Legislature(2007 - 2008)HOUSE FINANCE 519
05/08/2007 08:30 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB125 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 125 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
May 8, 2007
8:46 a.m.
CALL TO ORDER
Co-Chair Meyer called the House Finance Committee meeting to
order at 8:46:26 AM.
MEMBERS PRESENT
Representative Mike Chenault, Co-Chair
Representative Kevin Meyer, Co-Chair
Representative Bill Stoltze, Vice-Chair
Representative Harry Crawford
Representative Richard Foster
Representative Les Gara
Representative Mike Hawker
Representative Mike Kelly
Representative Mary Nelson
Representative Bill Thomas, Jr.
MEMBERS ABSENT
Representative Reggie Joule
ALSO PRESENT
Kevin Brooks, Deputy Commissioner, Department of
Administration; Pat Shier, Director, Division of Retirement
and Benefits, Department of Administration; Kathy Lea,
Retirement Manager, Division of Retirement and Benefits
Department of Administration
PRESENT VIA TELECONFERENCE
None
SUMMARY
CSSB 125(FIN) "An Act relating to the accounting and
payment of contributions under the retirement
plans of the Public Employees' Retirement System
of Alaska and the Teachers' Retirement System, to
calculations of contributions under those
retirement plans, and to participation in, and
termination of and amendments to participation in,
the defined benefit plans of those systems;
relating to employer contributions to the health
reimbursement arrangement plan; making conforming
amendments; and providing for an effective date."
CSSB 125 (FIN) was heard and HELD in Committee for
further consideration.
8:47:24 AM
CS FOR SENATE BILL NO. 125(FIN)
"An Act relating to the accounting and payment of
contributions under the retirement plans of the Public
Employees' Retirement System of Alaska and the
Teachers' Retirement System, to calculations of
contributions under those retirement plans, and to
participation in, and termination of and amendments to
participation in, the defined benefit plans of those
systems; relating to employer contributions to the
health reimbursement arrangement plan; making
conforming amendments; and providing for an effective
date."
KEVIN BROOKS, DEPUTY COMMISSIONER, DEPARTMENT OF
ADMINISTRATION, introduced testifiers for SB 125.
Representative Gara asked how this bill works in conjunction
with the PERS fix bill that passed out of committee. Co-
Chair Meyer replied that SB 125 is the cost share bill. Mr.
Brooks pointed out that the two bills work together; one
makes some technical fixes and this bill creates a cost
share program so that PERS mirrors TRS in that regard and
provides funding to cover the transition as well as unfunded
liability costs of the systems.
8:49:45 AM
PAT SHIER, DIRECTOR, DIVISION OF RETIREMENT AND BENEFITS,
DEPARTMENT OF ADMINISTRATION, provided a sectional analysis
of the bill:
Section 1 repeals and reenacts the employer
contribution section of the TRS defined benefits (DB)
status to 12.56 percent. It specifies that the rate
applies to the entire payroll base - regardless of tier
- for DB and Defined Contribution Retirement (DCR)
normal costs. It stipulates that any money in excess
of what is needed to pay the system's normal costs is
applied to the accrued unfunded liability.
Section 2 talks about the state's commitment to adding
money to the plan in excess of the set rate, determined
by what the actuary calculates the plan needs for the
coming year. That is the sum total of both the normal
cost and the past service cost.
Section 3 defines "past service liability" and "system"
and makes clear the calculation methodology.
Section 4 clarifies the health reimbursement plan
contributions that are established in AS 39.30.370, not
AS 39.30.300.
Section 5 says there is no longer any employer asset
reserve account. It also talks about how the state
will disperse any payments made by employees of a
voluntary basis.
Section 6 is slightly reworded to match language
already passed in SB 123.
Sections 7 and 8 move references to participation
amendments, if employers want to opt in or out of the
plan.
Section 9 is similar to Section 1 in that it addresses
the PERS rate, sets the annual rate to 22 percent, and
applies it to the entire payroll base regardless of
tier. The payroll base used in calculation is the
current year or FY 07, whichever is greater. Any money
in excess of what is needed to pay the system's normal
costs, are applied to the accrued unfunded liability.
The 22 percent rate applies also to retiree rehires
that may be in the payroll base. This section also
defines "normal cost".
Section 10, as in Section 2 for TRS, describes the
state's commitment to make up the difference between
the actuarial rate of 22 percent and what the actuaries
say the plan needs in order to pay off the unfunded
liability and cover normal costs.
Section 11 moves references as mentioned earlier, some
that are repealed in Section 20.
Section 12 describes the process whereby the
administrator may claim funds from other agencies of
the state if an employer is behind in retirement
contributions or interest owed. It was discovered that
there was no language that brought employers to the
table to have discussions about how arrears might be
solved. This section establishes such a process,
including appeal rights.
