Legislature(2013 - 2014)BARNES 124
03/19/2014 03:15 PM House LABOR & COMMERCE
| Audio | Topic |
|---|---|
| Start | |
| HCR15 | |
| HB370 | |
| HB152 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HCR 15 | TELECONFERENCED | |
| *+ | HB 370 | TELECONFERENCED | |
| += | HB 152 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 152-PERS TERMINATION COSTS
4:41:53 PM
CHAIR OLSON announced that the final order of business would be
HOUSE BILL NO. 152, "An Act requiring certain employers who
terminate participation in the defined benefit retirement plan
or the defined contribution retirement plan of the Public
Employees' Retirement System to make contributions related to
past service liability and pay termination costs; repealing a
requirement that employers who terminate participation in the
defined contribution retirement plan or the defined benefit
retirement plan of the Public Employees' Retirement System pay
for a termination cost study; and providing for an effective
date." [Before the committee was Version Y, labeled 28-KS9272\Y,
Wayne, 2/26/14.]
4:42:23 PM
JANE PIERSON, Staff, Representative Steve Thompson, Alaska State
Legislature, explained that HB 152 does away with termination
studies, the costs associated with conducting termination
studies, the actuarial costs to employers for future benefits to
employees whose coverage is terminated, and the past service
cost annually on each position terminated until the unfunded
obligation is paid off decades from now.
4:43:07 PM
MICHAEL BARNHILL, Deputy Commissioner, Department of
Administration (DOA), stated shortly prior to the last hearing
[March 10, 2014] the DOA did not have the backup information
from the actuary, Buck Consultants, but has since received it.
He remarked that the fiscal note is complex, but he was somewhat
surprised at the $75 million fiscal note.
MR. BARNHILL explained termination studies. When an employer
terminates a group classification under current statute a
termination study is required and costs are accrued for three
different items. First, a termination study costs from $2,500-
$5,000. Secondly, costs accrue when a new unfunded liability is
created by a new group of employees being terminated. Under
Alaska statutes employees have the option of refunding the PERS
balance or immediately vesting. The actuary assumes some of the
employees will immediately vest; however, when that date is
prior to the anticipated date of retirement, an unfunded
liability is associated with that because the state hasn't had
time to collect enough funds to pay the expected benefit.
Third, costs accrue when an employer terminates a group
classification in a department. In this instance, an employer
must pay the entire past service liability cost, not capped at
22 percent, until the unfunded liability is entirely
extinguished, which is currently projected at 2031.
4:46:08 PM
MR. BARNHILL related that various PERS employers have objected
to Senate Bill 125, the statute enacted in 2008. These
employers have raised concerns about this impairing their
ability to be flexible with their payroll and employers wanting
to avoid the unfunded liability costs just described. The
department recognizes their concerns but there will be cost
shifting from the state. Last year, one version of the bill had
a sliding-scale threshold when termination studies would "kick
in." Under the prior version of the bill, the sliding scale
depended on the size of the payroll. For large employers, with
$5 million or more in annual payroll, the employers would need
to terminate 20 percent or more of their payroll before a
termination study will "kick in." Anything under that, such as
new unfunded liability or past service cost would be picked up
by the state. For medium-sized employers with $1-$5 million in
payroll, the threshold was set at 50 percent or more. Thus, the
employers would need to terminate 50 percent or more of their
employees in order for a termination study to "kick in." And
for small employers, with $1 million or less in payroll, the
state would pick up the costs, he said.
4:47:59 PM
MR. BARNHILL related that Buck Consultants used an assumption
that all employers terminated all employees from PERS service to
determine the new unfunded liability when someone retires
earlier than expected, which cost $375 million. Thus the
system, due to the early retirements, would not collect $375
million. The actuary then allocated that amount on the sliding
scale using the aforementioned threshold. Buck Consultants
determined the state would end up picking up $99 million and
employers would pick up $375 million. The $99 million
represented the amounts under the sliding scale, including the
costs to pick up all the small employer costs, 50 percent of the
mid-range employer costs, and 20 percent of the large employer
costs, he said.
MR. BARNHILL said that Buck Consultants made another assumption,
which was that only 20 percent of the employees would opt out.
He acknowledged that the percentage could be debated, but it was
the figure that Buck Consultants used, so 20 percent of the
costs fall to the state, which is approximately $20 million. In
addition, the past service costs shifted to the state because as
the payroll costs shrink the amount of past service cost also
shrinks. He related a scenario in which an employer had a $1
million payroll with 22 percent of the employees terminated. In
that scenario, the payroll would be multiplied by the 22 percent
contribution rate on $800,000 instead of $1 million, which means
the state collects less money and must pick up the difference.
4:50:39 PM
MR. BARNHILL explained last year's fiscal note, which computed
the annual cost. The first line referred to the retroactive
effect, which is no longer relevant in Version Y; the second
line related to the shift of the past service cost payments to
the state [due to the repeal of AS 39.35.625] due to a smaller
payroll, and the third line represented the new past service
costs associated with the new unfunded liability of $800,000,
and when computed would be $25 million. That is the methodology
behind last year's fiscal note, he said.
