MINUTES SENATE FINANCE COMMITTEE 20 March 1996 9:20 A.M. TAPES SFC-96, #43, Sides 1 & 2 SFC-96, $44, Side 1 CALL TO ORDER Senator Rick Halford, Co-chair, convened the meeting at approximately 9:20 A.M. PRESENT In addition to Co-chairman Halford, co-chairman Frank, Senators Phillips, Sharp, Donley, Rieger and Zharoff were present when the meeting was convened. Also Attending: Mr. Robert Storer, Chief Investment Officer, Treasury Division, Department of Revenue; Mr. Jim Kelly, Research and Liaison Officer, Alaska Permanent Fund Corporation, Department of Revenue; Peter A. Bushre, Chief Financial Officer, Alaska Permanent Fund Corporation, Department of Revenue; Joe Thomas, State Accountant, Division of Finance, Department of Administration; Mr. Don Wanie, Director, Division of Finance, Department of Administration; Mr. Byron Mallot, Executive Director, Alaska Permanent Fund Corporation, Department of Revenue; Nancy Weller, Department of Health and Social Services; Marie Sansone, Assistant Attorney General, Natural Resources Section, Civil Division, Department of Law; Janice Adair, Director, Division of Environmental Health, Department of Environmental Conservation; Mr. Dwight Perkins, Special Assistant, Officer of the Commissioner, Department of Labor; Mr. Randy Welker, Auditor, Legislative Audit Division; Mr. Mike Greany, Director, Legislative Finance Division; and aides to committee members. Elizabeth Kerttula, Assistant Attorney General, Oil, Gas & Mining Section, Civil Division, Department of Law testified via teleconference. SUMMARY INFORMATION SENATE BILL NO. 303 "An Act relating to management of the budget reserve fund; and providing for an effective date." Testimony was given by Mr. Bob Storer, Mr. Jim Kelly, Mr. Pete Bushre, Mr. Don Wanie and Mr. Joe Thomas. Mr. Jim Kelly advised that he would do an analysis and provide specific plan to the committee regarding this bill. SB 303 was HELD in committee for further discussion. SENATE BILL NO. 199 "An Act relating to environmental audits and health and safety audits to determine compliance with certain laws, permits, and regulations; and amending Alaska Rules of Appellate Procedure 202, 402, 602, 603, 610, and 611." CS FOR SENATE BILL NO. 199(RES) "An Act relating to environmental audits and health and safety audits to determine compliance with certain laws, permits, and regulations." Testimony was given by Senator Leman sponsor of SB 199. Further testimony in objection to the bill was given by Nancy Weller, Marie Sansone, and teleconference testimony by Beth Kerttula. Janice Adair testified briefly and will continue testimony tomorrow via teleconference from Anchorage. SB 199 was HELD in committee for further discussion on tomorrow's calendar. SENATE BILL NO. 303 "An Act relating to management of the budget reserve fund; and providing for an effective date." Mr. Bob Storer, Chief Investment Officer, Treasury Division, Department of Revenue was invited to join the committee. He paraphrased the last question yesterday that did the permanent fund have residual cash or some element of cash component in their portfolio and he felt the Permanent Fund could answer this question in more detail. He noted that the Division's cash flow accounts they aggregate which minimizes the amount of cash on hand but manages towards cash flows that allow them to take more risk in reaching for incremental return in the cash flow portfolio. Mr. Jim Kelly, Research and Liaison Officer, Alaska Permanent Fund Corporation, Department of Revenue and Mr. Peter Bushre, Chief Financial Officer, Alaska Permanent Fund Corporation, Department of Revenue were invited to join the committee. Mr. Kelly said that it would be up to the committee to decide whether they wanted the money to managed by them or not. Commissioner Condon said there was a concern with liquidity. The way the fund is managed now it has to provide a certain amount of liquidity. He said that they were able to manage some other funds with the same asset allocation that was used for the Permanent Fund. It would be difficult to manage the money with the same asset allocation because the exact amount of money that would be coming in or going out could not be predicted with any great accuracy. There are frequent periods of up to three years running where the stock market does not return any opportunities for gains. He said there were two issues: one, if the Division is not managed as part of the Permanent Fund with the same asset allocation that would mean separate accounts, no accountants, an organization very similar as what is currently being provided by Treasury; and two, if merged with the Permanent Fund would it have a negative effect on the Permanent Fund itself. Answers need to be found. He asked Mr. Bushre to explain the cash flow chart and material received from auditors as to how a new account is treated. Mr. Bushre said that this cash flow chart was a tool used at the Corporation to help plan short term cash needs twelve months out into the future. There is an allocation to equity managers of $189,000 which can be called upon at any time. The fundamental difference between the Corporation and the Treasury Division is that the Corporation has only one disbursement each year and that is the dividend. That amount is known to the penny many months before it's distribution and the day of distribution is known. If the entire CBR were to be transferred to the Permanent Fund Corporation for management the Commissioner of Revenue made clear that it would be expected that the Corporation manage the general fund