HOUSE FINANCE COMMITTEE May 5, 1997 2:00 P.M. TAPE HFC 97-121, Side 1, #000 - end. TAPE HFC 97-121, Side 2, #000 - end. TAPE HFC 97-122, Side 1, #000 - end. TAPE HFC 97-122, Side 2, #000 - end. TAPE HFC 97-123, Side 1, #000 - #973. CALL TO ORDER Co-Chair Therriault called the House Finance Committee meeting to order at 2:00 p.m. PRESENT Co-Chair Hanley Representative Kelly Co-Chair Therriault Representative Kohring Representative Davies Representative Martin Representative Davis Representative Moses Representative Foster Representative Mulder Representative Grussendorf ALSO PRESENT Senator Dave Donley; George Utermohle, Legislative Legal Counsel; Annalee McConnell, Director, Office of Management and Budget, Office of the Governor; Alison Elgee, Deputy Commissioner, Department of Administration; Catherine Reardon, Director, Occupational Licensing, Department of Commerce and Economic Development; Geron Bruce, Legislative Liaison, Department of Fish and Game; Karen Brand, Staff, Senator Donley; Craig Johnson, Staff, Senator Ward; Joe McKinnon, Anchorage; Mitchell Gravo, Alaska State Homebuilders Association; John Grummet, Alaska Insurance Agents; Mike McMullen, Director, Division of Personnel, Department of Administration; Marianne Burke, Director, Division of Insurance, Department of Commerce and Economic Development; Alan Wilson, Alaska State Homebuilders Association; Paul Grossi, Director, Division of Workers' Compensation, Department of Labor; Richard Block, Seward. SUMMARY HB 116 "An Act relating to workers' compensation self-insurance." CSHB 116 (FIN) was reported out of Committee with "no recommendation" and with a fiscal impact note by the Department of Commerce and Economic Development; and with a fiscal impact note by the Department of Labor, both dated 4/25/97. SB 7 "An Act reducing certain resident sport fishing, hunting, and trapping license fees, increasing certain nonresident sport fishing license and tag fees, and relating to nonresident sport fishing, hunting, and trapping licenses; and providing for an effective date." HCS CSSB 7 (FIN) was reported out of Committee with "no recommendation" and with two fiscal impact notes by the Department of Fish and Game, and with a zero fiscal note by the Department of Public Safety, dated 2/11/97. SB 55 "An Act relating to the definition of certain state receipts; and providing for an effective date." HCS CSSB 55 (FIN) was reported out of Committee with "no recommendation" and with a fiscal impact note by the Office of the Governor, DATED 4/18/97. SB 68 "An Act relating to the Task Force on Privatization; and providing for an effective date." HCS CSSB 68 (STA) was reported out of Committee with a "do pass" recommendation and with a fiscal impact note by the Legislative Affairs Agency; and with two fiscal impact notes by the Office of the Governor, all dated 3/26/97. SB 103 "An Act relating to hearings before and authorizing fees for the State Commission for Human Rights; and providing for an effective date." HCS CSSB 103 (FIN) was reported out of Committee with a "do pass" recommendation and with a fiscal impact note by the Office of the Governor, dated 4/29/97. SENATE BILL NO. 103 "An Act relating to hearings before and authorizing fees for the State Commission for Human Rights; and providing for an effective date." Representative Mulder MOVED to Rescind the Committee's action in passing HCS CSSB 103 (STA) from Committee. There being NO OBJECTION, it was so ordered. Representative Mulder MOVED to adopt work draft #O-GS0045\B, dated 5/1/97. There being NO OBJECTION, it was so ordered. Representative Mulder MOVED to report HCS CSSB 103 (FIN) out of Committee with individual recommendations and the accompanying fiscal note. There being NO OBJECTION, it was so ordered. Co-Chair Therriault explained that the work draft is identical to CSHB 155 (FIN). HCS CSSB 103 (FIN) was reported out of Committee with a "do pass" recommendation and a fiscal impact note by the Office of the Governor, dated 4/29/97. SENATE BILL NO. 55 "An Act relating to the definition of certain state receipts; and providing for an effective date." ANNALEE MCCONNELL, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET, OFFICE OF THE GOVERNOR noted that SB 55 establishes designated program receipts as a fund source. She discussed the Office of the Governor's fiscal note. Designated program receipt revenues would increase by $2.6 million dollars from FY 97 to FY 98, without being counted against other areas of the budget. Ms. McConnell noted that the Legislative Auditor recommended that state employee travel paid by a third party be brought on budget. She suggested that these revenues be included under the definition of designated program receipts. She noted that areas in the Division of Occupational Licensing may be open for consideration. Ms. McConnell observed that much of SB 55 has already been passed as SB 136. She recommended that section 5 be deleted. She stressed that the Governor has the authority to put to competitive bid, grants authorized by the Legislature. She stressed that the Administration has worked to issue competitive grants instead of designated grants. She requested a deadline, for review by the legislature, of supplemental legislation. She asserted that this would allow the bulk of the supplemental to be done in a more expeditious fashion. Co-Chair Therriault noted that SB 136 did not include sections 4 