HB 143 - REAL ESTATE:SURETY FUND & DISCLOSURES Number 1650 CHAIRMAN ROKEBERG announced the committee's next order of business is HB 143, "An Act relating to the executive officer employed for the Real Estate Commission, to educational materials published by the Real Estate Commission, to the Real Estate Surety Fund, to contracts by the Real Estate Commission, and to disclosures in real property transactions." The chairman commented the committee would take the public testimony, noting two witnesses in Kenai had been unable to continue waiting: Ron Johnson and Dave Feeken. As the bill sponsor, Chairman Rokeberg presented HB 143 to the committee. The legislation is in two sections. 1) It affects the real estate surety fund of the Alaska Real Estate Commission. 2) It has provisions for nondisclosure of psychological (indisc.) to property. The first part of the bill changes the use of the surety fund. The chairman indicated the surety fund, by statute, cannot exceed $500,000 in contributions from part of the real estate licensees' fees, not to exceed $125 per biennial. After procedural hearings and claims are made, up to $10,000 per incident can be awarded out of the fund. The chairman indicated the surety fund is a form of consumer protection in lieu of bond, established a number of years ago. The current real estate statute allows portions of the surety fund above $250,000 to be used for educational purposes. The commission has funded portions of personal services from the surety fund. A portion of the executive secretary's salary comes from the fund; Chairman Rokeberg noted he thinks another full-time position is almost or completely paid out of the fund. He indicated additional items paid for out of the fund are the sponsoring of certain classes, seminars, et cetera, approved by the commission. Number 1815 CHAIRMAN ROKEBERG further indicated Alaska Statute requires that each occupational license program be self-supporting. However, the real estate licensees are somewhat unusual because of the surety fund fee in addition to the biennial license fee. The chairman expressed his view that the use of the surety fund co-mingled what should be entirely the license fee in with the surety fund fee. Money is being removed from the surety fund for what the chairman considers operational expenses. The intent of the first part of HB 143 is to make the biennial licensing fee cover all the commission's expenses, as is the practice with every other license. The only money removed from the surety fund would be what is needed for the administration and servicing of the fund: hearing officers, attorneys, and all the other expenses and claims that come out of the surety fund. The chairman stated, "Therefore, when the biennial cycle comes around, if there is very little use of the surety fund, which in the last couple years there actually has been very little use, and now the law allows for lapsing into the GF, the general fund, when you get over a half million dollars in the (indisc.), but we put sweep language in the budget so it doesn't happen, so it's kind of a ruse, that's what I'm trying to do, is straighten this thing out so what we're doing is only having the fees paid ... into the fund for the fund, and run the fund operations out of the fund, and have all the other licensing costs in their fee. That's the intention." Number 1946 REPRESENTATIVE BRICE questioned if the sweeping of all the various funds wasn't a constitutional requirement. CHAIRMAN ROKEBERG answered no, it is actually in the statute. The chairman indicated the bill contains a section providing for an ongoing report regarding the surety fund balance to avoid exceeding that cap. He commented there have been some accusations Ms. Reardon is also aware of that the Real Estate Commission has been using the security fund as a "slush fund" for trips to Hawaii, et cetera. The chairman noted commission executive staff members had attended "NARELO (ph), National Real Estate Officers Convention," held in Hawaii a few years previously. Although that expense was completely legitimate in the chairman's opinion, "it has the specter." The chairman continued, "Plus we always have to be aware, particularly of the Administration's and the Department of Commerce and Economic Development Occ-Licensing -- well, it's actually the commissioner's office that's (indisc.) tapping into the licensing fees but Miss Reardon has to defend the (indisc.), she's the great defender of (indisc.), but there's always that problem too." Chairman Rokeberg noted, as well, the commission has been publishing the landlord-tenant law book for several years, to his confusion. He noted this is like a phantom tax on real estate licensees, although he thinks the state has a clear responsiblity to publish a landlord-tenant book. In response to Representative Murkowski's question about the publishing costs, the chairman answered about $6,000 every other year. Number 2105 CHAIRMAN ROKEBERG continued that the second part of the bill concerns psychological impairment, and many states have these provisions in statute. This takes away any obligation on part of a real estate licensee to disclose certain background information about a property