SENATE LABOR AND COMMERCE COMMITTEE March 3, 1998 1:38 P.M. MEMBERS PRESENT Senator Loren Leman, Chairman Senator Jerry Mackie, Vice Chairman Senator Tim Kelly Senator Mike Miller Senator Lyman Hoffman MEMBERS ABSENT All Members Present COMMITTEE CALENDAR HOUSE BILL NO. 73 "An Act extending the termination dates of the salmon marketing programs of the Alaska Seafood Marketing Institute and the salmon marketing assessment; and providing for an effective date." - MOVED HB 73 FROM COMMITTEE Confirmation Hearing: Ms. Deborah Sedwick, Commissioner, Department of Commerce and Economic Development SENATE BILL NO. 269 "An Act relating to the state plumbing code; and providing for an effective date." - MOVED CSSB 269(L&C) FROM COMMITTEE CS FOR HOUSE BILL NO. 116(FIN) "An Act relating to workers' compensation self-insurance." - MOVED SCS CSHB(am) FROM COMMITTEE SENATE BILL NO. 212 "An Act relating to automated teller machines." - HEARD AND HELD PREVIOUS SENATE COMMITTEE ACTION HB 73 - See Labor and Commerce Committee minutes dated 2/24/98. SB 269 - No previous action to record. HB 116 - No previous action to record. SB 212 - No previous action to record. WITNESS REGISTER Ms. Annette Kreitzer, Staff Senate Labor and Commerce Committee State Capitol Bldg. Juneau, AK 99811-1182 POSITION STATEMENT: Commented on SB 269. Mr. Dwight Perkins, Special Assistant Department of Labor P.O. Box 21149 Juneau, AK 99802-1149 POSITION STATEMENT: Commented on SB 269 Mr. Donald Laughlin Director of Administration International Association of Plumbing and Mechanical Officials 20001 Walnut Drive South Walnut, CA 91789-2825 POSITION STATEMENT: Commented on SB 269. Mr. Peter Jursack, Plumbing Inspector Department of Labor P.O. Box 2385 Sitka, AK 99835 POSITION STATEMENT: Commented on SB 269. Mr. Doug Green, Architect 901 W 29th Ave. Anchorage, AK 99503 POSITION STATEMENT: Supported SB 269. Mr. Al Dwyer, Director Labor Standards and Safety Department of Labor P.O. Box 21149 Juneau, AK 99802-1149 POSITION STATEMENT: Commented on SB 269. Representative Pete Kott State Capitol Bldg. Juneau, AK 99811-1182 POSITION STATEMENT: Sponsor of HB 116. Ms. Patricia Vincent Kenai Peninsula Builders Association POSITION STATEMENT: Supported HB 116. Mr. Michael Hinchin Alaska Timber Insurance Exchange 2555 First Ave. Ketchikan, AK POSITION STATEMENT: Opposed HB 116. Mr. Martin Peal, Chairman Board of Governors Alaska Timber Insurance Exchange 2555 First Ave. Ketchikan, AK POSITION STATEMENT: Opposed HB 116. Ms. Marianne Burke, Director Division of Insurance Department of Commerce and Economic Development P.O. Box 110805 Juneau, AK 99811-0805 POSITION STATEMENT: Opposed HB 116. Ms. Robin Ward, Executive Director Alaska Homebuilders Association POSITION STATEMENT: Supported HB 116. Mr. Allan Wilson, Member Alaska Homebuilders Association POSITION STATEMENT: Supported HB 116. Mr. Paul Grossi, Director Division of Workers' Compensation Department of Labor P.O. Box 25512 Juneau, AK 99802-5512 POSITION STATEMENT: Commented on HB 116. Ms. Cathie Keyes, Sr. Vice President National Bank of Alaska 10541 Ketch Anchorage, AK 99515 POSITION STATEMENT: Opposed SB 212. Mr. James Beveridge Alaska Public Interest Research Group 507 E ST., STE 202 Anchorage, AK 99501 POSITION STATEMENT: Supported SB 212. ACTION NARRATIVE TAPE 98-9, SIDE A Number 001 HB 73 - SALMON MARKETING ASSESSMENT & ASMI CHAIRMAN LEMAN called the Senate Labor and Commerce Committee meeting to order at 1:38 p.m. and announced HB 73 to be up for consideration. SENATOR MACKIE moved to pass HB 73 from Committee with individual recommendations. There were no objections and it was so ordered. CHAIRMAN LEMAN announced they would take up the confirmation hearing of Ms. Debbie Sedwick, Commissioner, Department of Commerce and Economic Development. MS. DEBBIE SEDWICK said her mission is to promote jobs and a healthy economy. Her guiding principal is that economic development must be done and it must be done right. When she came on two and a half years ago, her responsibility was to reorganize the Division of Tourism, Trade, and Development, which has been done. She is very proud of what has been done and intends to have a hands-on approach to her job. Her deputy, Jeff Bush, and she will be very actively involved in helping the private industry in Alaska create jobs, especially small businesses which are the backbone of the Alaskan economy. CHAIRMAN LEMAN said the fish marketing related programs have moved more toward self-funding and the legislature has requested tourism programs to do the same. He asked what she is doing to inspire them to do that. MS. SEDWICK answered that she is working very closely with the industry to see where efficiencies can be made. She feels that the State of Alaska has a role in tourism. The big players, like Princess and Holland America, can take care of themselves and we need to create a business friendly environment for them to work in. We need to be fair and realize that last year the cruise industry spent $25 million marketing Alaska. We need to look closely at areas that impact small businesses. They have recognized that although the tourism industry has been increasing, it's mostly come from increased cruise ship passengers, but people on the road and marine highway system are suffering. Her Department recognized this is a problem, so they made changes right away; and are working more closely with the marine highway transportation system in terms of overall marketing, getting out to the big RV shows across the country on a regular basis with information that will allow them to book visitors. She feels that the State has a role in tourism, even though the large companies can take care of