MINUTES SENATE FINANCE COMMITTEE 8 May, 1998 8:50 a.m. TAPES SFC 98 # 161, Side A (000-591) Side B (591-000) CALL TO ORDER Senator Bert Sharp, Co-Chair, convened the meeting at approximately 8:50 a.m. PRESENT In addition to Co-Chair Sharp, Senators Torgerson, Adams, Parnell and Phillips were present when the meeting was convened. Senators Pearce and Donley arrived shortly thereafter. Also Attending: Senator TIM KELLY; Representative BRIAN PORTER; Representative PETE KOTT; Representative PETE KELLY; DWIGHT PERKINS, Special Assistant, Office of the Commissioner, Department of Labor; MARIANNE BURKE, Director, Division of Insurance, Department of Commerce and Economic Development; NANCY WELLER, Division of Medical Assistance, Department of Health and Social Services; JIM BALDWIN, Assistant Attorney General, Governmental Affairs Section, Civil Division, Department of Law; JANICE ADAIR, Director, Division of Environmental Health, Department of Environmental Conservation; ALAN WILSON, Member, Alaska Homebuilders Association; MIKE GREANY, Director, Division of Legislative Finance and aides to committee members and other members of the Legislature. via Teleconference: From Anchorage: LINDA HALL, Representative, Alaska Independent Insurance Agents and Brokers; ROBIN WARD, Vice President, State Of Alaska Homebuilders Association. SUMMARY INFORMATION Co-Chair Sharp explained the schedule for the meeting and listed the bills he hoped to get through. SENATE CS FOR CS FOR HOUSE BILL NO. 459(HES) "An Act establishing new eligibility for medical assistance for certain disabled persons and giving their eligibility for services the highest priority among optional services and groups under the medical assistance program; amending the definition of 'personal care services in a recipient's home' as used in the medical assistance program; moving midwife services from being the first to being the 14th service eliminated under the medical assistance program when there is insufficient funding; and adjusting the priority of optional services and optional eligible groups under the medical assistance program in order to reflect the new priorities given to the newly-eligible disabled persons and to midwife services but without otherwise changing the relative order of the other optional services and optional groups." This bill had been heard once before and held in committee. Co-Chair Sharp called upon NANCY WELLER of the Division of Medical Assistance to testify. She spoke to the fiscal note as follows: "This fiscal note combines the original fiscal note from the department relating to the working disabled with the direct entry midwives. And on page two of the fiscal note under direct entry midwives in the middle of the page, it explains the methodology that I used." "The Midwives Association estimated that the midwives would deliver 100 Medicaid eligible pregnant women per year. They report that they're transport rate is between two and ten percent so I assume five percent of the women would end up being transported to a hospital and delivered there." "I pulled our cost for hospital claims for the mother and the infant. They totaled $2465. And that times the 95 women that we were projecting, would lead to a total of $234,175 per year. However, we anticipate that because we have to develop regulations in do system changes that would be only a half-year implementation during fiscal year 99 at best. And so I divided that number in half and also deleted the $30,000 costs of implementing a new provider type within our claims processing system for the first year savings of 87.1." Co-Chair Sharp wanted to know if this fiscal note incorporated the previous two notes. Ms. Weller affirmed. Co-Chair Sharp compared the cost of hospital births versus midwives births. His information stated that Medicaid would only cover $1250 of midwife expenses and $2500 for hospital births no mater what the total cost. Ms. Weller explained that the hospital figure was determined using the average claim for services. She was in the process of working with the midwives to determine their estimated claim amounts. Co-Chair Sharp asked how many certified midwives practiced in the state. Ms. Weller replied that there were currently 15 licensed midwives in the state. Senator Phillips said that he wished to withdraw Amendment bill. Without objection, Co-Chair Sharp so ordered. There was some discussion as to where the midwives services would be placed on the priority list. Co-Chair Sharp commented on how other services would qualify for coverage using the savings realized on midwife births versus hospital births. He didn't want to move the midwife services up the list so far as to drop any currently funded services and suggested placing it near the emergency services item. He asked the department if they anticipated funding for all currently funded services if the midwife services were placed in that location. Ms. Weller responded that they expected funding to still be available for the other services. Senator Phillips moved to insert midwife services on the Medicaid priority list between lines 25 and 26, emergency hospital services, and treatment of speech, hearing and language disorders. This was titled Amendment #2. Senator Parnell said he supported the bill as is, but would also support the amendment with the understanding that all other currently funded services continued if it helped move the bill from committee. Senator Adams objected, saying he wanted to make sure the midwife services would be funded. He was assured they would be and he removed his objection. So without objection, Amendment #2 was adopted. Ms. Weller pointed out that a title change would be required. It was determined that the change could be made in the Senate Rules Committee. Co-Chair Sharp asked if there was any objection to having the Resolution for Title Change written by the Rules Committee. There was none. Senator Parnell offered a motion to move from committee, SCS CS HB 459 (FIN) with new fiscal note. There was no objection and Co-Chair Sharp so ordered. SENATE CS FOR CS FOR HOUSE JOINT RESOLUTION NO. 44(JUD) Proposing amendments to the Constitution of the State of Alaska relating to redistricting and reapportionment of the legislature; repealing obsolete language setting out the apportionment schedule used to elect members of the first state legislature. Representative BRIAN PORTER was invited to join the committee and speak to the bill, which he sponsored. His comments were as follows: "This bill basically does three things. It changes the method of appointing the members of the redistricting now board. It brings the constitution into conformance with US Supreme Court decisions that have occurred since the constitution was ratified and placed into existence. And establishes in the constitution, single member House and Senate districts basically the way they are configured today." "The first apportionment or redistricting board method of appointment has gone through several iterations and the one that is in front of the committee today is the final I hope version of that. It basically recognizes that the state has had in place a method of appointment that favored the Governor. The intent of course in changing that is to try to make it a more balanced and fair representation on that board." "Since the history of the state each time we have had a[n] apportionment board appointed and proclaiming a redistricting plan. It has been litigated the last time quite extensively to the point that the Superior Court ended up actually drawing the redistricting plan that was