liquidity. That would take an investment in additional resources that would replicate the capabilities of the Treasury Division. The CBR is used for the short term cash needs of the general fund. As revenues come into the general fund then the CBR is replenished. Currently all of this cash is in the same bank in the same account. The transfers merely become a bookkeeping entry in the State's access system. The Corporation's cash is held at a different bank. Different funds would have to be transferred daily in order to cover any shortfalls in the general fund and it would be necessary to maintain enough liquidity to meet the calls. Unlike the Dividend there is no advance warning of how much could be needed. The Permanent Fund with only one liability, which is known, has the luxury of being able to invest everything that is not needed for current cash disbursement requirements into longer termed securities. Therein lies the reason for the additional 2% in the projected returns. Financial statements should not be published which show the public, legislators and their staff that the Permanent Fund is $2.5 billion larger that it really was. Separate financial statements would have to be published. The assets being co- mingled together would require a fairly extensive allocation between the two funds for purposes of publication. Senator Sharp asked if there was not already separate publications regarding the Science & Technology Fund. Mr. Bushre said the assets of the Science & Technology Fund and the Mental Health Trust that are published are merely a percentage ownership in the assets of the permanent fund. They are not split out from the financial statement of the Permanent Fund. They are small in comparison to the Permanent Fund. These would not be small and they would have to go through and allocate every single security and property to the two different funds. Senator Frank asked that if $1.5 billion with a long run expectation were assigned to the fund would that be something that could be co-mingled and handled in the same fashion others are and would that make sense from their prospective? Mr. Bushre said the investment horizon of the Permanent Fund, Mental Health Trust, and the Science & Technology Fund exceeds thirty years. It is a question of fiduciary risk and ultimately it would have to be decided by the board of trustees. If a disaster occurred, for example a sharp drop in oil, and those funds were needed, there would be advanced warning and they are in liquid securities which can be sold. The problem is, co-mingled with the Permanent Fund, if conditions were not good for selling securities, the securities would be sold at a loss, which would mean having to sell more securities than normal and the permanent fund would suffer the consequences along with the Constitutional Budget Reserve. It could have a devastating effect on Permanent Fund income. Senator Frank referred to the cash flow chart and asked if it showed the maturing, fixed income securities and Mr. Bushre indicated that it did. These are maturities expected to retain in short term cash and not immediately re-invest in long term fixed income securities. They may be used for some of the outflow operations or perhaps manager funding. These are short term cash needs only on this particular chart. Senator Frank asked what the average maturity of the fixed income portfolio was. Mr. Bushre said the duration is 5.17 years and the weighted average life of the portfolio is 8 to 9 years. He explained that duration is a measurement of cash flow expressed in years. Mr. Kelly indicated that the financial statement showed net purchases for the first seven months, January of this year, of $608,000 million. One of the points of the cash flow projection is to indicate that the Permanent Fund keeps the amount of money as cash at a small amount. Senator Frank asked if maturing securities could provide cash if there was a call on the CBF funds. Mr. Bushre said that maturities and income could provide all or some of the cash depending on the amount of the call. Currently, those maturities and the income stream are re- invested at higher rates of return. If it is expended it will have an impact on the earnings of the Permanent Fund for that fiscal year and for the long term. Mr. Kelly further explained that in a normal month there is about $80 million of cash flow or income. These are the maturities that will happen in the Permanent Fund between now and February 1997. Mr. Bushre said this would not be expended or held in cash reserves. Senator Frank asked if this would be the principal portion of the securities as they become mature. And was this the total or just that which was not being re-invested? Mr. Kelly indicated that it was the total. Mr. Bushre referred to the net amount of principal maturities that have been earmarked for other uses other than being immediately reinvested. Senator Frank concurred that this was an appropriate plan at this time. Mr. Bushre said that if it were known that there would be a larger cash disbursement requirement those principal maturities would be invested on a much shorter term. Presently the money is re- invested in securities that have 8 to 9 year maturities and those securities pay a higher rate of return. Senator Frank and Mr. Bushre discussed how the rate of return was reached. Mr. Bushre indicated that the money was had before and it was returning money to the combined, co-mingled pool of the two funds. The combined earnings of this pool would have to be less if money is taken out of the pool. Senator Frank felt it