SENATE LABOR AND COMMERCE COMMITTEE February 13, 1996 1:30 p.m. MEMBERS PRESENT Senator Tim Kelly, Chairman Senator John Torgerson, Vice-Chairman Senator Mike Miller Senator Judy Salo MEMBERS ABSENT Senator Jim Duncan COMMITTEE CALENDAR SENATE BILL NO. 261 "An Act relating to the release of employment security records; relating to an injunction or an employer's security for delinquent unemployment insurance contributions; extending time periods for redetermination and appeals for unemployment insurance; relating to the overpayment or the redetermination of unemployment insurance benefits; relating to availability for work, seeking work, and the calculation of wages for unemployment insurance purposes; relating to voluntary federal tax withholding from unemployment insurance benefits; relating to the binding effect of unemployment compensation decisions; relating to the definition of `waiting week' for employment security purposes; and providing for an effective date." SENATE BILL NO. 258 "An Act relating to the jurisdiction governing a trust, to challenges to trusts or property transfers in trust, to the validity of trust interests, and to transfers of certain trust interests." PREVIOUS SENATE COMMITTEE ACTION SB 261 - No previous Senate action. SB 258 - No previous Senate action. WITNESS REGISTER Dwight Perkins, Special Assistant Department of Labor P.O. Box 21149 Juneau, AK 99802-1149 POSITION STATEMENT: Commented on SB 261. Ron Torgerson Department of Labor P.O. Box 25509 Juneau, AK 99802-5509 POSITION STATEMENT: Commented on SB 261. Chris Christianson, Staff Counsel Alaska Court System 303 K Street Anchorage, AK 99501-2084 POSITION STATEMENT: Commented on SB 261. Doug Gardner, Assistant Attorney General Human Services Section Department of Law P.O. Box 110300 Juneau, AK 99811-0300 POSITION STATEMENT: Commented on SB 261. Marilyn May, Assistant Attorney General Collections and Support Department of Law 1031 W. 4th Ave, Suite 200 Anchorage, AK 99501-1994 POSITION STATEMENT: Commented on SB 261. Joseph Ryan, Legislative Aide % Representative Al Vesey State Capitol Bldg. Juneau, AK 99801-1182 POSITION STATEMENT: Sponsor statement for SB 258. Richard Thwaites 500 L Street, Suite 301 Anchorage, AK 99501 POSITION STATEMENT: Supported SB 258. Wes Coyner Alaska Bankers Assn. 301 W. Northern Lights Anchorage, AK 99503 POSITION STATEMENT: Commented on SB 258. ACTION NARRATIVE TAPE 96-11, SIDE A Number 001 SB 261 UNEMPLOYMENT COMPENSATION  CHAIRMAN TIM KELLY called the Labor and Commerce Committee meeting to order at 1:30 p.m. and announced SB 261 to be up for consideration. DWIGHT PERKINS, Department of Labor, said SB 261 makes several changes to the Employment Security Act in six major areas: federal income tax withholding; confidentiality of records; contributions and collections; benefit overpayments; finality in determinations; and appeals. In addition, the bill contains a few minor and technical amendments. The federal income tax withholding provision brings the Employment Security Act into conformity with a new federal provision that requires states to allow claimants to have income withheld from benefits to cover their income tax liability. The confidentiality of records section proposes changes to AS 23.20.110 and allows the Department to provide additional specific unemployment insurance information to other entities under strict disclosure guidelines. This exchange will support and enhance the department's own programs as well as assist other state programs. The information would be used only to protect the unemployment compensation fund, enhance employment, training, and labor market information programs. These changes do not rescind the public disclosure prohibitions already in statute. The intent is to increase efficiency of state government while retaining current privacy safeguards. Regarding contributions and collections, two provisions would provide important tools for collecting delinquent contributions: first from an employer who is at least two-quarters delinquent. The bill also allows the department to enjoin a delinquent employer who refuses to post a bond or pay contributions from operating as an employer. The department would use these provisions when existing remedies are not effective. These uncollectible accounts are currently subsidized by the rest of Alaska's employers, who pay contributions timely. In the benefit overpayment section, the standard for waiving unemployment insurance overpayments would be changed from great hardship to equity in good conscience. The new standard would allow the department to consider other factors, such as the degree of good faith in claiming benefits, and the claimant's detrimental reliance on the benefits. The bill would also permit the department to write off uncollectible overpayments after two years. Practice has shown that most recoverable overpayments are collected within two years. The department would be given clear authority to correct any determination during the benefit year of an unemployment claim. This change will increase the accuracy of claim adjudication. In the appeals section, a proposed amendment would provide a uniform 30 day period for filing appeals from any determination made by the department. The current 15 day period probably impacts rural parties unfairly and may not allow enough time to review and consider an appeal. The bill would also clarify the legal effect of appeal decisions. It would make it clear that findings of fact, and conclusions of law in unemployment hearings are not binding in another proceeding. The purpose of this amendment is to prevent parties from excessively litigating issues based on the effect the department's ruling may have on a later civil litigation. Both the 30 day appeal provision, and the provision restricting the scope of the department decisions, address concerns of a recent legislative audit of the unemployment insurance