HOUSE LABOR AND COMMERCE STANDING COMMITTEE March 29, 2000 3:28 p.m. MEMBERS PRESENT Representative Norman Rokeberg, Chairman Representative Andrew Halcro, Vice Chairman Representative Lisa Murkowski Representative John Harris Representative Tom Brice Representative Sharon Cissna Representative Jerry Sanders MEMBERS ABSENT All members present COMMITTEE CALENDAR CS FOR SENATE BILL NO. 193(FIN) "An Act relating to the payment of wages and claims for the payment of wages." - MOVED CSSB 193(FIN) OUT OF COMMITTEE CONFIRMATION HEARINGS: Board of Marine Pilots Michael C. Spence - Ketchikan - CONFIRMATION ADVANCED Barbara Huff Tuckness - Anchorage - CONFIRMATION ADVANCED HOUSE BILL NO. 345 "An Act relating to state employee health insurance." - HEARD AND HELD HOUSE BILL NO. 339 "An Act authorizing the Alaska Commercial Fishing and Agriculture Bank to make loans relating to tourism and development or exploitation of natural resources." - SCHEDULED BUT NOT HEARD PREVIOUS ACTION BILL: SB 193 SHORT TITLE: COLLECTION OF UNPAID WAGES Jrn-Date Jrn-Page Action 1/14/00 1977 (S) READ THE FIRST TIME - REFERRALS 1/14/00 1977 (S) L&C, FIN 2/08/00 (S) L&C AT 1:30 PM BELTZ 211 2/08/00 (S) -- Rescheduled to 2/10/00 -- 2/10/00 (S) L&C AT 1:30 PM BELTZ 211 2/10/00 (S) Moved CS(L&C) Out of Committee 2/10/00 (S) MINUTE(L&C) 2/11/00 2272 (S) L&C RPT CS 4DP SAME TITLE 2/11/00 2272 (S) DP: MACKIE, TIM KELLY, DONLEY, LEMAN 2/11/00 2272 (S) ZERO FISCAL NOTE (LABOR) 2/22/00 (S) FIN AT 9:00 AM SENATE FINANCE 532 2/22/00 (S) Heard & Held 2/22/00 (S) MINUTE(FIN) 3/06/00 (S) FIN AT 9:00 AM SENATE FINANCE 532 3/06/00 (S) Moved CS(Fin) Out of Committee 3/06/00 (S) MINUTE(FIN) 3/06/00 2529 (S) FIN RPT CS 7DP 1NR SAME TITLE 3/06/00 2530 (S) DP: TORGERSON, PARNELL, PHILLIPS, 3/06/00 2530 (S) GREEN, PETE KELLY, LEMAN, WILKEN, 3/06/00 2530 (S) NR: ADAMS 3/06/00 2530 (S) PREVIOUS ZERO FN (LABOR) 3/07/00 (S) RLS AT 12:00 PM FAHRENKAMP 203 3/07/00 (S) MINUTE(RLS) 3/08/00 2562 (S) RLS TO CALENDAR 03/08/00 3/08/00 2567 (S) READ THE SECOND TIME 3/08/00 2567 (S) MOVE TO BOTTOM OF CALENDAR 3/08/00 2576 (S) FIN CS ADOPTED UNAN CONSENT 3/08/00 2576 (S) ADVANCED TO THIRD READING UNAN CONSENT 3/08/00 2576 (S) READ THE THIRD TIME CSSB 193(FIN) 3/08/00 2577 (S) PASSED Y19 N- E1 3/08/00 2577 (S) TORGERSON NOTICE OF RECONSIDERATION 3/15/00 2614 (S) RECONSIDERATION NOT TAKEN UP 3/15/00 2615 (S) TRANSMITTED TO (H) 3/15/00 2481 (H) READ THE FIRST TIME - REFERRALS 3/15/00 2481 (H) L&C, JUD 3/29/00 (H) L&C AT 3:15 PM CAPITOL 17 BILL: HB 345 SHORT TITLE: STATE EMPLOYEE HEALTH INSURANCE Jrn-Date Jrn-Page Action 2/07/00 2118 (H) READ THE FIRST TIME - REFERRALS 2/07/00 2118 (H) L&C, STA, FIN 2/07/00 2118 (H) REFERRED TO LABOR & COMMERCE 3/17/00 (H) L&C AT 3:15 PM CAPITOL 17 3/17/00 (H) Heard & Held 3/17/00 (H) MINUTE(L&C) 3/24/00 (H) L&C AT 3:15 PM CAPITOL 17 3/24/00 (H) Scheduled But Not Heard 3/29/00 (H) L&C AT 3:15 PM CAPITOL 17 WITNESS REGISTER KRIS KNAUSS, Staff to Senator Drue Pearce Alaska State Legislature Capitol Building, Room 111 Juneau, Alaska 99801 POSITION STATEMENT: Presented sponsor statement for CSSB 193(FIN). AL DWYER, Director Division of Labor Standards & Safety Department of Labor & Workforce Development P.O. Box 21149 Juneau, Alaska 99802-1149 POSITION STATEMENT: Testified on CSSB 193(FIN). MARGARET BAUMAN 8100 Lamplighter Court Anchorage, Alaska 99502 POSITION STATEMENT: Testified in support of CSSB 193(FIN). JAY SEYMOUR 1031 West Third Avenue Number 300 Anchorage, Alaska 99501 POSITION STATEMENT: Testified in support of CSSB 193(FIN). RANDY CARR, Chief of Labor Standards & Safety Division of Labor Standards & Safety Department of Labor & Workforce Development P.O. Box 107021 Anchorage, Alaska 99510-7021 POSITION STATEMENT: Answered questions on CSSB 193(FIN). CHUCK O'CONNELL, Business Manager A.F.S.C.M.E. [American Federation of State, County and Municipal Employees] Local 52 626 F Street Anchorage, Alaska 99501 POSITION STATEMENT: Testified in opposition to HB 345, Version G. DON VALESKO, Business Manager Public Employees Local 71 2510 Arctic Boulevard Anchorage, Alaska 99503-2516 POSITION STATEMENT: Testified on HB 345, Version G. ALISON ELGEE, Deputy Commissioner Office of the Commissioner Department of Administration P.O. Box 110200 Juneau, Alaska 99811-0200 POSITION STATEMENT: Testified on HB 345, Version G. ACTION NARRATIVE TAPE 00-38, SIDE A Number 0001 CHAIRMAN NORMAN ROKEBERG called the House Labor and Commerce Standing Committee meeting to order at 3:28 p.m. Members present at the call to order were Representatives Rokeberg, Halcro, Murkowski, Harris, Brice and Cissna. Representative Sanders arrived as the meeting was in progress. SB 193 - COLLECTION OF UNPAID WAGES CHAIRMAN ROKEBERG announced the first order of business would be CS FOR SENATE BILL NO. 193(FIN), "An Act relating to the payment of wages and claims for the payment of wages." KRIS KNAUSS, Staff to Senator Drue Pearce, Alaska State Legislature, came forward to testify on CSSB 193(FIN). He stated that the bill was introduced on behalf of Senator Pearce in regard to a constituent, Margaret Bauman, who attained membership with the Alaska Business and Industry Newspaper Publishing Company. Ms. Bauman was hired in the fall of 1998. She had arrears that reached the amount of $10,000 before termination of employment. The employment relationship ceased, and Ms. Bauman went to the Department of Labor & Workforce Development [DLWD], looking for a way to get the arrearage back. She encountered a problem since the maximum the department could deal with was $7,500. MR. KNAUSS explained that CSSB 193(FIN) is a modification of the law and raises the cap to $20,000. Since Ms. Bauman's arrearage amounted to $10,000, it was not feasible for her to gain legal representation on a contingency fee basis. Therefore, CSSB 193(FIN) alleviates that and would allow for Ms. Bauman to get those funds back. REPRESENTATIVE HALCRO indicated Ms. Bauman is a constituent of both his and Senator Pearce's. He spoke with Ms. Bauman this summer regarding her situation. His conversation led him to Randy Carr, who told him the cap has been at $7,500 because the Bar Association and associated attorney organizations have been hesitant in the past to allow the state to "go after any more" because they feared it would encroach on their business. He stated that it is now unlikely to find an attorney to pursue a matter for anything under $20,000. During the interim, Representative Halcro worked with Senator Pearce's staff. They spoke to the Bar Association and other organizations, and they did not have a problem raising the cap to $20,000. He also spoke with Dwight Perkins, Deputy Commissioner, DLWD, and Ed Flannagan, Commissioner of DLWD, who seemed to support this issue. He indicated he had introduced a