Legislature(2005 - 2006)CAPITOL 106

02/02/2006 08:00 AM STATE AFFAIRS


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08:06:34 AM Start
08:07:39 AM Overview(s): Department of Environmental Conservation, Division of Water, Village Safewater Program
09:38:53 AM HB238
10:01:59 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Overview of Department of Environmental TELECONFERENCED
Conservation, Division of Water, Village
Safewater Program
+= HB 238 PUBLIC EMPLOYEE/TEACHER RETIREMENT TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
HB 238-PUBLIC EMPLOYEE/TEACHER RETIREMENT                                                                                     
                                                                                                                                
CHAIR SEATON announced that the  last 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."                                                                                               
                                                                                                                                
9:38:53 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GATTO moved  to  adopt  the committee  substitute                                                               
(CS) for HB  238, Version 24-LS0761\R, Wayne, 1/31/06,  as a work                                                               
draft.   There  being  no  objection, Version  R  was before  the                                                               
committee.                                                                                                                      
                                                                                                                                
9:40:15 AM                                                                                                                    
                                                                                                                                
CHAIR SEATON stated  that the purpose of bringing back  HB 238 is                                                               
to address  helping employer costs.   He directed attention  to a                                                               
PowerPoint  presentation,  the  hardcopy  for  which  is  in  the                                                               
committee packet and  is [10 pages front and back].   On page one                                                               
of  the PowerPoint,  it shows  definitions of  relevant terms  as                                                               
follows [original punctuation provided]:                                                                                        
                                                                                                                                
     Blended  employer past  service cost  rate:   refers to                                                                
     the  average past  service cost  rate of  all non-State                                                                    
     non-school district PERS employee                                                                                          
                                                                                                                                
     Past  service cost:    refers to  the  annual lump  sum                                                                
     payment   made  towards   the   PERS  system   unfunded                                                                    
     liability.                                                                                                                 
                                                                                                                                
     Past Service Cost Rate:   means the annual payment as a                                                                
     percentage  of  total  wage  base  of  employee  salary                                                                    
     required to pay  the past service cost  as an amortized                                                                    
     contribution in percentage over  a stipulated number of                                                                    
     years.                                                                                                                     
                                                                                                                                
     Unfunded Liability:   refers to amount  that would need                                                                
     to be  paid into the  PERS system  to cover all  of its                                                                    
     liabilities.                                                                                                               
                                                                                                                                
CHAIR SEATON, regarding the blended  rate, said, "If you paid the                                                               
full normal costs  and all of your assumptions  were correct, you                                                               
would fully collect  and you would pay for all  the benefits that                                                               
would have accrued to that employee."                                                                                           
                                                                                                                                
9:42:27 AM                                                                                                                    
                                                                                                                                
CHAIR SEATON  directed attention to  the first "slide" on  page 2                                                               
of the  PowerPoint presentation, which read  as follows [original                                                               
punctuation provided]:                                                                                                          
                                                                                                                                
     What is the Past Service Offset Account? (PSCOA)                                                                         
                                                                                                                              
     The  PSCOA is  a mechanism  to help  municipalities pay                                                                    
     their unfunded  liability over 25 years.   The payments                                                                    
        are based on a municipality's number or Tier IV                                                                         
     employees and contributions are limited to the average                                                                     
     experience of the system                                                                                                   
                                                                                                                                
CHAIR  SEATON reminded  the committee  that the  rate has  always                                                               
been calculated  based on the  entire wage base of  the employer;                                                               
therefore, if an employer has  25 employees, it doesn't matter if                                                               
they are  Tier I,  II, III, or  IV.  He  directed attention  to a                                                               
hypothetical situation of how the  PSCOA is calculated, beginning                                                               
on page 3 of  the PowerPoint.  Using "City X"  as an example, the                                                               
page shows that if City X has  25 employees, 20 of whom are Tiers                                                               
I, II, and  III defined benefit (DB) employees and  5 of whom are                                                               
Tier IV defined  contribution (DC) employees, the  PSCOA will pay                                                               
the past service  cost (PSC) for those new Tier  IV employees who                                                               
technically  do not  have  a past  service  cost associated  with                                                               
them.                                                                                                                           
                                                                                                                                