themselves. In terms of the small players, if they add a person or two to their business, that's a lot and that is where the State can play a role. SENATOR MACKIE asked what she thought about the legislation proposing to merge DCRA and DCED. MS. SEDWICK answered that she is opposed to that, because two years ago they looked at that issue and everyone across the board agreed that it wouldn't save the kind of money originally thought. The kinds of programs they run a very different, but are very valuable and they get along very well. She, personally, and her staff would have a real hard time finding the time and energy it would take to go through this exercise again, having gone through it two years ago. Certainly all of the departments are looking for ways to save money and work more closely together, but she hadn't been consulted in this instance and would like to be at the table when something like this is being crafted. She would rather look program to program, because if they are going to consolidate, there are going to be some things that will go. SENATOR MACKIE asked for her thoughts on the Division of Tourism's idea to have industry participate in marketing. MS. SEDWICK said there is a lot of dissension within the ranks of the tourism industry and she has refrained from talking publicly about it. She feels that with the limited dollars we have, we need to look at the Alaska Tourism Marketing Council and the Division of Tourism and make sure what they are doing they are doing well. It might be time for a change there. The industry needs to be stepping up in a bigger way, but she wasn't sure about the proposal that was out there. Everyone has spent an incredible amount of time to craft something that is going to work. Trying to create a mechanism that is fair to all players is important. They can count on Department of Commerce to work closely with industry on this. Number 210 CHAIRMAN LEMAN asked her to describe the Department's process on issues that come before his Committee. He used as an example of legislation they were encouraged to introduce by her Department about insurance and when there was testimony, the Department opposed it. MS. SEDWICK said she couldn't speak about an insurance issue right now, but she would check into it. It is not her desire to oppose legislation they requested. She expects to work closely with the Committee to make sure those things don't happen. SENATOR MACKIE moved to issue the standard letter to the Joint Body of the Legislature regarding Ms. Sedwick. There were no objections and it was so ordered. SB 269 - PLUMBING CODE CHAIRMAN LEMAN announced SB 269 to be up for consideration. SENATOR MACKIE moved to adopt the committee substitute to SB 269. There were no objections and it was so ordered. MS. ANNETTE KREITZER, Staff to the Labor and Commerce Committee, reviewed the proposed committee substitute. The bill as previously written had two problems. First, the Northern Lights case vs. Sweeney means you can't delegate the authority or the public notice provisions of law in terms of adopting publications year after year. The bill had to be rewritten to meet the problems that were presented in that case. The second amendment begins on line 13 which Mr. Doug Green would discuss. Number 270 MR. DWIGHT PERKINS, Special Assistant, Department of Labor, concurred with naming the various codes and the dates being the wisest thing to do and had no opposition to the proposed committee substitute. MR. DONALD LAUGHLIN, Director of Administration, International Association of Plumbing & Mechanical Officials (IAPMO) read his letter which said that they have published the Uniform Plumbing Code (UPC) since the early 1950's and Alaska has adopted it for years. The 1997 edition is the most technologically advanced plumbing code ever published. IAPMO and its co-sponsors, the National Association of Plumbing, Heating, Cooling Contractors (NAPHCC), and the Mechanical Contractors Association of American (MCAA) utilize an industry consensus process to develop and maintain the provisions contained in the UPC. Then all effected parties have the opportunity to vote on amendments made to the Code. It is updated annually and published every three years. Number 325 MR. PETER JURSACK, State Plumbing Inspector, Department of Labor, said he supported adopting Appendix 29 of the 1997 Uniform Plumbing Code rather than Table 4-1. He thought the Department of Labor could work with either of those tables as there are pros and cons to both of them. The Uniform Building Codes has an occupancy rate which allows them determine the number of facilities for a certain type of occupancy. It also allows flexibility for smaller types of businesses where it is needed and eliminate confusion with the engineering and design community. CHAIRMAN LEMAN asked to reduce the chance of someone misusing the table, couldn't the 97 UPC be provided with a warning sticker on it with reference to the UBC table. MR. JURSACH said he thought something could be done. Number 377 MR. DOUG GREEN, Anchorage Architect, said he is a member of the Alaska Professional Design Council. He felt that it's definitely in the best interests of the design community and the State of Alaska to adopt the Uniform Building Code fixture schedule. The main reason they see this as important is typically Juneau, Anchorage, and Fairbanks do the same amendment for uniformity throughout the State, but as you move out of the urban areas, plumbing fixtures become a very important item in the design of any building. It has been historically the case and currently so that the Uniform Plumbing Code creates a larger fixture count in these buildings than are necessary. This is because