companion bill but that there was an agreement that Senator Pearce's legislation would move instead. REPRESENTATIVE BRICE asked when the $7,500 cap was established. CHAIRMAN ROKEBERG answered that it was two or three years ago, by the House Judiciary Committee, which raised the limit from $5,000 to $7,500. REPRESENTATIVE HARRIS wanted to confirm that DLWD was supportive of the bill. MR. KNAUSS said that is correct. He noted that he has been working with some defense attorneys who are more familiar with the legal aspects of the issues. A couple of amendments had been made with respect to double-penalizing on liquidation. As far as he knows, everyone is okay with the bill. Number 0457 AL DWYER, Director, Division of Labor Standards & Safety, Department of Labor & Workforce Development, came forward to testify on CSSB 193(FIN). He said he has not heard any complaints from the court system. REPRESENTATIVE MURKOWSKI asked, "Do you have any idea what this is going to mean to the courts in terms of an increase in case load to the small claims court?" MR. DWYER responded that approximately 120 cases have been assumed. Out of those claims, 10 or 20 could possibly end up in court annually. CHAIRMAN ROKEBERG asked if this is because the bill could provide some leverage. MR. DWYER explained that the division turns away a lot of people because of the $7,500 cap. REPRESENTATIVE HALCRO reported that Randy Carr had said that current penalties act as a hammer. Therefore, those in arrears have a vested interest to pay as soon as possible because the penalties are pretty steep. He indicated Mr. Carr had said this mitigates the number of cases that actually make it court. Number 0582 MR. KNAUSS said the employer has three days to pay arrears after employment is terminated. MARGARET BAUMAN testified via teleconference from Anchorage: I am here to testify in favor SB 193, legislation to raise the amount of back wages for residents which the state can pursue through the court system. At present, the Labor Department [DLWD] can only pursue amounts up to $[7],500 and my former employer owes me in excess of $10,000. The employer, Business News Alaska, has refused to pay me any of the amount since last July, although the company has acknowledged in writing that they owe me the money. At the time, I worked as the news editor for Business News Alaska, a monthly business publication in Anchorage, from October 1998 through July 1999. I was also caring for an elderly parent at home. My mother was not in good health and needed 24-hour care, so I needed a job I could do largely at home, except for hours when I had a care giver or my mother was at day care. Business News Alaska hired everyone on a contract labor basis. I had no idea at the time the practice was illegal, as the state Labor Department has twice since concluded. As the company became further and further behind in paying me, the publisher, Kay Cashman, continued to hire other people and kept coming up with excuses for not paying up. When we parted company last summer, I asked for the money due me within three working days. Kay said I was not an employee and she could pay me in the indefinite future. I inquired at the Labor Department, filled out paperwork for them to make a determination, as did Kay Cashman. The department spent a lot of time studying the situation and concluded I was an employee; so did the Internal Revenue Service [IRS]. Ms. Cashman and her publishing partner, Raylene Combs, then appealed the Labor Department's decision. The hearing officer for the appeal also concluded I was an employee, and the state is now studying all the records of Business News Alaska because the company hired most people on a contract basis with no benefits and no taxes [with]held. Now Business News Alaska is appealing the matter again, on the commissioner level. It's a good thing the Labor Department took my case, because even if I could afford an attorney to handle my side, I've been advised that given her track record, Cashman has no intention of paying me any of the money she owes. I have with me, for the legislature, copies of records which I paid for myself from Motznik Computer Service, showing that Ms. Cashman has numerous debts outstanding, including a $35,000 judgment against her through the state superior court. She's never paid a dime on that judgment, either. To cover herself, she lists herself as a publisher, and her son and a partner, Raylene Combs, as owners. Changing the state law to allow the Labor Department to pursue, through the court system, back wages would benefit residents like myself who have no other recourse. It would also put companies like Business News Alaska on notice that this state will not tolerate employers who think they can operate outside the law. SB 193 would make Alaska a fairer playing field for employers who do operate under the law and are at a disadvantage when other employers are allowed to operate outside the law. Number 0899 JAY SEYMOUR testified via teleconference from Anchorage. He stated that he is in support of CSSB 193(FIN), although he had some concerns with the bill when it was first introduced. An attorney whose practice almost exclusively deals with labor and employment issues, he has been an Alaskan for over 25 years. As an employment lawyer, he indicated that the most aggravating set of laws that employers face is the wage and hour laws. From an employer perspective, they often result in a windfall for employees who have been fairly paid. He commented: In my experience, I have often seen employees who have been paid $40,000 a year ... or even $80,000 or $90,000 a year when settlements for judgments in excess of ... $100,000 for unpaid overtime on the basis of a good- faith dispute between them and their employer. To add insult to injury, the current law provides for a waiting time penalty, which a court can impose for not having paid the overtime that was in dispute, even though it may have been a good-faith dispute. Paradoxically, there are some gaps in the law, as Ms. Bauman just testified, that don't allow the Department of Labor to pursue those unscrupulous employers with wage claims that are much smaller than the claims that we normally see brought by the plaintiff's (indisc.). I think that SB 193 is a good first step towards providing some relief on both ends of the spectrum - both for those who are paid at the minimum wage or don't have large claims, at the same time bringing a little bit of sanity for those who've already been fairly paid claims in excess of $30,000 or $40,000. The bill provides additional authority to the department to enforce labor laws for the State of Alaska, and I do believe that those are claims that ordinarily would not be brought by most of the attorneys in the claims (indisc.). It