HOUSE FINANCE COMMITTEE February 7, 2000 1:50 P.M. TAPE HFC 00 - 27, Side 1. TAPE HFC 00 - 27, Side 2. TAPE HFC 00 - 28, Side 1. CALL TO ORDER Co-Chair Therriault called the House Finance Committee meeting to order at 1:50 P.M. PRESENT Co-Chair Therriault Representative Foster Co-Chair Mulder Representative Grussendorf Representative Austerman Representative Moses Representative Bunde Representative Williams Representative G. Davis Representative J. Davies and Representative Phillips were not present for the meeting. ALSO PRESENT Representative Lisa Murkowski; Representative Bill Hudson; Representative Fred Dyson; Melinda Hofstad, Staff, Representative Bill Hudson; Wes Keller, Staff, Representative Fred Dyson; Mike Tibbles, Staff, Representative Gene Therriault; Jim Lynch, Interim Vice President of Finance, University of Alaska, Fairbanks; Barbara Thompson, Deputy Director, Division of Teaching and Learning Support, Department of Education and Early Development; Anne Allen, Senior Council, Section #29, Government Relations Department, TIAA-CREF, New York (Testified Via Teleconference). SUMMARY HB 108 An Act relating to the use, operation, and regulation of boats; establishing a uniform state waterway marking system; and providing for an effective date. CS HB 108 (FIN) was reported out of Committee with a "do pass" recommendation and with a fiscal note by the Department of Administration and zero notes by the Department of Public Safety and the Department of Natural Resources. HB 191 An Act relating to charter schools; and providing for an effective date. CS HB 191 (FIN) was reported out of Committee with a "do not pass" recommendation and with a fiscal note by the Department of Education and Early Development. HB 268 An Act relating to the Alaska Higher Education Savings Trust; and providing for an effective date. HB 268 was HEARD and HELD in Committee for further consideration. HOUSE BILL NO. 108 An Act relating to the use, operation, and regulation of boats; establishing a uniform state waterway marking system; and providing for an effective date. MIKE TIBBLES, STAFF, REPRSENTATIVE GENE THERRIUALT, spoke to Amendment #1, 1-LS0445\U.1, Ford, 2/7/00. [Copy on File]. The amendment would insert "by a person who has not established residency as described under AS 01.10.055". He noted that original language did not address the difference between residents and non-residents and would have exempted all paddleboats. The amendment adds the language, that if you are a non resident, you would have 90 days before you would be required to register your boat, however, if you are a resident, you would be required to register your paddle boat regardless of the amount of time intended to use the boat. Vice Chair Bunde MOVED to adopt Amendment #1. There being NO OBJECTION, Amendment #1 was adopted. Mr. Tibbles spoke to Amendment #2, 1-LS0445\U.3, Ford, 2/7/00. [Copy on File]. He explained in the current draft, the director of Legislative Finance would be responsible to notify the reviser of the statute. If no federal receipts were received by the State, the language of the amendment would speak to that. Amendment #2 would remove the director of the Legislative Finance Division and would specify the Chair of Legislative Council. Additionally, there would be language added which would speak to the federal funds received during the year. Co-Chair Therriault clarified that this should be action approved by the majority of the Legislative Council. MELINDA HOFSTAD, STAFF, REPRESENTATIVE BILL HUDSON, testified that Representative Hudson did support Amendment Vice Chair Bunde MOVED to adopt Amendment #2. There being NO OBJECTION, it was adopted. Co-Chair Therriault questioned the fiscal note. Ms. Hofstad spoke to the Department of Administration's fiscal note. She commented on the potential to bring in federal dollars somewhere between $400,000 and $600,000 dollars per year to operate the boating safety program and the registration of the vessels. Ms. Hofstad reiterated, following the initial set-up costs, the State could expect to receive these funds to be used for the boating safety program. She clarified that it was expected that the funds would be used for that program, however, added that would be decided by future legislatures. Co-Chair Therriault asked if the amount should be indicated. Ms. Hofstad replied that it should represent total operating costs. She added that the program would be a potential moneymaker for the State and would be revenue positive after the first year. In response to queries by Co-Chair Therriault, Ms. Hofstad stated that she was referring to the total operating costs. She pointed out that changes in revenue are indicated on the note. Ms. Hofstad repeated that the intent of the proposed legislation was to get people into the safety aspect of the program. Co-Chair Mulder referenced the non-motorized boats such as canoes, 10' and over, and asked if they were currently required to be registered with the Coast Guard. Ms. Hofstad noted that they are not. She added that one reason they were included in the registration section is that a large percentage of the deaths which occur in recreational boating, happen in non-motorized vessels. She stated it is important that those boat owners are contributing and registered in the program in order that lives can be saved. Co-Chair Mulder interjected if these people will be taxed so that "they