and 5 of SB 55. Section 13 of SB 55 provides for an effective date. The language in section 4 was deleted by the House Finance Committee in HCS CSSB 136 (FIN). He observed that the title reflects the inclusion of section 4. Representative Martin recounted that the Attorney General's Office indicated that the other body can remove language from the bill that is proposed in the title. He stressed that the title is not included in law. He acknowledged that language cannot be added to the legislation that is not reflected in the title. He observed that stripper well funding is one-hundred percent federal. Ms. McConnell stated that she would have to review federal regulations to determine if grants containing federal funding must be competively bid. Representative Martin noted that the Governor vetoed a grant issued through the Department of Community and Regional Affairs. The funding was transferred to the Alaska Housing Finance Corporation (AHFC). Co-Chair Therriault provided members with a memorandum from George Utermohle, Legislative Counsel, relating to the effect of having an over inclusive bill title (copy on file). He noted that Mr. Utermohle indicated that the more specific the description of the "missing" item is in the title, the more likely that a court will find the title misleading and unconstitutional. JOE MCKINNON, ALASKA HOUSING FINANCE CORPORATION testified via the teleconference network. In response to a question by Representative Martin, Mr. McKinnon explained that there are restrictions on oil overcharge funds. The settlement requires a spending plan for expenditure of Exxon Valdez Oil Spill Settlement funds. The plan is referred to as the Stripper Well Plan. The Alaska Housing Finance Corporation has submitted a plan covering FY 97 - FY 99. This plan has received approval. The Legislature appropriated designated grants utilizing this funding source in FY 97. He observed that AHFC developed its own scope of services for these grants. Both grantees objected, but ultimately signed grant agreements, agreeing to perform the work. He stated the scope of the grant, what is to be done under it, and if it falls under the Stripper Well Plan is at issue. Another issue is the agency to which the grants can be appropriated. The FY 97 grants were appropriated to the Department of Community and Regional Affairs, but AHFC is the designated agency that submits the Stripper Well Plan. He observed that there is a question as to whether or not the grant can be designated to a specific recipient. He noted that federal regulations require competitive solicitations for the expenditure of funding from the Department of Energy. Since stripper well funds were used as a funding source for these designated grants, there are a number of legal problems. Representative Davis MOVED to adopt Amendment 1 (copy on file). Co-Chair Therriault OBJECTED. ALISON ELGEE, DEPUTY COMMISSIONER, DEPARTMENT OF ADMINISTRATION explained that under Amendment 1 user fees paid by pioneer home residents would be accounted for separately, and appropriations from the receipts would not be made from the unrestricted general fund. Two years ago the Pioneer Homes Advisory Board adopted a recommendation to move the rate schedule to full cost of care over a period of seven years. She clarified that the decision was made to resolve an equity issue between the nursing home industry and the pioneer homes. Long term care beds are split 50/50 between nursing home and pioneer home beds. Legislation was also under consideration to privatize homes. The Advisory Board felt that, if residents of the homes were asked to pay what they could afford toward the full cost of care, the privatization pressure would be alleviated. Currently, these revenues are designated as general fund program receipts. Increased user fees have not been reflected as increased general fund support of the program. In FY 98, the Administration is proposing an additional $1.9 million dollars in revenues from pioneer home residents. These have been used in the budget to supplant the general fund appropriation. In FY 97, $7.8 million dollars in user fees were budgeted. The Department of Administration expects to collect $7.5 million dollars in user fees, in FY 97. The Department of Administration has budgeted $9.9 million dollars in user fees for FY 98. This includes the FY 97 shortfall. Co-Chair Therriault questioned if the pioneer program is 100 percent self funding. He spoke against Amendment 1. Representative Davis WITHDREW Amendment 1. Representative Grussendorf stressed that pioneer residents expect the increase in rates to be reflected in the budget. He MOVED to adopt Amendment 1. Co-Chair Therriault OBJECTED. Representative Davies stated that designated program receipts should cover items where there is a strong expectation on the part of those paying user fees that the fee is being collected for the operation of the activity in which they are participating. Representative Martin observed that approximately $980 million dollars in program receipts were previously identified as general fund dollars. He stressed that program receipts help legislators to identify how much money different departments or programs generate. He disagreed with allowing departments or programs to keep 100 percent of what they generate. He observed that some programs generate more money than they expend. Co-Chair Therriault pointed out that the