Legislature(2013 - 2014)HOUSE FINANCE 519
04/01/2014 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB278 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 278 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
April 1, 2014
1:39 p.m.
1:39:15 PM
CALL TO ORDER
Co-Chair Stoltze called the House Finance Committee meeting
to order at 1:39 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
Michael Hanley, Commissioner, Department of Education and
Early Development; Diane Blumer, Commissioner, Department
of Labor and Workforce Development; Angela Rodell,
Commissioner, Department of Revenue; David Teal, Director,
Legislative Finance Division; Michael Barnhill, Deputy
Commissioner, Department of Administration; Gary Bader,
Chief Investment Officer, Treasury Division, Department of
Revenue; John Boucher, Senior Economist, Office of
Management and Budget, Office of the Governor; Chris
Christensen III, Associate Vice President for State
Relations, University of Alaska.
PRESENT VIA TELECONFERENCE
Robynn Wilson, Audit Supervisor, Tax Division, Department
of Revenue.
SUMMARY
HB 278 EDUCATION: FUNDING/TAX CREDITS/PROGRAMS
HB 278 was HEARD and HELD in committee for
further consideration.
HOUSE BILL NO. 278
"An Act increasing the base student allocation used in
the formula for state funding of public education;
repealing the secondary student competency examination
and related requirements; relating to high school
course credit earned through assessment; relating to a
college and career readiness assessment for secondary
students; relating to charter school application
appeals and program budgets; relating to residential
school applications; increasing the stipend for
boarding school students; extending unemployment
contributions for the Alaska technical and vocational
education program; relating to earning high school
credit for completion of vocational education courses
offered by institutions receiving technical and
vocational education program funding; relating to
education tax credits; making conforming amendments;
and providing for an effective date."
1:39:20 PM
Co-Chair Stoltze discussed the meeting agenda. He noted
there would be a separate conversation related to the
Teachers' Retirement System (TRS). He asked the departments
to comment on the committee substitute [Work Draft 28-
GH2716\G].
MICHAEL HANLEY, COMMISSIONER, DEPARTMENT OF EDUCATION AND
EARLY DEVELOPMENT, walked through the changes in the CS. He
began with the "testing out" component on page 2 of the
bill. He detailed that the House Finance Committee had
reinserted the governor's language that would allow
students to test out [of courses] and identified specific
subject areas that would apply. He believed limiting the
subject areas was less burdensome on districts. He
supported the change. He pointed to language on page 4
requiring districts to include information regarding
students in military families in an annual report to the
Department of Education and Early Development (DEED). He
referenced the state's large military presence and opined
that the provision was appropriate.
Co-Chair Stoltze interjected that the committee could
potentially deal with the subject in another piece of
legislation (HB 318).
Commissioner Hanley continued to address the bill. He
believed several changes to the bill's charter school
component still met the governor's intent for equity and
integrity in the charter school application process. He
spoke to a self-imposed rule that presented an additional
challenge for smaller communities specifying that if
charter school enrollment fell between 120 and 150 the
school would receive 95 percent of the funding. Language
suggested by the governor had been removed that would have
decreased the number of students to 75 and allow for full
funding. The administration felt the governor's language
was important; it did have a fiscal component because it
incorporated a few additional schools that would receive
full funding as opposed to partial funding.
1:44:20 PM
Commissioner Hanley moved to page 9 of the bill that
included an additional component for the board report to
the legislature. He believed the component empowered the
state board to engage directly with the legislature. He
trusted that the term "method of education spending" was
used intentionally. He noted that typically the state board
of education was a policy and practice board (with a focus
on pedagogies on strategies for education) and did not
usually delve into how money was spent; however, he
believed the language provided flexibility on where money
was spent.