also provides some relief to those employers who face overtime claims, so that they don't have to face the claim of additional penalties. That's simply been a good-faith mistake in the application of the law. Number 1069 REPRESENTATIVE MURKOWSKI referred to Ms. Bauman's testimony. She asked whether allowances are being made in the bill for an employer who considers an employee to be an independent contractor. MR. SEYMOUR said he understands that the determination of whether or not an individual is an employee or an independent contractor would not be affected in CSSB 193(FIN). This determination is affected by other provisions of law which, in his experience, are fairly liberal in favor of the employee. He said: I'm not too familiar with the facts in this case, but I understand it to be that there are a lot of indices that Ms. Bauman was, in fact, an employee under the law in this particular case, even though she was labeled an independent contractor, and the Department of Labor or a court would make the determination of (indisc.) issue. REPRESENTATIVE MURKOWSKI responded: In recognizing that, they would, in fact, do that. But this legislation requires that it be paid three days afterwards, and if you fail to do, you've got certain penalties that the employer is facing. So, I guess, if this were to pass, if I were making the argument that no, I was not an employee - I was, in fact, an independent contractor - my employer would be wise to just go ahead and pay me right up-front and then argue about it later. Is that kind of the direction that things could take? MR. SEYMOUR explained that the laws currently provide for the three-day payment. He said: I guess, in most instances, a contractor, or someone who's labeled a contractor, would be claiming that they were in fact an employee - therefore, would be covered by the law. ... This law doesn't impact that determination either way. That would be a separate determination, but you're right: The employer wants to be conservative, and there's some question about whether the worker is, in fact, an independent contractor or is really an employee. The employer [would be] well-advised to make the payment of all wages ... in the time stipulated by law. Number 1233 RANDY CARR, Chief of Labor Standards & Safety, Division of Labor Standards & Safety, Department of Labor & Workforce Development, testified via teleconference from Anchorage. He stated: It is not unusual that an individual presenting a wage claim is responded to by the employer in such a manner that the employer ... wants to lay out a number of possible defenses. One of them may be the fact that they think they're an independent contractor, and the way the law currently reads - and the way the bill also reads - would allow the employer to settle with the Department of Labor at an administrative level, which basically means we can conduct the investigation to determine from the facts whether or not the individual is an employee or an independent contractor. Once we make that determination, if the finding is that the individual is an employee, then the matter becomes one of trying to effect a resolution as to the amount due and get payment from the employer. Once that determination has been made, if the employer resolves this matter administratively with the department, the waiting-time penalties that are addressed in this statute are not a factor. The way the statute is applied now - and the way it would be applied as amended - would be that the waiting-time penalties are there as an incentive to get the employer to deal in good faith with the Department of Labor. If a resolution cannot be reached and the Department of Labor is compelled to take the matter to court, then the waiting-time penalties in that action would become mandatory, but only in that situation. At all other points up until that time, they are a bargaining chip that can be used to reach a negotiated settlement. Number 1339 REPRESENTATIVE MURKOWSKI referred to page 2, subsection (b) [beginning on line 25], and said: You've got three working days after termination to make payment. Then, under subsection (d), if you do not do it within that three-working-day period, then you are subject to the penalties upon the employer and there isn't this waiting period that you're talking about. Maybe that's what I'm missing, is where's the reference to the waiting period? You've got to get through this administrative process where you all settle out, whether or not you are an employee or an independent contractor. MR. CARR explained that the current statute says the waiting-time penalties are not discretionary and must be awarded by a court. They cannot be awarded by DLWD. The present language requires that any party who seeks to collect waiting-time penalties gets a judgment from the court awarding them. REPRESENTATIVE HALCRO said to Mr. Carr: Randy, that goes to the heart of our discussion last August, when you were talking about some employees will simply just string you out, then take you to court. But ... the penalty provisions that were put in place recently act as kind of a deterrent for that, because people know at the end of the day they can string you out, but at the end of the day, they may just suffer the consequences of some heavy penalty. MR. CARR affirmed that it is exactly what the bill would now do. Prior to 1981, the penalties were mandatory. In 1981, the penalties were relaxed and discretion was given to the court to award or not award the penalties. He said: Now what we have before us is a compromise in matters wrought by the state Department of Labor. If we are compelled to go to court to prosecute on behalf of someone to collect their wages, any appropriate waiting-time penalties would be mandatory. MR. CARR indicated that in private cases it would be up to the discretion of the court to award waiting-time penalties or not. There is one exception to this, addressed in Section 5, subsection (f), page 3 of CSSB 193(FIN), which reads: (f) In an action brought for unpaid overtime under AS 23.10.060 that results in an award of liquidated damages under AS 23.10.110, the provisions of (d) of this section do not apply unless the action was brought by the department under (e) of this section. He said the waiting-time penalties under this statute would not come into effect. The language has been worked out as a compromise. CHAIRMAN ROKEBERG asked Mr. Carr to explain the amount that the liquidated damages under AS 23.10 could be. Number 1536 MR. CARR replied that the liquidated damages under AS 23.10 are equal to the amount of unpaid minimum wage or unpaid overtime. It is a punitive damage and, under the current statutory construction, the employer may assert a good-faith defense to his violation. If that defense is acceptable