HB 378-WORKERS COMP AND WORKER SAFETY CHAIRMAN ROKEBERG announced the next order of business would be 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." Number 1183 PAUL GROSSI, Director, Division of Workers' Compensation, Department of Labor and Workforce Development, came forward to testify on HB 378. He explained that HB 378 eliminates the premium tax on workers' compensation insurance policies and enacts a user fee on all workers' compensation claim payments. It establishes a special account for the funding of workers' compensation and the Occupational Safety and Health program. He said all employers under the current law must cover their employees for workers' compensation. MR. GROSSI said this can be one of three ways. The employer can purchase a workers' compensation insurance policy and have to pay a premium tax, or the employer can certify to be a self-insurer and not pay the premium tax. The fee starts at 3.3 percent and then graduates down to 2.6 percent over a period of four years. During the same four years, the self-insurers would also be phased in and pay a percentage starting at 25 percent and then up to 100 percent over that time period. This will allow employers and insurers to pay at the same rate. They would pay based on their use of the system. If the rate of injury is higher, claims are higher and the user fee is higher. As well, if the injuries are lower, the user fee is lower. It is believed this is a better policy because it provides greater incentive for employers to be safer and also allows all employers to pay at the same rate according to their use and need. It also reduces the reliance on the general fund. The money would be placed in a special account under program receipts. He commented there is a spreadsheet in the bill packet which shows there are six other states that exclusively pay for workers' compensation and pay for the program through their general fund. Number 1431 MR. GROSSI informed members that 34 states pay for their program through special accounts paid by the users of the system in a variety of ways. Ten states pay through a combination of general funds and special account funds. Of the 44 states which have special accounts, 16 are using a similar method as that being proposed in HB 378. The bill is an attempt to end the negative funding problems the department is experiencing. The Workers' Compensation Division and the Occupational Safety and Health program (OSH) are suffering from budget cuts and are unable to provide the types of services they have in the past. He said: As a matter of fact, last year the House [of Representatives] almost eliminated OSH and sent it back to the feds to do. And we're hearing from our customers that this is not something they really want. Now, you're going to hear probably some testimony and you're going to get letters, and some are going to be positive and some are going to be negative.... Primarily, those in favor, and this includes some self- insurers as well, are in favor of it because they see the funding of these programs as something beneficial to them...If they're into, like workers' comp[ensation], for example, if it's insufficiently funded, it actually costs them more money in the sense that it increases litigation costs and claim costs. And the same with OSH, they really don't want to deal with the feds with OSH. They want OSH to be in Alaska so that they can deal with it here. Number 1588 MR. GROSSI noted that there will be people against this proposal because it provides a mechanism requiring some employers to pay a portion of the fee. He understands this will upset some employers who currently do not have to pay anything. He said: The thing you have to ask yourself: is this good public policy? Do we want a viable workers' compensation program? And do we want OSH to be here in the state? And I think the answers to those questions is, "Yes". And this provides a way of allowing that to happen. REPRESENTATIVE HALCRO asked what the anticipated impact on local government would be. MR. GROSSI said: Of course, it will start out at a lower amount because it's starts out at 25 percent of the fee and then graduates up to 100 percent. As far as the totals, I can give you some numbers for the various systems. The Municipality of Anchorage, in the first year, it's going to cost about $74,000. These are based on, by the way, the 1998 claims numbers which is the last numbers we have at this time, and it would graduate up to $234,000 approximately. Joint Insurance arrangement, it would start out about $17,000, go up to $86,000; that's small municipalities that join together. CHAIRMAN ROKEBERG asked what the Joint Insurance arrangement is. MR. GROSSI explained that it is the members of the Alaska Municipal League. There are approximately 140 members. In the first year, the cost would be about $121 per member and then graduate up to $400 per member. CHAIRMAN ROKEBERG wondered if it is per claim. MR. GROSSI clarified that it is per employer per year. CHAIRMAN ROKEBERG asked if that is the fee. MR. GROSSI replied yes. CHAIRMAN ROKEBERG said he thought the fee was going to be based on each claim. MR. GROSSI said the amount is based on the 1998 claims figures. CHAIRMAN ROKEBERG asked if the Alaska Municipal League (AML) is self-insured. Number 1793 MR. GROSSI explained that AML is an insurance pool. CHAIRMAN ROKEBERG asked Kevin Ritchie, Executive Director, Alaska Municipal League, if AML has an underwriter. KEVIN RITCHIE, Executive Director, Alaska Municipal League, came forward to testify on HB 378. He commented that AML is an organization which is self-insured with excess insurance above a certain amount. CHAIRMAN ROKEBERG referred to the amount the AML would have to pay and asked, "Based on the percentage, for example,...3.3 percent of what?" MR. GROSSI said it is 3.3 percent of the total