HOUSE STATE AFFAIRS STANDING COMMITTEE February 22, 2000 8:06 a.m. MEMBERS PRESENT Representative Jeannette James, Chair Representative Joe Green Representative Jim Whitaker Representative Bill Hudson Representative Hal Smalley Representative Scott Ogan MEMBERS ABSENT Representative Beth Kerttula OTHER HOUSE MEMBERS PRESENT Representative Gail Phillips Representative Lisa Murkowski Representative John Coghill Representative Jerry Sanders COMMITTEE CALENDAR HOUSE BILL NO. 335 "An Act relating to information contained in retirement system records; relating to retirement boards; relating to procedures and hearings under state retirement systems; relating to benefits for reemployed retired members of retirement systems; relating to eligibility for normal retirement for members of the teachers' retirement system who have Alaska BIA credited service; relating to disability benefits for members of state retirement systems; relating to deduction of premiums from retirement benefits; relating to protection of, and assignment and transfer of, amounts held in retirement systems; relating to retirement benefits for certain employees earning high salaries; relating to qualified domestic relations orders in state retirement systems; relating to the definition of 'retirement fund' in the teachers' retirement system; relating to membership of state employees in the teachers' retirement system; relating to refund of contributions made to the judicial retirement system or to the former elected public officers retirement system and repayment of refunded contributions in those systems; relating to self- insurance and excess loss insurance for persons receiving benefits from a state retirement system; relating to participation of elected officials in the public employees' retirement system; relating to reinstatement of credited service in the public employees' retirement system after a refund because of certain levies; relating to the level income option benefit under the public employees' retirement system; relating to participation of employees of political subdivisions and public organizations in the public employees' retirement system; relating to penalties for attempts to defraud the public employees' retirement system; relating to the definition of 'pension fund' in the public employees' retirement system; relating to calculation of years of service and of benefits under the public employees' retirement system for non certificated employees of certain educational employers; and relating to individual accounts maintained for members of the former elected public officers retirement system." - MOVED CSHB 335(STA) OUT OF COMMITTEE HOUSE BILL NO. 337 "An Act relating to claims against permanent fund dividends to pay certain amounts owed to state agencies and to fees for processing claims against and assignments of permanent fund dividends; and providing for an effective date." - MOVED CSHB 337(STA) OUT OF COMMITTEE HOUSE BILL NO. 380 "An Act relating to contributions to the Alaska Fire Standards Council and to an insurer tax credit for those contributions; and providing for an effective date." - MOVED CSHB 380(STA) OUT OF COMMITTEE HOUSE BILL NO. 411 "An Act relating to the market value of the permanent fund and to distribution of income of the permanent fund; and providing for an effective date." - HEARD AND HELD HOUSE BILL NO. 367 "An Act providing for the revocation of driving privileges by a court for a driver convicted of a violation of traffic laws in connection with a fatal motor vehicle or commercial motor vehicle accident; and amending Rules 43 and 43.1, Alaska Rules of Administration." - SCHEDULED BUT NOT HEARD HOUSE BILL NO. 292 "An Act adopting the National Crime Prevention and Privacy Compact; making criminal justice information available to interested persons and criminal history record information available to the public; making certain conforming amendments; and providing for an effective date." - SCHEDULED BUT NOT HEARD PREVIOUS ACTION BILL: HB 335 SHORT TITLE: STATE RETIREMENT SYSTEMS AND BENEFITS Jrn-Date Jrn-Page Action 2/04/00 2091 (H) READ THE FIRST TIME - REFERRALS 2/04/00 2092 (H) STA, FIN 2/04/00 2092 (H) REFERRED TO STATE AFFAIRS 2/17/00 (H) STA AT 8:00 AM CAPITOL 102 2/17/00 (H) Heard & Held 2/17/00 (H) MINUTE(STA) 2/22/00 (H) STA AT 8:00 AM CAPITOL 102 BILL: HB 337 SHORT TITLE: CLAIMS AGAINST PERM FUND DIVIDENDS Jrn-Date Jrn-Page Action 2/04/00 2094 (H) READ THE FIRST TIME - REFERRALS 2/04/00 2094 (H) STA, JUD, FIN 2/04/00 2094 (H) FISCAL NOTE (LABOR) 2/04/00 2094 (H) GOVERNOR'S TRANSMITTAL LETTER 2/04/00 2094 (H) REFERRED TO STATE AFFAIRS 2/22/00 (H) STA AT 8:00 AM CAPITOL 102 BILL: HB 380 SHORT TITLE: INSURER TAX CREDIT:FIRE STANDRDS COUNCIL Jrn-Date Jrn-Page Action 2/16/00 2213 (H) READ THE FIRST TIME - REFERRALS 2/16/00 2213 (H) STA, L&C, FIN 2/16/00 2213 (H) REFERRED TO STATE AFFAIRS 2/22/00 (H) STA AT 8:00 AM CAPITOL 102 BILL: HB 411 SHORT TITLE: DISTRIBUTION OF PERMANENT FUND INCOME Jrn-Date Jrn-Page Action 2/16/00 2221 (H) READ THE FIRST TIME - REFERRALS 2/16/00 2221 (H) STA, FIN 2/16/00 2221 (H) REFERRED TO STATE AFFAIRS 2/18/00 2240 (H) COSPONSOR(S): DAVIES 2/22/00 (H) STA AT 8:00 AM CAPITOL 102 WITNESS REGISTER MELINDA HOFSTAD, Legislative Assistant to Representative Bill Hudson Alaska State Legislature Capitol Building, Room 108 Juneau, Alaska 99801 POSITION STATEMENT: Provided information on HB 335. GUY BELL, Director Division of Retirement and Benefits Department of Administration PO Box 110203 Juneau, Alaska 99811-0203 POSITION STATEMENT: Provided information and answered questions regarding HB 335. RON HULL, Deputy Director Division of Employment Security Department of Labor & Workforce Development PO Box 25509 Juneau, Alaska 99802-5509 POSITION STATEMENT: Provided department's position and answered questions regarding HB 337. DWIGHT PERKINS, Deputy Commissioner Department of Labor & Workforce Development PO Box 21149 Juneau, Alaska 99802-1149 POSITION STATEMENT: Provided department's position and answered questions regarding HB 337. NANCI JONES, Director Permanent Fund Dividend Division Department of Revenue PO Box 110460 Juneau, Alaska 99811-0460 POSITION STATEMENT: Answered questions regarding HB 337. REPRESENTATIVE GENE THERRIAULT Alaska State Legislature Capitol Building, Room 511 Juneau, Alaska 99801 POSITION STATEMENT: Testified as sponsor of HB 380. MICHAEL McGOWAN Fire Chiefs' Association Fairbanks, Alaska POSITION STATEMENT: Testified in support of HB 380. SCOTT WALDEN, Assistant Chief Kenai Fire Department Kenai, Alaska POSITION STATEMENT: Testified in support of HB 380. STEVE O'CONNOR, Assistant Chief Central Emergency Services Soldotna, Alaska POSITION STATEMENT: Testified in support of HB 380. ACTION NARRATIVE TAPE 00-8, SIDE A Number 0001 CHAIR JEANNETTE JAMES called the House State Affairs Standing Committee meeting to order at 8:06 a.m. Members present at the call to order were Representatives James, Green, Whitaker, Smalley and Ogan. Representative Hudson arrived as the meeting was in progress. Representative Kerttula was excused. HB 335-STATE RETIREMENT SYSTEMS AND BENEFITS Number 0020 CHAIR JAMES announced the first order of business is HOUSE BILL NO. 335, "An Act relating to information contained in retirement system records; relating to retirement boards; relating to procedures and hearings under state retirement systems; relating to benefits for reemployed retired members of retirement systems; relating to