Commissioner Hanley spoke to residential stipends on page
11. The language that allowed an annual open application
period had been maintained in the CS; whereas the boarding
stipend had been removed. He relayed that the previous year
the legislature had passed legislation allowing for a
variable-term boarding school program. As a result, an
application period had been opened and four new schools had
been added to the existing four residential schools. The
department believed the additional stipend represented true
costs or near true costs for housing students. The
department also believed the situation was a challenge for
school districts; the state was not fully meeting the cost
to room and board the students; however, the bill did not
remove the funding. There were four programs currently
working with the funding.
1:46:36 PM
Commissioner Hanley addressed a funding change on page 14
of the bill. He referred to testimony by David Teal,
Director, Legislative Finance Division, related legislative
intent associated with education funding. He believed the
intent was to remove the top tiers in the chart on page 14.
He pointed to line 19 pertaining to schools with 750
students and above; the multiplier was 0.84. He noted that
the multiplier decreased as school size increased due to
economies of scale (schools were funded less as their size
grew). Schools with 400 to 750 students would be funded at
0.92. He relayed that previously schools with 250 to 400
students were funded at 0.97. The CS removed the top two
tiers and funded schools (that had previously received less
funding) at 0.97. He detailed that the change allowed
funding to go to districts with larger schools with
particular challenges that were not traditionally
recognized in funding formulas. The change represented an
increase of $13.5 million; $12.5 million of the amount
would go towards Anchorage, Fairbanks, and Mat-Su; the
remaining $1 million would be split between eight districts
that had at least one large school.
Commissioner Hanley turned to page 15 where teacher tenure
had been changed from three years to five years. He opined
that an administrator should have the ability to determine
a teacher's effectiveness within three years; however, the
bill expanded the opportunity for teachers to prove
themselves before receiving tenure. He looked at a
provision on page 16 that would allow for the review of
teacher tenure every five years. He observed that the
review would keep teachers fresh and effective. He pointed
to language that a district may terminate tenure. He
wondered about the meaning and wondered if clarification
may be needed. He was not concerned about the issue, but
believed clarity may be necessary.
Co-Chair Stoltze noted the comment.
Commissioner Hanley anticipated that the provision would
bring legal challenges at the local level if tenure was on
the line. He suggested clarity related to language: "the
teacher did not adequately assist the school district with
the implementation..." (page 15). He relayed that typically
teachers had a longer tenure than school principals; he
wanted ensure that the teachers were adequately assisted
with the school. He thought clarity was needed on the
issue.
1:51:09 PM
Commissioner Hanley spoke to the repeal of Section 48 that
spoke to Bureau of Indian Affairs schools; it was no longer
in effect when school districts joined. He observed that
the High School Graduation Qualifying Exam (HSGQE) had been
removed from the bill. He believed it was the intent to
recognize that other bills may contain relevant education
provisions.
Co-Chair Stoltze commented that the language would have
been taken out if the bill was "stopping in this body."
Commissioner Hanley relayed that the administration would
like to see the HSGQE removed [from law]. Co-Chair Stoltze
believed it was the will of the committee. He referred to
the committee's passage of HB 220.
Commissioner Hanley turned the discussion over to
Commissioner Blumer to address the Technical Vocational
Education Program (TVEP) component of the bill.
1:52:12 PM
DIANE BLUMER, COMMISSIONER, DEPARTMENT OF LABOR AND
WORKFORCE DEVELOPMENT, addressed Section 28 and relayed
that the department would like to see a longer sunset date
[than June 30, 2017] for certainty and stability for TVEP
recipients.
Co-Chair Stoltze noted that the shorter sunset date had
been included and no other changes had been made to the
program. He asked if she would prefer the shorter sunset
date or to open the program to a "free-for-all."
Commissioner Blumer relayed that the department would like
to see a longer sunset, but did not want to open the
program up for a free-for-all. She reiterated that the
department would like a longer sunset to allow the
reporting structure to be implemented related to new
articulation language. She pointed to large projects on the
horizon including the potential LNG project, mining, and
infrastructure. She asked the committee to reconsider
reinstating the 20 percent provision withholding funds for
recipients that did not report fully or in a timely manner;
it was the only mechanism the department had to enforce the
requirement.