used for the election. And even it was not satisfactory to the Department of Justice when it went through the election - federal election law review." "What this iteration does I think, is keep in place to the extent possible to still have fairness, the Governor's appointment but takes away the ability of the Governor to independently take the board's plan and rewrite himself or herself, whatever the case is." "So at this point it's the same number as the constitution has now of board members. But it would be two appointed be the Governor, one appointed each by the President and Speaker, and one appointed by the Chief Justice of the Supreme Court." "I'd be happy to answer any questions you might have on specific matters, but that is a general description of the bill." Senator Donley said he liked the proposal. He wanted clarification on the timeline of the development of the plan and how it related to the one-year residency requirement of candidates. He wanted to reduce the politics of the plan. One suggestion was to require the plan be released before the filing for office deadline, he felt. Representative Porter offered Representative Eldon Mulder's staff member, TIM SULLIVAN, to address the issue. Mr. Sullivan spoke as follows: "The timeline begins either on September first or when we receive the information from the census, whichever occurs last. The board has to be appointed by September fist of a centennially census year. And then when we receive the census data, then the timeline begins." Senator Donley asked what year the ten-year census was usually completed. Mr. Sullivan explained that the next census would be taken in April of 2000 and the data was required to be delivered by December 31 of that year. Once the data was received, if before September, there would be thirty days allowed appointing the board. Senator Donley figured the timeframe and concluded that the board might not be in place by the end of February 2001. Mr. Sullivan stated that the latest a plan would be produced was February 1, 2001. The board must be appointed no later than September 2000 and they would have thirty days to develop a plan once the data was received. After that, a sixty-day public testimony period would occur and then they would release a proclamation on their plan, according to Mr. Sullivan. Senator Donley continued figuring the timeline. He liked the direction it gave the court that this was a priority. It required the Superior Court to clear their docket to address redistricting. His one concern with the system was the speed with which the court dealt with the matter at that point. He wanted to know if consideration had been given to imposing timelines on the court. Mr. Sullivan responded that with the removal of the ninety- days previously granted the Governor to review the plan, most time crunch worries would be alleviated. He spoke of the primary election in 1992 where the court ordered a later election date because of the length of time it took the redistricting process. He did not feel this would be a problem in the future under the proposed structure. Senator Donley spoke of Section 9, the timeframe allowed for appeals. He wanted to know when the thirty-day timeline began. Representative Porter replied that it began upon the issuance of the proclamation. Senator Donley voiced other concerns about the one-year residency requirement for candidacy. He realized the appeals process would allow a candidate to challenge any gerrymandering. He again asked if a deadline for court action had been considered. Representative Porter said the bill's process began with the intent of keeping things simple. It evolved into trying to address every issue and went back to trying to keep things simple. Trying to anticipate every court action, appeal and other obstacles was impossible, he concluded. Senator Donley suggested fixing a time for the original Superior Court decision. This would not include the appeal process. Representative Porter said they considered it, but believed that requiring the court to clear their docket was adequate. The plan could become very involved and they did not want to require a decision before allowing the court an opportunity to fully consider the plan. Co-Chair Sharp felt that placing definite deadlines could be construed as infringing on the separation of powers between the Legislature and the Court. Representative Porter said that this legislation requests that the court return its decision directly to the board rather than the Governor. He felt this would avoid some of the litigation seen during the last reapportionment. Senator Pearce indicated that she supported makeup of the board set out in the original version of the bill and wondered if the House would concur if they adopted that version. Under that proposal, the Supreme Court Justices would appoint the board and keep the elected officials out of the process completely. Representative Porter listed two considerations. The first was to get the constitutional amendment adopted and draft a plan the voters would approve. The other was the importance of having a board make-up of bipartisan or nonpartisan members. Since the Governor appointed the judges in this state, there was potential for partisanship in board appointments. Co-Chair Sharp felt the current delegation to each branch allowed for the most balanced board makeup. He stressed that "balance" was the key word. Representative Porter spoke also of the geographical balance requirements. Senator Donley approved of the current balance of appointment authority. He again addressed the one-year residency issue suggesting that the district residency for candidacy could be shortened to six months. One-year Alaskan residency would still be required. Representative Porter said the Legislature could do that statutorily rather than changing the constitution. However, he felt that this proposal would prevent gerrymandering. Co-Chair Sharp called upon JIM BALDWIN from the Department of Law to comment. He testified as follows: "I have a few comments about the resolution as it came from the Judiciary Committee. I think the sponsor has done a lot of work here in attempting to meet the criticism of the resolution. Has I think acted in good faith on many of the comments that we've been raising as this matter has moved through the Legislature." "There is still a basic philosophical difference that the Administration has with the sponsor over the resolution as it reads. And that's basically the choice that's being made here is that in existing constitution, the approach is that an advisory board to a statewide elected official makes the initial - proposes the initial plan that goes to the Governor after a 90-day period. And there's a period of time for the citizens to petition the Governor for any changes. And that provides an important safety valve to the reapportionment process that the resolution before you would no longer have." "That was the idea that the initial framers of the State Constitution had that there should be some safety valve to protect the citizens from people who get all bound up in the concept of boundaries and districts and social economic considerations and they just plain forget about the people. And the decision was that statewide - a statewide elected official, the Governor would be the one best suited to protect the interest of the people." "And I think there's a real danger here that this resolution would promote a process that - where the people might be overlooked in the reapportionment process. I think there has been an attempt to achieve