Legislature(2009 - 2010)BELTZ 105 (TSBldg)
03/30/2010 01:30 PM LABOR & COMMERCE
Download Mp3. <- Right click and save file as
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SB 298-ST. EMPLOYEE GEOGRAPHIC PAY DIFFERENTIAL 2:48:37 PM CHAIR PASKVAN announced SB 298 to be up for consideration. 2:48:51 PM SENATOR DENNIS EGAN, sponsor of SB 298, said he introduced this bill by request of constituents. He said the Palin administration commissioned the geographic pay differential study in 2008, but declined to introduce the bill. He said regional differences in the cost of living change drastically over time and the statute update on this issue was over a quarter century ago. SB 298 will bring the geographic differential statute up to date and many citizens believe it is a matter of fairness. 2:50:29 PM DANA OWEN, staff to Senator Egan, elaborated that 25 years have passed since this issue was updated. Serious pay inequities developed over that time and this inhibits recruitment and retention in certain areas of the state. It is time to begin the discussion on fixing this problem. When the Palin administration requested the study McDowell was charged with looking at differences in cost of living in various communities across the state and in various regions of the state. SB 298 incorporates the findings of the McDowell study. It follows the structure of the current statute in that is uses the same original 19 election districts that are currently embedded in the statute, but it would change the approach by substituting the McDowell study's percentage variation for the current step variation. The way the statute recognizes the geographic differential is by applying one or two and up to as many as eight pay steps within that geographic area. 2:52:23 PM MR. OWEN said it's important to note that McDowell recommended a different approach to grouping communities not in relation to their geography but in relation to their cost of living. The regions they recommended would have a maximum differential across the region of 10 percent. Using the approach suggested by the McDowell Group raises a new policy question of how to pick the number within the pool. Within a pool, for instance, if there is a 10 percent difference, do you split the difference or pick a number that is half between the lowest and the highest? Do you take a weighted average or use some other rationale for picking a number within that variation? SB 298's approach is the simplest, Mr. Owen said, and is one that people are familiar with. However, it is only intended to be a point of departure for the discussion and the sponsor is open to considering other methods. 2:54:13 PM CHRIS CHRISTENSEN, Deputy Administrative Director, Alaska Court System, said this is the third time he had addressed this subject with the legislature; the first time being in 1996 on SB 152 which failed to pass; the second time in 2002 was on SB 180 which passed but was vetoed by Governor Knowles. Both bills attempted to fix the geographic system for non union employees and both failed over the details. He said the legislative focus in 1996 and 2002 was finding a way to lower the state's personal services budget, not fixing the inherent unfairness in the current system. The current differential was adopted in 1976 while the TAPS was still under construction. Obviously a lot has changed since then. The executive branch's union contracts, which are renegotiated every three years, have not reflected this out-of- date differential since around 1985, although the differentials in the current contracts are apparently also substantially out of date. He said while the judiciary is a tiny branch using less than 2 percent of the state's general fund operating budget they actually employ about two-thirds of all the non union employees who are currently getting a geographic differential. They have 266 eligible employees as of late last year; the executive branch has 190 and the legislative branch has 10. He said this situation is especially problematic for his employees because most of them are clerical workers at ranges 10 and 12, whereas many of the executive branch employees are attorneys in the Department of Law and the Public Defender Agency who get a much higher base salary to live on. Assuming that the differential rates reflected in the McDowell study are accurate, he has clerical employees who, in rural Alaska for example Dillingham, are being paid as much as 25 percent less than the actual cost of living. To put it a little differently, those employees are effectively being paid about 25 percent less than employees in Anchorage for doing the exact same work. Conversely, he has employees in certain urban areas, such as Fairbanks and Palmer, who are effectively being paid 5- 10 percent more than Anchorage employees for the exact same work. MR. CHRISTENSEN said every year they go without fixing the unfairness inherent in the current system it gets more expensive because the differential between Anchorage and most rural communities has increased compared to what it was the last times they tried to fix it. It's complicated because those employees who are benefiting from a too high differential in their communities like Fairbanks have based their economic decisions - like mortgage payments, car payments, and rate at which they save for retirement and their children's education - on their current salaries, projected longevity increases and cost of living adjustments granted by the legislature. Under those circumstances they think it would be unfair to reduce the differential of those employees as was proposed in the past or even to freeze those employees in place as the current bill proposes. Some employees would not get a merit increase for 5-10 years if this would pass because their geographic differential has been changed so much. In conclusion, Mr. Christensen urged them to do something that would address the inherent unfairness in the current system. 