CS FOR HOUSE BILL NO. 494(FIN) am "An Act relating to the methods of disbursement of money by the state, including employment compensation, unemployment payments, and permanent fund dividends, and to bank investments and deposits by the state; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Wilken noted that this bill, CS HB 494 (FIN) am, Version 23-LS1754\U.A, sponsored by Representative Pete Kott, would mandate "that monetary disbursements can only be made through an electronic funds transfer or through an electronic payment card unless doing so would cause hardship to the recipient." He noted that several amendments would be forthcoming. SUE STANCLIFF, Staff to Representative Pete Kott, noted that this bill would alter the method through which the State disburses funds in order to reduce associated costs to State agencies and to "improve service delivery to the public." She informed that the proposed electronic payment delivery that would utilize such things as direct deposits would benefits the State, as it would reduce the high cost of issuing paper checks. She informed, however, that such electronic payment delivery would not be a viable payment method for "so-called cash customers" who are those who do not have a bank account or those who might live in Bush areas of the State and not have access to a bank or choose not to receive direct deposits. Ms. Stancliff stated that, in addition to reducing the cost of issuing paper checks, "considerable" savings would result from: not having to deal with check fraud; not having to re-issue lost or stolen checks or address stale dated checks; reduced postage and bank service fees; and reduced labor costs. Furthermore, she stated that the proposed process would benefit those who receive electronic payments because it would eliminate check-cashing fees, the payment would be made in a timely, reliable manner, and the check fraud liability would be reduced. Ms. Stancliff pointed out that while 89-percent of the State's payroll is direct deposited, only 1.5 percent of the 50,000 vendors the State does business with currently utilize the electronic payment transfer method. She pointed out that this is the area to which the maximum focus would be directed. She noted that the State's child support and public assistance programs are increasingly using electronic disbursements. Co-Chair Wilken understood that the legislation would allow the State to utilize electronic funds transfers. He asked whether there is a "compliant" component associated with the legislation. Ms. Stancliff stated that rather than "compliant" being the appropriate word, the hope is that incorporation of this legislation would encourage its use. She stated that the State would not require someone to choose this method of payment, as that would impede on their right not to choose it. However, she noted that an agreement within the Western States Alliance does have a compliant component in regards to electronic benefit transfers. Co-Chair Wilken voiced being "shocked" that the State issues 96,000 checks a month. He asked how this legislation would alter current payment regulations. Ms. Stancliff responded that it would insert a new section into State's statutes that identify the methods of disbursements that the State shall use. She noted that, included in the new language, is language specifying that a person would not be required to utilize electronic payment. Therefore, she concluded, that while a person could opt out of this payment method, the legislation would specify that this be the "primary method" utilized by State departments. Co-Chair Wilken surmised therefore that the legislation would establish the method for disbursement, which is currently "quiet" in statute. Ms. Stancliff concurred. She noted that the legislation also updates the statute to "the electronic age" by replacing the word "warrant" with "disbursement" throughout. DEBBIE BUMP, Division of Finance, Department of Administration, noted that she was available to answer questions. Senator Olson asked for further information regarding how the legislation would apply to people without a bank account. Ms. Stancliff responded that this legislation would not require a person living in a remote community with limited banking options or who elect not to receive electronic payments to do so. She stated however, that the State could alternately save money were these people to receive payment via an electronic or cash card, which is similar to a debit or credit card that could be used at their local grocery store or post office. Senator Olson asked for clarification regarding the fact that no more warrants would be issued. Ms. Stancliff clarified that the legislation would allow warrants to be issued to people "if they have no other means available to them." Senator Olson asked for further information regarding the electronic card. Ms. Stancliff explained that in lieu of receiving a check in the mail, funds in the form of cash cards could be utilized were electronic technology available at an area's post office or grocery store. Amendment #1: This amendment inserts a new section into the bill on page two, line 23, after Section 3, as follows. Sec. 4. AS 14.40.841 is amended to read: Sec. 14.40.841 Alaska Aerospace Development Corporation [REVOLVING] fund. (a) the Alaska Aerospace Development Corporation {REVOLVING} fund is established in the corporation. The [REVOLVING] fund consists of appropriations made to the [REVOLVING] fund by the legislature, and rents, fees, or other money or assets transferred to the [REVOLVING] fund by the corporation. Amounts deposited in the [REVOLVING] fund may be pledged to the payment of bonds of the corporation or expended for the purpose of the corporation under AS 14.40.821 - 14.40.990. (b) The corporation shall have custody of the fund, and shall be responsible for its management. The corporation is the fiduciary of the fund under AS 37.10.071 and may invest amounts in the fund in accordance with an investment policy adopted by the corporation. Notwithstanding AS 37.10.010 - 37.10.050, the corporation may make disbursements from the fund in accordance with AS 37.25.050. Notwithstanding AS 37.05.130 - 37.05.140, the corporation shall report disbursements from the fund annually