Legislature(2013 - 2014)HOUSE FINANCE 519
04/12/2014 02:00 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB385 | |
| SB104 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 385 | TELECONFERENCED | |
| + | SB 195 | TELECONFERENCED | |
| + | SB 104 | TELECONFERENCED | |
| + | SB 194 | TELECONFERENCED | |
| *+ | HB 349 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
April 12, 2014
2:54 p.m.
2:54:00 PM
CALL TO ORDER
Co-Chair Stoltze called the House Finance Committee meeting
to order at 2:54 p.m.
MEMBERS PRESENT
Representative Alan Austerman, Co-Chair
Representative Bill Stoltze, Co-Chair
Representative Mark Neuman, Vice-Chair
Representative Mia Costello
Representative Bryce Edgmon
Representative Les Gara
Representative David Guttenberg
Representative Lindsey Holmes
Representative Cathy Munoz
Representative Steve Thompson
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Angela Rodell, Commissioner, Department of Revenue; Michael
Barnhill, Deputy Commissioner, Department of
Administration; Gary Bader, Chief Investment Officer,
Treasury Division, Department of Revenue; David Teal,
Director, Legislative Finance Division; Karen Crane, Alaska
Municipal League; Pat Branson, Mayor, Kodiak; Larry
DeVilbiss, Mayor, Mat-Su Borough; Bob Bartholomew, Finance
Director, City and Borough of Juneau; Senator Fred Dyson;
Joshua Banks, Staff, Senator Dyson; Commissioner Schmidt,
Department of Corrections; Leslie Houston, Deputy
Commissioner, Department of Corrections; Dan DeBartolo,
Director, PFD Division, Department of Revenue.
PRESENT VIA TELECONFERENCE
Mim McConnell, Mayor, City of Sitka; John Sweeney, Finance
Director, City of Sitka; Rick Kock, City Manager, Kenai;
Jennifer Johnston, Anchorage Assembly, Alaska Municipal
League, Anchorage; Jim Williams, Chief of Staff, City of
Fairbanks; Sallie Stuvek, Human Resources Director,
Fairbanks North Star Borough; Jon Bolling, City of Craig;
Stephanie Scott, Mayor, Haines Borough.
SUMMARY
HB 349 AK RETIREMENT RESERVE FUND
HB 349 was SCHEDULED but not HEARD.
HB 385 PERS/TRS STATE CONTRIBUTIONS
HB 385 was HEARD and HELD in committee for
further consideration.
CSSB 104(FIN)
APPROPRIATIONS FROM THE DIVIDEND FUND
CSSB 104(FIN) was HEARD and HELD in committee for
further consideration.
CSSB 194(FIN)
TOURISM MARKETING BOARD
CSSB 194(FIN) was SCHEDULED but not HEARD.
CSSB 195(FIN)
POSTSECONDARY EDUCATION LOANS/GRANTS
CSSB 195(FIN) was SCHEDULED but not HEARD.
HOUSE BILL NO. 385
"An Act relating to additional state contributions to
the teachers' defined benefit retirement plan and the
public employees' defined benefit retirement plan; and
providing for an effective date."
2:55:31 PM
ANGELA RODELL, COMMISSIONER, DEPARTMENT OF REVENUE,
introduced the Public Employees' Retirement System (PERS)
and Teachers Retirement System (TRS) funding solution
legislation. She understood that legislators also worked
diligently to arrive at a solution for the state's unfunded
liability weighing the long-term financial impact against
other demands on the state's resources.
Commissioner Rodell remarked that pension funding was an
issue for many years. She recounted that the issue was
addressed in November 2010 by the Alaska Retirement
Management Board (ARMB) and a number of different options
were considered. She stated that in September 2011, the
governor asked the ARMB to seek potential solutions. In
2012, the ARMB adopted the "level dollar" approach; the
lowest cost option in the long-term. Within two years, the
actuarial reports revealed the long-term budget impact of
the approach, which prompted further examination. The
actuarial reports exposed the "real value" in the level
dollar approach in terms of lower costs, but the
administration also understood the real value in creating
"budget certainty and budget durability." She underlined
that the solution was a compromise between the level dollar
approach and initially pre-funding a portion of the
liability and creating budget certainty with an ongoing
payment.
MICHAEL BARNHILL, DEPUTY COMMISSIONER, DEPARTMENT OF
ADMINISTRATION, discussed the Power Point Presentation:
"PERS/TRS Funding Solution, Governor Sean Parnell" (copy on
file). He reported that the first several slides provided
background information on the issue. He began with Slide 3
and explained that the defined benefit pension system was
administered by three entities:
"Organization"
1) Department of Revenue
Treasury Division
Invests retirement system assets
2) Alaska Retirement Management Board
Sets contribution rates, invests retirement system
assets.
3) Dept. of Administration
Division of Retirement & Benefits
Administers retirement and benefits system.
Mr. Barnhill expounded that the retirement system assets
amounted to $20 billion and the defined contribution assets
were approximately $5 billion. He added that the ARMB had
nine members appointed by the Governor comprised of PERS
and TRS employees, two public members, one municipal
finance officer, and two commissioners. The Department of
Administration (DOA) administered the pension and health
care benefits which amounted to $1.5 billion per year.
Mr. Barnhill continued with slide 4: "Membership." The
slide depicted a chart containing the membership statistics
as of December 31, 2013. He highlighted that the state
employed 27,000 active members of PERS and TERS and had
42,000 retirees. Including dependents approximately 120,000
people were encompassed under PERS and TRS plans.