subcommittee chairs consider the contribution of program receipts. A roll call vote was taken on the MOTION to adopt Amendment 1. IN FAVOR: Grussendorf, Moses, Davies OPPOSED: Foster, Kelly, Martin, Mulder, Davis, Therriault Co-Chair Hanley and Representative Kohring were absent from the meeting. The MOTION FAILED (3-6). Co-Chair Therriault MOVED to adopt Amendment 2 (copy on file). He explained that Amendment 2 would allow the department to withhold a grant if it is not in the public interest. The Administration could hold on to the money until an agreement is reached by the grantee. Representative Grussendorf theorized that a situation could arise where the service is needed but the Administration feels that the grantee is unable to provide the service. He questioned what would happen in the interim. Co-Chair Therriault pointed out that the Administration admitted that this section of the statute is not used very often. He clarified that the Legislative Budget and Audit Committee would not be able to award grants to other recipients. He emphasized that Amendment 2 meets the title requirements. Representative Davies noted that the Legislature appropriated a grant to a grantee that the Administration felt was inappropriate. The Administration put the grant out to competitive bid. He expressed support for the Administration's actions. He spoke against removing the Administration's ability to deny a designated grantee and award the grant through competitive bid. Representative Martin suggested the addition of "or if in conflict with federal regulations and or laws." He stressed that the State intends to obey federal regulations and laws, in accordance with the receipt of federal funds. He observed that a grantee may be incarcerated. He questioned if an incarcerated grantee should receive a grant. Co-Chair Therriault pointed out that an individual may not be the entity providing the service. Representative Martin stressed that a problem can occur if the individual is the sole owner. Representative Mulder emphasized that there is an issue of "turf war" between the Legislature and Administration. He stressed that legislator's ability to name a grant recipient is at issue. He asserted that the proposed amendment makes an allowance for the Administration to cancel the grant if it is not in the State's best interest. Representative Davies pointed out that it would be against the public interest to issue a grant to a grantee who is in jail. Representative Martin MOVED to amend Amendment 2, add "in conflict with federal regulations and or laws." Representative Davis spoke against the amendment to Amendment 2. He did not think the amendment to Amendment 2 was necessary. Representative J. Davies argued in support of the amendment to Amendment 2. Representative Grussendorf pointed out that the State's interest sometimes conflicts with federal law. Representative Martin spoke in support of the Administration's action. A roll call vote was taken on the MOTION to adopt the amendment to Amendment 2. IN FAVOR: Grussendorf, Kohring, Martin, Davies OPPOSED: Mulder, Davis, Foster, Therriault Co-Chair Hanley and Representatives Kelly, and Moses were absent for the vote. The MOTION FAILED (4-4). Representative Grussendorf did not think the amendment went far enough. Representative Davies expressed concern that the amendment does not allow a program to be continued if the Administration does not think it is in the State's best interest to issue the grant to the grantee. He estimated that litigation will occur over the separation of powers. (Tape Change, HFC 97-121, Side 2) Representative Davies questioned if the legislation fits under the single subject rule. He did not think the title should prevent the removal of section 5. He noted that titles are not enacted in law. He observed that there is a general severability statute in law. Representative Martin maintained that the amendment would have a "Christmas tree effect". He asserted that there will be a lot of presents under the tree. He maintained that the legislation will open the door to designated grants. A roll call vote was taken on the MOTION to adopt Amendment 2. IN FAVOR: Kelly, Mulder, Davis, Foster, Therriault OPPOSED: Kohring, Martin, Davies, Grussendorf Co-Chair Hanley and Representative Moses were absent for the vote. The MOTION PASSED (5-4). Representative Davies MOVED to adopt Amendment 6. Amendment 6 would delete section 5. Section 5 was amended by Amendment 2. Representative Davies noted that similar language was removed by the House Finance Committee from SB 136. The amendment would leave the statute unchanged. Co-Chair Therriault referred to a memorandum by legislative legal counsel which indicated that Article II, Section 13 requires that the subject of each bill shall be expressed in the title. (See memorandum from George Utermohle to Co-Chair Therriault dated May 2, 1997, copy on file.) He noted that the title includes this section of the bill. The memorandum stated that "the more specific the description of the missing items is in the title, the more likely that a court will find the title misleading and unconstitutional. Representative Davies argued that everything that is in the bill is in the title. He observed that the title would have an extra item. Co-Chair Therriault concluded that, according to Representative Davies' argument, all titles should say, "the following bill contains some or