Legislature(2003 - 2004)
04/30/2004 09:12 AM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
CS FOR SENATE BILL NO. 232(STA) "An Act relating to federal tax requirements for and other provisions of the teachers' retirement system, the public employees' retirement system, and the judicial retirement system; removing village public safety officers from the public employees' retirement system; requiring the public employees' retirement system to refund contributions under $1,000 to inactive employees; limiting service credit for village public safety officer service in the public employees' retirement system to five years; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Wilken stated this bill, sponsored by the Senate Rules Committee by request of the Governor, "amends current statutes pertaining to the State's retirement systems to comply with IRS standards. These changes impact the TRS, PERS and Judicial retirement systems." Co-Chair Green moved for adoption of CS SB 232, 23-GS1009\I, as a working document. Co-Chair Wilken objected for an explanation. ANSELM STAAK, Chief Financial Officer, Division of Retirement and Benefits, Department of Administration, testified that the primary difference between the Senate State Affairs Committee substitute and the Version "I" committee substitute pertains to the "specific wording that have been negotiated with the IRS [federal Internal Revenue Service]." Mr. Staak stated that this bill is the "second installment" of the changes required by the IRS in the "plan documents" of the Public Employees Retirement System (PERS), the Teachers Retirement System (TRS), and the Judicial retirement system. Because these are "qualified tax plans" these changes must contain an appropriate plan document. The plan documents for each of these plans is the governing State statute. Therefore, State statute must comply with the IRS code. This legislation would also repeal the provisions adopted in the year 2001 by SB 145 relating to inclusion of Village Public Safety Officers (VPSO) in the PERS program. Mr. Staak informed that the State Affairs committee substitute consists of the exact language requested by the IRS, although differs from the formats utilized by the Division of Legal and Research Services for statute. The committee substitute, Version "I" conforms the language to the IRS code requirements and also meets the standards required for State statute. The IRS approved the committee substitute language. Co-Chair Green referenced Section 8 of Version "I" on page 4, lines 6 - 26, which amends AS 14.25.075(b)(2) to, in part, insert "irrevocable" in the provision allowing a member to purchase credited services. She asked if "irrevocable" is a term employed in IRS rules. Mr. Staak affirmed and reiterated that every change included in this legislation conforms to IRS code. He furthered that the issue of irrevocable election to purchase credited service involved six months of negotiation between the Division and the IRS. The Division preferred the exclusion of the "irrevocable" stipulation. Co-Chair Green asked for an explanation of the stipulation. Mr. Staak explained that once the employee makes the election to purchase the credited service, the employee could not change that decision. He exampled that employees could opt to pay off an indebtedness with pre-taxed income; however, once the agreement is made, the payments must continue, regardless of reduced salary or other circumstances. Payments could stop only upon termination of employment. This stipulation is required to obtain a "very favorable method to pay off an indebtedness." Co-Chair Green next cited Section 24, on page 12, lines 17 - 25 of the committee substitute, which reads as follows Sec. 24. AS 39.35.200(b) is amended to read: (b) [IF, UPON TERMINATION OF EMPLOYMENT, AN EMPLOYEE HAS CREDITED SERVICE OF LESS THAN FIVE YEARS AND HAS LESS THAN $1,000 IN THE EMPLOYEE CONTRIBUTION ACCOUNT, A REFUND OF THE EMPLOYEE CONTRIBUTION ACCOUNT MUST BE MADE UNLESS THE EMPLOYEE INDICATES IN WRITING THAT FUTURE RETIREMENT IS INTENDED AND CONTRIBUTIONS SHOULD NOT BE REFUNDED.] An employee who is reemployed with an employer and whose contributions have not been refunded before reemployment is not eligible for a refund. [DELETED TEXT BRACKETED] Co-Chair Green asked if the deletion of this language from statute would result in a discontinuation of refunds of less than $1,000. Mr. Staak responded that originally a "forced cash out" was made to those employees who would be "deferred vested". The aforementioned language is the result of an amendment to statute that removed the cash out requirement. The IRS code allows an employer to cash out an account of a small amount to simplify administrative expenses for the employer. However, this language had been inserted in statute to accommodate those employees who work for short periods of time, including legislative employees, to allow them to retain their contribution account. Co-Chair Green understood that the funds in the contribution account would remain and continue to increase if the employee