SENATE JUDICIARY COMMITTEE March 18, 1994 1:35 p.m. MEMBERS PRESENT Senator Robin Taylor, Chairman Senator Rick Halford, Vice-Chairman Senator George Jacko Senator Dave Donley MEMBERS ABSENT Senator Suzanne Little COMMITTEE CALENDAR HOUSE CONCURRENT RESOLUTION NO. 24 Supporting the governor's decision to authorize a suit against the United States government for violating the Alaska Statehood Act. SENATE BILL NO. 337 "An Act relating to the voting of shares in Native corporations." HOUSE CONCURRENT RESOLUTION NO. 11 Designating the month of March as "Women's History Month." SENATE JOINT RESOLUTION NO. 47 Proposing amendments to the constitution of the State of Alaska changing the membership of the Judicial Council. SENATE BILL NO. 161 "An Act relating to interest rates and calculation of interest under certain judgments and decrees and on refunds of certain taxes, royalties, or net profit shares; and providing for an effective date." PREVIOUS SENATE COMMITTEE ACTION HCR 24 - See Judiciary minutes dated 3/14/94. SB 337 - NO PREVIOUS ACTION. HCR 11 - See State Affairs minutes dated 4/16/93. SJR 47 - NO PREVIOUS ACTION. SB 161 - See State Affairs minutes dated 4/2/93 and 4/7/93. See Judiciary minutes dated 4/14/93 and 4/20/93. WITNESS REGISTER John Katz, Special Counsel State/Federal Relations 444 N. Capitol NW, Suite 336 Washington, DC 20001-1512 POSITION STATEMENT: Supports HCR 24. Cheri Jacobus, Asst. Atty. General Civil Division Department of Law 1031 W. 4th, Suite 200 Anchorage, Alaska 99501-1994 POSITION STATEMENT: Supports HCR 24. Daniel Bruce, Attorney Baxter, Bruce & Brand P.O. Box 32819 Juneau, Alaska 99803 POSITION STATEMENT: Represents Huna Totem Corporation. Larry Carroll, Securities Examiner Division of Banking, Securities and Corporations Dept. of Commerce & Economic Development P.O. Box 110807 Juneau, Alaska 99811-0807 POSITION STATEMENT: Opposed SB 337. Alice Petriuelli, President Aleut Corporation 4000 Old Seward Highway Anchorage, Alaska 99503 POSITION STATEMENT: Supports SB 337. Renee Chatman, Aide Representative Bettye Davis State Capitol Juneau, AK 99801-1182 POSITION STATEMENT: Introduced HCR 11. William Cotton, Executive Director Alaska Judicial Council 1029 W. 3rd Ave., Suite 201 Anchorage, Alaska 99501 POSITION STATEMENT: Opposed SJR 47. Chris Christensen, Staff Counsel Judicial Branch 310 K Street Anchorage, Alaska 99501-2084 POSITION STATEMENT: Opposed SJR 47. Deborah Vogt, Asst. Atty. General Civil Section Department of Law P.O. Box 110300 Juneau, Alaska 99811-0300 POSITION STATEMENT: Supports SB 161. Larry Meyers, Director Income & Excise Audit Division Department of Revenue P.O. Box 110420 Juneau, Alaska 99811-0420 POSITION STATEMENT: Supports SB 161. Grant Hunter 733 W. 4th Street Anchorage, Alaska 99501 POSITION STATEMENT: Opposes SB 161. ACTION NARRATIVE TAPE 94-18, SIDE A Number 001 CHAIRMAN ROBIN TAYLOR called the Judiciary Committee meeting to order at 1:35 p.m. SENATOR TAYLOR returned HCR 24 (SUPPORT SUIT AGAINST FEDERAL GOVERNMENT) by prime sponsor REPRESENTATIVE RAMONA BARNES, to committee. SENATOR TAYLOR announced JOHN KATZ, Special Counsel for State- Federal Relations, was on teleconference from Washington, DC, to answer questions from SENATOR DONLEY. SENATOR DONLEY, in reference to a conversation with MR. KATZ the previous day and from reading about the suit, expressed his concern about the timing of the lawsuit that dealt with the oil export ban. He described his support for the substance of both the lawsuits, as well as the resolution, but he was concerned about the timing of the oil export ban provision in relation to the potential for an administrative lifting of the ban. He understood there was a gap between the expiration of the export act and when it was once again extended by executive order by the Bush Administration. SENATOR DONLEY explained his staff had faxed to MR. KATZ a couple of oil industry periodicals that identify the concern about whether it was the Justice Department stance that caused the withdrawal by the Bush Administration. He quoted MR. KATZ as not having a direct conversation about the Justice Department position, and he asked MR. KATZ if he had any details on any communication. Number 050 MR. KATZ responded by reiterating what he had said to SENATOR DONLEY yesterday, in that he didn't believe the timing of the lawsuit had any effect on the discussions that occurred with respect to rescinding the oil export ban by administrative action. He explained there was