Legislature(2011 - 2012)BELTZ 105 (TSBldg)
03/29/2011 02:00 PM Senate LABOR & COMMERCE
| Audio | Topic |
|---|---|
| Start | |
| SB78 | |
| HB28 | |
| SB100 | |
| HB13 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 100 | TELECONFERENCED | |
| + | HB 13 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | SB 78 | TELECONFERENCED | |
| += | HB 28 | TELECONFERENCED | |
SB 100-PERS TERMINATION COSTS
2:12:17 PM
CHAIR EGAN announced SB 100 to be up for consideration.
SENATOR PASKVAN moved to bring SB 100, labeled 27-LS0272\D,
before committee for discussion purposes.
CHAIR EGAN objected.
SENATOR PASKVAN explained the purpose of SB 100 arises out of
his discussion with Michael Lamb, the Chief Financial Officer of
the Fairbanks North Star Borough, in which they were talking
about a problem that exists when a borough tries to be flexible
in its programs and may want to do something for a couple of
years and then transition to a different type of program. The
question is when they potentially transfer those employees from
one program to another there is this termination study that has
a resulting cost burden that can be applied even if there is no
change in the overall number of employees (of a particular
municipality or school district). In short, as a result of that
conversation he presented a bill a year ago and it quickly
became apparent that the details were pretty significant.
2:14:17 PM
MICHAEL LAMB, Chief Financial Officer, Fairbanks North Star
Borough, said he is also president of the Board of the Municipal
League Investment Pool and co-chairman of the Alaska Municipal
League's Finance sub-committee. He said his comments on SB 100
are supported by the Alaska Municipal League (AML). He thanked
them for the opportunity to testify on how crucial PERS
employers feel getting SB 100 passed into law this session is.
The following statement captures what he said:
Given the very real press of time for legislative
action this session, my comments today are going to be
purposely direct. I'm going to be as transparent as I
can conveying what AML member employers feel that
there exists a compelling need to adopt the
disciplined and exactly focused limited change to
those parts of state law that order termination
studies. Very simply, because of the 'shall' language
in state statutes, regulatory action cannot fix the
problems I'm going to explain to you today. Regulation
cannot override statutory directives, thus the need
for this legislative fix to a few detrimental and
unanticipated consequences of certain language adopted
in SB 125.
Let me commence by addressing three significant
questions that some may have about SB 100. With these
relevant questions addressed, you can cast them from
your minds and I can focus my time on why passage of
SB 100 is so critical and compelling.
2:17:11 PM
Number one, first and foremost, let me convey with no
ambiguity at all, SB 100 has absolutely nothing,
nothing and nothing to do with the defined benefit, DB
versus defined contribution, the DC issue. That
controversy, that discussion, is real as it is and I
acknowledge that has no place and should be given no
standing when considering SB 100. For purposes of SB
100, the DB versus DC issue is not relevant - period -
other than to create and foster fear when any PERS
legislation is under consideration. Let us not let
fear rule the day or impede our doing the correct and
proper thing that is so demanded and so clearly
obvious.
Secondly, it is the view and formal position of AML
PERS member employers that their desire and their
respectful request to legislators is that there be no
amendments made to SB 100. It is exacting in what it
accomplishes and should be adopted exactly as drafted.
Should SB 100 be used to hang any amendment to it for
any purpose, absolutely and unequivocally NO. It is a
single-issue focus bill to fix a specific problem and
it should be left untainted by any other legislative
issues.
Thirdly, and let me say with clarity and purpose, that
my integrity and my reputation and my credibility are
sacred to me and I stand as a vanguard to them always.
And knowing that this, what if so, if I were asked are
PERS employers trying to sidestep their obligation to
help pay down the unfunded obligation or asked has SB
100 been in any way constructed or intended to be used
for this purpose, I unequivocally say NO. I guess I
would also say with some confidence that no one has
talked or communicated with more people and/or
communities on this issue in this state than me and I
say to you not in one conversation, not in one e-mail
and not in one letter relating to the termination
study issues has it ever been discussed in any way,
shape or form that PERS employers could sidestep their
financial obligation or shift any PERS funding
responsibilities to the state through or by this
legislation.