appeals process. Additional amendments would allow an insured worker to continue receiving unemployment benefits while attending the funeral of an immediate family member. The worker would be required to file a compensable claim for the week, immediately before jury duty or attendance at a funeral in order to receive an eligibility exemption for those reasons. The bill also exempts extended benefit claimants from the work search requirement while attending an improved training course and corrects the definition of a waiting week in the Employment Security Act, and clarifies the treatment of cafeteria plan payments under the wage definition of the Act. Number 113 SENATOR KELLY asked Mr. Perkins to explain the cafeteria plan. MR. PERKINS replied cafeteria plan payments are not considered wages so long as the payments would not be otherwise treated as wages under the Act. For example, payments made to a cafeteria plan for retirement or medical expenses would not be considered wages. SENATOR KELLY questioned whether those payments are considered as income by the IRS and whether SB 261 would exempt them from being considered as wages for the unemployment compensation program. MR. PERKINS replied wages are considered to be the hourly pay wage. The benefits are other compensable benefits. SENATOR KELLY asked how compensable benefits are currently treated. RON TORGERSON, a hearing officer with the Department of Labor, testified that he was not sure what the taxable status of compensable benefits is with respect to the employee, but they are currently exempted from the Federal Insurance Contribution Act tax and the federal unemployment tax. Since there are no federal payroll taxes on those payments, SB 261 would harmonize the Employment Security Act with the federal standard. Number 151 SENATOR SALO asked if an Alaska employee who failed a urinalysis drug test when applying for a job with the Department of Transportation would be eligible for unemployment benefits. MR. TORGERSON stated the Department of Labor does not have a standard to apply to people that are going to take a job but fail the test. There is no case law or statutory requirement that would support a disqualification for refusing work. SENATOR SALO said she was concerned with the difference between the way the private and public sector treatment this issue. CHRIS CHRISTENSEN, Alaska Court System, said they supported section 3. He said it would give the Department of Labor access to information to determine eligibility for a public defender. MARILYN MAY, Department of Labor, also supported section 3 of SB 261. DOUG GARDNER, Collections, said section 3 would help them in collecting on unpaid bills. SENATOR KELLY asked why the Governor had a separate bill to amend the benefit amount for unemployment. MR. PERKINS explained that the benefit amount was a separate issue from access to Department of Labor information. Number 324 SB 258 TRUSTS & PROPERTY TRANSFERS IN TRUST  JOE RYAN, Legislative Aide to Representative Al Vesey, Sponsor of SB 258, said this Trust law is simple and would allow trusts to be administered in Alaska and this has the potential of bringing in a lot of outside money to Alaska. RICHARD THWAITES, an estate planning attorney, testified that SB 258 would create an opportunity for investors to place property in trust, with an Alaska trustee, and thereby establish its situs as Alaska. If a current New York resident, with property in New York, put property in a trust anywhere else, it would still be taxed in New York. If the situs of the trust is in Alaska, with an Alaskan trustee, and is an irrevocable transfer as set forth in SB 258, it removes the property out of the jurisdiction and places it in the jurisdiction of Alaska. That would mean a $50 million trust in New York would no longer be subject to New York State taxes. Most members of the American College believe that if and when Alaska passes a state income tax, it will be less than the combined taxes of New York City and New York State. SB 258 does not create any shelter for estate taxes or income taxes. This measure makes Alaska similar to the jurisdictions of the Cook Islands, the Cayman Islands, and the Bahamas. The difference is that the trust would be subject to federal income tax in Alaska. Alaska is an attractive jurisdiction because the U.S. military and the Alaska National Guard provide legal stability. The Joint Committee on Taxation for the U.S. House of Representatives did a study two years ago and estimated that $460 billion dollars per year was going offshore. MR. THWAITES believed Alaska could pick up a substantial portion of that business in a relatively short period of time. Most of the dollars would come in the form of commissions to banks, trust companies and brokers managing the funds. Using a three-eighths percent average return on a $200 billion corpus, commissions would total approximately $750 million dollars per year. On a $1 million trust the commission is one percent. As the volume of the trust increases, the commission decreases, however if the asset requires unusual management, the commission increases. Number 414 SENATOR KELLY asked if the bill would attract more trust attorneys to Alaska. MR. THWAITES replied there are currently 12 to 15, and he does not know if the number will increase. SENATOR KELLY asked if trust attorneys work independently, or whether they are employed through banks. MR. THWAITES stated one-quarter of the membership of the American College are law professors, mostly in private practice. The American College is an organization devoted to education, therefore members must be published, and give presentations to the college to become elected nationally. SENATOR KELLY asked if all members must be attorneys. MR. THWAITES replied affirmatively. SENATOR KELLY inquired whether any other accreditation is necessary. MR. THWAITES replied negatively and explained the