balance and for that I think that the sponsor's need to be commended." "There are a couple points I want to make because we have - this is a finance committee and we have submitted some fiscal notes and we would like you to consider those fiscal notes favorable if you're going to move this resolution on." "In this resolution there is a policy choice that's been made that - and it's not readily apparent from the body of the resolution, but it's a policy choice that the state should, in the reapportionment process, not be involved in what are known as military surveys, which is an attempt to try to balance the populations between urban districts and rural districts to account for the concentration of perhaps nonvoting military personnel and their dependants who are clustered in the military bases near urban areas of the state." "What a court decision has stated in the past is that we are obligated to go through that exercise to first determine if we can do it. For the last reapportionment we determined - we went through the exercise and determined we couldn't do it. As I read this resolution it's telling us to count every - to base our counts exclusively on the census. And there was testimony throughout the various committees that it the intention of the sponsors that we not deduct from those totals, military personal who were not voting - not qualified voters in the state. And that, depending on what would be determined by a military survey may have the affect as much as a single -as a district - a House district of voters, people who would be counted in the ideal district size that you would deduct from the totals and therefore the rural areas of the state would benefit from such a practice and the urban districts would not benefit from such a practice." "And we thing that might raise voting rights act preclearence problems and for that reason, we submitted a fiscal note of some $68 - $67. What we would use that money for is to try to bring other - is to try to integrate the information that we're gonna have from the census bureau with our voting - what's known as our VREMS system V-R-E-M-S that's in Voter Registration Maintenance System so that we have other factors working together with the census information that we're going to have so that when we go to defend our plan, that we will have something more than just ethnic data to support our lines. We need to start that work soon. And it will also come in handy and will no doubt need to preclear this resolution if it's adopted by the voters with the US Department of Justice. And it's likely that we will face a challenge to that from interests who will feel that they are not benefited by this. And those funds will assist us in obtaining whatever expert assistance we need in developing our defense of the preclearance application." "Then we also have a note in our fiscal note to you saying that we can't place an exact dollar amount on it. But if you look in the resolution, what it says is that the redistricting board as reconstituted in this resolution, is to obtain independent legal services. And in the past, the offices of the Attorney General has provided the legal staffing for the reapportionment board. I'm not sure the sponsor's want to stay with that now because this has carried from the beginning of the early versions of this where it was exclusively a legislative agency. Then it kind of migrated to be a judicial agency. And now it's sort of a mixture of all three branches of government. Our note to you in our updated supplement to the fiscal note states, 'well, if you're going to contract with outside law firms you're looking at $175 to $200 an hour. If you have the Attorney General's office do that kind of work you're looking at about ninety some dollars an hour - ninety-odd dollars an hour.'" "So we point out that you have a potential here with the litigation - the cost of litigation, potential a couple hundred thousand swing on the cost of legal services to staff this board." "So I think I could say more but it's all been said before and I - if you have any questions, I'll be glad to take them." Senator Parnell addressed the safety valve aspect Mr. Baldwin raised with the current system. The senator felt the current system was the most partisan the state could be engaged in where a Governor, whoever that was, was going to be a member of a political party. He disagreed that considering the public's opportunity to appeal to the governor was an adequate safety valve. He felt that the true safety valve was the court, who had the least political interest in the districting process. Mr. Baldwin conceded the point, but argued that the court system was part of the current safety valve. Tape #161 Side B, 9:35 a.m. Senator Donley expressed a desire to work further with the bill sponsor on the residency requirement, but that he wanted to move the bill out of this committee today. Co-Chair Sharp asked the committee for opinions about the DOL's fiscal note on potential court challenges. Senator Pearce offered that if needed, funding could be allocated in a supplemental budget request. Senator Phillips wondered if the fiscal noted would be needed if the voters turned down the constitutional amendment. Mr. Baldwin replied that the constitutional amendment still needed to obtain preclearance from the US Department of Justice to be allowed on the ballot. Senator Donley offered a motion to move from committee, SCS CS HB 44 (JUD) with accompanying fiscal notes. Senator Adams objected and said he felt it was amazing that the committee would spend this amount of time on a constitutional amendment when it would not spend any time on a subsistence constitutional amendment, which should be first priority. While this bill was noted for it's balance and fairness, he disagreed referring to the Legislature's actions taken the previous day in passing legislation to change the rules to accommodate a Senator who failed to file APOC papers before the deadline. He argued that under this resolution, the Legislature could change the makeup of the reapportionment board through legislation in the future to suit it's political desires. Co-Chair Sharp requested a roll call. The bill moved from committee by a vote of 6-1 with Senator Adams casting the nay vote. SENATE CS FOR CS FOR HOUSE BILL NO. 116(JUD) "An Act relating to workers' compensation self- insurance." Co-Chair Sharp noted that when this bill was last heard in committee, public testimony was still being taken when the meeting ended. He therefore invited Senator TIM KELLY to give his comments on the bill. Senator Kelly spoke as follows: "The idea behind this bill has been imported from the Homebuilders national headquarters in Washington DC. They are trying to build their membership dues and increase their revenues from their state and local organizations to help offset the increasing expenses of maintaining a rather ostentatious headquarters building back there." "It's not a bad idea. If they could organize all the homebuilders associations throughout the US into a series of self-insuring workers comp groups and skim off a two-percent royalty on all premiums paid like they do in this proposal, they could increase their national revenues by millions of dollars a year. They would work quite nicely for the national organization, thank you. But unfortunately, without a large cash capital from - cash capital base from somewhere for these local organizations, it doesn't adequately protect either the injured workers, their families, or the individual homebuilders who have to put their personal and family