MR. LAMB recalled that in 2008 the Alaska State Legislature
passed SB 125 that helped Alaska's PERS employers tremendously
by adopting the flat statutory 22 percent rate. It brought
predictability, affordability and stability to the employers'
rate. When SB 125 was crafted, legislators did not intend to
create any inequitable financial damage to any PERS member
employer nor negatively interfere with the current or future
delivery of any member services or programs which the
termination study law clearly and conclusively does.
2:21:30 PM
MR. LAMB said that Marvin Smith, Manager, Bristol Bay Borough
told Representative Edgmon and Senator Hoffman that presently
they have decided not to add or delete any positions until this
issue is resolved. Therefore, their government can't expand or
shrink as good management should be allowed to do.
He said that "2AAC 35.235 (calculation of termination costs)
states (a) an employer that proposes to terminate coverage of
the department, group or other classification employee or
terminate participation of the employer must have a termination
study completed by the plan actuary to determine the actuarial
cost to the employer for future benefits due employees whose
coverage is terminated.
He said that defined contribution employees have no future
actuarial costs. Further, (b) says in addition to the cost
calculated in (a), the employer is required to pay to the plan
until the past service liability to the plan is extinguished an
amount calculated by applying the current past service rate
adopted by the board for salaries of the terminated employees.
This payment shall be made each payroll period.
2:22:48 PM
MR. LAMB said the problem is if a PERS employer reduces his
employee count because it made a decision to change or suspend
one of its program or services or simply moved some of its human
resources to where they are most needed (even a single person,
such as a single disaster response coordinator at a school
district), then per 2AAC 36.235, PERS very possibly will send
that employer three bills: the first will be for the cost of
doing an actual termination study ($2,500-5,000), the second
will be what the study says you owe the system due to the
employee changes you made and the third bill is the one that
will require the employer to pay the past service cost on each
of the positions salaries the PERS said you needed to opt out of
PERS; currently that's $18.63 until the unfunded obligation is
paid off - maybe 30 years from now.
He explained that as he reads about the assumption, he and Larry
Semmens, who both have a great deal of understanding of the
system, wonder if the past service liability ever actually gets
extinguished, essentially making these termination payments
perpetual payments on the backs of PERS employers.
MR. LAMB said these three bills could cumulatively run from
hundreds of thousands of dollars to several millions of dollars
per each termination study incident. The underlying fear that
certain PERS employers would purposely act in a manner that
jeopardized payment of the unfunded obligation and thus shrink
the salary base that pays the unfunded obligation simply has not
happened. The total PERS salary base must be sustained and have
reasonable growth, which it has to the tune of about 19.50
percent since June 30, 2008 when the floor was set. It's
important to absorb and digest the fact that the statutes
already have a salary base floor that all PERS employers must
pay the 22 percent on even if they completely exited the system,
he said. SB 100 actually statutorily reinforces this obligation
by its amendment to Sec. 1 of AS 39.35.255, which added a new
subsection (i) that reads:
(i)After an employer's participation in the plan
terminates with regard to some or all of the
employer's employees who are active members of the
system, the employer remains obligated to make
contributions under (a) of this section (which is the
greater of 22 percent times your current salary or the
6/30/08) until the plan does not have a past service
liability.
2:26:16 PM
He said the future stability of PERS employers and their ability
to efficiently and effectively manage the delivery of their
programs and services is being directly and negatively impacted
by 2AAC 35.235. What is exceedingly frustrating for all other
PERS employers, except for the state, is that equitable and
consistent application of the state's termination law does not
seem to be occurring, nor likely can it ever occur given the
uniqueness of all PERS employers' positions.
A law like this that has such a material financial impact on
PERS employers should, at a minimum, be able to fairly,
equitably and consistently be applied to all PERS employers. Yet
the Division of Retirement and Benefits has taken the position
that the state with half of the PERS salary base ($1 billion of
a $2 billion annual salary base) is exempt from termination
studies and their financial impacts. A simple straight-line
calculation of the unfunded liability tells one that one-half of
the obligation must belong to the state, but the state as the
biggest PERS employer isn't subject to that portion of the law
per retirement benefits. The state is subject to the June 30,
2008 portion of the law for retirement benefits but not the
termination portion of the law and this significantly disturbs
other PERS employers (an understatement).