2:58:24 PM SENATOR JOE THOMAS asked what he used to determine the differential in places like Bethel versus Anchorage. MR. CHRISTENSEN answered that those figures were based on what the law currently gives employees and what the McDowell study would give those employees in those communities. SENATOR THOMAS asked if the real problem wasn't finding a meaningful formula that everyone can agree on. He said they should have compared a comprehensive list of things that were done the same way every time. He said he received a complaint that a lot of the Fairbanks housing data was used when the military troops were gone and that applied downward pressure to the housing market as far as what rents were or sale of houses. He didn't know what the right answer was, but he did know that a lot of people were excited about it. MR. CHRISTENSEN said he didn't know if the committee received a letter from the Association of Alaska Magistrates stating concern about the McDowell study because they disagreed with some of the methodology and the way it affected certain communities. He agreed that deciding what is fair is the most difficult thing. SENATOR CON BUNDE asked what he thought would be a good solution. MR. CHRISTENSEN replied their preferred method would be to give people who are getting paid substantially less than the cost of living relative to Anchorage a raise and freeze people who are getting paid too much. He said the court system has a great deal of turnover, about 10 percent per year, and that would make the fiscal note for the first year the same either way; the cost would go down more slowly if they were allowed to retain their current salaries and continue to get merit increases. He explained that a merit system gives annual merit increases to employees, if they deserve it, but often it isn't used like that. In the Court System merit increases are withheld if people aren't performing adequately. When you tell people they aren't going to be eligible for merit increases for 4-10 years because of this change in the law, you have to wonder what is going to happen in your organization. So, there are practical problems. SENATOR BUNDE remarked that very few state employees think they get paid too much. 3:04:15 PM JIM CALVIN, principal, McDowell Group, Juneau, said they provided the geographic differential survey. He said two primary methodological tasks were involved in this project. One was a household survey of 2500 Alaskan households in 74 communities scattered throughout the state; the purpose was to essentially understand the size and shape of the Alaskan household budget relative to housing, food, transportation, medical care, et cetera. The second was a retail price survey conducted in over 600 retail outlets throughout the state and 58 different communities to understand the difference in prices of a market basket of about 200 typical household items over the state - like the price of a loaf of bread in Angoon versus a price of a loaf of bread in Anchorage. He stated clearly that the study never addressed nor implied that anyone was being overpaid in state government. In fact they didn't measure the cost of living; they measured the differences in cost of living between Anchorage as the base community, and a differential of 1 and a range of other districts. So the equity of pay overall is not part of what they were trying to do and they don't want that suggested. MR. CALVIN said one last methodological background point is that they initially departed from the election district structure of the previous differential and focused instead on defining geographic differential pools, which are essentially collections of communities that exhibit like characteristics in terms of size, geographic location, climactic conditions and transportation infrastructure. One of the overarching conclusions the study found is that if you're on a road system you're in a very different situation than if you are off the road system, although small Southeast communities are different because they have ferry service. Road access is probably the most critical aspect in the cost of living. 