eligibility for normal retirement for members of the teachers' retirement system who have Alaska BIA credited service; relating to disability benefits for members of state retirement systems; relating to deduction of premiums from retirement benefits; relating to protection of, and assignment and transfer of, amounts held in retirement systems; relating to retirement benefits for certain employees earning high salaries; relating to qualified domestic relations orders in state retirement systems; relating to the definition of 'retirement fund' in the teachers' retirement system; relating to membership of state employees in the teachers' retirement system; relating to refund of contributions made to the judicial retirement system or to the former elected public officers retirement system and repayment of refunded contributions in those systems; relating to self- insurance and excess loss insurance for persons receiving benefits from a state retirement system; relating to participation of elected officials in the public employees' retirement system; relating to reinstatement of credited service in the public employees' retirement system after a refund because of certain levies; relating to the level income option benefit under the public employees' retirement system; relating to participation of employees of political subdivisions and public organizations in the public employees' retirement system; relating to penalties for attempts to defraud the public employees' retirement system; relating to the definition of 'pension fund' in the public employees' retirement system; relating to calculation of years of service and of benefits under the public employees' retirement system for non certificated employees of certain educational employers; and relating to individual accounts maintained for members of the former elected public officers retirement system." Number 0100 MELINDA HOFSTAD, Legislative Assistant to Representative Bill Hudson, Alaska State Legislature, offered Amendment 1, 1- LS1217\H.1, Cramer, 2/21/00, which read: Page 7, lines 17-29: Delete all material. Renumber the following bill sections accordingly. Page 24, lines 812: Delete all material. Renumber the following bill sections accordingly. Page 24, line 30, through page 25, line 3: Delete all material. Renumber the following bill sections accordingly. Page 33, line 26: Delete "sec.30" Insert "sec.29" Page 33, line 29: Delete "sec. 30" Insert "sec. 29" MS. HOFSTAD requested that Guy Bell come forward and discuss the amendments. Number 0178 GUY BELL, Director, Division of Retirement and Benefits, Department of Administration, reminded the committee that last week the proposed committee substitute (CS) [Version H] had been discussed section by section, and questions were asked that he would answer today. He suggested that Sections 9, 44, and 46 regarding recovery from disability be dropped entirely from the proposed CS; the amendment was written accordingly. MR. BELL, in response to a question from Chair James, explained that since the proposed CS discusses technical cleanup issues and not policy issues, it would be advisable to handle Sections 9, 44, and 46 in a different manner. Through the hearing process he now understands recovery from disability to be a policy issue. Number 0350 CHAIR JAMES made it clear that the proposed CS is a technical cleanup, not to change policy; Amendment 1 removes policy issues from the proposed CS. Number 0417 REPRESENTATIVE SMALLEY made a motion to adopt Amendment 1. There being no objection, Amendment 1 was adopted. Number 0470 REPRESENTATIVE GREEN made a motion to move CSHB 335, version 1- LS1217\H, Cramer, 2/13/00 [as amended] out of committee with individual recommendations and attached fiscal notes. There being no objection, CSHB 335(STA) moved from the House State Affairs Standing Committee. HB 337-CLAIMS AGAINST PERM FUND DIVIDENDS Number 0550 CHAIR JAMES announced the next order of business is HOUSE BILL NO. 337, "An Act relating to claims against permanent fund dividends to pay certain amounts owed to state agencies and to fees for processing claims against and assignments of permanent fund dividends; and providing for an effective date." Number 0620 REPRESENTATIVE SMALLEY made a motion to adopt the proposed committee substitute (CS), version 1-GH2060\G, Cook, 2/17/00, as a work draft. There being no objection, Version G was before the committee. RON HULL, Deputy Director, Division of Employment Security, Department of Labor & Workforce Development (DOLWD), said currently the only method the DOLWD has to attach a permanent fund dividend is by voluntary assignment, judgment through a small-claims action, or through a criminal prosecution judgment. The proposed CS would speed recovery. He explained that federal law prohibits the offset of unemployed insurance (UI) benefits to collect money, which, if recovered, is deposited into the general fund. Estimated recovery of penalties in the first year is approximately $750,000, and $400,000 each year thereafter. MR. HULL pointed out that Section 2 amends AS 43.23 by adding a new section .072, in which subsection (a) adds procedures allowing DOLWD to make a claim against the permanent fund dividend for money owed to the state agency and establishes procedure for execution of the same. Subsection (b), he indicated, establishes procedures for notification of the individual, and subsection (c) makes an exception to notification when an individual requests a hearing. Furthermore, if DOLWD has a notification or hearing procedure established in statute, the department may use that procedure. Subsection (e) allows DOLWD to adopt regulations to implement or interpret this section by the same procedure under which it adopts regulations to a program. Subsection (f) allows DOLWD to include fines, fees, penalties, overpayments, attorney fees, costs and other amounts owed the department under state law. Section 3 is a transitional provision that allows DOLWD to adopt regulations to interpret Sections 1 and 2 of this proposed CS. Section 4 specifies that Section 3 takes place immediately, and Section 5 says Sections 1 and 2 take effect on January 1, 2001. Number 0882 CHAIR JAMES directed Mr. Hull's attention to page 3, line 29, where it reads "fines, fees, penalties, overpayments, attorney fees, costs, and other amounts owed the department." With the exception of overpayment, she asked, what due process does an individual have to determine if the fines, fees and so forth are factual? And how does the department determine that an individual owes money? MR. HULL answered that page 3, line 29, refers to cases that have already gone to court, such as a small claims action. Small claims actions carry a 10.5 percent interest penalty on overdue benefits, and such a penalty is awarded to DOLWD by small claims court. The criminal court awards fines and penalties to DOLWD, but DOLWD itself does not levy fines except for benefit overpayments. Number 0991 CHAIR JAMES asked if the proposed CS only allows the collection of fines, fees, penalties, attorney fees and costs as deductions from the permanent fund dividend, providing that due process has already been experienced in the court. MR. HULL answered in the affirmative. CHAIR JAMES asked if DOLWD can collect on overpayments without going to court. MR. HULL answered that DOLWD can collect by means of an administrative hearing, which he considers to be due process. CHAIR JAMES replied that an