including a natural death, suicide, murder or other crime classified as a felony under state or federal law on the property. He stated, "In other words, if you have a house listing ... you should not have to disclose ... you should all know we have a disclosure form. Any time a residential property is sold, there is a mandate in the statute that requires that the disclosure form be filled out and there are certain requirements for the disclosure. What's happened is there's national case law about the expectations of what should or should not be disclosed. There's even a case in Massachusetts where the failure to disclose ... the existence of a ghost in a residential home was grounds for recision of a contract." There was some discussion among the committee regard this issue and ghosts in sold property. Number 2279 CHAIRMAN ROKEBERG continued, "The real property -- there's certain background information which shouldn't be disclosed, (indisc.) for example, the AIDS or HIV-positive disease because it's unlikely to be transmitted. This particular provision in the law reflects the federal law which is on the books now. As just a further reminder, remembering the licensees have to learn their law to remind them that's part of the federal law and ... they shouldn't do that. And the other thing is subsection (D) [(C)] on page 3, an amendment I rather intemperately, without committee hearings, put in a real estate bill last year that relieves the obligation of a real estate licensee to disclose a registered sex offender (indisc.) property. ... [We] have some veterans here ... who recall that situation ... this is a famous provision. And what I want to do is flip the feedback on the real estate industry and see how they want to proceed on these particular issues. The first section I think is an important thing that should be taken care of, the second one's ... something I want to try to get cleaned up." Number 2388 REPRESENTATIVE BRICE said he felt it is appropriate to put the landlord-tenant printing someplace besides the Real Estate Commission. He does think there is going to be an issue with removing the notification requirements on sex offenders. CHAIRMAN ROKEBERG asked why Representative Brice would say that. He indicated the chairman needs to educate the committee. REPRESENTATIVE BRICE noted he was present and when the law to register sex offenders was passed and supported it. CHAIRMAN ROKEBERG stated this has nothing to do with the sex offender registry. REPRESENTATIVE BRICE replied yes, it does. CHAIRMAN ROKEBERG commented, "Well, we have taken care of in a good part the disclosure, but we haven't take care of the potential liability on a licensee." REPRESENTATIVE BRICE said he purchased a home in December. He was given a piece of paper notifying him the search would not be done, but providing the appropriate Internet address if he wished to do it himself. Representative Brice commented he appreciated that very much. CHAIRMAN ROKEBERG noted the previous year's legislation had done that. He commented, "This is the closure, this is the last step in that." Number 2510 REPRESENTATIVE HALCRO questioned, "Let me ask you about..." [TESTIMONY INTERRUPTED BY TAPE CHANGE] [From tape log notes: 'Landlord-tenant (indisc.) original (indisc.) having fund pay for that initially'] TAPE 99-30, SIDE A Number 0001 REPRESENTATIVE HALCRO finished, "...just did." CHAIRMAN ROKEBERG responded, "I think that probably when the de-funding of consumer protection (indisc.) about, they transferred it over there, as I recall. I don't know, may be it'll come out in testimony." REPRESENTATIVE HALCRO asked in follow-up, "What about the fact that real estate agents sell multi-family dwellings thereby they're selling to somebody who's going to become a landlord." He questioned whether that didn't fall under the purview. Number 0046 REPRESENTATIVE MURKOWSKI clarified that the landlord-tenant handbook is mainly a handbook to aid tenants, primarily, with their rights regarding any potential evictions. CHAIRMAN ROKEBERG said there is no question it is a very valid publication. He agreed with Representative Murkowski's suggestion the court system should publish it, indicating he doesn't think the real estate licensees should be required to pay for this. The chairman further indicated the committee would take the public testimony. Number 0139 ERIC DYRUD, Co-Chair, Legislative Committee, Anchorage Board of REALTORS, testified via teleconference from Anchorage. Mr. Dyrud referred to AS 08.88.450 which is amended on page 2, Sections 3 and 4 of HB 143, regarding the surety fund. This portion [current statute] directs that the surety fund be established in the general fund. The licensees, or at least the Anchorage Board of REALTORS legislative committee, would like to see the surety fund in an interest-bearing fund where the interest accrues to the benefit of the licensees who pay into it. CHAIRMAN ROKEBERG noted the committee would examine that but he thinks there will be restrictions based on the appearance of a dedicated fund situation. The committee can look into whether it might be possible to have a separate fund that is not in the general fund. MR. DYRUD indicated probably