Mr. Barnhill discussed slide 5: "Benefits." The graph
depicted the projected benefits payments. The system was
projected to pay $136 billion in benefits by 2070. He
reported that the current PERS/TRS account balance was
$19.9 billion. [The unfunded liability reported on the
slide amounted to approximately $11.9 billion.]
Mr. Barnhill discussed slide 6:
Defined Benefits
Defined Benefit Pension: fixed benefit amount from
date of retirement to death
Contributions + Investment Earnings = Benefits +
Expenses
IF
Experience equals actuarial assumptions
Actuarial Assumptions:
Inflation, Investment Return, Mortality, Date of
Retirement, Cost of Healthcare, Payroll Growth,
Disability, Spouse Age, Dependent Children, COLA, Plan
Expenses, Turnover
Experience that falls short of projections leads to
unfunded liability
Employer Takes the Risk
Mr. Barnhill informed the committee that the critical piece
of the defined benefit formula was investment earnings. The
state's active employees contributed 6.75 percent to 8.75
percent of their salary to the plan. The actuary set the
rates each year for the amount the employer needed to
contribute. The rates were highly unstable since 2002. The
current balance determined the rates; set at 12 percent for
TRS and under 10 percent for PERS. In addition, health care
cost projections were not satisfactory. Employer
contribution rates rose dramatically since the early
2000's. The projected FY 15 employer contribution rate was
over 40 percent for PERS and over 70 percent for TRS. He
elaborated that two types of costs or rates were included
in a defined benefit system. The normal cost was the rate
collected from employees and employers. Nothing additional
was necessary beyond the normal cost if all actuarial
assumptions were correct. The actuarial projections were
not correct and were underestimated over the last 10 years.
The underestimated contributions were known as a "past
service liability" and a past service liability
contribution rate was established by the actuarial. He
emphasized that when the actuarial underestimates the
employer takes the risk. The situation lead to the current
challenge for the state of how to manage the unfunded
liability.
3:05:04 PM
Mr. Barnhill turned to slide 7: "Events."
2002 - Milliman actuarial audit; dotcom collapse
2003 - FY 2002 valuations released with revised
assumptions.
$4.1B unfunded liability
2005 - SB 141 enacted: DB plans closed; DC plans
created; PERB/TRB/ASPIB sunset; ARM Board created
2007 - ARM Board files suit against Mercer for
actuarial negligence; SB 123 enacted: PERS cost share
2008 - SB 125 enacted: employer contribution rates
capped; state assistance begins; Great Recession
begins
2009 - PERS / TRS investment loss: (20.5%)
2010 - Mercer litigation settled for $500mm (net
$403mm); other states begin to cut DB benefits, change
plans;
2012 - ARMB adopts level dollar amortization; $11.9B
unfunded liability
2013 - 12.5% investment gain; recession over?
Mr. Barnhill summarized that throughout the 1990's the
impact of growing healthcare costs were underestimated and
the collective downturn in the investment market in the
early 2000's and again in 2009 were the largest drivers of
the current unfunded liability of $11.9 billion.
Mr. Barnhill moved to slide 8: "PERS/TRS Balance Sheet." He
explained that an 80 percent funding ratio was a common
gauge for a healthy system. Both PERS (61.3 percent) and
TRS (52.1 percent) were well under the 80 percent funding
ratio which indicated additional funding was needed. The
total balance for both accounts was approximately $20
billion.
Mr. Barnhill addressed the graphs on Slides 9 and 10. He
believed that the state appropriated "extraordinary"
amounts on behalf of public employees and school districts
each year. The current year contribution totaled $3.3
billion; $1.7 was appropriated on behalf of school
districts and $1.6 billion for state and municipal
employees. He questioned whether school districts could
have existed without the state's contributions.
Mr. Barnhill discussed the multiple approaches to deal with
the unfunded liability. He discussed Slide 9: "PERS/TRS
Approaches to Unfunded Liability." He noted that ARMB
amortized the unfunded liability over 25 years at the
"level percentage of pay" methodology. The payments on the
unfunded liability were expected to grow at the same rate
as payroll would grow (approximately 4 percent). He termed
the system as a "back loaded" amortization methodology and
defined it as a system where contributions were less in
earlier years and increased in later years in nominal
dollar terms. He noted that slide 9 illustrated the trend,
depicting payments ranging from $700 million per year
currently and increasing to well over $2 billion per year
in the late 2020's. The ARMB considered the payment
methodology with dozens of scenarios with the goal of
paying it down in an affordable way.
Mr. Barnhill discussed slide 10: "PERS/TRS Approaches to
Unfunded Liability." The ARMB adopted a new methodology for
amortizing the unfunded liability called "Level Dollar." He
delineated that level dollar was formula based and
identical to home mortgage amortization with equal flat
level payments over the amortization period; referred to as
a "front loaded" amortization methodology. He pointed out
that the profile of the graph curve from FY 2015 through FY
2030 depicted higher payments earlier and lower payments
later. If adopted the payments would go from $630 million
in FY 2014 up to $975 million in 2015 and would crest over
$1 billion in FY 2016 through FY 2020 and begin to trend
down. The main concern was finding consensus on what amount
was affordable. He thought that the general consensus was
that multiple billion dollar payments were not affordable.
The administration searched for a more affordable way of
responsibly amortizing the unfunded liability in the next
several years.