to the court, then the court has the authority to waive some or all of the liquidated damages for cases brought in the private sector. Liquidated damages are mandatory in cases brought by DLWD. The mandatory aspects in cases brought by DLWD are not there to specifically "roll up the dollar value of the case, but to offer an incentive to the employer to negotiate harder, and reach a settlement with the department short of court action." CHAIRMAN ROKEBERG referred to Section 5, subsection (f), amending AS 23.05.140. He asked, "If you go into a small claim court under this provision, you could get the mandated liquidated damages as well as the section (e) damages also?" MR. CARR said that is correct because the damages are for different violations of different laws. The liquidated damages in AS 23.10 relate to failure to pay the minimum wage or overtime. The waiting-time penalties relate to failure to pay whatever is due. For example, it could be vacation pay, wages all together, minimum wage or overtime that the employee is entitled to. Number 1627 CHAIRMAN ROKEBERG said: You've indicated the reason that you have the waiting time penalties - in particularly, like, the (f) section, liquidated damages, which would be mandatory - is to try to get a settlement before you go to court, but that doesn't square up with ... we're giving you a free pass to small claims court right out of the chute. MR. CARR replied that it is not so much that the bill is giving a pass to small claims court; rather, it is providing the ability to take a claim into [their] "offices to administratively investigate it and attempt to resolve it." Currently, the ability to do that does not exist because it is over the statutory limit. He said, "Our track record has about a 85 to 90 percent resolution administratively, short of ever having to go to court." CHAIRMAN ROKEBERG indicated he was not aware that a statutory limitation existed on their jurisdiction. REPRESENTATIVE MURKOWSKI asked whether she understands correctly that a person can be assessed both liquidated damages and the waiting-time penalty. MR. CARR said that is correct. That is the current status of the law, unchanged by the bill. The changes effected by the bill would be if DLWD brings a case in court and has to go through the court process to judgment; then the penalties will be mandatory. In the private sector, the penalties may be discretionary if awarded by the court. He expanded on his answer: Let's say someone takes a claim for unpaid vacations and unpaid wages, and they get an attorney to take a case to court for them. Then the court can award the waiting-time penalties or not. If the claim, as identified in Section 5(f), is strictly for overtime - such as the case that Mr. Seymour is referring to, where he has an individual who is a highly paid person who files an overtime claim - usually those arise out of a dispute over whether the individual was exempt from overtime or not. And so, they have an overtime claim for 30, 40, 50 thousand dollars; they win that claim, they also get liquidated damages awarded by the court. In that situation, this bill says waiting-time penalties would not apply because it's a highly paid individual in the first place, and it's a large claim. The compromise here is that the liquidated damages should suffice for the recovery, and the waiting-time penalties should not be an issue. CHAIRMAN ROKEBERG wondered if a private party, under this bill, could bring an action for a wage-and-hour claim up to $20,000 to a small claims court. MR. CARR said that is not correct. Only the DLWD can bring an action for $20,000 in small claims court. All other issues in small claims court are subject to the $7,500 cap set out in the small claims statute. CHAIRMAN ROKEBERG asked whether the penalties would, therefore, apply. MR. CARR affirmed that. CHAIRMAN ROKEBERG referred to Section 4, subsection (d), page 3, of CSSB 193(FIN). He requested clarification. MR. CARR replied that the demand is going to be set by DLWD's first notice to the employer. The deadline can be set, in rare cases, when the employee has articulated a demand for their wages in writing. In most cases, there has not been that sort of a formalization in the dispute. In the private sector, it may well be more frequent that the demand is established in writing because the party has usually received legal counsel sometime well before the filing of a lawsuit. CHAIRMAN ROKEBERG said it appears to be an incentive to drag one's feet, up to 90 days, so that one's award could be bigger. MR. CARR responded, "No." He clarified that the award only starts from the day of demand until the day of payment. If a person waits 45 days before demanding his or her wages, the clock doesn't start until the 48th day, and that is when the 90 days begin to run. CHAIRMAN ROKEBERG asked Mr. Seymour, "In your capacity as counsel on these types of wage-and-hour [disputes], you represent both ... employees and employers normally, or what is your typical practice?" MR. SEYMOUR replied that he typically only represents employers. CHAIRMAN ROKEBERG asked whether Mr. Seymour is satisfied with the conditions set out in the bill. MR. SEYMOUR reiterated that he thinks the bill is a good first step. There are some provisions in law not covered in the bill, but it is well balanced. Number 1934 REPRESENTATIVE HALCRO made a motion to move CSSB 193(FIN) out of committee with individual recommendations and the attached zero fiscal note. There being no objection, CSSB 193(FIN) moved out of the House Labor and Commerce Standing Committee. CONFIRMATION HEARINGS - Board of Marine Pilots Number 1948 CHAIRMAN ROKEBERG announced that the committee would consider two appointees to the Board of Marine Pilots. In accordance with AS 39.05.080, the committee would review the qualifications of the appointees. He stated that the execution of the reviewed document does not reflect an intent by any of the committee members to vote for or against the individual during any further sessions for the purpose of confirmation. [Committee packets contained a resume from each appointee.] CHAIRMAN ROKEBERG made a motion to forward the nomination of Michael C. Spence. There being no objection, the confirmation was advanced. CHAIRMAN ROKEBERG made a motion to forward the nomination of Barbara Huff Tuckness. There being no objection, the confirmation was advanced. CHAIRMAN ROKEBERG called an at-ease at 4:05 p.m. and called the meeting back to order at 4:09 p.m. HB 345 - STATE EMPLOYEE HEALTH INSURANCE Number 2069 CHAIRMAN ROKEBERG announced the next order of business would be HOUSE BILL NO. 345, "An Act relating to state employee health insurance." CHAIRMAN ROKEBERG noted that Version G [1-LS1364\G, Cramer, 3/17/00] of HB 345 was adopted at the last