compensation pay. CHAIRMAN ROKEBERG said, "But at 25 percent of that?" MR. GROSSI answered yes. CHAIRMAN ROKEBERG wondered what the other part of the equation is and asked if the premium tax is being phased out over four years. MR. GROSSI clarified that the premium tax will end January 1, 2001. CHAIRMAN ROKEBERG wondered if there would be enough money. MR. GROSSI indicated there would not be enough money the first year to fund the entire year's budget because the fee would not be collected until March 1, 2001. Three-quarters of the budget would have to be funded through the general fund. CHAIRMAN ROKEBERG wondered if he is referring to this year. MR. GROSSI replied yes. CHAIRMAN ROKEBERG asked if there is a savings to the general fund of $1.5 million. MR. GROSSI answered yes. CHAIRMAN ROKEBERG asked Mr. Grossi to explain how that works. MR. GROSSI stated the fee would be collected on March 1, 2001 towards the end of the fiscal year. Two-thirds would need to be funded from the general fund, and from March 1, 2001 forward, the fee could be used for funding. CHAIRMAN ROKEBERG wondered if it is a general fund from the premium tax only. MR. GROSSI said yes. CHAIRMAN ROKEBERG asked when the cut-off is for the premium tax. Number 1934 MR. GROSSI said he believes the effective date is January 1, 2001. CHAIRMAN ROKEBERG wondered, "So, there's some revenue coming in during the next fiscal year for the transition?" MR. GROSSI said yes, but stated that it depends on the Legislature. CHAIRMAN ROKEBERG said, "Assuming this passed, and everything else being equal, we'd have approximately six months of the fiscal year with a premium tax (indisc.)." MR. GROSSI replied yes. CHAIRMAN ROKEBERG asked if Mr. Grossi has a spreadsheet which shows how everything balances out and works over a four-year period. MR. GROSSI indicated that he does not currently have that available. CHAIRMAN ROKEBERG asked if that could be done. MR. GROSSI said yes. CHAIRMAN ROKEBERG wondered if there would not be a premium tax in 2002 and if they would be getting 50 percent of the fee assessment. MR. GROSSI said, "No. Basically it'll still amount to the same amount of money because, if you look, we've graduated; the fee starts at 3.3 percent and graduates down to 2.6 percent as the self-insurers are phased in." CHAIRMAN ROKEBERG asked, "Well, the people that are not self- insured, what are they paying?" MR. GROSSI stated that they pay the premium tax at 2.7 percent with a total amount of $3.5 million. CHAIRMAN ROKEBERG asked if they have a different rate. MR. GROSSI explained that the premium tax is based on the premium pay which is different. CHAIRMAN ROKEBERG wondered if that is what is being eliminated. MR. GROSSI replied yes. CHAIRMAN ROKEBERG asked, "What are they going to be assessed in terms of the claims, what percentage?" Number 2038 MR. GROSSI commented that they would be assessed at 3.3 percent the first year and 3.1 percent the second year. CHAIRMAN ROKEBERG wondered if the schedule would be the same. MR. GROSSI said yes. CHAIRMAN ROKEBERG asked, "The 25, 50, 75, 100 also?" MR. GROSSI said, "No. No, they're at a 100 percent the first year." CHAIRMAN ROKEBERG wondered, "You pay the premium tax previously by having an underwriter. The first year it'll be 3.3 against 100 percent of your claims?" MR. GROSSI responded yes. CHAIRMAN ROKEBERG said, "So, there's the variable there." MR. GROSSI stated that is correct. CHAIRMAN ROKEBERG commented, "Previously it was whatever your premium tax was. You said it was about 2.7 approximately." MR. GROSSI clarified that it is 2.7 percent of the total premium pay. CHAIRMAN ROKEBERG said, "Now we're going to shift to 3.3 of whatever claims were paid out." MR. GROSSI said that is correct and stated, "As that pool gets larger, that percentage can go down." CHAIRMAN ROKEBERG wondered, "Okay, so it's only the self-insurers that are getting a break at the beginning and that's, maybe there's a margin in there you can get squeezed on? If I have a perfect safety record, [and] the other part of OSHA, or whatever it is, did a great job and you didn't have a bunch of claims (indisc. - coughing)?" MR. GROSSI replied: You wouldn't pay anything. Yes, that's true, but there wouldn't be as great a need for us. I mean if everybody does a great job on safety, and they eliminate injuries, there won't be any claims. There'd be fewer claims and so there shouldn't be as much work for us. So, it actually gives us a reasonable way of cutting the budget. Number 2118 REPRESENTATIVE SANDERS asked, "You say that their bill, by performing well and protecting the safety and health of their employees, their bill can go down. Does that continue until it can go to nothing?" MR. GROSSI stated it can. He noted some states have a minimum payment, but that was not included in HB 378 because if someone is doing that good of a job they should not have to pay anything. REPRESENTATIVE SANDERS commented that it sounds like an incentive program. MR. GROSSI replied that it is an incentive program for employers to have safer work places. The idea is that if the work place is safer then the annual fee is less. REPRESENTATIVE SANDERS added, "And they have a direct interest in this." MR. GROSSI said, "Absolutely." CHAIRMAN ROKEBERG indicated he is a little confused because the fiscal notes for HB 378 show level amounts. He asked, "But we know it's not going to be level, but that's the best guess?" MR. GROSSI pointed out that it was made revenue neutral based on the 1998 claims numbers. The fee and the graduation were calculated so they would be $3.5 million, the amount which is required to fund the programs. Number 2195 REPRESENTATIVE MURKOWSKI stated she is confused with respect to the fiscal notes and asked: If in fact, part of the incentive, if you will, is to have a perfect safety record, and you can therefore reduce