administrative hearing is not the same as going outside DOLWD to court. She reiterated that she does not want to skip due process for the individual while making it simple and less expensive for DOLWD to collect money. Number 1064 REPRESENTATIVE OGAN said he is concerned about due process. He cited Governor Knowles' letter [of February 2, 2000] to Speaker Porter, which says "most state agencies still need to use a time consuming and costly court action to attach an individual's permanent fund dividend." In his opinion, that phrase refers to due process. He explained that the proposed CS appears to bypass the court process. CHAIR JAMES commented that Governor Knowles' letter is written to the original HB 337 draft, and therefore does not apply to this proposed CS. However, she is concerned that the due process problem still exists in the proposed CS. Number 1131 REPRESENTATIVE OGAN indicated the proposed CS turns due process into an administrative hearing process. Further, he added, an administrative hearing process simply amounts to an in-house administrative hearing officer who works for the commissioner and is accountable to the commissioner for the amount of collections he/she accomplishes, so there is concern that an individual will not get an unbiased hearing. He emphasized that he sees a constant erosion of people's rights in the name of government expediency. CHAIR JAMES acknowledged that every citizen should have the right to due process. She also agreed with Representative Ogan regarding the possible bias of administrative hearings. However, she said overpayments seem to be quite clear: either there is an overpayment or there is not. She also recognized that it is not easy for people to pay back an overpayment. She stated that she is definitely concerned about the proposed CS apparently circumventing due process by adding the words "fines, fees, penalties, overpayments, attorney fees, costs, and other amounts owed." She asked Mr. Hull if the proposed CS circumvents due process. Number 1270 MR. HULL replied in the negative. He acknowledged that a DOLWD administrative hearing is not the last resource for an individual who is in contention for alleged money owed. He reiterated that a claimant could choose to file a lawsuit in an outside court; thus due process continues. Fines and penalties mentioned in the proposed CS are part of due process because those are determined by a court of law. CHAIR JAMES said she understood, then, that fines, penalties, attorney fees and costs all must be court-approved. MR. HULL answered in the affirmative. CHAIR JAMES noted that the proposed CS, then, makes it unnecessary to go to an outside court to authorize a deduction from an individual's permanent fund dividend. She commented that she understood DOLWD had made an assessment through court procedure and at that point would use the proposed CS to make a collection. Number 1380 MR. HULL replied in the affirmative. He reminded the committee that there is a two-level, in-house appeal process available to an individual: (1) a lower-level appeal and (2) an appeal to the commissioner. If DOLWD prevails at both levels, then the debt is established. CHAIR JAMES asked if there is a difference between overpayments and the other charges that the proposed CS addresses in that overpayments do not have to be determined by a court. MR. HULL replied in the affirmative. CHAIR JAMES asked what "fees" are referred to in the proposed CS. Number 1414 MR. HULL answered that he did not know what the fees were for or why they were in the proposed CS. Number 1421 REPRESENTATIVE OGAN asked if the fees are established by regulation. MR. HULL replied in the affirmative. CHAIR JAMES said she is not happy with the word "fees" in the proposed CS unless someone can tell her what they are for. DWIGHT PERKINS, Deputy Commissioner, Department of Labor & Workforce Development, said the word "fees" will be removed from the proposed CS. REPRESENTATIVE WHITAKER noted that he is concerned with the notion of overpayment. He asked if overpayment is the result of (indisc.) claim or of a mistake by the agency. He requested a percentage breakdown of mistakes. Number 1483 MR. HULL answered that an overpayment could be a result of both reasons, as stated by Representative Whitaker. He reiterated that DOLWD breaks collection into two categories: fraudulent claims and error. For the latter, there could be error on the part of both DOLWD and the claimant. REPRESENTATIVE WHITAKER asked if DOLWD could show a percentage of errors as opposed to fraudulent claims. MR. HULL replied that he was not prepared to answer that question but that DOLWD does produce a monthly report with those figures and he will provide it to the committee. CHAIR JAMES offered to help answer Representative Whitaker's question. Every month, she said, DOLWD sends a request to employers asking for information and verification as to when employees were working. Then, when an employee files for unemployment insurance, the dates between what an employee claims and what an employer reports may not agree because of a time lapse in the method of reporting. Another problem with unemployment insurance dates occurs because work is counted when an employee gets paid, not when the employee actually worked. She acknowledged that generally when someone receives an overpayment, that person is aware of the overpayment but in her long career as a payroll person, she has not seen anyone deliberately cause an overpayment. Number 1615 MR. HULL recognized that a time-lapse problem as Chair James had just described happens quite often in DOLWD, but the department does not consider that to be fraud, especially if the employee reports the overpayment. REPRESENTATIVE WHITAKER stated that even though DOLWD would not label an overpayment as fraudulent, the overpayment is still classified as an overpayment, and the employee's permanent fund dividend would be subject to garnishment according to the proposed CS. CHAIR JAMES said she understood that money collected from both fraud and overpayment judgments would be deposited in the [UI] trust fund. Number 1667 MR. HULL specified that by statutory authority DOLWD assesses a 50 percent penalty on all fraud cases; the money collected is deposited in the general fund. Money collected for overpayment is deposited in the UI trust fund. CHAIR JAMES asked if DOLWD had a dollar figure of what is currently owed to the department in overpayments. MR. HULL answered that $4.5 million is owed for fraud, $3.5 million in statutory penalties and $1.5 million for overpayments. REPRESENTATIVE WHITAKER asked how many cases are involved in the stated figures. Number 1736 MR. HULL surmised that several thousand cases are involved. CHAIR JAMES offered her belief, from her experience, that people on unemployment are not financially secure; when a check arrives in the mail, they cash it, whether it is right or wrong to receive it, just because they need the money. Therefore, it is not easy for people on unemployment to pay back an overpayment, and she sees the proposed CS as an involuntary way for people to return overpayments. Number 1772 REPRESENTATIVE GREEN said the DOLWD fiscal note states that in the first year of collection DOLWD would recover $1.5 million, most of which would be fraud overpayments. In the second year, collection by DOLWD drops to about half of that amount. He asked if the proposed CS was designed to scare people with the threat of losing