MR. BARNHILL related that this year under Version Y, the
requirement for termination costs and studies all would be
repealed. Under this version, all of the costs shift to the
state, which means a new unfunded liability of $75 million;
however, since Buck Consultants assumed only 20 percent will
terminate, the computation for 20 percent of $375 million is $75
million. This provides the background on the $75 million
projected for the unfunded liability, which is reflected on page
2 of Buck Consultants' letter of 3/18/14. He said the effect of
shrinking payrolls by 20 percent is that since payroll costs are
smaller, that amount is not available to compute past service
costs on so the past service costs also shift to the state.
4:52:38 PM
MR. BARNHILL turned to the letter of 3/18/14 from Buck
Consultants and noted that line one is incorrect since there is
not any retroactive effect in Version Y. The second line
relates to the shift of past serve cost payments to the state
due to the repeal of AS 39.35.625 due to smaller municipal
payrolls. The third line represents the new past service
liability associated with the $75 million new unfunded liability
due to people retiring earlier than anticipated.
4:53:17 PM
REPRESENTATIVE HERRON expressed concern about the bill, noting
he has served on the Alaska Public Entity Insurance Board. He
said that everything is based on 2008 legislation as a starting
point and suggested reviewing the figure used as a base for
2008. He further asked whether a six-year window should be
defined and updated as the base.
MR. BARNHILL acknowledged a whole variety of approaches could be
used to accomplish the objective of the 2008 legislation, which
was essentially to prevent or limit cost shifting from
municipalities to the state. He explained that effort was taken
since the state was picking up a fair amount of additional
liability in the form of state assistance under Senate Bill 125.
As previously stated, the state has contributed over $600,000 on
behalf of municipalities to PERS. Furthermore, Senate Bill 125
had two ways to address cost shifting: One, through the 2008
salary floor. For example, if a PERS employer payroll dipped
below the 2008 salary floor, the 22 percent employer
contribution rate would be computed on 2008 instead of the
current payroll. Second, the bill would address the cost
shifting through the termination cost and study requirements.
Both are important since the further removed from 2008, assuming
payroll are growing at a rate of two to five percent per year,
the 2008 salary floor becomes less and less meaningful. For
some PERS employers, the 2008 salary floor is quite meaningful
since their PERS payrolls have declined below the 2008 salary
floor; however, he estimated that would only affect a handful of
employers. He agreed it may be worth it at some point to take a
fresh look at how to preserve a certain portion of the payment
of the unfunded liability within the PERS municipal community.
4:56:36 PM
REPRESENTATIVE HERRON said the fundamental question everyone is
facing is that although the 2008 legislation was important at
the time, whether it is still relevant six years later.
MR. BARNHILL said that for certain employers it is still quite
relevant. The largest employer whose PERS payroll dipped below
the 2008 salary floor is the University of Alaska, primarily
since it offers other retirement programs to new professors,
with a 14 percent employer contribution rate and a 401(k) style
retirement plan, which he deemed as being pretty attractive.
4:57:39 PM
REPRESENTATIVE HERRON commented that the Elected Public
Officials Retirement System (EPOR) is almost finished since
these legislators are gradually dying. He remarked that those
legislators were careful to craft a provision that allowed them
to receive raises each time current EPOR members receive raises.
4:58:36 PM
CHAIR OLSON asked how many people were covered under EPOR.
MR. BARNHILL answered 34 people. He related that this type of
linkage is also found in the judicial retirement system so when
judges receive a raise, it also boosts benefits for the retired
judges. He explained that the department delivers its fiscal
note and a letter from the actuary to the legislature. Last
week the DOA submitted [dated 3/14/14] the fiscal note with the
$75 million [page 2 of the fiscal note], and the backup letter
from Buck Consultants arrived today, he reported.
5:00:16 PM
REPRESENTATIVE JOSEPHSON said he was pretty convinced that
smaller communities have a larger problems with termination
costs. He questioned what certainty exists if an agreement was
reached in 2008 but now the plan is to "back end" the costs. He
asked how the legislature will know that won't be revised.
MR. BARNHILL said he thought Representative Josephson was
referring to the governor's proposal to appropriate $1.9 billion
to PERS, which is part A of the proposal and that Part B is a
$157 million capped payment from 2015-2036. That capped payment
is very important since it can secure certainty with respect to
the demands on the undesignated general funds of the state. If
that were to go into effect, one idea is that it would mean that
any new unfunded liability associated with PERS employers -
taking 20 percent of payroll out of service - will be tacked on
to the end in 2036. He acknowledged that there is a cost to
that, but any new unfunded liability will be shared by state and
municipalities. He said that hasn't been the case since 2008
when Senate Bill 125 was enacted. Any new unfunded liabilities
are borne entirely by the state, which has had some fairly
dramatic impacts on the state's general fund. Thus, state
assistance to PERS employers has increased substantially so that
combining PERS and TRS would place a call on the general fund of
upwards of $1 billion, he said.