would increase the rate of return same as one would get a higher rate of return on stocks as compared to fixed income. Mr. Bushre referred to the example of having to sell the stocks at a loss but Senator Frank felt there was enough turnover in the fixed income portfolio to accommodate any request. Mr. Kelly said that there would be more analysis done based on the amount of money the committee would like the Corporation to do. Senator Rieger asked if borrowing from the CBRF to cover cash flow shortages was because of legislative appropriation which authorizes that to be done and could it be done if it was not authorized? Mr. Don Wanie, Director, Division of Finance, Department of Administration was invited to join the committee. He said that if they did not have the authorization in the appropriations act payments would be stopped. Senator Rieger asked if the CBRF was drawn on because it was there and convenient and if it were not there could the cash flow still be managed? He said there was plenty of other cash in the general fund that would be available if the CBRF could not be drawn on. Mr. Joe Thomas, State Accountant, Division of Finance, Department of Administration was invited to join the committee. He said within the general fund were multiple accounts and sub-funds which have been set aside and restricted for specific uses. When talking about the general fund, as far as having to borrow from the CBRF, only that one sub-fund is looked at, being the general fund itself. Senator Rieger referred to the enterprise fund. Mr. Thomas said this was a separate group of funds. Within the general fund itself there are several general fund sub- groups, such as, the Railbelt Energy Fund, Power Cost Equalization, and others. That money has been restricted for a specific use and is therefore unavailable. Senator Rieger asked if it was unavailable for borrowing purposes and how restricted was it for borrowing for short term liquidity purposes. Mr. Thomas said for the purpose of borrowing from the CBRF it was considered unavailable. Monies could be borrowed from the fund if it was really necessary but then what would happen when the bills come due for the other funds and how would they be paid. It is therefore deemed not available. Senator Rieger said that it was good to see good cash management and the main thrust is to not have $2.2 billion sitting around for immediate liquidity on the off chance $100,000 of it might have to be taken. Mr. Thomas said that a list of the sub-fund could be provided. Senator Frank requested a cash flow list be done, too. Senator Rieger asked if when the question was taken to the board of trustees and their concern was about liquidity were they concerned about coming up with $2.2 billion on short notice? Would they have been concerned if there had been a 99% chance that a draw within the next six months would not exceed $200,000? Mr. Kelly indicated that every decision they make is based on probability. Mr. Bushre also indicated that there was no distinction made between a short-term fund being retained by the Department of Revenue and a longer-term fund with a 99% probability of it not being called upon and being managed by the Permanent Fund. The question presented to the Corporation was the whole CBRF. The whole CBRF is called upon to manage the short- term liquidity of the general fund. There are no current resources available to do this and the operations of the Treasury Division would have to be replicated in order to do it correctly. Senator Rieger said that they would have to dig into the general fund and see what is there and how realistic it would be to give authorization for that to be the short-term liquidity source. What does the enterprise fund consist of? Mr. Thomas indicated that this fund is legally set aside in another fund group and therefore not available. The enterprise fund consists of the agriculture fund, clean water fund, international airports, residential energy conservation and various loan funds are included. Senator Rieger asked if a draw would be documented with a note. Mr. Thomas said he would have to check into whether it is legal to borrow from other funds or not. Co-chairman Halford asked if there were no an appropriation from the CBR and it were a choice of issuing or not issuing checks could the money in the Railbelt Energy Fund be used? Mr. Thomas indicated that money has been appropriated. Co- chairman Halford said that the money has been appropriated to the general fund. Mr. Thomas said that this was a legal question but it probably would be available to be expended if there were a shortfall. Co-chairman Halford said if there were no CBR language in the budget that series of funds that totals over $600 million would be the source of the budget. Mr. Thomas indicated there is a list of funds which have been deemed to legally be set aside which cannot be touched even if they are within the general fund. That list can be provided also. Senator Phillips said he felt there was a reluctance to manage the money because they needed more people and the length of the investment horizon. The problems have to be solved. He suggested the Corporation manage the money and let Treasury run it. Mr. Kelly said that the Permanent Fund Corporation and Treasury would have to get together and offer a recommendation to the committee. If the intent is to maximize the return on the CBR a recommendation can be worked out for the best way to accomplish that. Mr. Bushre said that when the question was first proposed to the Corporation in the form of SB 303 it appeared