GARY BADER, CHIEF INVESTMENT OFFICER, TREASURY DIVISION,
DEPARTMENT OF REVENUE, announced that that the benefits
were secure today, but unless addressed soon, the
combination of increased benefits and insufficient
investments impacted the rate of return, leading to reduced
earnings and increased contributions. He turned to slide
12:
Fund Liquidity Analysis
Although there is a substantial unfunded liability in
both the PERS and TRS, there are billions of dollars
to pay benefits well into the future.
Benefits payments will increase substantially in the
next decade. Unless addressed, the combination of
increased benefit payments and insufficient assets in
the trusts will require investing in more liquid
assets.
Mr. Bader discussed slide 13: "Comparative Returns." He
stated that the table illustrated the returns of the
state's largest funds: PERS/TERS, CBR (Constitutional
Budget Reserve) and the APFC (Alaska Permanent Fund
Corporation.) He pointed out that the PERS and TRS and the
Permanent Fund had similar earnings over time. Both funds
outperformed the CBR. The purpose of the funds determined
the investment strategy. He stated that the PER/TRS were
invested for the long term. The permanent fund was a
perpetual fund invested for the long term. The long term
nature of the fund allowed the funds to invest in certain
asset classes such as private equity called "ill-liquid"
assets.
Mr. Bader discussed slide 14:
"ARMB Private Equity Program."
Private equity is largely made up of interests in
limited partnerships that make equity investments in
privately held operating companies.
Private equity is expected to deliver long-term
returns in excess of the public markets and to enhance
diversification. To earn higher returns, private
equity gives up liquidity.
Performance has been good, generating 10.2% returns
through 2013 versus a public market equivalent return
of 4.6% for the S&P 500 and 5.1% for the Russell 3000.
The private equity program has generated $800 million
in additional fund value for the ARMB compared to
investing in the public equity markets.
The ARMB started investing in private equity in 1998
and now has $1.7 billion invested across 200+
partnerships; private equity is a 9% asset allocation
for the ARMB.
Mr. Bader emphasized that prompt access to the CBR funds
were necessary and therefore not conducive to investing in
the long term asset class. The PER/TERS were expected to
earn a higher percentage of return on investments after a
transfer of funds from the CBR into the PERS/TRS Trust
Fund.
3:15:32 PM
Commissioner Rodell turned to slide 16:
"Problem: $11.9 Billion Retirement System Unfunded
Liability."
The Public Employees Retirement System (PERS) and
Teachers' Retirement System (TRS) combined unfunded
liability is $11.9 billion
•State Assistance payments to PERS and TRS rise from
$629 million in FY2014 to over $1 billion per year
•Funding State Assistance solely through the operating
budget crowds out funding for other vital public
services
•Rating agencies express concern with the increasing
liability
Commissioner Rodell moved to slide 17:
"Proposal: $3 Billion Investment in Trust Funds."
Invest a total of $3 billion in the Retirement Trusts
in FY2015:
$1.12 billion - Teachers' Retirement Fund
$1.88 - Public Employees' Retirement Fund
Funding source: the Constitutional Budget Reserve
•Includes state assistance payments for FY2015.
•Beginning FY 2016, State Assistance payments would be
fixed at $500 million annually:
$157 Million - PERS
$343 Million - TRS
•State Assistance projected until FY2036; length of
time depends on actuarial gains or losses experienced
Commissioner Rodell discussed the graph on slide 18:
"Governor's Proposal." She noted that the graph depicted
what the governor's proposal would look like over time. She
pointed out that the previous graphs depicting level
percent of pay (slide 9) and level dollar (slide 10)
indicated variability in payment amounts from 2008 through
20014. The lump sum leveled out the annual payments to $500
million per year.
Commissioner Rodell turned to slide 19:
"Governor Parnell's Approach.
• Pays down the retirement system debt rather than
passing it on to future generations.
•A comprehensive and straight-forward approach
addressing the problems of both PERS and TRS
retirement systems.
•Addresses Alaska's biggest budget driver while
keeping the State's promise to our retired public
servants.
•Dramatically reduces future operating budget
obligations and provides predictability for future
budget planning.
•Improves municipal balance sheets and aligns the
interest of the State of Alaska with our
municipalities by sharing gains and losses.
•Addresses the number one credit concern raised by
rating agencies.
•Improves and strengthens the health of the retirement
systems.
Commissioner Rodell commented that the administration
believed the legislation was the "right approach."
Commissioner Rodell provided a sectional analysis of HB
385. She read from the prepared sectional.
Section 1:
This section amends the Teachers' Retirement System
(TRS) state assistance statute (AS 14.25.085). This
statute was enacted in 2008 by SB 125, and currently
provides that the state shall appropriate the amount
sufficient to fully pay the total past service
liability for the year at the employer contribution
rate adopted by the Alaska Retirement Management Board
(ARMB). In practice, this means that the State
appropriates the amount that reflects the difference
between the TRS employer contribution rate cap of
12.56% and the actuarial contribution rate to the TRS
trust funds. In FY14, this amount was approximately
$317mm.
Section 1 amends AS 14.25.085 to implement the
Governor's proposal. Under the Governor's proposal,
$1.1 billion would be appropriated from the
constitutional budget reserve to the TRS trust fund,
and then from FY16-FY36, an annual flat payment of
$343mm would be appropriated as state assistance.
The Governor's plan would convert the actuarial
approach for TRS from an actuarial ratemaking paradigm
to a fixed contribution paradigm. In a ratemaking
paradigm, each year the actuary calculates what
contribution rate is necessary to pay down the
accumulated past service liability. In Alaska, this
has resulted in highly volatile employer contribution
rates that over the past decade have ranged from 12%
to over 70%.
