Legislature(2003 - 2004)

04/30/2004 09:12 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= 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                                                            
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                                                            
     [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                                                            
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                                                            
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                                                            
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                                                            
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                                                            
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                                                            
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                                                            
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                                                            

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