SB 254 - LEVY ON PERMANENT FUND DIVIDEND MR. MIKE PAULEY, Staff to Senator Loren Leman, came forward to present SB 254. MR. PAULEY said this bill will enhance the ability of Alaskan businesses to collect from debtors who are in default. He said existing law exempts 45 per cent of a person's Permanent Fund Dividend (PFD) from collection by private parties, except if the debt is a child support payment, student loan or other debts owed to the state. MR. PAULEY said the state is entitled to collect 100 per cent of a PFD in those cases. He explained that the cost of business increases for small businesses unable to collect debts owed them and these costs are passed on to honest consumers. Essentially, the majority of Alaskan consumers are paying for the financial irresponsibility of a small minority, according to MR. PAULEY. He said the original bill eliminated the exemption altogether, but it was amended to maintain a 30 per cent exemption, making 70 per cent of a PFD available for collection by private parties and 100 per cent available to the state. MR. PAULEY said this bill also increases the fee for garnishing checks to five per cent of the total value of the check, to be taken from the defaulter's portion. Currently, the charge is two dollars. The five per cent fee will apply both to private parties and state agencies who are garnishing a PFD check. MR. PAULEY concluded that this bill will help narrow the gap between what private parties and state agencies can collect from debtors. CHAIRMAN TAYLOR asked if the original purpose of the bill was to change the exemption and MR. PAULEY replied that the original bill completely eliminated the exemption, allowing 100 per cent of a dividend to be garnished. CHAIRMAN TAYLOR asked why citizens would be treated differently than the state and SENATOR MILLER said they discussed that point extensively in the labor and commerce committee and the concern was, if 100 per cent was garnished, there would be no incentive to file for a PFD at all. CHAIRMAN TAYLOR responded that the same would be true on a debt to the state and SENATOR MILLER agreed but added it might be required by a court order. He concluded that 70 per cent of something is better than 100 per cent of nothing. SENATOR MILLER said the labor and commerce committee thought two dollars was a ridiculously low fee and so increased it to five per cent. MS. DEBORAH VOGT, Deputy Commissioner of the Department of Revenue, said garnished dividends are a big part of what is collected by obligors and the department does not oppose the bill nor oppose the change to a 30 per cent exemption. She said there are no program implications if the exemption was eliminated but there is a concern that people may not apply. She said debtors can be ordered to apply but that has not yet occurred and the division is aware that some people simply do not. MS. VOGT questioned the public policy of the increase to a five per cent fee, saying this would reduce the amount available to private parties and state agencies attempting to collect debts. She said the two dollar fee has resulted in program receipts to the department of approximately $150,000 and this bill would generate 3.5 million dollars in program receipts. She explained the Department of Revenue will be on one end of every transaction and she thinks $3.5 million would be grossly disproportionate to the actual administrative costs. She added this fee may have a significant impact on creditors. She disputed the sponsor's statement that said the state will continue to get 100 percent of a garnished amount, saying they will only get 95 per cent and the other five per cent will go to the general fund. She concluded this bill will basically take money out of the hands of private individuals and put it in the general fund. SENATOR MILLER guessed that two dollars would not cover collection costs. He said private collection agencies charge fees much greater than five per cent. CHAIRMAN TAYLOR explained his concern that many of these debts have already been taken to private collection agencies and now another five per cent will be lost to an additional collection fee. CHAIRMAN TAYLOR agreed that two dollars is low but that there may be public policy reasons to keep it that way. He estimated the amount of work to the department for collection to be minimal. DEBORAH VOGT agreed the task of garnishing a PFD is fairly insignificant. She explained it is mostly done by computer and involves a lot of phone calls and mailings. SENATOR PARNELL asked what the cost of this function might be and MS. VOGT believed the $150,000 they currently get from program receipts covers the cost. She said that even with the increase they would continue to request $150,000 in program receipts. SENATOR PARNELL asked a question regarding the fiscal note and MS. VOGT clarified that the fiscal note represents revenue from the increase to five per cent and would not apply if the current two dollar fee remained. MS. VOGT mentioned that the IRS was not too happy with the two dollar fee but acquiesced because it is a small amount. She thinks charging a larger amount might push their willingness to accept the state's collection of the fee. MS. NANCI JONES, Director of the Permanent Fund Division, stated that the way the bill reads currently each claim would be charged the five per cent fee. She said many PFD's are garnished multiple times. She mentioned that there was an informal discussion in the previous committee