the it is determined upon exiting requirements. One of the problems he has with that table is that it says the optimum load shall be determined by minimum exiting requirements and doesn't reference anywhere for that requirement. Typically, you have to go back to the Uniform Building Code to get those requirements, anyway. These numbers are intended to generate safety for exiting purposes, not for plumbing counts. The Building Code is much more integrated as a tool to utilize the occupant load calculations to determine the number of occupants utilizing a building than for the fixture count in the toilet room. It has historically required fewer toilets which in the bush is a big plus, because they require more water and waste handling systems which are a premium out there. He strongly supported the amendments in the committee substitute. MR. PERKINS said the Department supports the bill as written. He suggested amending some language within the Code that refers to Table 1 on page 1, line 13 as "excluding 41.3.1 and...." which directs you to Table 4-1, a cleanup issue. Number 435 MR. GREEN agreed with that amendment. CHAIRMAN LEMAN said a better approach would be to reference the new table by leaving in the language and where it says "Table 4-1" insert "Table 8-29-A." MR. PERKINS said that would be O.K. MR. AL DWYER, Director, Labor Standards and Safety, said the books are sold state-wide and they wouldn't be able to revise them. He thought the best thing would be in the statute delete 4.13.1 and they would not have to renumber the rest of the Code Book. CHAIRMAN LEMAN asked if they needed a reference to the other table. MR. DWYER said they could do that in the statute. They talk to most journeymen plumbers and administrators in their seminars where this can be brought up. MR. PERKINS thought it might be less confusing if they delete it in statute and then when the Division goes into the communities with their courses, they bring the most recent edition of the Uniform Building Code. Then he noted there would be no reference to the table anywhere. MR. JURSACK commented that he thought they needed to leave 4.13.1 in and substitute Table 4-1 with an appendix from the Building Code by regulation. SENATOR MILLER moved CSSB 269 from Committee with individual recommendations. There were no objections and it was so ordered. HB 116 - WORKERS COMPENSATION SELF-INSURANCE GROUP CHAIRMAN LEMAN announced HB 116 to be up for consideration. MS. PATRICIA VINCENT, Kenai Peninsula Builders Association, supported HB 116 which allows them to self-insure for workers compensation with a self-pooling arrangement. This type of legislation has been enacted in over 40 other states; 14 of them utilizing the pooling concept. MR. MICHAEL HINCHIN, Alaska Timber Insurance Exchange, testified that, as a reciprocal, he and MR. PEAL had a letter from Senator Kelly which raised a number of questions. SENATOR KELLY wanted to know how much money they needed to start their reciprocal and was it enough. Number 511 MR. MARTIN PEAL, Chairman of the Board of Governors, Alaska Timber Insurance Exchange, replied that they were formed in 1980 when the requirement was $1,000,000 of capitalization. The statute has moved that requirement up to $2,000,000. Their capitalization was always monitored closely by the Division of Insurance and they were pressured to keep it at a good level with respect to annual premiums. At one time it was at least 30 percent, but it has been changed to 50 percent, which has been very adequate for his group. They never encroached the level required by the State. He said their capitalization stands at $6.8 million currently. SENATOR KELLY asked if they ever had to assess the members. MR. PEAL replied that they issue non-assessable policies which means when you write a policy, they use an experience rating system. The premium is set and is not assessable for the year. SENATOR KELLY asked if their ratings were established by a national organization or did they do their own. MR. PEAL said they use a combination. For classifications where they write an extensive amount of business such as in logging, they file rates with the State of Alaska that are either below the National Rating organization or above. For the other classes, they typically use organization rates. SENATOR KELLY asked if they use rates and then go under or above compared to an experience factor. MR. PEAL replied that is correct. However, those deviations must be approved by the Division of Insurance. SENATOR KELLY asked if he thought this self-insurance pool the Committee was looking at in this committee substitute would work like the reciprocal has. MR. PEAL replied that he had some significant concerns. He thought the Director of Insurance should have some authority on this. He thought the size of the group was very small and the principle of insurance is to spread risk among a larger number of people. He didn't know how the reinsurance would work, because you need adequate stop insurance to stop your losses. The joint and several liability provision of the bill ought to concern anyone who has a substantial stake in the pool, in case there is an assessment because of a failure. MR. PEAL said they had other questions; one had to do with benefits members gain from participating in a reciprocal. He thought an important benefit lies in the fact that the Board and management are owners in the timber industry and manage their own safety operations. TAPE 98-9, SIDE B Their frequency of accidents today is less than half of what it was 10 years ago. The members, after meeting the substantial capitalization requirements and setting conservative reserves, get profits returned to them as