Legislature(2007 - 2008)SENATE FINANCE 532
04/28/2007 01:30 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB104 | |
| SB125 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| = | SB 125 | ||
| += | SB 104 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE BILL NO. 125
"An Act relating to the accounting and payment of
contributions under the defined benefit plan of the Public
Employees' Retirement System of Alaska, to calculations of
contributions under that defined benefit plan, and to
participation in, and termination of and amendments to
participation in, that defined benefit plan; making
conforming amendments; and providing for an effective
date."
This was the fourth hearing for this bill in the Senate Finance
Committee.
Co-Chair Hoffman moved to adopt committee substitute Version 25-
GS1074\K as the working document.
There being no objection, the Version "K" committee substitute
was ADOPTED.
4:43:47 PM
Co-Chair Stedman announced that several spreadsheets and a new
Department of Administration fiscal note dated April 20th, 2007
pertinent to Version "K" [copies on file] would be addressed
during today's discussion. A side-by-side comparison of Version
"K" to the original version of the bill was being developed.
MILES BAKER, Staff to Co-Chair Stedman, communicated that his
remarks would highlight areas of change in this committee
substitute relative to the original version of the bill. As
noted, a side-by-side comparison was currently unavailable but
would be provided once completed.
Mr. Baker identified the first change as being the elimination
of a section in the bill pertaining "to the duties and
responsibilities" of the Alaska Retirement Management Board
(ARMB). The reference to ARMB in the bill's title was also
removed. The provisions pertinent to ARMB had not been included
in the original version of the bill, but were incorporated by a
previous committee substitute adopted by the Committee.
Mr. Baker informed the Committee that "some slight drafting
differences" resulted in there being minor language changes in
Section 1. The substance of the Section had not been changed. In
addition, definitions incorporated into Section 1 in the
previous committee substitute, Version 25-GS1074\E, had been
moved to "the broad definition section" of the Teachers
Retirement System (TRS) Statute.
4:45:49 PM
Senator Olson asked for confirmation that the Senate's proposed
TRS employer contribution rate of 12.56 percent had not been
affected by these changes.
Mr. Baker affirmed the rate was unchanged.
4:45:58 PM
To that point, Mr. Baker directed attention to Section 1
subsection (d) page 2 line 9. In essence, this section specified
that "regardless" of that 12.56 rate, "if the normal cost goes
above that in the future", then that higher rate would become
the normal cost.
4:46:24 PM
Mr. Baker indicated that, other than minor "wording differences"
resulting from "editorial" changes, no substantial changes were
made in Sec. 2. The working differences also resulted in a
change in the title of the section: instead of reading
"Determination and payment of state contributions", the title
now read "Additional state contributions".
4:46:50 PM
Mr. Baker stated that the TRS definition removed from Section 1
has been incorporated into Sec. 3, page 3 lines 3 through 5.
4:47:16 PM
Mr. Baker specified there being were "no real changes to
Sections 4, 5, 6, or 7.
4:47:34 PM
Mr. Baker expressed that the first substantial change made by
Version "K" is in Sec. 8. The effort being furthered in this
bill is to transition entities to a cost-share system. In the
case of the Public Employee Retirement System (PERS), all PERS
employers would contribute 22 percent of "their active payroll"
base.
Mr. Baker reminded the Committee of the concern raised in
previous hearings on this bill that employers might endeavor to
reduce their payroll base by selling off, "for example, their
local utility or to decide to outsource something that
previously was done by the municipality". While such action
would lower that municipality's contribution, other
municipalities "would be required to share in the loss of that
revenue".
Mr. Baker specified that language in Sec. 8 subsection (a) page
5 lines 4 through 11 was reworked to address this concern. Each
year, an employer would be required to pay 22 percent of the
greater of either their current total payroll base or "the
salary base as it was for the fiscal year ending June 30, 2007".
This would prevent an employer from contributing less were their
payroll to decrease as well as ensure their contribution
adequately reflected any increase in their payroll base in the
future.
4:49:41 PM
Senator Dyson asked whether the municipality would still be held
to this obligation if the buyer of one of its political
subdivisions "agreed to assume the benefits liability for the
employees".
4:50:35 PM
Mr. Baker clarified that that issue could be addressed during
the negotiations with the buyer. However, the reason for
requiring the municipality to pay 22 percent of the "higher
payroll base is because built into that 22 percent is the money
that this employer currently is putting forward into this new
pooled pot to pay off the unfunded liability".
Senator Dyson characterized this obligation as "legacy costs"
Mr. Baker affirmed.
Senator Dyson accepted the explanation.
4:51:21 PM
Mr. Baker noted that language in Sec. 9 was slightly reworked.
