HOUSE LABOR AND COMMERCE STANDING COMMITTEE January 21, 1998 3:34 p.m. MEMBERS PRESENT Representative Norman Rokeberg, Chairman Representative John Cowdery, Vice Chairman Representative Bill Hudson Representative Tom Brice MEMBERS ABSENT Representative Jerry Sanders Representative Joe Ryan Representative Gene Kubina COMMITTEE CALENDAR * HOUSE BILL NO. 247 "An Act relating to escrow accounts; and providing for an effective date." - HEARD AND HELD EXECUTIVE ORDER NO. 100 Moving The "Silver Hand" Program From DCED to DOE - HEARD AND HELD (* First public hearing) PREVIOUS ACTION BILL: HB 247 SHORT TITLE: REGULATION OF ESCROW ACCOUNTS SPONSOR(S): REPRESENTATIVES(S) ROKEBERG BY REQUEST Jrn-Date Jrn-Page Action 04/11/97 1080 (H) READ THE FIRST TIME - REFERRAL(S) 04/11/97 1080 (H) LABOR & COMMERCE WITNESS REGISTER D.J. WEBB, Legislative Affairs Committee Chair and Past President Alaska State Escrow Association; Senior Escrow Officer First American Title Company of Alaska 510 West Tudor Road Anchorage, Alaska 99503 Telephone: (907) 562-0504 POSITION STATEMENT: Testified in support of HB 247. DAVID LAWER, Senior Vice President First National Bank of Anchorage; Alaska Bankers Association 101 West 36th Avenue Anchorage, Alaska 99507 Telephone: (907) 777-3011 POSITION STATEMENT: Testified in opposition to HB 247. WILLIS KIRKPATRICK, Director Division of Banking, Securities and Corporations Department of Commerce and Economic Development P.O. Box 110807 Juneau, Alaska 99811-0807 Telephone: (907) 465-2521 POSITION STATEMENT: Testified on HB 247, proposed amendments. TOM LAWSON, Acting Director of Administrative Services Division of Trade and Development Department of Commerce and Economic Development P.O. Box 110803 Juneau, Alaska 99811-0803 Telephone: (907) 465-2017 POSITION STATEMENT: Testified in support of EO 100. FRED SMITH, Economic Development Planner Association of Village Council Presidents P.O. Box 219 Bethel, Alaska 99559 Telephone: (907) 543-3541 POSITION STATEMENT: Testified in support of EO 100. VERNON CHIMEGALREA, Native Arts Program Director Alaska State Council on the Arts 411 West 4th Avenue, Suite 1E Anchorage, Alaska 99501-2343 Telephone: (907) 269-6610 POSITION STATEMENT: Testified in support of EO 100. HELEN HOWARTH, Executive Director Alaska State Council on the Arts 411 West 4th Avenue, Suite 1E Anchorage, Alaska 99501-2343 Telephone: (907) 269-6610 POSITION STATEMENT: Testified in support of EO 100. ACTION NARRATIVE TAPE 98-2, SIDE A Number 0001 CHAIRMAN NORMAN ROKEBERG called the House Labor and Commerce Standing Committee meeting to order at 3:34 p.m. Members present at the call to order were Representatives Rokeberg, Cowdery, Hudson and Brice. HB 247 - REGULATION OF ESCROW ACCOUNTS Number 0070 CHAIRMAN ROKEBERG announced the first order of business was HB 247, "An Act relating to escrow accounts; and providing for an effective date." Chairman Rokeberg noted he had introduced HB 247 at the request of the Alaska State Escrow Association. Number 0105 CHAIRMAN ROKEBERG presented the sponsor statement for the record: "This was introduced at the request of the Alaska State Escrow Association in an effort to assure that consumers have their -- that their monies will be safe and properly accounted for when delivered to a settlement agent for a property transaction. There are no Alaskan laws concerning this now. "The bill has the support of the Alaska Escrow Association and the Alaska Association of Realtors. Consumers need to be assured that their funds, which can be rather large amounts, will not be jeopardized and will be available as needed during the course of a real estate transaction. From the seller's viewpoint, the execution of a deed and the - and the deposit of that deed will bring forth proceeds upon recording of - of the deed. Under current Alaskan business practices, a buyer deposits a cashier's check prior to recording a property deed; however, this is not the case if a lender provides the purchase funds. In the case of a lender, the deed is recorded along with the lender's lien and the funds are deposited after the deed and other documents have been recorded. "This procedure leaves sellers and settlement agents in the middle. The seller's interest in the property has been transferred but no funds have been received. This bill requires that before a settlement agent records documents transferring property, or creating a security interest in the property other than the seller's current interest, that the money required under the escrow agreement must be available for distribution in accordance with Alaska Statute 34.75.040 as set forth in the bill. Number 0238 "The basic thrust of this bill is to protect Alaskans that are selling their property and to make sure that the funds due those sellers are available in a timely fashion." CHAIRMAN ROKEBERG summarized that HB 247 means the escrow agent has to have the money in hand before the transaction closes and money is disbursed. He noted currently that is not the case. Number 0287 D.J. WEBB, Legislative Affairs Committee Chair and Past President, Alaska State Escrow Association; Senior Escrow Officer, First American Title Company of Alaska, testified via teleconference from Anchorage. MS. WEBB asked the committee to support HB 247 on behalf of the Alaska State Escrow Association. She noted, with the recent changes in lending closing activities, the association's members have found they are being asked by many lenders to record the warranty deed of a seller prior to receiving lender funds. MS. WEBB stated the association is concerned that there is no way to reference or determine the stability of lenders making these requests, especially from out of state. There is no way to determine if lenders will be