your payments altogether, are the self-insureds going to be able to get to a point where they don't pay? Because it looks like they pay an annual service fee regardless of the safety record. MR. GROSSI clarified that self-insureds pay the annual fee based on the workers' compensation payments. There is also another fee. REPRESENTATIVE MURKOWSKI pointed out that the annual service fee is kind of a misnomer because a self-insured with a perfect safety record would pay an annual fee based on zero claims and would thus have no annual service fee. MR. GROSSI explained that there would not be an annual service fee if that were the case. Number 2266 CHAIRMAN ROKEBERG asked Mr. Grossi to point out where this is in the bill. MR. GROSSI replied it is in Section 7, page 5, which states that the annual service fee is part of yearly certification. CHAIRMAN ROKEBERG wondered if the transition for the phase-in of fees occurs in Section 9. MR. GROSSI said that is correct. Section 6 addresses the issue of service fees and the exact percentages to be paid each year. CHAIRMAN ROKEBERG said: It just doesn't come out in what I was getting at. It doesn't say under the claims paid, but just refers back to the statutory revision about what the percentages; it just talks about the service fee. MR. GROSSI referred to Section 6, page 3, lines 24 through 26, which reads, "The service fee is the following percent of all payments reported to the Alaska Workers' Compensation Board under AS 23.30.155(m) or (n)." CHAIRMAN ROKEBERG stated he understands now. He asked if there were federal funds in the OSHA program. MR. GROSSI noted that OSHA has a 50 percent match. Number 2424 CHRIS ROSS, Corporate Health, Safety and Environmental Manager, NANA Development Corporation, testified via teleconference from Anchorage. He stated: I am testifying today in support of HB 378.... I am serving my second term on the Alaska Safety Advisory Council and I'm past chair of the Governor's Safety and Health Conference, and as many of you know, I'm the Division Director of the National Ski Patrol and serve on the national board of directors. I'd like to share a couple of key points about HB 378 that appeal to me. First, it will spread the cost of funding DOL [Department of Labor and Workforce Development] programs such as workers' comp[ensation] and workers' safety over a much larger group as Mr. Grossi pointed out. Under the current premium tax, there are many employers who are not contributing to the process, and insurance pools such as the Timber Exchange all enjoy the benefits of the DOL programs, but do not pay premium tax. This bill would charge a user fee on all claims, not traditional premium payments which is a more equitable arrangement. In other words, all users will now be assessed and contribute their fair share. The second consequence of this bill also relates to equity and paying a fair share. Because of the new funding, employers with high claims will pay more, while employers with good loss control programs in place will pay less. Number 2479 Ten years ago, NANA embarked on a journey to completely overhaul our safety process. Our claims were way too high and our frequency and severity rates were much worse than average. As a result of our determination to change our culture, we achieved remarkable results. Our claim cost per employee has gone from $1.25 per employee hour in 1989...[Mr. Ross read from written testimony and this is what was cut off: to .02 cents per hour in 1999. This is a savings to us of nearly $800,000 per year. HB 378 will provide even more of an incentive for employers to implement.... [ends midspeech because of tape change] TAPE 00-21, SIDE B ... effective loss control strategies, as we have done. I think this is a far more of effective approach - the carrot - rather than implementing tougher laws or stepping up enforcement - the stick. And the third attractive element of this bill is the bright outlook for the Alaska Department of Labor. Recent funding cuts to DOL have jeopardized the Occupational Safety and Health Division. One possible outcome of these reductions would be a federal takeover of Alaska OSH, resulting in Alaska being a Federal OSHA state. This is not a desirable outcome for Alaskan employers. We would far prefer dealing with a state entity that has the flexibility to adapt to the unique conditions of Alaska, and employs local residents who more fully understand the risks associated with our workplaces. This bill would provide a stable funding mechanisms that will protect the mission of worker safety and effective workers' compensation insurance administration. As a side note, it would also help preserve the Governor's Safety and Health Conference, an important event that is self-sustaining and helps to reach and educate many Alaskans each year and it would prevent us from having to submit a similar bill such as HB 418 to keep designated program receipts. As I review each section of this proposed legislation, it all makes good, common sense. It spreads the cost of these important functions throughout the users in the State, and it rewards excellence and helps to maintain our important local relationships. There's two concerns I have about the bill which is a refund on subrogation and also that we deserve some prior year claims would not be taxed, but otherwise it's a good bill. Number 0072 REPRESENTATIVE MURKOWSKI referred to Mr. Ross' comment regarding a refund on subrogation. She asked Mr. Ross to explain his concern. MR. ROSS replied, "If we're paying in premium tax based on claims, some claims we later subrogate and get the money back. So, we would be looking for a credit for subrogated claims." In reply to Chairman Rokeberg, he explained that his other point had to do with the term "claims". He is not exactly sure what a claim is under this bill. He presumes it