Legislature(2003 - 2004)

02/10/2004 03:30 PM STA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
        SB 232-RETIREMENT:TEACHERS/JUDGES/PUB EMPLOYEES                                                                     
CHAIR GARY STEVENS announced SB 232 to be up for consideration.                                                                 
ANSELM  STAACK, Department  of Administration  (DOA), said  he is                                                               
the chief  financial officer  for the  public employees'  and the                                                               
teachers' retirement  systems and any others  that operate within                                                               
the  Division  of  Retirement  and  Benefits  including  SBS  and                                                               
deferred compensation.                                                                                                          
He  explained that  the Internal  Revenue Service  (IRS) reviewed                                                               
the entire  plan reviewed by  the Internal Revenue  Service (IRS)                                                               
and  the process  took three  years. He  noted that  to remain  a                                                               
qualified  plan,  the  division  must  ensure  that  their  plans                                                               
conform  to tax  law, which  requires modifications  whenever tax                                                               
laws change. More importantly, the  division had to get a private                                                               
letter  ruling from  the  IRS for  employees to  be  able to  pay                                                               
indebtedness to the system with  pre tax dollars rather than with                                                               
post tax dollars.                                                                                                               
For  the   public  employees'   retirement  system   (PERS),  the                                                               
teachers'  retirement  system   (TRS),  the  judicial  retirement                                                               
system  (JRS), and  the supplemental  benefits  system (SBS)  the                                                               
division sought a private letter  ruling and a plan determination                                                               
letter. The latter  is an IRS letter approving the  plan. As long                                                               
as the  established rules  are followed, monies  may be  paid pre                                                               
tax and the plan is eligible for IRA rollovers.                                                                                 
The  plan document  or the  rules  for a  tax-qualified plan  for                                                               
PERS,  TRS and  JRS  are  in statute  and  therefore any  changes                                                               
require legislative  action. The  original bill on  this subject,                                                               
SB 245,  addressed the first  series of changes suggested  by the                                                               
IRS. It  was at  that time  that the  Division of  Retirement and                                                               
Benefits  came to  realize that  the  process was  going to  take                                                               
longer than initially anticipated                                                                                               
SBS has a  separate plan document from PERS, TRS,  and JRS and it                                                               
contains  little  statutory  language. Therefore,  when  the  IRS                                                               
mandates certain  changes to the  SBS plan, the division  is able                                                               
to  make those  changes  without legislative  action. He  assured                                                               
members that just the changes that  the IRS required were made to                                                               
the SBS plan.                                                                                                                   
On April  30 2003,  the division received  the IRS  positive plan                                                               
determination letters for  the PERS, TRS, and  JRS plans. Because                                                               
the  positive determination  was  conditioned on  making all  the                                                               
suggested changes in statute within  210 days, the division asked                                                               
that SB 232 and HB 331  be introduced. They realized there wasn't                                                               
time  to  get  the  legislation  passed before  the  end  of  the                                                               
session, but felt this showed a good faith effort.                                                                              
In  August  2003,  the division  received  the  positive  private                                                               
letter rulings  related to PERS, TRS,  and JRS. At the  same time                                                               
they  received a  negative letter  ruling  for including  village                                                               
public safety officers  (VPSO) in PERS. This means  VPSOs must be                                                               
statutorily removed from  PERS. In the first session  of the 22nd                                                               
Legislature  SB  145 placed  VPSOs  into  PERS and  required  the                                                               
placement by March 2002.                                                                                                        
Mr.  Staack said  the division,  and  he in  particular, did  not                                                               
implement the  placement because  IRS had not  made a  ruling and                                                               
there  were indications  that IRS  would question  the placement.                                                               
Placing  VPSOs in  PERS without  a positive  ruling from  the IRS                                                               
would have exposed PERS to  unqualified plan status. The risk was                                                               
too great to test.                                                                                                              
MR. STAACK  said he  personally argued the  VPSO case  before the                                                               
IRS in  Washington D.C. but the  ruling was negative. He  noted a                                                               
copy of the ruling was in member's packets.                                                                                     
CHAIR GARY STEVENS remarked that tax code reading is tedious.                                                                   
MR. STAACK chuckled and admitted that  he's one of the few people                                                               
that enjoy it.                                                                                                                  
CHAIR GARY  STEVENS announced  there was a  work draft  CS before                                                               
the  committee and  he asked  for  a motion  to adopt  it as  the                                                               
working document.                                                                                                               
SENATOR  JOHN COWDERY  made a  motion to  adopt CSSB  232 as  the                                                               
working document. There being no objection, it was so ordered.                                                                  
CHAIR  GARY  STEVENS asked  Mr.  Staack  to outline  the  changes                                                               