In a fixed contribution paradigm, the rate volatility
is eliminated. Instead the annual contribution is
fixed. In the case of TRS, the annual contribution is
fixed at $343mm. What can change each year, however,
is the term of the amortization. Under the Governor's
plan, the initial amortization term is 21 years-fixed
payments of $343mm through FY36. In the event of
actuarial losses, the actuary may advise that the
amortization term needs to be extended. So if there is
a market downturn that results in investment losses in
FY18, the actuary may advise that the amortization
term must be extended to FY43 in order to fully
amortize the TRS unfunded liability.
Co-Chair Stoltze referred to the payment language in the
legislation that specified a fixed contribution "up to"
$343 million. He inquired how a fixed contribution could be
any amount from $0 to $343 million.
Commissioner Rodell replied that the legislature retained
its appropriation authority in the legislation. The
administration recognized the legislature's right to
determine the contribution amount. The governor intended to
appropriate the fixed contribution amounts but included
language in the legislation that payments were subject to
legislative appropriation.
Commissioner Rodell continued with the sectional.
There could be cases where the actuarial loss over a
particular period is sufficiently profound that
payment of $343mm over any length of amortization term
is insufficient to fully pay off the unfunded
liability. In such case, the actuary will assign a
date on which the TRS trust fund will exhaust its
funds unless the $343mm annual payment amount is
increased. The actuaries call this date the "cross-
over" point.
Co-Chair Stoltze wondered why the legislation did not use
the term "at least" when referring to the contribution
payment. He wanted the legislation to lend "moral guidance"
to the legislature.
Commissioner Rodell replied that the goal of the language
was to allow for legislative flexibility within the
legislation.
Co-Chair Stoltze opined that both terms: "at least" and "up
to" were not adequate. He felt that "up to" was ambiguous.
3:26:18 PM
Commissioner Rodell continued with the sectional and moved
on to Section 2.
Section 2. This section implements the same amendment
as does section 1, for the Public Employees'
Retirement System (PERS) state assistance statute, AS
39.35.280.
A benefit to making this amendment in the PERS context
is that a fixed contribution paradigm aligns the
respective interests of all PERS employers. PERS
employers all share in the actuarial gains, through
having a shorter amortization schedule, and share in
actuarial losses, through having a longer amortization
schedule. Under the current version of AS 39.35.280,
PERS municipal employers are largely indifferent to
the impact of market downturns that create new
unfunded liability because their rate does not change,
and the State absorbs 100% of the impact of any new
unfunded liability. The Governor's proposal cost
shares such new unfunded liability in a fair way by
extending the amortization term, so that PERS
employers pay at the 22% capped contribution rate for
a longer period of time.
Commissioner Rodell concluded with Section 3 and Section 4
of the sectional.
Section 3. This section makes the bill contingent on
the enactment of constitutional budget reserve fund
appropriations to TRS in the amount of $1.1 billion,
and to PERS in the amount of $1.9 billion.
Section 4. Establishes the effective date of this act
as July 1, 2014.
3:28:45 PM
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION, wanted
to offer context to the figures in HB 385. He presented the
fiscal outlook model [presented as an excel spreadsheet]
(copy on file). He recapped that the model included the
state's forecasted oil price and revenue and the operating
budget which totaled $4.35 billion. He pointed out that
spending on the House budget was flat. The model comprised
statewide operations, which included the debt service and
the growing retirement contributions. Finally the model
included a stagnant Capital budget of approximately $550
million.
Mr. Teal reminded the committee that the budget was well
beyond the long-term plan and the funding cap of $5.6
billion announced by the governor. He relayed that the
retirement plan was not included in the funding cap. He
referred to a document that contained 2 graphs titled,
"Unrestricted General Fund Revenue/Budget"(copy on file)
and "Budget Reserves" (copy on file). He pointed out that
the Budget Reserves bar graph depicted budget deficits
escalating and the reserves depleted by 2024 in both the
base scenario and current scenario. He remarked that the
depleted reserves sparked the concern over retirement costs
and cost containment. The bar graph demonstrated lower
reserves over the next ten years in either plan. He said
the "pay as you go" plan (base scenario) was designed to
minimize near term costs. The plan improved the reserve
position by $2 billion which kept the reserves flexible to
ensure cash for gasline investment. He offered that the
governor's scenario, although accepted by the actuaries
"cannot significantly improve" the near term health of the
reserve fund. He concluded that the governor's plan was
designed to improve the health of the retirement system in
the long term and did not consider near term cash flow like
the pay as you go plan, which reduced retirement
contributions as much as possible.
Mr. Teal continued that the governor's plan which paid $3
billion initially and $500 million per year over the next 9
years totaled $7.5 billion or half of the state's $15
billion in reserves.
Mr. Teal discussed the long term outlook and examined the
cumulative retirement costs. He turned to a graph titled
"Cumulative Costs of Options to Eliminate TRS Unfunded
Liability" (copy on file). The graph illustrated that the
governor's plan, which extended into 2043 was initially $1
billion higher than the base scenario paying lower yearly
contributions. The total cost of the plan grew slower than
the base scenario and crossed paths with the base scenario
in 2023 similar to the previous graph. The results were the
same; the early infusion of cash lowered annual payments
and the lower annual payments eventually saved
approximately $.5 billion. He maintained that cheaper
retirement costs lead to lower deficits in the future if
the fiscal outlook remained the same.
