Legislature(1997 - 1998)
04/08/1997 08:04 AM House STA
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 188 - DEFINITION OF COMPENSATION IN PERS The first order of business to come before the House State Affairs Standing Committee was HB 188, "An Act relating to calculation of compensation for the public employees' retirement system." CHAIR JEANNETTE JAMES called on Representative John Cowdery, sponsor of HB 188, to present the bill. Number 0080 REPRESENTATIVE JOHN COWDERY, Alaska State Legislature, read the following sponsor statement into the record: "HB 188 was introduced at the request of Anchorage Mayor Rick Mystrom. "The current definition of compensation for the Public Employees Retirement System allows for the use of overtime in the calculation of pension benefits. "This definition invites abuse of the system through the use of overtime loading to inflate an employee's high three years. Salaries have been inflated by as much as $40,000 to $50,000 per year in extreme cases through the use of overtime. This increases the long term liability to the State in its retirement systems. "HB 188 amends AS 39.35.680(8) to exclude overtime from the definition of "Compensation" for all new employees." REPRESENTATIVE COWDERY explained the Public Employee Retirement System (PERS) was calculated on an employees' highest three years consisting of the following: base pay, employee contribution, cost-of-living differential, leave, and overtime. The Municipality of Anchorage had been experiencing an increasing amount of "overtime padding" where some retiring employees maximized the amount of overtime to maximize their pensions. In the past year alone, the municipality had reported overtime payments as high as $76,000 a year. The bill would simply exclude overtime from the calculation of the benefit. Number 0221 CHAIR JAMES asked Representative Cowdery if overtime was time and a half or premium pay? REPRESENTATIVE COWDERY replied overtime was anything above the salary base pay. In addition, the bill would only affect new hires; it would not be retroactive. Number 0246 REPRESENTATIVE AL VEZEY said overtime was pay at the overtime rate, and premium time was pay above the normal hourly rate. The point that Chair James raised was a good one, however; it was not defined anywhere. Number 0281 REPRESENTATIVE ETHAN BERKOWITZ asked Representative Cowdery if the best three years were adjusted for inflation or were just flat dollars? Number 0296 REPRESENTATIVE COWDERY replied flat dollars. Any three high years could be calculated. Number 0318 CHAIR JAMES wondered, if a person's base pay required him to work six days a week, would the sixth day be counted because it would receive a time-and-a-half rate of pay. Number 0343 REPRESENTATIVE COWDERY replied, "Yes." It was overtime. CHAIR JAMES responded then only the premium was overtime as far as she was concerned. REPRESENTATIVE COWDERY replied there was the occasional overtime worked beyond the 37.5 hours a week for state employees. The bill, he reiterated, was based on the base salary. Number 0393 REPRESENTATIVE IVAN IVAN asked Representative Cowdery if this was a problem in Anchorage? Number 0405 REPRESENTATIVE COWDERY replied, "Yes." In the police and fire departments there had been as high as $1,500 of overtime used for the purpose of retiring. He reiterated the bill was not retroactive; it was perceived as an abuse of the past and the purpose was to deal with the problem in the future. Number 0454 REPRESENTATIVE FRED DYSON commented on the part-time and seasonal professions, such as, firefighting. The nature of the work required lots and lots of overtime, not by choice, but by demand. Therefore, was the case of a firefighter more valid because it was seasonal? he asked. REPRESENTATIVE COWDERY replied he did not know if it would be more valid. He reiterated the bill was not talking about the past; it was talking about the future. If the bill was to pass, the law would be in place and the firefighters would have to live by it. He understood, however, that there were emergency situations that demanded a lot of overtime. Number 0557 REPRESENTATIVE VEZEY said state employees who worked seasonally did not accrue a year's pay in a calendar year. They could have to work three years to accrue one calendar year of retirement credit, for example. Number 0581 REPRESENTATIVE KIM ELTON stated the presentation made by Representative Cowdery indicated this was an employee problem. He defined this issue as a management or political problem. For example, in the case of the police officers, it could be argued that there were not enough police officers to reduce the amount of overtime needed. He was concerned that the police officers would lose out because of a management problem. Furthermore, overtime was approved by management. Number 0667 REPRESENTATIVE COWDERY replied there was a problem. He did not know if it was a management or an employee problem, however. Maybe the bill would solve the problem. In addition, the debate in Anchorage was to create all new hires