their permanent fund dividends. MR. HULL answered that the motive is the huge uncollected balance of fraud money owed to DOLWD, which assesses two or three million dollars per year for fraud but is successful in collecting only 50 to 55 percent of money owed. However, DOLWD does collect 90 percent of overpayments assessed. Collection of $1.5 million in the first year and the subsequent drop to half that collection in following years is because of the five- or six-year accumulation of old debt. He commented that $1.5 million of money owed does not accrue in one year. Number 1844 CHAIR JAMES asked if DOLWD had matched debtors with their permanent fund dividends, and if it was likely that those people had left the state. MR. HULL replied in the affirmative to both parts of the question. He mentioned that DOLWD sends a letter to debtors, many of whom voluntarily assign their permanent fund dividends to DOLWD. Debtors who have left the state are another problem. REPRESENTATIVE GREEN expressed concern about the fraud. He asked whether the drop in collections after the first year indicates a collection decrease each year, and whether there would be about $2 million or $3 million that DOLWD would never recover. Number 1871 MR. HULL answered, "Probably." REPRESENTATIVE GREEN asked if collection of the non-fraud overpays would also decrease since Mr. Hull had said $1.5 million is owed, yet DOLWD only expects to collect $400,000. MR. HULL answered that DOLWD does much better with collection of non-fraud money than with fraud collection, collecting as much as 90 percent of that. However, DOLWD does poorly on collecting penalties because the department cannot use UI trust fund dollars to offset it. If a person claims benefits at a later date, after paying off the overpayments but not the statutory penalties, the department cannot collect that penalty [from UI trust fund money]. REPRESENTATIVE GREEN noted that the ratios, however, indicate the same sort of trend. He asked whether that is because it is a ballpark guess. MR. HULL answered that it is based not on what the department is doing on a yearly basis, but on the fact that there is a large balance out there. Number 1937 CHAIR JAMES asked whether anyone else wanted to testify; there was no response. CHAIR JAMES then requested a motion for Amendment 1, to remove the word "fees" from page 3, line 30, of the proposed CS. REPRESENTATIVE HUDSON made a motion to adopt the foregoing as Amendment 1. There being no objection, Amendment 1 was adopted. REPRESENTATIVE OGAN noted that the entirety of Section 1 talks about fees for processing claims and assignments. CHAIR JAMES proposed having the drafter remove "fees" wherever that wording exists in Section 1. Number 2062 REPRESENTATIVE OGAN answered that he would feel more comfortable if it dealt strictly with fraudulent claims and was not so heavy- handed with people after the department had made a mistake. He felt that people should not pay for DOLWD's mistakes. REPRESENTATIVE WHITAKER echoed Representative Ogan's concern, saying he is very concerned about the appearance or perception that individual rights are being subjugated to state agency expediency. He specified that he could support the proposed CS if it related only to fraudulent claims. Number 2188 CHAIR JAMES explained that in the proposed legislation, fraudulent claims must go through a court process. Whereas a small number of overpayments are due to departmental error, it seems the majority would be either an employee's or an employer's error. She asked Mr. Hull to respond. MR. HULL said Chair James is correct because DOLWD tracks overpayment errors and assigns a code for each source of error; one code designates departmental error, which is a fairly rare cause. Many times when the department makes the error, the department tends to treat it differently. Number 2273 CHAIR JAMES commented that she believes most overpayments are not fraudulent; therefore, they should be put in a different category. She added that fraudulent claims are already authorized to levy fees and fines through a court process. MR. HULL agreed fees and fines are assessed by the court, not by the department. REPRESENTATIVE OGAN asked Mr. Hull to clarify his statement that most of the money owed is due to benefit overpayments but the Governor's letter states that $4.5 million is due to fraud. Representative Ogan emphasized that the numbers in the sponsor statement and the letter do not match. Number 2373 MR. HULL replied that the fraudulent collection amount [owed] is so large is because of difficulty in collection. The DOLWD has been trying to collect this money for five or six years, and as each year goes by, the amount to be collected increases. REPRESENTATIVE GREEN asked why DOLWD is reluctant to act on the concern expressed by Representatives Ogan and Whitaker regarding overpayments if the bulk of outstanding money owed is for fraud. He suggested that perhaps the committee would be doing a service to DOLWD by limiting the proposed CS to fraudulent claims only. Number 2438 MR. HULL answered that if passage of the proposed CS depended upon separation of fraud from overpayments, then he would accept the proposed CS for fraud only. He agreed that DOLWD is successful on collection of overpays. CHAIR JAMES asked how much money DOLWD is supposed to collect from overpayment cases. MR. HULL replied that around $1.6 million is owed for overpayments. A good bit of that is money that DOLWD cannot collect. When asked to provide an example of why DOLWD could not collect that money, Mr. Hull answered that partly it because of the cost of going to small claims court. On a non-fraud case, if a person who has been overpaid reapplies for benefits, the DOLWD can offset the money. Otherwise, it is a matter of collection; the department gets a judgment in small claims court, and if it is a large enough amount of make it worthwhile, the department uses that judgment to go back and get the person's permanent fund dividend. REPRESENTATIVE WHITAKER said he was having difficultly aligning the 2 percent mentioned earlier with the $1.6 million. MR. HULL noted that the 2 percent may be wrong "by a percent or two." He then said the percentage refers to the percentage of overpayments that might be caused by departmental error. Number 2526 REPRESENTATIVE OGAN asked if DOLWD had thought about reporting it to a credit bureau or hiring a collection agency. He noted that most reasonable people do not want their credit records put in jeopardy, which a collection agency threatens to do. MR. HULL answered that the department had looked at that. However, there were problems regarding how to pay for it because there is a fee attached to it. However, the biggest problem is that collection agencies do not want to deal with old debt; they prefer 30-90 day debt. The department can collect new debt easily itself; the problem is in collecting old debt. Number 2576 REPRESENTATIVE OGAN asked if DOLWD had looked at statistics of people who owe old debt in order to ascertain if they are still receiving permanent fund dividends. MR. HULL answered in the affirmative but said he cannot provide percentages. He estimated that about 50 percent of [people who owe] fraud debt are located out of state. CHAIR JAMES asked where DOLWD would stand in the hierarchy of permanent fund dividend lien authority if the proposed CS passed. Number 2626 MR. HULL replied that he thinks DOLWD is number five. NANCI