a brief window of opportunity in 1992 when it was hoped that the ban Executive Order would expire by its own terms, but it did not. MR. KATZ further explained that after the November elections his office entered into discussions with both the Department of Energy and the White House, which culminated in a direct meeting between the Governor and the President in December. At no time, in any discussion at any level did anyone raise the issue of the pending lawsuit in district court and court of claims as a problem with the negotiations. MR. KATZ believed the involvement with the Justice Department concerned the legal issue as to whether the President had the authority to rescind the Executive Order once he had executed it originally. He argued that because the President had the authority to execute it, he had the authority to rescind it. MR. KATZ said there were people at the Justice Department who were raising questions about that legal issue, but in all his discussions he concluded the pendency of Alaska's litigation didn't have an effect. He believes the Bush Administration decided not to rescind the Executive Order for other reasons. Number 99 SENATOR DONLEY respectfully disagreed with MR. KATZ'S analysis, and stated that he did think the lawsuits were a factor. He read excerpts from some of the petroleum periodicals which made it seem to be common knowledge around Washington, DC, that there was a problem with the Justice Department on the lifting of the ban because of the defense the department had to prepare for the case. He told MR. KATZ he had faxed him a copy of the periodicals to him and had distributed copies to the committee members to show his concern on the timing. SENATOR DONLEY reiterated his support for the lawsuit and the dilemma faced by MR. KATZ, but he thought that the lawsuit should not have been filed until after the elections and that that would have prevented the defense presented by the Justice Department. He read a quote from INSIDE ENERGY, dated December 11, 1192: "DOE had to back off its support of Alaska Governor Walter Hickel's request to have President Bush administratively lift a ban on the export of Alaska North Slope crude oil, after learning that the Justice Department had taken the opposite legal stand in its defense against Hickel's lawsuit on the same subject, according to sources familiar with the issue." He read several other quotes along the same theme to indicate there was knowledge in the oil industry that this conflict had occurred. SENATOR DONLEY thought there was a strong case that there was direct input from the Justice Department to halt lifting the ban, but he accepted MR. KATZ'S explanation that he didn't get such a message from the White House. Number 169 MR. KATZ opined we will never know exactly what transpired between the Justice Department and the White House at any given time in the process, and he described juggling the State Administration with the judicial option against the possibility of executive action against the future possibility of legislative action. He claimed with certainty in all the meetings he attended, at no time dealing with the clients was the lawsuit mentioned. He explained if there had been a chance the ban would be lifted if the lawsuit was dropped, the lawsuit would have been dropped. MR. KATZ, in reference to one of the quotes read by SENATOR DONLEY, thought the principal legal issue was when the Justice Department advised the president there would be significant legal problems, not caused by the lawsuit, but by the questions raised about the president's authority to rescind the ban once he had executed the ban. MR. KATZ thought there were political concerns about the merits, but not about the legal issues, and the existence of the lawsuit was only a tertiary factor in the analysis. Number 207 SENATOR DONLEY suggested it would be interesting if MR. KATZ followed up the discussion with someone from the Department of Energy to determine their opinion on the problem. SENATOR DONLEY thought it was a significant enough question to propose an amendment to disclaim the timing of the specific case of State v. Brown, but not taking a position one way or the other about the case. SENATOR TAYLOR objected to the motion for purposes of discussion, and he asked MR. KATZ to stay on line during testimony from CHERIE JACOBUS, Asst. Atty. General from the Department of Law who wanted to comment. She was on teleconference from Anchorage. MS. JACOBUS thought the