can be saved". Ms. Hofstad replied that there are two different programs which address the safety aspects. Additionally, there are two types of vessel groups, the motorized and the non-motorized. The intent is to include all boat users. Co-Chair Mulder emphasized that the pool of people being required to pay would be expanded through the proposed legislation. He pointed out that currently there are 33,300 non-powered boat registrations processed each year at $10 dollars. He believed his constituents would not appreciate the legislation. REPRESENTATIVE BILL HUDSON advised that the majority of accidents in the State of Alaska take place in small vessels. When providing search and rescue, it is difficult to determine who owns these boats. He pointed out that many times boats are found drifting. Through the proposed legislation, the boat owner would be required to have on their boat, a small decal with large numbers so that they could be quickly recognized. He emphasized that this is not a matter of the money to be generated, but rather an opportunity to help identify in the search and rescue situations. He understood the concerns voiced by Co-Chair Mulder. Representative Hudson clarified that the cost would be $10 dollars for three years. He reiterated that this legislation would help to save lives. Co-Chair Mulder noted that he had based his statement upon information included in the fiscal note. Representative Hudson clarified that the note stipulates only one third of the boats would register each year. Ms. Hofstad pointed out that Representative Hudson had worked with the two largest non-powered boat groups and that both of those groups had endorsed the legislation. They believe these safety benefits will help boat users. Co-Chair Mulder understood why the large groups would endorse the bill but he did not believe that group represented the general rank of the casual user. He stated that those constituents will resist the proposed legislation. He suggested that a good safety educational program could be provided without including that group under the umbrella of the bill. He recommended using the fiscal note to buy life jackets and then place them on the ends of each dock. He advised that would save more money than the proposed education program. Representative Grussendorf reminded members of previous testimony and the support voiced by specific groups. He did agree that the "paddle boat aspect" would be a concern for the individual users. Co-Chair Therriault referenced the fiscal note provided by the Department of Administration, Page 3, which would require three-year registration. He reiterated that language was not clear regarding the length of time for the registration renewals. He asked the total number of paddleboats in use throughout the State. Ms. Hofstad clarified that there are 90,000 paddleboats in the State, and noted that information had been specified in the bill. Co-Chair Therriault explained that the Department would address this work in much the same manner as it does with the Division of Motor Vehicles (DMV). He advised that if the municipalities wanted access to the raw data regarding the information, they would then be responsible to refine it at their at their own expense. Representative Austerman MOVED to report CS HB 108 (FIN) out of Committee with individual recommendations and with the accompanying fiscal notes. There being NO OBJECTION, it was so ordered. CS HB 108 (FIN) was reported out of Committee with a "do pass" recommendation and with a fiscal note by the Department of Administration and zero notes by the Department of Public Safety and the Department of Natural Resources. HOUSE BILL NO. 191 An Act relating to charter schools; and providing for an effective date. MIKE TIBBLES, STAFF, REPRESENTATIVE GENE THERRIAULT, spoke to Amendment #1, 1-LS0598\N.1, Ford, 1/31/00. [Copy on File]. Vice Chair Bunde MOVED to adopt Amendment #1. Co-Chair Therriault OBJECTED for the purpose of discussion. Vice Chair Bunde explained that that the amendment would make the language of the bill more permissive. The current language states that a charter school may not elect to receive services. The amendment clarifies that the charter school and the school district can negotiate over services that are appropriate for the charter school. Co-Chair Therriault asked if the charter school has no "special needs" children, what would happen to the federal dollar allocation. Vice Chair Bunde explained that during negotiations, the school district would be responsible to stipulate that the money be used for the "betterment of all". Co-Chair Therriault WITHDREW his OBJECTION to the amendment. REPRESENTATIVE FRED DYSON foresaw no problem with inclusion of the amendment. He stated that it was language that was intended to be included. Inclusion of that language would assume that there is a congenial relationship between the two entities, however, he acknowledged that is not always the case. Representative Foster asked what would occur if the relationship was not smooth. Representative Dyson replied that the school boards would be the final entity to make that decision. There being NO further OBJECTION, Amendment #1 was adopted. Mr. Tibbles spoke to Amendment #2, 1-LS0598\N.2, Ford, 2/3/00. [Copy on File]. He noted that the amendment would give charter schools more flexibility in the space in which they could operate. Representative Foster