committee hearing [March 17, 2000], at which time members asked for public testimony. He said he did not intend to move the bill beyond the next committee of referral. CHAIRMAN ROKEBERG noted that one objective of the legislation is to "allow the legislature to make the public policy." Testimony from the Department of Administration has indicated that the commissioner made a decision to grant collective bargaining units the right to establish their own health care trusts. That, he said, is what galvanized him to introduce HB 345. Furthermore, discussions with the president [executive president, Mano Frey] of the AFL-CIO [American Federation of Labor and Congress of Industrial Organizations] have indicated that he is working to form larger coalitions with the state employees. His concern is related to the size of the actuary pool. CHAIRMAN ROKEBERG said, "When you take the basic premise that an actuary pool is to be smaller then there's a smaller amount of covered lives to spread those risks." It's particularly important to consider in cases of major illnesses such as AIDS [acquired immunodeficiency syndrome] because the rollback affects the cost of those in the pool. He said, "We don't have [a] reinsurance cap because we have a large pool of covered employees. So, my concern was ... decreasing the amount of the people in the pool, and that's ... the problem." CHAIRMAN ROKEBERG further noted that there are some 30,000 lives under the AFL-CIO trust statewide, and the idea that a collective bargaining unit could stop their own trust and enter into a coalition for greater buying and negotiating power causes him concern. He said: If they're [going to] enter into agreements to pull in the state employees under this net with these coalitions - that potentially, with some excess of 30,000 lives that would be part of that, that particular umbrella organization could have as many as 60, 70 thousand lives underneath it. And, therefore, in the state of Alaska this would be the 800-pound gorilla. And they would have the ability to do the bargaining with the health care providers ... in such a way to get the very best of prices, which you think, "Well, that's a good thing." But I think all of us in this committee should know, or at least you should recognize, in the health care game, if you will, anytime there's a decrease in price, it becomes a cost-shift type of situation. And that's one of the problems I can talk about with the insurance mandates and things like that. When you get a cost- shift situation, ... you'd have this large group of people going into a very small market, which is basically the state of Alaska, and those folks would get lower costs for their service and everybody else would basically have to pay more. And so, I think, that is a responsibility on the part of the legislature, to make sure that whatever happens with the state employees and how they are given their rights or they're given the right to leave the pool that we need to know, number one, where they're going and, number two, how they're [going to] be administered. We have the responsibility to protect the state employees, and we have a responsibility to every other citizen in this state to make sure that their health insurance doesn't go up as a result of this type of action. And that is absolutely the reason I introduced this bill, and no other. Number 2359 REPRESENTATIVE BRICE said he doesn't see how making public employees pay $500,000 into a pool that they can't participate in addresses the concern expressed by Chairman Rokeberg. CHAIRMAN ROKEBERG said he is talking about the ACHIA [Alaska Comprehensive Health Insurance Association] portion of HB 345. REPRESENTATIVE BRICE said Chairman Rokeberg's assumption that self-insurance pools increase medical costs for everybody across the state is not accurate in relation to the principles of economics. CHAIRMAN ROKEBERG replied that it is a question of fairness. Number 2450 CHUCK O'CONNELL, Business Manager, A.F.S.C.M.E. [American Federation of State, County and Municipal Employees] Local 52, came before the committee to testify. Local 52 represents about 7,400 GGU [General Government Unit] members. He said HB 345 he said, would make the subject of negotiating health care for state employees illegal. He referred to Section 3 of Version G [page 2, lines 8-11], which read as follows: (b) Except as provided in this [sic] (c) of this section, the state and an organization representing state employees may not enter into a collective bargaining agreement in which members of the bargaining unit are exempted from coverage under the health insurance plan provided by the state under AS 39.30.090(a)(1) or 39.30.091. TAPE 00-38, SIDE B Number 0001 MR. O'CONNELL said if the bill becomes law it would increase the cost of health care for state workers dramatically. He noted that during the course of bargaining Local 52's contract there was a dispute over the cost of health care. In that regard, Local 52 became convinced that they could provide health care for their members at a lower cost if they directly managed an independent trust. Under state control, he noted, the administrative costs would be about at least $15 a month more than if Local 52 was to negotiate a third party administrator outside of the procurement codes. MR. O'CONNELL said it also became glaringly obvious throughout the negotiation process that there were many more of those types of cost-efficiencies that could be secured if they controlled the delivery of the plan. As a result, an agreement was reached with the commissioner to set up a trust. Local 52 is in the process of selecting trustees, as soon as the contract is ratified. Local 52 also thinks that with direct oversight they can audit claims and premium payments annually. He further stated that the health care industry in the state is a mature, professionally managed industry. It's very profitable and knows how to survive in the business world. It seems therefore that it is not necessary for the legislature to put a "mantel" over the industry in order to protect that "1000 pound gorilla." He respectfully asked the committee members to oppose the bill. Number 0205 CHAIRMAN ROKEBERG asked Mr. O'Connell whether he truly believes HB 345 was designed to protect the health care providers of the state. MR. O'CONNELL replied that if HB 345 is to prevent large health care coalitions from forming, that is exactly what it would do. CHAIRMAN ROKEBERG stated that the intention of HB 345 is to keep the large pool of state employees together. It is not to restrict the ability of collective bargaining units to bargain health care benefits or anything like that. He asked Mr. O'Connell: Doesn't the phenomena of cost-shifting take place in the health care industry? MR. O'CONNELL