all of the mentioned items." Representative Davies maintained that the second House should have the ability to remove a section of the bill without violating the title. Representative Grussendorf stressed that titles indicate to the other body what is available for discussion. He argued that action does not have to be taken on everything in the title. He acknowledged that nothing can be added. He maintained that the title represents the parameters for the process. He asserted that every item in the title does not have to be addressed. Representative Martin asked for an opinion by the Department of Law. He spoke in support of the amendment. Co-Chair Therriault emphasized that if the title is broad items can be added or subtracted from the general subject area. Representative Davies noted that anything can fit under a broad title. Narrow titles do not allow anything to be added beyond what is in the title. He maintained that there is an attempt by one body to prevent the other body from taking appropriate action in committee. A roll call vote was taken on the MOTION to adopt Amendment 6. IN FAVOR: Kohring, Martin, Davies, Grussendorf OPPOSED: Mulder, Davis, Foster, Kelly, Therriault Co-Chair Hanley and Representative Moses were absent from the vote. The MOTION FAILED (4-5). Co-Chair Therriault provided members with Amendment 7 (copy on file). He observed that action taken in the budget requires the amendment. GEORGE UTERMOHLE, LEGISLATIVE COUNSEL, LEGISLATIVE AFFAIRS AGENCY explained that Amendment 7 would add a new provision for a grant program. He observed that SB 107 contains an appropriation to the Department of Community and Regional Affairs for grants to unincorporated rural communities affected by the Exxon Valdez oil spill. There is no grant authority in the Department of Community and Regional Affairs for these grants. The amendment would allow these grants to be made. A similar appropriation was made in 1993 under AS 44.47.050. This statute does not provide the Department of Community and Regional Affairs with any authority to make grants. The amendment would make the grant authority retroactive to 1993. In response to a question by Representative Martin, Mr. Utermohle clarified that the funding source is derived from the settlement of litigation arising from the Exxon Valdez oil spill. These funds are limited to oil spill affect areas. Representative Martin questioned how the amendment fits under the title. Mr. Utermohle stated that the amendment fits under the provision relating to the state budget in a broad sense. Mr. Utermohle noted that the Department of Community and Regional Affairs can make grants to incorporated areas through the municipal grant authority in AS 37.05.315. In response to a question by Representative Davies, Mr. Utermohle stated that section 5 would fit under broad state budget provisions. He stressed that section 5 is specifically provided for in the title. He stated that the deletion of section 5 would necessitate the removal of that portion of the title. Co-Chair Therriault MOVED to adopt Amendment 7. A roll call vote was taken on the MOTION. IN FAVOR: Moses, Davis, Grussendorf, Foster, Kelly, Therriault OPPOSED: Martin, Davies, Kohring Co-Chair Hanley and Representative Mulder were absent for the vote. The MOTION PASSED (6-3). Representative Davies MOVED to adopt Amendment 5 (copy on file). He explained that Amendment 5 would add two categories under designated receipts. Receipts from the Division of Occupational Licensing and the Division of Insurance, except for premium tax receipts, would be added. He observed that statute specifies that users pay the entire cost of the operation of these Divisions. The fees paid are adjusted based on the cost of providing the service. He argued that these are "clearly" designated receipts. CATHERINE REARDON, DIRECTOR, DIVISION OF OCCUPATIONAL LICENSING, DEPARTMENT OF COMMERCE AND ECONOMIC DEVELOPMENT spoke in support of the amendment. She noted that fees are raised or lowered so that they break even for each occupation. A roll call vote was taken on the MOTION to adopt Amendment 5. IN FAVOR: Davies, Grussendorf, Moses OPPOSED: Davis, Foster, Kelly, Kohring, Martin, Mulder, Therriault Co-Chair Hanley was absent for the vote. The MOTION FAILED (3-7). Representative Davies MOVED to adopt Amendment 4 (copy on file). Co-Chair Therriault OBJECTED. Amendment 4 would identify state park system user fees as designated program receipts. Representative Davies maintained that users of the state park system expect that their fees will be used for park maintenance. Co-Chair Therriault did not think that current park receipts are being used for items outside of the park system. Representative Davies pointed out that as park fees increase the general fund contribution is being reduced. He asserted that the public expects increased fees to be used for additional maintenance. A roll call vote was taken on the MOTION to adopt Amendment 4. IN FAVOR: Davies, Grussendorf, Moses OPPOSED: Davis, Foster, Kelly, Kohring, Martin, Mulder, Therriault Co-Chair Hanley was absent for the vote. The MOTION FAILED (3-7). Representative Davies provided members with Amendment 3 (copy on file). Representative Mulder OBJECTED. Representative Davies explained that Amendment 3 would require the Legislative Council to administer grants. He argued that if the Administration is not allowed discretion to determine