Co-Chair Stoltze intended to reinstate the item as an
amendment; the change had been made erroneously.
1:54:26 PM
ANGELA RODELL, COMMISSIONER, DEPARTMENT OF REVENUE, spoke
to the tax credit changes beginning in Section 36, page 22.
She relayed that the language encompassing the tax changes
was the same for each type of education opportunity credit.
There was one major change that included the addition of
the Science, Technology, Engineering and Math program
provided by a nonprofit agency or school district. The
department did not object to the change. She pointed to
item 10 and noted that childhood early learning programs
were provided by a nonprofit organization; for-profit
language had been removed. The administration was fine with
the language. She wanted to ensure there was consistency in
terminology related to nonprofits (e.g. agency,
organization, or corporation); she noted there was a
defined term for a nonprofit "organization" under Section
47, page 33.
Co-Chair Stoltze wanted the language to work. Commissioner
Rodell replied that the department also wanted it to work.
Co-Chair Stoltze asked about the Base Student Allocation
(BSA) component of the bill. Commissioner Hanley noted that
the governor had included an increase of $85 to the BSA.
The CS increased the $85 by $100 for a total of $185 for
the current year. There would be an annual increase of $58
for the subsequent two years.
Co-Chair Stoltze remarked that the increases would be $185
[in the current year], $243 [in the second year], and $301
[in the third year]. Commissioner Hanley responded in the
affirmative.
1:57:48 PM
Representative Gara thanked the department for providing
the BSA model. He stated that Fairbanks was facing an $8
million deficit; the proposed increase would raise
approximately $6.5 million for the district. Juneau was
facing a $4 million deficit; the proposed increase would
raise just under half of the deficit. Kenai was facing a
$4.5 million deficit; the proposed increase would raise
$3.3 million for the district. He thought the increase
would mean another year of layoffs in the mentioned
districts. He asked if he was incorrect.
Co-Chair Stoltze asked the department to addendum the
bracketing as money that would go to the districts.
Commissioner Hanley replied that according to
Representative Gara's numbers the districts would not have
full funding and would require the districts to make cuts.
Based on conversations with districts over the past year he
believed numbers were constantly changing. He had not
spoken to districts recently about their specific needs,
but he had heard generally across the state that districts
were facing cuts.
Representative Gara remarked that the increase appeared to
roughly match the deficit of approximately $23 million in
his Anchorage district in the first year, but the increase
of close to $4.3 million in the second and third year was
not close to what the district would need to hold even. He
asked if DEED was comfortable with the decision.
Commissioner Hanley replied that the governor had put in
$85 as a starting point; the governor trusted the
legislature to determine the necessary BSA number. He
detailed that the governor had communicated that in the
past three years he had been entrenched in the idea that
money would not be put into the BSA and that funds would be
targeted; however, he had changed his strategy and was
willing to put money into the BSA.
2:00:43 PM
Representative Gara understood that the state was facing
budget deficits; however, there had been three years of
cuts. Districts were facing additional cuts in future
years. He pointed to teacher, guidance counselor, and
curriculum cuts. He wondered how schools would move forward
under the circumstances.
Commissioner Hanley replied that the ball was in the
legislature's court. He reiterated his earlier statement
that the governor had put forward an increase of $85 to
start the conversation.
Representative Gara asked if the department was blaming the
legislature for coming up with a higher BSA number than the
department had presented. Commissioner Hanley replied in
the negative. He elaborated that the governor had used the
$85 figure as a starting point.
2:02:47 PM
Representative Costello asked about one-time funding from
recent years. She wondered if DEED or another entity
tracked how districts spent the one-time funding.
Commissioner Hanley replied that the funds had been
distributed in the past few years through the formula's
Adjusted Average Daily Membership (AADM). He noted that the
funding did not go into the BSA. Without clear intent
language specifying the department to do so, it had not
tracked the funding. He pointed to $25 million provided to
districts to address energy costs and explained that it was
up to the districts to determine how the funding was used.
