Legislature(2011 - 2012)SENATE FINANCE 532
04/02/2012 09:00 AM FINANCE
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SENATE BILL NO. 100 "An Act relating to employer contributions to the Public Employees' Retirement System of Alaska; relating to requirements that employers who terminate some or all participation in the Public Employees' Retirement System of Alaska pay termination costs; and making the changes retroactive." 9:05:29 AM SENATOR JOE PASKVAN, introduced SB 100. He referred to the Sponsor Statement for SB 100 (copy on file). Senate Bill 100 addresses the future financial stability of all PERS employers - the State municipalities, school districts and the University of Alaska - and their ability to efficiently and effectively manage the delivery of programs and services. Due to a variety of historical circumstances and decisions, the Public Employees' Retirement System (PERS) defined benefit system evolved from being fully funded to being underfunded by billions of dollars. A solution embraced by all parties to address the unfunded liability was incorporated into Senate Bill 125 and was passed by the legislature in 2008. SB 125 set into law that the PERS system is a consolidated system and that the combined defined benefit (DB) and defined contribution (DC) salary base would be required to pay down the unfunded obligation, which in turn would provide for sustainable, predictable and affordable employer rates. Paying off the unfunded obligation is predicated upon a stable, reasonably growing, system-wide salary base. A concern at the time SB 125 was adopted was that employers might en-masse elect to convert PERS salaried positions to contracted positions to reduce or avoid their PERS cost, thus shrinking the PERS salary base needed to pay off the unfunded obligation. To address this concern, it was agreed that employers would pay the greater of 22 percent on their combined DB and DC salary base, or, 22 percent on their total payroll for the period ending 6/30/2008. This effectively set the minimum contribution, or floor, that an employer would pay once PERS converted to a consolidated system. Additional language relating to termination studies was added at the time to prevent employers from intentionally reducing their fair share contribution toward paying off the unfunded obligation. The application of the termination studies law is the cause for concern and the introduction of SB 100. Current law requires an employer who terminates participation of a department, group, or other classification of employees to pay the following bills: 1. the cost associated with obtaining a termination study from the PERS actuary; 2. the actuarial cost to the employer for future benefits due employees whose coverage is terminated; and 3. the past service cost, annually, on each position terminated until the unfunded obligation is paid off decades from now. Enforcement of the termination studies law is making it difficult for employers to manage their delivery of services, discriminates against small municipalities even thought their impact is immaterial, and is costly and nearly impossible to implement in an equitable manner. These mandated termination studies fail to recognize that we do not have a single-agent, multiple employer system in which different employers pay different net rates. SB 125 provided for one integrated system of accounting; the unfunded obligation is to be shared among all employers, with each paying a single, uniform contribution rate of 22 percent. All agree that the unfunded obligation must be paid off. All agree that the entire PERS salary base - both DB and DC - is needed to pay off the unfunded obligation, and that it must be sustained and have reasonable growth. The fear that employers would actin in a manner jeopardizing the payment of the unfunded obligation has not materialized; in fact, the system- wide salary base has grown steadily. The law providing for termination studies is not needed and is repealed through SB 100. SB 100 maintains the 6/30/2008 floor as the base salary amount upon which PERS payment must be calculated as this is the most efficient, cost effective and equitable method of ensuring the unfunded obligation is paid off. 9:13:09 AM Co-Chair Stedman noted the one fiscal impact note from the Department of Administration (DOA). MICHAEL BARNHILL, DEPUTY COMMISSIONER, DEPARTMENT OF ADMINISTRATION, stated that DOA did not take an official position on SB 100. Senate Bill 125 was passed in 2008, and the salary floor provision in that bill was intended to ensure a certain participation of political subdivisions and payment of the existing unfunded liability. By capping employer rates at 22 percent, SB 125 ensured that all future unfunded liabilities would be the responsibility of the general fund. The termination study issue ensured that when employers create new unfunded liabilities as a result of staffing changes, those employers bear those new unfunded liabilities. He expressed concern about SB 100, because the bill permitted cost-shifting when new unfunded liabilities were created. The amounts at issue were currently relatively small, but those amounts could grow larger in the future. He relayed some discussions with the bill sponsor and the Alaska Municipal League. He stated that DOA recognized the concerns of the Alaska Municipal League, particularly in the context of smaller employers. Those small employers often wanted additional flexibility in how their staff was handled. Mr. Barnhill stated that DOA had offered the Alaska