resolution, HCR 24, was very appropriate because it was this governor's legacy to Alaska's future, and she reviewed the past 35 years with the erosion of promises made to Alaska at statehood. She said Alaska had not been treated equally with other states, particularly under the compact lawsuit and the 90/10 split which is the subject of the lawsuit. She also reviewed the manner in which Alaska was to fund state government and the effect of dwindling resource development. MS. JACOBUS thought future legislatures would see continued erosion of the unreserved lands available for development. She also thought it was important the legislature take a stand on the issues as outlined and the litigation should continue. She urged support for the resolution, saying it was also supported by the governor. In reference to the proposed amendment, MS. JACOBUS said she understood what SENATOR DONLEY was suggesting, but she did not agree it would serve any purpose, and she believed MR. KATZ'S explanation was correct. Number 255 SENATOR TAYLOR questioned whether would it not have been logical to assume that when the President, the Governor, and MR. KATZ sat down with litigation pending on the issue, the Governor would have said, "We're suing you, but we will drop the suit if you lift the ban." MS. JACOBUS said she couldn't speculate as to what occurred between the Governor and the President, but she thought dropping the lawsuit would be a factor in whether the oil export ban was lifted. SENATOR DONLEY didn't see how the proposed amendment undercuts, because the whole resolution is the legislative support of the concept behind the lawsuit. He claimed the amendment only specifically disclaims the timing of the one lawsuit, and he reiterated his support for the substance of the suit. He asked MS. JACOBUS why she thought the amendment would undercut the substance of the suit. Number 290 MS. JACOBUS didn't think there was anything to be gained by the action of the amendment, and she thought it might suggest the suit should have been brought earlier. SENATOR DONLEY continued to explain the amendment was neutral on support for the timing, and he admitted the suit should have been brought earlier. MS. JACOBUS concluded her testimony. SENATOR TAYLOR called for a vote on SENATOR DONLEY'S motion to disclaim the timing of the specific case of State v. Brown, but not ot taking a position one way or the other about the case. SENATOR JACKO objected to the amendment. The roll was taken with the following results: SENATOR DONLEY voted "yes," and SENATORS JACKO and TAYLOR voted "no." SENATOR TAYLOR said the motion failed. SENATOR TAYLOR announced SB 337 (SHAREHOLDER VOTING: NATIVE CORPORATIONS) to be up for consideration. DANIEL BRUCE, Baxter, Bruce & Brand, representing Huna Totem Corporation, supported SB 337, the purpose of which is to eliminate the sunset provision contained in AS 10.06.420. (d) pertaining to non-cumulative voting. The 1989 amendments to the corporations code provides that a corporation that had prohibited cumulative voting only in the by-laws had until July 1, 1994 to amend their Articles of Incorporation to replace the restriction on cumulative voting in the Articles. This would have required a two thirds majority vote of the corporation shareholders to approve the amendment of the Articles. It is his position that not amending AS 10.06.420 (d) enforcing compliance with the sunset provision is unnecessary, unduly burdensome, and costly to the affected corporations. The concern with cumulative voting is that it is necessary to protect the rights of minority shareholders and they believe the current system of non-cumulative voting adequately protects the shareholders in the context of the Alaska Native Corporations. He said there are no benefits to the sunset provision currently in the statute for the Alaska Native Corporations. SENATOR JACKO asked him to explain cumulative. MR. BRUCE explained if a corporation has cumulative voting, and four directors are being elected, for instance, each shareholder would be able to cast, four hundred shares to vote for one director. Under non- cumulative, it's basically 1 person, 1 vote. SENATOR JACKO asked if this would have any affect on the corporations using cumulative voting now. MR. BRUCE said it would not. He said it would basically only affect the corporations which had restricted cumulative voting in their by-laws prior to amending the Corporations Act in 1989. SENATOR TAYLOR commented that if