is a paid-out claim and would not include reserves. From his perspective, NANA has far more reserves than paid-out claims. If there was a tax based on reserves, it would be anywhere between three and ten times as much as a tax pain on actual claims. He indicated that claims from prior years, which have already been assessed down to the premium tax, should not be double-taxed. CHAIRMAN ROKEBERG asked Mr. Grossi to address these issues. Number 0127 MR. GROSSI said, with respect to subrogation, he had not thought about that. He noted that there would somehow have to be a reduction for that which could possibly be done through regulation. CHAIRMAN ROKEBERG asked Mr. Grossi to speak to the definition of a "claim". MR. GROSSI replied, "The way we have it, it's just the reported actual claim payments made in the annual report. So, it would not in any way...be charged against the reserve." CHAIRMAN ROKEBERG wondered if it is fully defined in the bill. MR. GROSSI responded, "Not in those words, but because the annual report only reports actual payments made." He reiterated that it appears in Section 6, page 3, lines 23 through 24. AS 23.30.155(m) and (n), in Section 6, require a report of payments made on workers' compensation claims. CHAIRMAN ROKEBERG referred to AS 23.30.155(m). MR. GROSSI said the statute refers to actual payments made. CHAIRMAN ROKEBERG wondered, "Just to payment of the claims or litigation costs?" MR. GROSSI specified that it is all payments made regarding claims with the exception of the administrative costs. CHAIRMAN ROKEBERG said he believes a claim needs to be defined very clearly in the bill. REPRESENTATIVE MURKOWSKI commented: I listened to what you said, and I was waiting for it to become clear to me exactly what the claim was. What I heard the previous speaker mention was whether or not reserves are included as part of that and I didn't hear any mention of it. So, it sounds like there's still some vagueness, I think, as to the term and it certainly couldn't hurt to clarify it in the statute. CHAIRMAN ROKEBERG asked, "Is the interest on your litigation, is that part of a claim paid out because you're paying it out?" MR. GROSSI answered yes. Number 0315 REPRESENTATIVE MURKOWSKI referred to a February 4, 2000, letter from the Workers' Compensation Committee of Alaska (WCCA) [included in the bill packet]. It states in the letter that WCCA's support of the bill is "based on the qualification that the fees raised be used specifically for the purpose stated and not be diverted" to any other uses. She asked if there is any way for the fees to be used for other purposes. MR. GROSSI indicated the fees will be placed in a separate account. He hopes the Legislature will choose to use the fees for the specific purposes stated. However, it is possible, but highly unlikely, the fees could be used for other purposes. REPRESENTATIVE MURKOWSKI asked if this issue has been a subject of controversy. MR. GROSSI said: I think the employers, in their discussion, were concerned that it could potentially be raided, but I don't think that that's likely. I don't think that those accounts, those special accounts that exist, get raided. So, I guess the answer to that is you can't have a purely designated fund because that would be unconstitutional. However, you can have these special accounts that allow money to be available for the funding of...those purposes. Number 0385 CHAIRMAN ROKEBERG pointed out that there are several concerns regarding the misuse of the funds. MR. GROSSI stated that it is the legislature that truly has the choice. The Department of Labor and Workforce Development (DLWD) would not really have any control. He explained that the budget process would still go forward, but it would be up to the Legislature to budget how the money would be used. The Department would not be able to spend any more than what is allocated by the budget. He is not sure if this answers Representative Murkowski's question. REPRESENTATIVE MURKOWSKI replied that it does. She simply was unsure if this had been a concern by employers that they would be paying into this and then not have the ability to access to the money for the intended purposes. MR. GROSSI clarified that employers are willing to pay the fee if it is then going to be used to fund the programs being discussed. Number 0460 GENE STORM, Staff Support, Workers' Compensation Committee of Alaska, testified via teleconference from Anchorage. He stated: WCAA represents approximately 600 employers, insurers and defense attorneys statewide. There's a 17-member board. At the time that the Board addressed this issue, there were 15 active members on the Board and not all board members participated in the vote. Some chose to abstain or did not vote. The majority of those who did vote, supported this legislation, and it followed some discussions with Mr. Grossi and Mr. Flanagan [Commissioner, DLWD] from the Division [Department] of Labor when the legislation was in draft form. The issue raised by Representative Murkowski was very critical for those people who voted to support this. They did so contingent on the money being raised going back into the program as described in the bill. They didn't want the money that they paid to support the Division or the safety programs to be rated for other purposes. CHAIRMAN ROKEBERG asked if Mr. Storm participated in the ad hoc committee. MR. STORM said he provided staff support to the board. He did not participate in the ad hoc committee deliberation. He commented that hundreds of hours were spent on meetings over a period of two months. CHAIRMAN ROKEBERG asked whether Mr. Storm is in a position to inform the committee if there is any connection between HB 378 and the other ad hoc bill [HB 419] that will be before the committee. MR. STORM explained that there is no connection even though both bills