2:27:29 PM
MR. LAMB said that he has talked to many attorneys and none of
them have found any such written exception or exclusion in the
law. Just as concerning is the fact that the termination
language inescapably creates an inequitable impact on small PERS
employers. Many small communities have only one employee for a
program or a service. If they lose a grant or simply are faced
with budget constraints have to cut one person, say their only
school nurse, then they would be required to have a termination
study done; then pay all of the related costs - just because
they actually cut a function or a group. A large employer could
cut 10 nurses, but as long as they kept at least one nurse
employed no termination study would be required. Only the small
school districts get financially impacted by the currently law.
MR. LAMB said, "If you want to drive some of our very limited
education dollars right out of the classroom then keep the law
the way it is. SB 100 effectively helps keep education dollars
in the classroom."
2:29:10 PM
He explained that amazingly and contrary to good public policy,
termination studies negatively impact decisions and the ability
to accept grants because of their potential future termination
study liability. Grant-funded positions may become subject to
the termination studies once the positions are terminated due to
grant funding ending even if brand new DC employees were hired
with those grant funds. An extract from a communication between
Larry Semmens, city manager for Soldotna, posed this question:
The city of Soldotna recently received a grant to fund
the new police position for three years. Part of the
grant application was to create a lieutenant position.
The city has not had this position previously. My
concern is that at the end of the four year period if
the city is unable to fund the position and eliminates
the lieutenant's position, the city will be on the
hook for a termination study and paying the past
service liability rate for an unlimited time period on
this position, which didn't come into existence until
FY2011.
I base this on my assumption the Division of
Retirement and Benefits would determine that the
single position constitutes a group since it is the
only position with the title 'lieutenant.'
MR. LAMB said this response was sent:
I see from your email that the City of Soldotna chose
to pursue grant funding for a new police position and
have created a lieutenant position as part of that
grant application. You are correct that if this
lieutenant position is the only one in the city, then
it constitutes the only of its classification. If the
position created is PERS eligible and the city's
participation agreement is not amended to exclude it
from PERS, termination costs will be calculated when
the city removes it from PERS.
Taking advantage of grant opportunities to improve
services to the public is a decision for local
officials to make for themselves. Part of that
decision process must include consideration whether
the positions resulting from the grant should or
should not be included in PERS. Our recommendation for
any position which has uncertain future funding is
that it not be placed in the PERS.
2:31:27 PM
MR. LAMB said that employers could find themselves paying the
past service cost rate on former grant funded position salaries
with and from other finite revenues once those grant funded
positions are ended. It was amazing to him that the Division of
Retirement and Benefits suggests excluding grant funded
positions from PERS as its solution to the problem. He
exclaimed:
Why would we as a policy seek to minimize or reduce
the total salary base used to pay down the unfunded
obligation by excluded grant salary dollars? That
solution is 180 degrees off course. We ought to be
finding every grant dollar we can and do all we can to
be sure as many dollars as is reasonably possible are
salary dollars helping to pay down the unfunded
obligation.
He said it is also surprising that no offsets are taken into
account for salary increases in one area or decreases in another
area. In other words, the ability for entities to adjust their
programs and services to meet their constituents' needs is
negatively impacted by the current law.
2:32:42 PM
Essentially the same salary dollars that were shifted could be
billed not only at the 22 percent, but the 18 percent past
service cost rate on top of it - for an effective PERS rate of
40 percent on those salaries. A communication from DRB to
Senator Paskvan's aide, Mr. Stepp, on February 14 promised him a
response today regarding their review an analysis of AS
39.35.625 and AS 39.35.255 and it said they recognized and
agreed that the construction of the two statutes would result in
employers being double-charged for contributions on salaries of
employees for whom coverage is terminated.