to be the whole CBRF and there was not the possibility of such a division of the two agencies. The whole CBRF carries with it a liquidity management task and the Corporation is not geared up to do that. These are additional possibilities that are being discussed. Senator Frank commented on the financial statement for the Permanent Fund. He felt that the Permanent Fund's natural turnover provides a tremendous amount of liquidity that could be used and any unexpected draw on the CBRF could be much more easily accommodated within the context of a fixed income portfolio. (tape SFC-96 #43 switched to side 2) Mr. Storer said that half of their fixed income securities are managed for the retirement system and some of the endowment funds are managed identically to the way the Permanent Fund would manage them and have basically the same characteristics. The other half are the cash flow accounts which are being aggregated so they can be managed as aggressively as possible. Senator Frank asked if the funds could be co-mingled for management purposes so that if there was an unexpected draw on the CBRF the retirement fund's maturing securities could be used? Mr. Storer indicated that the retirement fund could not be borrowed from. There is no flexibility to be able to access the entire liquidity of all of the fixed income securities. Senator Rieger said that there are two situations: one, there is an appropriation in the general appropriations act which allows use of the CBR and; two, there is not an appropriation that allows use. If there is an appropriation it should cover any eventuality. If there is no appropriation it cannot be used anyway. It would not matter how much would be sent to the Corporation because there would always be notice if there was going to be any use of those funds or not. Mr. Kelly said the problem is already being faced with the Earnings Reserve Account, which could be appropriated today and the Corporation could be forced to return tomorrow. Mr. Bushre in reply to Senator Rieger said that if the Legislature appropriates an amount from the CBRF, theoretically it could be kept for a short time because it would be expended at some point during the fiscal year. The problem arises in managing the liquidity of the general fund. There is not an amount that is appropriated for that and the demands are daily. There is no advance warning as to what that demand will be and it may go on day after day. Senator Rieger said Treasury could ask for a chunk of money they could use for liquidity. Mr. Bushre said that if the CBRF is co-mingled with the Permanent Fund there is an investment pool. The investment pool members, the Permanent Fund and the CBRF will share proportionately in the returns. The Permanent Fund will be the largest member of the pool and consequently will have to share in any lower rates in return proportionately that would be generated by the cash requirements of the CBRF. If the Permanent Fund represented 80% of the pool then it would get 80% of the lower return as well as the higher returns. Senator Frank said he didn't think it was the intention for the Permanent Fund to assume a lesser rate of return. An amount of money should not be assigned that would change management, asset allocation or anything else. The amount that should be assigned would be the amount which will not reasonably be expected to be required for cash flow purposes, cash needs, and only in the event of some unforeseen circumstance would the Permanent Fund be asked to return money to the Treasury. In that case the normal turnover would allow that to be accommodated. Mr. Kelly said they would do an analysis and work with Treasury to see if they can come up with a plan that the committee would want. Senator Zharoff said that the price of oil has increased to where there is going to be an additional $70 million between now and the end of this fiscal year. He is concerned with the accessibility of money that is needed and not having to go borrow it and the flexibility under which the agencies can operate in order to respond to the needs. There are several long range fiscal planning plans before us, but the majority has yet to put a plan forth to address these needs other than to cut. Senator Frank said that everyone is saying they need a higher rate of return and that is what the committee is trying to do. Senator Zharoff said that he hoped to see a flow chart or a side-by-side chart showing a comparison between the Permanent Fund and Treasury so that one could actually see whatever includes a risk, the interest on the return. If one takes the CBR money and invests it then it will not be put into high risk. Mr. Kelly said that if one wanted higher return there would be higher risk. Senator Frank said they wanted the same return and risk that the Permanent Fund has. Co-chairman Halford indicated that the Administration, the Democratic proposal and the Republican proposal all assume at least the increase to over 7%. Mr. Bushre said if the CBRF was co-mingled with the Permanent Fund the CBRF would then have a proportionate share of every investment the Permanent Fund has. It would have exactly the same risk profile, the same investment horizon and the same return. Senator Halford indicated that is what needed to be accomplished and for at least three- quarters of the balance that might work very well and still maintain a $500,000 plus cushion. He said the committee would wait for more information back from the Administration and the Permanent Fund Corporation and HELD SB 303 in committee. SENATE BILL NO. 199 "An