replied, yes, it does. Number 0244 CHAIRMAN ROKEBERG asked Mr. O'Connell to explain to the committee members how GGU relates to the coalition. MR. O'CONNELL first noted that GGU members fall under a different health plan than other state employees. GGU members do not have a select-benefit option. In that way, GGU members have preserved their insurance pool and have found that the cost of the plan is increasing slower compared to other plans. It is the intention therefore of Local 52 to maintain that structure in a trust situation. MR. O'CONNELL further stated that there are about 30,000 lives that have access to the coalition. The way it works, the coalition of labor unions negotiates rates with certain providers and each union has the option to purchase whether or not they want to use those providers. For example, the iron workers have a preferred provider agreement with Alaska Regional Hospital. The Teamsters [General Teamsters Local 959, State of Alaska] and NEA [National Education Association-Alaska], for example, have a preferred provider agreement with Providence Hospital. Each union is free to make its own deal with the most astute business persons in the health care industry. Number 0344 CHAIRMAN ROKEBERG asked Mr. O'Connell whether a union opts in or out under the same contract that has already been bargained. MR. O'CONNELL explained that the only thing unions bargain in relation to health care is the employer's contribution. They do not bargain the preferred provider [agreement] or the level of benefits. Number 0359 CHAIRMAN ROKEBERG asked Mr. O'Connell whether the preferred provider [agreement] is bargained by the coalition and whether unions opt in or out of the coalition. MR. O'CONNELL replied, to the best of his knowledge, not every union participates in the hospital preferred provider "deal." He deferred the question to Mr. Don Valesko [Business Manager, Public Employees Local 71], who is part of the coalition. As to the intent of Local 52 in relation to the coalition, they have not made any commitments. Local 52 is going to look at all of the options, and will take the best option for their members. Local 52, he noted, has members in every House [of Representative] district across the state, which means a good deal in Fairbanks, for example, doesn't necessarily benefit those in another part of the state. Number 0432 CHAIRMAN ROKEBERG asked Mr. O'Connell, "Wouldn't it be possible, if you thought that the state was properly managing it, to have more power and stay together as a unit?" That, he said, is all that he is trying to "get at" in HB 345. MR. O'CONNELL replied, "I'm not sure I agree with that." CHAIRMAN ROKEBERG said, "No, I mean, ... because you're statewide exposure, don't you think you'd have a greater ability to do that or maybe the reluctance of the Administration to enter into a PPO [Preferred Provider Organization] type program would ...." MR. O'CONNELL replied: Well, there's a lot of reasons for that, and I wouldn't blame the Administration totally. There's been an awful lot of legislative interference over the years to prevent preferred provider agreements. You have to remember that whenever you have one you have legislators in the constituent area where the preferred provider agreement has not been reached. Number 0469 REPRESENTATIVE BRICE asked Mr. O'Connell what has driven Local 52 down the path of developing its own program. Has it been budget cuts? MR. O'CONNELL replied that budget cuts are part of it. Local 52's employees are paying a large amount of money for health care in relation to the amount of money that they make. If that cost can be lowered, he said, it might help in making their modest salary settlement more attractive. Number 0498 REPRESENTATIVE BRICE asked Mr. O'Connell to indicate what kind of money Local 52 is able to save for its membership and the state general fund by developing its own plan. MR. O'CONNELL replied that he doesn't know an exact amount. He also doesn't know whether or not Local 52 can continue to save money; but he thinks that they can bring about a number of cost- efficiencies in the short term. Number 0532 CHAIRMAN ROKEBERG asked Mr. O'Connell what the cost of the plan is now. MR. O'CONNELL replied that the current total cost of the self- insurance plan is $573 a month per member. CHAIRMAN ROKEBERG asked Mr. O'Connell what it costs a member. MR. O'CONNELL replied that a member pays $84.50 a month and the employer pays $488.50 a month. CHAIRMAN ROKEBERG asked Mr. O'Connell whether $573 is the equivalent to an economy plan with the state. MR. O'CONNELL replied, yes, it is commonly referred to as an 80- 20 plan. CHAIRMAN ROKEBERG asked Mr. O'Connell how much Local 52 thinks it can save by providing its own plan. MR. O'CONNELL replied he doesn't know. He pointed out, as his only comparison, that Local 52 has 20 employees and the premium is $402 a month under the laborers' health insurance trust. CHAIRMAN ROKEBERG asked Mr. O'Connell to comment on ACHIA, the high-risk pool. He explained that before the state went to a self-insured plan, it paid a million-dollar premium into a high- risk pool, which was necessary for an affordable plan. MR. O'CONNELL replied, as he understands the pool, it was created for those who had a difficult time obtaining insurance. In that regard, it is a very small but expensive pool. CHAIRMAN ROKEBERG noted that it is a pool of 362 people. It was put together for those who couldn't get insurance, and the health insurance companies that conduct business in the state picked up the difference of what was paid above the high premiums. He also noted that the state has to have a pool in order to maintain compliance since the federal Health Insurance Portability [and Accountability] Act passed three years ago. Chairman Rokeberg said it's a matter of fairness. When the state became self- insured, everybody else around the state had to pay for it. It's a classic example of cost-shifting. The bill therefore says that state employees would have to make a prorated contribution in that regard. Number 0695 REPRESENTATIVE BRICE asked under what circumstances state employees do not get insurance. Is a person who has a catastrophic illness and who is hired by the state not insured? MR. O'CONNELL answered that the only people who are not covered by health insurance are those who work less than 30 hours a week. REPRESENTATIVE BRICE said, "Okay, so, if I come in with a predetermined condition, ... I get my coverage?" MR. O'CONNELL replied, "Right." REPRESENTATIVE BRICE said, "So, in other words, then, trying to apply the ACHIA to state employees is kind of like trying to put an apple in an orange crate, given the fact that the ACHIA ...." MR. O'CONNELL interjected and said it is paying for a benefit that's not