came up at the same time. There had been discussion last year regarding the service provided by the Division and whether or not the level of service could be sustained given the last few budget cuts. He believes there was a consensus at the WCCA level that it is important for everyone who uses the system to have a level of service that results in claims being processed in a more expeditious manner. Number 0621 CHAIRMAN ROKEBERG stated that it seems HB 419 offsets the intent of HB 378 to increase premiums. MR. STORM confirmed that would be the case. CHAIRMAN ROKEBERG said: I have a marketing background. I'd say it would be kind of a marketing tool that you can sell the concept of this and then it's easier to sell the other one which is an increase in premiums. Was that not discussed at the ad hoc committee or WCCA? MR. STORM responded no and stated that the two bills were not really tied together during the ad hoc committee process. He commented there were a lot of details in the ad hoc process that were discussed through a long series of meetings, but they were not tied to the change in funding for the Division. Number 0718 GLENN SMITH, Risk Manager, Municipality of Anchorage [MOA], testified via teleconference from Anchorage. He is a former member of the WCCA. He stated: I'd like to state that it's very difficult in today's day in age and with our budget cuts to argue with supporting our Department of Labor and workers' compensation system as well as OSHA. As you may or may not be aware, the Municipality's been self-insured since 1976 and I just wanted to make it clear to the members that we're one of the largest self-insureds in the state with the exception of the State [of Alaska] most likely and we do pay premium tax in the form of excess premiums. I don't believe there's a self-insured entity within the state that doesn't have excess coverage over and above their self-insured retention. Secondly, I have some difficulty in paying a user fee on my defense costs. I don't have a problem with indemnity payments, but on defense costs and medical payments which account for approximately; the medical-only claims account for approximately two-thirds of my claim frequency on an annual basis. And over the last ten years that I've gone through this, we've been consistent within 50 claims per year. So, we have a very active safety program. We spend a great deal of money. Every department head in the city contributes to it on a monthly basis. We've had one OSHA complaint in my entire tenure with the Municipality which admittedly has only been three years. And I do not see why I would be paying a user fee on my defense costs to support a system that generally supports the injured worker. It seems that there would be a conflict of interest there. On the other hand, I have no adversity for supporting the system. It just, I feel, should be done more equitably and the bill should reflect that it's not based on prior claims because, from the carrier's standpoint they've already paid the premium tax on it. And from my standpoint, I've already paid the premium tax on the excess coverage...We have several claims that have been open 10 and 15 years, fatalities and such. And I'm sure many of the other employers do also. Number 0858 REPRESENTATIVE MURKOWSKI referred to Mr. Smith's comment regarding the Municipality already paying the equivalent of a premium tax through the excess premiums. She asked, "If this bill is passed, and you pay this annual service fee, that excess premium expense is still there, is it not?" MR. SMITH said that is correct. He believes the premium tax which is paid is based on a combined loss ratio. He thinks it is important to differentiate for everyone that there is a distinct difference between an insurance company's combined loss ratio and their claim loss ratio. Most carriers today have a combined loss ration in excess of 125 percent for workers' compensation. He wondered if the percent has consistently been 3.5 on the premium tax. Number 0928 CHAIRMAN ROKEBERG said 3.5 percent is correct. He stated that the MOA in 1998 paid $2,302 of that tax. MR. SMITH replied that is based on $2.4 million in claims. CHAIRMAN ROKEBERG asked, "At what level does your excess kick in, Mr. Smith?" MR. SMITH responded that it is $500,000 this year . He further stated: Of course, under the premium tax, an insurance company can use their claims adjusting administration underwriting is included in that combined loss ratio. In my case, I'm paying a self-insured administrator and claims adjuster, at least from the Municipality's standpoint, above and beyond, and that's a substantial amount yearly. CHAIRMAN ROKEBERG said that is their choice though. MR. SMITH replied that is correct. Number 1027 DON ETHERIDGE, Lobbyist, Alaska State AFL-CIO, came forward to testify in support of HB 378. He indicated there is a letter of support in the bill packet from the AFL-CIO. The AFL-CIO considers HB 378 a very important piece of legislation for protecting workers' safety and taking care of those that are injured due to lack of safety. He said last year they came close to losing the OSHA program. One of the effects of becoming part of the federal OSHA is that public employees would no longer be covered under any kind of an OSHA program. Number 1088 ALAN WILSON, President, Alaska State Home Builders Association, came forward to testify on HB 378. He read the following letter of support: The Alaska State Home Builders Association [Alaska HBA] voted to support House Bill 378 for the following reasons. Home builders across Alaska recognize the importance of dealing with workers' compensation claims and disputes in a timely manner. We know this can only be done with a stable source of funding which this bill would provide. We further advocate that the funds collected remain separate from the State's