Act relating to environmental audits and health and safety audits to determine compliance with certain laws, permits, and regulations; and amending Alaska Rules of Appellate Procedure 202, 402, 602, 603, 610, and 611." Testimony was given by Senator Loren Leman sponsor of SB 199. He stated that this is an idea he learned from his duties on the Energy Council. Fourteen other states have enacted environmental and health and safety audits which is an incentive program to people in business who conduct audits of their actions and if they find deficiencies to identify them, make corrections and come into compliance with the law. Three commissioners and their staff conceptually agree with this bill. There are two main elements in the bill: one, the audits are privileged; and two, limited immunity against prosecution. The bill has conditions when the immunity applies. Many of the suggestions made by the administration have been incorporated. In the area that is the present committee's jurisdiction are the fiscal notes. This bill provides for streamlining government and making government more friendly to business so they can operate better. There should be a savings in government. The fiscal notes are not based on a sound analysis of what the bill will accomplish. Co-chairman Halford and Senator Leman discussed negative fiscal notes for the bill. Nancy Weller, Division of Medical Assistance, Department of Health and Social Services was invited to join the committee. The Department is concerned that the bill does not sufficiently cover the certification requirements of health care facilities. She requested that the committee on line 8, after "license" add "or certification..." so the sentence would read, "as a requirement for obtaining, maintaining or renewing a license or certification...". Certification is a federal requirement under federal law. It is done on contract with the federal health care financing administration in order to allow health care facilities to bill for services for medicare and medicaid recipients. Senator Zharoff said that the Department of Transportation fiscal note made reference to the same section. Marie Sansone, Assistant Attorney General, Natural Resources Section, Civil Division, Department of Law was invited to join the committee. She indicated that the Department of Law's concerns regarding this bill relate to the breadth of the privilege and definition. The bill has been divided into three parts: first, the definitional section which is extremely broad; second, the evidentiary privilege is also extremely broad; third, the immunity provisions which are quite detailed. The immunity provisions are much more narrow in scope than the privilege and full of ambiguities and inconsistencies. The bill applies to all environmental and occupational health and safety laws and they may be federal, state or municipal. She defined audit and said under this bill it could be conducted randomly, routine or regular, but of great concern was that it could be performed spontaneously or in response to a particular event. This is an open invitation to initiate audits after any awareness of a violation or any sense of a violation in an effort to conceal all information relating to that violation. Audits may be initiated by employee or independent contractor associated with a particular facility whether or not they have authority to undertake corrections or commit funds to make corrections. There is a concern with the definition of audit report. In the law of evidence a communication is privileged, the underlying evidence is not. Under this bill that evidence is privileged and will not be discovered or be able to be used in evidence. The privilege can be waived expressly, in writing or by entering into a confidentiality agreement. The department has the following concerns: because of the privilege they anticipate they will spend a great deal more attorney time in negotiating, drafting and reviewing permits, leases, contracts, licenses and other documents to make sure of adequate compliance information is being gathered and maintained to meet the State responsibilities in both its regulatory and proprietary capacity. Considerable time for negotiating, drafting and reviewing the confidentiality agreements will be spent. A great deal of time is spent presently advising state agencies on public records and on whether information is confidential or not. Under the bill the State and its employees are subject to damages if they violate a confidentiality agreement or penalties stipulated. Because many of the provisions of the bill are ambiguous much time will be spent litigating and appealing issues about whether or not the immunity applies or not, whether or not there has been substantial injury. Senator Phillips asked if the department had any alternatives to the objections. Marie Sansone indicated they provided Senator Leman with information and material regarding their concerns. Legal issues were reviewed and Senator Leman did make quite a few corrections in response to the concerns. The greatest concern is with the breadth of the privilege and the definitions. Co-chairman Halford indicated that the department did come in with information and offered a different approach to looking at the federal privilege. Marie Sansone said they provided draft language to the Department of Environmental Conservation that addressed their concerns. However, this bill applies to many departments because many departments have environmental or health and safety responsibilities. The bill does not provide exception for evidence