HOUSE FINANCE COMMITTEE April 13, 2000 2:30 P.M. TAPE HFC 00 - 117, Side 1 TAPE HFC 00 - 117, Side 2 CALL TO ORDER Co-Chair Therriault called the House Finance Committee meeting to order at 2:30 p.m. PRESENT Co-Chair Mulder Co-Chair Therriault Representative Foster Vice Chair Bunde Representative Grussendorf Representative Austerman Representative Moses Representative J. Davies Representative Phillips Representative G. Davis Representative Williams ALSO PRESENT Senator Al Adams; Barbara Huff Tuckness, Director, Governmental and Legislative Affairs, Teamster Local 959; Eric Yould, Alaska Rural Electric Cooperative Association; Dave Carlson, Project Coordinator, Four Dam Pool, Petersburg; Walter Sapp, Four Dam Pool (did not testify); Robert Wilkinson, Copper Valley Four Damm Pool (did not testify); Tom Friesen, Four Dam Pool (did not testify); Randy Simmons, Executive Director, Alaska Industrial Development and Export Authority, Department of Community and Economic Development; Keith Laufer, Chief Financial and Legal Affairs Manager, Alaska Industrial Development and Export Authority, Department of Community and Economic Development; Neal Slotnick, Deputy Commissioner, Department of Revenue; John Jenks, Chief Investment Officer, Department of Revenue; Kate Balinger, Kodiak. TESTIFIED VIA TELECONFERENCE Dr. George Reineer, MD, Anchorage; Brian Bjorkquist, Assistant Attorney General, Department of Law; SUMMARY HB 211 "An Act relating to liability for providing managed care services, to regulation of managed care insurance plans, and to patient rights and prohibited practices under health insurance; and providing for an effective date." CSHB 211 (FIN) was REPORTED out of Committee with "no recommendation" and a zero fiscal note by the Department of Community and Economic Development published 3/8/00. HB 446 "An Act establishing and relating to the power cost equalization endowment fund; relating to the power cost equalization and rural electric capitalization fund; authorizing and relating to the sale of the four dam pool hydroelectric project; establishing and relating to joint action agencies created to purchase power projects; and providing for an effective date." HB 446 was heard and HELD in Committee for further consideration. HB 447 "An Act making appropriations relating to power cost equalization and the sale of the four dam pool hydroelectric project and to capitalize funds; and providing for an effective date." HB 447 was heard and HELD in Committee for further consideration. HOUSE BILL NO. 211 "An Act relating to liability for providing managed care services, to regulation of managed care insurance plans, and to patient rights and prohibited practices under health insurance; and providing for an effective date." REPRESENTATIVE NORM ROKEBERG, SPONSOR provided members with a letter from Ed Burgan, Senior Vice President, Brady and Company (copy on file). Mr. Burgan represents a number of private sector employers, unions and trusts around the state. He observed that he was able to resolve the concerns of Mr. Burgan and that Mr. Burgan now supports the legislation with the addition of an amendment. The amendment would exempt self-insured employers. He observed support for the legislation by Alaska State Medical Association, Blue Cross, Aetna and representatives from the Health Insurance Association of America. He maintained that that the legislation is supported by organized labor and other businesses in the state. Representative Williams MOVED to ADOPT Amendment 1: Sec. 21.07.090. Construction. This chapter may not be construed to supersede or change the provisions of 29 U.S.C. 1001 - 1191 (Employee Retirement Income Security Act of 1974) as those provisions apply to self-insured employers. There being NO OBJECTION, it was so ordered. Vice Chair Bunde MOVED to ADOPT conceptual Amendment 2: add "medical necessity" back into the legislation. He expressed concern regarding the removal of "medical necessity". Medical necessity was removed as part of a compromise with the understanding that it would be included in another bill. He stressed that its absence would leave the legislation incomplete. Co-Chair Therriault thought that the medical community supported the bill and did not want to risk killing the legislation. BARBARA HUFF TUCKNESS, DIRECTOR, GOVERNMENTAL AND LEGISLATIVE AFFAIRS, TEAMSTER LOCAL 959 observed that the Teamster supports the legislation with the addition of the amendment. DR. GEORGE REINEER, MD, ANCHORAGE testified via teleconference in support of Amendment 2. He noted that the definition of "the best care" for patients changes rapidly. Vice Chair Bunde questioned if the inclusion of the right for an external appeal would remove the need for a definition of "medical necessity". Dr. Reineer responded that the right for an outside appeal should not exclude the acceptance of something as a medical necessity. Representative Rokeberg argued that the statutory provisions for the external review amount to a de facto definition of "medical necessity". Representative Rokeberg added that the external review agency might also take into consideration additional evidence. Vice