they take no action, that would be an affirmative act on the part of the native village corporations that have decided not to use cumulative voting to continue not using cumulative voting. LARRY CARROLL, Securities Examiner, said that was correct. He said the one thing you can do as a shareholder is vote. Eliminating cumulative voting poses a serious consideration for dissenting minority shareholders within any corporation. If the enactment was done by the Board, it's makes it harder to change that Board. They, therefore, suggest an amendment that says if the by-law was in place by a majority of shareholders. SENATOR JACKO said often the corporations have a difficult time having two thirds of the members present, so it is really difficult to amend the Articles to get non-cumulative voting. MR. CARROLL commented that usually quorums arise when there issues of importance to shareholders. However, they realize it is a problem which is why they suggested the amendment. SENATOR TAYLOR said he is personally concerned with the village corporations in his area of the state whom he watches harvesting their resources go broke in the process of doing it, and yet the Board members get taken care of real well. The shareholders couldn't do anything about it, because the Board was so well entrenched and they didn't have cumulative voting where they could take advantage of their minority status to get some of their people on the Board to turn things around. SENATOR JACKO said it has been his experience that the Boards that had more continuity were more successful than the ones with new members every two years. He said non-cumulative voting doesn't prevent a minority from getting elected. SENATOR TAYLOR said it is tougher and takes longer. SENATOR DONLEY asked for a position paper. MR. CARROLL said they didn't have one at the time, but they did have a $0 fiscal note. They do oppose SB 337. He said their bottom line is to let the shareholders make the decision themselves. Number 526 ALICE PETRIUELLI, President, Aleut Corporation, supported SB 337. She said anyone can run for their Board and win. They don't have a management slate. Non-cumulative voting does not encourage a management slate. They want to be allowed to keep doing what they have been doing since 1972 which is 1 man gets 1 vote. SENATOR TAYLOR asked if the decision to go from cumulative to non- cumulative was made by a vote of the shareholders or if it was made by a by-law change by the Board of the Directors. She said they have had non-cumulative voting from the beginning. They went to every village and asked them how they wanted it and it was put into the original by-laws which was voted on by the shareholders. MR. BRUCE said that type of voting is not the only protection shareholders have under corporate law. If they believe abuses are being made of corporate resources by the Board of Directors or they are being oppressed by a majority on the Board there can be derivative suits. SENATOR TAYLOR said that derivative suits are at the shareholder's expense and the Board has the wealth of the corporation behind them. He did not think that was a level playing field. SENATOR TAYLOR moved to amend page 1, line 7 inserting "or approved by a majority of the shareholders and provided for non-cumulative voting by its shareholders" after "June 30, 1989." SENATOR JACKO objected. He said the amendment would cost the corporations a substantial amount to do what they have already been doing and also he thought it would be difficult to get the number of people required to vote. SENATOR TAYLOR pointed out on page 2 it said "an affirmative vote of the shares represented at a regular or special meeting at which a quorum is present by person or proxy." SENATOR JACKO said the expense would be for the campaign before the shareholders meeting. SENATOR TAYLOR pointed out that they would be having an annual meeting anyhow. He also thought that it would probably be more difficult for a Board who did it without consent of the shareholders. SENATOR TAYLOR called for the question on the amendment. SENATOR TAYLOR and SENATOR DONELY voted yes; SENATOR JACKO voted no; SENATOR HALFORD passed. There was more discussion and action was deferred on the vote. Number 495 SENATOR TAYLOR announced HCR 11 (WOMEN'S HISTORY MONTH) to be up for consideration. RENEE CHATMAN, Aide to Representative Bettye Davis, said HCR 11 was intended to bring to the forefront contributions that women have made to our nation and in