that is otherwise impossible to obtain and it cannot be obtained without undue hardship. The State therefore will be unable to successfully litigate a number of cases without great expense. Specifically this refers to contaminated sites and who is responsible for what portion of the contamination and how much of the clean- up costs they should be allocated. The information generated during an audit is very relevant to that question and without this information the State will end up assuming a greater share of clean-up costs and it will be difficult to arrive at fair allocations of liability. The audit provision may also jeopardize a number of our state-run programs in the Department of Environmental Conservation such as air quality and drinking water programs. Others would include the Alaska Oil & Gas Conservation Commission, the Department of Labor, occupational safety and health program. These programs have minimum standards for enforcement. The Department of Labor has mandatory penalties and the immunity provisions of this bill would conflict with that. She said the department would have to work with state and federal agencies to figure out whether this bill adversely impacts the state programs. There may be situations where the federal agencies initiate efforts to withdraw approval of the State programs. Another area of conflict is federal law does not provide for this privilege. In a federal case or mixed federal and state case federal law would be followed. That would create extra time having to be spent on trying to sort out which rules of evidence apply, what is fair or not and an attorney bringing a case will have to spend quite a bit of time analyzing whether there is any federal remedy possible. That would give them greater advantage in accessing information. Elizabeth Kerttula, Assistant Attorney General, Oil, Gas & Mining Section, Civil Division, Department of Law was invited to testify via teleconference. Just recently some audit and financial figures were received to supplement information to the committee. The State pays about one quarter of the expenses on the pipeline. This is a unique situation as a result of a settlement on how to run the pipeline. One of the things the State has available to it is the ability to object when it thinks those costs have been imprudently made. The State does object frequently and currently they are in the middle of litigation over the 1995 tariff cases. (temporary cut-out of teleconference) $82 million right now is in contention. The State currently relies on audits performed by Aleyska and carrier companies in these cases and they cost about $25 million. If SB 199 is enacted in its current form the State will not have access to these audits and they would have to bear the burden of that $25 million and it would jeopardize the entire case for the $82 million. The state has the right to object to the imprudent cost but it will also through a monkey-wrench into the system of being able to get the underlying information. Why should Alaskan's have to bear the burden for something they did not have the right to control? She hoped the committee would understand the impact to the tariff cases. Senator Rieger related a hypothetical case wherein a document was found without a warrant but also a copy was found legally somewhere else. Is the document still admissable? Marie Sansone said that the criminal prosecutors may not be able to use the document because of the warrantless search but civilly, administratively or for private litigation the document could be used. She further stated that the audit report would include everything generated in connection with the audit. A number of specific items are mentioned such as, photographs, data and interviews. There is a catch-all for anything related to the audit and there are also provisions for the corrective action plan itself. The corrective action plan would be very difficult to implement without the involvement of the State regulatory agencies because typically it would involve the regulated person to obtain a permit or approval, update their permit, make reports. It is very hard to see how this would work without triggering the confidentiality agreements and running into conflicts with the public processes that are used for permitting an approval and for maintaining these records. There would be many instances that it would be impossible to implement the audit without running into the actual need to make the documents public but that is the conflict that is set up in this bill that it would have to then be done under claims of confidentiality and negotiated out and it will be an extremely cumbersome way to do business. She mentioned that under existing law when a company undertakes an environmental audit and they feel they need to protect information because of potential liability exposure they will use the attorney-client privilege. The work product doctrine protects materials that are generated in connection with litigation or threatened litigation and there is also an evidence rule that protects evidence of subsequent remedial measures. Industry already has available a number of tools when they feel that they may be into a very sensitive area they can frequently protect a lot of the highly sensitive information. They also have the trade secret protection. (switch to tape SFC-96, #44, side 1) Senator Phillips said that fourteen states have passed this bill. Co-chairman Halford indicated that fourteen states have some degree of immunity for audit. The federal government has some degree of immunity under a