Legislature(2005 - 2006)CAPITOL 106

04/12/2005 08:00 AM STATE AFFAIRS

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08:04:47 AM Start
08:05:56 AM Human Rights Commission
08:28:44 AM HB215
08:44:31 AM HB238
09:43:52 AM SB87
10:09:17 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Confirmation hearing:State Commission TELECONFERENCED
for Human Rights
Heard & Held
Moved Out of Committee
Moved HCS SB 87(STA) Out of Committee
Scheduled But Not Heard
Scheduled But Not Heard
Bills Previously Heard/Scheduled
HB 238-PUBLIC EMPLOYEE/TEACHER RETIREMENT                                                                                   
8:44:31 AM                                                                                                                    
CHAIR SEATON announced that the  next order of business was HOUSE                                                               
BILL  NO.  238,  "An  Act  relating  to  contribution  rates  for                                                               
employers  and  members  in  the defined  benefit  plans  of  the                                                               
teachers' retirement system and  the public employees' retirement                                                               
system and  to the ad-hoc  post-retirement pension  adjustment in                                                               
the  teachers'  retirement   system;  requiring  insurance  plans                                                               
provided  to  members of  the  teachers'  retirement system,  the                                                               
judicial  retirement  system,  the public  employees'  retirement                                                               
system,  and  the  former  elected  public  officials  retirement                                                               
system to provide a list  of preferred drugs; relating to defined                                                               
contribution  plans  for  members  of  the  teachers'  retirement                                                               
system  and   the  public   employees'  retirement   system;  and                                                               
providing for an effective date."                                                                                               
[Before the  committee as a  work draft was  committee substitute                                                               
(CS) for HB 238, Version 24-LS0761\L, Craver, 4/8/05.]                                                                          
8:44:42 AM                                                                                                                    
CHAIR SEATON directed attention to  a series of 15 tables showing                                                               
the "Projected  Values for Health Reimbursement  Accounts," which                                                               
were added to  the committee packet to replace  an inaccurate set                                                               
of tables previously in the packet.                                                                                             
8:46:18 AM                                                                                                                    
KATHERINE  SHOWS, Staff  to  Representative  Paul Seaton,  Alaska                                                               
State Legislature,  on behalf of Representative  Seaton, sponsor,                                                               
reminded  the   committee  that   the  retirement  for   all  the                                                               
categories about to be discussed is set at 30 years in HB 238.                                                                  
8:46:38 AM                                                                                                                    
MR. BRAD  LAWSON, Mercer Human Resource  Consulting, referring to                                                               
the 15 tables, reviewed the  contents page, which lists the types                                                               
of accounts, and read as follows:                                                                                               
     1.   PERS "other" early hire - 1% HRA                                                                                      
     2.   PERS "other" early hire - 2% HRA                                                                                      
     3.   PERS "other" late hire - 1% HRA                                                                                       
     4.  PERS "other" late hire - 2% HRA                                                                                        
     5.   PERS "other" with spouse late hire - 2% HRA                                                                           
     6.   PERS police/fire early hire - 1% HRA                                                                                  
     7.   PERS police/fire early hire - 2% HRA                                                                                  
     8.   PERS police/fire late hire - 1% HRA                                                                                   
     9.   PERS police/fire late hire - 2% HRA                                                                                   
     10. PERS police/fire with spouse late hire - 2% HRA                                                                        
     11. TRS early hire - 1% HRA                                                                                                
     12. TRS early hire - 2% HRA                                                                                                
     13. TRS late hire - 1% HRA                                                                                                 
     14. TRS late hire - 2% HRA                                                                                                 
     15. TRS late hire with spouse - 2% HRA                                                                                     
8:47:34 AM                                                                                                                    
CHAIR  SEATON noted  that  the upper-left  corner  of each  chart                                                               
shows the assumptions.                                                                                                          
8:48:44 AM                                                                                                                    
MR. LAWSON selected the first chart to review the assumptions.                                                                  
8:52:00 AM                                                                                                                    
REPRESENTATIVE GARDNER  asked why the subsidy  base is calculated                                                               
from 2003, when the hire date is 2005.                                                                                          
8:52:20 AM                                                                                                                    
MR. LAWSON explained as follows:                                                                                                
     We  have the  premium rate,  from which  we subtract  a                                                                    
     subsidy  base that's  established  by the  legislature,                                                                    
     and  we arrive  then at  a retiree  contribution.   ...                                                                    
     The subsidy  base that we  established at  7/1/2003 was                                                                    
     equivalent to  the claims cost.   Each retiree  then is                                                                    
     entitled  to a  portion  of that  subsidy base  towards                                                                    
     their  health care  cost.   ...   So, the  subsidy base                                                                    
     multiplied by  the percentage determines the  amount of                                                                    
     dollars  that will  go  towards  that retiree's  health                                                                    
     care cost, ...  with the retiree making  up the balance                                                                    
     of the premium.                                                                                                            
8:54:54 AM                                                                                                                    
MR. LAWSON,  in response to  Chair Seaton, said the  subsidy base                                                               