returns to service. Mr. Staak affirmed and added that the employee would not need to repurchase the service as indebtedness and pay additional interest. The account would also earn interest while the employee was not in service. Co-Chair Green then asked about the term "actuarial adjustment" included in Sections 13, 19 and 28 of the committee substitute, and whether the amended language would be an improvement over current practice. Mr. Staak replied that the State is required, under the IRS code, to place a description of any reduced benefit in the plan document. He exampled a 50 percent joint survivor option for those members eligible for a full benefit. He informed that the Division unsuccessfully argued with the IRS to relent this position, which would have required approximately 40 pages of additional statutory language. Instead, the agencies agreed to allow the descriptions to be provided for in regulations, given that regulations have potentially the force of law in Alaska. Senator Hoffman asked if the TRS and Judicial system require changes as a result of the inclusion of VPSO employees in the PERS program. Mr. Staak answered that all the changes in this legislation are required to comply with the IRS code. AT EASE Senator Dyson supported the creation of a Tier IV level of State employment, and asked if this would not occur at this time. MELANIE MILLHORN, Director, Division of Retirement and Benefits, Department of Administration, affirmed such action is not included in this legislation. Senator Dyson asked when the Division anticipated a Tier IV would be established. Ms. Millhorn replied that recommendations would be presented to the legislature in February 2005. Co-Chair Wilken removed his objection to the adoption of the committee substitute. The committee substitute, Version "I" was ADOPTED without objection. Senator Bunde requested discussion on the situation, which resulted in the need for an appropriation of funds to the PERS and TRS programs. He commented on the magnitude of the problem. Co-Chair Wilken stated that the matter would be discussed, although not in conjunction with debate on this legislation. Senator Bunde offered a motion to report CS SB 232, 23-GS1009\I, from Committee with individual recommendations and accompanying fiscal note. There was no objection and CS SB 232 (FIN) MOVED from Committee with zero fiscal note #1 for "Various" departments. Co-Chair Wilken spoke to media reports of earlier in the day regarding the rates for PERS and TRS contributions, as referenced by Senator Bunde. Co-Chair Wilken requested Ms. Millhorn provide a brief outline of the situation. Ms. Millhorn reported that on April 19, 2004, the PERS and TRS boards of directors met in Anchorage and the PERS Board adopted a five-percent rate increase, which would increase the average employer contribution rate to 16.77 percent for FY 06. The TRS Board recommended a five-percent increase, which would increase the rate from 16 percent for FY 05 to 21 percent for FY 06. She stated the Division has calculated the costs to the State for FY 06 for all PERS and TRS employees. Mr. Staak furthered that the cost of the five percent increases for both PERS and TRS would total an additional $109 million in contributions: approximately $79 million for PERS and $30 for TRS employees. This is in addition to the $100 million cost for FY 05. He indicated a spreadsheet would be made available to detail this information. Senator B. Stevens noted this amount reflects the mandatory contribution rate and asked the amount suggested as the contribution rate. Ms. Millhorn replied that the amount for PERS was 26 percent and TRS was 38 percent. Mr. Staak pointed out the rate for TRS increased three-percent from the recommended rate. The rate for PERS decreased "slightly". Senator Bunde clarified that once an employee is included in the retirement system, the courts have ruled their contributions could not be changed. Therefore the entire amount of the increase must be borne by the State. Mr. Staak affirmed this provision is established in the Alaska Constitution and the employers essentially must assume all of the risk. Senator Bunde calculated the State must contribute approximately $100 million this year and another $100 million the following year. He asked the number of years the increased contributions would be required. Mr. Staak responded that because the current rate is 16.77 percent and the rates could increase to as high as 25 percent, another two to three years of increases would occur until the highest percentage was reached. This would also occur for the TRS program for five to six years. Senator Bunde asked the impact of early retirement programs and whether these would expand the State's debt. Mr. Staak affirmed. Senator B. Stevens asked the percentage of the TRS contributions made for State employees versus municipal employees. Mr. Staak responded that approximately $22 million of PERS contributions would be municipality obligations. He included TRS employees and stated the total amount would be approximately $38 million.