assets at risk under the joint and several liability clause inherent in this legislation." "This national homebuilders self-insurance proposal's like a big tidal wave that begin in the East, travel west and finally made it's way several years later north to Alaska. It's like a fad but by the time it arrived up here, it already had begin to recede from where it came from. As Marianne Burke of the Division of Insurance will explain, in one of the just four states that has enacted similar legislation to the national model act, no new groups have formed since 1994. And in another, no new groups have formed since 1996. And in fact, some are beginning to dissolve." "The reasons are simple. Many homebuilders aren't prepared to risk the personal liability of the long-term financial exposure and the economics of scale in a healthy competitive insurance market don't allow a small association to compete financially with a large well-capitalized and fully reserved insurance company. It's like the under-capitalized Anchorage Telephone Utility trying to compete with AT&T. It doesn't work unless you have a monopoly and there is no monopoly in this bill as the homebuilders are free to stay with the large insurance companies if they so chose." "So I call on the National Association of Homebuilders to put up or shut up. If they are expecting individual Alaska homebuilders to risk a personal and family financial security, so as to increase the revenues to the national association 4,000 miles away, then they should provide the cash capital that is necessary to give the local groups a fighting change to succeed." "As you already know, the homebuilders in Alaska don't need this legislation to self-insure. They could do so tomorrow under existing Alaska law by raising a million and a half dollars in capital and forming their own reciprocal. End of story, they're self-insured." "But there are at least two problems associated with this approach. They don't have, or won't invest the capital required. And two, the national association wouldn't be able to siphon off their two percent a year." "Alaskan homebuilders could also, by the way, get together and organize a group called a purchasing pool and go out to bid on a combined volume basis for the lowest rate among the many workers comp carriers. There is no shortage of workers comp insurance companies in Alaska. It's a very competitive market. That's exactly how one of Alaska's two existing reciprocals, AERCA, began before evolving into the successful reciprocal it is today. That's called starting small and growing big. But of course, it's unacceptable to the Washington DC crowd because they wouldn't get their two percent skim that they call a royalty." "Reciprocals work in Alaska as shown by the timber exchange and AERCA but before they became successful they had several rough times when they had to dip into their capital reserves. The initial capital contribution and a strong oversight by the Division of Insurance is why they became successful." "The proposed legislation before you has none of the first and not enough of the second. This proposed legislation has the promise to pay but doesn't have any real reserve ability to do so. They hope to get lucky and live off of policy premiums alone. That's not my idea of sound public policy." "Remember the tradeoff in workers compensation. And injured worker gives up the right to sue for damages in a court of law for the security of immediate payment of loss wages and medical treatment. There is simply not enough security for injured workers and their families in this proposal for them to give up that right to sue and you shouldn't force them to." "Not a single committee in this Legislature has taken a serious look at the financial ability of these relatively small self-insured groups to survive economically. Most everyone else has been sort of overcome by a well organized grass roots lobbying effort and have simply ignored the bottom lined financial inadequacy." "Until this Legislation addresses the financial security of injured workers and their families, and about ten percent of our workers get injured a year, and the financial security of the Alaska Homebuilders as well, I will continue to oppose it. I am counting on this committee to fix the financial responsibility issue. I have asked Senator Adams to submit five amendments for me that I have been working on with the Division of Insurance. There is good reason why those commercial - those that commercially promise to insure others are among the most heavily regulated of all of our industries. And that reason as centuries of experience has shown that without adequate capital in reserves, average people will get ripped off and not just by the fraudulent companies, but by those with every good intention as well." Co-Chair Sharp next called upon LINDA HALL of the Alaska Independent Insurance Agents and Brokers to testify via teleconference from Anchorage. She spoke as follows: "I want to give a very brief description of our organization. Our members are independent insurance agents across the state. We represent insurance agencies with several hundred employees. These are small business people in every community in the state. We are in Fairbanks, Bethel, Kenai, Homer, Sitka, Juneau, Anchorage. These are people who provide services who work with employers, who work with the consumers." "We've listened and had discussion on this bill for the two years it's been in the Legislature. You've heard discussion and most of you heard me. You've read our position papers as we've discussed the issue. Richard Block gave testimony last week. Director Burke will be talking today. I see no reason for me to take your time in reiterating the financial intricacies of this bill." "I would like to focus on two issues today. One are the allegations that there are few in opposition to this bill. I've heard it said that there are only three people that oppose the bill: Director Burke, Linda Hall and one single for-profit insurance company. I would submit to you that there are many people who oppose this bill but as you understand what political suicide is, my members understand what business suicide is. These are small business people. They write the insurance for the homebuilders along with many other business people. It's very difficult to stand up and oppose the bill and not have ramifications." "Our organization unanimously opposes the bill. As individuals, it's difficult to put together opposition letters and sign them because it has an impact. I would submit that this is become an emotional power struggle. There have been reams of data showing why this bill is financially unsound. Division of Insurance has repeatedly testified to that." "The other issue that I would like to address today is who pays. Who pays for the administration of this bill? I have heard testimony that all of the safeguards in the bill are, 'by approval of director', 'upon the approval of the director'. That requires a tremendous amount of staff time and the director's time. I don't see any provision to reimburse the state for those administrative and oversight costs. A very expensive process." "As Senator Kelly indicated, this is a highly regulated industry. And we work with those regulators on a daily basis. We are all subject to those regulations and it's very expensive to do that. It's expensive to regulate and it's expensive to be regulated." "The other 'who pays issue.' If this bill passes, self- insurance are groups formed and they fail, who pays? We've heard testimony that it can't fail. There are safe