represents  the  known  or fixed  responsibility  of  the  system                                                               
toward the health care coverage.                                                                                                
8:55:04 AM                                                                                                                    
CHAIR SEATON  said this  is the point,  during discussion  of the                                                               
bill  on a  previous  day, when  the committee  had  to remove  a                                                               
section regarding  a 5 percent  limit on premiums, because  it is                                                               
not  feasible to  set  that limit  with  fluctuating health  care                                                               
costs  and service.    He indicated  the result  is  that "the  5                                                               
percent is limiting  the amount of escalation that  the system is                                                               
paying over time."                                                                                                              
8:55:39 AM                                                                                                                    
MR.  LAWSON answered  that's correct.   He  added, "And  with the                                                               
retiree making up that remaining portion."                                                                                      
8:55:50 AM                                                                                                                    
MR. LAWSON  continued with the  first chart, reading  the columns                                                               
from left to right.                                                                                                             
8:59:53 AM                                                                                                                    
REPRESENTATIVE GRUENBERG asked  if there is a  column that totals                                                               
the amount of contributions over the 30 years.                                                                                  
9:00:10 AM                                                                                                                    
MR.  LAWSON  noted  that  that  amount is  shown  in  the  column                                                               
entitled,  "End  of  Year  HRA  Balance."    He  offered  further                                                               
9:01:21 AM                                                                                                                    
REPRESENTATIVE  GRUENBERG said  he  wants to  know  if there  are                                                               
totals listed before interest.                                                                                                  
9:01:51 AM                                                                                                                    
MR.  LAWSON  indicated  that  the  committee  doesn't  have  that                                                               
listed, but, based on a spreadsheet  he had open in front of him,                                                               
he said, "That  is just a hair over $20,000."   He continued with                                                               
his  review.   He  noted that  the  pre-Medicare composite  trend                                                               
factor represents an average of medical and prescription drugs.                                                                 
9:03:17 AM                                                                                                                    
MR. LAWSON, in response to  Representative Seaton, confirmed that                                                               
the pre-Medicare  composite trend uses  rounding of numbers.   He                                                               
added,  "And   some  of  that   also  is  an  interplay   of  the                                                               
prescription  drug assumptions,  which is  a higher  ... starting                                                               
trend  amount,   and  the  medical   inflation,  which   we  have                                                               
decreasing at a slower rate, but starting at a lower point."                                                                    
9:04:36 AM                                                                                                                    
REPRESENTATIVE GARDNER asked,  "So, this number of  $7,319 ... is                                                               
the subsidy base  of $5,962, increased by roughly  12 percent per                                                               
year for the two years here?"                                                                                                   
9:04:45 AM                                                                                                                    
MR. LAWSON answered  that's correct, but he said  that 11 percent                                                               
would perhaps be more accurate.                                                                                                 
9:06:04 AM                                                                                                                    
MR. LAWSON  noted that the  subsidy base increases year  to year,                                                               
but at  a slower pace than  the composite premium.   He explained                                                               
that is because  it is being limited to 5  percent, versus the 9-                                                               
11 percent seen  in the premium growth.  He  pointed out that the                                                               
subsidy,  beginning at  age  55  through age  59,  is  zero.   He                                                               
explained, "That  is a result  of the provision that  the subsidy                                                               
will not  begin until five  years prior to  Medicare eligibility.                                                               
During that five years ...,  the retiree will then be responsible                                                               
for the entire  premium amount, receiving zero subsidy."   At age                                                               
60, the  retiree is eligible for  a subsidy.  He  offered further                                                               
MR. LAWSON  highlighted where  the table  shows that  the retiree                                                               
would be  required to  make a  contribution at  age 55,  the year                                                               
after  retirement.   The  retiree would  be  responsible for  the                                                               
entire premium  and remain so  for five years, until  the system-                                                               
sponsored   subsidy  begins,   at  which   point  the   retiree's                                                               
contribution would drop.  He  explained that that's the result of                                                               
subtracting  the  retiree  subsidy  from  the  composite  premium                                                               
9:11:00 AM                                                                                                                    
MR.  LAWSON, regarding  the beginning  year health  reimbursement                                                               
account balance  and the health care  reimbursement "spend down,"                                                               
said the  "HRA spend"  amount in the  first year  [of retirement]                                                               
would equate to  the entire premium amount for  which the retiree                                                               
is responsible.   He stated  that after pulling that  amount out,                                                               
one would expect a difference in  the HRA balance; however, it is                                                               
important  to  remember  that  the  money  left  will  grow  with                                                               
interest over the  remainder of the year.  The  amount in the HRA                                                               