3:08:01 PM In regards to Senator Thomas's issues about the impact of the deployment of troops on the Fairbanks economy, there certainly was an impact. But typically about 60 percent of the residents in a community own their own home; so that deployment didn't affect anyone's mortgage payment. It would affect rental payments if a typical renter were moving into a different rental situation during the period and new people coming into town might have experienced slightly lower rents if property values were slightly lower. But overall, if you think of the slice of the population that might have been affected because they were moving in or out of the community it was pretty small. MR. CALVIN said turnover in Fairbanks housing is relatively low and it is typically about one-third of the household budget. Some minor variation in that aspect of the household budget is possible, but they didn't see that as having any meaningful impact on the differential. What really matters is transportation infrastructure and Fairbanks has great transportation infrastructure. Essentially they have the same overall cost of living as Anchorage and many other communities on a highway system. SENATOR THOMAS said he appreciated that and would probably agree, but he wanted to know how values were assigned to these things. Rents and housing costs, for instance, vary dramatically from one part of town to another whether the town is Anchorage or Fairbanks. The cost of fuel is extremely volatile in Fairbanks but not in Anchorage, and the cost of fuel also affects the price of electricity because Fairbanks has a fuel surcharge that doubled the electric costs last year. It still exists now as it is getting paid off. That made his electric bill go from $100/mo. to $200/mo. and doubled the cost of fuel for his car. He had difficulty with understanding the methodology in the survey. He thought there should be relatively fair way of establishing it and then some adjustment would have to be made for up and down. People probably looked at their survey and compared it to what took place in 2009 and said it didn't make sense because the cost of fuel went way up and a variety of other things. He wasn't so much concerned about the cost of tooth paste and Campbell's soup. MR. CALVIN responded that the basic methodology in the survey was to measure the cost of housing as people experience it in each community. Their challenge was to compare how people live in Anchorage versus how they live in Fort Yukon and look at how important the cost of housing is to a household budget in Fort Yukon versus Anchorage. Housing is the single most important factor; urban areas typically have higher mortgage rates and housing costs. Anchorage's are among the highest in the state. So, using Anchorage as the base doesn't mean it's the lowest cost by any stretch of the imagination for all aspects of the household budget. 3:15:23 PM SENATOR THOMAS said it's important for him to know how they settle on particular items that they think are indicative of the economy in that specific area and how they are adjusted because a lot of things are based on that - like salaries, for instance. They are talking about percents; so even if there was a minor impact to housing, it is such a big item in the overall household budget that 1 or 2 percent would have a big impact. Also, he wanted to know what McDowell used when they compared the heating cost - a dollar value or a barrel of equivalent - for the heating value that one gets out of a certain increment of a particular fuel. MR. CALVIN replied that they collected a great deal of data on what people paid in each community regardless of the energy efficiency of their home or the price of fuel in their community and calculated how important it was to the average household budget there. He said they conducted their household survey and all of their secondary research where they collected price data in the fall of 2008. The peak of fuel prices was in the summer of 2008; so fuel prices were changing dramatically right during their research effort, but they weren't at a peak. They asked people to tell them about their average monthly expenditures for the year of 2008. It interested them to understand if they had done the study in 2009 or 2007 what differences they might have seen in the differentials. There is some sensitivity in the differentials if prices had been 30 percent lower for fuel primarily in the small remote rural communities, not so much Fairbanks that might be 1.05 instead of 1.04 or 1.06. Sensitivity to prices is much more evident in the rural areas where they are not only paying higher prices for their fuel but the effect of a spike in fuel prices is multiplied because first you have to get the fuel out to the community and then you pay the additional price on that. It's really a geometric increase in prices when you look at a fuel change in Bethel. for example. 3:18:00 PM CHAIR PASKVAN asked if the McDowell Group knew that the Striker Brigade had deployed. MR. CALVIN answered yes, certainly; they keep close track of the economy. CHAIR PASKVAN asked what numbers left Interior Alaska as a result of that deployment. MR. CALVIN answered if 2000 people were deployed that might be a population change of 3 percent or so. CHAIR PASKVAN asked if triple those numbers would that have an immediate effect on selling prices of homes and rents. MR. CALVIN answered certainly in the rental market. The turnover in the population is what is meaningful. People leaving is not going to change anyone's mortgage nor will it change rent for a renter. CHAIR PASKVAN asked if he didn't believe that rents dropped as a result of the deployment. MR. CALVIN said they probably did, but it didn't change the rental rates for people already living in the community pre Striker Brigade deployment. He said a guy wasn't going to drop his rental rates; although someone who lost renters because of the deployment might need to offer lower rental rates to someone new coming in. 3:22:18 PM CHAIR PASKVAN said this discussion has shown SB 298 to be a complex issue; he thanked everyone for their testimony and said it would be held for more work. He adjourned the meeting at 3:22 p.m.