Mr. Teal believed that the legislature faced tough choices
in the future. The legislature must decide its level of
commitment to maintaining a healthy retirement system and
whether reserve flexibility was an issue. He declared that
whether the reserves were used for a cash infusion into the
retirement fund or for annual payments the retirement
systems would "consume the same amount of reserves" in the
10-year period regardless of the payment option.
Mr. Teal discussed the graph, "Cumulative Costs of Options
to Eliminate TRS Unfunded Liability". He pointed to the
year 2025 at the approximately $4.5 billion mark, where the
lines intersect. He explained that reducing costs in the
early years were linked to higher costs in total. High
contributions in the early years brought lower costs in
total. He deduced that the situation could be expressed as
"you can pay now or you can pay more later." The relative
position of the intersecting lines was maintained even when
changing the payment variables for either plan. The costs
met on the graph at approximately $4.5 billion, which was
the amount of the unfunded liability. He stated that "the
bottom line" was paying more now significantly reduced
total costs and paying lower payments now cost more in the
"long run." All plans intersect at about 2025. He
maintained that if the legislature was committed to a
healthy retirement fund and knowing that using reserves for
a cash infusion had no significant consequences for the
life or flexibility of the reserves why not choose the
least expensive option in the long run.
Mr. Teal questioned why HB 385 contained the language
"subject to appropriation" and "up to" when the actuarial
recommended contribution could be higher than $343 million
at the standard amortization of 25 years. He concluded that
if the legislature was seeking solutions that minimized
contributions over the next ten years and took a long term
view of the system then larger cash infusions were a better
solution in the long run and in the short run. Minimizing
contributions cost more but both approaches catch up to
each other in the 2023 to 2025 year period. After that time
"the deficits would be lower and the systems healthier."
Co-Chair Stoltze OPENED public testimony.
KAREN CRANE, ALASKA MUNICIPAL LEAGUE, spoke in strong
support of HB 385. She relayed that the bill provided
predictable and affordable annual payments for both the
state and municipalities. The legislation kept the
liability in check and allowed future earnings to offset
future contribution requirements and strengthened the state
and municipal credit ratings. The plan extended
amortization of the unfunded liability and local government
would "bear" a $1.5 billion share of the liability. The
league felt the time to deal with the issue was now and
should not be left to burden future generation.
PAT BRANSON, MAYOR, KODIAK, testified in support of the
legislation. She stated that the city supported the
infusion of $3 billion dollars into the PERS/TRS reserve
account and maintaining the municipalities contribution
rate of 22 percent. The provisions allowed for future
interest in contribution requirements, reduced the budget
pressure on state and local governments and facilitated
planning for leaner budget years. She appreciated the
committee's consideration.
LARRY DEVILBISS, MAYOR, MAT-SU BOROUGH, appreciated the
legislation. The borough supported front-loading the
liability. He stated that the municipalities contributed 22
percent to each payroll. The solution brought relief for
tax payers by lifting the municipality's burden of the
unfunded liability. He hoped for a solution that was
fiscally responsible and fair to taxpayers.
BOB BARTHOLOMEW, FINANCE DIRECTOR, CITY AND BOROUGH OF
JUNEAU, relayed the city's support for the governor's
proposal. He understood that a contribution extension
mandated by the actuary was a necessary expense. He
challenged the notion that reducing the cost in the long
term caused giving up flexibility or resources in the short
term. He believed that transferring the lump sum money from
the CBR into the retirement fund increased investment
earnings. The potential returns were higher. He believed
investment compounding was paramount. He felt that
"compounded interest" was the "reward" of giving up short
term reserve funds. The gain was a benefit to the initial
loss of the reserve flexibility. The stabilization of the
plan benefited both the state and local governments.
3:51:21 PM
MIM MCCONNELL, MAYOR, CITY OF SITKA (via teleconference),
testified in support of HB 385. She stated the reason
municipalities were in favor of the legislation. The bill
enabled municipalities to plan a budget based on the 22
percent contribution rate which maintained necessary
community services without increasing the local tax burden.
She shared that the city increased its electric rates 49
percent since December 2012. The bill decreased the
municipality's amount of the unfunded liability. She
believed that addressing the liability now instead of
sometime in the future was sensible.
JOHN SWEENEY, FINANCE DIRECTOR, CITY OF SITKA (via
teleconference), stated that the city supported HB 385. He
was grateful that the municipal contribution was maintained
at 22 percent. The city of Sitka was currently deliberating
its municipal budget. The legislation enabled proactive
planning for municipal contributions to PRS/TRS funding. He
cautioned that Sitka's budget process would become
"reactive" if the legislation was not adopted. He urged for
passage of the bill.
RICK KOCK, CITY MANAGER, KENAI (via teleconference),
testified in support of the legislation. He appreciated the
financial stability the legislation established for
municipalities. He thanked the legislature for its diligent
work on the issue.
JENNIFER JOHNSTON, ANCHORAGE ASSEMBLY, ALASKA MUNICIPAL
LEAGUE, ANCHORAGE (via teleconference), testified in
support of the legislation. She noted that the unfunded
liability for the city totaled $651 million. She elaborated
that new rules allowed that some or all of the money could
be reallocated to either the city's enterprise fund or the
water and waste water utility; Anchorage Water and
Wastewater Utility (AWWU). She mentioned problems with the
city's aging water treatment facilities and the costs
associated with upgrades. She supported the process of
front-loading the unfunded liability. She compared the
unfunded liability to a how a credit card bill worked.