investment income. They have very low administrative and overhead costs, there being no brokers' commissions. There is more direct contact with an injured worker which brings about a quicker return to work. MR. HINCHIN said the other benefit that's important is that they do return all the net income back to the members. In 1997 they returned 62 percent of the premiums. Over a period from 1992 - 1997 70 percent of the premiums were returned back to the members of the Exchange. So, in effect, they paid 30 percent of the established workers compensation rate. SENATOR KELLY asked if that was because over a period of years they established a strong reserve or equity base. MR. PEAL answered that it was a combination of factors. They have strong capitalization, strong reserves that have built up over time and have been invested, and they tend to set conservative rates knowing that a profit will be returned. Number 540 SENATOR KELLY asked how their members pay for their premium. MR. PEAL answered that they pay monthly. SENATOR KELLY asked why monthly instead of quarterly. MR. PEAL answered that quarterly payments are too risky for collecting premiums. When you write a policy and the premiums don't come in, you have to give notice which runs another 30 days before you can send a notice of cancellation. In an industry where premiums are pretty large, that can mount up pretty fast. SENATOR KELLY asked what their deposit premium was for someone joining the organization. MR. PEAL answered about 30 percent of estimated annual premiums. SENATOR KELLY asked if that had always been the case. MR. HINCHIN answered that he had been there for the last 10 years. It is adjusted as membership grows or decreases. SENATOR KELLY asked if they have to pay monthly premiums also. MR. PEAL explained you pay monthly premiums based upon the payrolls an employer pays. During the first two years a person is a member of the Exchange, they are also surcharged 20 percent of their premiums, so they are essentially paying 120 percent. That 20 percent goes into their own capital account with the Exchange. After the two year period, a member has approximately 70 percent of their annual premium on deposit with the Exchange. SENATOR KELLY asked him what he thought of the provision in the self-insurance pool that only requires a five percent premium deposit to join the group. MR. PEAL explained that that five percent has only to do with their own guarantee fund. SENATOR KELLY asked how one becomes a member of a pool under the committee substitute. MR. PEAL answered there is a provision in there for a deposit of 25 percent of the premium for the first year, but it goes on to say that it would be consumed as the first year's premiums. SENATOR KELLY asked if in his group, do they pay 30 percent up front, but do they also pay the entire premium the first year plus 20 percent. MR. PEAL said that is correct until the capital account is built up to the level it is supposed to be. SENATOR KELLY asked how the capital account worked for the member. MR. PEAL explained that is the capitalization of the Exchange. SENATOR KELLY asked if they established their capital by using the 30 percent on first year deposits. MR. PEAL answered that the capital account is separate from that, although the Division of Insurance looks at the combination of the capital account and the deposit premium when looking at the soundness and capitalization of the Exchange. MS. MARIANNE BURKE, Director, Division of Insurance, addressed the profitability of workers compensation in this State with copies of the 1996 profitability report prepared by the National Association of Insurance Commissioners, by state and five territories, for workers compensation. Alaska worker compensation for 1996 return on net worth was 12.7 percent. Country-wide including the five territories was 12.4 percent. Of the 55 entities, 30 were at the same profitability or higher than Alaska. CHAIRMAN LEMAN asked if it was possible that one carrier could have been a lot higher than the average, like 22 percent. MS. BURKE answered that it's possible, but looking at the annual statements that are filed with the Division, the five top writers in the State did not have profitability of those high numbers. Number 458 SENATOR KELLY asked if she was concerned about the capitalization requirements of this plan as compared to the reciprocals which are obviously in place and working well. MS. BURKE answered that she is extremely concerned. The two successful reciprocals in the State (since 1980 and 1983) have all started out with cash and marketable securities. The Timber Exchange started out with a $300,000 deposit of cash under a tri- party agreement with the Director of the Exchange and the Bank. The money was actually in the bank which could only be accessed with the agreement of the three parties. In addition, they had $825,000 in cash and marketable securities that was owned by the Exchange. When you compare that to the bill before them, the closest amount to the $300,000 held in the bank would be the $450,000 security bond which is only accessible when the entity becomes insolvent. SENATOR KELLY asked where the cash comes from to operate in this plan. MS. BURKE answered that they have to have a minimum of their first year's premium which is 25 percent of $500,000. That is their premium that they pay up front. There is no equivalent to the capitalization that was addressed by the reciprocal. SENATOR MACKIE asked if the $125,000 up front was to pay for administration and to pay for any claims that come up the first year. MS. BURKE responded that according, to this bill of the $125,000, 70 percent is available to pay claims. The