in PERS rather than the existing system. Number 0737 REPRESENTATIVE MARK HODGINS agreed with the bill. He suggested changing Sec. 2, however, to make it equal for everybody. There could be changes made in another committee to prevent two tiers, for example. Number 0784 REPRESENTATIVE COWDERY replied the act would take effect on the effective date. REPRESENTATIVE HODGINS stated this was a good fix for a mounting problem. Number 0821 REPRESENTATIVE COWDERY explained there were many things included in the definition of "compensation" and the bill just added one more thing to the definition - overtime. If there was better language to clarify Sec. 2, he would not have a problem changing it. Number 0846 REPRESENTATIVE ELTON stated retirement and benefits could not be reduced which was why the multiple tier system had been created for the state. Number 0865 REPRESENTATIVE DYSON asked Representative Cowdery where the bill went next? REPRESENTATIVE COWDERY replied the House Finance Committee. REPRESENTATIVE DYSON asked Representative Cowdery where had the bill been? REPRESENTATIVE COWDERY replied the House State Affairs Standing Committee was the first committee of referral. REPRESENTATIVE DYSON asked Representative Cowdery if there was a fiscal note attached? REPRESENTATIVE COWDERY replied there was a zero fiscal note. Number 0902 CHAIR JAMES stated she did not understand the zero fiscal note because the state would save money. Number 0918 REPRESENTATIVE COWDERY replied the state would not save any money until it happened. The state would not undo anything. CHAIR JAMES stated she understood it was the operations that were measured and not the liabilities for the funding ratio of the General Fund. However, it had been a cause for concern in the past that the funding ratio stay constant and sufficient. It was hard to realize that there would not be a fiscal note attached to the bill. A positive fiscal note would be from communities that would take advantage of this. Number 0975 MIKE McMULLEN, Personnel Manager, Division of Personnel, Department of Administration, was the first person to testify in Juneau. The retirement benefit was now based on the average of the high five instead of the high three as a result of the passage of Tier III last year. It would be more difficult for an employee to build up and sustain his overtime for retirement over a five year period compared to a three year period. Therefore, Tier III already had addressed this issue. MR. McMULLEN further stated that Representative Elton was correct. Overtime was a management decision. In addition, upon passage of the bill, it would be necessary to identify the new hires and forever thereafter track them as a separate group in order not to calculate their overtime creating a two tier system for the employer. In the past, when Tier II and Tier III were enacted, the new rates applied to everybody. Moreover, there were prohibitions in statute against reducing retirement benefits for employees. Therefore, Sec. 2 would apply to those hired after the effective date of the bill. There were employees who moved to a high cost- of-living area for their final three years so that the overtime would be based on the higher differential rate and the combination would go into their retirement calculation. The Tier II program provided that the geographic differential could only be counted if over half of an employee's service was at the higher differential. Number 1241 CHAIR JAMES asked Mr. McMullen what was in Tier I, II and III that allowed for the retirement compensation to be calculated the same? Number 1265 MR. McMULLEN replied the difference was in the tracking. Tier II changed the geographic differential provision so that the employer deducted the full percentage from the employee, but upon retirement, the record was reviewed to determine if the majority of the service was at the higher level or not. Tier III changed the benefit calculation from three years to five years. For Tier II and III, the employer did not have to distinguish between its employees; it continued to make the same deductions. Tier IV, on the other hand, affected the calculation determination and required a distinction between employees. Number 1352 CHAIR JAMES stated there was no other way to reduce benefits. Number 1367 MR. McMULLEN stated the way to keep them the same was to off-set the difference. Number 1394 REPRESENTATIVE BERKOWITZ asked Mr. McMullen if the segregation for the different tiers of employees was done on a computer? MR. McMULLEN replied, "Yes." The system was computerized. Mr. Bill Church, Division of Retirement and Benefits, was also here today. He could answer the question better. The bill required that the employer make the distinction rather than the retirement system. Number 1394 REPRESENTATIVE BERKOWITZ asked Mr. McMullen if this would be a difficult technical step to take for the state? MR. McMULLEN replied it would take work to make the distinction because all of the hiring offices in the departments would have to get the right information