This section clarified the State's additional obligation to the
retirement systems. In addition to paying 22 percent on its
payroll base, the State, as specified in Sec. 9 line 5 page 6,
"shall contribute to the plan each July 1" or as soon after that
date as possible, "the amount of money required between the 22
percent and the Board adopted rate to fund the payment for the
whole system for the unfunded liability for that year". The date
for the payment was allowed some flexibility in consideration of
the State's cash flow situation in July, as numerous payment
obligations are specified for July first.
4:52:55 PM
Mr. Baker communicated that no changes were made in Sec. 10.
4:53:29 PM
Mr. Baker deferred to the Department of Administration to
discuss Sec. 11.
4:53:53 PM
ANNETTE KRIETZER, Commissioner, Department of Administration,
informed the Committee that Sec. 11 would allow the Department
"to claim monies that's owed to it under the system". The
language in this section was rewritten in consideration of
concerns of the Alaska Municipal League (AML). The revised
language is located on page 7, lines 5 through 8 and reads as
follows.
After the agency submits this amount to the administrator,
the employer may appeal the administrator's claim to the
Office of administrative hearings (AS 44.64). If an appeal
is timely filed, the administrator shall hold the submitted
funds in an escrow account pending a final decision on the
appeal.
Commissioner Kreitzer stated that this compromised language
would assist in addressing some of AML's concerns.
4:55:23 PM
Senator Elton inquired to the cost of conducting an
administrative hearing; specifically to a small community.
Commissioner Kreitzer responded that this information would be
provided.
4:56:08 PM
Mr. Baker addressed Sections 12, 13, 14, and 15. They dealt with
two sections of statute regarding an employer's termination from
the plan or amending their participation agreement. Both the
original bill and the previous committee substitute "envisioned
that" once the system transitioned to a cost share plan,
employers would have a 90 day period in which "to make changes
to their participation agreement": they could opt in or out
classes of employees. No such changes would be allowed after
that. The only recourse after that would be for an employer to
exit the system completely.
Mr. Baker advised that Version "K" would eliminate that 90 day
window. An employer's ability to amend their participation
agreement would continue to be allowed as in current Statute.
However, language in Sec. 15, page 8 was required to address
costs associated with an employer's decision to opt in or opt
out a group of employees or sell off a portion of the business
which would in effect reduce the employer's payroll base. For
instance, a community could decide not to cover their municipal
waste people or their fire chief or city administrator.
4:58:47 PM
Mr. Baker stated that while an employer could continue to amend
their participation agreement, language in Sec. 15 specified
that an employer who terminates a class of employees or
completely terminates from the system would be required to pay
termination costs. He reviewed how the termination costs would
be calculated. For instance, an employer terminating a class of
employees would be required to pay that groups' past service
costs.
5:00:20 PM
Senator Thomas expressed concern that, as has happened in the
past, the State might not have an accurate unfunded liability
figure. Were that the case, an entity terminating groups of
people or completely terminating from the plan, might be told
their obligation was satisfied, but then might un-expectantly
get a "huge bill" later" when the system's unfunded liability
was reevaluated.
5:01:43 PM
Commissioner Kreitzer pointed out that "no plan is foolproof".
The Department, Committee members and staff, and other entities
and individuals working on this bill have worked diligently "to
identify areas where we think that there could be some loophole
and could allow for a situation where you might not have the
unfunded liability taken care of". The bill before you "is our
best effort to deal with that and to not come into a situation
in the future where we would have someone getting a big bill
because the Division of Retirement and Benefits made a mistake".
She could not envision where at this point, a mistake might be
made.
Senator Thomas also acknowledged being unable to identify any
specific weakness. Nonetheless, despite professional action in
the past, the State is facing a substantial unfunded liability.
5:02:47 PM
Mr. Baker pointed out that "liabilities by individual employers"
are tracked under the current retirement system. Each year, the
actuary conducts an extensive process to determine "the new
liability of the system is and allocating it as appropriate to
all the individual employers".
Mr. Baker directed his remarks to Senator Thomas's concern. An
employer might have been fine at one time, but, as each new
valuation was determined, their unfunded liability grew. This
was the experience of most employers.
Mr. Baker expressed that the same valuation process would
continue under this bill. However, under the cost share system
being proposed, the unfunded liability would be "shared amongst
everybody".
5:03:44 PM
Mr. Baker stated that, under the current system, each entity was
combating "a different number".
Mr. Baker agreed with Commissioner Kreitzer that "this is a best
attempt to address the fact that everyone will be sharing the
load and" appropriately allocating it going forward.
5:04:15 PM
Mr. Baker informed the Committee there was no change in Sec. 16.
Mr. Baker noted that it was decided to move definitions from
individual areas of the bill to a more appropriate place in the
Statute section. Thus, definitions were added to Sec. 17.
5:04:31 PM
Mr. Baker deemed Sec. 19 to be a significant component of the
committee substitute. The spreadsheets earlier referenced by Co-
Chair Stedman were pertinent to this section.
