Legislature(2001 - 2002)
02/21/2002 08:02 AM House STA
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* first hearing in first committee of referral
+ teleconferenced
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+ teleconferenced
= bill was previously heard/scheduled
HB 254-TAX-QUALIFIED STATE RETIREMENT SYSTEMS Number 2198 CHAIR COGHILL announced the next order of business, SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 254, "An Act relating to the teachers' retirement system, the judicial retirement system, and the public employees' retirement system and to the tax qualification under the Internal Revenue Code of those systems; amending the definition of 'actuarial adjustment' in the teachers' retirement system and the public employees' retirement system; repealing certain provisions of the teachers' retirement system and the public employees' retirement system; and providing for an effective date." Number 2176 BARBARA COTTING, Staff to Representative Jeannette James, Alaska State Legislature, presented SSHB 254 on behalf of Representative James, sponsor. She said Chair Coghill had described [SSHB 254] aptly when he called it complex; however, its purpose is simple. Ms. Cotting emphasized the importance of passing the bill this year. Developed over the past year, the bill would keep the retirement system of the state employees in compliance with the Internal Revenue Service (IRS). She deferred to Guy Bell, who was responsible for writing the sectional analysis, to address technical aspects. Number 2142 GUY BELL, Director, Division of Retirement & Benefits, Department of Administration (DOA), thanked Representative James for sponsoring SSHB 254. He said the legislation would bring the statutes for public employees, teachers, and the judicial retirement system up-to-date with the Internal Revenue Code, which is important for the continued tax qualification plans of the division. He explained: "Basically, it means that we can take employee contributions, pretaxed, and that ... taxation doesn't occur until the benefits are received." He said the legislation would not increase or reduce retirement benefits under any provisions of the aforementioned systems. Simply a compliance bill, [SSHB 254] would bring the statutes into compliance with the Internal Revenue Code. MR. BELL noted that the legislation would allow [retirement system] members to take advantage of recent federal pension- reform legislation that is beneficial to teachers and other public employees. It would allow those members to purchase service credit using pretax dollars. He listed the following service credit options: military time, Outside teaching time, and temporary time. Currently, members may buy that time, but only with post-tax dollars. MR. BELL told the committee this proposed legislation would allow members to buy that time either with pretax payroll deductions or with tax-deferred savings allowed under the Internal Revenue Code, including the following: public employees; deferred compensation 457-plan monies offered by the state and many political subdivisions to employees; or, offered by most school districts to teachers, 403(b) money, a tax- deferred savings. He said, "This will be a direct benefit to those folks who want to purchase time, which effectively adds to their defined benefit at retirement." He added that it reduces the cost of purchasing that service. CHAIR COGHILL asked Mr. Bell to clarify the meaning of "buying time." MR. BELL offered the following explanation: Alaska Statutes allow ... members to buy [a] certain kind of time, which effectively adds to their defined benefit. For instance, a person who has military time can buy up to five years of military time by paying the actuarial cost. ... What that means is ... a person who has ... military service can claim an additional ... five years of service toward ... the retirement benefit. And remember that retirement benefits are calculated using a formula, and part of that formula includes years of service. ... Let's say, ... depending on your multiplier, ... if you were retiring after 30 years that would be an extra 12.5 percent retirement benefit, and that costs something. [The] individual has to pay to receive that. They pay to receive that for the rest of their life through the defined benefit, currently, either by taking an actuarial reduction to their benefit or by paying cash or taking payroll deductions - post-tax. With the change in the federal pension reform, they can now do that, ... subject to [the] legislature incorporating the new provision, by taking pretax payroll deductions or using their 457-plan money or 403(b)-plan money. CHAIR COGHILL indicated he thought that aspect of the issue was important, because the committee would be addressing it "in another venue, in a little different angle." MR. BELL added that this legislation would not cost the employers or change employer contribution