guards in place. But they do fail. There have been failures in states. Alaska is very small. We have a small number of people we have a small marketplace. We've seen stats from New Mexico that there are 125 participants in their self- insurance plan has grown to 1500. By their own newsletters, the Homebuilders Association only has 360 total members. They can't possibly grow to 1500. There is a size necessary to make these types of plans successful and I don't think we have that in Alaska." "The other problem with who pays is, if we have a self- insurance plan and they're very selective about who can participate in that plan to make sure they're willing to abide by safety regulations and consideration for their fellow employees, what happens to rest of the people who can't participate? Do we really expect an insurance industry to insure only the quote, undesirable employees? That doesn't seem to make sense." "As my bottom line, I would echo Senator Kelly's - there are other methods available, this is unnecessary. Reciprocals are available. [Undecipherable] timber exchanges has been very successful. Purchasing groups are also allowed under state statute. The ability to join together and take advantage of group size to purchase and negotiate discounted insurance with none of the risks." "Again, I appreciate the opportunity to testify and I tried to keep it brief. And I would be happy to answer any questions regarding." Next, ROBIN WARD, Vice President of the State of Alaska Homebuilders Association, also connected to the meeting via teleconference from Anchorage, was called upon to testify. Her comments were as follows: "I appreciate the opportunity to testify today. There are several things that I would like to clarify for the committee. It has been mentioned that the National Homebuilders Association would be involved. I need to clarify that they are not involved. The only thing that they have done, is share models, language for the bill." "Any royalties that we could afford to our state association or local associations would stay in the state. So there is no financial involvement with our national group." "This type of legislation is allowed and working in 37 other states. And if you'll notice the bill is not the homebuilder's bill. We just happen to be the first trade association to push this type of legislation. But any trade association that qualifies would be able to start this, whether it be the miners or truckers or general contractors. So it's not actually not just the homebuilders that would be using this. We've identified at least eight other trade associations that would have the membership to be able to actually start and work a group like this." "I also need to clarify that we do have 897 members statewide. We do expect it to grow probably to 1300-1500 by the time that we can get something like this up and rolling." "I do want to make sure that people understand again this not our bill. This is a trade association bill. We want the opportunity to research the ability to get into business. We can't do that until we have the legislative rights to do that." "I will be happy to answer any questions." Senator Phillips asked about the issue of the royalties paid to the national headquarters and wanted to know if this bill would prohibit any future contributions. Ms. Ward said it would not. Co-Chair Sharp then called upon MARIANNE BURK the Director of the Division of Insurance. She testified as follows: "For the past two legislative sessions there have been literally hours of testimony about this bill. And I will not take this committee's time to rehash all of the various points. I do however, feel that it's extremely important that we address some critical issues especially on the financial side of this proposed legislation." "And I would start by reminding this group of something that I know you all already know. But for the members, all of our constituents, I would just like to again start my testimony with the fact that we need to keep in mind, the workers have given up their rights to sue their employers for the assurance that they will have medical treatment and they will have some money for living expenses. That is in my opinion, the heart of this issue." "We've had testimony that the rates in this state are high. I would submit, and this is verifiable by official records, that since the major legislation that was enacted in 1988, making massive changes in the workers comp statutes, that the rates have continued to go down. One year there was zero change. Two years there were increases. One, 2.4 and one, 2.6. Other than that, the rest of the seven years, each one has been a decrease. In the past three years the decreases have been quite significant for the homebuilders themselves. And I would acknowledge that this bill is available to any trade association. But the testimony has been geared toward the homebuilders." "I would like to point out for the record that, of the three classifications that the homebuilders are in, such as carpentry, detached one, two-story dwellings, carpentry dwellings three stories or less, end carpentry installation of cabinets. These rates have continued to go down in the past ten years. One category, installation of cabinetwork, nine out of ten years, there's been a decrease. It's gone from $14.76 per hundred, to $6.71. Carpentry two-story, seven of the ten years it's gone down. It's gone down from $17.66 to $11.22. For the other carpentry category again, seven out of the ten years it's decreased. From $18.80 to $11.88. This is official record and this is what the individual employers have been starting at their manual rate." "There has been a lot of testimony about the fact that workers comp is extremely profitable in the State Of Alaska. In fact, testimony was introduced that it was 20-30 percent profit. I introduced at an earlier committee meeting, the National Association of Insurance Commissioners' profit ability by line, by state, which showed that 30 of the states either are more profitable or equal to Alaska. And the profitability for workers comp in Alaska is 11.4. Quite a difference from the 20-30 plus percentage that has been presented." "There has been testimony that we should allow entrepreneurial activities. I wholeheartedly support entrepreneurial activities. In fact, Mr. Chairman, members of this committee, I have formed for an employer, self- insurance. So it does have a place in the scheme of things. However, again we must be sure the employees are protected. If you're an individual employer in the state you can be self-insured. But you've got to have a net worth of $5 million. And it's got to be proven by audited financial statements every year." "If you are a group of small employers and you want to form a purchasing group, you can. There is nothing standing in your way. You can group together and market for your coverage. This is true entrepreneurialship." "Reciprocals are also available, and I won't dwell on those. I just want to point out that we do have two outstanding examples in this state. The Alaska Timber, which started out with full capitalization by their members, today has $6.8 million in surplus. The AERCA, which again is an excellent example of entrepreneurialship in it's finest. This group started out again, with proper capitalization. And actually their premium base is similar with the premium base that is called for in this legislation. Today, they again are one of the outstanding examples of making it work. They've plowed their profits back in to reducing their workers comp premiums. Today they have