Representative Costello asked if the department would need
specific direction from the legislature to track the
funding. She was interested to know how the funds were
spent and noted that it was not easily determined.
Commissioner Hanley replied that DEED would follow the
legislature's intent; it did not want to insert itself in
places it should not. He relayed that at times the
department had been given direction on how money should be
distributed and other times there had been accountability
measures to report out.
Representative Costello understood that when the
legislature allocated money it was distributed to the
districts; whether it was special needs, intensive special
needs, geographic differential, AADM, or one-time funding,
the districts had complete control and autonomy on how the
dollars were directed. She believed the decision was solely
up to the local school district. Commissioner Hanley
replied that her understanding was accurate generally
speaking.
Representative Wilson spoke to the removal of the top tiers
[page 14] and efficiencies that may have been in schools
with enrollment above 400 or 750. She asked whether economy
of scale still existed when the enrollment number was
reduced to 250 students and every student counted for at
least 0.97. She mentioned items such as broadband that were
based on something separate from the student.
Commissioner Hanley replied in the negative. The component
was relatively new and the department had not followed
through on identifying efficiencies. The change allowed for
additional funding for schools that had a smaller
multiplier. He could not speak to the direct impact at
present.
2:06:16 PM
Representative Wilson addressed teacher tenure on page 16.
She asked Commissioner Hanley to reiterate the department's
concerns.
Commissioner Hanley did not have a concern about reopening
the issue. He thought clarification was needed related to
the tenure termination language. He explained that current
language read that a teacher's tenure could be terminated,
but it did not necessarily mean the employee would lose
their job. He wondered where that left the employee. He
asked if an employee could earn the tenure back after a
probation period or if they would start from the beginning.
Representative Wilson asked for verification that a teacher
could transfer their tenure from one district to another.
Commissioner Hanley believed so. He would follow up on the
question.
Representative Wilson believed that each district had the
option to decide differently on the issue.
Representative Guttenberg asked about page 16, line 19. He
pointed to a deletion and observed that the sentence no
longer made sense grammatically. Commissioner Hanley
replied that the figure changed from 12.56 percent to 32.56
percent (included on line 32).
2:09:20 PM
Representative Guttenberg asked about teacher tenure on
page 16, line 9. He believed that the bill language
essentially meant that there would be no teacher tenure.
Under the section if a teacher did not adequately assist a
school district with an implementation of a school-wide
change to the instructional model it was grounds for tenure
termination. He remarked that a teacher may not be involved
in the specific curriculum. He believed the provision was
arbitrary.
Commissioner Hanley agreed; he believed the language needed
clarity. He questioned whether a teacher implementing the
strategies in a classroom was sufficient.
Representative Guttenberg looked at the change in formula
on page 14. He assumed that increasing the multiplier for
large schools meant there were few efficiencies based on
school size. He wondered about the basis of the change to
remove the top two tiers. He wondered what it had done for
other schools and what inefficiencies existed for smaller
schools.
Commissioner Hanley could not speak to the specific
language.
2:12:02 PM
Representative Guttenberg wondered where a person doing the
research would go to determine the calculation. He wondered
how a person would calculate where efficiencies existed.
Co-Chair Stoltze asked if the question was about the value
of a student.
Representative Guttenberg disputed the remark and
reiterated his question related to value, efficiencies, and
school size.
Commissioner Hanley answered that the department could help
someone with the pursuit, but it was necessary to look back
at where the numbers in the bill had originally come from.
He believed the intent was to recognize economies of scale.
He did not know why 750 had been selected related to the
number of students. He believed it represented the number
and size of schools in the state and how to adequately fund
them. The actual multipliers did become a term of value.