Municipal League a compromise proposal. He stated that DOA suggested the adoption of a 20 percent partial termination rule: if there was a staffing change that would trigger a termination under existing law, but impacted 20 percent or less than the payroll over a specified period of time, no termination study would be triggered. He felt that the partial termination rule would particularly help the smaller municipalities. He remarked that under the 20 percent partial termination rule, there was a potential for municipalities to create new unfunded liabilities that would be cost-shifted to the state. He stated that DOA suggested that the 22 percent cap be increased to account for the projected new unfunded liabilities that would be created. This way, the State would be protected from the creation of any new unfunded liability by a political subdivision that wanted to take advantage of the 20 percent partial termination rule. 9:17:26 AM Co-Chair Stedman surmised that if SB 100 were amended to include a 20 percent partial termination rule, DOA would be in favor of the bill. Mr. Barnhill replied that he could declare that DOA would be in favor of the bill, but felt that DOA would not oppose the bill. Senator Thomas wondered if there would be a change to the aggregation of the employees working for an employer, or were employees tracked individually based on who they work for, length of service, and hours worked. Mr. Barnhill did not know to what extent individual employees were tracked. CATHY LEE, DEPUTY DIRECTOR, DIVISION OF RETIREMENT AND BENEFITS, stated that individual employees were tracked by their service hours, salaries, and by employer. This information was transmitted to the actuary in order to evaluate the system. KATHIE WASSERMAN, ALASKA MUNICIPAL LEAGUE, JUNEAU, testified in support of SB 100. She stressed that the small communities were taking the brunt of this expense. The larger employers could layoff or lose 20 employees, but if they kept just one employee, the larger employers would not need to pay into the system for that loss. Whereas, a small community could have one person in that group, and when that one person is terminated, the small community needs to pay into that loss. She stressed that the larger employers are impacting the system when the employees were laid off. She agreed that there needed to be safeguards against manipulating the system. Co-Chair Stedman wondered if the Alaska Municipal League had an opinion on the 20 percent termination rule. Ms. Wasserman replied that she had not addressed the idea with the board. She expressed concern regarding the increase to 20 percent, but stressed that there had been no negotiation or discussion regarding the 20 percent termination rule. 9:22:51 AM DOROTHY LEAKE, SELF, CITY OF ANDERSON (via teleconference), spoke in support of SB 100. She explained that Anderson had received a bill from the State Division of Retirement and Benefits for $27,000 for falling below the 2008 salary floor. She had spent the last two months trying to opt out of the contract, because the City of Anderson had not had a full-time employee since 2008. That one, former employee had been paying into the Public Employees' Retirement System (PERS) in their new job with the State. She stressed that the City of Anderson did not have the money to pay for full-time employees, so therefore could not pay the $27,000 owed to the Division of Retirement and Benefits. SALLIE STUVEK, HUMAN RESOURCE MANAGER, FAIRBANKS NORTH STAR BOROUGH, FAIRBANKS (via teleconference), testified in support of SB 100. The Fairbanks North Star Borough was concerned with the current application of the existing statute in regards to the PERS termination studies. In its current form, the termination study requirement impacted all PERS-participating municipalities in a significant way. It "ties the hands" of municipal governments to effectively and efficiently manage their provided services. DOUG GRIFFIN, CITY OF PALMER, PALMER (via teleconference), testified in support of SB 100. He agreed with the previous testifiers. He stated that the City of Palmer would probably be considered a medium-sized community, but it had faced some recent budget adjustments. The general fund was reduced by 15 percent over the last two fiscal years, and it was difficult for the City of Palmer to pay into the unfunded liability. 9:28:30 AM LISA VAUGHN, ACCOUNTANT, NORTH POLE (via teleconference), testified in support of SB 100. Current practice placed an unfair burden on small employers across the state, as many of the departments and classifications in individual municipalities only have one or two employees. JENNIFER JOHNSTON, MEMBER, ANCHORAGE ASSEMBLY, ANCHORAGE (via teleconference), testified in support of SB 100. She stated that Anchorage was recently charged with a termination study regarding the discontinued weatherization grant program. Co-Chair Stedman closed public testimony. Senator Olson queried Senator Paskvan's position on the 20 percent partial termination study. Senator Paskvan replied that it was a new proposal, but looked forward to more discussions regarding this idea. Senator Olson wondered if Senator Paskvan would be opposed to an amendment. Senator Paskvan stressed that the proposal was new, and would like to speak with the Alaska Municipal League regarding the proposal's effect on smaller communities. Senator Paskvan stressed that the problem was an immediate problem that needed to be resolved in a timely manner. SB 100 was HEARD and HELD in committee for further consideration.