JONES, Director, Permanent Fund Dividend Division, Department of Revenue, said the proposed CS is a request for administrative levy powers. If the proposed CS separates fraud collection from overpayment collection, then DOLWD's [place in the] payment hierarchy changes; one levy has a higher priority than the other. If the proposed CS authorized levy power to DOLWD for both types of collections, that would give DOLWD a higher priority in permanent fund dividend levies. She emphasized that it is an administrative nightmare for the Permanent Fund Dividend Division to impose the levy if the areas to be levied are cut up into little pieces. Number 2705 REPRESENTATIVE HUDSON inquired of Ms. Jones as to the hierarchical position of DOLWD if the proposed CS were to pass as it stands now. He also asked who the other agencies are that have authority to garnish permanent fund dividends. MS. JONES replied that if the committee kept the proposed CS intact, then DOLWD would have the same standing as other state agencies except for the Alaska Commission on Postsecondary Education, the Child Support Enforcement Division in the Department of Revenue (DOR), and the Division of Public Assistance in the Department of Health and Social Services. She agreed that DOLWD's standing is about in fifth place. Number 2750 CHAIR JAMES referred to Section 1 and asked whether the "fees for processing claims and assignments" are the same as the fees under discussion on page 3, line 30. MR. HULL answered that fees addressed in Section 1 are DOR charges for processing permanent fund dividend levies. MS. JONES acknowledged that DOR charges a $2 fee against a permanent fund dividend account each time a dividend is levied; for example, if a dividend account has six agency levies against it, DOR charges $12 to the account before giving the levy to the corresponding agency. Number 2797 CHAIR JAMES said she understood, then, that the DOR administrative fee deduction against a permanent fund dividend account is paid by the permanent fund dividend recipient in addition to what the recipient may owe DOLWD. MS. JONES concurred. REPRESENTATIVE HUDSON noted that Section 1 is existing [statutory] language regarding fees; therefore, when considering the new section .072, page 3, line 30, those fees are essentially the same as the fees in Section 1. Number 2832 REPRESENTATIVE SMALLEY mentioned that page 3, line 31, and page 4, line 1, say "and other amounts owed the department under other provisions of state law under which the claim for payment is being made." He asked if that includes Section 1 fees. Number 2851 MR. HULL offered his belief that paragraph (f) of the proposed CS means DOLWD fees. CHAIR JAMES agreed. She said although she does not want DOLWD to collect any fees, she does agree that DOR should collect their administrative fee. She does not see any difference between collecting overpayment for welfare or collecting overpayment for unemployment insurance, she said, since she believes unemployment insurance is a benefit, as is welfare. Nevertheless, it distresses her to see agencies make mistakes that cause repayment problems for people. She emphasized that based on Amendment 1, she feels comfortable with the proposed CS. TAPE 00-8, SIDE B Number 2963 REPRESENTATIVE WHITAKER expressed concern about the practicality of the proposed CS. He said he understands the expediency benefit for DOLWD and that $1.6 million is at stake, half of that perhaps being collectible. However, he is very concerned for the citizen who receives a mailed notice from DOLWD that funds are owed. At that point, the citizen has to work his/her way through the bureaucracy and try to figure out what happened, who garnished his/her permanent fund dividend, for what reason, and then defend himself/herself against the alleged claim. He reiterated that the legislature is putting agency governmental expediency above the rights of the individual, and he will oppose the proposed CS. CHAIR JAMES commented that she did not believe Representative Whitaker's picture was accurate. First of all, there is an administrative hearing, so to say that the person does not know that he/she owes DOLWD is not true. Second, the person will have received several overpayment notices before an administrative hearing is scheduled. She observed that in her experience someone who does not receive a permanent fund dividend knows why, and sometimes a garnished permanent fund dividend is the easy way out of a required payment situation. She does recognize individual rights, she said, but also has a legislative responsibility to manage state funds in a correct manner. Under the proposed CS, she sees a huge amount of money that can be collected at less cost to the state. She feels comfortable with the proposed CS, she concluded, because DOLWD will not collect fees, fines, and so forth without a court decision, and overpayments will result in an opportunity for administrative hearing. She said she will not sacrifice $1.6 million for a few people who know very well that they have been overpaid. Number 2783 REPRESENTATIVE WHITAKER said he disagrees with Chair James on this issue. REPRESENTATIVE OGAN agreed with Representative Whitaker. He said the issue reminds him of the Internal Revenue Service (IRS) philosophy that one is guilty until proven innocent: the IRS will take a citizen's money first and then the court case begins. Under what the justice system is supposed to be, however, a person has the right to due process and is supposed to be innocent until proven guilty. He emphasized that he is going to support the side of the people on the proposed CS. However, he is willing to support the proposed CS if it is modified to include fraudulent claims only. He reminded the committee that Mr. Hull had said that DOLWD was willing to make that modification to gain passage of the proposed CS. Number 2709 REPRESENTATIVE SMALLEY agreed with Chair James in that the money is owed to the state and he is confident that DOLWD will make the collection in a correct manner. He reiterated that he will support the proposed CS along with Amendment 1. REPRESENTATIVE OGAN noted that the state constitution says "privacy and security must be safeguarded against arbitrary invasions like governmental officials." He concluded that this statement supports due process. Number 2645 CHAIR JAMES indicated she understood that Representatives Ogan and Whitaker believe that [having the] court adjudicate issues regarding overpayments is sufficient, but if DOLWD has not gone to court, then overpayment collection is not acceptable. She, however, believes overpayment is prima facie evidence. Therefore, neither the individual nor DOLWD should be obliged to go to court to collect money owed. She emphasized that she does not believe it is a good financial decision to go to court in any case. Her summary is, she added, either drop the proposed CS entirely or spend general fund money to collect monies owed as DOLWD is currently doing. She reminded members that the individual has been notified of overpayment, an administrative hearing has taken place, and the overpayment is prima facie evidence that the person owes money. She reiterated that she understands Representative Ogan's and Whitaker's argument but she does not agree. Number 2556 REPRESENTATIVE WHITAKER reminded Chair James that prima facie evidence is determined by a court of law, not by the committee or by the legislature. He said the committee