about $15,000 to $20,000 in interest per year could be gained that could be used to reduce the licensees' fees. Referring to the landlord-tenant publication, Mr. Dyrud said he is not sure it should be paid out of the surety fund, but it certainly is a useful book, and is used in the industry as well as with tenants. He wouldn't necessarily call it pro-tenant. It is used in the courses taught and in dealing with rental property management. Mr. Dyrud indicated he used to use the booklet at least once a month and now uses it perhaps once a quarter. A lot of the tenants request it, and he provides them copies. Number 0321 CHAIRMAN ROKEBERG asked if Mr. Dyrud thought the real estate licensees should pay for the landlord-tenant booklet. MR. DYRUD answered that if they had their choice, no. CHAIRMAN ROKEBERG indicated this was a brief hearing on HB 143; he wanted to introduce the legislation and circulate it in the industry. The committee would await further input. He confirmed there was no one else in Anchorage who wished to testify on the bill. Number 0380 SUZANNE MANNIKKO, We [?] Against Sexual Predators (WASP), testified next via teleconference from the Matanuska-Susitna Borough Legislative Information Office (Mat-Su LIO). Ms. Mannikko stated she is opposed to this bill because it removes the responsibility of Realtors to notify potential buyers/sellers of a sex offender in the area. Ms. Mannikko described that she recently put her home on the market and she has no problem with the disclosure of this. She continued, "Part of protecting our children is being aware of our environment and our surroundings, and I feel like our state does so little to protect our children from these sex offenders and repeat sex offenders. By removing this ... from the bill, here we are again taking away from our children and I just think it's the wrong thing to do. And if you're concerned about the sex offender registration not being accurate, then you need to find some more financing to put more people out there to make these sex offenders comply with the laws that we do have. I think this is a poor thing to do to our children." Number 0490 CHAIRMAN ROKEBERG informed Ms. Mannikko it is not the duty of a real estate agent to disclose a sex offender and that is the nature of this bill. MS. MANNIKKO agreed, but noted on the form she received from her Realtor it provided a website address for people, and she would hate to see even that disappear. CHAIRMAN ROKEBERG noted that was just enacted the previous year. MS. MANNIKKO questioned if the bill wasn't to remove the responsibility of the Realtor in giving notice of sex offenders. CHAIRMAN ROKEBERG said the real estate agent does not have a responsibility or duty to notify now; this is just to clarify that. The chairman commented that is the point. MS. MANNIKKO replied, "Oh, but that is the point. ... I guess I did misunderstand this, correct?" Number 0569 CHAIRMAN ROKEBERG agreed, stating he just wanted to clarify it with her. The issue is should or should not the real estate agent have the responsibility. MS. MANNIKKO interjected she believes they definitely should. CHAIRMAN ROKEBERG said the agents can't because they sometimes get into what is called dual agency. The chairman continued, "Where you have a duty to two people, one the buyer and one the seller, potentially, after it's fully disclosed, and therefore you're in an impossible situation." He noted that is why it is a matter of technicality within the law. A Realtor can disclose that information if he desires but he shouldn't have a duty to do so, particularly if he finds himself in a position where whatever he would do would be basically illegal. Chairman Rokeberg noted that is the dilemma they are in. Number 0606 MS. MANNIKKO noted her understanding is that the Realtor has the duty to disclose potential health hazards and she questioned that this was not considered a health hazard to children. CHAIRMAN ROKEBERG replied there is a duty to disclose if the real estate agent is aware of a defect in a home. There is also a further duty to be aware of certain things, if the agent has a level of professional expertise. However, in the chairman's opinion, to impose a further duty to identify sex offenders goes beyond the responsibility. He noted, "We have a technical problem in the law because of the duties of a[n] agent to (indisc.) various people in the transaction that he finds himself into a -- actually in a legal box that he can't get out of without some legislative relief. This in no way is intended to diminish the importance of the sexual register ... it is also intended to tell the public that the real estate agents are not the sex offender police either. That's the duty of law enforcement and of government, and everybody involved with knowledge of the sexual register. So, to suggest that the real estate agent has a special duty is not -- I don't think is fair, and that's really the point of the bill. I authored the provision on the disclosure last year to help the public, make sure they knew that the registry existed and ... become knowledgeable about that. It's kind of hard to explain the technical details [of] why we need this kind of legislation, but