between the original bill and the CS.                                                                                           
A sectional analysis may be found in the bill file.                                                                             
MR. STAACK  noted the original  bill had  19 sections and  the CS                                                               
has 32  sections. He pointed to  page 2, lines 6-9  and read, "No                                                               
amendment  to this  chapter  provides any  person  with a  vested                                                               
right to  a benefit  if the  Internal Revenue  Service determines                                                               
that the  amendment will result  in disqualification of  the plan                                                               
under the  Internal Revenue  Code." That  addition is  to prevent                                                               
the  general  fund  from  being  liable if  a  state  law  exists                                                               
allowing benefits that cannot be  paid out of plan assets because                                                               
of an IRS determination.                                                                                                        
Section 3  relates to changing  any reference to  "teacher(s)" to                                                               
the term "member(s)." That change  occurs throughout the bill and                                                               
applies  to PERS  as well.  The IRS  determined that  using terms                                                               
other  than  "members"  could  lead to  confusion  and  a  single                                                               
definition was preferable.                                                                                                      
Sections 5  and 6 are conforming.  Section 7 is to  allow members                                                               
to purchase  permissible service  credits such as  military time.                                                               
Section  10  adds  additional  sections  to  satisfy  eligibility                                                               
requirements and use  service history. Sections 11 and  12 are to                                                               
conform to the tax code in effect for 1980.                                                                                     
Section 13 was  a hard fought and long negotiated  addition. If a                                                               
member has any reduction from  the 100 percent based benefit, the                                                               
actuarial factors that apply have  to be specified in regulation.                                                               
The IRS originally wanted the  factors outlined in statute rather                                                               
than regulation so to satisfy  them, the division was required to                                                               
prove  the basis  for  every  actuarial factor  in  terms of  the                                                               
mortality  table. He  emphasized there  is good  reason for  this                                                               
because members should  be able to find out how  their benefit is                                                               
computed. He  continued, "You have a  right to know that  yes, we                                                               
use the  1973 mortality table  and we  used a 2  percent interest                                                               
rate." That is in regulation and not the bill.                                                                                  
Section  14 speaks  to the  interchangeability between  "teacher"                                                               
and  "member." Section  15 defines  the prescribed  interest rate                                                               
used for the actuarial tables.                                                                                                  
Sections 16  - 20 relate  to the JRS. Section  18 says no  one is                                                               
entitled to a  benefit unless the code says they  are. Section 20                                                               
is the actuarial assumption factors.                                                                                            
Sections  21  - 31  relate  to  PERS.  Section 21  stipulates  no                                                               
amendment  can  be made  if  it  results in  a  disqualification.                                                               
Section 22  deletes VPSOs.  Section 25 deletes  a mistake  in the                                                               
original HB  245 relating to forcing  a member to cash  out their                                                               
Section 26  shows corrections for  VPSOs for  permissible service                                                               
credit. Sections 27 and 28 are  conforming. Section 29 is for the                                                               
actuarial assumptions.  Sections 30  and 31 are  the last  of the                                                               
VPSO removal.                                                                                                                   
Sections  32 -  35 are  for  redesignations of  some systems  and                                                               
outlines when certain parts are effective.                                                                                      
TAPE 04-3, SIDE B                                                                                                             
4:24 pm                                                                                                                       
CHAIR GARY STEVENS  thanked Mr. Staack then  outlined the process                                                               
by which  the state passes  money to village nonprofits  that pay                                                               
the VPSOs. He  asked how that process is dissimilar  to the state                                                               
funding school districts that use the money to pay teachers.                                                                    
MR. STAACH replied there are  two issues involved. When the state                                                               
gives money to  a school district, the district  employees may be                                                               
TRS members because they are  employees of a governmental entity.                                                               
In contrast,  VPSOs are not  employees of a  governmental entity;                                                               
they are employees of a 501(c) (3) nonprofit corporation.                                                                       
He emphasized that  the division tried very hard  to include VPSO                                                               
and  even argued  that the  state was  leasing an  employee of  a                                                               
regional  Native  corporation for  the  purpose  of doing  public                                                               
safety services. The  IRS didn't agree with that  argument or any                                                               
other. Their  point is that the  state is asking the  IRS to rule                                                               
that  a  small  portion  of   the  regional  Native  corporation,                                                               
specifically the VPSOs, are government  employees and are working                                                               
for a government. At the  same time, those employees will provide                                                               
services to villages that are members  of PERS. IRS asked why the                                                               
village couldn't  employ those individuals. IRS  said asking them                                                               