asked if the fire codes would be more restrictive. Co-Chair Therriault voiced concern with the amendment. Co-Chair Mulder MOVED to adopt Amendment #2. Co-Chair Therriault OBJECTED for the purpose of discussion. Representative Dyson explained that the school building safety requirements are very stringent. What the charter school people have found is that if they can not find public school space, it is inordinately difficult to find a building to lease that meets the school requirements. The charter school people want to go with the same standards that are used for "large groups of people who come together". Representative Dyson pointed out that most of the charter schools have small populations. He noted that in the language of the amendment, it stipulates that the safety codes for the children are met. He emphasized that it has been very difficult for prospective charter schools to find adequate facilities. Co-Chair Therriault inquired if the same standards had to be met by private schools. Representative Dyson replied that they did not. Currently, private schools must have the same standard as exists in public building facilities. Representative Foster questioned how those standards would apply to a public building. Representative Dyson explained that each school administrator would have the final say on that concern. He stressed that getting small children out of a burning building is always a concern. He believed that any superintendent would be capable of making the proper decision. He noted that the amendment would extend the contract period. Vice Chair Bunde advised that he would support the amendment because the chief supporting administrator would have the final say and would ultimately be in charge. The liability would be "personified" in that person. He stressed that the language of the amendment does not provide a lot of flexibility as the ultimate authority rests in that person. Representative Grussendorf noted that he opposed the amendment because it would require that the safety standard rest solely on the school official. The standards for public schools are always much more stringent because of that responsibility. He emphasized that it would be a mistake to incorporate the amendment. Co-Chair Therriault noted that he would be more comfortable knowing that school administrator was directly responsible for the decision. Co-Chair Therriault WITHDREW his OBJECTION to Amendment #2. Representative Grussendorf OBJECTED to adopting Amendment A roll call vote was taken on the motion. IN FAVOR: Foster, Austerman, Bunde, G. Davis, Therriault, Mulder OPPOSED: Grussendorf, Moses, Williams Representative J. Davies and Representative Phillips were not present for the vote. The MOTION PASSED (6-3). Vice Chair Bunde MOVED to adopt Amendment #3, 1-LS0598\N.3, Ford, 2/4/00. [Copy on File]. Mr. Tibbles explained that the amendment was submitted by the Department of Education and Early Development to clear up the statutes and reference on basic need. He reminded members that there are four factors which determine basic need. The Department believes that it is important to reference all four of these concerns. WES KELLER, STAFF, REPRESENTATIVE FRED DYSON, replied that the amendment was a housekeeping measure. Co-Chair Therriault stated that from previous conversations with Representative Dyson, he did not have an objection to the amendment. There being NO OBJECTION, Amendment #3 was adopted. Vice Chair Bunde MOVED to adopt Amendment #4, 1-LS0598\N.4, Ford, 2/3/00. [Copy on File]. Mr. Tibbles explained that the amendment would delete the sunset clause. There being NO OBJECTION, Amendment #4 was adopted. BARBARA THOMPSN, DEPTY DIRECTOR, DIVISION OF TEACHING AND LEARNING SUPPORT, DEPARTMENT OF EDUCATION AND EARLY DEVELOPMENT, spoke to the fiscal note. She stated that the bill would expand the number of charter schools throughout the State. The fiscal note would provide funding for that endeavor. This legislation would institutionalize the State program. Those people who intend to start a charter school must have the expertise to help plan and implement that endeavor and the fiscal note would provide for that. Co- Chair Therriault questioned the need for a full time education specialist at Range 21. Co-Chair Mulder added that the Range 21 position would need a + time sectary. He additionally, questioned the contractual $50 thousand dollars requested to evaluate the effectiveness and success of charter schools within Alaska. Ms. Thompson advised that the contractual amount includes funding for providing essential evaluations and covers costs for the regular contractual agreement. Representative Williams asked about the statewide acceptance of the charter schools concept. (TAPE CHANGE HFC 00 - 27, Side 2) Ms. Thompson noted that there is a lot of interest in concept of charter schools. She noted that it is obviously indicated by viewing charter school applications from within the Alaska schools districts. The bill will allow more schools to start up. Representative Williams observed that the bill would be asking the State to spend more money. He questioned how the additional funds would be spent and asked if there was supporting material indicating that the charter schools are doing well. Ms. Thompson replied that there has not been funding available at any time to provide an extensive evaluation. Co-Chair Therriault pointed out that the legislation