Section 13 is language to prevent an employer from
awarding past service credit to employees who were
added to the plan by amendment. Elected officials
cannot be added unless they make a minimum of $2,001 a
month.
Section 14 discusses that an entity must be paid up if
they want to re-enter or if they want to bring a group
in that has been excluded.
Section 15 talks about a previously terminated employer
having the opportunity to re-enter if they pay costs
associated with the termination. They would only
participate in the DCR plan.
Section 16 deals with termination costs. If an
employer terminates completely from the system, they
will be required to pay the past service cost on that
terminated wage base.
Section 17 conforms to other section changes in the CS.
Section 18 adds the definition of "past service
liability".
Section 19 discusses the health reimbursement
arrangement plan.
Section 20 repeals various portions of statute that are
no longer effective.
Section 21 is transition language. It talks about
those entities that had contributed excess funds or
funds provided by the state or other source to their
unfunded liability. This bill would hold them
harmless. New subsection (b) sets contribution rates
for those employers who are below 22 percent to allow
them significant time to adjust to the higher rate.
8:58:36 AM
Representative Gara requested more information about section
21 (a). Mr. Shier explained that (a) describes those
employers that had made contributions above those required
in an effort to build employer-specific asset reserves
against future rate increases. Subsection (b) is a
description of a solution for those employers who are
currently experiencing rates less than the 22 percent
statutory rate. It is an effort to hold those communities
harmless from the negative effects of raising the rate.
Representative Gara asked how that is done and if it is for
PERS employers. Mr. Shier referred to pages 12 and 13 to
answer. He said it is PERS and it fixes their rate. In
response to a question by Representative Gara, Mr. Shier
pointed out that subsection (a) is forward funding and
subsection (b) it is merely that employer's experience rate.
Mr. Brooks addressed fiscal note #2 by the Department of
Administration for $193,113.2 million. He explained that
currently $180 million is appropriated in HB 95, leaving a
difference of $13,113.2 that would be required by the fiscal
note. That amount is comprised of $5.4 million that would
hold harmless current employers that are below the 22
percent rate for a five-year period. The rebate provision
of $7.2 million recognizes that some communities have made
additional payments and levels the playing field.
Representative Gara asked if in the five-year period, the
communities that had overpaid would have received full
compensation. Mr. Brooks replied that would happen the
first year.
9:03:09 AM
Representative Kelly asked about the 13.32 percent floor.
Mr. Shier said it was the actuarially set normal cost rate.
Representative Kelly asked if the five-year time allotment
accomplishes the goal of not losing employers. Mr. Brooks
thought it was a reasonable approach.
Representative Hawker inquired if the bill deals with the
unfunded past service cost liability. Mr. Brooks related
that it requires the state to pay the difference between the
actuarially determined rate, which includes the normal cost
as well as the past service cost, and the two rates
established in statute. The fiscal note shows the
contribution that will be required by the state over the
next couple years will continue to rise through 2010 and
then go down. By 2032 the state will be at normal cost.
Representative Hawker summarized that the mechanism is that
communities are limited to a certain amount and the state
pays the rest. Mr. Brooks concurred. Representative
Hawker spoke in support of that mechanism.
9:06:24 AM
Representative Hawker voiced concern about the amount that
the state must provide, as identified in Section 2 of the
bill. He noted that TRS is paid at the contribution rate
determined by the board. He asked if the board is required
to adopt a contribution rate that fully amortizes the past
service cost liability. Mr. Shier related that there are
guidelines about determining those rates. He explained that
there is a mechanism that returns it to a normal payment
rate.
Representative Hawker asked when the bill would take affect.
Mr. Shier said FY 09. Representative Hawker asked if the
board has revised its actuarial rates for FY 08. Mr. Shier
replied that the ARM board did consider and supports the
action of the legislature. Representative Hawker asked if
the decision is neutral or has a consequence on the growth
of the unfunded past service cost liability. Mr. Shier
said, given the fiscal notes, it should suffice.
9:10:11 AM
Representative Hawker asked if rates are high enough to stop
the rate of growth of the unfunded past service cost
liability. Mr. Brooks repeated that the costs would go up
for two years and then decrease. Representative Hawker
noted the proposal is a long way from the 65/35 split. He
asked if two years of growth is anticipated, and then a
decrease. Mr. Brooks said the payment would go up for two
years and then the unfunded liability would go to zero in 25
years. Representative Hawker requested to see an
amortization chart.
Co-Chair Meyer compared it to taking out a 25-year mortgage
on a home. Mr. Brooks noted that the unfunded liability
does go down. It is a 25-year payment based on a number of
actuarial assumptions and is updated yearly.
9:14:24 AM
Representative Kelly summarized that the 22 percent exceeds
the normal cost rate and will pay off the unfunded
liability. He stated support for that concept. He asked if
the legislature can change the 22 percent in the future.
