The 1st meeting of the Interim Joint Committee on Banking and Insurance was held on Tuesday, July 29, 2008, at 10:00 AM, in Room 149 of the Capitol Annex. Representative Tommy Thompson, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Representative Tommy Thompson, Co-Chair; Senators Julian M. Carroll and Dorsey Ridley; Representatives Sheldon E. Baugh, James R. Comer, Jr., Will Coursey, Ron Crimm, Robert R. Damron, Mike Denham, Ted Edmonds, Tim Firkins, Danny Ford, Jim Gooch, Jr., Dennis Horlander, Dennis Keene, Adam Koenig, Rick Rand, Steve Riggs, Arnold Simpson, John Tilley, Ken Upchurch, and Susan Westrom.
Guests: Sharon Clark, Commissioner of Insurance; Tonya Parsons, Director of Kentucky Access, Department of Insurance; Jay Thompson, Branch Manager, Seniors Branch, Department of Insurance; Stuart Owen, Branch Manager, Department of Medicaid Services; D. J. Wasson, Department of Insurance; Cordell Lawrence, Commissioner of Financial Institutions; David Coyle, Department of Financial Institutions; Christine Sauaer and Paul Stransky, Farmers Insurance; Steve Bolton, American Insurance Association; Bill Doll, Kentucky Medical Association; and John Brazel, Associated General Contractors of Kentucky.
LRC Staff: Rhonda Franklin and Marlene Rutherford.
Chair Thompson acknowledged the retirement of Committee Staff Administrator, Greg Freedman and his replacement, Rhonda Franklin. He also advised members that the committee's assistant, Jamie Griffin, was absent due to a recent accident and wished her a speedy recovery.
Chair Thompson also announced a retirement reception today from 2-4 p.m. for the retirement of Pam Jones.
The minutes of the November 28, 2007, meeting were approved.
Robert Vance, Secretary, Public Protection Cabinet, discussed the reorganization of the Environmental and Public Protection Cabinet and the creation of the Public Protection Cabinet. The newly created Public Protection Cabinet includes the Board of Claims and Crime Victims Compensation, Department of Insurance, Kentucky Boxing and Wrestling Authority, Department of Charitable Gaming, Department of Financial Institutions, and the Department of Housing, Buildings, and Construction. Additional offices and departments previously maintained in the Environmental and Public Protection Cabinet were divided into the Energy and Environment Cabinet and the Labor Cabinet. He emphasized that the reorganization into the three cabinets was accomplished with revenue-neutral measures. The newly created Public Protection Cabinet will share administrative and legal services with regulatory agencies that were part of the Environmental and Public Protection Cabinet but under the reorganization are moving to the Cabinets of Energy and Environment and Labor. Personnel in these areas will continue to perform duties but will report to all the three cabinets. These shared services are attached physically to the Labor Cabinet but answer to all three cabinets. He also pointed out that the Public Service Commission which was attached to Public Protection would better serve the Commonwealth being relocated within the Energy and Environment Cabinet. The Office of Inspector General is also attached administratively to the Labor Cabinet but serve all three cabinets. The Office of Communications and Public Outreach is attached to the Public Protection Cabinet and answers to all three cabinets. All three cabinets have their own legal departments but the Public Protection Cabinet will represent all three cabinets in any personnel matters. The goal was to provide services in the most economical manner. Secretary Vance also pointed out that the Department of Insurance had within the department a State Risk and Insurance Division overseeing the insuring of state property which has now been more appropriately transferred to the Finance and Administration Cabinet. A unit within the State Risk and Insurance Division that remained in the Department of Insurance is the Mine and Subsistence Fund which provides funding to help property owners deal with mine subsistence.
Senator Carroll asked if item iv. page three of the Executive Order was an error as to who the director of the Legal Division of Financial Institutions reported. Secretary Vance indicated that it should be to the Commissioner of the department, not the executive director of the Office. Senator Carroll suggested that the heads of the legal divisions of each of the departments as to who they should report should be clarified so there is a clear understanding. To further clarify, Secretary Vance indicated that those individuals report to the General Counsel of the Public Protection Cabinet but are assigned and housed in each respective department.