whole series of court cases. Marie Sansone said that among the fourteen states some have pursued the privilege and some the immunity. The only state that has included occupational health and safety law is the state of Texas. The federal EPA has adopted a formal policy concerning audits and there are federal cases which recognize a type of privilege called the self-critical analysis privilege that requires the court to weigh various factors to decide whether or not that privilege should apply. It provides what should be considered relative to audits, how disclosures of violations will be treated in terms of not making referrals for criminal prosecution and penalty reductions. Co-chairman Halford asked how this related to the series of cases at the federal level that define the self-critical analysis privilege. Marie Sansone said that the EPA audit policy would be more specific than the federal cases. Janice Adair, Director, Division of Environmental Health, Department of Environmental Conservation was invited to join the committee. There are some concerns about this legislation as testified before the Senate Resources Committee. Limited immunity is what is practiced now. When something is disclosed the department will not take civil or administrative action but will work with the permittee to bring the facility into compliance. The definition of environmental health and safety law in this bill is very broad which is what is reflected in their fiscal notes. It is not known which laws in DEC are impacted by this. It is presumed that air, water quality, contaminated sites would be included but what is less clear are those laws within DEC that deal with public health concern, such as drinking water and seafood processing that have built-in concepts of continuous monitoring or auditing to insure compliance with the laws to protect the consumers. There would be a need for some legal services which DEC does pay for through RFA's to the Department of Law. There are concerns about how the audits are done, who can conduct them and the scope of the audit report. If this bill is to replace the inspectional duties on the department it must be known that these audits are being done credibly, and by someone who knows how the facility works, how it should work, what the laws are that are involved. The definition of the audit report is a concern because it is extremely broad and the fact it includes the corrective action plan becomes very problematic. That is when the department wants to work with the facility to insure that whatever they have identified as the necessary corrective action will in fact solve the problem. There would be a report to DEC that there was a violation found and that report would not be privileged or confidential. It would be available for the public's review, but the corrective action plan would be privileged or if disclosed would be confidential. The public would be aware of a problem but would not know how it was being corrected. EPA did testify before the Senate Resources Committee that this bill, if passed as written, could negatively impact the Department's ability to retain delegation for the state clean air program, solid waste and perhaps drinking water. The department questions the advisability of providing immunity or privilege for criminal activity. The information that would disclose this activity would be privileged. If someone were harmed that information would be kept from them. Establishing a privilege for environmental audits is unnecessary. There is a limited immunity already when something is disclosed to the department but it would be very problematic to not allow the public, especially a member of the public who had been harmed by that action from receiving the information. Senator Sharp said that there are members of the public from special interest groups that live off certain cases that get money back from the State of Alaska when they file. There is also a problem with voluntary compliance and that being a potential for prosecution under regulations now being developed by the department of air quality. In certain instances it is impossible to achieve what is specified. Why does the DEC continue to promulgate regulations they know cannot be enforced without making criminals out of people. Janice Adair said that she was referring to members of the public that might be harmed by a violation and would not be able to obtain the necessary documentation to prove that the company or the facility knowingly engaged in that action that led to that harm. This does not apply to special interest groups. There are several locations where drinking water has been contaminated through petroleum products or diesel, underground storage tanks and above- ground storage tanks. Either a public water system or individual water systems have been contaminated. Individual water wells have been contaminated through sewage either on the ground or leaking septic tanks. Senator Sharp asked if these individuals would have been submitting voluntary self audits? Janice Adair answered that through this bill they could and it would be privileged and no one could get the information and there would be someone that would be out economically, reestablishing a drinking water system or supply is very expensive if it can be done at all. Under the privileged section of the bill the information would kept confidential. Co-chairman Halford HELD SB 199 in committee until tomorrow morning. Janice Adair will testify via teleconference from Anchorage. ADJOURNMENT The meeting was adjourned at approximately 11:05 A.M.