if grants are appropriate then responsibility should be transferred to the Legislature. Co-Chair Therriault pointed out that, with the adoption of Amendment 2, the Administration can hold a grant and negotiate with the grantee. Representative Davies WITHDREW Amendment 3. Representative Martin expressed concern that separation of powers are not maintained. He cautioned that it is difficult to track a large number of designated grants. He maintained that designated grants allow corruption. Representative Mulder MOVED to report HCS CSSB 55 (FIN) out of Committee with individual recommendations and with the accompanying fiscal note. Representatives Martin and Davies OBJECTED. Representative Martin spoke against the legislation. Representative Davies noted that he could not support the legislation with the inclusion of section 5. Representative Grussendorf questioned the interpretation by legislative legal counsel regarding the title. He suggested that other legal opinions be sought. Co-Chair Therriault responded that he would be seek further legal opinions. Representative Kelly echoed the comments of Representative Grussendorf. A roll call vote was taken on the MOTION to move SB 55 from Committee. IN FAVOR: Grussendorf, Davis, Foster, Kelly, Kohring, Martin, Mulder, Therriault OPPOSED: Martin, Davies Co-Chair Hanley was absent for the vote. The MOTION PASSED (8-2). HCS CSSB 55 (FIN) was reported out of Committee with "no recommendation" and with a fiscal impact note by the Office of the Governor, DATED 4/18/97. (Tape Change, HFC 97-122, Side 1) SENATE BILL NO. 68 "An Act relating to the Task Force on Privatization; and providing for an effective date." CRAIG JOHNSON, STAFF, SENATOR WARD testified in support of SB 68. He explained that the legislation would establish a task force to identify functions of state government that can be transferred to the private sector. The task fore would be made up of members of the public and the legislative and executive branches. He stated that the task force would look at every department, starting with the Department of Corrections, the Department of Health & Social Services, the Department of Transportation and Public Facilities and contracting. The legislation is endorsed by the Alaska Trucking Association, Gold Belt Inc., the National Federal of Independent Businesses, Alaska Nursing Home Association and Local 71. He noted that 48 other states, including Alaska, have some type of privatization. He stressed that SB 68 would be the first attempt to do a broad look at privatization in a non-political aspect. He maintained that it is not the intention of the bill to "recreate the wheel." The legislation was based on privatization studies of other states. The task force would divide state government into two equal parts to study over two years. The task force would be made up of members of both Houses, the private sector and appointees from the Governor. There would be thirteen members. Minority and majority members would be included. Representative Davies provided members with Amendment 1 (copy on file). He explained that Amendment 1 would redistribute the membership. He stressed that different viewpoints should be represented. The amendment would allow the task force to select the chair and vice-chair from among the members. Amendment 1 would allow the Governor to have an additional appointee. The Senate President and Speaker of the House would each appoint one member instead of two. The amendment would also add the commissioner of the Department of Commerce and Economic Development or the commissioner's appointee. Mr. Johnson noted the Governor's reluctance to appoint members to the task force based on concerns regarding the separation of powers. He observed that a legal opinion indicates that the separation of powers doctrine would not be violated by allowing the Governor to make appointments to the task force. He spoke against an additional appointee by the Governor. He asserted that the task force was designed to be fair. Representative Davies MOVED to adopt 1. Co-Chair Therriault OBJECTED. A roll call vote was taken on the MOTION to adopt Amendment 1. IN FAVOR: Davies OPPOSED: Kelly, Kohring, Martin, Mulder, Therriault Co-Chair Hanley and Representatives Davis, Moses, Foster, and Grussendorf were absent for the vote. The MOTION FAILED (1-5). Representative Martin MOVED to report HCS CSSB 68 (STA) out of Committee with individual recommendations and with the accompanying fiscal notes. There being NO OBJECTION, it was so ordered. SENATE BILL NO. 7 "An Act reducing certain resident sport fishing, hunting, and trapping license fees, increasing certain nonresident sport fishing license and tag fees, and relating to nonresident sport fishing, hunting, and trapping licenses; and providing for an effective date." KAREN BRAND, STAFF, SENATOR DONLEY testified in support of SB 7. She explained that the legislation makes changes to sport fish license fees. Three day non-resident sport fish license fees would be increased from $15 to $20 dollars. A new seven day non-resident king salmon license would be $30 dollars. A fourteen day license would be increased from $35 to $50 dollars. Non-resident annual sport fish licenses would be increased from $50 dollars to $150 hundred dollars. Resident combination hunting and sport fishing fees would be reduced by $1 dollars each. SENATOR DAVE DONLEY clarified that the $1 dollar