Chair Bunde referred to a letter by the Alaska State Medical Association (copy on file.) According to the letter the Association recognizes that the legislation contains some significant protections for Alaska's patients. However, the letter continues, "the job is not yet completed." Two major issues remain, managed care entity accountability (liability issue) and the issue pertaining to the definition of "medical necessity" with its impact on the external appeal mechanism and with liability. The Alaska State Medical Association acknowledged the shortness of the remaining session and concluded that passage of an incomplete bill was better than no bill at all. Dr. Reiner agreed that something is better than nothing. Representative Rokeberg observed that the addition of "medical necessity" would remove support of the legislation by groups that support its current version. In response to a question by Vice Chair Bunde, Representative Rokeberg observed that there is a three stage level of review in the legislation to assure that a patient has a forum for due process before going to the court. Representative Foster MOVED to report CSHB 211 (FIN) out of Committee with the accompanying fiscal note. There being NO OBJECTION, it was so ordered. CSHB 211 (FIN) was REPORTED out of Committee with a zero fiscal note by the Department of Community and Economic Development, published date 3/8/00. HOUSE BILL NO. 446 "An Act establishing and relating to the power cost equalization endowment fund; relating to the power cost equalization and rural electric capitalization fund; authorizing and relating to the sale of the four dam pool hydroelectric project; establishing and relating to joint action agencies created to purchase power projects; and providing for an effective date." HOUSE BILL NO. 447 "An Act making appropriations relating to power cost equalization and the sale of the four dam pool hydroelectric project and to capitalize funds; and providing for an effective date." RANDY SIMMONS, EXECUTIVE DIRECTOR, ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY, DEPARTMENT OF COMMUNITY AND ECONOMIC DEVELOPMENT provided members with a proposed Amendment (copy on file). He explained that ADIEA has been working with Four Dam Pool communities for the past five years on the sale of the projects. He gave a brief history of the sale negotiation. The Alaska Industrial Development and Export Authority (AIDEA) approached sale negotiations with three goals: to get a fair value for the projects and to relieve the state of any liability; ensure that the sale and transfer benefited local communities; and try to put a deal together that would use proceeds from the transfer to fund the Power Cost Equalization program. He maintained that the Memorandum of Understanding (MOU), signed by the utilities and Alaska Energy Authority accomplished these goals to a large extent. Mr. Simmons discussed the purchase price. The purchase price is $73 million dollars for the sale of the projects. This price is within a range of value that AIDEA determined was fair. He observed that the range of value was determined by taking the present value of the revenue stream that would be received from the projects over the life of the power sales agreement - discounted to present value; and the state's payments or liabilities were discounted back to a present value. He summarized that the liabilities and present value were subtracted from the present value of the revenue stream. The value range was $66 - $85 million dollars based on a variety of assumptions. The sale will take about two years to close. The tentative closing dated is January 31, 2001. The state receives approximately $9.5 - $10.5 million dollars a year from the sale of the power. This is currently appropriated: 40% Southeast Intertie grants and 60% to PCE. Communities have agreed that the whole amount would go to the state for PCE. Communities will also give up self-help rights during that time. To give communities comfort, the state has agreed that if there is something that the communities could not take care of, that they could step back from the agreement. Communities give up a two-year payment stream. The payment stream is approximately $20 million dollars. Mr. Simmons observed that the state holds an insurance fund, which is used for the deductible. The estimated amount of the insurance fund at closing is $13 million dollars. These funds would go into the endowment. Mr. Simmons observed that there has been an intertie loan to the Southeast Intertie of $20 million dollars. It is a low interest loan of 3 percent. This loan would be available to communities if an intertie were built. The communities have agreed to turn the loan over to the state as part of the package. The state agrees to give the communities a credit to the sales price; if the intertie were built the credit would apply. If the intertie is not built then the credit returns to the state. He noted that if communities give up the loan and have to borrow from somewhere else at a market rate that the subsidy would be approximately $5 and $6 million dollars. The purchase price is credited for $5 million dollars. If the intertie is built this credit can be used. If it is not built it returns to the state. KEITH LAUFER, CHIEF FINANCIAL AND LEGAL AFFAIRS MANAGER, ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY, DEPARTMENT OF COMMUNITY AND ECONOMIC DEVELOPMENT explained that they would have 5 years from the date of the MOU to implement a finance plan that shows committed funds for the intertie. Construction would have to be started within 10 years of the MOU. Vice Chair Bunde clarified that, if the communities do not go after the loan, the state gets the money back. Mr. Simmons explained that the $5 million dollars would be credited and not paid out. In response to a question by Representative J. Davies, Mr. Simmons explained that in FY01 the debt service would be $10.5 million dollars: this would go into the endowment fund. The Four Dam Pool debt service would be $9 million dollars in FY02. At closing there is $68 million dollars from the sales price ($73 million dollars minus $5 million for the credit): plus $13 million dollars from the insurance fund. Co-Chair Therriault observed that there is a potential that the money could be held for up to 10 years. Mr. Simmons explained that the money is sitting in an account in the Alaska Energy Authority, generating interest. The state wanted to have the entire $20 million dollars come back immediately. Mr. Laufer stressed that the $5 million dollar credit is a conservative amount. He estimated that the actual subsidy amount could be higher. Mr. Simmons further explained that AIDEA would finance the transaction. Only $68 million dollars would be financed. The financing would be increased if the credit were used. There is no recovery of costs for the $5 million dollars. Representative J. Davies referred to the interest on the $20 million dollars. He observed that the state has been collecting the interest on the funds. Mr. Simmons added that this amount would go into the endowment and the interest would be collected as part of the endowment. Vice Chair Bunde observed that PCE expenditures are flat funded for the next 10 years under the proposal. He observed that the costs increase. Mr. Simmons noted that the legislature could change the funding amount. He felt that the endowment would grow and is conservative. Other money, such as federal funds, could be deposited into the endowment. The endowment is based on current statute. Vice Chair Bunde stressed that an annuity assumes that the problem has been addressed. He stated that he would prefer language to allow pro-ration if more money is needed. Mr. Simmons stated that the intent is that the plan would provide full funding. (TAPE CHANGE, HFC 00 - 117, SIDE 2)  Mr. Simmons discussed the endowment. The Four Dam Pool sale proceeds of $120 million dollars would flow into the endowment minus the FY01 funding for PCE ($10 million dollars). The original intent was to take 7 percent of the fund for a specific date. He noted that this created a problem in that equities can vary on any given day. The CS has a phase in and transition approach utilizing a three- year average to derive the 7 percent. Representative J. Davies questioned if 7 percent is aggressive and asked if it would be sustainable. Representative Austerman pointed out that the fund is not inflation proofed. Mr. Simmons agreed. Representative G. Davis observed that an 8.3 percent endowment would have been reduced to 5 percent with inflation proofing and felt that the numbers were appropriate. Co-Chair Therriault expressed concern that there would be future questions regarding the funds ability to keep up with inflation proofing. Representative Austerman questioned if the Department of Revenue could put some inflation proofing in the fund. Co-Chair Therriault pointed out that if more than 7 percent is achieved that the excess would be deposited into the fund. Representative Austerman questioned if the bill specifies a 7 percent pay out. Mr. Simmons clarified that the bill does specify a 7 percent pay out. In response to a question by Representative Williams, Mr. Simmons explained that whatever is earned under the proposal would returned as an AIDEA dividend. He observed that it is a policy call of how the legislature appropriates AIDEA dividends. NEAL SLOTNICK, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE explained that the legislation specifies that the commissioner of the Department of Revenue is to invest the endowment fund in a manner that is likely to achieve at least a 7 percent return. There is not inflation proofing, but the department will try to achieve more than a 7 percent return. JOHN JENKS, CHIEF INVESTMENT OFFICER, DEPARTMENT OF REVENUE explained that under a normal endowment system that they would anticipate earning 8.25 percent over a five-year period. One percent could be added to the endowment a year based on current markets. Mr. Simmons clarified that it would be a long time before the 7 percent draw would be more than $15 million dollars. Mr. Slotnick added that the draw is 7 percent and the return is expected at 7 percent. Vice Chair Bunde concluded that with a 7 percent pay out of