funding on the date indicated or ever. There have been a few cases where the deed was recorded and the lender refused to fund for some reason. She related that the seller was left with having (indisc.) interest in the property, and no way to retrieve that without either filing a lawsuit or joining with the buyers to execute a deed back. Number 0330 MS. WEBB said the association is concerned that the general public has no knowledge this practice is standard. She stated the public suspects that, once they go into escrow and sign the documents, funds will be available upon recording. The general practice is that the lender funds after receiving confirmation the loan is of record. MS. WEBB commented that several other states have funds legislation which mandates and requires lenders to fund into escrow prior to the recording of the document. She stated, "In those states, where their lenders are -- that are also lending up here, it's just general practice for them to fund prior to recording when they know that the state statutes requires that." Number 0503 CHAIRMAN ROKEBERG cited Section 34.75.030, interest on escrow money, "Notwithstanding any other provision of law, interest may not be collected or paid by a settlement agent on money held in escrow unless authorized in writing by the parties to the escrow, including the settlement agent." He referred to the sectional summary from Legal Services, Division of Legal and Research Services, Legislative Affairs Agency, which reads, "Sec. 34.75.030. Prohibits collection or paying interest on escrow money unless the parties agree to do so." CHAIRMAN ROKEBERG stated that this account is not your typical escrow or impound account held by a "bank institution" for tax insurance on a house loan, noting debate about interest on retained escrow amounts. This bill provides that there can be an agreement to pay interest if there is an escrow account specifically with a settlement agent. This is not related to a typical situation in which a lender holds an escrow account to pay the taxes, insurance and other probated portions of a loan. Number 0580 MS. WEBB agreed. She said it makes it clear that the funds held by a settlement agent are not funds of the settlement agent. Usually, the only time (indisc.) interest is paid is when funds will be held for a period of time, for completion of items or for the final preparation of closing, and all parties agree to enter into an interest-bearing account. Typically, funds held in the normal trust account of a settlement agent are not held for more than one day to the next, between the time the funds are deposited and then disbursed. Number 0634 CHAIRMAN ROKEBERG noted some large commercial transactions contain substantial amounts of money, possibly in the hundreds of thousands of dollars, that can be held in escrow. The provision allowing interest to be paid by agreement is appropriate for these transactions. Chairman Rokeberg said he knew of situations where provisions had been made for (indisc.) payments of interest when $20,000 or $30,000 of option money was involved. He asked Ms. Webb if that was correct. Number 0670 MS. WEBB agreed. She noted, here again, the settlement agent would initiate an interest-bearing account at a local financial institution, rather than keep the money in a normal trust account. All interest is passed on to the party designated to receive that interest. Number 0754 DAVID LAWER, Senior Vice President, First National Bank of Anchorage; Alaska Bankers Association, testified via teleconference on behalf of the Alaska Bankers Association. Number 0782 MR. LAWER stated HB 247 was unnecessary in the view of the Alaska Bankers Association. This legislation, in large part, is merely a codification of what is already the law (indisc.) contracts. It is, he said, already a term of the contract between the escrow agent and the seller. Mr. Lawer commented that HB 247 appears to make transactions involving financing marginally more expensive for the borrower. Number 0850 MR. LAWER further stated that HB 247, at least by its terms, impacts the collection escrow business a number of the association's members are involved in, although it appears some effort has been made to restrict the impact of the legislation to escrows involving real estate closings. He noted, since the financial institutions of this state often close real estate transactions that they are involved in as financer, as mortgage lender, that the possible impact of this legislation on association members is unclear. Mr. Lawer stated, for all of those reasons, the Alaska Bankers Association recommends HB 247 not be enacted. Number 0907 MR. LAWER commented that, as far as the title companies are concerned and in so far as their activities as closing escrow agents are concerned, this legislation is not necessary. He stated, "They are simply in the position to refuse to go forward and close a transaction by sending the ... instruments of conveyance for recording until such time as they have the money available for this person to the seller." Number 0950 MR. LAWER continued, "It looks as if, by the terms of this legislation, they're entitled to go forward and record upon receipt of a cashier's check issued by a bank in this state. There is nothing to prevent them, in connection with every one of these transactions, from refusing to go forward and close the transaction by sending the documents of conveyance to the recorder's office or to - to the filing officer, until such time as they have in their hands a cashier's check issued by a bank in this state." Mr. Lawer noted again that the Alaska Bankers Association considers HB 247 unnecessary for all of the stated reasons. Number 1006 REPRESENTATIVE BILL HUDSON asked Mr. Lawer