general fund and be used for the purpose stated in the bill. Second, as employers engaged in an industry that deals with OSHA on a regular basis, we support this bill because we adamantly insist on in-state management of the OSHA program. Under federal control any appeal hearings would be held in Seattle. The cost of travel, hiring lawyers, and the time involved would create an economically disastrous situation for small employers across the state. The Alaska State Home Builders Association understands the importance of a stable funding source for the Workers' Compensation and in-state management of OSHA programs. It is with this goal that we support House Bill 378. MR. WILSON commented that a few years ago the Alaska HBA pushed a piece of legislation with a similar impact for the employers. He thinks it is advantageous to pursue ways to offer incentives for workers to provide safety programs and make job sites safe. CHAIRMAN ROKEBERG asked, "Is that bill on the self-insured programs still wandering around the halls of this building?" MR. WILSON affirmed that it is. CHAIRMAN ROKEBERG said, "For that to be enacted, you'd have...to be paying a surcharge, if you will, or a percentage of the claims paid out. Were you aware of that?" MR. WILSON replied yes and stated that the Alaska HBA, under the bill they sponsored a few years ago, was one of the few self- insureds that would have voluntarily paid the premium tax. He believes HB 378 is a better approach. CHAIRMAN ROKEBERG asked if the state inspects any of HBA's job sites. Number 1241 MR. WILSON responded that is exactly how it works. He noted: You know, OSHA's one of those things that; kind of a love-hate relationship going on, you hate to see them on your job site, but just knowing they're there increases the likelihood that you're going to comply with safety programs. The fear for us is that if a federal OSHA person came in, it's going to be pretty tough to sit down and work through any issues with that inspector and then the appeal process, of course, would be to Seattle or possibly Washington, D.C. which would, for a small home builder, that would be pretty disastrous. CHAIRMAN ROKEBERG asked if OSHA actually comes out to the job sites. MR. WILSON said they do come out to job sites occasionally, typically by request. Number 1300 MR. RITCHIE stated that the Alaska Municipal League [AML] supports the work the department has done in this area. He commented: What I wanted to sensitize you to is simply the kind of comprehensive impact of a number of issues that are happening at the same time on municipalities and tax payers. From a standpoint of allocating the costs, an insurance company would be going from a tax to a fee. In this particular instance, for better or for worse, municipalities, or the Joint Insurance Association, would be going from no cost to a percentage fee. I'm not going to comment on whether that's a good system or a bad system, but I just wanted to just talk to you about for a very brief was, of all the things that are happening right now, Mr. Grossi suggested that it might be $400 per year or per municipality for the small ones. In that particular instance, though, many of these small municipalities now are receiving $23,000 to $25,000 in revenue-sharing funds cut several thousand dollars from the previous year so when you look at the context of that, it may be one-third, even 50 percent of their total municipal budget, it does make an impact. Number 1399 REPRESENTATIVE HALCRO wondered if it is fair that municipalities do not pay anything for the same service that private insureds do. MR. RITCHIE said he does not think it is fair. He clarified: And all I'm commenting on is, in the context, is it fair that lots of costs from a whole different bunch of areas together impact both the taxes? My answer to that would be it's not fair either. And there is a compromise, obviously. You know, we're hoping that the legislature works on a long-range, comprehensive fiscal plan that includes considering what local tax payers have to pay and working on that. ... Obviously, partially or fully restoring the funding for revenue sharing mitigates a lot of this kind of issue, but there needs to be something on both sides of the balance sheet. One point I would like to make, my understanding, and I'd maybe have Mr. Grossi comment more on this, is that the premium tax apparently is being paid on the excess insurance; that probably the savings would not get passed on to the Joint Insurance Association. I'm not really sure how that relationship works, but its, what Mr. Smith essentially referred to, and the play between saving money for a private company, it may or may not get passed on to the municipality through the insurance program. Number 1499 REPRESENTATIVE HALCRO referred to Mr. Ritchie's letter in the bill packet which reads that municipalities "cannot absorb the cost of additional state mandates without raising taxes or cutting local services". He stated HB 378 is a "pay-as-you-play" proposal. He indicated that local services would not need to be cut, but that workers' compensation claims would need to be cut. He pointed out that there was some controversy four or five months ago in Anchorage regarding road grader drivers. These drivers were on workers' compensation because they suffered injuries from plowing over manhole covers. Some of the debate revolved around who was responsible for covering their workers' compensation claims. The drivers claimed the Municipality of Anchorage should have fixed the problem years ago. Representative Halcro asked, "With this type of program in place, don't you feel that municipalities might be a little more quicker to respond to potential safety hazards?" MR. RITCHIE said no. He explained that there is a tremendous incentive to save money through workers' compensation. He stated that