Sharon Clark, Commissioner of Insurance updated the committee on the ICARE Program and the Long-Term Care Partnership Act, House Bill 259, passed during the 2008 General Assembly. Joining Commissioner Clark from the department was D. J. Wasson and Tonya Parsons who works with the ICARE Program and Kentucky Access. Commissioner Clark indicated that the ICARE Program pilot program had been slow getting started but is beginning to grow. An area of concern is a General Fund transfer of $16.5 million made from the program to balance the budget. There remains $3.25 million in the program and if the current enrollment continues, with no projected growth, it will cost approximately $3.6 million which will cause the department's operating funds to be used for the program. Applications for the ICARE Program have been received from 86 counties with 73 counties enrolled in the program. The construction trades have shown the greatest interest in the program. The department will be monitoring enrollment in the program and the costs involved to meet the needs of the enrollees.
Chair Thompson pointed out that the objective of the program was to move the uninsured to the ranks of the insured and to stop the shifting of the healthcare cost burdens which are being shifted to the employees who subsequently drop the insurance because of affordability. If all current enrollees renew, there will not be enough funds to cover the renewals through 2010. Ms. Parsons indicated that the department would be short approximately $1.5 million based on current numbers. Ms. Parsons pointed out that because of the newness of the program it was hard to determine a pattern of applications and enrollments. Senator Carroll suggested the department report to the committee in January 2009 the participation in the program and the rate at which funds are being utilized. Ms. Parsons said she would be glad to prepare the report.
Representative Ford asked what the cost is to administer the program over and above what has been paid out for incentives. Ms. Parsons stated the administrative costs for the 2007 fiscal year were just under $50,000 and through May of the 2008 fiscal year they were approximately $80,000.
Representative Crimm requested and Commissioner Clark agreed to provide an organizational chart to the committee with the names and phone numbers of staff for contact purposes.
Representative Riggs asked whether the recent charitable gaming lawsuit challenging the transfer of funds would affect the department. Ms. Wasson pointed out that the department was not a party to the lawsuit but the general fund transfer for the ICARE Program was an appropriation not part of the department's fees. Ms. Wasson also pointed out that the department is a fee-driven agency, except for the general fund appropriation and federal funds received for Kentucky Access. Commission Clark noted that the largest transfer of funds was from the Kentucky Access and ICARE Program.
Representative Damron noted that when the charitable gaming statute was written it was the intent that charitable gaming was to be a self-sufficient operation and not to collect taxes but collect the cost to administer the department which is different from the Department of Insurance. There continues to be concern that Kentucky Access, the state's high risk pool was established to mitigate risk, and the pool in place to fund risk exposure. When monies are taken out of the fund, the exposure remains and the state would have to make up that exposure.
Senator Carroll indicated that he had performed a study of how many funds have been raided across state government and the most disturbing finding was that the unemployment compensation funds have been transferred in order to balance the budget. He noted that only one budget in the last twelve years has been passed that did not exceed the state's revenue. When trust funds are raided in order to balance a budget as with the unemployment compensation fund, there are statutory and constitutional issues involved. If the state is downgraded because of its financial situation, an additional cost of approximately $46 million per year in interest will be charged on existing outstanding indebtedness.
Representative Denham asked whether there is a list of counties that have been enrolled in the ICARE Program as well as Kentucky Access. He also asked how many applications had been denied. Ms. Parsons indicated she would be glad to obtain that information. He also inquired whether those enrolled in the program had been counseled as to where they could seek help in the event the program collapsed, and whether the employees would be without insurance. Ms. Parsons pointed out that the company makes the decision whether to have group coverage and it applies for the ICARE and incentive payment to subsidize the company's expenses.
Chair Thompson said the committee looked forward to an update on the program later in the interim and have information available for the 2009 session. Representative Riggs suggested that rather than measure the progress or participation in the program by county that it be measured or the ratio be in terms of how many businesses in a particular county are eligible to participate in the program and those who utilize and receive ICARE.
Commissioner Clark, along with Jay Thompson of the department and Stuart Owen with the Department of Medicaid Services, briefly discussed the Long-Term Care Partnership Program. Commissioner Clark indicated that the biggest problem in administering the program will be the training involved with agents involved in selling long-term care insurance. Mr. Owen stated that an implementation date is contingent on the state plan amendment to the Centers for Medicare and Medicaid Services (CMS) being approved. The amendment was submitted last week to CMS who has 90 days to reply. It is their understanding that with the addition of the Long-Term Care Partnership, state plan amendments have been approved in approximately 60 days. CMS endorses long-term care and hopefully approval will be quicker. Mr. Thompson said the department is well underway in getting long-term care regulation and compliance with the NESC model and will be working on the partnership regulations specific to long-term care policies. Meetings are being held monthly with the Department of Medicaid Services (DMS) working out details. Other implementation issues, after discussing the program with other states, is working with other agencies outside of the department. Kentucky has had a good working relationship with DMS.