Mr. Brooks said it could. Under the defined contribution
system, the 9.75 contribution rate should remain flat. The
number of defined benefit plan members will decrease, so the
normal cost of that plan, which is just under 15 percent,
could climb.
Representative Kelly said the defined contribution rate can
be changed. He said it is the legislature's intent not to
change the 22 percent. He stressed that there is exposure,
and it is important not to change back to the defined
benefits plan.
9:18:31 AM
Representative Gara asked if the major cost shown in fiscal
note #2 shows numbers above this year's contribution. Mr.
Brooks replied that they are numbers above the 22 percent
and 12.56 percent - the equivalent of this year's
calculation of the difference. Representative Gara asked if
this year's $193 million is $193 million more than last
year. Mr. Brooks reported that coincidentally the FY 07
rate is at 22 percent. The amount of $193 million is the
amount required over the current year. Representative Gara
asked about the "stacking trend". Mr. Brooks explained that
the base amount will be 22 percent, and the appropriation
will be in addition to that and not building on subsequent
years.
9:21:31 AM
Representative Gara asked if the 12 percent TRS contribution
and the 22 percent PERS contribution is the employer's
contribution obligation based on percentage of salary. Mr.
Brooks said that is correct. Representative Gara asked when
the rates expire. Mr. Brooks said they are set in statute.
Representative Gara requested an explanation of the PERS
rate which will be leveled at 22 percent. Mr. Brooks said
that is correct. He referred to a spreadsheet which depicts
the impact on all employers of the hold harmless provision.
9:24:25 AM
Representative Gara asked if the legislation is fair to
schools with more PERS employees. Mr. Brooks thought it was
fair. Mr. Shier thought relative fairness is difficult to
access. An attempt at a solution was found with involvement
from communities around the state. Representative Gara
wondered how many school districts have more PERS than TRS.
Mr. Brooks listed several that do. Representative Gara gave
an example of a PERS school district that does not get equal
treatment. Mr. Brooks said that the PERS system has been in
place for years. Mr. Shier referred to page 13 and noted
that schools districts are participating in the hold
harmless provision. Mr. Brooks noted that the school
districts decide which plan to participate in.
9:28:45 AM
Representative Gara gave another hypothetical situation of
unequal benefits in school districts.
KATHY LEA, RETIREMENT MANAGER, DIVISION OF RETIREMENT AND
BENEFITS DEPARTMENT OF ADMINISTRATION, clarified that all
school district teachers participate in TRS. All school
districts can choose PERS or TRS for non-classified
personnel. The issue of fairness is in the eye of the
beholder.
Representative Hawker opined that the bill is an attempt at
an elegant solution to a complex problem. He pointed to
transition language that deals with the districts that would
lose out because of this bill unless a solution was
included. The current structure says that the current rate
is frozen and then readjusted in five years. He spoke in
favor of the hold harmless provision.
9:36:12 AM
Representative Hawker asked about alternative transitionary
mechanisms. Mr. Brooks said that has been considered. He
concurred with Representative Hawker's analysis.
Representative Hawker spoke to the five years of insurance
and suggested it be revisited from time to time. Mr. Brooks
noted that there will be a high level of scrutiny.
Co-Chair Meyer said the magic number is 40 percent, which is
to be shared by communities and the state. On top of that
the state has to pay for its own state employees at the full
40 percent rate. Mr. Shier reported that the original ARM
board rate was 40 percent. The ARM board supports the 32
percent as allocated in the bill.
Co-Chair Meyer concluded the rate would be 40 percent
without the bill. He asked if this is a form of revenue
sharing. Mr. Brooks declined to answer.
9:41:50 AM
Representative Kelly asked for an opinion of Pension
Obligation Bonds (POB)'s and their relationship to the bill.
He related how the five-year timeframe came about and
suggested that it shouldn't be messed with.
Mr. Brooks saw the use of POB's as a tool to address the
state's payment in excess of 22 percent or 12.56 percent.
It would help address appropriations in the out years.
Representative Kelly requested administrative support for
POB's given the timing and the interest rates now.
Representative Hawker concurred with Representative Kelly.
9:44:45 AM
Representative Gara addressed the issue of new legislators
being left out of the system for nine months. He suggested
adding an amendment to the bill. Co-Chair Meyer asked if
that has been addressed. Mr. Shier said it has not.
Representative Hawker pointed to an effort to correct that
language during another bill hearing.
Representative Gara thought no other state employees were
excluded. He asked Mr. Brooks to research the issue. Mr.
Brooks agreed.
CSSB 125 (FIN) was heard and HELD in Committee for further
consideration.
ADJOURNMENT
The meeting was adjourned at 9:47 AM.
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