Mr. Smith [Kevin Smith] is here with the Joint Insurance Association [JIA] which is actually a separate organization from AML. From his experience, the costs are pretty staggering. In a self-insured program, more of the cost goes directly back to the municipality itself. He commented those municipalities which are self-insured or anyone insured by the JIA have a charge back system for organizations which have higher than average loss rates. One of the advantages of the JIA is they provide loss- control service far more than any private insurance company. Number 1668 KEVIN SMITH, Risk Manager, Alaska Municipal League Joint Insurance Association, came forward to testify on HB 378. CHAIRMAN ROKEBERG asked Mr. Smith to explain what his association does and what opinion he has on HB 378. MR. SMITH stated: About 15 years ago, municipalities and school districts were having a tough time buying insurance so they turned to the Alaska State Legislature and said, "We'd like to give a big California howdy to any insurance companies and we'd like to do this ourselves." and the Legislature said, "Okay". So, what they've got now in law is the ability to basically pool self-insurance for workers' compensation, liability and property. With respect to the workers' comp[ensation] provisions here, you know, I think that everybody at this table can see a difference between government and an insurance company. Is it fair ... that governments don't pay as they go? Well, these are your constituents, these are members of our organization, it's a public entity. We don't typically tax public entities. Yeah, I think it is fair that, perhaps, municipalities and the state and public entities don't pay as they go. This is a hard cost that basically would be passed on to the municipal governments and, frankly, the timing couldn't be worse. REPRESENTATIVE HALCRO stated that Mr. Grossi pointed out that there are only six states that do not get some kind of a contribution. That leaves 44 states that have a program similar to what is being proposed in HB 378. He said, "I would say, in the case where you're concerned about governments taxing each other, it seems to be okay in 44 of the 50 states." MR. SMITH said he is unclear as to whether Mr. Grossi was proposing legislation similar to this or whether it specifically applies to public entities. He was under the impression that a fee-based schedule was being discussed with respect to these states. CHAIRMAN ROKEBERG asked how many different municipalities or organizations are involved with his group. MR. SMITH said there are 141 municipalities and school districts in his group. There is another pool in the state which consists of another 20 to 25 municipalities and school districts. The JIA is a voice for a much broader section of the municipalities that are "self-insured", but not really. Number 1854 CHAIRMAN ROKEBERG wondered if Mr. Smith has an idea of the impact number wise. MR. SMITH said the JIA, if their claims remain stable, could stay at about $56,000 four years out. He added that there has been a lot of discussion about how the 3.3 percent increase for self- insureds will provide an incentive for losses to go down. He pointed out that it is 3.3 percent on all the money the self- insureds are already paying out on workers' compensation. He stated, "The fact that they're self-insured and paying workers' compensation alone is reason enough and incentive enough to try and get their losses down." CHAIRMAN ROKEBERG asked if the MOA and the Anchorage School District are part of his group. MR. SMITH said these organizations are part of the AML's mother group. They are self-insured and not part of a joint insurance arrangement. The North Slope Borough is an exception to this. His group provides a layer of their law enforcement liability between their self-insurance and another type of insurance purchased elsewhere. CHAIRMAN ROKEBERG indicated there needs to be amendments to HB 378 with respect to refunds on subrogation and the definition of a claim. Number 2043 REPRESENTATIVE HALCRO asked for clarification on the number of states which have a similar program to what is being proposed in HB 378. MR. GROSSI said he believes there are approximately 16 that have a fee based on compensation pay. Number 2189 JOHN GEORGE, National Association of Independent Insurers, came forward to testify on HB 378. He stated: We're not really opposed to the bill, but there's a couple of things that came up in testimony today that I think are important to clarify. Several people mentioned, "We don't want to pay twice". If you write a policy this year and you pay the losses next, you want to make sure you haven't paid out a premium tax and then have to pay a fee on top of the losses that apply this year's premium. Several people have mentioned that, but I haven't seen how we're going to address that to make sure that we don't have to pay twice. And the reason that I really think that's important is that a lot of testimony has hinged about insurance companies paying. Insurance companies don't pay, they pass on. It's almost like a sales tax. The merchant doesn't pay sales tax. The individual pays it. It goes to the merchant. The merchant sends it in. Premium tax on workers' comp[ensation] is an add-on. The fee on the claims is going to be an add-on. Now, it's a little more difficult to figure it out because you don't know precisely what the claims are going to be. You know what precisely the premium is, but assuming that an insurance company is going to adjust to that, they will figure out what it is and they will pass it on to employers. So, what we're really talking about is small employers who are unable to self-insure or large employers who elect not to self-insure are paying, at this point, into the general fund, unrestricted, money's just there. So, you could say that it's