to expand on his belief that HB 247 might cost the borrower more money. Number 1023 MR. LAWER answered that currently, for loans made by Alaskan banks to finance the purchase and sale of real estate, the bank postpones disbursement of loan proceeds until such time as the instrument of conveyance and the mortgage have been recorded, and the title company involved furnishes notice to the bank that it is in a position to issue its title insurance in the form required by the bank. Then, he said, "The bank disburses and that - that's a day later." Number 1068 MR. LAWER continued, under the proposed legislation, if the bank is required to disburse in advance of closing, there will be at least a day's worth of interest added to the cost of financing at the buyer's expense. Mr. Lawer said that, if the lender disburses against recording, interest accrues from the date of recording. On the other hand, if the title company or escrow agent is required to be in receipt of payment, according to this law, there will be disbursement to the borrower in advance and additional interest charges. Mr. Lawer stated this was the additional cost to the borrower he had mentioned. Number 1149 CHAIRMAN ROKEBERG noted the original intent of HB 247 was not to impact business collections activities. He referred to the definitions of "escrow" in the bill and asked Mr. Lawer if they were the source of his concern. Number 1185 MR. LAWER responded that the definition of "settlement agent" in Section 34.75.090 (7) ("'settlement agent' means a person who engages in the business of handling escrow accounts, but does not include a person who collects money for the sole purpose of applying the money to the payment of a loan during the term of the loan: 'settlement agent' includes an employee of a person who engages in the business of handling escrow accounts when the employee is carrying out the employee's duties in the business.") leads him to believe this legislation could impact collection escrows. Number 1212 CHAIRMAN ROKEBERG asked Mr. Lawer if he understood that definition to apply to anyone handling funds in his collection escrow department. Chairman Rokeberg noted the definition of escrow in HB 247 (Section 34.75.090 (3), "'Escrow' means a transaction where, for the purpose of effecting the sale, transfer, encumbrance, leasing, or other disposition of real or personal property to another person, ..."), commenting that there is no existing law in statute. Applying this to Mr. Lawer's situation, he said, "Of course many of your collections are ... on, say, secondary deeds of trust and things of that nature for real property, but they are run through your collection department." Number 1251 MR. LAWER agreed, noting his institution is involved in all sorts of purchase and sale transactions, not only those pertaining to real property, but also, for example, limited entry permits. Number 1272 MR. LAWER noted he understood the intent was to define "settlement agent" as, in fact, the closing agent at a closing between a buyer and seller. However, he feels Section 34.75.090 (7) is not effective. Number 1294 CHAIRMAN ROKEBERG commented that he would have the same concern about the breadth of the definition of "escrow." Number 1301 MR. LAWER responded, "Exactly so, it's ... very difficult, for instance, to reckon how this impacts the bank when it indeed is closing a transaction that involves a purchase and sale of real property ... and is also doing the financing. Under the definition of escrow, escrow means a transaction where there is, to the effect if you will, the sale, transfer, encumbrance, leasing -- all those activities are part and parcel of one involving a loan by a bank that it closes itself. I would agree with you that definition, too, is perhaps overly broad, if not otherwise narrowed." Number 1348 CHAIRMAN ROKEBERG noted it is clear many banking institutions would be covered by HB 247 because they close home loans and other loans "that would be appropriate for this purpose." He stated concern over costs related to accrued interest and the alleged delay in recording. He asked Mr. Lawer to explain, in steps, how his institution would fund a typical home loan through a title company. Number 1382 MR. LAWER replied that his institution furnishes written instructions to the title company, as do the buyer and seller who are involved. The buyer's instructions are: Pay the seller when you are in a position to deliver a recorded deed to me. The seller's instructions are: Deliver the deed when you are in a position to pay me, in cash, the price. MR. LAWER said the instructions from the bank that is financing the transaction are: We will pay you the proceeds of a loan we are making to the buyer as soon as you, title company, are in a position to tell us: 1) the deed of conveyance in our mortgage has been recorded and 2) you will issue to us your policy of title insurance which is in keeping with our requirements. Number 1459 MR. LAWER continued that the bank waits once those instructions are issued, if this transaction is being closed at a title company, until the seller has gone to the title company and executed the deed, and the buyer has gone to the title company and executed a note and the mortgage. Following that, the bank waits until the deed is recorded and the title company notifies all parties, which is normally at least a day after the documents are executed. Number 1494 MR. LAWER explained, under those circumstances, the bank pays the title company the proceeds of the loan when the title company notifies the bank that the deed has been recorded. According to HB 247, the bank would have to pay the title company the proceeds of the loan conditionally at least a day in advance of that recording. He