Alaska. SENATOR TAYLOR thanked her for her testimony and announced SJR 47 (MEMBERSHIP OF THE JUDICIAL COUNCIL) to be up for consideration. SENATOR HALFORD, sponsor of SJR 47, said he had a proposed CS which added two public members. SENATOR HALFORD moved to adopt the CS to SJR 47. There were no objections and it was so ordered. BILL COTTON, Executive Director, Alaska Judicial Council, said their agency is separate from the court system. It is assigned 3 duties by law: to screen and nominate judicial applicants providing the Governor with at least two nominees for each vacancy; second, to review the performance of judges and to provide the voters with information and a recommendation as to whether the judges should be retained; and, third, to do research into the administration of justice as the constitution refers to it. The Council is currently made up of 3 non-attorney members appointed by the Governor; 3 attorney members appointed by the Bar Association; and the Chief Justice sits as the seventh member who only votes to break a tie. MR. COTTON said the Judicial Council voted unanimously to oppose SJR 47 which would change the makeup of the Council giving the Governor more appointees. The Council believes the current system works well. He gave a brief background on two of the public members who had made significant contributions to the Council: Janice Linheart and Jim Arnesson who both oppose changing the current system. The reasons are in every trade and profession the ones who know the careers the best are the ones engaged in the same type of occupation. Attorneys have a self interest in selecting good judges. They endeavor to base the selection of judges on the basis of merit rather than political correctness. SENATOR HALFORD commented that his discussion with the members of the Council was based on the version prior to the Judiciary CS. He asked if they had taken a position on adding two public members. MR. COTTEN said his understanding of their feelings was that they were satisfied with the current system and did not wish to change. That is not true of the sixth member who was not there to vote, however. He would propose something like the Judiciary version. CHRIS CHRISTENSEN, Staff Counsel to the Alaska Court System, said he didn't have anything to add to Mr. Cotten's comments. The Supreme Court had instructed him to state their opposition to changing the composition of the Judicial Council. They believe Alaska has the best judicial selection procedure in the country. SENATOR DONLEY said that sections 6 and 10 have concerned him more over the years, because the terms of the judges are really long. Section 10 is where they vote on the conduct of the Judiciary. Because there are only three members of the public on the Council, it is possible to get a quorum with no public members present. SENATOR HALFORD agreed with Senator Donley and pointed out that the public members have to go through legislative confirmation and the attorney members don't even have to go through legislative confirmation. He thought it was set up to protect the establishment. Number 241 SENATOR HALFORD noted that this is where the separation of powers occurs and it is defined by the document they are working on. The separation in this state is far greater than in other states. SENATOR TAYLOR said things are structured now so that if a person takes "an elevated position" in this state, we believe that they have just forfeited all of their civil rights - for a trial by their peers and to know what the charges are posted against them. MR. CHRISTENSEN said the system works very well for the criminals and for their civil process. SENATOR HALFORD said that was probably true, but he didn't think it worked very well for the victims. SENATOR DONLEY asked what they thought about requiring that a certain number of public members have to be present for a quorum to occur instead of changing the membership. SENATOR TAYLOR said he had no problem with that; and said again he thought their terms were too long. SENATOR TAYLOR said they would hold CSSJR 47 for further discussion and announced HCR 24 (SUPPORT SUIT AGAINST FEDERAL GOVERNMENT) to be up for consideration. SENATOR HALFORD moved to pass HCR 24 from Committee. SENATOR DONLEY commented he thought there was a substantial question as to the specific timing. There were no objections and it was so ordered. Number 60 SENATOR TAYLOR announced SB 161 (INTEREST RATES: JUDGMENTS/TAXES/ROYALTIES) to be up for consideration. DEBORAH