HB 392 - PERMANENT FUND DIVIDEND PROGRAM Number 654 RICHARD VITALE gave an overview of HB 392. HB 392 addresses three subjects. First, many of the regulations will being adopted into statute to simplify things that have already been proven to work. As regulations it is easier for them to change, but as statutes there will not be a lot of changes without the scrutiny of the legislature. This is at the request of Representative Parnell and the Permanent Fund Dividend Division. Second, HB 392 will close loopholes and try to bring back some of the statutes and regulations to the original intent of the PFD legislation. Legal challenges over the past couple years have created loopholes. Third, and the most pressing, HB 392 will address a court decision of late, which disallowed the piggyback rule, which states a person out of the state with a spouse on an allowable absence, also gets that allowable absence. The court just ruled the spouse that is accompanying the person does not get the allowable absence, therefore, does not get their PFD. The last two years are now disallowed for approximately 1,600 people. HB 392 would retroactively put these people back in, as well as, fix the problem for the future. Number 675 TOM WILLIAMS, DIRECTOR, PERMANENT FUND DIVIDEND DIVISION, DEPARTMENT OF REVENUE, joined MR. VITALE at the table to testify. He felt Mr. Vitale's summary of HB 392 was accurate. A vast majority of HB 392 makes technical corrections, appropriately moves items into statute that are currently in regulation. He offered to examine the sectional summary with the committee. Section 1, for technical purposes, updates a reference to correspond to the amendments made in Section 12. Number 687 CHAIR VEZEY clarified that paragraph B3 would be changed to B4. MR. WILLIAMS answered that Chair Vezey was correct. In Section 2 the primary emphasis was to redefine allowable absences as eligibility criteria, instead of elements of residency, as current statutes do. Section 2 also eliminates the multiple references to individual. He stated individuals, who have lived in Alaska for several years, take offense when the PFD Division says they are not out on an allowable absence, therefore, not a resident for PFD purposes. TAPE 94-16, SIDE A Number 000 REPRESENTATIVE ULMER asked if a person were to marry a nonresident outside or inside the state would the nonresident spouse be eligible for the piggyback rule. Number 008 MR. WILLIAMS answered no, the current PFD statutes state an individual is a state resident, if they are physically present in the state or on one of the defined allowable absences. Two years ago in SB 327, there was a clarification made that the definition of residency should correspond to the definition already contained in Title 1, the general state definition of residency. By moving the allowable absence out of the definition of residency for PFD purposes, has no effect on the linkage to the true definition of the state resident. CHAIR VEZEY clarified to Representative Ulmer, Section 2 eliminates six repetitions of the word "individual," clarifies an individual has to be a resident on the date of application, it does not define what a resident is. The only addition is that it clarifies that a person is eligible for a dividend if he/she is not present in the state for one of the reasons which is considered to be an allowable absence. Number 039 MR. WILLIAMS continued examining the sectional analysis. Section 3 closes a loophole for children born out of state to nonresidents, and exempts children from the current six month predeparture residency requirement that would be enacted in Section 5. When SB 327 was enacted, there was an amendment that allowed an individual or child of an eligible resident on allowable absence to qualify for a dividend, even though the child had not been physically present in the state. Prior to that time, a child born out of state had to return back to the state to receive a PFD. When the amendment to SB 327 was adopted two years ago, a loophole in the wording of it existed. For example, a nonresident couple lives out of state, he moves to Alaska and establishes residency, she remains out of state and has a baby, he then claims the child as an eligible dependent and claims a PFD for that child. This example is not what the original legislation was intended to do. HB 392 would make sure the child would have to be an allowable absence. HB 392 would not interfere with the original intent of the changes made in SB 327. Section 4 addresses the issue of what happens with a suspended imposition of sentence (SIS). AS 43.23.005(d) makes an individual who was incarcerated for a felony conviction ineligible for a dividend. It has been questioned if an individual was granted an SIS and if the terms were completed, whether or not a true conviction exists. Section 4 clarifies even with an SIS, the individual would also lose eligibility for a dividend and the conviction would not be overturned. Section 5 places in statute all absences currently allowable by statute and regulation. Section 5 eliminates the Department of Revenue's (DOR) discretion to add allowable absences. Section 5 also moves into statute, the six month predeparture regulatory requirement for absences exceeding 180 days during the qualifying year. The language in the allowable absence list has minor technical changes and is consistent with current laws by recommendation of Legislative Legal staff. Section 6 ensures an applicant must sign their application and adds the requirement for verification into statute. Having verification from two witnesses reduces the chances for fraud. Section 7, similar to Section 4, basically will keep penalties intact, even with an SIS, for trying to defraud the program. Section 8 allows duplicate payments of dividends to be assessed without a time limit. In SB 327, there were changes made in the statute of limitations to identify erroneous dividend payments, whereby the 10 year period was reduced to 3 years. He stated the DOR wanted the ability to retrieve erroneous payments regardless of the time elapsed. Section 9 allows the DOR to withhold payments if an applicant has an unpaid assessment pending. The DOR will withhold payment