in accordance with AS 14.40.866(b)(1). An appropriation made to the fund by the legislature shall be transferred from the state treasury to the corporation for deposit in the fund. In addition, Sec. 31 on page 11, line 12 is replaced with the following language. Sec. 32. Section 4 of this Act takes effect July 1, 2004. Sections 1-3 and 5-31 of this Act take effect January 1, 2006. Co-Chair Wilken offered Amendment #1 and objected for explanation. Co-Chair Wilken shared that the Alaska Aerospace Development Corporation (AADC), of which he is a Board member, has "struggled with how to bring their accounting system which is somewhat unique because of its launch customers" into the State's accounting system. PAT LADNER, Executive Director, Alaska Aerospace Development Corporation, testified via teleconference from an offnet site and explained that the twelve year-old corporation, after struggling "in the beginning against long odds," has recently signed a five- year missile defense contract. He noted that in FY 03, the Corporation: earned $3.7 million in revenue; is expected to generate $11 million in FY 04; and, "provided all scheduled launches occur," would be expected to generate $22.1 million in FY 05. He stressed that this "is money brought into the State." This amendment, he explained, would allow the Corporation to be responsive to its customer the federal government, and be competitive with Vandenberg Air Force Base. He recounted that the missile defense contract requires an accounting system that is approved by the federal Defense Audit Agency (DAA), and he noted that the Corporation's Axis Accounting System does not meet the established criteria as it was initially designed to be a funds tracking system for the Legislature. Furthermore, he explained that the current system segregates disbursements into five categories: labor; travel; contractual; supplies; and equipment. However, he continued, the national missile contracts require a work breakdown structure that consists of approximately 15 categories with sub- category requirements. He disclosed that because the current system does not provide that ability, a "shadow mode accounting system" has been developed, which as subsequently been approved by the DAA. The continuation of the Axis System and the development of the shadow system, he disclosed, has resulted in a double accounting system, which has increased labor costs that could not be recouped under the contracts. Therefore, he stated that because the Corporation receives no funding from the State, this scenario is placing the Corporation in a non-competitive situation as these overhead rates escalate. Mr. Ladner stated that this amendment would serve to make the Corporation more efficient and competitive by allowing the incorporation of the separate accounting system. He attested that no other component of the operation such as annual audits and reports would be affected. He further assured the Committee that each contract would continue to require an annual DAA audit, a legislative audit, and a separate federal audit. He urged the Committee to support the amendment. Co-Chair Wilken noted that further information is attached to the amendment. Ms. Stancliff stated that the sponsor has no objection to the amendment. Co-Chair Wilken removed his objection. Senator Bunde asked whether this amendment would exclude the Corporation from a Legislative Budget & Audit review. Mr. Ladner responded that it would not. There being no further objection, Amendment #1 was ADOPTED. Conceptual Amendment #2: This amendment replaces the word "person" with the words "vendor or grantee" in Section 18, subsection (b)(4) on page six, line 18. The new language would read as follows. (4) a vendor or grantee elects not to be paid by the disbursement methods; Co-Chair Wilken moved to adopt Conceptual Amendment #2. Ms. Stancliff explained that this language is being proposed as most accounts are established with a vendor or a grantee rather than with a person. There being no objection, Amendment #2 was ADOPTED. Conceptual Amendment #3: This amendment deletes Sections 25 and 26 of the bill beginning on page nine, line 20 through line 31, which read as follows. Sec. 25. AS 44.99.205(a) is amended to read: (a) A state agency may not place a picture of an elected state official on an application form [, A WARRANT,] or a direct deposit notice provided by the agency. Sec. 26. AS 44.99.205(b) is amended to read: (b) A state agency may not place a message on or with an application form [, A WARRANT,] or a direct deposit notice provided by the agency unless the message is (1) from a state agency employee who is not an elected state official; and (2) required by law, necessary for the operation of the document, related to seasonal health issues included in flu shot reminders, or related to a program or activity of the state agency. Co-Chair Wilken moved to adopt Conceptual Amendment #3. Ms. Stancliff explained that because this legislation incorporates the disbursement requirement into State statutes and because people could opt out of the electronic payment method and continue to receive a paper check or warrant, this language is no longer required. There being no objection, Conceptual Amendment #3 was ADOPTED. Senator Dyson moved to report the bill, as amended, from Committee with individual recommendations and accompanying fiscal note. There being no objection, SCS CS HB 494(FIN) was REPORTED from Committee with seven zero fiscal notes as follows: fiscal note #1, dated March 19, 2004 from the Public Assistance Field Services, Department of Health and Social Services; fiscal note #2, dated March 19, 2004 from the Information Technology Services, Department of Health and Social Services; fiscal note #3, dated March 19, 2004 from the Administrative Supports Services Division, Department of Health and Social Services; fiscal note #4, dated March 16, 2004, from the Unemployment Insurance Division, Department of Labor and Workforce Development; fiscal note #5, dated March 16, 2004, from the Employment Services, Department of Labor and Workforce Development; fiscal note #6, dated March 19, 2004, from the Department of Revenue; and fiscal note #7, dated March 16, 2004, from the Department of Administration.