Legislature(2013 - 2014)BARNES 124
03/28/2013 08:00 AM House COMMUNITY & REGIONAL AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| HB174 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 174 | TELECONFERENCED | |
HB 174-PERS CONTRIBUTIONS BY MUNICIPALITIES
8:07:46 AM
CO-CHAIR NAGEAK announced that the only order of business would
be HOUSE BILL NO. 174, "An Act requiring each municipality with
a population that decreased by more than 25 percent between 2000
and 2010 that participates in the defined benefit plan of the
Public Employees' Retirement System of Alaska to contribute to
the system an amount calculated by applying a rate of 22 percent
of the total of all base salaries paid by the municipality to
employees of the municipality who are active members of the
system during a payroll period; reducing the rate of interest
payable by a municipality with a population that decreased by
more than 25 percent between 2000 and 2010 that is delinquent in
transmitting employee and employer contributions to the defined
benefit plan of the Public Employees' Retirement System of
Alaska; giving retrospective effect to the substantive
provisions of the Act; and providing for an effective date."
8:08:29 AM
REPRESENTATIVE FOSTER, speaking as the sponsor of HB 174,
informed the committee that HB 174 seeks to correct an
unintended consequence of the salary floor enacted in 2008 by
Senate Bill 125 in the 25th Alaska State Legislature. The
salary floor was meant to prevent Public Employees' Retirement
System (PERS) employers from gaming the system by laying off
PERS employees and hiring contract employees to reduce their
contribution to the system. [The salary floor] was not meant to
saddle communities experiencing an exodus event with a financial
burden that can't possibly be administered. Therefore, HB 174
removes the 2008 salary floor for communities that lost more
than 25 percent of their population between the 2000 and 2010
census period. For those communities, the interest rate on
delinquent payments is reduced from 22 percent to either a rate
agreed upon with the administration or three percentage points
above the Federal Reserve discount rate for the applicable
payroll period.
8:09:46 AM
PAUL LABOLLE, Staff, Representative Foster, Alaska State
Legislature, explained that by narrowing the legislation to only
those communities that lost 25 percent of their population, it
would only refer to the following five communities: Galena,
Atka, Pelican, Anderson, and St. George. Since Anderson and St.
George don't currently have any PERS eligible positions they are
included within the scope of the legislation as a matter of law,
but not practically. He then noted that he wasn't sure if Atka
is even a functioning community. Therefore, Pelican and Galena
are the communities that will be directly impacted by HB 174.
In the way of background, Mr. LaBolle explained that Senate Bill
125 was a way to bail out the PERS system. In the past, each
municipality was responsible for its own retirement system under
PERS, and therefore the system's benefits were laid out by
statute while the actual management of that system was up to
each municipality. Senate Bill 125 turned the aforementioned
into a pooled resource such that every community is in the same
system. A large amount of funds were provided by the state to
help secure the unfunded liability while at the same time there
was the desire to ensure municipalities paid their fair share.
The concern, he explained, was that municipalities would lay off
employees in order to reduce the number of PERS positions on
which they would be paying into the system and hire contract
employees to perform the same task. Unfortunately, exodus
events in certain communities weren't foreseen. A community
that loses more than 25 percent of its population won't carry
the same amount of municipal staff. For Galena, there is an
unfunded liability of almost $500,000 for a population of 500,
and thus there is no way to carry that [unfunded liability].
Since the aforementioned wasn't the intent of Senate Bill 125,
HB 174 offers a targeted approach to rectify the situation.
8:12:49 AM
CO-CHAIR LEDOUX asked whether these communities are behind in
their payments with what she characterized as a very high rate
of interest.
MR. LABOLLE replied yes, and added that Galena is delinquent and
faces a 22 percent interest rate. Section 2 addresses interest
rates for delinquent communities that fall within the definition
[provided under HB 174].
8:13:38 AM
CO-CHAIR LEDOUX surmised then that HB 174 wouldn't reduce the
interest rate for other communities that are delinquent and
asked whether there are other communities that are delinquent.
MR. LABOLLE replied yes.
8:14:04 AM
REPRESENTATIVE FOSTER stressed that the assumption when [Senate
Bill 125 passed] was that communities would grow, and thus they
wouldn't have a problem with the payments as they would add
employees into the system.
8:15:24 AM
MIKE BARNHILL, Deputy Commissioner, Department of
Administration, said that he has a spreadsheet of delinquent
communities as of January 31, 2013, but Pelican isn't on that
delinquent list.
8:15:54 AM
CO-CHAIR LEDOUX asked if all the delinquent communities are
paying 22 percent.
MR. BARNHILL replied no, recalling that the rate of interest is
12 percent. The interest rate is the earnings assumption of the
system, 8 percent, plus another 50 percent of that, 4 percent,
which totals 12 percent.
CO-CHAIR NAGEAK opened public testimony.
8:16:38 AM
REPRESENTATIVE OLSON inquired as to whether 8 percent is overly
optimistic.