reduction is a response to the issuance of two licenses in one. He emphasized that the legislation addresses the problem of non-residents utilizing year long sport fish licenses to commercially harvest sport caught fish. He observed that the Board of Fisheries did not address the issue. He reiterated that the legislation reduces fees for combination licenses. He added that section 7 is a technical amendment. Representative Mulder provided members with Amendment 1 (copy on file). GERON BRUCE, LEGISLATIVE LIAISON, DEPARTMENT OF FISH AND GAME clarified that there have been a number of instances of non- residents selling fish harvested under a non-resident license. He indicated that the problem is not wide spread. Representative Mulder MOVED to adopt Amendment 1. Co-Chair Therriault OBJECTED for purposes of discussion. The amendment would lower the annual non-resident sport fishing license to $75 dollars. He noted that Wyoming charges the highest fee at $72 dollars. A 14 day king salmon tag would be $40 dollars. An annual king salmon tag would be $50 dollars. Representative Davies MOVED to amend Amendment 1, a 14 day salmon license would be 50 dollars, and an annual king salmon tag would go to $75 dollars. Representative Mulder noted that the annual king salmon license would cost the same as an annual sport fishing licenses. In response to a question by Representative Martin, Mr. Bruce did not anticipate that the fee structure would reduce non-resident sport fishing. Co-Chair Therriault clarified that the effective date is January 1, 1998. Senator Donley observed that the Department of Fish and Game recommended that the annual fee be $125 hundred dollars. He suggested the annual fee by changed to $100 hundred dollars. He emphasized that king salmon fishing is unique. He stressed that these licenses are issued for a year. Representative Davies WITHDREW his amendment to Amendment 1. He MOVED to amend Amendment 1, a 14 day salmon license would be 50 dollars, an annual sport fishing tag would go to $100 dollars, and an annual king salmon tag would go to $100 dollars. There being NO OBJECTION, it was so ordered. There being NO OBJECTION, Amendment 1 was adopted as amended. Representative Mulder spoke in support of SB 7. He maintained that the legislation will help sport fisheries. He MOVED to report HCS CSSB 7 (FIN) out of Committee with individual recommendations and with the accompanying fiscal notes. HCS CSSB 7 (FIN) was reported out of Committee with "no recommendation" and with two fiscal impact notes by the Department of Fish and Game, and with a zero fiscal note by the Department of Public Safety, dated 2/11/97. HOUSE BILL NO. 116 "An Act relating to workers' compensation self-insurance." GEORGE DOZIER, STAFF, REPRESENTATIVE KOTT testified in support of HB 116. He explained that HB 116 permits the formation of a worker's compensation self employment group. The group is defined as an association of 10 or more employers who are in the same or similar business and are members of the same trade association, providing that the association has been in existence for at least 5 years. The legislation requires the establishment of a board of directors to set policy and permits the employment of a professional administrator and service companies. In addition, the legislation contains several requirements that must be satisfied before a certificate of approval is issued by the director of the Division of Insurance. The net worth of the group must be at least one million dollars. The group must have security posted in the amount of $450 thousand dollars. The association must have excess insurance by an approved company. There must be joint and severable liability indemnity agreements signed by each person or company participating in the group. Fidelity bonds and errors and omissions insurance are also required. The legislation allows the director of the Division of Insurance to examine finances, books and records of the group. The cost of review by the Division would be born by the group. Annual audits and statements would be submitted to the Division of Insurance. The group would be required to make contributions to the Alaska Second Injury Fund. Refunds of previous years surpluses are allowed if approved by the director of the Division of Insurance. Representative Mulder referred to section 2 on page 13. Mr. Dozier clarified that this section should have been deleted. JOHN GRUMMET, ALASKA STATE INSURANCE AGENTS ASSOCIATION testified against the legislation. He maintained that the legislation is designed to lower workers' compensation costs for the Home Builders Association. He stated that the legislation does not require pools to participate in the current assigned risk pool. Fair claims settlement practices would not be addressed. He discussed the Guarantee Fund. He noted that it is not clear if all groups would participate in the same fund. He stressed that administrative costs are not addressed. There are no licensing requirements. He asserted that self insured associations would not be subject to the same financial requirements as other agents. He noted that errors and omissions insurance does not cover insolvency of companies. If there is a bad loss experience in the pool they have the ability to request extra funds to cover costs. He stressed that asset requirements are not the same as those for insurance companies. He asserted that unfair competition is