problem had been identified over the "last few years." She detailed that the scope of the audit was 2010 through 2015. In the summer of 2014, the division hired a new chief investigator that created a management shift. The new manager had put into place some new policies and procedures and supervisory restructuring in an attempt to resolve the issues that were due to a lack of management in a particular unit prior to 2014. She suspected that the samples in the audit were prior to late 2014. She blamed the issue on a "management oversight responsibility." She pointed out that the new measures resulted in a reduction in caseload and turnaround time. 2:23:08 PM Representative Guttenberg hoped that the situation was remedied. He asked about conflicting statues that interfered with the commission obtaining a master policy. He wondered what mechanism was preventing the board from purchasing the policy. Ms. Chambers explained that the statute required individual licensees to carry the policy but the commission was not required by use of the word "may." However, the other clause stated that individuals were not required to carry the policy until the commission obtained an umbrella policy. She summarized that individual brokers and salesperson were not required to obtain the policy until the commission procured an umbrella policy yet everyone was required to obtain it and the commission was not required to procure the umbrella policy all at the same time. She could not speak to the situation prior to her involvement in mid-2014 but "sensed that someone was dragging their feet." She reported that she "dug in" to remedy the situation and was hopeful that the policy could be attained by January 2016. The "intent to bid" process was initiated and the department received "zero response" from the market. She indicated that the premium level set in statue was far too low and the potential bidders were concerned that they did not have enough information regarding the brokers and agents they would be covering to assess the risk. In response, the division reexamined the regulation setting process to evaluate resetting the premium. She stated that the insurance process was complex and the procurement process was unusual. The policy covered individuals and was not just "a simple contract with the state." 2:27:42 PM Representative Guttenberg restated his concern that action only took place when the commission was bumping up against the sunset date. He agreed that the insurance policy sounded complex. He wondered whether the two year extension was an adequate amount of time to clear up the issue. He asked her to comment on the 2-year sunset. Ms. Chambers shared her concern that the length of time was not adequate due the short time period before the new sunset audit would commence. Vice-Chair Saddler asked about the reasons for the shortcomings with the investigation process and whether she was confident the issue was remedied. Ms. Chambers was very confident in the actions and progress of the investigators under the new management. She referred to a detailed department response on page 26 of the audit that provided great feedback. She delineated that prior to the restructuring, the investigations unit had one manager to 19 investigators. The department added a level of senior investigators working under the chief to allow "more hands- on" supervision and accountability to meet guidelines. She reported that a new guideline was that every 30 days an investigator reviewed her caseload and worked with management to discern why any inactivity occurred and how to address it. She relayed that other audit's results and end of fiscal year statistics proved that the remedy was working. 2:33:02 PM Co-Chair Thompson OPENED public testimony. TRACY BARICKMAN, ALASKA REAL ESTATE COMMISSION, MAT-SU (via teleconference), supported HB 290. She reported having 20 years of experience in the industry and was a commissioner on the board. She relayed that she was also a subject matter expert on a national level for Pearson Vue [Testing Services of Philadelphia, Pennsylvania contracted by the Real Estate Commission of Alaska]. She noted that she was sitting in for the chair of the commission, Nancy Davis who had medical issues. She supported the extension. She recounted that the commission operated well within its budget due to adequate licensing fees and was not a burden the state's budget. She worked with the state's investigator to review complaints as a result of a transaction or licensees interaction with the public. She reported that most complaints were legitimate and in many cases licensees were disciplined through education, fines, and at times suspension or revocation of their license. She stated that without the board the only recourse for consumer complaints was through litigation and the consumer might not have the resources to take a case to court. She believed the scenario would allow improper actions to continue. She noted that the audit failed to recognize the remedies that were already established in response to the investigative inactivity. The 65 case backlog took place from 2011 through 2014 and the new investigator had cleared all of the cases. Currently the investigator had 23 cases with the oldest dating back from 2015. She indicated that the commission constantly improved industry standards via the modification and adoption of regulations. She communicated that the low premium set in statute and a lack of historical data prohibited the board from procuring the master policy. She suggested that the simple solution was to remove AS 8.88,172 sub paragraph (e). The statute eliminated the requirement of the umbrella policy. Once that was established the insurance companies could gather the historical data. She stressed that the low premium estimate of $300 was not practical. The premium should be $1,200 to $20,000 per year depending on the size of the brokerage and what services were offered. She added that property management coverage even was more expensive. 2:39:12 PM Co-Chair Thompson CLOSED public testimony. Ms. Stidolph noted that the Labor and Commerce Committee was offering additional provisions to another bill that removed the requirement to carry the Errors and Omissions insurance in two years. The provision was expected to rectify the situation. 2:40:37 PM Representative Kawasaki commented that the committee should not discuss other legislation. He did not have a problem with extending the date of the sunset. He believed that the short period of time for the sunset burdened the audit division. He offered the following conceptual amendment. Representative Kawasaki MOVED Conceptual Amendment 1 extending the sunset year from 2018 to 2022. Representative Kawasaki WITHDREW Conceptual Amendment 1. Representative Kawasaki MOVED Conceptual Amendment 2 extending the sunset year to 2020. Representative Wilson OBJECTED for discussion. Representative Wilson read from the audit Findings and Recommendations: … However, the legislation also required errors and omissions insurance as a condition of real estate licensure. The new insurance requirement has not successfully protected the public because the commission has not obtained a master policy and licensees have continued to practice without this important consumer protection in place. Representative Wilson believed that the finding pointed out that an important aspect of consumer protection was lacking. She felt that the pressure of a sunset would bring about a resolution to the problem. She maintained her objection to the amendment. Vice-Chair Saddler shared Representative Wilson's concerns. He also expressed some concerns regarding the problems with the commission's investigations. He acknowledged that some improvements were put into effect but felt the two year sunset was warranted. Representative Wilson MAINTAINED her objection. A roll call vote was taken on the motion. IN FAVOR: Kawasaki OPPOSED: Munoz, Pruitt, Saddler, Wilson, Edgmon, Gattis, Guttenberg, Thompson. The MOTION FAILED (1/8). Representative Gara and Representative Neuman were absent from voting. Vice-Chair Saddler reviewed the fiscal impact note. He noted that new zero Department of Commerce, Community and Economic Development fiscal note that appropriated the amount of $8.7 thousand dollars and was included in the governor's budget request. 2:45:45 PM Vice-Chair Saddler MOVED to REPORT HB 290 out of committee with individual recommendations and the accompanying fiscal note(s). There being NO OBJECTION, it was so ordered. HB 290 was REPORTED out of committee with a "no recommendation" recommendation and with a new accompanying zero fiscal note by the Department of Commerce, Community and Economic Development. 2:46:06 PM AT EASE 2:48:05 PM RECONVENED