is talking about small claims actions that do not ordinarily incur costs associated with a full-blown trial. Again, in his opinion, this is a question of individual rights as opposed to states' rights. If the legislature does nothing else but stand on the line between individual rights and states' rights and say "you may not cross the line," he feels the legislature has done its job. REPRESENTATIVE OGAN made a motion to table the proposed CS. A roll call vote was taken. Representatives Green, Ogan, and Whitaker voted for it. Representatives Hudson, Smalley and James voted against it. Representative Kerttula was absent. Therefore, the motion to table the proposed CS failed by a vote of 3-3. Number 2369 REPRESENTATIVE HUDSON made a motion to move version 1-GH2060\G, Cook, 2/17/00, as amended, out of committee with individual recommendations and attached fiscal notes; he asked unanimous consent. REPRESENTATIVE OGAN objected. A roll call vote was taken. Representatives Green, Hudson, Smalley and James voted in favor of moving the bill. Representatives Ogan and Whitaker voted against it. Representative Kerttula was absent. Therefore, CSHB 337(STA) moved from the House State Affairs Standing Committee by a vote of 4-2. HB 380-INSURER TAX CREDIT:FIRE STANDRDS COUNCIL Number 2363 CHAIR JAMES announced the next order of business is HOUSE BILL NO. 380, "An Act relating to contributions to the Alaska Fire Standards Council and to an insurer tax credit for those contributions; and providing for an effective date." REPRESENTATIVE GENE THERRIAULT, Alaska State Legislature, sponsor of HB 380, explained that HB 380 is an attempt to follow through on actions of the legislature in passing HB 473, which created the Alaska Fire Standards Council (AFSC) but had a delayed effective date. He noted that the date of implementation is approaching and a funding mechanism has to be found. When he was approached by the fire chiefs organization about funding, they had discussed a few ideas and had decided to invite certain insurance companies to contribute because the insurance companies would benefit from the training of firefighters. The AFSC proposes to train fire suppressant personnel and the public in general as far as losses from fires, primarily structure fires, in Alaska. REPRESENTATIVE THERRIAULT indicated he had information from the Division of Insurance, Department of Community & Economic Development, that shows substantial fire-related losses in Alaska are $9 million. He and the ASFC had determined to invite insurance companies that do business in the state to make a contribution to the AFSC to cover operational costs. He remarked that the fiscal note relating to HB 473 was for $166,000 a year, but AFSC wants to come up with at least $150,000 a year to pay for AFSC operational costs. REPRESENTATIVE THERRIAULT explained how HB 380 will work. An insurance company would make a contribution to the AFSC and, in return, receive a 50 percent tax reduction on the first $100,000 on insurance premium tax owed to the state. If an insurance company contributed more than $100,000, any money over $100,000 would result in a 100 percent tax reduction, or the insurance company could elect a 50 percent tax reduction on its total tax owed to the state, whichever is less. The legislature would control the total amount that is raised by the tax-break mechanism by making an appropriation to the AFSC. He noted that any surplus money that was raised which the legislature did not appropriate to the AFSC would lapse into the general fund. The plan is to entice insurance companies to help fund the AFSC but still maintain legislative control on the total amount appropriated for yearly operation. Number 2130 REPRESENTATIVE GREEN asked whether a contribution to AFSC would affect insurance companies' actuarial figures. REPRESENTATIVE THERRIAULT answered no because the contribution is just a tax offset and the money contributed does not enter into the actuarial computation. CHAIR JAMES requested some numbers to demonstrate how HB 380 would work, assuming the insurance company donates $25,000 to AFSC. She said she understood that the company's insurance premium tax would be reduced by $12,500, half of the donation. She asked if the $25,000 comes first through the legislature for appropriation to AFSC, and whether the money would be considered non-general funds. If that is the case, then the general fund loses $12,500. Number 2023 REPRESENTATIVE HUDSON asked if the $25,000 flows first into the general fund and then the legislature appropriates it to AFSC. REPRESENTATIVE THERRIAULT explained that the money comes in as a statutory designated program receipt. If the legislature did not make an appropriation on a yearly basis, the money donated by insurance companies for fire training would lapse into the general fund. There is a similar mechanism for contributions made to the university, he noted, which only one insurance company in the state has ever used. A section in HB 380 says a credit can only be given under one section of statute; therefore, someone cannot make a donation and make it count in different areas. Number 1909 CHAIR JAMES asked if a charitable-type mechanism has also been used in corporation taxes. She noted that HB 380 serves as a loss-payable incentive for the insurance companies to contribute. MICHAEL McGOWAN, past president of the Alaska Fire Chiefs' Association, testified via teleconference from Fairbanks. He said his organization is committed to improving the state's record for fire and fatality loss. Alaska has the worst fire loss record in the United States, he reported; therefore, he supports HB 380. He noted that the Representative Therriault's sponsor statement presents the best option of funding AFSC. The bill appears to be a win-win situation for the insurance industry and fire departments throughout Alaska. He explained that AFSC is needed, and it is about time because the Police Standards Council has been in force for 22 years. MR. McGOWAN informed members that right now the only training standards available in Alaska for the fire service come from the National Fire Protection Association as adopted by the Occupational Safety and Health Administration (OSHA). He indicated that urban fire departments find those standards to be difficult to achieve, but for many rural volunteer fire departments the training standards have proven unrealistic due to [Alaska's] unique environment and economic conditions. If HB 380 provides a mechanism for funding AFSC, he noted, AFSC would adopt minimum training standards for firefighters and instructors. He pointed out that local entities do have the option to choose not to become a member of AFSC; instead, they may choose to adopt the national fire standards. He envisions increased firefighter safety and a reduction of fire loss and fatalities through efficient operations as the end result of HB 380. Number 1650 SCOTT WALDEN, Assistant Chief, Kenai Fire Department, testified via teleconference from Kenai, saying he is in full support of HB 380. It is essential that a mechanism be developed to fund AFSC for the safety of fire personnel across the state and improved efficiency to communities for fire protection. The end result of HB 380 would be reduced fire loss, injuries and death. STEVE O'CONNOR, Assistant Chief, Central Emergency Services, testified via teleconference from Soldotna. He informed the committee that he views HB 380 as being extremely