CHAIR SEATON moved  on to [page 4 of the  PowerPoint] which shows                                                               
the following in the top slide [original punctuation provided]:                                                                 
                                                                                                                                
     Assumptions about City X                                                                                                 
               2005                                                                                                           
                                                                                                                              
     Past Service Cost Rate of City X:  30%                                                                                     
                                                                                                                                
     Average Past Service Cost Rate:  20%                                                                                       
                                                                                                                                
     Average Salary for City X:  $40,000                                                                                        
                                                                                                                                
     City's X's Wage Base:  $1 million                                                                                          
                                                                                                                                
     The PSCOA will pay on behalf of the 5 DC employees:                                                                        
     (average salary * average employer PSC rate) * number                                                                      
     of DC employees = PSCOA assistance                                                                                         
                                                                                                                                
     ($40,000 * .2) * 5 = $40,000                                                                                             
                                                                                                                                
9:46:02 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER  stated her  understanding of  the benefit                                                               
of having a  DC program is that it is  freestanding, meaning each                                                               
employee's costs  and benefits are  independent of  anything that                                                               
went before.                                                                                                                    
                                                                                                                                
CHAIR SEATON said Representative Gardner is exactly correct.                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER  asked, "So, why  is there a  past service                                                               
cost for the new tier employees?"                                                                                               
                                                                                                                                
9:46:19 AM                                                                                                                    
                                                                                                                                
CHAIR SEATON explained  that there actually is  not; however, the                                                               
employer has to make a certain  amount of payment into the system                                                               
to pay  the debt.   Even though the new  employee did not  have a                                                               
past service cost, the employer still  owes the debt, and the way                                                               
it's most easily calculated is  by looking at the employer's wage                                                               
base.                                                                                                                           
                                                                                                                                
9:47:22 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER responded that in  some respect this is an                                                               
artificial construct; it's a bookkeeping decision.                                                                              
                                                                                                                                
9:47:35 AM                                                                                                                    
                                                                                                                                
CHAIR SEATON confirmed that is correct.                                                                                         
                                                                                                                                
9:47:38 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER  asked, "If I  am a small  public employer                                                               
and  ...  I need  to  hire  somebody, am  I  better  off to  hire                                                               
somebody under  the new tier or  to hire somebody who  already is                                                               
in a tier and comes to me from some other state agency?"                                                                        
                                                                                                                                
9:48:00 AM                                                                                                                    
                                                                                                                                
CHAIR SEATON reiterated that the debt  is a fixed amount that the                                                               
employer  would  have to  pay.    In response  to  Representative                                                               
Gardner's  restatement of  her question,  he  confirmed that  the                                                               
employer  would be  better off  hiring someone  new, rather  than                                                               
someone who is in the old DB system.   He said he is waiting on a                                                               
legal opinion  to find out  whether an employer can  legally make                                                               
that determination.                                                                                                             
                                                                                                                                
9:49:23 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER asked, "If we  were to assume that this is                                                               
a great plan  and it would be very effective,  why would we limit                                                               
it to nonstate and nonschool  district employers; why not include                                                               
everybody?"                                                                                                                     
                                                                                                                                
9:49:40 AM                                                                                                                    
                                                                                                                                
CHAIR  SEATON  said  the  school   district  and  state  agencies                                                               
basically have  no funding other  than from the legislature.   He                                                               
said,  "This is  a  mechanism to  try to  get  to those  nonstate                                                               
funded."                                                                                                                        
                                                                                                                                
REPRESENTATIVE GARDNER  said, "So,  we're setting up  a mechanism                                                               
for indirectly  funding those obligations  that are  not directly                                                               
ours, but we're  accepting them as ours and setting  up a funding                                                               
mechanism.  But we still could  do the same for all the different                                                               
pots.   We're just saying,  'This gets paid  out of this  pot and                                                               
this gets paid out of this pot.'"                                                                                               
                                                                                                                                