spend  column  reflects  that  interest.     He  offered  further                                                               
9:13:14 AM                                                                                                                    
CHAIR SEATON observed:                                                                                                          
     In  ... the  last  column  and the  third  to the  last                                                                    
     column we  have ... [$42,751], and  that actually shows                                                                    
     a  retiree  contribution  of   that  amount,  but  it's                                                                    
     actually being  spent from  the HRA.   Now that  was an                                                                    
     employer  contribution  into the  employer-funded  HRA,                                                                    
     but it is still money  that's available for health care                                                                    
     to the retiree.  So, this is assuming that money will                                                                      
     make that payment.  Is that correct?                                                                                       
9:13:50 AM                                                                                                                    
MR. LAWSON  answered in the  affirmative.  He stated,  "I believe                                                               
that the way  the bill was written, the payment  will come out of                                                               
the HRA until it's exhausted,  but the retiree can also designate                                                               
... that balance to pay for  other expenses, as well, such as [a]                                                               
deductible or if  they have some other  permissible expenses that                                                               
they wanted to get reimbursed for."                                                                                             
9:14:14 AM                                                                                                                    
CHAIR SEATON observed  that the employee at year 32  on the table                                                               
will  have to  come up  with  approximately $13,500  in order  to                                                               
supplement the HRA.                                                                                                             
9:15:02 AM                                                                                                                    
MR. LAWSON  responded that's  correct, "as  the remainder  of the                                                               
premium contribution."                                                                                                          
9:15:16 AM                                                                                                                    
CHAIR  SEATON made  some other  observations based  on the  first                                                               
table.  He indicated that the  good thing about the table is that                                                               
it shows that there  is a huge problem.  He  said the numbers are                                                               
"incredible to  most of  us."   He offered  further details.   He                                                               
noted that the medical base is  one-sixth of total salary, but by                                                               
the year before  retirement, 40 percent of salary is  eaten up in                                                               
medical costs.   With an advance apology to Mr.  Lawson, he said,                                                               
"Actuarials  are  kind of  fortune  tellers  or soothsayers,  and                                                               
they're projecting out  these numbers, and they  just become kind                                                               
of incredible  to me."   He said  the committee is  attempting to                                                               
create a system that "works within  the numbers" and won't put an                                                               
employee at  risk of losing  all his/her medical [coverage].   He                                                               
stated, "We're assuming  in the model that health  care is really                                                               
only growing at 5 percent."   However, if it grows at 10 percent,                                                               
an employee  would be paying  more in medical than  his/her total                                                               
9:18:49 AM                                                                                                                    
MR. LAWSON  responded that  he thinks it's  important to  keep in                                                               
mind  that  "these are  retired  medical  valuation trends"  and,                                                               
according  to  actuarial  guidelines and  standards,  those  high                                                               
medical trends  do need to  decrease on a  long-range projection.                                                               
He pointed out that using 5  percent rather than the standard 3.5                                                               
percent assumption  used for inflation  purposes adds  an element                                                               
of conservatism.                                                                                                                
CHAIR SEATON said  he did not intend his previous  comments to be                                                               
a challenge; he  wants the committee to be aware  that staying at                                                               
6 percent, rather than 5 percent,  for example, would result in a                                                               
much  greater  discrepancy  between  the  subsidy  base  and  the                                                               
composite medical amount.                                                                                                       
9:20:57 AM                                                                                                                    
CHAIR  SEATON  said,  "You  can  see why  my  staff  and  I,  and                                                               
everybody  that's been  trying  to deal  with  these numbers,  is                                                               
going kind  of nuts trying to  figure out what there  is that can                                                               
work."   He warned that  the legislature  must be careful  not to                                                               
create a  system that says a  person has access to  medical care,                                                               
but he/she doesn't  have money for that access and  is out of the                                                               
plan and  then ineligible when  he/she turns 65  because coverage                                                               
lapsed.   He  also warned  against a  system where  people cannot                                                               
retire before age 65 without  losing medical coverage.  He stated                                                               
that medical  coverage is the  most important component  and that                                                               
is the challenge of the committee in working on HB 238.                                                                         
CHAIR SEATON  directed attention  to the  next page,  which shows                                                               
the PERS "other" early hire at 2  percent.  He said it shows that                                                               
"the HRA actually pays for three  years and there's only [a] one-                                                               
year gap in the coverage."  He offered further details.                                                                         
9:25:42 AM                                                                                                                    
MR. LAWSON  said it's important  to note that, under  the current                                                               
system, the entire  gross retiree premium cost would  be paid for                                                               