until there is a resolution of the prior year assessment, but the DOR is limited to take timely action. Section 10 makes the DOR's current authority to establish deadlines explicit. Section 11 clarifies language to correspond to the original intent as administered from the beginning of the program. Section 12 gives the PFD program priority in recovering erroneous payments before all other levies, executions, garnishments, and attachments. The IRS or Child Support authorities, for example, would not be able to confiscate the dividend before PFD officials, if a dividend was accidentally paid to an ineligible person. Section 13 corrects a grammatical error. Section 14 adds language to make it clear that the intent of the statute cannot be circumvented by having a judgment assigned to a court, only to be distributed to a private party, by the court, on the assigner's behalf. The court system challenged a provision within SB 327, whereby the dividend could only be assigned to a government agency. This change would clarify the intent of the statute. Section 15 places into statute most of the current confidentiality regulations. The DOR would like clarification as to what can and cannot be disclosed from the dividend file, since it is one of the largest single sources of data in Alaska. An individual's privacy is a concern. Section 16 deletes the references to absences and the definition of state resident, this is in concert with Section 2. Absences are redefined as eligibility criteria in Section 3, and the specific absences are listed in Section 5. Section 16 clarifies that while absent, an individual must maintain at all times, an intent to return to remain permanently in order to retain residency. Section 16 is also renumbered as appropriate. Section 17 reaffirms 1992 and 1993 eligibility of individuals accompanying their eligible resident spouse. Superior Court Judge Dana Fabe's December 16, 1993, decision invalidated the "piggyback" provision of 15 AAC 23.163 (c)(15) effective January 1, 1992. This will affect approximately 1,600. Sections 18, 19, and 20 relate to the effective dates. (Sectional analysis available on file.) Number 286 REPRESENTATIVE ULMER understood Section 17 to be a major issue, in terms of both people and money; therefore, she wanted Mr. Williams to go over it again. She clarified a couple would have to have been married and living in Alaska, being eligible for a PFD, to then leave with an allowable absence. By definition the accompanying spouse would similarly be given the allowable absence, thus allowed to receive the PFD. She asked Mr. Williams if she was correct. Number 298 MR. WILLIAMS responded she was correct. The "piggyback" provision has been in regulation since the beginning of the program, because it did not make sense to grant an individual an allowable absence and not treat his/her family similarly. A regulation was adopted to account for this provision. SB 327, in part, addressed a concern as to how the DOR was viewing the eligibility of spouses of nonresidents. Specific language was added which said, in essence, the DOR shall consider all the relevant facts in determining an individual's residency. The original bill draft stated, "and you cannot consider the residency of an individual spouse as the only reason to deny the spouse." He mentioned on the House floor there was an amendment proposed that said residency could not be considered at all. When that amendment was adopted, the DOR noted it would invalidate the "piggyback" rule. Accordingly, the House adopted other language which said, "residency could not be the principle factor." The DOR had thought this change solved the problem, however, Superior Court Judge Fabe concluded the "piggyback" rule was basing an individual's eligibility or residency as the principle factor. Number 351 REPRESENTATIVE OLBERG asked how this conflict had gotten to court or why was a judge involved. Number 354 MR. WILLIAMS stated the court challenge came as a result of an Alaska resident, who was absent with a nonresident, the nonresident was serving in the military, therefore the resident claimed she should have also been given an allowable absence. The DOR did not see the regulation allowed for this. Judge Fabe did agree with the DOR on this issue, but in reviewing the whole issue, she felt the "piggyback" rule was invalidated by the changes made in SB 327. Number 372 REPRESENTATIVE ULMER clarified Section 17 only applies if they were married in Alaska and both were eligible for dividends before they left Alaska. Both individuals have to be eligible to then have allowable absence. Number 378 MR. WILLIAMS replied a nonresident is not entitled to a dividend. It does not matter where the marriage takes place, only that both residents are eligible before departure. Number 383 REPRESENTATIVE ULMER responded they must then be a family unit or their allowable absence could not "piggyback." MR. WILLIAMS clarified a spouse or a minor dependent. REPRESENTATIVE ULMER believed then it does matter where the couple is married, because they have to be a family unit before they left the state. Number 389 MR. WILLIAMS responded in order to claim the "piggyback" allowable absence, Representative Ulmer was correct. Number 391 REPRESENTATIVE KOTT clarified Section 17 was basically the same section he dealt with in Judiciary, Representative Eldon Mulder's bill, a couple of weeks ago. He had similar concerns about residency, particularly relating to military families, and asked if Section 17 would resolve this problem and afford those dependents PFD checks. Number 404 MR. WILLIAMS answered Section 17 would not resolve the concerns raised in House Judiciary about HB 75. Section 17 will resolve problems caused by Judge Fabe's court decision. Section 17 does not allow an individual resident accompanying a nonresident to retain eligibility for the dividend. Residents accompanying residents on allowable absence, to remain eligible for the dividend. Number 418 REPRESENTATIVE G. DAVIS saw the DOR's point with Section 12, where the PFD program is the first in line for receiving unallowed payments. For the overall residents of the state, however, the DOR would be better off to allow for a child