REPRESENTATIVE JOSEPHSON asked whether the compromise is that
the relief will be afforded to local governments now, but the
quid pro quo will be a sharing of new unfunded liability later.
MR. BARNHILL acknowledged that is a fair statement, but the flip
side of that is that if the reverse of unfunded liability is
created - an actuarial gain - happens it will also be shared and
under the governor's proposal these gains will be shared in the
form of a shorter amortization term. The municipal employers
would pay up to 22 percent contributions rate through 2036 if
there were actuarial gains during that time period and the 22
percent employer contribution rate cap could be adjusted prior
to 2036. He said this is entirely speculative since the state
can't predict the net gains or losses.
5:04:02 PM
REPRESENTATIVE MILLETT asked what will happen to MOA if the
municipality is short funded by $5 million and HB 152 doesn't
pass.
MR. BARNHILL said then the status quo continues and it will
depend on whether the MOA pulls PERS employees out of service,
for example, if the municipality were to terminate a group
classification or department. In smaller municipalities,
sometimes a fire chief position is terminated. He related a
scenario in which MOA privatized a utility of $5 million. This
would trigger a termination study, the MOA would pay $5,000 for
the study, and Buck Consultants would project how many people
will vest early and it would create a new unfunded liability,
for example, perhaps $600,000. The DOR would bill the MOA, and
the entire past service cost for those employees would need to
be paid via the final payoff of the unfunded liability in 2036.
5:06:32 PM
REPRESENTATIVE MILLETT asked whether the MOA could pay this at
22 percent over the life span.
MR. BARNHILL said the current statutes provide municipalities to
work out a plan with the Division of Retirement and Benefits.
He acknowledged options could be explored.
5:07:23 PM
KATHY LEA, Deputy Director, Retirement and Benefits, Department
of Administration (DOA), answered that the statutes are broad
and an increased contribution over time is a possibility.
REPRESENTATIVE MILLETT asked whether a payment plan could be
flexible.
MS. LEA answered yes; it would be payable upon receipt or the
municipality would work out a payment plan with the division.
5:08:10 PM
KATHIE WASSERMAN, Executive Director, Alaska Municipal League
(AML), stated that the AML represents 161 communities.
Depending on what happens with this bill, municipalities will
need help and more tools. She anticipated that if lean times
are forthcoming, municipalities will need to lay people off.
She said that municipalities need help in finding tools to deal
with any consequences that might come their way. The AML has
been supporting the governor's cash infusion, hoping that
termination costs can be tacked on the end of the 25-year
amortization. The amount of termination study costs would be so
small compared to a potential $12 billion liability that
municipalities could pay the costs. She assured members that
they are not "trying to get out of anything" but also to
recognize municipalities can only pay so much in order to keep
rates at a steady, predictable 22 percent that can be budgeted.
5:10:42 PM
REPRESENTATIVE MILLETT said that her municipality is concerned
that at some point in time it will need to increase property
taxes to the cap, which still won't cover the unfunded liability
to PERS. This means that smaller municipalities will need to
take on a greater cost percentage based on their property taxes
and population base.
MS. WASSERMAN said that is exactly right. She added that some
small communities without a tax base don't have any way to make
up those costs, which leaves everyone in a bind. She stated
that municipalities are not trying to get out of obligations,
but the legislature must find an affordable solution.
[HB 152 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB370 ver A.pdf |
HL&C 3/19/2014 3:15:00 PM |
HB 370 |
| HB370 Sponsor Statement.pdf |
HL&C 3/19/2014 3:15:00 PM |
HB 370 |
| HB370 Sectional Analysis.pdf |
HL&C 3/19/2014 3:15:00 PM |
HB 370 |
| HB370 Fiscal Note-DOLWD-WC-03-14-14.pdf |
HL&C 3/19/2014 3:15:00 PM |
HB 370 |
| HB370 Supporting Documents-Report Workers Compensation 2012 Issues by Joseph Paduda.pdf |
HL&C 3/19/2014 3:15:00 PM |
HB 370 |
| HB370 Supporting Documents-Report Lockton & Associates 08-2012.pdf |
HL&C 3/19/2014 3:15:00 PM |
HB 370 |
| HB152 CS(L&C) Fiscal Note-DOA-DRB-03-14-14.pdf |
HL&C 3/19/2014 3:15:00 PM |
HB 152 |
| HCR15 Supporting Documents-Resolution Fairbanks EDC 2014-01.pdf |
HL&C 3/19/2014 3:15:00 PM |
HCR 15 |
| HB370 Supporting Documents-AK Drug Overdose Deaths2008-12.pdf |
HL&C 3/19/2014 3:15:00 PM |
HB 370 |
| HB152 Letter-Buck Consulting 3-18-2014.pdf |
HL&C 3/19/2014 3:15:00 PM |
HB 152 |