MR. BARNHILL noted that there is a debate in the pension,
actuarial, and economist communities regarding whether 8 percent
for a public pension system is overly optimistic. The majority
of pension systems have adopted 8 percent or something in the
range of 8 percent. A Chicago economist, he related, believes 8
percent is very optimistic and recommends a riskless rate of
return in the range of 4-5 percent. If the [Alaska Retirement
Management (ARM)] Board adopted a more riskless rate of return
that would essentially double the unfunded liability of the
systems. Currently, the total unfunded liability for the
systems is $11.9 billion, which would place pressure on the
state assistance payments that the legislature appropriates
every year. Mr. Barnhill acknowledged that a lengthy discussion
on the choice to use 8 percent could be held, but said that for
now 8 percent is in the range of prudent and it's possible that
the ARM Board will consider rate reductions in the future.
8:18:12 AM
REPRESENTATIVE OLSON conjectured that 8 percent is what placed
[the state] in the situation it is now [with the PERS unfunded
liability].
MR. BARNILL responded that a number of issues resulted in the
state's current situation with the [PERS unfunded liability].
Certainly, one of those issues is not targeted the assumed rate
of return. Over the past 5 years, the rate of return has been
well below 8 percent a year. Going forward, the investment
advisor for the ARM Board has indicated there is practically no
likelihood that 8 percent will be reached in the next 10 years.
8:19:04 AM
CO-CHAIR LEDOUX inquired as to the average rate of return over a
20-year period.
MR. BARNHILL offered to provide that information to the
committee.
CO-CHAIR LEDOUX questioned the choice of 8 percent if the
assumed rate of return hasn't been 8 percent over the last 20
years, now, and little hope reaching it over the next five
years.
MR. BARNHILL reminded the committee that there are boom and bust
markets, and therefore there is at least one slice during which
the average rate of return was in excess of 8 percent. He noted
that per statute the ARM Board is required to provide the
legislature 1-, 4-, 7-, and 10-year average rate of returns.
8:20:31 AM
REPRESENTATIVE HERRON referred to the sponsor statement, which
relates that the salary floor was instituted to ensure that the
system couldn't be gamed. However, he questioned whether the
system is being gamed anyway because of the high expectation of
the ARM Board.
MR. BARNHILL said that the ARM Board adopts many assumptions,
the point of which in a defined benefit system is to attempt to
project the savings necessary in order to pay defined benefits
in the future. In addition to the earnings reserve assumptions,
there are assumptions for mortality, retirement, medical
expenses, health care cost growth, and inflation. He said he
could guarantee that one or more of those assumptions about the
future will be incorrect, which is the nature of a defined
benefit plan. By statute and guaranteed by the constitution,
the state has committed to pay certain defined benefits in the
future. The only way to achieve the aforementioned is to make
assumptions regarding what the future holds in order to save
money and invest it.
8:22:17 AM
REPRESENTATIVE OLSON requested the average rate of return
reports from the ARM Board.
MR. BARNHILL agreed to provide those.
8:22:51 AM
KATHIE WASSERMAN, Executive Director, Alaska Municipal League
(AML), said that the municipalities understand the huge
liability faced with the PERS liability and appreciate the
agreement between the state and PERS employers to settle on 22
percent of the past service cost and the present service cost.
However, some municipalities just can't pay this kind of penalty
on losing employees due to a decrease in population. The [PERS
salary floor] has taken away their ability to manage their
employees and their city. She recalled that originally Galena's
bill was about $129,000, but with the 12 percent interest it has
now grown to about $500,000. The original amount was very
difficult to impossible for Galena while $500,000 is impossible.
Ms. Wasserman provided an example with the City of Pelican that
she recalled having a population/tax base of 150 people that
decreased to 62 people. In such situations,
[reductions/layoffs] have to occur and that incurs a cost of its
own. Therefore, AML supports HB 174 as there has to be some
relief for these smaller communities. Although the larger
municipalities are probably in a better position to game the
system, they are also in a better position to be able to pay
penalties. With regard to gaming, Ms. Wasserman didn't believe
the smaller communities, which aren't close to main population
areas, would know how to game the system.
8:25:51 AM
REPRESENTATIVE HERRON inquired as to the alternative for Galena
if HB 174 doesn't make it this legislature.
MS. WASSERMAN surmised that it would be in the state's hands.
8:26:24 AM
REPRESENTATIVE HERRON, appealing to Ms. Wasserman being a former
city manager, inquired as to what she would recommend to her
community.
MS. WASSERMAN recalled that for a community to dissolve it must
fill out a petition, which requires enough work that the
community, particularly smaller ones, would have to hire a
consultant. However, it's probably not worth it for those on
the brink of dissolving to hire a consultant for a year petition
system. Therefore, she would suggest mailing the key to the
city hall to the state.
8:27:33 AM
REPRESENTATIVE DRUMMOND inquired as to why other communities
listed on the chart as having had employees that don't now
aren't included in the bail out.
MR. LABOLLE clarified that the chart doesn't show the population
percentage but rather shows the salary floor. Communities could
be impacted by the salary floor for any number of reasons,
including loss of employees or lowering of the salary base.