does exist due to requests by constituents. Representative Williams reiterated that there is additional funding requested with the legislation. Co-Chair Therriault advised that the fiscal concerns for the extra personnel would be addressed at the end of session during Conference Committee. Representative Grussendorf referenced Section 4(f). He asked why would the school board approve another charter school given the considerations of Section 4(f). He believed that would curtail the growth of charter schools throughout the State. Mr. Keller replied that he did not think that would happen. He commented that it is only fair that the local contribution be distributed equitably. Most school districts are distributing local contribution in excess of 4 mils. Co-Chair Therriault agreed that Section #4 merited concern with regard to compliance with federal guidelines. Mr. Tibbles explained that at this time, he did not know if Section #4 would cause complications with the federal guidelines. Mr. Tibbles had not had an opportunity to speak with the federal auditors regarding charging direct and indirect costs. He noted that Section #4 would require that the district itemize each service provided. In that each service must be recorded, a potential exists that may require itemization of the indirect costs. The problem with that is the federal guidelines that determine how things should be accounted for. It could be a problem if a charter school "pushed" the school district to itemize the indirect costs. Anchorage and Fairbanks school districts have indicated that this could become an accounting "nightmare". Without solid information from the auditors, Mr. Tibbles did not know the scope of the problem this could cause. In response to Co-Chair Therriault, Mr. Tibbles pointed out that Legislative Legal has suggested options for language to address this concern. He noted that language could be included in the "exceptions" section for the indirect costs by providing specific examples, or to add the language "except for services that are not required to be itemized". Representative Bunde asked if it should be included as an amendment or simply stated through the intent of the Committee. Co-Chair Therriault believed that it should be placed in the "exceptions" section as recommended by Legislative Legal. Representative Austerman spoke to the library funds coming to the charter school. Mr. Keller stated that the sponsor assumes that the school district and the charter school would be negotiating and that the final decision would be decided at the local level between the charter school and the school district. Mr. Tibbles reiterated the suggestion provided made by Legislative Legal Services which would place the information either under the "exceptions" or on Page #3, Line 12, following the word "itemized". Co-Chair Therriault MOVED a conceptual amendment which would add to the list of exceptions that the itemization not be so specific that it would run counter to the federal guidelines. Mr. Keller replied that Representative Dyson would support that change. There being NO OBJECTION, a conceptual Amendment #5 was adopted. Co-Chair Mulder MOVED to report CS HB 191 (FIN) out of Committee with individual recommendations and with the accompanying fiscal note. Representative Austerman OBJECTED. He stated that his understanding of charter schools was that they were not suppose to cost the State any more money than that based on the student count. He warned that he was additionally, "nervous" about the Section #4 allocation. Representative Williams OBJECTED to the amount of money proposed to be spent. He added that the sunset clause should have remained in the bill. Representative Williams voiced concern that charter school students might not be adequately educated, while at the same time spending more money per student. Co-Chair Therriault advised that he had indicated to the Department that they should not begin spending the money as proposed in the fiscal note. He foresaw a reduced fiscal note. Co-Chair Therriault invited Representative Williams to propose a reduction to the fiscal note at this time. Representative Williams asked how that action would affect the charter school system and how it could be tracked. He recommended that the existing charter schools be more closely watched for the next year or two to see how well they are performing. Representative Grussendorf stated that he did not know why a school board would find any incentive to expand the charter school system with the inclusion of Section #4. Additionally, he warned of the repercussions of not giving the Department adequate funding to cover the fiscal notes to determine accountability. He stated that he could not support the proposed legislation given these concerns. Ms. Thompson echoed Representative Grussendorf's concern in not funding the fiscal note to provide for the evaluation effectiveness study. She emphasized that there are more charter schools "coming on board" each year. The school district must be providing more evaluation on the effectiveness with the proposed increases to charter schools. She stressed that it is important to have expertise and evaluation at the State level. A roll call vote was taken on the motion to move the bill from Committee. IN FAVOR: Williams, Bunde, G. Davis, Foster, Mulder, Therriault OPPOSED: Grussendorf, Moses, Austerman Representative Phillips and