from the new hire to determine the tier he or she was under. REPRESENTATIVE BERKOWITZ stated that information would already be part of the employee record. MR. McMULLEN replied, "Not necessarily." A person could have worked for the Municipality of Anchorage in the past which would not be part of the record. There were dozens of steps in the enrollment process, and this was a minor burden that would not be looked at for the next 20 years. Number 1506 REPRESENTATIVE BERKOWITZ asked Mr. McMullen which state employees would this bill impact? Number 1511 MR. McMULLEN replied there were state employees who worked overtime as a matter of course, such as, firefighters. Airport safety officers worked a schedule where there was a quarter of an hour of overtime per day because they did not get a real break. Therefore, someone hired after the effective date of the bill would be treated differently. Number 1567 CHAIR JAMES asked Mr. McMullen if the employees under a collective bargaining unit could make a different deal than state law? MR. McMULLEN replied retirement was outside the scope of collective bargaining. But, rates to accommodate the same thing, for example, could be collectively bargained. At some point, an employer would note that this would be an employment and recruitment problem. Number 1620 REPRESENTATIVE BERKOWITZ asked Mr. McMullen if it was possible for seasonal workers to negotiate overtime pay away from the contract? MR. McMULLEN replied the state was subject to the Fair Labor Standards Act (FLSA) which mandated overtime pay for time over 40 hours in a week. REPRESENTATIVE BERKOWITZ asked Mr. McMullen if it was possible for seasonal workers to negotiate overtime pay away from the contract in terms of PERS? MR. McMULLEN replied, "No." Workers could negotiate for a 20 percent higher rate of pay for those hired after the effective date of the bill, for example, to take care of the difference. Number 1669 REPRESENTATIVE ELTON asked if a seasonal employee would loose status in the retirement tier if he was hired in another tier? MR. McMULLEN replied employees were in whatever tier they were first hired into, even if they left the work force for 10 years. Number 1702 REPRESENTATIVE ELTON stated there could be costs outside of the retirement and benefit system, if every PERS unit had to track its employees differently. He asked Mr. McMullen if that would be a minor or a major cost? Number 1725 MR. McMULLEN replied it was a matter of the Division of Finance making computer changes, training, and departments following the provision for the next 20 years. The division was not asking for a fiscal note because it made changes to the payroll system all of the time. In addition, there were 20 questions as part of the new hire process so this would be question 21. It was just one more cog in the process. Number 1725 DON ETHERIDGE, Jr., Lobbyist, Alaska State District Council, Laborers, was the next person to testify in Juneau. The council opposed the bill. It recognized that there were problems in some cases, but it was a management problem. The council was trying to help management take care of the problem to protect those that justified their overtime work. He worked 22 years for the Alaska Marine Highway System averaging 1,000 hours of overtime per year. It was not by choice; the job had to be done. He stuck with it because it would help his retirement. If that incentive was cut out, it would create a recruitment problem because there were a lot of areas that troopers would not move to, for example. It was unfair to blanket everybody with those who abused the system to correct the problem. There must be a way to handle the abuses without hurting everybody. Number 1890 CHAIR JAMES stated that earnings were how much a person made in a year, not necessarily what a person made in a day or an hour. In Fairbanks, the fire and policemen worked a lot of overtime, and their salaries reflected that. She agreed it was a management decision; management approved overtime. She also understood that overtime was necessary. She questioned the concept of counting the extra hours in the week as overtime rather than calling it premium time. "It seems to me if you have the people working just for the straight time, and you counted the straight time but not the overtime premium, then you would be at the same place based on the value of the work that you need done - whether you have new employees or the same employees." It would create a more level playing field because more people would be working more overtime rather than new people being hired as a way to cut down on the cost of retirement. Number 1991 MR. ETHERIDGE replied in his situation his overtime was the same just about ever year. The department figured it was cheaper, overall, to pay the overtime for two men than it was to hire a third man. The same amount of work was accomplished for less dollars. He worked on average of 6 days a week, 12 hours a day. A lot of people would be better off in the scenario Chair James presented. The Local 71 folks