remaining 30 percent is to be used to pay for administrative costs including the cost of the safety program, payroll audit, and other administrative charges they may have. Their total amount of minimum premium for the year is $500,000 to get started, of which they would have 70 percent. But that must cover all claims plus reinsurance. For reinsurance, the lower you get as an attachment point, the premium gets higher. SENATOR KELLY asked if that is what is called reinsurance. MS. BURKE answered that is correct. SENATOR MACKIE asked if the reinsurance would cover any claims that would exceed the amount that was available to pay any claims. MS. BURKE clarified that stop loss (reinsurance) will pay at what is known as an attachment point. So if you have five accidents that cost $10,000 each, you would be paying the full $50,000, because the attachment wouldn't occur until $10,000 is met for each one. Different industries are different in this regard. Some have small claims with a lot of frequency with a low dollar value; others have few claims, but very high dollar value. MS. BURKE said that Senator Kelly had asked how the capitalization in 1980 compared to today's dollars and she applied the Anchorage consumer price index to that. The equivalent today would require $2,340,000 in cash and marketable securities in the ownership of the organization itself. CHAIRMAN LEMAN said he thought the inflation was overstated a little bit. He thought it would be safe to say $2,000,000. MS. BURKE said the guarantee fund, if you did business in Alaska, and there are over 500 who are licensed to write workers' compensation here, are on the hook for 2 percent of their direct premiums written each year. In the case of the Timber Exchange, for 1996, their direct premium was $8.4 million. One company would have to pay $168,000 into the guarantee fund, should the need arise. All 500 companies that write workers' compensation in Alaska are on the line each year. It is the ultimate safety net. If a licensed insurance company or a reciprocal becomes insolvent, the payments to the injured worker are seamless. The injured worker does not know the company is insolvent, because the guarantee association steps in and makes sure those payments are continued. The money to make those payments is assessed against them on an as needed basis. The guarantee fund in the committee substitute calls for a five percent, one-time only assessment. For the first year, if they have their minimum premium, that would be $25,000. There is no way to project how much premium they will have in the future. She could only address the minimums that are provided for in this bill. The guarantee association has worked throughout the country for as long as anyone has been tracking this. Number 383 SENATOR MACKIE asked if in the first year there would be $500,000 from which 70 percent would be available to pay claims. MS. BURKE said that is correct. SENATOR MACKIE asked if he is an injured worker and files a claim that exceeds that amount of money, what steps would follow. MS. BURKE explained that a worker files a claim, and as long as the group has the cash (not net worth) to pay, the injured worker would be paid timely and the injured worker wouldn't know what the status of the company was. If there was a series of accidents or injuries that are below the reinsurance figure and the money is exhausted, the next step would be to go to the guarantee fund of $25,000. If that is exhausted, the members can be assessed for additional premiums. This bill does not provide that money to be on deposit, but to be in assets. SENATOR MACKIE asked who has the ability to assess them, themselves or the Director. MS. BURKE replied both. If they don't pay it promptly, it falls to the Director to assess it. If those funds are exhausted and they can get no other funds from the builders, there is joint and several liability which could be considered analogous to the guarantee fund, and the other insured members would have to step forward and convert their assets to cash. If that is exhausted and the company is insolvent, the State of Alaska would step in, according to the legislation, call down the $450,000 security that is available - only when they are insolvent. Then the State would have to take over payment of the claims. If that were inadequate, she didn't know where the money would come from. SENATOR MACKIE asked if they would be litigating personal assets and those kinds of things. MS. BURKE responded that since this isn't an insurance company, it doesn't have the protection of liquidation. It would go into bankruptcy. SENATOR KELLY asked to see the section on the $25,000 limit on the guarantee fund. Someone indicated it was Section 160 on page 10. SENATOR MACKIE commented that $25,000 is five percent of $500,000. SENATOR KELLY remarked that was a one-time only assessment. MS. BURKE indicated both comments were right. SENATOR KELLY asked if she felt that was sufficient to protect injured worker's medical bills and pay given the cash flow scenario. MS. BURKE responded that she didn't feel it was anywhere near adequate. SENATOR KELLY asked what she thought would be adequate. MS. BURKE replied that she would tie it to a percentage of their premium assessable every year, but she would like to add that guarantee associations have been used one time in the State of Alaska in the past 10 years. It is the capitalization up front that protects the workers. The money on deposit can make the worker whole on a timely basis and is built up over time. When the Timber Exchange started, they had 40 percent of their premium that they put in as capitalization in addition to the money they were required by statute