Representative J. Davies were not present for the vote. The MOTION PASSED (6-3). CS HB 191 (FIN) was reported out of Committee with a "do not pass" recommendation and with a fiscal note by the Department of Education and Early Development. HOUSE BILL NO. 268 An Act relating to the Alaska Higher Education Savings Trust; and providing for an effective date. REPRESENTATIVE LISA MURKOWSKI explained that Alaska, through the student loan program and the Advance College Tuition program has traditionally offered its residents seeking higher education, solid financial options. HB 268 continues this trend and will allow residents and non-residents alike the ability to put money into a trust fund to be used for higher education expenses. The bill will ensure that Alaskans will continue to have flexible and powerful financial options to utilize for their higher education. Representative Murkowski continued that under IRS Code 26 USC 529, commonly known as "Section 529", it is recorded that states are allowed to create "qualified State tuition programs". Section 529 defines "qualified State tuition program" as a program established and maintained by a state or an agency under which a person may either purchase tuition credits or certificates on behalf of a designated beneficiary. That then entitles the beneficiary to the waiver or payment of a qualified higher education expense for the beneficiary, or they may make contributions to an account that has been established for the purpose of meeting the qualified higher education expenses of that designated beneficiary. Representative Murkowski continued that HB 268 would establish a qualified State tuition program. The program would be administered by the University of Alaska and would be known as the "Alaska Higher Education Savings Trust". The bill would also change the structure in order to conform to the new IRS codes and changing the name of the program to the Advance College Tuition Savings Fund. In order to keep the overhead down and the record keeping and marketing costs to a minimum, HB 268 would place both programs under one administrative head. Representative Murkowski urged members to pass the bill from Committee. Co-Chair Therriault asked about "rolling" the program into the University services. JIM LYNCH, INTERIM VICE PRESIDENT FOR FINANCE, UNIVERSITY OF ALASKA, FAIRBANKS, explained Section #529 and the federal regulations of that section. He noted that in 1996, he had participated in the drafting of Section #529. Mr. Lynch stated that he had argued the tax-exempt status to the University's Advanced College Tuition (ACT) program before the National Office of the Internal Revenue Service (IRS). He added that the University of Alaska administration is in support of the proposed legislation. The institutions could use that are eligible for federal financial aid purposes. He added that the legislation would support education by subsidizing programs and making loans available. He commented that the legislation would encourage prospective students to save in advance for college. Co-Chair Therriault asked if the bill would dismantle the current University program. Mr. Lynch explained that the legislation would add a higher education trust and would modify the ACT program from a tuition program to a savings program. Mr. Lynch provided background history regarding the legislation. He noted that there are essentially two types of savings programs. The first is a prepay program; the other is like a defined benefit pension plan. Mr. Lynch pointed out that the first state program made available was in Michigan in the late 1980's. Michigan established a prepaid tuition program and filed with the IRS for exempt status. The IRS came back and told them that they were a taxable entity. It took five to six years for the State of Michigan to win the appeal of the program. The Alaska Program was started in 1991, and was designed to be tax exempt to accomplish some of the items listed in Section Mr. Lynch spoke to the taxable criteria of the tuition costs. He noted that there have been gift tax exemptions built in and tuition credits for the kids as a completed gift. They would qualify for the $10,000 dollar gift tax exclusion. He added that the program is deeply connected to the University, as it is an unrestricted liability of the University. The intent of this was to make the organization exempt. The IRS never accepted any of the arguments maintaining that these were loans by citizens to the University and the increase in value was essentially interrupting income to those individuals. At that time, the Alaska Program was running and the IRS lost its case against the State of Michigan. Following that, various states got together and passed Section #529 in 1996. Mr. Lynch noted other events which had occurred regarding the concern. In 1998, the Alaska Legislation passed the Alaska State Trust Act, which does provide a creditor protection vehicle to be associated with it. Mr. Lynch explained that Section #529 basically exempts State programs and that private entities would not be able to issue to them. The earnings are tax deferred and the beneficiaries are the ones taxed on this money. Mr. Lynch pointed out that there are a number of state tax break benefits that are associated with it. There is a special averaging provision which allows a person to put up to $50,000 into one of these accounts for a beneficiary