Co-Chair Austerman appreciated the fact that the city of
Anchorage claimed its $651 million share of the unfunded
liability. He expressed frustration about the criticism the
legislature received for allegedly not wanting to fulfill
its retirement obligations. He appreciated the
acknowledgement.
JIM WILLIAMS, CHIEF OF STAFF, CITY OF FAIRBANKS (via
teleconference), supported the legislation. He commented
that the bill was an "important and time sensitive
opportunity" to control the projected unfunded liability
and, by infusing cash into the system, eliminated an
"uncertain" financial burden that would be transferred to
municipalities. He discussed learning of a proposed 2
percent increase in the municipal PERS contribution rate.
A two percent increase translated to a $200 thousand budget
expense for the City of Fairbanks, which could decrease
services or increase property taxes. He appreciated the
legislature's support.
4:02:21 PM
SALLIE STUVEK, HUMAN RESOURCES DIRECTOR, FAIRBANKS NORTH
STAR BOROUGH (via teleconference), relayed the assemblies
unified support for the legislation. She believed the $3
billion cash infusion provided a sound financial model as a
way of addressing and eliminating the unfunded liability by
2037. She stated that the cash infusion allowed
municipalities to save in future contributions when state
revenues would likely be reduced. The assembly passed a
resolution (copy on file) in support of the cash transfer
into the retirement trust fund in 2015. She appreciated the
efforts to address the unfunded liability and maintaining
the municipality's contribution rate of 22 percent.
JON BOLLING, CITY OF CRAIG (via teleconference), supported
the legislation. He concurred with all of the previous
testimony and expressed gratitude for the predictability
maintaining the established 22 percent contribution rate
provided.
STEPHANIE SCOTT, MAYOR, HAINES BOROUGH (via
teleconference), testified in support of the legislation.
She relayed that the assembly unanimously supported the $3
billion cash infusion into the retirement fund. The
assembly supported HB 385 and the premise that by "paying
more now all will pay less later."
Co-Chair Stoltze noted that there had been a large volume
of retirees interested in the bill. He favored the
solution's approach, which was in the form of legislation
rather than an appropriation. He stated that both bodies
had been dealing with the retirement issues and expressed a
commitment to making the deposits. He explained that the
House Finance Committee's approach to separate out the
Teachers' Retirement System (TRS) portion was well intended
but not well received by the public. But there had always
been an agreement about payment and that point was lost in
the translation. He clarified that the current plan called
for a $3 billion withdraw from the Constitutional Budget
Reserve "irrespective" of how it was apportioned and
required a three-quarter vote from each house. The
governor's legislation established certainty and "enshrined
in statute" a guarantee with future politicians. The
legislature would continue to discuss the issue with the
governor's staff and with the Legislative Finance Division
in an expedited fashion to pass the bill.
Co-Chair Austerman spoke about the unfunded liability and
whose responsibility it was. He appreciated the
municipalities' thanks for maintaining the 22 percent
contribution rate but commented that he had not heard
acknowledgement of the municipalities' liability which was
approximately 42 percent. He stressed that the 22 percent
paid by the municipalities left 20 percent of its liability
unpaid. The remainder was shouldered by the state. By
holding the contribution at 22 percent it meant there would
be a longer payment period. If the legislature changed the
municipalities contribution rate from 22 percent to 24
percent it would contribute to the upfront cost; however,
the municipalities did not support the idea. He wished that
the municipalities had voluntarily stepped forward to offer
to pay an additional 2 percent to lower the upfront costs.
He pointed out that the liability was not just the state's
responsibility. He emphasized that the state did not cause
the liability. He remarked that a past "bad actuary" and
the stock market crash caused the liability. He believed
the responsibility of the unfunded liability should be
shared and that while the state is paying the majority of
the liability it is not exclusively the state's
responsibility.
4:14:05 PM
Co-Chair Stoltze CLOSED public testimony.
HB 385 was HEARD and HELD in committee for further
consideration.
4:14:25 PM
AT EASE
4:31:49 PM
RECONVENED
CS FOR SENATE BILL NO. 104(FIN)
"An Act relating to appropriations from the dividend
fund; creating the criminal fund; relating to
appropriations from the criminal fund for payments for
crime victims, operating costs of the Violent Crimes
Compensation Board, grants for the operation of sexual
assault response teams and domestic violence
intervention projects, and incarceration costs; and
providing for an effective date."
SENATOR FRED DYSON explained that in 1988 the legislature
adopted restorative justice measures and enacted a criminal
justice fund with the intention to restore victims to their
pre-offense condition. He reported that the prior year's
court ordered restitution totaled $600 thousand for victims
but only $85 thousand was available to the Violent Crimes
Compensation Board (VCCB) for distribution. He discovered
that most of criminal's statutorily withheld Permanent Fund
Dividend (PFD) was being diverted to cover prisoner's
medical cost instead of funding victim's compensation. He
expounded that SB 104 was a clean-up measure to clearly
prioritize the distribution and use of the PFD criminal
fund to ensure adequate funding for victims compensation.
He noted that his first attempt to structure the funds
ensured that the victims received their money before court
or other costs.
Senator Dyson clarified that the bill also allowed other
victims support organizations to receive funding. He
offered that the VCCB had advantages over other groups. The
board appropriated funds to victims before the cases were
adjudicated, which could take years. The victims were
suffering and carried all of the costs. He added that the
Department of Corrections (DOC) did not oppose the bill
because of the increased payout of the dividends and that
under the Affordable Care Act incarcerated criminals would
be covered by Medicare and Medicaid. He added that the
Department of Law (DOL) maintained a recovery section for
court ordered funds that recently improved their recovery
rates. Child support enforcement and collection by the
Department of Revenue (DOR) would not be affected by SB
104.