being created. He noted that there are 5 to 6 companies writing workers' compensation insurance. He observed that rates are down due to competition. He maintained that there would not be an advantage for 5 to 7 years. He asserted that the group would not be subject to the same regulations. He expressed concern that the regulatory body will not have the ability to monitor the strength of these companies. He stressed that premium options will be reduced due to an unfair playing field, resulting in increased costs. He stated that workers' compensation rates have been reduced by 40 percent since 1988. In response to a question by Representative Martin, Mr. Grummet explained that money must be available to pay claims. He stated that companies make money on investment income. The more investment income the better the ability to pay claims. He observed that high risk groups can go as a group to obtain lower rates from established companies. He stated that if there are more claims than premium dollars, rates will be raised. He noted that everyone is eligible for workers' compensation coverage in Alaska. (Tape Change, HFC 97-122, Side 2) In response to a question by Representative Davies, Mr. Grummet stated that agents should participate in the assigned risk pool so that the same thing can be offered to everyone. He maintained that if they do not participate they are not contributing to the overall benefit of the market place. He stressed that the bad should accompany the good. Representative Kohring noted that workers' compensation rates are high. Mr. Grummet stated that the workers' compensation rate for coverage of dry wall workers is $9.87 dollars per hundred dollars in pay roll. Carpentry coverage has been reduced from $17 to $12 dollars per hundred dollars of payroll. He pointed out that the legislation originated several years ago when the rates were higher. Rates are based on a national average. Representative Kelly asked what is reducing the rates. Mr. Grummet responded that better loss control and precautions have contributed to reduced rates. There has been better promotion of safe work places. Representative Davies noted that one of the reasons the legislation was introduced was to create a strong motivation for self education and safety. Mr. Grummet maintained that there will be claims in the construction industry. He stressed that there will not be enough reserves to prevent insolvency with the pool. He asked what will happen to the consumer when they cannot pay their bills because they are not on the job. RICHARD BLOCK, ALASKA NATIONAL INSURANCE COMPANY, SEWARD testified via the teleconference network in opposition to HB 116. He stressed that their primary objections have not be addressed. He noted that the primary concern is that the legislation allows the creation of insurance companies without requiring any liquid capital to fund operations. He observed that there are early operational expenses that cannot be offset by receipts of sale revenues. Money is needed to support operations until business has developed. He emphasized that the cost of goods or losses is unknown. He noted that the insurance code requires a capital base to operate. These capital and surplus requirements have been periodically raised by the legislature. He acknowledged that the net worth of the participates must be $1 million dollars. He suggested that this proposes that customers will pay an additional amount to cover their loss. He observed that there is no provision for determining net worth. He stressed that 50 participants worth $20 thousand dollars could fulfil the requirement. He did not think this is an appropriate way to provide financial underpinning for policy holders and claimants. He stated that it is not clear how the bond would be available to pay claims. He pointed out that the code allows reciprocals to provide cost control. Associations can be grouped for purposes of loss control activities, premiums, and dividends. He maintained trade group concerns can be resolved through current law. He spoke against the legislation. Representative Martin asked how workers are protected during the transition period. Mr. Block stated that workers would be at serious risk if the group collects insufficient amount of premiums to cover losses. He noted that losses would be paid from the bond, guarantee association, and assessment. He emphasized that the individual worker would not receive compensation while the Division attempts to collect the money. He stressed that a single catastrophic loss could occur. Representative Martin questioned if the State is responsible while the new group establishes itself financially. Mr. Block did not think the State was responsible for guaranteeing proper workers' compensation coverage. MARIANNE BURKE, DIRECTOR, DIVISION OF INSURANCE expressed concerns with the legislation. She stated that there would be inadequate cash to pay the claims that will be incurred. The legislation requires no money in the group. She acknowledged that the legislation requires that the group have a $1 million dollar net worth. The legislation requires the director to issue a certificate of approval if certain provisions are met. She noted that 25 percent of the first year's premium, which must be at least $500 thousand dollars, must be collected. Of this amount, 75 percent or approximately $88 thousand dollars is available to pay claims. The group must