Representative Costello thought school districts were
struggling to find ways to increase efficiency and that
they had reached a point where cutting teachers was their
only solution. She spoke to the Anchorage School District
cutting 200 teachers. She commented on the district's
diversity and families moving from smaller to larger
districts in order to take advantage of opportunities. She
believed the question had been asked and the districts had
answered that more efficiencies could not be located and
districts were now cutting into the marrow of the purpose
of education. She had received calls from constituents who
were upset that their child was not counted as one [a whole
student].
2:14:27 PM
Vice-Chair Neuman discussed TVEP. He mentioned federal
withholdings related to the Workers' Compensation
Employment Act. He spoke to training individuals in order
to help them find employment to support their families. He
looked at changes in the CS and noted that there was one
full page of new recommendations on how to regulate $11
million for TVEP. He did not believe the change was
streamlining the process. He believed a new division would
be needed to look at the provision [due to the workload it
would create]. He pointed to language pertaining to data
collection on page 18, line 10 related to the percentage of
former participants who had jobs, the median wage, former
participants who were employed, and other. He wondered why
the data was needed and how it would be used. He opined
that the data collection would be a full-time job. He
thought it would be easier to include language that the
commissioner shall make a determination to ensure that the
funds were distributed in an equitable fashion that
addressed employment needs statewide. He believed the state
tried to overregulate and provide over accountability. He
asked the Department of Labor and Workforce Development
(DLWD) to provide comment on the issues.
2:17:11 PM
Commissioner Blumer clarified that the funds came out of
the Unemployment Insurance Trust Fund from the employees'
portion. She communicated that the numbers 1 through 5 of
the criteria had been set in 2009. The TVEP funds were set
out to keep individuals from being on unemployment and
drawing from the fund. The articulation agreement
components had been added to encourage regional training
centers to work with the local school districts to equip
the state's youth with employability skills after high
school. She highlighted that nationally students were
underequipped for the workforce after high school
graduation and some two-year degree programs. The intent of
the articulation agreement was to provide students with
dual credit and to give them technical education experience
to help them move more quickly into the workforce. She
addressed whether the reporting structure could be put on
the DLWD commissioner to increase efficiency. She believed
criteria was needed because the money was designated by the
legislature and formula funded; she thought clear
guidelines were needed for the reporting structure. She
noted that the 20 percent mechanism she discussed earlier
was the only way the department could have any leverage to
receive the information. She reiterated that the department
already did items 1 through 5; therefore, she did not
believe adding the two additional components would require
new staff.
2:19:27 PM
Vice-Chair Neuman noted that the funds came out of a
person's federal withholdings through the Federal
Employment Compensation Act. He wondered what the
information would be used for.
Commissioner Blumer replied that the department provided
the data to the legislature annually. She detailed that the
department was working to identify some of the items it
wanted regional training centers to look at to ensure that
trainees were moving into employment. Most of the measures
had been implemented in 2009; only the articulation
agreement had been added in the bill.
Vice-Chair Neuman would continue to work with the
commissioner to provide additional streamlining.
Representative Munoz pointed to the change in employer rate
from 12.56 percent to 32.56 percent. She noted that the
bill allowed compensation through the formula to reimburse
the school districts, but it did not direct reimbursement
to other TRS employers including DEED. She detailed that
the impact was estimated to be around $700,000 to DEED. She
asked for comment from the department.
Commissioner Hanley deferred the question to others.
Representative Munoz noted that there would also be an
impact on the University of Alaska and other affected
agencies.
2:22:07 PM
Representative Gara spoke to the revenue generated by the
BSA including $22 million for Anchorage and $6.9 million
for Fairbanks for the first year. He asked for verification
that the funds would only be available if the additional
$25 million to be distributed through the BSA formula
remained in the operating budget.
Commissioner Hanley would follow up on the question.
Representative Gara was bothered that the commissioner did
not know the answer. He pointed to page 11 and spoke to the
current public education fund that distributed money to
school districts, boarding schools, correspondence study,
and for transportation (items the BSA was used for). He
noted that the bill included a provision that the funds
could be spent on TRS. He was concerned that the funds
would be taken from classrooms. He wondered if the
department shared the concern.