almost $14 million in their capital [undecipherable]." "A lot of testimony has been given about the NAIC model law. The NAIC did adopt this law at a time where in many states; there was genuine prices in the workers comp market. Senator Kelly pointed out that only four states have adopted similar legislation. This documentation is attached to the model act and I would be happy to introduce this into the record. The model act has on the back, those states that have adopted model or similar legislation. There're only four. Those four are Pennsylvania, New York, Tennessee and New Mexico." "I have talked to the departments to get information about how this has worked for them. Pennsylvania only requires $500,000 of premium to form one of these entities. However, you must pay the full $500,000 up front day one. The legislation before you requires only 25 percent of a million dollars or $250,000. Pennsylvania also requires surety bonds to be as high as $800,000. Since they adopted this legislation, 25 groups in total have formed. No new groups have formed in the past few years. When I questioned why, I was told because workers comp rates are going down and the workers comp is cheap enough that who wants to go on risk individually. They have had four groups go out of business." "Tennessee has twelve groups. Four of those groups have been dissolved. Two more are likely in the near future. All members of those groups must be approved by the Department of Insurance, something that is not called for in this legislation." "New Mexico however has been held out as an example in several different committee meetings. New Mexico has had no new groups since 1994. They raised their net worth - the combined net worth from one million dollars, which is what this bill calls for, to three million dollars. But probably the most significant difference is the level of benefits. In New Mexico, the maximum per week benefit to an injured worker is $353. In Alaska it's $700. The minimum benefit is $36. In Alaska it's $154. I submit that that in itself is a significant difference on whether or not there is sufficient money to protect the workers." "I would also submit, but I have no evidence to prove - support this, that in all likelihood the medical care in New Mexico is not as high as it is in Alaska." "We have this bill before us and with the chairman's permission, I have a handout that I would like to share with the committee members, which will analyze this proposed legislation." "This has been prepared by the Division of Insurance and I would like to stress that I will identify for you the number that we came up with. However, the categories of expenses and the percentages are directly from experts that the homebuilders hired to come up and testify. And I will tell you up front that the credentials of their experts have been excellent. I do not disagree with the qualifications of their experts in any way." "The first page says the analysis of the premium proposed. And I urge you to keep these numbers in mind. Seventy percent of a million dollars must, according to the proposed legislation, buy excess insurance and pay the claims. Thirty percent is available to pay the administrative expense. And on day one, will have one quarter or $250,000. Will have $75,000 for the administrative claims and $250,000 to buy the reinsurance - or buy the excess insurance and pay claims. Mr. Chairman, members of the committee, excess insurance must be paid for when you buy it. You cannot get an installment plan." "The second page is especially important and I want to make sure that I give credit to where the numbers and categories did in fact come from. On your left, you have a list of expenses. Then you have percentages and that percentage applied to $1.3 million of premium. Now why $1.3 million? The consultant that came up to testify for the homebuilders who is with the Frank Gates Service Company, a well- established reputable third-party administrator, said that is what they had just done so the numbers were as current as he could get. I asked him why he didn't use the one million. And his response to me was that they would be uncomfortable with anything less than a million dollars. But back to this page, as you can see, they have provided categories, none of which I would dispute would be necessary for the implementation and running of this program." "He did include royalties to the associations and that is two percent. He said it is two percent of the premium, whether it's a million dollars or ten million dollars is two percent." "You can see that the total percentage is below the 30 percent. However, there are expenses that are called for in this legislation that he did not include. And if I could direct the committee meeting to the page titled 'analysis of expenses of self-insurance group'. These are expenses that are required by this proposed legislation. We have crossed referenced them to the specific section in the bill. The second injury fund payment is required. And it by the way is required of anyone insuring in the state. The guarantee fund assessment is a one-time only five- percent payment. That's $50,000. Now that money, according to the legislation, is to be set aside as a safety net. When we start day one that's all they have to have as a safety net, $50,000 in that guarantee fund." "It also calls for surety bond of $450,000. We have checked with a variety of insurance companies and bonding companies and this amount is on the low end. This is a number we got from riders in the State Of Alaska. The legislation also calls for fidelity bond errors and omissions and performance bonds. Again, these are numbers that we called Alaskans to get quotes for. Keep in mind we're getting quotes. They're not necessarily what they would have to pay because this is a start-up group and they could be higher but I would be extremely surprised if they were lower." "So when we can take those costs, not optional costs, but costs that are called for in the legislation and bring them over again to the analysis. We are in a situation of where we have additional expenses in additional to what their experts have called for." "Now if I could direct your attention to the right-hand side of this page. There is the million-dollar premium this proposed legislation calls for. If a cost if fixed, we simply brought that cost over as it was. And I do not believe that - I do not want to infer that we think these are reasonable costs. I find it very problematic that the estimate for legal fees is only $3,250. I can speak for my own profession in that I find it highly unlikely they would be able to get the accounting services and the audit for $10,010. But I am using their numbers. Where the expense is a function of premiums, i.e., two percent of the premium, that's what we used." "You'll come down and then also add in those costs, which I reviewed for you that are called for in the legislation. We've exceeded the 30 percent. Middle of the column there. My point in bringing this out is one of the strong pillars, if you will, that has been given as support for shortfalls of funds to pay claims, has been 'we'll go back to excess administrative funds.' Assuming these - they can buy these services for this amount, there are no excess funds." "Now to the bottom right-hand corner. Excess insurance is called for in this proposed legislation and the homebuilders again brought up an expert from a company that is well known and highly respected for writing workers comp reinsurance and excess insurance. I talked in my office to both of these gentlemen. They