I think it's -- a good case can be made and it certainly isn't meant to diminish the amount of notice and awareness of a potential sex offender to the children of our state, that's certainly not the intention." Number 0750 MS. MANNIKKO said, "What you're saying is it's just not the way to do it." CHAIRMAN ROKEBERG responded, "No, it's really a legal technical problem we find ourselves in to try to impose a duty and that's the reason for the bill. It's not that a[n] agent can't disclose it, he can if he so desires but once he does that then he's got a duty and responsibility to one of the individuals as part of the transaction -- it gets kind of technical to explain but -- and sometimes that relationship changes so he find himself in a dilemma where you have a duty to two masters and that's what the problem (indisc.)." Number 0793 REPRESENTATIVE BRICE thanked Ms. Mannikko for her testimony. He explained the real estate agents don't disclose, but they do ask the person buying the property to sign a piece of paper signifying that this information has been presented, that the purchasers have been made aware. The purchasers currently sign the paper saying that the real estate agent has disclaimed any knowledge of any sexual offenders in the area, and the paper shows, if the purchasers are interested, where to find out if there are any registered sex offenders in the community. Representative Brice indicated the real estate agents don't necessarily have to disclose the information, and he thinks that is appropriate. However, he thinks the provision in the legislation would remove the real estate agents' requirement to make that information available to the purchaser; Representative Brice thinks Ms. Mannikko has a valid point. He thinks that is an important service provided to the consumer by the Realtor. CHAIRMAN ROKEBERG thanked Ms. Mannikko for her testimony. He questioned whether anyone else wished to testify on HB 143. Number 0921 CATHERINE REARDON, Director, Division of Occupational Licensing, Department of Commerce and Economic Development, came forward. Ms. Reardon offered to hold her testimony until a later time if the chairman desired. CHAIRMAN ROKEBERG offered a couple of questions, agreeing the hour was getting late. He asked about the interest-bearing fund concept. MS. REARDON replied she would examine it again to give the committee a definitive answer. She has asked this question before herself. She believes the surety fund can be in the general fund and still be an interest-bearing account if the statute specifies it will earn interest. There may be some other types of funds she could obtain statutory language from. Ms. Reardon indicated removing the surety fund from the general fund might create some problems. Noting it is possible the surety fund could be interest-bearing, she commented she did not know if there would be extra work for the treasury or the fund managers but the question could certainly be posed. CHAIRMAN ROKEBERG asked Ms. Reardon to discover when and why the Real Estate Commission received responsibility for the landlord-tenant booklet. Number 1014 MS. REARDON assented, noting it is something they have chosen to do; it is not assigned by regulation or statute. It is a very popular government publication, many requests are received. Many agencies request the booklets so they can further distribute them. Ms. Reardon noted the bill, as she understands it, would not prevent or stop the commission or division from publishing the document. She indicated the legislation simply mandates a publication that is primarily tenant and not equally landlord-oriented can't be published from the surety fund. Ms. Reardon maintains they currently try to publish a very impartial, unbiased item which might very well satisfy the legislation. Noting she does not want to fight the committee on the issue, it appears to her publishing the booklet out of the general fund real estate funding source would still be an option. She stated, "So if you really don't want that published, we probably need to be real clear about that or else you might just get frustrated to find we're still doing it." CHAIRMAN ROKEBERG noted it is not a large amount but it is kind of a personal thing: Should the real estate licensees be paying for it? He thinks it came from the disbanded consumer protection division (indisc.) Department of Law, and so they tried to find a place to put it. The chairman questioned again why the real estate licensees are paying for it. Number 1121 MS. REARDON suspects there a couple of reasons. The real estate office receives a lot of telephone calls about landlord-tenant issues, which is not within the office's area of responsibility. However, rather than just turning away these members of the public, it is helpful to offer to send the booklet so people can inform themselves. Additionally, as Ms. Reardon understands it, there are licensees involved in dealing with tenants and "we" want them to know how to deal with tenants legally. She mentioned that property managers are in the business of collecting rent, keeping it in escrow accounts, deposits, et cetera. Ms. Reardon informed the committee the Real Estate Commission is meeting