noted the bank would be charging its customer interest from its disbursement date, not from the date the title company disburses. Number 1532 CHAIRMAN ROKEBERG questioned Mr. Lawer briefly on occupancy and closing dates. Number 1580 CHAIRMAN ROKEBERG asked Mr. Lawer if he was suggesting that when people execute their deeds and assume they now own their homes, the money has not changed hands. Number 1601 MR. LAWER said he wasn't sure he understood. Number 1606 CHAIRMAN ROKEBERG said Mr. Lawer had stated that the lender had to wait until the buyer and seller executed their note and their deed. Then, usually at least a day after, the lender funded. Chairman Rokeberg commented that most people assume they have purchased their home at the point they executed the documents. He noted, "I think the court of law would probably indicate that whatever cause of (indisc.) you had, either in damages or equity, that you had purchased your property then but you're suggesting that you normally fund them a day later -- is that right?" Number 1635 MR. LAWER disagreed. He stated, "Assuming I'm the buyer, I'm telling the title company, 'Don't give the seller the money until you have, to deliver to me, his deed of conveyance.' And vice versa, the seller is saying, when - when he signs that deed on - on Monday, and gives it to the title company, 'Don't give this to the buyer and cause it to be recorded until you've got money in hand to pay me.' So, on the day that the documents are executed, if you will, ... there is not presently any - any conveyance. That's - that's the law the way it is today." MR. LAWER noted there is a constructive delivery to the title company of a deed and maybe the proceeds, but the transaction doesn't "incur" until a later point, when all conditions are satisfied. Number 1699 CHAIRMAN ROKEBERG noted that included the conveyance of the consideration and the money. He further noted, "So people's assumptions aren't quite correct. It's the operation of law that dictates that." Number 1709 MR. LAWER agreed and said, "I think you would find your way to that same conclusion by reviewing the ... instructions that are routinely furnished to the title companies ... in their own form. It is a matter of contract, yes." Number 1726 CHAIRMAN ROKEBERG noted he could appreciate many practical implications in the process. He asked if the lender normally waited until it was actually in receipt of the deed before issuing the draft for the funds. Number 1758 MR. LAWER said the lender waits until the title company notifies the lender that it is in a position to go forward, and is prepared to furnish the lender with the policy of title insurance required by the lender in connection with the transaction. At that time the lender funds the loan. Number 1784 CHAIRMAN ROKEBERG mentioned variable occupancy and closing dates and commented, "I guess that's the whole point of this bill -- is when you're going to actually take possession legally, and you're suggesting it's upon the receipt of the conveyance and the - the completion of the transaction. ... I suggest that the intent here is to make sure that those monies are in place so that the transaction can be completed, and I think we should both be in concurrence on that." Number 1820 MR. LAWER said that objective is not necessarily offensive, at least from the banker's standpoint. He noted the unintended consequences of HB 247 raise, perhaps, the strongest objections. Number 1844 CHAIRMAN ROKEBERG asked, "Do you actually don't accrue interest on the date it was executed, the following date when it was recorded, is that your practice?" Number 1852 MR. LAWER answered in the affirmative. Number 1878 WILLIS KIRKPATRICK, Director; Division of Banking, Securities and Corporations; Department of Commerce and Economic Development, came forward to testify on HB 247. Number 1898 MR. KIRKPATRICK related a story about a friend, Lee Coffman (ph), a former president of Alaska Federal Savings Bank, who purchased a piece of property in Juneau and experienced an abnormal practice at a title company which included a delay in recording. Mr. Kirkpatrick noted this was not under his jurisdiction and he was in the process of advising the Division of Insurance about the situation. Number 2012 MR. KIRKPATRICK recommended some amendments to HB 247. On page 4, line 21, "financial institution," he suggested the committee consider replacing (A) and (B) with "(A) whose deposits are insured by an agency of the federal government." Mr. Kirkpatrick noted this wording includes both (A) and (B), and has been used elsewhere in Alaska statutes. Number 2097 MR. KIRKPATRICK referred to Section 4, page 5, a proposed amendment to Alaska Statute 45.55.110 (g), the Alaska Securities Act of 1959. He noted the reference in (g) is in the offering of securities, allowing a promoter to participate in a stock offering that is not available to the public, but restricting those stocks from sale for a period of three years. MR. KIRKPATRICK mentioned, regarding the other provision, an Anchorage structure known in the 1970s as the "Blue Birdcage." He noted it was a public offering he had registered as a securities examiner but hadn't provided for escrow collection. He described the history of the structure and summarized the definition of escrow collection as, "If you need to raise money for a certain purpose and that purpose has a dollar amount, if you can't raise that, we're not going to let you have it. You need to at least raise that much, or a certain percentage of that much." Number 2221 MR. KIRKPATRICK noted this section was kind of the "apple out of this orange bill" and asked the committee to consider deleting it. He said it had no other effect if left in. Number 2251 MR. KIRKPATRICK