rates to the retirement system, because it is the member who would be paying. The difference, he highlighted, would be that the member would be paying with pretax dollars, versus post-tax dollars. Number 1773 REPRESENTATIVE WILSON asked Mr. Bell to confirm that [the proposed legislation] would not add a cost to the employer or state and would not jeopardize the retirement plan for anybody else. MR. BELL said, "That's correct." Number 1745 REPRESENTATIVE STEVENS, having retired from the university in TRS [Teachers' Retirement System], said he was paying a substantial amount of money to "buy in" his military service. He asked Mr. Bell if there would be any retroactive provisions. MR. BELL replied that there are retroactive provisions in the bill; however, once a person is receiving a benefit, he didn't think a retroactive adjustment could be made. CHAIR COGHILL concurred that retroactive provisions were provided in the bill for those "buying in" to get the pretax benefit for previous time [worked]. He said he believed this issue to be important. MR. BELL said he would follow up on the topic to be certain of the answer. MR. BELL told the committee the Alaska Government Finance Officers Association - a group of finance officers from the political subdivisions around the state - has endorsed [SSHB 254]. He noted that the retirement systems are not only for state employees, but also for teachers and employees of most of the political subdivisions in the state. Number 1646 CHAIR COGHILL stated, "Certainly, there are practices that have pushed the limits of our ability of the law to respond to [the] IRS." He asked if there had ever been any penalty to the State of Alaska for "doing a practice that wasn't necessarily lined out in statute." Number 1632 MR. BELL answered no. He said letter rulings had been submitted to the IRS, asking for its approval of the plan [for legislation], and [the IRS] was in the final stages of that process. He explained that one reason for the repeated drafting of the bill is that there has been some "give and take" between the tax consultants and the IRS regarding specific language in the bill. He said there have been no penalties; furthermore, he stated his belief that the IRS may appreciate the continued efforts of [the division] to bring the statutes up-to-date. He clarified that the division has not been out of compliance in terms of its practice; rather, the law doesn't match the current requirements of the IRS. He concluded that [the IRS] is "happily accepting our request for that letter ruling, and that letter ruling effectively incorporates this legislation." Number 1555 CHAIR COGHILL confessed that the language of the bill was, at times, difficult to comprehend. His study of the proposed legislation did raise a question regarding flexibility and new IRS rulings. He said there would be changes in various benefits programs in the future, and he asked Mr. Bell if there is flexibility in [the language of SSHB 254] to allow for that. MR. BELL responded, "There is some flexibility, because it doesn't make indication to ... the broad provisions of the Internal Revenue Code." He clarified that those provisions may change, but "we" would still be in compliance, because the changes are made by reference. He noted that the IRS requires a plan document and that [the division's] plan document is [Alaska Statute], which specifies benefits, requirements, and provisions. MR. BELL said he thinks some states give broader leeway to the "retirement entity" to develop those rules or plan documents by regulation, or by some other means, through a board process. Because the division's plan document is the state statutes, however, it is subject to legislative oversight and review. Although he surmised the division could, alternatively, add a one-line provision in statute to change that, he noted that it was not doing so with this legislation. CHAIR COGHILL asked if the actuarial adjustments were designed by the IRS or [the division]. MR. BELL answered that [the division] designed the actuarial adjustments. Provisions of Alaska law determine the cost of purchasing certain types of service. Although laws relating to purchasing military service have changed over time through the legislative process, for example, that isn't what is being changed [in this legislation]. Mr. Bell clarified that how it is purchased is the issue, not how it is calculated. CHAIR COGHILL stated his intention a little later on to discuss the actuarial "makeup" [as it pertains to the retirement system]; however, he clarified that the present discussion was regarding the "pre-post-tax trigger." Number 1350 REPRESENTATIVE FATE moved to report SSHB 254 out of committee with individual recommendations and the accompanying zero fiscal note. There being no objection, SSHB 254 was moved out of the House State Affairs Standing Committee.
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