also have a bond of $450 thousand dollars. This money is only available when claims cannot be paid. She maintained that the money will not be available until the association is insolvent. The bond would not be available if the group only over-drafted. The legislation also provides for specific and aggregate excess insurance. She noted that the cost of excess insurance depends on the trigger point for coverage. The cost of excess insurance would be in addition to what the employer is paying. She noted that 25 percent of the first year's premium would be deposited into a reserve account. This reserve can be used after the premium has been spent. She observed that there is a conflict in statute. Statute requires that the fund be maintained. She stressed that insurance companies must collect enough money to pay losses. Their profit is on the invested assets. This group does not have excess money up front. They will be relying on premiums to pay claims, administrative costs, excess insurance, and safety programs. Ms. Burke observed that the Alaska Guarantee Association only includes insurance companies. These companies have the resources to make good on claims. She explained that if one company becomes insolvent, all the remaining companies make good on the policies. All insurers must provide this safety net in Alaska. Representative Martin asked if a worker can sue for false coverage. Ms. Burke noted that the State requires statutory minimum coverage. If an insurance company sold a worker something below the statutory minimum they could be subject to litigation. The legislation exempts the group from insurance laws that are not specifically addressed in the legislation. She did not know if the State could be sued. The Division of Insurance is responsible for the financial aspect of the legislation. The Division of Workers' Compensation is responsible for enforcing the laws in regards to claims. All workers must be covered. In the case of bankruptcy, injured workers would be included with other claimants. Representative Davies referred to page 11, lines 20 - 22. Ms. Burke explained that the group will be assessed before liquidation. She noted that Title 21 provides that the Division take action if there is a danger of a crisis. The legislation requires financial statements to be filed, but does not give the Division similar authority to act. MITCHELL GRAVO, ALASKA STATE HOME BUILDERS ASSOCIATION testified in support of HB 116. He noted that North Carolina was the first state to institute a similar program in the 1980's. Since then, 13 other states have created pooling arrangements. The legislation is based on North Carolina's statute. He pointed out that the program has been successful in other states. He maintained that workers' compensation costs have been reduced by 20 to 40 percent. He stressed that the legislation allows groups of small businesses to reduce the huge burden of the cost of workers' compensation. He compared the New Mexico program to the proposal. Mr. Gravo indicated that the Association has 800 members. (Tape Change, HFC 97-123, Side 1) ALAN WILSON, LEGISLATIVE CHAIR, ALASKA STATE HOME BUILDERS ASSOCIATION, JUNEAU stressed that the population of New Mexico is similar to that of Alaska. He observed that the New Mexico program is successful. He emphasized that safety will help reduce claims. He stated that small businesses seldom see safety inspectors. Co-Chair Therriault questioned how Mr. Wilson viewed the risk of personal bankruptcy. Mr. Wilson emphasized that they will be protected by reinsurance. He acknowledged that excess insurance is expensive. He stressed that surpluses will be used to pay claims in the succeeding years, reducing the need for reinsurance. He emphasized that the group will be comprised of small, independent, custom home remodelers and builders. Mr. Gravo stressed that the Association believes that the benefit far outweighs the risk. Mr. Wilson emphasized that, in good years, profits will remain within the group. PAUL GROSSI, DIRECTOR, DIVISION OF WORKERS' COMPENSATION, DEPARTMENT OF LABOR noted that the Department supports the concept of the legislation. He noted that the legislation could reduce risk and increase safety. He expressed concern that there is not adequate funding to assure that claims will be paid. He acknowledged that the group could be successful if there are no catastrophic claims. He pointed out that the $1 million dollars in assets exist outside the group. He stressed that the first injury could be extensive. He noted that a ten member group could be ten employees. He maintained that other programs that have been successful have a large pool with hundreds of employees. He reiterated concerns regarding the ability to pay claims. He observed that he reviewed workers' compensation cases for 125 members in the Alaska Home Builders Association. The average yearly claim cost for these businesses, during the last five years, was just under $1 million dollars. He suggested the bond be determined by the director. Mr. Grossi discussed self insurers. He observed self insurers are individual employers that pay their liability and are required to have $5 million dollars in assets and excess insurance. He stressed that self insurance is costly. He urged the Committee to error on the conservative side. HB 116 was HELD in Committee for further consideration. ADJOURNMENT The meeting adjourned at 5:31 p.m.