important and encourages the committee to use it as a mechanism to fund AFSC so that standards can be established for fire service. Number 1645 REPRESENTATIVE THERRIAULT said there is concern that the language of HB 380 is written tightly. There are two functions to be covered: actual operations of AFSC and training programs that AFSC administers. He noted that page 1, line 6, is worded as follows: "For cash contributions made for fire services training programs"; therefore, there is concern that those words are not broad enough to cover the operation expense of AFSC itself. He noted that the legal drafters had suggested dropping the word "training" and then HB 380 would be broad enough to cover AFSC personnel and functions, plus training programs that AFSC would provide. Number 1554 REPRESENTATIVE GREEN made a motion to adopt that as Amendment 1 to HB 380. There being no objection, it was adopted. REPRESENTATIVE HUDSON made a motion to move HB 380, as amended, out of committee with individual recommendations and the attached zero fiscal note; he asked unanimous consent. There being no objection, CSHB 380(STA) moved from the House State Affairs Standing Committee. HB 411-DISTRIBUTION OF PERMANENT FUND INCOME Number 1485 CHAIR JAMES announced the next order of business is HOUSE BILL NO. 411, "An Act relating to the market value of the permanent fund and to distribution of income of the permanent fund; and providing for an effective date." Number 1450 REPRESENTATIVE HUDSON read the sponsor statement as follows: House Bill 411 was introduced to give the permanent fund strength, security and stability far into the future. This legislation allows for distributing income from the permanent fund as a percent of market value, rather than the current realized return formula. Arguments in support of distributing fund income as a percent of market value were first suggested by then permanent fund trustee Hugh Malone in the late 1980s. The Commission on the Future of the Permanent Fund advised further study of this concept in 1990. In 1995, the Long-Range Financial Planning Commission recommended the market value approach for a long-term investment strategy. This year, Commonwealth North also recommended this blueprint for strengthening the fund. This legislation fits in with the permanent fund's long-term investment horizon. While not necessarily endorsing HB 411, the Permanent Fund Board supports a percent of market value approach, recognizing that continuing the present realized return formula could lead to distortions in distributions due to gain taking and asset allocation decisions made as part of good investment policy. Passage of HB 411 would allow the permanent fund to hold investments that historically need more time to mature. Another unique feature of the market value approach is that it produces a distribution program that is inherently more level. This is consistent with accepted methods of measuring permanent fund performance and with the market value accounting requirement now mandated by the Governmental Accounting Standards Board. First and foremost, HB 411 protects the principal of the permanent fund. Additionally, this approach maximizes the predictability and stability of annual distributions. This proposal is but one possible element of a long-range fiscal plan. It is, however, an essential element if we are to close the troublesome fiscal gap, by most accounts, approximately $800 million short annually. House Bill 411 preserves and grows the permanent fund through statutorily required inflation proofing and actually maintains the permanent fund dividend at the status quo over the next 10 years of projected growth. After inflation proofing the fund, the total amount of money available for distribution would be calculated. Out of this amount, HB 411 allocates 80 percent to the dividend and 20 percent to the general fund. It produces stability in the fund management and clearly affords a first ever contribution for payment of essential services provided to the people of Alaska, while at the same time holding the dividend harmless. It may be politically convenient to simply eat the public's savings as we have done since 1992, but that practice could easily lead to a full collapse of Alaska's economy. REPRESENTATIVE HUDSON referred to the [permanent fund advisory] vote that occurred September 14, 1999. He said HB 411 is appreciably different than the September vote because HB 411 does not attempt to solve all of our fiscal gap problems solely from the assets of the earnings of the permanent fund. He recognized from the September vote that the legislature had to hold the permanent fund dividend harmless, which he feels that HB 411 seeks to do. He further stated that Alaska does not have a steady revenue source to address the fiscal need, which is now at $2.1 billion. He acknowledged that he does not recommend HB 411 as a stand-alone solution to the fiscal gap and is glad that other people are looking at alternative revenue sources. Number 0509 REPRESENTATIVE HUDSON reminded members that the legislature has a constitutional responsibility to deliver not only a spending plan but also a revenue plan that shows source of the money. He emphasized that the legislature cannot constitutionally present an unbalanced budget plan. He acknowledged that since 1992 the budget has been balanced annually almost exclusively by draw- downs on the constitutional budget reserve fund. He emphasized that if the legislature does not develop additional revenues, the constitutional budget reserve fund money is gone by 2004. He predicted that after 2004 the legislature will face a $990 million deficit. He envisions that the 2004 deficit could be paid for by the earnings reserve account of the permanent fund, which the legislature has never touched. REPRESENTATIVE HUDSON recognized that until now the legislature has always added permanent fund earnings back into the corpus of the fund to the extent of $5 billion in order to inflation proof the fund. He noted that HB 411 will continue to inflation proof the fund. He reiterated that it is the legislature's mandate to produce a series of fiscal plans in an effort to close the fiscal gap in a responsible manner. If HB 411 passes, $272 million of permanent fund earnings would be available in 2001. As it is, the constitutional budget reserve fund earns $100 million a year in interest, which could be added to the $272 million permanent fund earnings. Therefore, even though those two pots of money cannot close the fiscal gap, the use of that money could allay the need for onerous tax measures. Number 0114 CHAIR JAMES said she is distressed about how the permanent fund and its earnings are counted together in one lump sum. She suggested that the public has been led astray because they believe there is $27 billion in the permanent fund, which is not true. In the future, the legislature should make a separation between the permanent fund itself and the earnings. She noted that the original constitutional amendment regarding the permanent fund made that separation clear. In fact, she added, if the legislature presented any plan that ate into the permanent fund itself, it would have to pass a constitutional amendment to so. TAPE 00-9, SIDE A CHAIR JAMES reminded the committee that all money taken out of the constitutional budget reserve must be repaid. Furthermore, the practice of drawing down on the budget reserve does not allow the reserve