Legislature(2013 - 2014)BARNES 124

03/19/2014 03:15 PM LABOR & COMMERCE

Download Mp3. <- Right click and save file as

* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Moved CSHCR 15(L&C) Out of Committee
Heard & Held
Heard & Held
+ Bills Previously Heard/Scheduled 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                                                               
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                                                               
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