MR. LAMB said that SB 100 fixes this travesty and that there is
no regulatory authority to fix or override the statutes for this
issue. Once you start shifting employee resources from one area
of responsibility to another and start paying 40 percent, you
start a negative downward spiral in program and services
delivery. And the consequence of the termination study is that
it effectively nullifies the intent of SB 125, which was that
employers pay the exact same rate. It is clear that one result
of these termination studies is that different employers will be
paying different net rates and therefore there will not be a
single uniform contribution rate for all PERS employers. The
adoption of SB 125 was based on the acknowledgement that the
state did not have a single agent multiple employer system, but
a consolidated although inequitable cost share system. The
intent of SB 125 was that all employers would pay the exact same
rate. That cannot happen when each employer pays different
termination cost amounts or they pay none at all.
It is clear that all PERS employers support a sustainable salary
base to pay off the PERS unfunded obligation. It also is crystal
clear that the termination language in SB 125 was a solution to
a problem that never materialized and is not needed. The
negative consequences, the additional charges and the payments
that result from the termination language were never
contemplated or intended by the legislature and they are
destructive and divisive.
2:36:12 PM
AS 39.35.625, which requires termination studies and any other
similar statute or regulation should be repealed, Mr. Lamb
concluded, and that is precisely what SB 100 accomplishes.
2:40:01 PM
CHAIR EGAN asked Mr. Semmens if he wanted to add anything.
2:40:32 PM
LARRY SEMMENS, Manager, City of Soldotna, said he is a CPA and
was very involved in the process of adopting SB 125 in 2008.
Given this involvement, he said he was embarrassed to say that
he didn't know how these termination studies were going to work
until the Division of Retirement and Benefits adopted the
regulations and began enforcing the law. After much discussion
with DRB, he is now convinced that a statutory change is needed.
He is very concerned about the impact of the law particularly on
small municipalities or school districts because it apparently
requires a termination study to be conducted at any time a
department group or other classification that was paying into
the system for any reason stops paying into the system.
He explained that in small municipalities a group is often made
up of a single position; consequently they will be required to
pay the state's actuary to conduct a termination study, pay the
resulting cost identified in the study and pay the past service
rate contribution on the salary projected - even though there is
no continuing salary. It makes it impossible for PERS employer
members to manage staffing levels.
He emphasized that SB 100 does not eliminate termination studies
for everyone. If a member employer terminates all participation
in the plan, that employer will still be required to conduct a
termination study and pay the resulting costs. And employers are
still required to pay their fair share in that the 2008 salary
floor is still in place. This was the provision that was
intended to prohibit a PERS employer from escaping their
obligation for unfunded liability of the system. Setting a floor
for contribution calculations ensures that one employer is not
going to contract out a significant portion of their operation
thus reducing salaries and thus avoiding paying their fair share
of the debt.
MR. SEMMENS said he supported Mr. Lamb's testimony and is also
shocked that the Division of Retirement and Benefits considers
the state, which is the largest member of PERS, to be exempt
from these regulations. All large employers are minimally
impacted because typically they have larger departments and
larger groups of employees and are able to eliminate positions
without eliminating an entire group. But it's extremely punitive
to small school districts. He urged them to act swiftly on the
bill.
2:45:45 PM
MARK LYNCH, Manager, City of Cordova, said he supported all
previous testimony. The city understands they have to pay their
fair share of unfunded the liability, but he needs to be able
manage personnel so that his decisions are in the best interests
of his community. He needs the law to be clear so that he won't
end up somewhere down the road paying both a past service
liability and the current PERS retirement fee on the same
individual or position. He said he honestly believes that PERS
believes that statute provides it with the right to hold cities
on the hook indefinitely for any position that is terminated
from PERS and the picture is as bleak as Mr. Lamb painted it.
His city attorney believes the same.
2:48:32 PM
JON BOLLING, City Administrator, City of Craig, said he
supported SB 100. He said Craig is a first class municipality
with a population of 1,201 persons and has two departments that
are caught up in these very difficult circumstances. Without
passage of SB 100 the financial impacts will be very difficult
for them to manage.
2:49:51 PM
PATRICK COLE, Chief of Staff, City of Fairbanks, stated support
of SB 100.