8:28:47 AM
MR. LABOLLE explained that in 2008 Senate Bill 125 took a
snapshot of that fiscal year and said that going forward the
community's contribution will be 22 percent of the current
salary base or 22 percent of the 2008 salary base, whichever is
more. As mentioned earlier, when populations increase, salaries
increase and thus the salary floor shouldn't be an issue.
8:29:33 AM
REPRESENTATIVE OLSON requested the list of the communities with
their populations and change in population. Representative
Olson expressed concern that [HB 174] may create a situation in
which there are a number of communities that fall just outside
the current parameters and the legislation could "Christmas
tree."
MR. LABOLLE deferred to Mr. Barnhill, DOA. He reminded the
committee that the communities that fall within the definition
in HB 174 are Galena, Pelican, Atka, Anderson, and St. George.
However, Anderson and St. George don't currently have any
eligible PERS positions, and thus aren't functionally a part of
HB 174. Furthermore, the legislation defines the population
loss within the 2000 and 2010 census period and anything
occurring beyond that census period would be applicable under
the definition in HB 174.
8:30:48 AM
REPRESENTATIVE OLSON clarified that his point is that the
legislation has an arbitrary line that could be changed in the
next committees of referral to include those communities that
fall just outside of the existing definition in HB 174.
Therefore, it would be helpful to know which communities fall
just outside of the definition in HB 174.
8:31:32 AM
REPRESENTATIVE HERRON opined that the danger is that the
legislation is being pre-loaded, which is why it's necessary to
further analyze it.
8:32:11 AM
GREG MOYER, Interim City Manager, City of Galena, informed the
committee that 11 months ago he was hired to restructure and
ultimately save Galena, which is still reeling from the 2008
closer of the Galena Air Base. He opined that the military
became Galena's economic engine as it provided residents, jobs,
and economic stability. In 1994, the Galena airbase was
realigned in 1994 and its population fell from 800 to 650, which
was a 20 percent reduction. In 2005, the Base Realignment and
Closure (BRAC) Commission decided to move forward with the
closure of the Galena Air Base by September 2008, which is the
same time the state took the snapshot of Galena's salaries that
required that salary floor be met every year or Galena would be
penalized by 22 percent of the difference plus interest. As has
been mentioned, Galena's population is just below 500 now. Mr.
Moyer told the committee that he developed an austere fiscal
year (FY) 2013 budget with total PERS salaries in the amount of
about $800,000. Unfortunately, those PERS salaries are over
$600,000 less than the state's salary floor. That 2008 salary
snapshot is $1.5 million, which must be met every year. Galena
is being charged 22 percent of the difference, approximately
$139,000 every year plus interest. Galena, he stressed, will
never meet its salary floor amount. He further stressed that
there is no gaming in Galena. Mr. Moyer acknowledged that he
has the option to add 15-20 positions or give existing employees
a raise. He then pointed out that current law leaves no room
for DOA to consider hardships. Therefore, Mr. Moyer requested a
legislative fix for this situation that developed through no
fault of Galena. In conclusion, Mr. Moyer emphasized the need
for a common sense solution and reiterated that there is no
gaming on the part of Galena.
8:37:19 AM
BROOKS CHANDLER, Attorney, Partner, Boyd, Chandler & Falconer,
LLP, speaking as the attorney for the City of Galena, pointed
out that the salary floor in 2008 was created was created as a
disincentive for municipal employers to bail out of PERS due to
the increase in the contribution rate to 22 percent. The
overall policy of the salary floor isn't impacted by HB 174,
which recognizes that a one-size-fits-all statewide policy has
unintended and unduly punitive consequences in that salary
decreases due to population decreases is out of the control of
these communities. The solution proposed in HB 174 is very
focused, narrow, and limited to communities with a population
loss that existed between the 2000 and 2010 census and provides
an alternative contribution rate that isn't fixed on what
salaries were in 2008 but rather existing salaries.
8:39:37 AM
REPRESENTATIVE HERRON questioned whether a new snapshot should
be taken.
8:40:06 AM
CO-CHAIR NAGEAK announced that HB 174 would be held over.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 174 ver A.pdf |
HCRA 3/28/2013 8:00:00 AM |
HB 174 |
| HB 174 Sponsor Statement.pdf |
HCRA 3/28/2013 8:00:00 AM |
HB 174 |
| HB 174 Hearing Request.pdf |
HCRA 3/28/2013 8:00:00 AM |
HB 174 |
| HB174-Fiscal-Note-DOA-DRB-3-22-13.pdf |
HCRA 3/28/2013 8:00:00 AM |
HB 174 |
| HB 174 Total Active PERS employees.pdf |
HCRA 3/28/2013 8:00:00 AM |
HB 174 |
| HB 174 PERS Employer Salaries for FY08 - FY12.pdf |
HCRA 3/28/2013 8:00:00 AM |
HB 174 |
| HB 174 PERS Employer Salaries for FY08 - FY12 Affected Muniticaplities.pdf |
HCRA 3/28/2013 8:00:00 AM |
HB 174 |
| HB 174 Employers Impacted by Salary Floor.pdf |
HCRA 3/28/2013 8:00:00 AM |
HB 174 |
| HB 174 Email on Effected Employers.pdf |
HCRA 3/28/2013 8:00:00 AM |
HB 174 |