VOGT, Department of Law, supported SB 161 which addresses two distinct areas relating to interest in the state, judgements in all civil litigation, not just litigation involving the state of Alaska, and interest on back taxes and royalties. The 10.5% statutory interest rate is totally out of wack with current reality, she said. The legislation would simply adopt a market rate that would float with the market for both prejudgement and postjudgement interest. TAPE 94-20, SIDE A Number 001 SENATOR TAYLOR said that is not 10.5% more than you would have had to have paid. If we take this legislation and apply a sliding scale or a market test, the state would have to pay 7% or 8% interest. So we are talking about a 3% penalty. MS. VOGT said that interest under this legislation would be 3.49%, an amount that would apply to postjudgement interest were the litigation concluded this year. The prejudgement interest would flow under the legislation from the rate in effect in the year in which the litigation began. That might be significantly higher if it was several years ago. SENATOR DONLEY said he liked interest rates to be a little high as incentive for people to settle. He thought her proposal took away a lot of that incentive. MS. VOGT explained that in the examples she brought for the Committee the state makes an original deposit, an additional deposit, and a master's award. The state deposits into an escrow account the amount it believes the property is worth so interest is just paid on the net. There was some discussion regarding the examples of condemnation cases she brought for the Committee because they involved such large amounts of money owed by the state. MS. VOGT explained that a very small percentage of condemnation cases ever are contested. Most of them are agreed upon. A small percentage goes into hearing and these are some of the ones they have paid most of the interest in. SENATOR DONLEY suggested having a fixed addition to the sliding scale. MS. VOGT emphasized that the state's position is that the interest should be a floating market rate. It shouldn't be an incentive to either party to either drag out the litigation or to settle. Number 219 LARRY MEYERS, Department of Revenue, said under current law the interest rates for over and under payment are determined by the federal discount rate compounded quarterly at a percentage of the greater of 5% or 11% above that rate. Currently, that discount rate has been at 3% which means we have an 11% interest rate. MR. MEYERS said what the state is seeing now is that we are currently earning between 3 1/2% and 4% on our own money that is being invested. We are seeing example of taxpayers who are actually parking their money with the state to earn a higher rate than they could under short term earnings elsewhere. SENATOR HALFORD asked if there is any effort to accelerate in getting the refunds out? MR. MEYERS answered by law if they issue a refund within 90 days there is no interest due. The bulk of the refunds we are paying have to do with taxpayers who are filing an amended return. These are people who are voluntarily coming forward saying they have made mistakes. Number 284 SENATOR HALFORD asked if there was a way to separate by classification those voluntary actions from the acts of conflicts. MR. MEYERS said there is. If the state has, in an assessment mode, collected and then had to make a refund. SENATOR HALFORD said for the ones where the state was precipitating the conflict, it would seem that the interest rate ought to be 25% in both directions so everyone is betting a whole lot higher and would come to an agreement a whole lot quicker. MR. MEYERS said there are penalty provisions that they do apply routinely for negligent preparation. Number 334 MR. MEYERS suggested they change language that reads, "However, if the overpayment is a result of the correction of an assessment, a return made by the Department, the amount overpaid bears interest rate in the manner provided in AS 43.05.225. GRANT HUNTER, Anchorage, suggested that there be an alternative interest rate which would be greater than 10.5%. He didn't think interest should be paid on overpayments of taxes and royalty payments to the state of Alaska. It's the obligation of every citizen or royalty payer to determine on their returns what is the current rate, he said. SENATOR TAYLOR said he intended to have this bill again after an informal work session. SENATOR TAYLOR adjourned the meeting at 3:35 p.m.