Senator Dyson added that the bill received "rigorous"
examination in the Senate and improved during the committee
process.
Senator Dyson stated that the legislation would make an
extraordinary difference for some of the victims. He added
that the criminal fund did not relinquish the
responsibility of the amount owed by the perpetrator. The
criminal will reimburse the fund.
Representative Wilson asked whether the fund would pay all
of the child support expenses owed by a criminal and
wondered how the state would recover the costs.
JOSHUA BANKS, STAFF, SENATOR DYSON, answered that the
Senate Finance version of the bill removed the child
support arrears provision. He pointed out that on page 4,
line 6 of the Senate Finance version the second priority
distributed funds to the Council on Domestic Violence And
Sexual Assault (CDVSA).
Senator Dyson interjected that he struggled with the child
support issue. He worked with the administration and Child
Support Services Division and a solution proved difficult.
He delineated that child support arrears were exorbitant
and would make a huge impact on the fund. Issues such as
how far back to assess arrears were problematic. The Senate
Finance committee was unable to determine an equitable way
to address child support issues. He acknowledged the need
and thought a solution could be found in the future.
Representative Wilson asked how the order of priorities was
established.
Senator Dyson replied that the concept of restorative
justice clearly intended that the first priority for the
perpetrators restitution would be used to restore the
victim to the pre-offense condition. He then examined the
other entities that were entitled for court ordered
reparations and pondered who the most worthy was. He
concluded that organizations that provided services to
victims were another high priority.
4:43:26 PM
Representative Holmes noted that the second priority
appropriated funds to the CDVSA. She read page 4, lines 8
through 10:
… for grants for the operation of sexual assault
response teams and domestic violence intervention
projects that input data into the Alaska Public Safety
Information Network…
Representative Holmes reported that the language in
previous versions was broader. She wondered whether the
change was substantive and if it would change the way funds
were currently distributed to the program.
Mr. Banks replied that the language was established to
focus on programs that were successful. The programs
accomplished a large reduction in the rate of recidivism
for domestic violence perpetrators and immediately
responded to the victim's needs.
Representative Holmes restated that the provisions limited
the flexibility of the funds use to two particular programs
of CDVSA's broader mission.
Mr. Banks concurred.
Senator Dyson stated that setting priorities established a
new source of funds to help victims and he advised that the
legislature only distribute funds to organizations that
have a track record of providing services in an effective
way.
Co-Chair Austerman asked what was meant by new funds.
Senator Dyson replied that the prior year's total criminal
fund administered to DOC was $13 million. He stated he
misspoke. The funds were available for a new purpose.
Co-Chair Austerman asked what the cost of SB 104 was out of
the $13 million.
Mr. Banks referred to the chart regarding potential
scenarios of the fund: "Historic PFD Criminal Fund
Appropriations" (copy on file). He stated that the impact
to the department for the next fiscal year was $.5 million.
Co-Chair Austerman wanted clarification regarding the cost
of the bill to the department and the $8.4 million figure
on the fiscal note FN7 (COR).
4:48:58 PM
AT EASE
4:50:47 PM
RECONVENED
Mr. Banks pointed to the first priority established on page
4 of the bill and noted that 20 percent of the criminal
fund would be distributed to the VCCB. He clarified that
based on the current years criminal fund of approximately
$10 million the total distributed to the board would be $2
million. Currently DOC received $1.5 million for victim's
compensation. He noted that the projection for next year's
PFD was $1,300 to $1,800. The criminal fund would
significantly increase. He did not anticipate losses for
the department if the later scenario occurred.
COMMISSIONER SCHMIDT, DEPARTMENT OF CORRECTIONS, explained
that SB 104 re-prioritized the department's needs to meet
the prisoners' medical needs. He exemplified the situation
where a prisoner needed a lung transplant that cost
$800,000. The prisoner was medically paroled and treated at
the Alaska Native Medical Center. If the prisoner had been
denied treatment at the medical center, the law required
that the department would have had to pay for the medical
costs of the transplant. He relayed that the PFD funds
distributed to the department fluctuated each year. The
department requested general fund money to backfill the
anticipated need based on projections. If funds were
lacking due to the legislation the department would request
general fund money or make a supplemental request. He
qualified that the department worked hard to control rising
medical costs and made careful projections in order to
avoid requesting supplemental funds.
Co-Chair Austerman asked what the prisoners' total medical
budget was.
LESLIE HOUSTON, DEPUTY COMMISSIONER, DEPARTMENT OF
CORRECTIONS, replied that the current year's total was $41
.268 million.
Commissioner Schmidt reiterated that DOC worked hard to
achieve medical cost containment. He stated his neutrality
about the bill but stressed that if the money fluctuated,
the department would have no other choice except to request
additional funding.
Co-Chair Stoltze addressed the $8.4 million appropriation
in DOC's fiscal note. He asked whether that was a worst
case scenario projection in anticipation of decreased
funding due to passage of the legislation.
Ms. Houston affirmed his assumptions.
Representative Holmes recalled much discussion about the
spiraling cost of prisoner's medical care in DOC
subcommittee. She remembered that prisoners were not
eligible for any type of government assistance for medical
care. She wondered how the Affordable Care Act would impact
the department when prisoners qualified for medical care.
Commissioner Schmidt replied that coverage was limited. He
continued that inmates' eligibility was complicated and
that the department worked diligently with the Department
of Health and Social Services (DHSS) to understand the
process.