function of the College is to recognize those with expertise in the field. MR. THWAITES said the money in trust must be "clean" money; no fraudulent transfers can occur, no liens or claims against it can exist. Once the money is placed in trust, it is irrevocable. Only the very wealthy will take advantage of this type of trust. SENATOR KELLY asked if any other states besides Missouri have a similar set up. MR. THWAITES responded that Missouri passed a similar statute, however the statute was too ambiguous therefore trust holders have not established trusts in that state. Alaska is not encumbered by any statutes in particular regarding which types of trusts are permissible, and has no case law on trusts, therefore as a state, Alaska has a relatively clean slate to begin with. He suspected Nevada may try to pass a similar statute. SENATOR KELLY asked if a sales tax would have much affect on these types of trusts. MR. THWAITES replied it would depend on the nature of the sales tax, and whether it applied to brokerage items. Alaska is unique on that basis because it does not have a past record. If SB 258 passes, a private letter ruling will have to be obtained from the Internal Revenue Service, which a New York firm is planning to pay for. The IRS categorizes trusts in three ways to determine taxability: grantor trusts; complex trusts; and simple trusts. SB 258 would establish grantor trusts which are taxed at the rate of the grantor or the beneficiaries of the trust. SB 258 does not change existing statute substantively, it merely adds some provisions within the trust section. The definition of an Alaska resident is that used to define recipients of permanent fund dividends. Number 481 SENATOR TORGERSON questioned why that definition is used, since it has nothing to do with the qualifications of the person managing the trust. MR. THWAITES explained by statute, there is a difference between domicile and residence. The definition of resident was used to be consistent with existing statutory language at the recommendation of the legislative drafter, Terry Bannister. MR. THWAITES noted in the House version, the trust company is organized under AS 06.25 with its principal place of business in the state, and adds that a bank, organized under AS 06.05, or a national banking association organized under 12 USC 12.21-216(d) that has trust powers, must have its principal place of business in this state. SENATOR KELLY asked for an example of a banking association. MR. THWAITES specified National Bank of Alaska or First National Bank would be designated as national banking associations. State banks and national banking associations differ depending upon which section they were incorporated under. SENATOR KELLY inquired whether credit unions would fall under this definition. MR. THWAITES replied it would not matter, since credit unions have never been granted fiduciary powers to function in that capacity. Number 516 SENATOR KELLY asked how much money would move to Alaska if SB 258 passed. MR. THWAITES projected, under a best case scenario, the amount could range from $200 to $500 billion. SENATOR KELLY asked how much of that would be sitting in Alaska banks, as opposed to being in the form of property elsewhere. MR. THWAITES felt it would be a large percentage, since these types of trusts are not usually funded with active assets that are normally used to develop and run a business. This transfer is irrevocable and is meant to benefit one's succeeding generations. Number 526 SENATOR SALO requested more elaboration on "clean" money. MR. THWAITES pointed out the question arose, in earlier discussions, whether someone could set up a trust fund knowing he/she planned to file bankruptcy to discharge debts later on. There is a fraudulent transfer statute to prevent that from happening. He also explained a person cannot put their money in a trust knowing he/she is about to be sued for malpractice, because money cannot be sheltered in the trust. Likewise, if an airplane is part of a trust, and a beneficiary uses the airplane and causes damage, the trust is open to suit. If assets in a trust are used as collateral, those assets can be taken. It is only those assets with no lien or claim that are protected from creditors. SB 258 would extend the same status that protects shareholders from the liability of a corporation to family trusts. In the Cayman Islands and the Cook Islands, there are no treaties with the U.S. Even though there is a legal obligation for a U.S. resident to pay tax on those dollars, the resident does not, because records are not available from the administrator on the Cook Islands. That would not be the case in Alaska since trusts in Alaska would be subject to IRS review and claims. SENATOR SALO commented SB 258 would attract wealthy investors who are not trying to avoid paying U.S. taxes. MR. THWAITES believed the bill would hurt jurisdictions such as New York and California. WES COYNER, representing the Alaska Bankers Association, stated the banking community in Alaska is still reviewing this issue, and has no position on SB 258. SENATOR KELLY asked when a position might be forthcoming. MR. COYNER believed a position might be determined in one week. MR. THWAITES commented he has not received a response from Key Bank, but he has received a response from the National Bank of Alaska, which indicated they were interested in the legislation and wanted to know how it would be promoted. They are hesitant to accept placing real property in a trust, because of the problem of environmental regulations. SENATOR KELLY asked if they were hesitant to accept real property anywhere. MR. THWAITES clarified real property anywhere. In other states real property is accepted, but the commission is higher. SENATOR KELLY announced the bill would be held over until Thursday to give the banking industry time to determine a position. He adjourned the meeting at 2:20 p.m.