Commissioner Hanley believed that the intent was for money
to be placed into and withdrawn from the fund for TRS; the
portion of TRS currently paid by the state would be paid by
school districts. He deferred the question to David Teal
for further detail.
Representative Gara wondered if the committee would hear
from someone else related to the Public Employees'
Retirement System (PERS)/TRS portions of the bill.
Co-Chair Stoltze replied that the bill was associated
primarily with TRS, but there were some PERS elements.
Representative Gara pointed to new language associated with
the educational credits on page 22 that let companies
receive tax credits by putting money into private nonprofit
elementary or secondary schools (line 27). He wondered if
the provision applied to private or religious schools. He
surmised that it would allow state money to go to private
schools.
Commissioner Rodell replied in the affirmative. She
elaborated that the provision mirrored the federal
deduction that was currently in place. She agreed that the
provision could allow for a donation to a private nonprofit
that may have a religious affiliation.
Representative Gara noted that it was allowable under
federal law, because there was no ban under federal law on
public money being used for private or religious schools,
but there was a ban under the Alaska State Constitution. He
wondered how the provision did not violate the
constitution.
Commissioner Rodell deferred the question to the Department
of Law.
Representative Costello asked if the education tax credits
were transferable.
ROBYNN WILSON, AUDIT SUPERVISOR, TAX DIVISION, DEPARTMENT
OF REVENUE (via teleconference), replied that the education
tax credits were not transferrable under existing law or
under the bill.
Vice-Chair Neuman discussed the education tax credits. He
relayed that if a company owed the state corporate taxes it
would receive nontransferable tax credits if it gave money
to a private nonprofit for a vocational education purpose.
2:27:56 PM
Representative Guttenberg asked about the recommendations
for reports from the state (page 9). He noted that
curriculum and information relevant to efforts made to
improve the education system were already included under
items 2 and 3. He asked for clarification on the addition
of item 4 pertaining to recommendations for changes in the
method of education spending, district cost factors,
efficiencies, and other.
Commissioner Hanley replied that he was not sure of the
intent of item 4. He observed that the component included
recommendations to the legislature as opposed to previous
components that only reported on the state board's actions.
He believed it was broad enough to incorporate all of the
components.
Representative Guttenberg asked for verification that there
was not currently an annual report of recommendations.
Commissioner Hanley replied that an annual report was
presented to both education committees.
2:30:08 PM
Representative Guttenberg surmised that an assessment of
the district efficiencies and cost factors (e.g. heating,
maintenance, transportation, and other) was an intensive
report to conduct annually. He wondered if the information
was already included in the report.
Commissioner Hanley replied that the information was not
currently included in the report. He detailed that the
report included work the state board had conducted in the
areas, but it did not include recommendations. Cost factors
fell under the purview of local school districts and were
not typically included in the report.
Representative Guttenberg asked for verification that the
district cost factors were accumulated at the district
school board level. Commissioner Hanley replied that the
cost factors were accumulated at the local level.
Representative Guttenberg asked how the cost factors were
accumulated into a calculation for state funding. He noted
that currently a formula determined amounts to be received
by district based on need. He understood that no two
districts were equal. He wondered whether there was
oversight to determine whether the method was accurate.
Commissioner Hanley replied that the geographic cost
factors associated with revenue were determined by the
legislature; however, the actual district cost was driven
by conversations between the districts and the legislature.
The actual costs at the local level were not monitored by
the state.
Representative Guttenberg stated that the gasoline in
Kivalina was over $13 per gallon. He wondered how the
increased costs for communities were reflected in the
overall formula.
Commissioner Hanley replied that the geographic cost factor
was designed to reflect costs in a community; however, he
doubted that it would reflect the annual changes in fuel
costs. The idea of the geographic cost factor was to
recognize and compensate for the increased costs in rural
areas.
2:32:42 PM
Co-Chair Stoltze referred to the bracketing change related
to the large school students. He asked what percentage of
the total student population the large school students
comprised. Commissioner Hanley replied that the large five
school districts accounted for slightly over 80 percent of
the state's students.