necessary. REPRESENTATIVE BRICE replied, "Well, not necessarily, in that they will never get." MR. O'CONNELL responded in the affirmative. Number 0748 DON VALESKO, Business Manager, Public Employees Local 71, came before the committee to testify. Local 71 represents some 1,700 people who work for the state. At any one given time, Local 71 represents 1,390 to 1,485 employees of the state who are covered by their trust, depending on the season. The bill, he said, would have little effect on Local 71. CHAIRMAN ROKEBERG asked Mr. Valesko how many covered lives are involved. MR. VALESKO replied that he doesn't have the exact figure with him, but 4,500 is real close. Number 0833 MR. VALESKO further stated that he was appointed to Local 71's trust, when it was originally formed in 1976, as a member from the Department of Transportation [& Public Facilities] in Fairbanks. He has served on the trust since. The trust, he explained, was formed to provide supplemental health insurance because members wanted better coverage than what the state was providing. The state, he noted, provided a plan that was close to the current 80-20 plan. The union, therefore, negotiated an additional 18 cents an hour from members' wages in order to go into a trust fund to buy additional coverage. The supplement provided for a 90 percent plan. The trust was in effect from 1976 until around 1981 to 1982, when the state opted out of the Social Security system and into the SBS [Supplemental Benefit System] system, which offered additional coverage. It was then decided that members could use the money that was made available from opting out of the Social Security system to buy an additional 10 percent health coverage. MR. VALESKO further stated that when [Bill] Sheffield became governor, Local 71 negotiated a full trust. Local 71 negotiated the removal of "X" amount per hour from members' wages in order to go into the trust and pull away from the state plan. The trust was bilateral in that there were three "straight" trustees and three union trustees. Prior to that, the trust was strictly unilateral in that there were only union trustees. The unilateral trust lasted for one year and built up a surplus of one million dollars. The next year, however, the attorney general ruled that a trust was not an option at the time because of AS 39.30.090. As a result, Local 71's members went back under the state's plan, and the million dollars was distributed to the participants of the trust. MR. VALESKO further stated that in 1993, Local 71 renegotiated a full plan of coverage under a unilateral trust of union trustees. Local 71 was able to find a 90 percent coverage plan in the marketplace. Three years ago the plan was changed to a flexible benefit type of plan so that members can select a plan depending upon their marital status. For example, a member who has dependents can opt for Plan 101, which provides for 90 percent coverage. A member who is single can opt for Plan 105. The state, he noted, contributes $550 a month, while members contribute $50 a month. Plan 105 costs $325 a month so a participant can get $275 put into his/her paycheck. He noted that taxes are paid on any money put into a paycheck. MR. VALESKO further stated that a union is better able to communicate with its members compared to a state as a entity in order to get a person onboard to help cut costs. He further stated that economy-of-size is not necessarily the driving factor, and individual bargaining units should have the choice to deal for what best fits their members. He cited that custodians, as a group, are rated as the lowest in experience in relation to health coverage, while doctors and nurses, as a group, are rated the highest. MR. VALESKO said in that regard, Chairman Rokeberg's concern of the large groups pulling out of the state thereby causing rates to increase for those who are left is something that might not happen. It could happen, however, if the group that's left is a high-user group because of how the insurance system works. Local 71 is part of the coalition and he believes that competition will drive down the cost of medical coverage in the state. The area where cost-shifting takes place is related to free services - those who cannot pay their medical bills. Those who have coverage or who can pay for medical expenses, on the other hand, end up paying for those who cannot. Number 1501 CHAIRMAN ROKEBERG asked Mr. Valesko whether Local 71's trust is self-insured or whether there is an underwriter. MR. VALESKO replied that Local 71's trust contracts with United of Omaha [Life Insurance Company]. CHAIRMAN ROKEBERG asked Mr. Valesko whether United of Omaha is the underwriter or the administrator. MR. VALESKO replied that Local 71 pays United of Omaha premiums. He said: It's like an underwriter but it's kind of self-insured too. We reach an agreement that only so much will go into paying claims each month and, if it's at the end of the year it costs them "X" amount of dollars over, they own that risk. Number 1549 CHAIRMAN ROKEBERG stated, then, that the trust has an actual underwriter as well as a variable menu. MR. VALESKO agreed. CHAIRMAN ROKEBERG stated, then, that the trust is not self- insured, which means that the trust pays into ACHIA. MR. VALESKO replied, "I suppose so." CHAIRMAN ROKEBERG said it is true because it means that United of Omaha is paying its fair share into ACHIA. MR. VALESKO said, in essence, the fund is self-administered through Local 71. In other words, an administrator pays the bills to United of Omaha. Number 1600 CHAIRMAN ROKEBERG explained to Mr. Valesko that when he introduced the legislation he wasn't trying to put the trust out of business. MR. VALESKO replied that he sees that now, but he would still have to testify in opposition to excluding other bargaining units from having the same opportunity that Local 71 has had to address its individual memberships. Number 1632 CHAIRMAN ROKEBERG said he wanted to get a discussion going in order to address the issue of health care insurance problems, which includes the bargaining units as well as the state. He appreciated Mr. Valesko's testimony today and how it illustrated Local 71's ability to give a choice to its members and to save money. CHAIRMAN ROKEBERG asked Mr. Valesko what the total monthly cost is for the 90-10 plan. MR. VALESKO replied that the total cost is $600 a month, which includes vision and dental. He also commented that Local 71 would be interested in negotiating coverage for the non-covered employees. Number 1748 ALISON ELGEE, Deputy Commissioner, Office of the Commissioner, Department of Administration, came before the committee to testify. She said: We are opposed to this legislation. The first section that would bring state employees back in ... as participants in