came over and asked to speak with me. They recognized and in fact followed up with a letter, saying they recognized my concern on the funding." "I asked them to give me what it would cost for what they had testified to as the best this group could hope to get. They testified the best attachment point for single injury - and by that I mean the group has to pay every dollar up to a point - was $350,000 per occurrence and in the aggregate, $900,000. So let's say we had 100 $5,000 injuries. We're going to pay all of that. And then we have a big one that's $350,000. We'll pay up to the $350,000. When the group has paid, in a policy year, $900,000 their reinsurance kicks in. Now their reinsurance - and again this is an important - the excess insurance it's important to point this out - you have to pay the claim first and then you are reimbursed." "These are the estimates they provided me. If you look at this analysis again, based on either the expert testimony of the homebuilder's experts or quotes from people doing business in the State Of Alaska, you'll find that on day one we have a negative position to pay claims. We've overspent for the excess insurance out of our $175,000 and we're a hundred - I'm sorry - $71,000 in the hole for the year. And I think it's important to consider the entire year." "The maximum amount that's gonna be available to pay claims is $454,000. Keep in mind there aggregate attachment point is $900,000 and their individual attachment point $350,000." "So in summary, the administrative expenses exceed 30 percent. The only options are to eliminate costs that are called for in the legislation or are in their expert's opinion necessary, use claims money for the administrative costs, which would require the approval of the director, or immediately assess their members. And again in summary, I would just like to say that that does leave only $454,000 to pay the claims." "The entrepreneurial, the arguments for the fact that this is a very profitable line, we have presented evidence provided by independent sources. We are deeply concerned that the workers needs will not be met and will not be met on a timely basis. The guarantee fund, as established by this legislation, should not be confused with a guarantee fund that the workers of Alaska that are insured have. If they get into trouble the full fate of all other property and casualty insurers throughout the country are there to make good. Alaska Pacific Marine, ten years ago, was a workers comp insurer that had reinsurance that was properly capitalized. It still failed. Fortunately, it was an insurer. It was - the workers were protected." Tape #161 Side A, 10:25 a.m. Senator Parnell commented that he felt it was irresponsible for the Division of Insurance to wait until a year into the legislation's process to bring forth the figures. However, he was glad to finally have them. He referred to page 3 of the spreadsheet, the "Amount to Pay Claims on Day One", saying that the needed $71,000 that was not available and the needed $454,000 to pay claims for the year. He then asked if all the expenses listed above those numbers were paid up front or throughout the year. Ms. Burke replied that the excess insurance must be paid up front and resulted in the negative $71,000. She defended the lateness of the spreadsheet, citing the experts hired by the homebuilder's association only recently supplied the information to them. Prior to then, the division testified there was not sufficient money to run the program. Senator Parnell questioned the accuracy of the spreadsheet, saying that it assumed that all the expensed must be paid up from, where he felt most of them could be spread out over the first year. Ms. Burke said the specific insurance amounts of $50,000 and $110,000 must be paid on day one. Senator Parnell asked if practically speaking, would the group have to pay claims on day one. Ms. Burke said no, they would not write a check on day, however some of the other expenses would have to be paid. She noted commissions of 3.5 percent, legal cost to get the program started, and royalties, if they were due right away, as some. Senator Parnell wanted to know if the division had done an analysis on the anticipated claims and the amount necessary to pay those claims. Ms. Burke replied that the Workers Comp Division provided actual computer runs showing the claims that had been paid in prior years. She added that if it was known who would be participating in the group, their claim history could be used to make an actuarial determination. She thought even the homebuilder's themselves didn't yet know who would be a part of the group. Senator Parnell surmised that the current $454,000 might not be enough to pay the claims. Ms. Burke agreed stating that it was never known how much would be needed, that workers comp insurance was a risky business. Senator Parnell asked if the division had performed an actuarial determination. Ms. Burke again said they couldn't without knowing who would be participating. Senator Donley spoke of the Uniform Act and how it was said the act was not adequate to protect the injured workers. He wondered, if that were true, why it wasn't amended. Ms. Burke responded that there was no enforcement of the act, but that it actually did call for $1 million premium. Senator Donley had a copy of the act and said it was only $500,000. Ms. Burke corrected her comments, saying that $250,000 was required the first year and $250,000 the second year. She added that no state had adopted the model plan "as is". Each state tightened the requirements and she explained those changes. In her opinion, it was irresponsible to not tailor the act to the specific needs of each state. Senator Donley argued that if there were any problems with the act, it would have been amended. Ms. Burke countered that the only times the acts were revised was when federal regulations changed. Until then, the act was customized for each state. Senator Donley and Ms. Burke continued their discussion on the matter. Ms. Burke's final comment was to stress that since no state had adopted the model act, the insurance commission had no need to address whether or not it needed to be amended. Senator Donley felt the examiners would review their recommendations to ensure they are still applicable. Senator Donley next addressed the level of reinsurance issue. He said the issue of royalty was settled, therefore it should not be included in the spreadsheet. He then referred to the calculated $900,000 aggregate attachment amount. Ms. Burke confirmed the amount saying that Ed Smith, the homebuilder's expert testified was the lowest they could get. Senator Donley thought there would be lower amounts available in the marketplace. He wanted to hear more testimony telling him lower amounts could be had. He thought the director could require a lower amount, since the bill provided the director complete discretion to determine if the reinsurance amount was adequate. Ms. Burke responded that she could require it, but if it were not available it wouldn't work and she would be subject to criticism of abusing her position. She continued speaking on the details of reinsurance and information provided by the homebuilder's experts. Senator Adams reminded the committee he had five amendments. After the committee had heard all public testimony, he requested the director be allowed to return to the table to speak to the amendments. Co-Chair Sharp said he had requests from other committee members to be given time to review the amendments and the new information provided by the