to put up. The profitability of insurance companies is in large measure to their investments. Her quote of profitability includes profits on investments, as well. Twelve percent, or 12.7 percent, it will vary. There will be years when they make more money and there will be years when they make no money. They need capitalization to earn the return on investments to help smooth it out. Number 267 MS. ROBIN WARD, Executive Director, Alaska Homebuilders Association, said the New Mexican self-insurance pool, which is very successful, started when they had 800 statewide members of their trade association. Alaska Homebuilders have 892 members. MR. ALLAN WILSON, member, Alaska Homebuilders Association, said he is a builder here in Juneau. He has spent some time with a firm called Towers Perrin, the second largest reinsurer in the world. A gentleman he has been working with currently works with six other homebuilder pools in the country. With a handout he explained the cost of the reinsurance is 10 - 15 percent of the premium base; in this case $50,000 - $75,000. He thought that was a significant number since other higher numbers had been quoted during the hearing. The stop loss insurance has two parts to it. There's specific excess insurance which is per claim and goes on for the duration of the claim, even if it goes for five years to $5,000,000. The second portion is the aggregate, excess insurance and the specific insurance applies to that premium amount. This insurance kicks in and pays everything from there and up to an amount that is agreed to by the Director and the trustees of the pool. The cost, whether it's $1,000,000 or $5,000,000 is neither here nor there. Several other factors affect the cost of the excess insurance - who your third party administrator is, the people who do your actuarial work, the administrators, the more experienced they are, the cheaper the insurance becomes. The 10 - 15 percent rate can be reduced even beyond that point. MR. WILSON said there are seven reasons they have for choosing this option as opposed to the options Mr. Block suggested at the last hearing. The profits remain with the industry, the lack of site safety programs is vital to these organizations and getting workers back quicker with less legal involvement (by 70 percent). In all three alternatives Mr. Block presented there are no incentives to provide a safe workplace. In the proposal, everyone pays the same rates. He thought the expensive premiums were barriers put up by big companies to keep entities like the Alaska Homebuilders out of the market. He thought it was important for their long term profitability that they get some control over some of these issues. Number 152 REPRESENTATIVE PETE KOTT, sponsor, passed a handout to the Committee that explained the process for paying solvent and insolvent claims. He noted that the reinsurance was a major aspect of this bill and is somewhat different from the Timber Exchange's. He reiterated how much control the Division of Insurance has over this program. A group applying for self insurance must prove to the Director that the organization consists of at least 10 members. They must have payment by each member equal to 25 percent of their annual premium and they must show the Director a net worth of $1,000,000 and show a security amount in the total of $450,000, must have aggregate insurance as required by the Director, and provide the Director premiums of at least half a million dollars the first year and $750,000 in subsequent years. The Director is also involved with the joint and several liability of members, the fidelity bonds, a performance bond, the certificate of approval, examination of the books, review of the annual financial statements and require additional reports and premiums. Refunds from the pool are made only after approval of the Director. The reserve plan is on approval of the Director. This is the amount of leverage the Division has over this particular group. He referred the Committee to page 10 for the financial requirements. He said he is very comfortable with this proposal. Number 41 CHAIRMAN LEMAN the security amount of $450,000 on page 2 seems to be low without them being liquid assets. Another concern is the joint and several provision, because he thought that would scare off members to join and without adequate members, they wouldn't get capitalized initially to get off and running. REPRESENTATIVE KOTT explained that the $450,000 deposit can be made in many different forms and is the amount required of 80 percent of the other states. TAPE 98-10, SIDE A He thought each individual member would make their own decision about joining. The drawing feature about this group is that they have the ability to do self-checking on members and he thought members who had more to lose would eventually benefit. CHAIRMAN LEMAN said he wanted this group to succeed and was pointing out his concerns. MS. WARD said she has found that in all other states the joint and several provision has been an advantage, because they can watch over each other's safety program and things like that. SENATOR KELLY asked where the Alaska State Homebuilder's Association's form came from and what's it supposed to show. REPRESENTATIVE KOTT said this is a listing to find out what the losses were from this particular group to insure there would be the ability to pay those claims. This is one page selected at random and it's not entirely accurate. SENATOR KELLY pointed out that it is pretty incomplete, because they are awfully small numbers. However, it does show the volatility of claims every year. In 1992 for only 10 companies it's $66,000, in 1993 it's $22,000, in 1994 it's $70,000, in 1995 it's $53,000, in 1996 it's back to $25,000, and he guessed that 1997 was an up year. REPRESENTATIVE KOTT said it does look volatile, but when you average them out, it still falls well below the capitalization required by the bill. SENATOR KELLY responded that there are only 10 companies showing here. It doesn't show how much in premiums they pay. He said that someone was telling him that last year he had $135,000 claim. He, himself, had a heart attack last year and if that had happened during working hours, he could have pressed in court for worker's compensation claiming stress, and some of those are being recognized. That was a $70,000 medical bill not counting lost time. It can happen to anyone in this group; it's not uncommon. Medical payments are expensive as heck. If a worker gets unlucky and falls under one of these groups that's undercapitalized, there can be a big problem. REPRESENTATIVE KOTT agreed and explained that the chart was provided for illustration purposes only. The bill does call for 10 employers and they would have to come up with half a million dollars in premiums. He said the reinsurance would kick in, if he had a heart attack. SENATOR KELLY responded that there are a million heart attacks in the United States each year and courts have allowed those types of claims during working hours to be workers' compensation claims. He told Ms. Ward he found that to form a self-insurance group in New Mexico, they need a net worth of $3 million and the employers must have been in business for five years and asked if she would object to having those provisions in the Alaska law. MS. WARD answered yes. In New Mexico their original legislation was $1 million and this proposal also calls for being in business for five years. SENATOR KELLY asked where the five year business requirement was and hoped that it was in Alaska. He asked if it means the employer or the association has to have been in business for five years. New Mexico says the employers. He doesn't care about the association; he's worried about the employers who are supposed to be paying the premiums to protect the workers. Number 110 SENATOR KELLY moved a conceptual amendment saying that you have to have been an employer in the State of Alaska for five years before you're eligible to join one of these insurance pools. MS. WARD said this is the first time anyone mentioned the employer and it was their intention that the association needed to be in business for five years, because they are afraid that other employers would go out and start another trade association and immediately self pool. They trust the trustees of their group to decide who will be allowed into it. SENATOR KELLY said he got the information about the New Mexico statute from the National Council on Compensation Insurance as he requested in the last meeting. They have some concerns about the bill and this is one of them. If someone has been in business up here for five years, that's probably a pretty stable person. He would not be as concerned with other provisions in the bill, if that were the case. He did not trust the Board of Trustees, whose sole line is volume, to be any kind of a judge. REPRESENTATIVE KOTT opposed the amendment because if he had a good track record for even one year, he thought he should be allowed to enter this group. The Board will take into consideration a number of factors. He did not think it business friendly to exclude someone from another state who has a good record. SENATOR KELLY responded that until they can prove they can stay in business for five years, they can go out like everybody else and buy their workers' compensation insurance from an insurance company or a reciprocal, or they could self-insure. They don't have to join this particular association. If he wants to make the association work with weak capitalization requirements, he should look at the provisions in the New Mexico law that make it work and one of those is the five year provision. Maybe that's the basic reason it's working there. We can't just take the good aspects without taking some of the reasons behind why it worked. This is clearly criteria on how they select their membership. He thought they should at least establish a three year standard. REPRESENTATIVE KOTT said he didn't want to be business unfriendly. SENATOR KELLY said he was not concerned with the Homebuilders and the protection they would have; he is concerned about the employees of the Homebuilders that the legislators are trying to protect under the workers compensation law of the State of Alaska. SENATOR MILLER moved to amend the amendment by changing five years to three years. There were no objections and it was so ordered. MR. PAUL GROSSI, Director, Division of Workers Compensation, informed the Committee for an employer to be self insured in Alaska, he has to have been in business here for five years. SENATOR KELLY added, but you also have to have the $5 million net worth. MR. GROSSI said that is right. Number 278 CHAIRMAN LEMAN asked if there was further discussion on the amended amendment. SENATORS KELLY, MACKIE, MILLER, and HOFFMAN voted yes; CHAIRMAN LEMAN voted no, and the amendment passed. SENATOR KELLY said on page 4, line 6, he thought it was normal to have an errors and omissions policy for Corporate Boards of Directors, too, and made a motion to add "Trustees" after "Administrator." He didn't think it would be that expensive to add and it could help someone down the road somewhere. There were no objections and it was so ordered. SENATOR KELLY said on page 10, line 2 that he had real concerns about the quarterly installments as did the Timber Exchange. Since most of the homebuilders are going to be working