and then take the exclusion for the next five years. For a husband and wife, that means that they could put $100,000 dollars aside for a child's education. Mr. Lynch added that there are some generational "skipping" provisions within Section #529, intending that no generation be skipped. He stated that it is one of the few vehicles in which you can make a gift and continue to control it and then take it back from the beneficiary. The other advantage to Section #529 is that there are no income limitations on who can put the money into the fund. He pointed out that after Section #529 passed, there was an "explosion" in the number of college savings programs. Mr. Lynch advised that the bill would create one administrative structure within which to manage two programs. ? The advanced college tuition program; and ? The higher education trust. The bill would help to combine the benefits of Section #529 with the creditor protection trust laws in Alaska. It would help complete the transition of the ACT program from a prepaid to savings program. Savings vehicles have special treatment in terms of determining what the taxable portion of the earnings are under those savings and the treatment for federal financial aid purposes. Mr. Lynch pointed out that the bill would allow the two programs to develop on a complimentary basis, while at the same time, it would allow for one record keeper. Co-Chair Mulder commented that the main advertisement was somewhat misleading, indicating that the money would be tax deferred. Mr. Lynch replied that a person pays tax on the money when it goes into the account. Co-Chair Mulder asked what would happen if the child decides that they are not going to school. Mr. Lynch explained that in Alaska Plan, they could not get the funds out of the account unless they go to school and instead, the money would revert back to the grantor of the trust. Mr. Lynch added that the granter of the trust could change the name of the child as long as it is a member of the family. Co-Chair Therriault inquired if the funding would reflect on the child's assets for federal college assistance. Mr. Lynch replied that at this point, that decision has not been made. Many of those decisions will be left up to the individual. He noted that they would receive better treatment than through the prepaid tuition. Mr. Lynch testified that unfortunately, the financial aid rules do penalize for saving. That can not be avoided at this time. He acknowledged that it is not clear how a savings program will be treated down the road. (TAPE CHANGE, HFC 00 - 28, Side 1) Mr. Lynch noted that this would have to be limited to eligible institutions. Eligible institutions are defined within code Section #529 as a "Group of institutions that qualify for federal financial aid as of the date the act was passed". Co-Chair Mulder asked if Alaska Vocational Technical Center (AVTEC) would qualify. My Lynch understood that the school in Seward did not initially qualify, however, they do now. Vice Chair Bunde thought that the legislation would encourage more students to leave the State. Mr. Lynch agreed that there needs to be more incentives to encourage students to go to college within the State of Alaska. Mr. Lynch stated that through the Advanced College Tuition program, there is a guarantee that if you come to school at the University of Alaska, you would receive education at that equivalent, at some point in the future. Vice Chair Bunde reiterated that the money from this program could be used for attendance of any school throughout the United States. He believed that it would encourage more "brain drain" from Alaska. Co-Chair Therriault pointed out that these funds are portable. Mr. Lynch replied that it is difficult to get people to buy into a program isolated to the University of Alaska. He emphasized that incentives need to be provided. ANNE ALLEN, SENIOR COUNCIL, SECTION #529, GOVERNMENT RELATIONS DEPARTMENT, TIAA-CREF, New York, (TESTIFIED VIA TELECONFERENCE), offered to provide a resource of information to Committee members. She encouraged Alaska to offer this program. She stated that these are flexible programs and they can be used for any type of higher education including vocational schools, technical schools, and would cover the costs for room, board and books. She noted that there are a wide variety of donations that can be make to this program. The accounts act somewhat like a ROTH IRA and are affordable. She stressed that it is important to encourage these programs and that a lot of states do have the tax deductions and incentives to attract people to their state program. She emphasized that Alaska would be carving out its own niche. She explained that the age of the beneficiary would determine the investment risk and that various risk factors could be considered. Ms. Allen pointed out that account owners can not move money around. Ms. Allen referred Page 2, pointing out language that indicates that there can be multiple investment managers to an account. She noted that at this time, there is only one state that has multiple mangers. She noted that there has been negative testimony regarding the use of multiple managers. She proposed that the multiple investor's concept could lead to increased costs to the participants. Ms. Allen concluded that HB 268 is a good bill and urged the Committee's support. Vice Chair Bunde asked if the main difference between HB 