Mr. Baker stated that Sec. 19 subsection (a) of Version "K"
contained a listing of employers who had contributed excess
funds to their retirement plans during the prior three years and
their contribution rates, as adjusted, for the first year of
program implementation. This information had been re-verified by
the Department.
Mr. Baker directed attention to a spreadsheet titled "FY 08 Rate
Adjustments Required to Recoup Excess Muni PERS Contributions
from Prior 3 Years (Revised 4/28/07) Prior to application of
Hold Harmless Provision" [copy on file], which pertained to this
section.
5:05:40 PM
Mr. Baker addressed Column "9" of the spreadsheet. Changes on
this spreadsheet, as compared to the previous version, are
highlighted. For instance the City of Barrow and the City of
Klawock have been added to the list.
5:06:26 PM
Mr. Baker next addressed the spreadsheet titled "Impact of a 22%
Employer PERS Rate on Municipalities, with CSSB 125 Hold
Harmless Provision" [copy on file]. In addition to the desire to
assist the "Heroes" communities, those entities which had
contributed excess funds toward their retirement plans, an
effort was made "to be equitable. As we set a rate of 22
percent, many municipalities are going to see quite a windfall
or credit to what they previously thought they were going to
have to pay if their rates were substantially higher than 22".
Mr. Baker also pointed out that there were also a few
communities that had rates significantly lower than 22 percent.
They would be experiencing a substantial increase in their
payments.
Mr. Baker signified that the "Impact" spreadsheet reflected
communities' estimated FY 08 payroll; their FY 07 employer
contribution rate; and the FY 08 Board recommended rate they
would have been required to pay absent this legislation. For
example, the City of Fairbanks would have paid $13,271,641 under
the FY 08 Board Requested Rate. Under this legislation, they
would pay $1,578,676 for a savings of $11,692,965 or an 88
percent "credit gain".
Mr. Baker stated that the City of Fairbanks would not be subject
to the hold-harmless provision in the bill because, under this
bill, they would be experiencing a tremendous decrease in the
contribution level as compared to the status quo system.
5:08:33 PM
Mr. Baker stated that the City of Fairbanks situation was
opposite to that of the City of Seldovia in that the proposed
cost share system would require them to contribute more than
they would under the status quo system. Therefore, hold harmless
provisions were incorporated into the bill in an attempt to
provide equality.
Mr. Baker explained that the hold harmless provision would apply
to those entities whose FY 07 rate or FY 08 Board Recommended
Rate was less than 22 percent. They would be subject to the
lower of those two years' contribution rates.
Mr. Baker informed the Committee that the total fiscal impact of
the hold harmless provision was then calculated. The State, in
addition to its 22 percent contribution, would be required to
contribute an additional $1.3 million as specified at the bottom
of Column (7).
5:10:21 PM
Senator Elton asked whether there were school districts with
employees in the PERS system which might require similar hold
harmless considerations.
5:11:00 PM
Mr. Baker stated that this issue is under review. Until
recently, only municipalities and cities had been considered. In
addition to considering whether any school districts with PERS
employees should be included, attention is being expanded to the
category referred to as "PERS Others". This would include
entities such as a housing authority or Bartlett Regional
Hospital in Juneau.
Mr. Baker calculated that an additional one million dollars
could be added to the hold harmless total were school districts
considered. "PERS Others" might add an additional three million
dollars.
Mr. Baker concluded that applying the hold harmless clause to
these entities would be doable; it would be a policy call
matter.
Senator Elton appreciated the foresight given to this issue.
5:12:23 PM
Mr. Baker referred the Committee to the spreadsheet titled "CSSB
125 Sec (19) Rate Adjustments" [copy on file]. This spreadsheet
reflects communities "recoup" rates as affected by the hold
harmless provisions. For instance, the Aleutian East Borough's
recoup rate for FY 08 would have been 10.01 percent. Once the
hold harmless rate is factored in, their rate for FY 08 would be
3.24 percent.
5:14:16 PM
Mr. Baker stated that communities who qualified for both the
recoup and hold harmless provisions would contribute at the
adjusted rate for FY 08. The hold harmless provision adjustment
would continue to apply to qualifying communities for an
additional four years.
Mr. Baker specified that all communities would be subject to the
22 percent contribution rate beginning in FY 13.
5:15:20 PM
Mr. Baker noted that the communities depicted at the top of the
spreadsheet were those that qualified for the recoup and/or the
hold harmless rate provisions specified in Sec. 19(a) for FY 08.
Mr. Baker stated that 19(b) contains the hold harmless
provisions specific to the additional four years. Communities
subject to that provision are depicted at the bottom of the
spreadsheet.
5:15:45 PM
Commissioner Kreitzer "commended" Co-Chair Stedman's staff for
their efforts in developing the Version "K" committee
substitute.
Co-Chair Stedman asked Members to review Version "K" thoroughly
and advise his office of any concerns or suggestions.
The bill was HELD in Committee.
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