funding the ACHIA pool, we don't believe there is any equity in that. We would be the only self-insured environment in the state participating, and because of the way our contracts work with a capped employer contribution, this increase cost would be borne entirely by employees. ... When the state participated in the ACHIA pool, prior to our going self-insured, the entire cost of health insurance was covered by the state. The employees did not participate. The concerns that we have about Section 3 and the inability of various bargaining units to move into a health trust environment, I think, have been very clearly outlined by the labor representatives here. We believe self-determination will, in fact, allow some of the health plan design changes that may be necessary in the future to ... control costs or perhaps reduce costs. And putting those management decisions in the hands of the employees themselves is the best way to go about accomplishing that. So, we have a lot of hope for a health trust environment. There are a couple of things that I do want to clarify, and I think that Mr. O'Connell covered that. We don't presently pool all of the state employees. We pool the General Government Unit apart from the Select Benefits people. So, we're maintaining two separate environments in our health trust today. The implications of actually reducing the size of that pool are that we might have to look at ... a little different mix of ... self-insurance and stop-loss kinds of insurance, if the pool were to get smaller. We purchase stop-loss for a variety of different purposes through our risk management program, and we would look at actually purchasing some kind of stop-loss coverage ... if the pool got down to a size where we felt that was important, in order to minimize the state's risk. CHAIRMAN ROKEBERG asked Ms. Elgee how many non-covered employees there are. MS. ELGEE replied that there are 2,000 non-covered employees and about 4,700 covered lives - a sizable pool. CHAIRMAN ROKEBERG asked Ms. Elgee whether that would be one method of a stop-loss or a smaller pool. Number 1982 MS. ELGEE replied, "Yes." She noted that the Public Safety Employees Association, which is part of a trust environment, is a small group and, therefore, purchases an insured product. In that regard, there are a wide variety of options available in order to continue to provide coverage. The labor representatives have indicated very clearly the advantages of the ability to exercise cost controls, compared to the state as an entity. CHAIRMAN ROKEBERG asked Ms. Elgee to comment on the difficulty of the state as a large group entering into a PPO contract. Number 2028 MS. ELGEE replied that the Administration has looked at a PPO agreement primarily in the Anchorage market, the only place that has the volume and necessary competition to make it effective. The Administration has looked primarily at the hospital aspect and has explored the option with some of the unions. She said: The labor management group that we worked with looked at this last year and choose not to try to implement that option because we were still relatively new in a select-benefits environment, and the concern they expressed was that the more choices you threw at the employees the more difficulty the employees were going to have trying to make a meaningful selection for their own set of circumstances; that we ought to give employees a couple of year to actually become comfortable with the options that they had at that time before we introduced anything new. MS. ELGEE said the contract for the GGU employees does not allow the Administration to make any changes to their plan without concurrence. In other words, a PPO plan option would have to be negotiated. Number 2168 CHAIRMAN ROKEBERG asked Ms. Elgee whether the Administration has a plan for the non-covered employees, if the bargaining agreements are approved. MS. ELGEE replied that the Administration would like to include non-covered employees in a trust environment in order to allow the same type of self-determination, in terms of plan design and participation in the coalition. An attorney is looking into that now. In the meantime, there are a bunch of tiny units of employees who are participating in Select Benefits, and the non- covered employees act as an "anchor" to that pool. For example, there are only 75 masters, mates and pilots who need to be made part of a broader plan. Number 2295 CHAIRMAN ROKEBERG said: So, you think you can manage this whole situation without sticking together and lowering costs? There's been testimony and also comments made that the state employees had a good deal for too long and they overused the plan and that's one of the reasons they've driven the cost of the plan up. Is there any validity to that? MS. ELGEE replied that the escalators in health care nationwide have been a good deal higher than the general cost-of-living adjustments, and Alaska has been experiencing a higher escalation of cost than the Lower 48, primarily because of the small provider markets and the inability to utilize health maintenance organizations. She further stated that there was a "run on the plan" in 1997, when the state went to a self-insured plan, which is not uncommon in a time of uncertainty. For example, participants were "shoving" checkups and teeth cleanings into a tighter time frame instead of spreading them out over the course of a year, in order to get them done before the change. The "run on the plan" reduced the available reserves to zero; as a result, the new self-insurance program started with no reserves. TAPE 00-39, SIDE A Number 0001 MS. ELGEE continued: And in '99, when we priced the plan, we priced the standard plan design for the Select Benefits group at $525, because we were seeing a lower trend at that time for that crowd than the GGU group, which was priced at $573. So, the reason they have a lower premium today is that we substantially underpriced the Select Benefits plan in '99 after the experience came in, but had the General Government Unit priced appropriately. So, we're playing catch-up on the Select Benefits side this year. We believe both those plans will level out to be similarly priced, because the coverages are almost identical and the demographics of the two groups are not significantly different. CHAIRMAN ROKEBERG said, "Well, we look forward to having a PPO or point-of-service action in the state plan for the uncovered employees in about a year or so, wherever they may be. We may be over with Local 71." CHAIRMAN ROKEBERG announced that he would put HB 345 aside in order to sort out the misunderstanding. ADJOURNMENT Number 0156 There being no further business before the committee, the House Labor and Commerce Standing Committee meeting was adjourned at 5:08 p.m.