Ms. Houston reported that inmates that were 65 years of age
and older, pregnant women, and unsentenced inmates would be
covered under the Affordable Care Act. The unsentenced
inmates were only covered outside of the correctional
facility for a period of 24 hours in the hospital. She
expounded that Medicaid coverage was split 50 percent
between the state and Federal government but that currently
the split was 60 percent federal and 40 percent state when
paying for hospital costs. The department did not yet know
how much the department could leverage or recover under the
Affordable Care Act coverage.
Representative Holmes asked whether someone who was covered
under Medicaid or Medicare before they were incarcerated
was still eligible when in prison under the Affordable Care
Act.
Ms. Houston answered that once the person was adjudicated
and sentenced they would not be eligible.
Representative Gara asked whether the felony classification
disqualified the prisoner or just the fact that the person
was incarcerated.
Ms. Houston read the four factors that disqualified the
inmate: 1) convicted of a felony during the qualifying
year; 2) incarcerated for a felony during the qualifying
year; 3) convicted of or incarcerated for a felony during
the qualifying year with two prior misdemeanor convictions
that occurred after December 13, 1996; 4) convicted of or
incarcerated for a misdemeanor during the qualifying year
with a prior felony conviction.
Representative Munoz asked about the possibility of
enrolling higher costs prisoners in the program and paying
the premiums.
Ms. Houston stated that inmates were not eligible for the
general Affordable Health Care coverage.
Representative Costello mentioned the $42 million cost of
inmates' health care and asked what the amount spent on
prescription drugs was.
Ms. Houston answered that she would supply the data after
the meeting.
Representative Wilson asked whether the four disqualifiers
for Affordable Care Act coverage were prohibited by state
or federal law. She wondered whether inmates that were
covered by private insurance were prohibited coverage by
state or federal law.
Ms. Houston answered that the prohibitions were from the
code of federal regulations.
Co-Chair Stoltze requested clarification on how the role of
the PFD Division interacted with the criminal fund and how
the legislation affected the division.
5:04:25 PM
DAN DEBARTOLO, DIRECTOR, PFD DIVISION, DEPARTMENT OF
REVENUE, replied that the bill did not change the
calculation of the criminal fund and was the reason the
division submitted a zero fiscal note. He pointed to page
2, line 12 of CS SB 104 FIN which delineated the three
categories of individuals who were counted in the criminal
calculation. He read:
(A) during the qualifying year, the individual was
convicted of a felony;(B) during all or part of the
qualifying year, the individual was incarcerated as a
result of the conviction of a(i) felony; or(ii)
misdemeanor if the individual has been convicted of a
prior felony or two or more prior misdemeanors.
Mr. Debartolo furthered that each year DOC and the
Department of Public Safety (DPS) sent the division the
list of the individuals who met the criteria. The division
matched them against individuals who applied for the
dividend. The amount of applicants who applied for the
dividend was smaller since many categorized individuals
realized they were ineligible for a PFD. The division then
ascertained who would be otherwise eligible if they did not
fall into the three categories which typically amounted to
95 percent. The applicants and non-applicant offenders were
added together to yield a count which was multiplied by the
dividend amount. The total amount was the criminal fund and
sent to the Office of Management and Budget (OMB) for
distribution. He added that the amount fluctuated greatly
since 2008 and for the current fiscal year was $9.6
million. He informed the committee that the division did
not decide how the fund was distributed but merely
calculated the amount.
Co-Chair Austerman asked how much of the $9.6 million was
distributed to DOC.
Mr. Houston reported that the department received
$10,000,474 in FY14 in criminal receipts.
Mr. DeBartolo replied that he attributed the $9.6 million
calculation was to FY 15.
Ms. Houston replied that the department anticipated
$8,445,900 in criminal receipts as requested in the fiscal
note.
CSSB 104(FIN) was HEARD and HELD in committee for further
consideration.
ADJOURNMENT
5:11:28 PM
The meeting was adjourned at 5:11 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Alaska_Fiscal Note_HB 385_Governor's Proposal 041114.pdf |
HFIN 4/12/2014 2:00:00 PM |
HB 385 |
| HB 385 Legislative Pres V6.pdf |
HFIN 4/12/2014 2:00:00 PM |
HB 385 |
| HB 385 Nineteen municipal resolutions of support for Governor's PERS-TRS plan, 12 April 2014.pdf |
HFIN 4/12/2014 2:00:00 PM |
HB 385 |
| HB 385 - Chenault Transmittal Letter - PERS-TRS.pdf |
HFIN 4/12/2014 2:00:00 PM |
HB 385 |
| HB 385 - Sectional Analysis.pdf |
HFIN 4/12/2014 2:00:00 PM |
HB 385 |
| HB 385 Somers Letter.pdf |
HFIN 4/12/2014 2:00:00 PM |
HB 385 |
| HB 385 Teal LFD 4-11-14 Fiscal Outlook Model-4.pdf |
HFIN 4/12/2014 2:00:00 PM |
HB 385 |
| HB 385 Teal LFD 4-11-14 Fiscal Outlook Model-3.pdf |
HFIN 4/12/2014 2:00:00 PM |
HB 385 |
| HB 385 Teal LFD 4 11 14 Comparing TRS Options.pdf |
HFIN 4/12/2014 2:00:00 PM |
HB 385 |
| HFIN Testimony RPEA HB 385.doc |
HFIN 4/12/2014 2:00:00 PM |
HB 385 |