market value that the fund would diminish in value in real dollars. Representative Austerman questioned if the fund should be inflation proofed. Mr. Jenks agreed that a fully funded endowment would need to be inflation proofed. He acknowledged that a 7 percent pay out is high for a fund that was going to be inflation proofed. He stated that they would normally have a 4.5 - 5 percent pay out on funds that are inflation proofed. Mr. Simmons continued discussion of the endowment funding. He noted that $10 million dollars would be used for FY01 PCE funding. There should be an $8 million dollar carry forward into the PCE fund from NPRA funds. The endowment would be $110 million dollars with an annual dividend of $7 - $8 million dollars. He added that AIDEA dividends of $9 million dollars would also go into the fund and $15.7 million dollars would be appropriated to the PCE program. Co-Chair Therriault observed that federal funds go directly to the PCE fund. Mr. Simmons explained that the default for federal funds is to go to the endowment. There would have to be specific instructions for funds to go to PCE for any specific year. Representative J. Davies pointed out that FY01 would still be short $4.3 million dollars. In response to a question by Representative Austerman, Co- Chair Therriault clarified that the amendment proposed by AIDEA would be given to the legislative drafter for incorporation into a proposed committee substitute. Co-Chair Therriault pointed out that there is the issue of the $20 million dollars (from the Southeast Intertie loan): should the funds go to the endowment or to the Railbelt Energy Fund (the original source) and replaced by a CBR draw. Mr. Laufer clarified that any appropriation would be taken in HB 447. He explained that an amendment to HB 447 would require a corresponding amendment to the MOU, which would have to be acknowledged in a subsequent bill. The documents signed by the utilities anticipated that intertie funds would be contributed to the PCE endowment, if this were not to happen the MOU would need to be amended. HB 447 authorizes the sale based on the terms of the MOU. The MOU is referenced by date. Representative Phillips pointed out that the communities would not be concerned as to where the money comes from. Co-Chair Therriault stressed that the money was owed back to the Railbelt Energy Fund. SENATOR AL ADAMS pointed out that an additional $4.4 million dollars is needed for FY01. He acknowledged the benefit of the legislation, but stressed that it is not a full endowment. He pointed out that part of the funding would come from an AIDEA dividend. He maintained that $200 million dollars is needed for a full endowment. He observed that the Administration is working on acquiring federal funds. There will still be a transition period, which would require $7.7 million dollars from the AIDEA dividend. He suggested that money from rural locations, such as the Red Dog Mine, could be used for the AIDEA dividend. He emphasized that a full endowment would be possible. Senator Adams pointed out that AS 19.93.181(b) require that PCE be funded at $17 million dollars till the year 2000. The statute allows for growth. Representative J. Davies summarized that $15.7 million dollars is a base and that there may be times when more is needed for items such as increased fuel costs. He noted that increased efficiencies have allowed flat funding. He expressed concern with the findings: affordable rates are a necessary ingredient of a modern society and a prosperous developing economy. He pointed out that PCE is a limited subsidy for residential rates. It doesn't subsidize commercial rates. He stressed that PCE needs to be expanded past residential rates. He maintained that there is not enough subsidy to develop the economy. Co-Chair Therriault stressed that the findings are unnecessary. He agreed that it is a subsidy for residential use, not economic activity. Representative J. Davies stressed that PCE helps economic development. ERIC YOULD, ALASKA RURAL ELECTRIC COOPERATIVE ASSOCIATION testified in support of the proposal. The Association supports PCE, divestiture of Four Dam Pool and the use of the proceeds of the sale for PCE. A Dittman research poll, which asked urban areas if they support PCE, found that 61 percent favored continued state support for PCE. He maintained that PCE is a linchpin for economic development in rural areas. DAVE CARLSON, PROJECT COORDINATOR, FOUR DAM POOL, PETERSBURG testified in support of the legislation. He noted that the MOU ended a five-year effort to purchase the Four Dam Pool. He maintained that it is a win/win situation. The state is relieved of risks and local communities will gain control over their destiny. In response to a question by Representative Austerman, Mr. Carlson did not object to using CBR funds to replace the loan to the Rail Belt Fund. KATE BALINGER, KODIAK, testified via teleconference in support of the legislation. She urged movement of the legislation during the current session. HB 446 and HB 447 were heard and HELD in Committee for further consideration. ADJOURNMENT The meeting was adjourned at 4:05 p.m.