seasonally and since there would be only two quarters of the year in which they would pay, a person could just pay the first quarter and then bail out and head south and not pay the second quarter. If they have to pay on a monthly basis, the Trustees would have a greater ability to get that money before someone else, like a supplier or bank, liens it. He moved to delete "or quarterly installments" and insert "monthly." He said it also increased the capitalization. There were no objections and it was so ordered. Number 337 SENATOR KELLY asked how the penalties on page 11 equated with the penalties in reciprocal laws. MS. BURKE answered that she had prepared a side by side in which that is addressed. SENATOR MACKIE said they referred to AS 21.47.180. MS. BURKE said that the penalties required for a reciprocal are the same as for any other insurance entity - $2,500 per violation compared to $500 in the proposal. It can go up to $25,000 as compared to $5,000 in the aggregate. SENATOR KELLY asked if there could be a penalty after a notice of opportunity for hearing and another set of penalties upon a finding in the bill. MS. BURKE explained that the process is that they assess penalties and, based on the results of a hearing, assess additional penalties. SENATOR KELLY asked if there were additional penalties in the reciprocal. MS. BURKE answered that there were the same requirements of $2,500 and $25,000. SENATOR KELLY said what's lower in the committee substitute is the initial after notice and opportunity penalty and the difference is $2,000 and $20,000. MS. BURKE answered yes; and added that the reciprocal is also subject to $100 per day late filing fees for any of their required reports. SENATOR KELLY asked if the self insurance would not pay. MS. BURKE said that is correct. SENATOR KELLY said he thought those amounts were a little low. If you want these things done properly, you have to make time to do things like filing taxes, etc. He wasn't sure a civil penalty not to exceed $500 would be enough incentive to force people to do these things on time and stay out of trouble. He thought the number should be somewhere between what's proposed in the CS and the reciprocal. SENATOR MACKIE said he would like to research that issue in the next committee, because he doesn't know that much about it. It was noted that the proposal goes to Judiciary and Finance Committees, also. SENATOR KELLY said that he doesn't object to the self insurance pool concept, but he objects to what he considers to be the lack of capitalization protection for injured workers. Number 337 SENATOR MILLER moved to pass SCSHB 116(am) from Committee with individual recommendations. SENATOR KELLY objected because he didn't feel quite ready. There were no further objections and the motion carried by a vote of four to one. SENATORS LEMAN, MILLER, HOFFMAN, and MACKIE voted yes; SENATOR KELLY voted no. SB 212 - FEES FOR USE OF AUTOMATED TELLER MACHINES CHAIRMAN LEMAN announced SB 212 to be up for consideration. MS. CATHIE KEYES, Sr. Vice President, National Bank of Alaska, said she also represented the Alaska Bankers Association and opposed SB 212. She said contrary to popular belief, ATM's aren't profitable. The majority are subsidized by their owners to provide a service to their own customers. An ATM costs anywhere from $18,000 - $35,000 depending on the features. There are costs to install, service, and maintain them which average $1,200 - $1,500. There are also charges that are assessed for each transaction that they take. The larger the ATM network, the larger the cost. When ATMs were first used in 1980, the thought was that customers would gravitate to the ATMs, banks would be able to reduce their teller staff, and therefore, there would be savings. That did not happen. They found that customers wanted good branch networks and accessibility to the branches and increased their transaction activities through ATMs. Customers began to expect both. Surcharging allow ATMs to pay for themselves and to expand to areas where they had not previously been able to justify placing one. Nationally surcharging has been available in the lower 48 since 1976 and more are available because they aren't losing money. A surcharge is just a convenience fee, she said, which is nothing new. People pay for convenience in purchasing many things, like tickets to a play, over the phone. They pay a little extra for going to a convenience store, but they make those choices themselves. MR. JAMES BEVERIDGE, Alaska Public Interest Research Group (APIRG), said the ATM issue is one they have been following for a long time and they have seen an alarming trend in the lower 48, which is a fee that is being charged in addition to the fee that a customer's own bank will charge for a transaction. For the consumer it means they will be charged twice for one transaction while banks, in turn, are receiving the additional fees. The fees are also increasing, costing the consumer as much as $2 when they use ATMs. This is particularly bad news for people with lower incomes who need to make smaller and more frequent withdrawals. Their research indicates that NBA is now surcharging consumers of other banks who use their machines $1 per transaction as are independent owners of machines at bars and other convenience locations. He also noted that big banks own most of the machines which causes a serious competitive threat to small institutions and credit unions. He concluded by saying that this legislation goes in the right direction and consumers would be much better protected. CHAIRMAN LEMAN thanked him for his testimony and said they would hold SB 212 over until Thursday and adjourned the meeting at 3:50 p.m.