268 and parents putting money into their own mutual fund would be that the earnings would be taxed deferred. Ms. Allen agreed that it would be tax deferred on the federal level. She emphasized that whom ever opens the account, would have the assurance that this money would be used for education. Additionally, she noted that there is a "potential" to receive a higher investment at the state level. Representative Austerman questioned the fiscal note and the indicated interest earnings. Mr. Lynch replied that he had prepared the fiscal note for the University conceptually creating a business plan. The product must first be established. He added that the fiscal note would be providing for the child's education and plans for a future event. The restrictions on Section #529 are that you only choose once. He agreed with Ms. Allen that the cost would be the key point. Mr. Lynch explained that initially, the State will need to adopt a business plan by undertaking an analysis of what other states have done. Attorney fees will be accessed in establishing a complicated trust. Securities and Exchange Commission (SEC) will depend on how the program is marketed. The intent is to take the $25 million dollars in the ATC program and combine these two programs for record keeping and investment and then use today's program as a carrot for the providers. He noted that what makes the program work is the volume and the earnings from that the program would be used to support it. Co-Chair Therriault asked if the existing program would be converted. Mr. Lynch explained that the bill would make a common administrative structure for the two programs. Co- Chair Therriault asked if the programs would remain separate. Mr. Lynch replied that they would. One is a formal trust program and the other is a contract. Representative Austerman assumed that the operating cost of $100 thousand dollars would cover the cost of one employee. Mr. Lynch replied that most of the costs would be out- sourced. Otherwise, it would be contracted out with a major consolidator, as they know how much it will cost to manage the money. After that, it is important to access what services you expect to receive from the provider. The question is what the fee would be used for to determine the investment returns. Co-Chair Therriault asked if this would be similar to the Supplemental Benefits System (SBS) portfolio. Mr. Lynch explained that the investment program can not be changed. Most programs are set up based on the age of the participant. This would be the same concept as the Alaska Target 2005, 2010, or 2015. You would be required to choose the asset allocation and stick with it. Co-Chair Therriault asked at what age a child is no longer paying at the parent's rate of unearned income. Representative Murkowski replied that was at age 14. Mr. Lynch replied that the child would not be paying until the money is withdrawn. Representative Austerman questioned how the program would work. Mr. Lynch replied that the sponsor would receive a portion of the fund for the investment work. He explained that you have to invest money to receive it. The larger the fund becomes, the more will be received. Co-Chair Therriault inquired who the sponsor would be. Mr. Lynch replied that would be the State of Alaska or the University of Alaska. He noted that there are a couple of ways that the fees come in. The provider will set the fee amount for establishing the account. He added that there are fee revenues associated with the plan. Representative Austerman pointed out that the income received back would be determined by how the market was doing. Mr. Lynch replied that even if the mutual fund is loosing money, the manager would still be receiving their fees. Representative Austerman questioned how the percentage fee would be determined. Mr. Lynch replied that this would be an account opened for the child through the sponsor. Representative Austerman asked if the remaining amount, after the cost for running the program, would be issued to the participants. Mr. Lynch replied that there is no guarantee that a specific amount would be received. Mr. Lynch acknowledged that it will take a while to obtain the objective for the invested money. If the fund is doubled, the program would pay for itself. Representative Austerman asked if the plan is not paying for itself, who is paying for it. Mr. Lynch replied that the University would be subsidizing the program initially. Vice Chair Bunde requested to see the revenue neutral. He believed that the program would be subsidized by the State. He pointed out that manager fees will always be included. He added that there is a potential liability to be able to pay the managerial fees. Mr. Lynch stated that the subsidized costs would not be to the managerial fees. The upfront costs would be used for consulting and attorney costs to establish the program. Mr. Lynch noted that the purpose of the Alaska Prepaid Tuition Program (APPTP) program is to help change the view of parents and children and to get them thinking about higher education. Mr. Lynch stressed that program does have the potential to grow. HB 268 recommends a defined benefit program that will go up with inflation and tuition and providing a guaranteed education program. Co-Chair Therriault noted that HB 268 would be HELD in Committee for further consideration. ADJOURNMENT The meeting adjourned at 3:50 P.M. H.F.C. 18 2/07/00