tomorrow and the next day; she or Grayce [Ms. Oakley, Executive Secretary, Real Estate Commission] will bring these questions and concerns to the commission. CHAIRMAN ROKEBERG mentioned that another thing is the out-sourcing of the surety fund hearings and counsel. He noted it is not entirely clear but it is his intention to hire other counsel besides the Department of Law for the surety fund hearings. Number 1203 MS. REARDON explained that regarding surety fund hearings, the commission is simply the judge. In disciplinary actions against real estate licensees, the division prepares the case acting as the prosecution. Therefore the division is hiring the prosecution lawyer - basically the Department of Law. That is not the case with the surety fund. The division pays for the hearing officer, not a lawyer, not the Department of Law. In surety fund proceedings, the member of the public who feels that he/she was injured presents his/her own case. The division does not investigate for or argue the person's case. The accused person also argues his/her own case. The state role is, through the hearing officer, to make a proposed decision which the commission then accepts or does not accept. The division is not paying the Department of Law in this particular setting. Ms. Reardon indicated the Department of Law might become involved if, for example, the commission was sued as a result of a surety fund hearing. Because the division does not investigate in these situations, the division does not really have any costs in that area. Ms. Reardon appreciated the removal of the threat that when the surety fund balance exceeds $500,000, the licensees who paid it would lose it. She indicated there shouldn't be this inherent pressure to spend to make sure the $500,000 limit is not exceeded. That is somewhat this year's situation because it has been a very low expenditure year. She would ask, from a technical point of view, that since the law states they cannot go over $500,000, what happens if they do? Number 1319 REPRESENTATIVE HALCRO commented that wasn't it the desire in the bill to create an average over two years, since the fees are higher one year and shrink the next year while in some cases the educational and other expenses stay consistent. He indicated the provision allowing the average daily balance of the fund to be based on a two-year period would be useful for these yearly variations. MS. REARDON responded it would be wonderful if the fund could not exceed $500,000 at the end of the two-year license period. Ms. Reardon referred to page 2, line 12, of the legislation, indicating she had not actually seen the two-year period. Something like that would be very helpful because that is exactly the problem: the fund is filled up in one year and it is difficult not to exceed the cap four months later, but it has to be high enough to make it through the entire second year. Ms. Reardon feels the chairman has been very supportive and constructive in working with the division and the Real Estate Commission. She informed the committee the use of the surety fund for educational purposes and a staff position is specifically authorized in the budget each year. It is appropriated; they are not using it as a "slush fund." The division is following its budgetary guidelines. Number 1425 CHAIRMAN ROKEBERG expressed his confusion regarding the fiscal note, commenting this should have a zero fiscal impact. MS. REARDON stated her intention was to show that $104,000 less would be spent out of the surety fund and $104,000 more out of general fund program receipts, for a net wash. Noting that the second paragraph of the analysis on the fiscal note says it is a funding source change, Ms. Reardon indicated there may be an error in the note and she will review it. No additional monies are being requested. CHAIRMAN ROKEBERG mentioned it should be pretty seamless, but has to be done; he questioned that the next cycle begins in January 2000. MS. REARDON agreed it does. CHAIRMAN ROKEBERG indicated this the reason they need to accommodate this and why the bill needs to pass this session if it is going to pass. The chairman mentioned the possible removal of items to ensure the legislation's passage. CHAIRMAN ROKEBERG asked Ms. Reardon how the hiring was going, questioning if a freeze was still in effect. MS. REARDON replied the commissioner's office had signed the request to hire memorandums that day, and they could speak of that if the chairman wished. Ms. Reardon commented the other item for future discussion regards the title change of the executive secretary on page 1 of the legislation. Her understanding is that this title change is not intended to trigger a change in pay or duties. Ms. Reardon said she may be suggesting at the next hearing that the title be left as "executive secretary", with an additional sentence, "who will use the working title 'executive director'". She indicated the current title change as written in the legislation might unintentionally trigger job classification and pay range changes. CHAIRMAN ROKEBERG requested Ms. Reardon pass the legislation on to the Real Estate Commission, noting he would appreciate the commission's input. [HB 143 WAS HELD OVER]