2:50:29 PM
DANIELLE FEGLEY, Acting Director, Employee Relations,
Municipality of Anchorage, supported SB 100. Reinforcing this
position is their experience with the weatherization program.
She explained that the MLA decided not to renew a state grant
for providing weatherization services. Instead they arranged for
another entity to resume the responsibility for administering
the program. Some of the employees moved into other jobs and
others were relocated to the new entity. When the process of
eliminating the positions associated with this grant was
started, they learned of the possibility of an ongoing financial
obligation for the unfunded PERS liability of potentially
reaching and exceeding $5 million. The MLA supports the changes
to restore an equitable process that maintains a sustainable
salary base currently described in the existing legislation -
without the termination study. They support this legislation
because it maintains a sustainable salary base, it creates a
flexible workforce that is responsive to market conditions and
available funds, it applies an equitable treatment across
participating employers, both large and small, and overall it
simplifies administration costs and is easily enforceable.
2:52:38 PM
DIANE WOODRUFF, representing herself, Wasilla, said she wanted
to add to the comments the committee had already received from
their finance director today. She said she is a CPA and has had
the pleasure of sitting in on Mr. Lamb's committee with the
Alaska Municipal League. She absolutely supports SB 100 seeing
what an effect it has on her community. It is inequitable for
small communities, but it is not without impact on larger ones
like Wasilla. They find themselves in the same position as
Cordova regarding the hiring of a temporary police chief in the
form a retired Alaska State trooper. They are also looking at a
program for which they may receive reduced grant funding, which
may cause them to reduce that program and eliminate it
altogether. If they do eliminate it they will be in the same
boat as the smaller communities.
2:55:01 PM
JIM DINLEY, Municipal Administrator, City of Sitka, said he
supported SB 100. The future of applying for grants to offer
programs to local citizens is in jeopardy if a termination study
is required upon layoff of personnel paid by the grant, he said.
The study would negatively impact Sitka's decision and their
ability to accept grants because of the potential future
liability. Sitka currently has two personnel-related grants on
the books and he doesn't want the risk of accepting these two
positions under the present scenario. It's too great a risk for
a small city to accept these grants with no continuation of any
future grant money. They support Mr. Lamb's and Mr. Semmens'
testimonies.
2:57:10 PM
MARV SMITH, Manager and Human Resource Person, Bristol Bay
Borough, Naknek, said he supported SB 100. Their borough is very
small and decided this year not to add any new positions because
their whole economy is based on the fishing industry which isn't
always stable. They can't either expand or shrink their
positions because of potential future costs related to the
termination studies.
2:59:51 PM
CATHY WASSERMAN, Executive Director, Alaska Municipal League
(AML), said they worked closely with the Senate during crafting
of SB 125 and thought that SB 100 would really help right what
is a wrong in it. Laws shouldn't be on the books that keep
government from operating efficiently. Further, she stated that
the AML was very active with HB 106, the Coastal Zone Management
(CZM) bill. If that goes away, then "a bunch of communities"
will have to pay the past service cost on those coastal zone
management workers. Many municipalities rely on Cox grants and
if they go away, that will cause some cost impacts also.
SENATOR MENARD mused that they knew about the small and large
employers and employees that were part of the termination study
and asked if "any red flag" went off at that time.
MS. WASSERMAN answered that she relies for most of her PERS
information on Mr. Lamb or Mr. Semmens; and they all did not
understand the ramifications or they would have done something
then.
SENATOR MENARD said it appears to be such a "debacle" that she
is having a hard time wrapping her mind around it.
SENATOR MENARD asked for someone from the administration to come
forward.
3:03:44 PM
MIKE BARNHILL, Deputy Commissioner, Department of Administration
(DOA), said he would offer a different perspective on the issue.
He explained that the state retirement systems have a big
unfunded liability that they learned about in 2003; at that
point it was just over $4 billion (PERS/TRS combined). Today it
is approximately $10 billion. Prior to passage of SB 125 in 2008
roughly speaking in the PERS system the responsibility for that
liability was allocated 50/50 between the State of Alaska and
the other 156 PERS employer participants. SB 125 reallocated the
responsibility for that by capping the total amount that
municipal employers would have to pay to the PERS system at 22
percent.