fund to earn interest for future use. She remarked that she believes that constitutional budget reserve fund monies should be added in either to the permanent fund or its earnings so that money is all in one place. Number 0237 REPRESENTATIVE OGAN referred to Representative Hudson's handout regarding the constitutional budget reserve fund. He had heard Representative Hudson say that since 1992 the budget has been funded almost entirely from the constitutional budget reserve, Representative Ogan said, but the handout showed that in 1996 the legislature drew upon the constitutional budget reserve fund in the amount of $173 million; in 1997 it was $83 million; in 1998 it was $325 million; and there is a projection for 1999 of $1,104 million. He suggested it is an overstatement that the legislature has funded a $2.2 million budget almost entirely from budget reserves. REPRESENTATIVE HUDSON clarified that he was talking about the fiscal gap and unrestricted funds. Number 0340 REPRESENTATIVE OGAN added that he had heard Representative Hudson say that the legislature always puts the earnings back into the corpus, but he himself recalls that the legislature has not deposited earnings back into the corpus in the last two years, nor has it done so this year. So there is almost $3 million that has not been deposited. REPRESENTATIVE HUDSON answered that in his many years in the legislature, the legislature has always deposited residual money, outside of dividends, back into the corpus of the permanent fund. However, Representative Ogan is right in that the legislature has not always deposited money into the corpus of the permanent fund. Number 0410 REPRESENTATIVE OGAN asked what is "broken" in regard to the existing formula for distributing dividends from the permanent fund. Number 0436 REPRESENTATIVE HUDSON answered that he does not think the permanent fund formula is broken but does believe that it can be managed in a more long-term, level-based methodology. He said HB 411 essentially advocates the same process that the permanent fund has now but HB 411 defines the process a little differently. He added that HB 411 still uses a five-year-average basis, but it is used on percent-of-market value as opposed to annual-earnings value. REPRESENTATIVE OGAN reiterated that HB 411 allegedly seeks stabilization, but the bill attempts to move the permanent fund to a market-based evaluation; therefore, HB 411 seems to make the permanent fund even more susceptible to the market. REPRESENTATIVE HUDSON replied that the permanent fund investment people had assured him that a market-based evaluation is a better process. Number 0557 CHAIR JAMES said when determining payout based on earnings of the fund, the possibility exists of making investment decisions based on maintaining a sufficient amount of money to cover a calculated income. The $3 billion constitutional budget reserve fund still includes some unrealized gains - the calculation of money to be spent. She emphasized that unrealized gains would eat into the earnings and investments would have to be sold to obtain cash to pay the dividends. REPRESENTATIVE OGAN interpreted the September 14, 1999 [permanent fund advisory] vote as sending a clear message that voters did not want the permanent fund dividend touched. He said it seems to him that people mistrust the motivations of anyone who tries to change the permanent fund structure. He said the legislature does not seem to be able to adjust its lifestyle to accommodate less revenue. He asked whether Representative Hudson thought the "no" [advisory] vote meant "take another shot at it." Number 0754 REPRESENTATIVE HUDSON acknowledged that he had heard the public's voice but had presented HB 411 because of the continued erosion of constitutional budget reserve earnings, which he believes will lead to the ultimate destruction of the permanent fund program. He emphasized that the legislature needs to curtail its appetite for spending or find other sources of revenue to eliminate erosion of budget reserves. He reminded the committee that Governor Knowles has recommended that the legislature take some unrealized gains (paper assets) of the permanent fund and deposit them into the constitutional budget reserve. Thus, interest earned from an increased constitutional budget reserve could be deposited into the general fund to help decrease the budget deficit. REPRESENTATIVE HUDSON explained that in drafting the questions for the September [advisory] vote, the drafters had thought that the public's fear of income taxes would be greater than their fear of putting a minor restriction on the permanent fund dividend. However, he recognized that the public disagreed and had voted resoundingly against the plan. REPRESENTATIVE HUDSON mentioned that he had met with former Governor Hammond a few weeks ago, who had said the legislature needs to pass a measure that guarantees 50 percent of the permanent fund earnings will be distributed as dividends and any surplus earnings after inflation proofing can be spent on state government. Representative Hudson indicated HB 411 follows that direction by depositing 80 percent of the earnings to permanent fund dividends after inflation proofing, with 20 percent deposited to pay for state government. Number 1200 REPRESENTATIVE OGAN said the only way he believes the public will have confidence in the legislature and accept some use of permanent fund earnings is to take the dividend program issue off the table. REPRESENTATIVE HUDSON acknowledged that HB 411 has a long way to go. He reminded the committee that HB 411 is not an individual effort, however, but is a result of cooperation between himself and Representatives Austerman, Phillips and Murkowski. The public needs to understand that there is a fiscal gap of $900 million, but he acknowledged that the public is sick of taxes because they are taxed heavily at the local level, at least in regard to property taxes. Number 1383 CHAIR JAMES said as soon as the legislature starts using permanent fund earnings in accordance with the calculation of 20 percent of a five-year average or one-half of the earnings reserve, whichever is smaller, at some point one-half of the earnings reserve will become the determining number on which the dividend payment is based. She reminded the committee that there is no guarantee over the next few years of what the inflation rate will be, which has to be considered in calculating permanent fund earnings. She emphasized that the current calculation of the dividend does not work to figure payouts in the future. CHAIR JAMES added that she, too, had heard the loud "no" of the people on September 14. Since then, she has conversed with thousands of people and found that the one main factor which led to the "no" vote was that there was no fence around how much money the legislature could spend; there was no limit and no plan. She emphasized that the legislature needs an overall plan that establishes by statute a healthy dividend that can be protected over the long term. She added that she is not sure if she will support HB 411 and recognizes that more work needs to be done on this issue. She reminded the committee that the legislature has three more years to come to grips with the budget deficit, and then time is up. [HB 411 was held over.] ADJOURNMENT Number 1714 There being no further business before the committee, the House State Affairs Standing Committee meeting was adjourned at 10:00 a.m.