department. Senator Donley wanted the sponsor and witnesses to have an opportunity to respond to the department's testimony. ALAN WILSON, member of the Alaska State Homebuilders, came to the table and commented as followed: "I sat on the executive board and have been working on this piece of legislation for the last couple of years. And I would certainly be glad to answer questions specifically regarding the excess." "I was told or heard testimony earlier that - concerning the attachment points and the costs of the reinsurance. Attachment points from individual two separate companies that we have worked with. One of those individuals was represented before this body last week or last hearing. Their attachment point is at the 300,000 that the director of Insurance just testified to." "Another individual quoted us some numbers regarding attachment point at 200,000. What I've learned in this industry is that the attachment point can be whatever amount we would want it to be. It's just a matter of are we willing to pay the cost of that." "We had some documents presented to us that represented a million dollar premium that showed a $200,000 attachment point with the expense of $50,000-75,000 for both your specific and your aggregate insurance." Senator Donley asked if Mr. Wilson's testimony was that the spreadsheet could be dramatically altered and the bottom line reduced, by shopping around for a more effective rate and lower attachment point. Mr. Wilson affirmed. He referred to the spreadsheet's million-dollar column listing a five-percent for specific, and 11 percent for excess insurance. His organization's quotes had been five to eight percent for both. Therefore, he believed the figure shown on the spreadsheet could be halved. Co-Chair Sharp clarified that the eight percent, $104,000 figure shown on the left-hand side was equivalent to the $160,000 shown on the right-hand side. Mr. Wilson affirmed. Co-Chair Sharp wanted to know if the $104,000 was documented as firm quotes to provide excess insurance at the $1.3 million level. Mr. Wilson detailed the specifics of the figure and where it was obtained. Senator Phillips saw Ms. Burke shaking her head and wanted to hear her observation of the last comments. Ms. Burke returned to the table and stated that the eight-percent was the amount that the TPA estimated. It was not a quote in any way. The people who provided the quote were not insurers, but merely provided estimates, she stressed. She believed the estimates to be very low. The only firm quote received was from National Safety Insurance, Ed Smith and gave the percentages of five and eleven. If there were other quotes, they had not been provided to the Legislature or the division, she stated. They could be purchased, she admitted, but only at a very high cost. Co-Chair Sharp offered that the high premium costs would then eat up all potential savings and thus making the program unfeasible. Senator Donley thought it looked like there was a lot of middle ground and a lot of room to work with. He detailed the different options where the group could shop around and get lower prices. Co-Chair Sharp responded that if that was the case, then the lower quotes should be brought before the committee as proof. There was some discussion as to the chair's intention with this bill. Co-Chair Sharp listed the members' schedule for the remainder of the day, and expressed a desire to return later in the afternoon to finish work in the bill. He noted committee members' requests to have some time to review the Division of Insurance's figures plus the amendments. He ordered the bill held in committee. Mr. Wilson made a final comment relating to the five-percent figure stating quotes had been given from multiple companies. He wanted the committee to hear testimony to that fact when it reconvened. Co-Chair Sharp requested written verification if they were not in Juneau to testify. SENATE CS FOR CS FOR HOUSE BILL NO. 144(RES) "An Act relating to the authority of the Department of Environmental Conservation to charge fees; and providing for an effective date." Senator Pearce moved for adoption of the "C" version Workdraft for consideration by the committee. There was no objection and Co-Chair Sharp so ordered. Senator Torgerson moved for adoption of Amendment #1. Senator Adams objected, and asked for an explanation of the amendment. Senator Torgerson spoke to the proposed changes on page 2 line 7 where "...if the systems are located within a municipality..." was deleted, and, "...except as provided in E-4 of this section..." was inserted. He detailed the provisions of E-4. With that explanation, Senator Adams removed his objection. Co-Chair Sharp asked if the department had reviewed the amendments. Senator Torgerson said they had and that the department was satisfied. JANICE ADAIR, Director of the Division of Environmental Health, was called to the table and she reiterated Senator Torgerson's statement that the department was happy with the proposed amendments. She did want to point out there was a significant typographical error on one of the amendments, however it was not on Amendment #1. Without objection, Amendment #1 was adopted. Senator Torgerson moved for adoption of Amendment #2. Senator Adams again objected, asking for an explanation. Senator Torgerson detailed the deletion on page 3 line 2, "...if the systems are located outside a municipality..." and the insertion of, "...if the system serves only a discrete industrial operation..." The reason for this change was that originally, they intent was to apply only to areas located outside municipalities. After further review, he learned there where many municipalities that had remote locations and that they wanted operators to negotiate fixed rates with DEC, he stated. The next change was to page 3 line 3 and inserted the letter "e" after "a", which referred to the earlier section. The last change was made on line 4 and added, "...after provided "a" or "3"..." Senator Adams removed his objection and the amendment was adopted. Senator Torgerson moved for adoption of Amendment #3 and Senator Adams objected. Ms. Adair pointed out the error on line 3, which should read, "preapplication" instead of, "reapplication." Senator Torgerson offered the change as a technical amendment to Amendment #3. Senator Adams removed his objection to the amendment with that correction. There was no objection and amended Amendment #3 was adopted. Senator Torgerson moved for adoption of Amendment #4 and spoke to the proposed change. It applied to Section 1 of the act, the direct marketing fishing vessels and the fee applied to them, and gave it an immediate effective date. He wanted the act to become effective for this season. There was no objection and Amendment #4 was adopted. Senator Torgerson said he had worked with all the parties on this legislation and it reflected compromise by each interest. It had the approval of everyone involved, he surmised. Ms. Adair added that the bill was acceptable to the department and they would submit a revised fiscal note. Senator Torgerson predicted the new fiscal note would be substantially less. Senator Torgerson offered a motion to move from committee, SCS CS HB 144 (FIN) with revised fiscal note. Without objection it was so ordered. Co-Chair Sharp announced that HB 393 and HB 284 would be held pending anticipated changes. He restated his desire to meet again in the afternoon to continue working on legislation. ADJOURNMENT Co-Chair Sharp recessed the meeting to the call of the chair at approximately 10:55 a.m. SFC-98 (25) 5/08/98 am