referred to page 3, Section 34.75.070, department supervision. He commented that he thought, possibly, the Division of Banking, Securities, and Corporations might be appropriate. However, he is concerned the legislation doesn't give enough instruction to the division to act appropriately. He noted that if the division finds a violation, it needs some sort of a means to act upon that violation. MR. KIRKPATRICK stated the division can use violation language from the banking code or the securities act; this language instructs the division how to proceed if a violation is found. He commented, "The way that it stands now, I'm afraid there's an implied responsibility of the state but if the state doesn't interpret this properly, that it would perform a deep pocket to somebody for neglect of the state." MR. KIRKPATRICK suggested, if the division does have a responsibility, that responsibility be better defined. Number 2319 MR. KIRKPATRICK referred to page 3, Section 34.75.060, civil penalty. He read, "the settlement agent who willfully violates this chapter is liable to the state for five times the amount of the consideration paid." Consideration paid is usually around $230. He noted his trouble, as a bank regulator and a securities regulator, with the wording "wilfully violates," which has the connotation of intent. Number 2366 MR. KIRKPATRICK commented it seems that if there is a problem with someone intending to deceive, the civil penalty isn't spelled out. He noted, "Then coupled with the Section 70, which says that - that the only thing the department is to look at is the one that contains the written complaint. But yet, if we find, on an audit or an examination, that somebody is wilfully ... violating the law, we're restricted from looking at other - other activities that the escrow agent has." Number 2394 CHAIRMAN ROKEBERG indicated the committee would take Mr. Kirkpatrick's suggestions under advisement and asked Ms. Webb if she would care to comment on any of the testimony. Number 2427 MS. WEBB referred to Mr. Lawer's testimony stating HB 247 was unnecessary. She said part of the reason the Alaska State Escrow Association feels the proposed legislation is necessary is because many lenders are unwilling to fund into escrow prior to recording without legislation requiring them to do so. Although the escrow companies can say they are unwilling to proceed, the lenders can go to another title company or escrow company. She commented that this allows for an uneven playing field with those parties who are playing more involved in the risky business of not having funds in their escrow accounts. Number 2460 MS. WEBB stated it certainly was not the escrow association's intent to include escrow collections in HB 247. She said she thought that was why the definition existed out on page 5 .... TAPE 98-2, SIDE B Number 0001 MS. WEBB continued, "... (indisc.) They're technically a party to that transaction and would have the loan funds, so I think the only part of this [that] would apply to them would be any down payment deposit that the buyer makes would need to be collected -- and I'm not even sure if that would apply by the definition of who the settlement agent is -- because if they're - if they're doing their own in-house financing, I don't see how they could be considered as a disinterested third party on an escrow." MS. WEBB noted, "In regards to funds being funded before recording and interest being charged by the buyer, those same loan funds that are being disbursed into our escrow, we take those right back and deposit them into our trust accounts at local banks, and we don't receive interest on those. So, it's likely there would be a scenario where a lender would funds to us and we would take those funds right back and deposit right into their depository account, if - if that's where we have our trust account. ... The funds could be back in their own account if (indisc.) a local lender." Number 0056 MS. WEBB stated, "Many out-of-state lenders who are in the habit of funding before recording if ... that's required for them to do so, they typically charge interest from the day the buyer signs the note, not necessarily the date of recording." MS. WEBB noted she wanted to clarify Mr. Lawer's comments about next day loan disbursement. She said, "Typically, we record first thing in the morning in order to make sure that those conveyances and deeds of trust are in the first lien position, or a first position, so we can check the title records. Typically a buyer and a seller will sign the business day prior to our recording, and - and it's just function of when we record that would cause the ... one day delay on - on the funding from the date (indisc.) documents are executed and the date that it's recorded." Number 0101 CHAIRMAN ROKEBERG asked if there were problems that had come up in the last couple of years because of the growing number of out-of- state lenders delaying their funding for several days. Number 0114 MS. WEBB responded that was certainly true, noting a few lenders were known to take several weeks from the date documents were forwarded down to them for review before funding. She thought many local escrow companies have taken the position of not recording until they receive loan funds from that particular lender. Number 0141 MS. WEBB noted the industry is changing and growing all of the time and the escrow association is concerned about mortgage brokers and lenders entering this marketplace with no track record. She commented that it is not possible to know all the companies one works with. Number 0158 CHAIRMAN ROKEBERG asked Ms. Webb if she would be comfortable exempting Alaskan banks from HB 247 if that were possible. Number 0168 MS. WEBB noted she thought the