Senator Carroll asked if there was an ingredient in the formula to look at the medical history of individuals prior to having a need for long-term care where an anticipated change in health condition by a change in an individual’s lifestyle. Until there is a change in lifestyle the cost associated with healthcare will not change. It was Senator Carroll's suggestion that the first step should be to determine why an individual has a certain condition or, if that condition could be anticipated because of other conditions that can be identified, lifestyle change recommendations could be made now to avoid that condition in the future. Mr. Thompson indicated that there is a statute, KRS 304.12-013, that prohibits looking at lifestyle issues.
Cordell Lawrence, Commissioner of Financial Institutions, updated the committee on the status of foreclosures in the state. According to RealtyTrac which is based on the number of households in each state, during the second quarter of 2008 Kentucky had 1,834 foreclosure filings or a 15.93% increase over the first quarter and a .60% increase for the same period in 2007; Kentucky ranks 42nd in the nation in the rate of foreclosures. There has also been a 13.88% increase in orders for Master Commissioner sales in 2007 compared with 2006. Jefferson County leads Kentucky in the number of foreclosures. On a positive note, the number of past due mortgages fell from 6.81% to 5.81% at the end of 2007. Kentucky ranks 12th highest in the nation in foreclosure inventory, based on the number of mortgages outstanding in the entire state not the number of households. This indicates that there are a number homeowners in Kentucky without mortgages on their property. Subprime loans continue to inflate the numbers making up 47.1% of the number of foreclosures and 38.8% of the loans delinquent over 90 days.
Representative Denham inquired about the data for the 2008 Master Commissioner Sales Fees by County. Commissioner Lawrence indicated that the heading was inaccurate but the numbers represent foreclosure filings in each county from the first quarter to the second quarter. Commissioner Lawrence pointed out that those numbers were not cumulative but actual filings each quarter. Commissioner Lawrence also noted that Kentucky's foreclosure inventory ranking is based on the number of mortgages outstanding in the state of approximately 442,000. The foreclosure inventory is based on the percentage of mortgages in the state outstanding not nationally. In light of the banking crisis nationally, Kentucky's banks are strong. Representative Denham asked how the foreclosure situation relates to the health of banks in Kentucky. Commissioner Lawrence indicated that Kentucky banks are safe and sound although there are two cease and desist orders outstanding which is not a concern for the safety of the deposits. The mortgage crisis nationwide has not affected Kentucky banks. The department early on reviewed the exposure of banks in terms of subprime mortgages. The department also reviewed banks bond portfolios to determine the bank's exposure to the bond market backed by mortgages.
Representative Keene asked about the Master Commissioner Sales Fees and how much money had been collected by Master Commissioners. Commissioner Lawrence indicated he did not have the information available but would be glad to provide the numbers. Representative Keene also asked who oversees the monies from Master Commissioner sales. Commissioner Lawrence stated that the Department of Financial Institutions does not have jurisdiction of these monies. Representative Keene also asked how appraisal fees are determined, whether two appraisals were required, and why the Property Valuation Administrator's assessment was not used. David Coyle indicated that there was no legal requirement to have two appraisals. He said that appraisals for Master Commissioner sales were not within the jurisdiction of the Department of Financial Institutions. One of the problems is that properties are moving slowly through some counties with the Master Commissioner sales which has caused a backlog of inventory which explains the higher inventory in Kentucky.
Representative Simpson clarified some of the questions raised. He said the law states there when a property is foreclosed upon it requires the court to appoint two disinterested housekeepers to place a value on the property. Its purpose is to provide a figure for the owner's protection or right of redemption. If a successful bidder fails to bid at least two-thirds of the value, the property owner has a right of redemption and has a year to pay the purchaser the amount of the bid plus interest. Typically Master Commissioner fees are based on the value of the real estate but normally are approximately $1,000 to $1,500. Those monies are maintained by the Master Commissioner's office and their salary is overseen by the Administrative Office of the Courts (AOC). Some of those fees are returned to the AOC to offset the cost of administering the justice system.
Representative Ford asked that the committee be provided with the percentage the property brings at the Master Commissioner sale versus the amount that was owed on the property. Commissioner Lawrence stated again that this was not in the purview of the Department of Financial Institutions but would be glad to obtain the information from the AOC.
Chair Thompson also asked that Commissioner Lawrence provide the names and telephone numbers of staff and their functions.
Chair Thompson also advised the committee that the next committee meeting would be on Monday, August 25 at the Galt House in Louisville and held in conjunction with the Kentucky Bankers' Association Convention.
Meeting adjourned at approximately 11:40 a.m.