to  declare   that  part  of   the  regional  corporation   is  a                                                               
governmental entity  raises the  question of  whether or  not the                                                               
entire corporation is a governmental entity.                                                                                    
There is  considerable tax law  stating you  can't be both  a 501                                                               
(c)(3) nonprofit  corporation and  a governmental entity.  If the                                                               
IRS were to rule that  the regional corporation is a governmental                                                               
entity for  purposes of the  VPSOs, their nonprofit  status would                                                               
be jeopardized.                                                                                                                 
CHAIR GARY  STENVENS referred  to page  4 of  the IRS  letter and                                                               
asked for clarification.                                                                                                        
MR.   STAACK  replied   the   IRS   letter  provides   background                                                               
information up to page 8. He read:                                                                                              
     Thus, we conclude  that the K Corporation(s)  is not an                                                                    
     agency or  instrumentality of the State  or a political                                                                    
     subdivision  thereof.  Accordingly,  as for  the  first                                                                    
     ruling requested, we find that  the inclusion in Plan X                                                                    
     of  Community  Officers,  who  are  employees  of  a  K                                                                    
     Corporation which does not qualify as an agency...                                                                         
He explained the following paragraph  states that it is not legal                                                               
for the  plan to take  contributions from VPSOs and  the employer                                                               
may not  pick them up.  He continued,  "The only reason  your SBS                                                               
money that  you pay into  the supplemental benefit system  or the                                                               
pretax  contributions   you  make  into  the   Public  Employees'                                                               
Retirement System  is pretax  is because a  'fiction' of  the law                                                               
converts it  to employer  money for purposes  of being  picked up                                                               
and deposited  in the plan." With  regard to VPSOs, IRS  is clear                                                               
in stating there is no authority to do that.                                                                                    
CHAIR  GARY  STEVENS  remarked  it's  unfortunate  that  this  is                                                               
occurring at the  same time that the Department  of Public Safety                                                               
is  encouraging  the  regional   Native  corporations  to  assume                                                               
responsibility for the VPSO program.  In this time of budget cuts                                                               
it makes  it difficult  for the  Native corporations  to continue                                                               
the program.                                                                                                                    
MR. STAACK  verified that all parties  tried very hard to  find a                                                               
solution and even the tribal section of the IRS was involved.                                                                   
SENATOR BERT STEDMAN questioned  whether the division is actually                                                               
using mortality tables from the 1970s.                                                                                          
MR. STAACK  replied the table  that is  used depends on  when the                                                               
member  was first  hired  in  the system.  Some  would use  those                                                               
tables, but  in 2000 the  division switched from the  1983 tables                                                               
to  the 1994  mortality tables  for the  purposes of  calculating                                                               
liabilities in PERS and TRS.                                                                                                    
SENATOR STEDMAN  observed the two  options are to bring  the plan                                                               
into compliance  or not. If  the latter  choice is made  then the                                                               
entire   plan  becomes   noncompliant   thereby  triggering   tax                                                               
MR. STAACK  replied if  a plan  is determined  non-qualified, the                                                               
pretax contributions  stop immediately.  It's also  possible that                                                               
the money  that is already  in the plan would  become immediately                                                               
taxable. The legal liability associated  with an unqualified plan                                                               
is tremendous.                                                                                                                  
SENATOR  STEDMAN asked  if  changes could  be  expected every  so                                                               
often as the IRS evolves their rulings.                                                                                         
MR. STAACK  assured him  that any  time the  tax law  changes the                                                               
division is automatically required to become compliant.                                                                         
SENATOR STEDMAN asked how the 457 (B) plan is handled.                                                                          
MR. STAACK said the 457(B)  plans are deferred compensation plans                                                               
for  governments and  other nontaxable  entities  and are  called                                                               
eligible retirement  plans. The  PERS, TRS, JRS,  teacher 403(B)s                                                               
and  the  supplemental  benefits   system,  which  is  a  defined                                                               
contribution plan  are all  qualified plans.  For the  most part,                                                               
the  rules for  both are  now identical  to all  other retirement                                                               
plans. Previously  they were not the  same, but there is  no need                                                               
to make a  change in this legislation, he said.  However, just to                                                               
be on  the safe side,  they adopted  any changes that  applied to                                                               
SBS to deferred compensation.                                                                                                   
CHAIR GARY STEVENS asked for the pleasure of the committee.                                                                     
SENATOR JOHN COWDERY  made a motion to move CSSB  232(STA) to the                                                               
next committee  of referral  with individual  recommendations and                                                               
the attached  fiscal note.  There being no  objection, it  was so                                                               

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