usually worked scheduled overtime - seven days a week all summer, for example. And the hours did not count towards vested time, but the dollars that they did earn helped build up the overtime earnings when they were vested. Number 2104 REPRESENTATIVE DYSON asked Mr. Etheridge how long a person had to work in the state system before being eligible for retirement? MR. ETHERIDGE replied five years. REPRESENTATIVE DYSON asked Mr. Etheridge if a person could retire at a certain age? MR. ETHERIDGE replied a person could retire after 30 years; or 55 years of age under Tier I; and 60 years of age under Tier II. REPRESENTATIVE DYSON asked Mr. Etheridge, if a person could retire after 30 years or at 55 or 60 years of age, whichever came first or last? MR. ETHERIDGE replied whichever came first. Number 2142 REPRESENTATIVE BERKOWITZ commented that there did not appear to be a definition of overtime in statute. Maybe, this issue could be resolved by developing a definition of overtime. Number 2153 CHAIR JAMES responded that would be a big issue to fix because overtime and premium time were not separated. She did not think it could be done in this bill. Number 2172 REPRESENTATIVE ELTON stated that a definition was not needed before because we did not put it in statute. Now that we were putting it in statute, it was time for a definition. CHAIR JAMES stated she was not convinced that a definition was needed; it was a different issue than what was before us now. Number 2204 KEVIN C. RITCHIE, Executive Director, Alaska Municipal League (AML), was the next person to testify in Juneau. In November of 1996 at its annual conference, the AML membership passed a policy statement which include the following section: "3. Basis for Computation of PERS Benefits: The League supports changes to the computation of PERS benefit to exclude overtime pay and leave cash-in from the calculation of retirement benefits." Number 2230 CHAIR JAMES stated this appeared to be a good deal for the municipalities but not necessarily the state. She wondered if it was possible to sort out the municipal employees, such as, the firefighters. Number 2259 MR. RITCHIE asked Chair James if she was talking about firefighters mainly? CHAIR JAMES replied firefighters and others who worked seasonally. Seasonal employees did not work a full year so if their overtime was taken away they would get even less. A person's expenses lasted for 12 months even if he or she did not work a full year. She would prefer to look at an annual wage as opposed to an hourly or weekly wage. In addition, some took a job because it could be extended. It seemed proper to include the straight-time hours as opposed to the premium pay in a retirement plan. But she also understood that the municipalities were asking the state for relief. She agreed with Representative Elton that the issue could be managed differently without changing the retirement computation, especially since it was such a generous and costly retirement system. She wondered if this could be done for the municipalities as well. Number 2341 MR. RITCHIE replied the Fair Labor Standards Act was passed in 1938 but it was not mandated until 1986 which kicked hundreds of state employees into the overtime categories that were not there before. The FLSA was designed for a post-depression, back-to-work, industrial society. Firefighters at the local level were affected by this because of their rigid shifts. Rigid shifts had not been factored into the FLSA. Number 2395 REPRESENTATIVE ELTON stated there were the following three ways to address the problem: hire enough people to do the work, manage the departments better, or adopt HB 188. He asked Mr. Ritchie if all three options had been discussed by the AML before adopting the recommendation? Number 2436 MR. RITCHIE replied the recommendation was done by a finance sub- committee of the AML. He was not familiar with all of its discussion. In some cases management worked, and in some cases it did not. For example, in the case of snow removal, sometimes there were dry years requiring no overtime. TAPE 97-37, SIDE B Number 0020 REPRESENTATIVE ELTON stated he was concerned that by adopting the bill, the first two options were taken off of the table. There would not be incentive to hire enough people, for example. He was sympathetic to the snow removal example, but in reality strong mayors often made a low-ball decision to be seen as a thrifty manager. And, the employees had to bear the brunt of the low-ball decision if the mayor was wrong. For example: they were on the road for 24 hours a day, away from their families, and missing their kid's school play. Now, their overtime would not count towards retirement. "It seems to me that the only person losing in this is the person that has to bear the brunt of decisions that we make as elected political officials or city department heads." He was more in favor of a rigid management style. Number 0094 REPRESENTATIVE BERKOWITZ stated police officers ran up big overtime because they were either working undercover or waiting