by  the system  so that  the  retiree is  incurring virtually  no                                                               
premium  sharing  or  contribution  expenses  under  the  current                                                               
program.  He continued:                                                                                                         
     In  this 2  percent  scenario, we  see  that the  total                                                                    
     state subsidy of $200,000 still  remains constant.  And                                                                    
     that represents just  a little bit under  40 percent of                                                                    
     those  entire costs.    By  the time  you  add the  HRA                                                                    
     reimbursement in,  the system  has contributed  or been                                                                    
     responsible  for over  67 percent  of  the ...  retiree                                                                    
     health costs,  at this  point.  And  so, looking  at it                                                                    
     from a perspective of cost  share ... that's actually a                                                                    
     fairly  large percentage  or a  substantial subsidy  or                                                                    
     contribution   towards   their   health   care   costs,                                                                    
     particularly in relationship to  looking at the current                                                                    
     marketplace  and what  other  employers and  government                                                                    
     agencies are doing.                                                                                                        
9:27:01 AM                                                                                                                    
REPRESENTATIVE  GATTO  mentioned  that his  21-year-old  daughter                                                               
signed off his  plan and is [covered by  the Consolidated Omnibus                                                               
Budget Reconciliation  Act of  1985 (COBRA)],  at about  $900 per                                                               
9:27:38 AM                                                                                                                    
MR. LAWSON, in  response to a question  from Representative Gatto                                                               
regarding  the price  of  insurance for  someone  if he/she  were                                                               
self-paying, said there is a starting  base of $7,318 for a group                                                               
rate.   He  surmised that  on  an individual  basis, that  amount                                                               
would probably be  closer to $10,000-$11,000.  He  said there are                                                               
two  issues:   One,  a  self-paid plan  would  certainly be  more                                                               
expensive; and  two, it would  be hard to find  such a plan.   He                                                               
said, "That is  why access, without evidence  of insurability is,                                                               
in itself, a benefit."                                                                                                          
CHAIR  SEATON observed  that the  individual, even  continuing on                                                               
COBRA, is "apparently costing more."                                                                                            
MR. LAWSON  said to keep  in mind "that  we may not  be comparing                                                               
apples and apples in those two numbers."                                                                                        
9:32:49 AM                                                                                                                    
MR. LAWSON compared aspects of  table 4, which shows PERS "other"                                                               
late hire, to table 5, which  shows PERS "other" with spouse at 2                                                               
percent HRA.   He said,  "All else remaining constant,  the total                                                               
premium amount is  actually going to double  for this individual"                                                               
[with covered spouse].   He said, "So,  while their contributions                                                               
will  double,  their HRA  balance  ...  remains constant.    This                                                               
results in ... a substantial increase to the net retiree."                                                                      
9:34:20 AM                                                                                                                    
CHAIR SEATON said  there is a lot for the  committee to consider.                                                               
He  reviewed  some  previously   stated  considerations  for  the                                                               
committee to make.                                                                                                              
9:36:41 AM                                                                                                                    
MELANIE MILLHORN, Director, Health  Benefits Section, Division of                                                               
Retirement & Benefits, Department  of Administration, stated that                                                               
she  thinks Chair  Seaton,  through the  tables  and through  his                                                               
testimony,  has  accurately depicted  that  medical  costs are  a                                                               
large issue  and the balance  needed by employers to  provide the                                                               
coverage  and the  employees' need  to have  the coverage  is the                                                               
issue before the committee.                                                                                                     
9:37:08 AM                                                                                                                    
MS.  SHOWS,  in  response  to   a  question  from  Chair  Seaton,                                                               
suggested  that the  committee may  want to  consider the  salary                                                               
levels as slightly inflated.                                                                                                    
9:37:50 AM                                                                                                                    
CHAIR  SEATON  clarified  that  the  average  salary  equals  the                                                               
average salary in  the system, not the  average beginning salary.                                                               
He also asked  that the committee remember that the  1 percent or                                                               
2 percent  is a  percentage of  the system  class salary,  not of                                                               
individual  salaries.   He  explained,  "Because  you can't  have                                                               
discrimination  between people  that  are getting  paid more  and                                                               
less under a federal health care reimbursement account."                                                                        
9:39:01 AM                                                                                                                    
MS. MILLHORN  said over 25  states have set their  retirement age                                                               
at  65.   She  said  the  reason  is  that that's  when  benefits                                                               
commence and  that's also the  age at which those  retirees would                                                               
be entitled to medical benefits.                                                                                                
[HB 238 was heard and held.]                                                                                                    

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