CHAIR  SEATON responded,  "We could,  and we  might want  to have                                                               
different funding mechanisms for the  others, because it gives us                                                               
more flexibility, because  we're paying those bills  anyway."  In                                                               
response to  a comment made  by Representative Gardner,  he said,                                                               
"Under this  mechanism we  would help pay,  and we're  creating a                                                               
mechanism to help the municipalities."                                                                                          
                                                                                                                                
9:51:21 AM                                                                                                                    
                                                                                                                                
CHAIR  SEATON continued  with the  PowerPoint, bringing  focus to                                                               
the  second slide  on page  4,  which read  as follows  [original                                                               
punctuation provided]:                                                                                                          
                                                                                                                                
      The PSCOA payment reduces City X's PSC contribution                                                                     
     from $300,000 to $260,000 , or their PSC rate from 30%                                                                   
     to 26%                                                                                                                   
                                                                                                                                
CHAIR  SEATON reviewed  that another  bill  dealing with  pension                                                               
obligation  bonds (POBs),  offered a  scenario in  which the  POB                                                               
could  lower  the  [past  service  cost] by  2.6  percent.    The                                                               
scenario  shown on  page 4  of  the PowerPoint,  he noted,  would                                                               
lower the past service cost by 4 percent.                                                                                       
                                                                                                                                
CHAIR  SEATON directed  attention to  page 5  of the  PowerPoint,                                                               
which shows  City X at  "20 years out," to  show how much  of the                                                               
employers' past service  cost the PSCOA would pay  in the future.                                                               
[The first  slide on page 6  shows that City X  has 30 employees,                                                               
three of which are DB and 27 of  which are DC.]  The second slide                                                               
on page 6 read as follows [original punctuation provided]:                                                                      
                                                                                                                                
     Assumptions about City X                                                                                                 
               2025                                                                                                           
                                                                                                                              
     Past Service Cost Rate of City X:  30%                                                                                     
                                                                                                                                
     Average Past Service Cost Rate:  20%                                                                                       
                                                                                                                                
     Average Salary for City X:  $40,000                                                                                        
                                                                                                                                
     City's X's Wage Base:  $1.2 million                                                                                        
                                                                                                                                
     The PSCOA will pay on behalf of the 27 DC employees:                                                                       
     (average salary * blended employer PSC rate) * number                                                                      
     of DC employees = PSCOA assistance                                                                                         
                                                                                                                                
     ($40,000 * .2) * 27 = $216,000                                                                                           
                                                                                                                                
CHAIR SEATON  noted that [the first  slide on page 7]  shows that                                                               
the   PSCOA  payment   reduces   City  X's   past  service   cost                                                               
contribution  from [$360,000  to $144,000],  or the  past service                                                               
cost rate from  30 percent to 12 percent.   Chair Seaton referred                                                               
to [the second slide on page  7], which read as follows [original                                                               
punctuation provided]:                                                                                                          
                                                                                                                                
      Why not a greater reduction in PSC payments for City                                                                    
     X?                                                                                                                       
                                                                                                                              
     City X is only receiving aid for the average PSC rate                                                                      
     (20%) when there [sic] actual rate is 30%                                                                                  
                                                                                                                                
     If city  X had the  same PSC  rate as the  system (20%)                                                                    
     the  PSCOA would  pay 18%  of  the city's  PSC for  the                                                                    
     twentieth  year,   the  city   left  to  make   up  the                                                                    
     difference of $24,000                                                                                                      
                                                                                                                                
CHAIR  SEATON explained  that is  the example  of City  X, "we're                                                               
only  funding to  the  average  past service  cost  rate for  all                                                               
employees."   He said  cities make  choices.   He said  there are                                                               
cities that  sell off  a section  of a  business and  retain that                                                               
money  within the  city's account.   Chair  Seaton said  the most                                                               
glaring example  is Fairbanks, which  sold off a utility  and put                                                               
$100  million in  an  account,  but kept  the  past service  cost                                                               
liability.   He said, "So, what  we're saying is we're  not going                                                               
to  go in  and  absorb,  from the  state  level, those  voluntary                                                               
changes that you make.  So, we'll only come up to the average."                                                                 
                                                                                                                                