regarding capping the garnishment fee at five per cent but this is not reflected in the bill. SENATOR PARNELL asked if the bill could accomplish the reduced exemption without the fee increase by deleting sections two and three of the committee substitute. MS. VOGT replied it would. MR. STEVE PHILLIPS, owner of a Ketchikan credit bureau, offered his support for this bill in the original form, with reservations about the lack of incentive to file. He expressed concern that the current bill does not clearly specify where the five per cent will come from. He said with a 30 per cent exemption and the statement that the five per cent would come out of the debtors' portion, they in fact would only receive 25 per cent. He believes this needs to be clarified. He referred to the sponsor statement, and said that was where the inconsistency lies. MS. VOGT responded by saying sections two and three state the five per cent comes from the debtors' portion when less than 100 per cent is garnished. If 100 per cent is claimed, the five per cent comes out of the creditors' portion. CHAIRMAN TAYLOR asked for clarification and MS. VOGT restated that the administrative fee would be paid by the debtor when less than the whole check is garnished, resulting in an actual exemption for 25 per cent of the amount of the PFD. CHAIRMAN TAYLOR asked if the amount that goes to the debtor is reduced and MS. VOGT said it is, and the amount conveyed to state agencies will also decrease. MR. PHILLIPS argued that the statute is flawed and may be problematic if it was brought to court. CHAIRMAN TAYLOR replied that it may be wiser to return to the two dollar fee. CHAIRMAN TAYLOR asked where this fee would be deducted from. MS. VOGT said it would come from the dividend applicants' portion. CHAIRMAN TAYLOR inquired what happens in cases where child support or student loans claim 100 per cent of a dividend. MS. VOGT replied they take the two dollars off the top. CHAIRMAN TAYLOR asked if the number of people who have their entire dividend taken is significant and MS. VOGT replied that the majority of garnishments are for the full amount of the dividend. CHAIRMAN TAYLOR could not understand why someone who owed a debt would not apply for a dividend. DEBORAH VOGT agreed but said people are often very emotional and do not file. Her agency tracked those who applied for a dividend which would have been garnished had it been paid. She said in most cases, the dividend was not awarded to anyone due to an imperfect application, left incomplete by the applicant. CHAIRMAN TAYLOR stated the court could have signed the application for them or forced them to do so. MS. VOGT responded it would still be necessary to determine eligibility for the dividend. CHAIRMAN TAYLOR said his point was that state agencies and the public should be treated equally and it must be a small percentage of people who refuse this found money to pay their debts. MS. VOGT said she was not sure of the proportion but knows it does occur. MS. JONES added that there are no statistics on people who do not apply and the only way they can infer this number is by comparing population figures with the number of people applying for the dividend. STEVE PHILLIPS stated he would like to see the amount available for garnishment raised to 75 per cent. He said three quarters is a good number to work with. He mentioned this bill deals with less than five per cent of the population who are debtors and the remaining 95 per cent are paying for them. He said this is an avenue to reach that five per cent who owe without hurting the other 95 per cent. MS. TAI SORENSON, from Johnson Nissan Jeep Eagle, testified via teleconference from Anchorage. She said she would like to see governmental agencies and private businesses with equal right to collect 100 per cent of a dividend. She said her company has recently started charging interest on defaulted promissory notes. She repeated that these debtors hurt the honest consumer. MR. KEN JACOBUS, an attorney, testified via teleconference from Anchorage. He commented that many Alaskans make it difficult to collect judgments against them by doing business in cash and hiding assets. He said this bill is a good tool for the small, unsophisticated claimant to collect a judgment. He believes the bill should be returned to its original form, saying overall it will generate more money than the current bill regardless if a few people do not file for their dividends. He concluded the more money available to collect debts, the better off Alaskans are. SENATOR PARNELL declared a conflict of interest. He explained his law firm does collections, attaches dividends and he may possibly benefit form this legislation. He asked to be allowed to abstain from voting on the bill and any amendments. CHAIRMAN TAYLOR objected. SENATOR MILLER said he felt strongly about the 70 per cent but would be willing to return to the two dollar collection fee, although he would be very upset if the agency came back in a few years saying it is inadequate. He moved to strike sections two and three from the bill and, without objection, it was so ordered. CHAIRMAN TAYLOR mentioned he would also like to see 100 per cent available for collection but understood the concerns presented. He said maybe eventually citizens will be on equal footing with the government in this regard. SENATOR MILLER moved the bill out of committee as amended with individual recommendations. Without objection, the bill moved from committee.