liability to the consumer was the same whether a local or out-of-state bank was involved. More knowledge might be available about a local lender, but, she said, in the interest of consumer protection it didn't matter where a lender was located. Number 0199 CHAIRMAN ROKEBERG closed public comment on HB 247. He noted that HB 247 would be held over for further consideration. EO 100 - MOVING THE "SILVER HAND" PROGRAM FROM DCED TO DOE Number 0224 CHAIRMAN ROKEBERG stated the next item of business, EO 100, Moving the "Silver Hand" Program from DCED to DOE. Number 0292 TOM LAWSON, Acting Director of Administrative Services, Division of Trade and Development, Department of Commerce and Economic Development (DCED), came forward to testify. MR. LAWSON stated he would like to do three things: 1) briefly describe the Silver Hand Program, 2) talk about its history with the DCED, and 3) explain the recommendation and reasons for moving the program to the Alaska State Council on the Arts (ASCA). Number 0310 MR. LAWSON said that the Silver Hand Program is represented by the silver hand on a black oval. The intent of the program is to certify that any handicraft bearing the seal was crafted in Alaska by an Alaskan Eskimo, Aleut or Indian. He commented that the seal is intended to be a guarantee to a consumer of Native handicrafts that the handicraft was indeed crafted by a Native person. Number 0340 MR. LAWSON stated the program was enacted in state law in 1961. There have been some small changes over the years, most recently in 1993, when the definition of Alaska Native was clarified. He added that authorization to implement regulations and clarification of allowed enforcement actions were also made at that time. Number 0360 MR. LAWSON noted four areas of program operation: 1) Certification of applicant eligibility - does he or she meet the definition of an Alaska Native? 2) Education - educating Native handicrafters that this program is available and may help them market their crafts better. 3) Promotion - making consumers of Native handicrafts aware of this program so that they request handicrafts with the program sticker in order to avoid purchasing counterfeits. 4) Enforcement of any violations that may occur. Number 0437 MR. LAWSON stated the DCED has had the program since 1961. In fiscal year 1997, DCED had $5,000 budgeted for the program, an amount they felt was woefully inadequate. Mr. Lawson noted the DCED has never truly had a professional staff person with expertise in Native handicrafts to advocate for the program. When there has been funding available for the program and the department has been able to assign staff, allocated staff time has been minuscule. MR. LAWSON said, at the end of 1996, the program contained approximately 600 individual Native artists and about 27 Silver Hand agents. Mr. Lawson noted a program provision allowing individuals to become Silver Hand agents. These agents are then able to issue Silver Hand permits. Number 0494 MR. LAWSON stated, since last fall, the DCED has contracted with the ASCA to operate the program. He referred to "Marketing Alaska, The Governor's Economic Development Initiative, 1996 Summary." The initiative's Cultural Resources Work Group stated, in their recommendation 15, that the Silver Hand Program is better suited to the ASCA. He noted this transfer is the intent of EO 100. Number 0555 REPRESENTATIVE JOHN COWDERY asked if the participating artists were charged fees. Number 0563 MR. LAWSON replied that there are no fees for individual artists; however, there is a fee to become a Silver Hand agent. Agents are typically the retail gift shop owners and the wholesalers of Native handicrafts. The Silver Hand agent is empowered, based on their qualifications, to place a Silver Hand sticker or tag on a piece of artwork if they know for a fact, and will guarantee, it was produced by a Native artisan. The fee is $200 for a three-year Silver Hand agent authorization. Number 0613 REPRESENTATIVE COWDERY noted Mr. Lawson's comment that the law defining Alaska Native was clarified in 1993. He presented the scenario of a Native man married to a non-Native woman who both contribute to a product. He asked if that product would be considered a Native handicraft. Number 0638 MR. LAWSON stated, in the strictest interpretation of the law and the regulations, that if a non-Native person worked on a handicraft then the Silver Hand sticker should not be applied. He noted difficulties with enforcement. Number 0667 REPRESENTATIVE HUDSON asked Mr. Lawson to again define Silver Hand agent. Number 0676 MR. LAWSON stated, again, that the Silver Hand agent is a person who is authorized to do two things. The agent can personally affix a Silver Hand sticker and tag to a handicraft if the agent has full knowledge that the artisan is an Alaska Native. An agent can also authorize an individual to be part of the Silver Hand Program as an individual artist. Number 0726 REPRESENTATIVE HUDSON stated, "I guess what I'm trying to figure out -- any time I see something here where we're transferring, in this particular case, a very pronounced program that obviously has been developed over time to have a value. That is, that if you're going to have the Silver Hand, you're going to have sort of a statement of higher value somewhere along the line, ... it signifies authenticity." REPRESENTATIVE HUDSON noted he was trying to determine if the Silver Hand Program dealt more with commodity or art. He stated that it seems the program should rightfully be in the DCED if it was more concerned with commodity, but it should be under the ASCA if it dealt more with art. Representative Hudson expressed some doubt, looking at long-range program cuts, that the ASCA would continue to exist