in court. This type of inefficiency had not been addressed anywhere in the system. The bill seemed to be driven by police overtime and there was a different way of "skinning the cat." He asked Mr. Ritchie what other alternatives had been used to reduce overtime? Number 0127 MR. RITCHIE replied any time overtime could be reduced, money would be saved. And sometimes hiring more people to reduce overtime was not efficient. If a municipal government did not try to limit overtime, it would not be fulfilling its management obligation to the public. Number 0160 CRAIG PERSSON, Vice President, Public Safety Employees Association, was the first person to testify via teleconference in Fairbanks. He represented the State Troopers, the Juneau Police Department and several other law enforcement agencies. The association opposed the bill because it was a management problem. In Fairbanks, the airport had a severe overtime problem because of short staffing. But through negotiations and a change in the work schedule it reduced the overtime greatly. There were clauses in the bargained agreements with the state troopers that management could call anybody for overtime; it was not based on seniority. The padding of overtime was a problem within the collective bargaining agreement itself which could be solved by management and the union. The association did not believe in penalizing everybody in the state for a problem that could be occurring in several municipalities. This was a slap in the face of the men and women who helped keep the streets safe. Number 0248 REPRESENTATIVE BERKOWITZ asked Mr. Pearson if he knew much about the problem with the Anchorage Police Department? He wondered if the municipality had explored ways of reducing overtime. MR. PEARSON replied he could not answer the question because he was not familiar with the agreement in Anchorage and the problems. He did know that Fairbanks had worked with its state personnel and had been able to solve a lot of the overtime problems; not all of them, but a great portion of them. Under staffing for the state troopers was necessitated by budget cuts. The bill penalized the folks for what had happened through the legislature. Number 0290 REPRESENTATIVE BERKOWITZ asked Mr. Pearson if there was anything that would preclude a municipality from negotiating separately on this issue with a police department? MR. PEARSON replied, "No." A municipality could work on a separate letter of agreement, for example, on the overtime problem. Number 0344 REPRESENTATIVE BERKOWITZ commented there were definitions of overtime in statute, but he had not had a chance to review them. A definition was crucial before it could be amended; it was unfair to push an interpretation down to the courts and bargaining units. Number 0373 CHAIR JAMES stated the intent of overtime in the bill was all of the hours at whatever rate over and above the regularly scheduled work time including time and a half and double time. A definition could be made in terms of the bill, as opposed to changing the definition throughout the statutes - the typical way the statutes were messed up. She was open to discussing such an amendment. Number 0406 REPRESENTATIVE BERKOWITZ said he was interested in providing a conceptual amendment. Number 0436 CHAIR JAMES asked Representative Cowdery what did he expect overtime to mean in HB 188? Number 0443 REPRESENTATIVE COWDERY replied anything over the base pay that was paid at an overtime pay - time and a half and double time. Moreover, in Anchorage, the police and fire departments had their own separate retirement system consisting of four tiers. Now, all new hires were under PERS. The bill talked about future hires only. Number 0546 REPRESENTATIVE COWDERY further stated the present police chief opted out of the local police retirement system and opted for PERS instead. Number 0570 CHAIR JAMES stated, historically, a person maintained his existing benefits despite changes to the system. CHAIR JAMES asked the committee members if they wanted to adopt a conceptual amendment today or hold the bill over to prepare an actual amendment to be discussed later? Number 0621 REPRESENTATIVE ELTON replied he wanted to hold the bill over. The bill created a fourth tier which was a big step. In the last several decades only three tiers had been created; the speed appeared to be picking up. In addition, this was the only committee of referral where substantive issues could be debated. He suggested holding the bill beyond Thursday even. Number 0661 CHAIR JAMES replied she did not intend to hold the bill beyond Thursday. In addition, the House Finance Committee - the next committee of referral - did more substantive changes to bills than any other committee. It behooved the House State Affairs Standing Committee to fix things as good as it could before reaching the House Finance Committee. CHAIR JAMES announced she would hold the bill over until Thursday, April 10, 1997, to look at the overtime definition issue further.
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