sort of been going to the Department of Labor for these or not, depending on how you want to look at it.... This does level that playing field a little bit. It makes insurance more competitive, I suppose with self-insurance, but probably not enough to really make a difference in whether someone was self-insured or not. We do support the fact that it brings in the other players and we think that they ought to be contributing...I think it's important to note that this is really affecting employers not insurance companies. CHAIRMAN ROKEBERG asked if the statutory tax has always been due on March 1. MR. GEORGE said he believes the tax has to be collected quarterly now. The premium is earned during a policy year. He explained: Let's say you bought a policy on January 1, 2000. The premium is earned all during 2000, but the claims may be largely paid out in 2001. You paid the premium tax and that was passed to the small employers, then we pay the claims in 2001 and pay an additional fee on top of those which, I assume, we're going to have to go back to the Division of Insurance and say we need to go back and retroactively charge are employer insureds so that we can have additional money to pay those. Or, if the claim results out of policy period for which you paid the tax, you don't have to pay the fee. And I think that probably is more logical. CHAIRMAN ROKEBERG stated, "Well, everybody in the business knows up here the tax is due on or around the first of March. So, when are the policy years for workers' comps (indisc.)?" [Due to a tape change, Mr. George's response was not recorded.] TAPE 00-22, SIDE A Number 0001 CHAIRMAN ROKEBERG voiced concern that the anniversary date of a workers' compensation policy typically varies with respect to when the underwriting occurred. He said: It's conceivable that with a March 1 premium tax, if you bought a policy sometime in February of the year, that next year, assuming this bill were to pass, you would pay the full premium tax on March 1 and then starting on; would that be prorated? MR. GEORGE indicated it would be similar to income tax. He explained that the tax year is January 1 to January 1, but a person pays in April. CHAIRMAN ROKEBERG asked, "So, whatever isn't a prorated share of how much premium you'd pay to the prior calendar year?" MR. GEORGE said he is not sure. CHAIRMAN ROKEBERG asked Bob Lohr if he could answer his question. Number 0104 BOB LOHR, Director, Division of Insurance, Department of Community and Economic Development, testified via teleconference from Anchorage. He indicated he does not know the answer, but would get back to Chairman Rokeberg with a response. MR. GEORGE recalled that there is now an exemption for municipalities paying a premium tax. CHAIRMAN ROKEBERG asked Kevin Smith if he knows anything about that. MR. SMITH replied that he does not know. He said if the JIA does pay it, then it would the reinsurers who are paying. He reiterated that his organization is self-insured. MR. GEORGE said, "I've been corrected by the State Risk Manager, and it is only on surplus lines that the tax difference; so, this would not apply to workers' comp[ensation]." CHAIRMAN ROKEBERG asked if there is a premium tax on surplus lines. MR. GEORGE explained that there is a premium tax on surplus lines, but the exemption is for that tax. He added that municipalities are not exempted from a premium tax on workers' compensation. CHAIRMAN ROKEBERG wondered, "Do they pay the tax or not? Yes or no?" MR. GEORGE said he believes if a municipality buys workers' compensation insurance, then the insurance company will add on premium tax and charge it to the municipality. The insurance company will then pay the premium tax to the State on municipal workers' compensation. CHAIRMAN ROKEBERG asked, "And it's best to use it for the excess lines because they're self-insured?" MR. GEORGE answered, "You don't want to go there. It's just different." CHAIRMAN ROKEBERG said: The other issue would be whether, for example, you heard testimony on those third-party administrators for these programs and so that'd be part of the whole claim payments and the fees charged by the third-party administrators to operate their programs. MR. GEORGE said he understands that the Division of Workers' Compensation is looking for is the amount on the check that is handed to the employee or to the doctor, and would not include claim payments, administrative fees, adjusting fees, etcetera. CHAIRMAN ROKEBERG said that is why he would like a clear definition of a claim. Number 0333 MR. GROSSI said he thinks a claim is well-defined in HB 378. He clarified that administrative costs would not be included. It would strictly be workers' compensation payments which are reported in the annual report. He could provide an example of what kind of costs are reported in that report. CHAIRMAN ROKEBERG stated, "That's basically what you're testimony was and it ties into that, the language in the statute there. That's subsection (m)?" MR. GROSSI replied yes. CHAIRMAN ROKEBERG asked Mr. Lohr to get back to the committee with information regarding the calculation on the premium tax now for excess lines and how the March 1 date impacts that. He suggested that Mr. Lohr speak with Mr. Grossi on the transitional elements outlined in HB 378. MR. LOHR agreed to do that. CHAIRMAN ROKEBERG asked if Mr. Lohr had any further comments regarding the rights of subrogation or any other issues. MR. LOHR replied no. He stated: Basically, the division views this as our duty under current statute is to collect the premium tax at the established rate by the Legislature and process those funds in the unrestricted general fund. And I don't think it's the place of the division to advise on the policy question of the most effective for the Legislature to fund the workers' compensation. [HB 378 was held over.]