in the future. He commented on the possibility of a private artists' council without government involvement. Number 0819 REPRESENTATIVE HUDSON asked if the Governor felt, in this instance, that moving the Silver Hand Program would allow for additional funding by the legislature. Number 0825 MR. LAWSON stated that the arts council has a full-time Native arts and crafts person who travels all through the state working with Native artisans; this person in a good position to inform the Native artist community about the program. The ASCA also fund- raises. He noted, unlike the DCED, the arts council is poised, and has the expertise, to research federal grants for Native handicrafts and pursue funding from private foundations. Mr. Lawson stated, in his opinion, no one in this era is looking to the legislature for additional funding. Number 0884 REPRESENTATIVE HUDSON asked how much funding would be considered necessary to reach the Silver Hand Program goals? Number 0917 MR. LAWSON stated he would rather let the witnesses speaking for the ASCA answer that question. He noted the amount would probably be more than the DCED would be able to transfer to the arts council. Number 0924 CHAIRMAN ROKEBERG asked if the $5,000 budgeted to the program paid for the actual decals, seals and tags. Number 0932 MR. LAWSON answered that $5,000 has covered that cost in the past. If the supply of stickers and tags was sufficient, the DCED did a modest amount of advertising, attempting to reach tourists coming to Alaska so that they would be aware of the program and seek out genuine Native handicrafts with stickers. Number 0955 CHAIRMAN ROKEBERG asked why EO 100 provides for the transfer of the seal but not the emblem. Number 0968 MR. LAWSON explained that the Made in Alaska Program and the Silver Hand Program are "intertwined" in the statute. Whenever the term emblem was used, it referred to the Made in Alaska Emblem; the Silver Hand was always referred to as the Silver Hand Seal. Number 1008 CHAIRMAN ROKEBERG noted the provision in Alaska Statute 45.65.020 that the Commissioner of Commerce is responsible for the supervision of the use of the emblem. Number 1025 MR. LAWSON explained the emblem in that instance refers to the Made in Alaska Emblem and Program, which are staying with the DCED. Number 1053 FRED SMITH, Economic Development Planner, Association of Village Council Presidents (AVCP), testified via teleconference from Bethel. He stated he works for the 50 or so communities in Southwest Alaska. MR. SMITH stated that the AVCP supports EO 100. Given the history of the Silver Hand Program at the DCED, he noted the program has never really reached any of its intentions. He said that there is an opportunity with this move for the Silver Hand Program to more fully meet some of those intentions. MR. SMITH stated that moving the Silver Hand Program will help the Alaska Native artists who use the program, the businesses who buy and sell Native arts and crafts, and the customers of Native arts and crafts. Number 1128 MR. SMITH noted he disagreed with Representative Hudson's feeling that the program should stay with the DCED for three reasons: 1) the program's history, 2) the program's potential value, and 3) the ASCA is the best-suited existing state structure for the Silver Hand Program. Number 1203 VERNON CHIMEGALREA, Native Arts Program Director, Alaska State Council on the Arts, testified via teleconference from Anchorage. He read the following statement into the record: "The Alaska State Council on the Arts is in support of the [Governor's] Marketing Alaska recommendation to transfer the Silver Hand Program from the Department of Commerce and Economic Development to the Alaska State Council on the Arts. "The economic impact of the arts have been proven on a state to national level. In Alaska, the arts are a viable industry with annual economic impact to the nonprofit sector alone of over $23.5 million. The importance of the arts industry is especially evident in rural Alaska where it may be a family's primary source of income. Number 1257 "ASCA, the Alaska State Council on the Arts, has long recognized that communities and artisans need assistance in developing and marketing local and regional cultural opportunities. It provides grant funds, technical assistance and leadership to help develop the arts industry in Alaska. For example, ASCA is in its third year of a partnership with the Department of Community and Regional Affairs to support community-based efforts to diversify and strengthen rural economies through arts-related economic development projects." Number 1295 CHAIRMAN ROKEBERG noted the committee was in possession of Mr. Chimegalrea's statement and it would be entered into the record. In the interests of time Chairman Rokeberg asked Mr. Chimegalrea to sum up his comments. Mr. Chimegalrea submitted the following statement for the record: The ASCA Rural Arts Initiative Grant Program has funded three arts cooperatives being developed through the Association of Village Council Presidents in the Yukon-Kuskokwim Delta, the Tribal Council of St. Paul Island and the Tribal Council of Pt. Hope. 2) ASCA is co-sponsoring a technical assistance workshop February 18 to 20 for the planning and management of Alaska Native Museums and Culture Centers. The workshop will include sessions on the role of tourism, role of gift shops, collections management and exhibit planning. 3) Last fiscal year ASCA made over $500,000 in grants to organizations and individuals. Every grant we issue supports Alaskan jobs and creates economic impact in the community it was awarded. 