He explained that the unfunded liability is a zero sum game. If
the municipal employers are not paying essentially what amounts
to a mortgage payment, then the state has to pay it; that is
essentially what SB 125 does - shift the responsibility from the
municipalities to the state general fund. Since its passage,
"we're closing in on the general fund picking up approximately
$1 billion worth of payments to the PERS system on behalf of
municipal employers." He said it's really important to
understand that whenever one party does not pay into the system,
someone else has to pay it.
MR. BARNHILL said he understands Mr. Lamb saying they are not
trying skirt their responsibility and they are paying their fair
share under SB 125, but the bottom line is the effect of this
bill will shift some costs to state general fund. He said they
would be submitting a fiscal note soon.
MR. BARNHILL said a presentation to Senate Finance a few weeks
ago identified the history of the termination study issue to
date. The state's actuary indicated that in 2010 there were five
terminations; each study cost $2500. The one-time termination
costs contemplated by the statute range from $10,364 - $21,373
and in the context where the state general fund is going to pay
$1 billion relatively soon on behalf of the PERS municipal
employers to the PERS system, these are relatively small costs.
He understands the legitimate concerns about the employers
wanting to be nimble and to have flexibility and said he is
willing to continue discussing a way to arrive at some solution
to this that achieves fairness to the system without shifting
undue costs to the state.
They have heard today about unfair double-counting of salaries.
He has discussed this with the Department of Law (DOL) that has
advised that it can be addressed through a regulation project.
This is underway and they hope to have it on the books
relatively soon. This probably won't solve of Mr. Lamb's and Mr.
Semmens' concerns, but it will go part way while still
maintaining fairness to the system and the state.
SENATOR PASKVAN asked if he agrees that SB 100 does not in any
way lessen the salary floor set in 2008.
MR. BARNHILL answered no, it does not.
SENATOR PASKVAN asked if he agrees that the municipalities and
school districts potentially are at risk because of accepting
grants - for example, police grants.
MR. BARNHILL answered no; they can accept whatever grants they
want. The issue becomes, if they terminate those positions when
the grant runs out, that potentially triggers a termination
study requirement under current law.
SENATOR PASKVAN asked if he believed there might be a connection
between the possibility of the lack of employment at the end of
a grant and that affects the decision making at the beginning as
whether you would even accept the grant.
MR. BARNHILL said he sees the concern. But it's an issue of
trying to balance the tensions that are inherent in this issue.
SENATOR PASKVAN asked on a yes or no basis, if the State of
Alaska is subject to a termination study process.
MR. BARNHILL replied that is an interesting question. The bottom
line is that under the cost shifting rubric he talked about, any
additional costs they system incurs under SB 125 will come out
of the state general fund.
SENATOR PASKVAN said, "So, you don't have an answer."
MR. BARNHILL said "Can I get one?" and asked Cathy Lee to help
with an answer.
3:11:35 PM
CATHY LEE, Acting Deputy Director, Division of Retirement and
Benefits, Department of Administration, said the reason the
State of Alaska doesn't need a termination study is that under
PERS statutes, AS 39.35.120, the state must mandatorily
participate in PERS. Participation by all political subdivisions
or school districts is voluntary. The State of Alaska has no
participation agreement in all of the termination statutes that
are in .600-630 that refer to "changes to a participation
agreement." It refers to the voluntary participation of the
political subdivisions or school districts. When the State of
Alaska makes changes or when it reduces employees, while it may
not have a termination study and may not have to amend an
agreement, it still has to pay the liability. So, no liability
is shifting to any of the other employers because of the state's
personnel actions. "The state pays them itself."
SENATOR PASKVAN stated that he knows they have received a
resolution in support of SB 100 from Nome and asked that other
municipalities and school districts from around the state submit
letters as well.
CHAIR EGAN thanked everyone for their testimony and said SB 100
would be held for further work.
| Document Name | Date/Time | Subjects |
|---|