support payment first, which would be more beneficial to the state. He felt there was probably more cost associated with attempting to recover those funds if they did not have this first option, rather than retrieving for the PFD program. Number 433 MR. VITALE stated Representative Parnell's opinion on this subject. Representative Parnell felt the money never belonged to these individuals in the first place, and once it is presented in this manner it may set a bad precedent. To give the money to another party to cover the individual's debt is to acknowledge that it was their money to begin with. The money should be given back since it is "akin to stolen money," although not intentionally stolen. Child support provisions are worthy, but the DOR should have the money back first. Number 447 CHAIR VEZEY noticed the time being near 10:00 a.m. and asked what time session was. REPRESENTATIVE KOTT answered 11:00 a.m. Number 450 REPRESENTATIVE ULMER visualized a military couple that becomes eligible and they leave the state, saying they intend to remain residents. She then asked how long this couple could be out of state and still receive a PFD check. Number 460 MR. WILLIAMS responded, as long as the couple can demonstrate residency, basically indefinitely. Under regulation, there is a presumption that an individual who has been absent for five years, for most of the allowable absences, does not really have the intent to return to remain permanently. This presumption can be overcome in unique cases of demonstrating ties to the state. Regulation does state the DOR will consider facts in determining whether an individual has overcome the five year presumption against them. There is a higher threshold of proof after five years. Number 475 REPRESENTATIVE ULMER was curious as to how the DOR deals with people on allowable absences differently whether or not they intend to maintain residency. She believed the regulations Mr. Williams was referring to were used by people who review the applications. She asked if there were any percentages determining how long and how many people on allowable absences have been gone for. MR. WILLIAMS replied there is currently a question on the PFD application that asks "you the last time that you have lived here for six consecutive months." Based on this question and edit criteria, the DOR selected only 600 individuals for an eligibility determination last year. This number does not include their spouses or their dependents. He stated bright-line criteria is not readily available for this area, and it would be easier to administer, if perhaps the law said after a certain period time, an individual could not get the dividend. The DOR has received letters from individuals who complain of people who are out of state, who still receive dividends, and do not intend to return to Alaska. Number 515 REPRESENTATIVE ULMER directed to Chair Vezey, HB 392 may be an opportunity to insert a bright-line, which might say after eight years, if a person has not returned to Alaska to live, the presumption changes. A different test, rather than the initial one, may be administered. She felt HB 392 might be a good opportunity for the state to "close the door" or put people on notice that they need genuine intent to return to Alaska. Number 528 MR. WILLIAMS replied the DOR would welcome any bright-line criteria because it makes the administration easier and reduces their use of discretion. Using discretion has been known to result in additional appeals. Number 535 On behalf of Representative Parnell, MR. VITALE entered he is in very much in favor of bright-lines and tightening down the program. There had been initial dialogue about a five year limit; however, this provision was stalled because it would eliminate Senators Murkowski and Stevens, and Congressman Young from the PFD. REPRESENTATIVE ULMER clarified her point was not an automatic elimination, just a change in the presumption after the bright-line to require more proof. Number 541 MR. VITALE responded to do what Representative Ulmer suggested the PFD would then be brought into judgment roles, which would have to be clarified. He stated intent is really hard to define. There is another option such as the introduced bill, which states a person cannot receive the money until he/she comes back for a year. He emphasized Representative Parnell would be very willing to entertain wording in that manner. Number 554 REPRESENTATIVE G. DAVIS noted students out of state may succumb to the large registration drives on their campuses to vote federally, which would automatically eliminate them from the PFD. Registering out of state would automatically make them nonresidents, so it would take them another year to qualify as a residents, which in turn deprives them of the PFD for two years. He was concerned for these students and realized it would be hard to judge a valid mistake. He then asked if the DOR has any type of consideration which would put one of these students back on line sooner than two years. MR. WILLIAMS replied, in all instances, when an individual registers to vote in another state, they are declaring they are a resident of that state. The DOR is well aware of the problem, but he felt there was not a reasonable basis for saying "we believe your original intent is to remain a resident here." Regardless of voter registration or applying for property tax exemption, Title 1 states "you are a resident of the state of Alaska, until such time as you take steps inconsistent with that residency, or to establish residency elsewhere." Number 590 CHAIR VEZEY questioned whether it was good legislative drafting practice to incorporate into a statute, a former statute, referring to Section 17. He felt it may be cleaner to incorporate the paragraph of the former statute in HB 392 and not require a person to have to research what it says. Hearing no more testimony, CHAIR VEZEY held HB 392 in committee to be rescheduled and allow time for amendments to be proposed. ADJOURNMENT Chair Vezey adjourned the meeting at 10:16 a.m. BILLS NOT HEARD HB 483: "An Act relating to payment of permanent fund dividends of certain individuals who have been absent from the state; and providing for an effective date."