4) Master Artist and Apprenticeship Program pairs apprentices desiring to pursue serious study of a Native Art with an acknowledged master artist. This program encourages the creation of high quality products by master artists in traditional Native art forms. The Silver Hand Program was established to authenticate Native arts for the retailers and consumers while protecting the work of Native artists. The program began with good intentions but has languished due to lack of commitment and resources at the Department of Commerce and Economic Development. The Marketing Alaska task force identified significant problems with the program calling it "outdated, vague and ineffective." The Silver Hand Program has been repeatedly criticized for failing to carry out its obligations. It is estimated that over 85 percent of art merchandise sold as Native made is not authentic. In addition, Native artists lack trust in the program and retailers are not educated on how to market Native arts and crafts without misrepresenting the art and its cultural origin. In response to the Governor's Marketing Alaska findings, it was recommended that the Alaska State Council on the Arts take over management of the Silver Hand Program. This program goes hand in hand with our existing Native Arts Program. As the Native Arts Program director, I apply my art and language expertise as well as a statewide networking to enhance and build the program. Since the beginning of the fiscal year, ASCA has devoted considerable staff resources to revitalize this important program. 1) We convened the advisory committee of both Native artists and retailers. 2) We incorporated the Silver Hand Program into a statewide Native arts outreach through exhibitions at major Native conferences and gatherings as well as travel to major hub areas of the state. 3) We produced video public service announcements describing the program and the purpose of the Silver Hand tag. 4) We increased enrollment in the program by 50 percent to over 600 artists. 5) We contacted Federal Trade Commission to discuss enforcement issues. 6) We are working to make the Silver Hand Program locally accessible by developing partnerships with village corporations. 7) We placed advertisements in major tourist publications alerting travelers to the importance of the Silver Hand tag when purchasing authentic Native arts. The council feels strongly that the Silver Hand Program will be best served under the direction of the Alaska State Council on the Arts. We will seek the public and private resources necessary to enhance the economies of rural Alaska through arts-related program like Silver Hand. Number 1301 MR. CHIMEGALREA summed up the rest of his statement for the committee. He noted that the Silver Hand Program authenticates Native arts for retailers and consumers while protecting Native artwork. MR. CHIMEGALREA referred to the efforts the ASCA has already made in regards to the Silver Hand Program since July 1997. He commented that 200 new artists had entered into the program since July 1997, as compared to the 600 over the past 36 years. MR. CHIMEGALREA indicated the ASCA was not comfortable with the current Silver Hand agent structure, and he mentioned the efforts to contact the over 200 village corporations throughout the state to encourage the corporations to become the Silver Hand agents for their communities, paying the fees. He noted the Silver Hand sticker would help local economies. Mr. Chimegalrea concluded that, with all these facts, the ASCA is in support of the transfer. Number 1466 CHAIRMAN ROKEBERG asked Mr. Chimegalrea how much money the ASCA received from the legislature this fiscal year and how this transfer would affect the ASCA's budgetary requests for next year. Number 1500 HELEN HOWARTH, Executive Director, Alaska State Council on the Arts, testified via teleconference from Anchorage. She stated that she would like to address Chairman Rokeberg's question. Number 1528 MS. HOWARTH, referring to the earlier hearing on EO 100 in the House Community and Regional Affairs Standing Committee and questions raised in this meeting, noted she understood the concerns expressed about the ASCA's viability. Ms. Howarth noted the ASCA'S appropriation this year from the state was approximately $460,000 and was matched by the federal government. MS. HOWARTH stated that the ASCA feels very strongly it can accommodate the Silver Hand Program within its current budget, and with current staff to a certain extent. She noted the ASCA did ask for a budget increase this year of approximately $32,000 to fund the addition of the program to the ASCA's budget. MS. HOWARTH stated that the council plans to seek private funding to make up any additional budget needs it might have through the operations of the program. She noted the council feels very confident that it will be able to attract private support to help fund the Silver Hand Program. Number 1601 MS. HOWARTH continued, "I think, perhaps, the most important part about us taking over this program is the fact that we - we consider ourselves experts in Native arts. We have the contacts in the communities; we have a Native arts panel that advises us on - on matters of Native arts and culture; we do a lot within our current existing structure, without having to add a lot of budget needs or personnel costs, or anything like that, to actually manage the Silver Hand Program in ... association with our Native Arts Program. So, while it would certainly be nice to have additional funding, we feel fairly strongly that we can manage the program with the resources that we have, ... soliciting additional resources from the private sector." Number 1676 CHAIRMAN ROKEBERG, hearing no further comments, closed the public hearing on EO 100. ADJOURNMENT Number 1682 CHAIRMAN ROKEBERG adjourned the House Labor and Commerce Standing Committee meeting at 4:58 p.m.