9:57:05 AM                                                                                                                    
                                                                                                                                
CHAIR  SEATON noted  that the  [first slide  on page  8] shows  a                                                               
graph  correlating with  the employer's  30 percent  past service                                                               
cost  rate, with  the average  being  20 percent,  a scenario  in                                                               
which  the  employer  would  pay  about  12  percent  with  PSCOA                                                               
assistance.   The same slide  shows the employer having  the same                                                               
past  service cost  rate as  the  system average  of 20  percent.                                                               
With the PSCOA, that scenario  would mean that the employer would                                                               
pay only 2 percent.                                                                                                             
                                                                                                                                
CHAIR SEATON  cited [the second slide  on page 8], which  read as                                                               
follows [original punctuation provided]:                                                                                        
                                                                                                                                
     PSCOA  payments will  increase over  time until  by the                                                                  
     end  of the  amortization  period the  PSCOA is  paying                                                                  
     almost all  of the past  service cost payment  for that                                                                  
     year                                                                                                                     
                                                                                                                                
CHAIR  SEATON drew  attention to  [the  first slide  on page  9],                                                               
which he noted  contains a graph showing  the PSCOA contributions                                                               
as percent  of total  past service  cost.   The graph,  he noted,                                                               
begins in 2005 at about 8  percent and goes to almost 100 percent                                                               
[by 2027].  The next slide on page 9 read as follows:                                                                           
                                                                                                                                
     System Impact of PSCOA                                                                                                   
                                                                                                                              
        Unfunded liability of PERS non-State non-school                                                                         
     district:  679 million                                                                                                   
                                                                                                                                
     What the PSCOA will pay over 25 years:  299 million                                                                      
                                                                                                                                
CHAIR SEATON suggested  a better way to look at  this is that "we                                                               
would pay 44  percent of the amount due for  employers" [which is                                                               
shown on  the final slide  on page 10].   He said, "To  make this                                                               
function, it would be a little  less than $300 million in present                                                               
dollars  that would  have to  go into  the present  dollar offset                                                               
account to create this funding mechanism."                                                                                      
                                                                                                                                
9:59:03 AM                                                                                                                    
                                                                                                                                
CHAIR SEATON  directed attention to the  sponsor statement, which                                                               
he  indicated  will   clarify  some  of  the   information.    He                                                               
referenced  a  two-page  graph  entitled,  "Payment  to  Unfunded                                                               
Liability per  Tier - Actual  Dollar Value."   He said  the graph                                                               
offers a look  at a five-year breakdown of  communities for Tiers                                                               
I, II, III, and IV, and totals.                                                                                                 
                                                                                                                                
CHAIR  SEATON asked  the  committee to  remember  that this  plan                                                               
would set up  a long-term mechanism; it's not an  instant shot to                                                               
reduce the employers' contribution amounts today.  He said:                                                                     
                                                                                                                                
     We've heard  a lot of  complaints, but in  reality, the                                                                    
     contribution rates  for municipalities haven't  gone up                                                                    
     at all, because  we made a 5  percent contribution last                                                                    
     year.   There's 5  percent, plus  the other  5 percent.                                                                    
     ...  At  least  in  the governor's  budget,  there's  a                                                                    
     proposal  to pay  the 10  percent for  this year.   ...                                                                    
     What's going to happen over  time though, is if we take                                                                    
     a  long-term look,  we want  to make  sure that  on the                                                                    
     further end  of things  that cities  aren't constrained                                                                    
     so that  they can't offer  their services that  we want                                                                    
     all communities to offer.                                                                                                  
                                                                                                                                
10:01:08 AM                                                                                                                   
                                                                                                                                
CHAIR  SEATON,  in response  to  a  question from  Representative                                                               
Gardner, reminded everyone that the  bill that dealt with pension                                                               
obligation  bonds  had passed  out  of  the House  State  Affairs                                                               
Standing  Committee  and  is  currently   in  the  House  Finance                                                               
Committee.   He  explained he  had offered  that example  to show                                                               
another plan with quite a different effect.                                                                                     
                                                                                                                                
CHAIR SEATON announced that HB 238 was heard and held.                                                                          

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