Co-Chair Stoltze remarked that the provision impacted above
80 percent of the state's students. He pointed to the
significance of counting the students as whole students.
Representative Edgmon asked about smaller schools and
unknown expenses. He stressed that the cost structure in
rural Alaska was exponentially higher than in urban areas
that had natural gas and other efficiencies. He was not
opposed to the change in Section 17. His district included
a portion of 10 school districts and he was troubled that
the costs would increase for small schools with fewer
students. He appreciated the additional BSA funding, but he
was worried that the bill did not recognize the expenses.
He wondered if the department kept a handle on the various
cost structures in smaller schools compared to larger
schools.
Commissioner Hanley replied in the negative.
Representative Guttenberg asked for verification that DEED
would be tracking the data as a result of the new language
on page 9 of the bill. Commissioner Hanley did not read the
provision in that way. He surmised that the board would
present recommendations for changes in the method of
education spending. He did not believe the board was being
asked to specifically recommend where to direct funds. He
thought the provision outlined a method of spending (e.g.
that money should be focused on the classroom,
infrastructure, teachers, or other). He was unsure the
board had the capacity to address the issue on a deeper
level.
Representative Guttenberg surmised that the change would be
included in a fiscal note. Commissioner Hanley replied that
the department had not intended to generate a fiscal note
on the item.
Representative Guttenberg thought that that intent of the
provision may need clarity.
Representative Wilson understood that districts needed to
provide significant information through audits and other
methods. She noted that DEED had extensive information on
its website. She observed that the website did not include
a specific form that included information on energy. She
wondered if the department had considered including a form
on its website with more clarifying information. She
wondered if it would be possible for DEED to compile the
information without creating additional work for districts.
Commissioner Hanley replied that DEED had not pursued the
idea because it was a burden on districts. He questioned
how much information was really needed. He added that the
department could pursue the issue if the information was
needed. He communicated that districts needed the
flexibility to move funds around as energy costs increased.
The department had not felt the need to monitor districts
that closely.
Representative Wilson clarified that she did not want to
monitor districts that closely. She detailed that the
education task force had looked at drivers of the formula
and it was difficult to determine needs; a $25 million one-
time increment had been provided to address rising energy
costs; however, costs continued to rise. She did not know
how the legislature would address the entire formula
without the information. She believed it would be helpful
if the department could provide the cost driver information
in one place.
2:40:21 PM
AT EASE
2:48:19 PM
RECONVENED
Co-Chair Stoltze discussed the intent to address TRS.
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
addressed three cost drivers including Medicaid, education,
and retirement; HB 278 dealt with education and retirement.
Under the legislation, K-12 costs would increase by
approximately $900 million to $1 billion over the upcoming
10 years. He shared that TRS retirement costs would be
approximately $4.3 billion during the upcoming 10 years. He
detailed that the governor's plan would decrease the TRS
costs to approximately $4.2 billion during the same
timeframe; the TRS costs would decrease to $3.3 billion
under HB 278. He communicated that essentially the $900
million in savings under the HB 278 TRS plan offset the
education increase in the bill. Offsetting the education
increase was important due to annual deficits of $2 billion
to $2.5 billion under a no-growth scenario. The state's $15
billion in reserves were estimated to be depleted by 2024.
He believed the no-growth scenario was optimistic because
Medicaid costs were projected to increase by approximately
$2 billion during the upcoming 10 years.
Mr. Teal relayed that the state was looking at consuming $2
billion for Medicaid, $1 billion for education, and another
$3 billion or more for retirement in the upcoming 10 years,
which represented roughly one-third of the state's savings.
He emphasized that the figures did not factor in PERS. He
relayed that action by the legislature was not required if
the state could afford the current TRS payments. He
detailed that if the state maintained the current TRS path,
the TRS problems would be fixed within 25 years. He
believed the appropriate question was whether the state
could afford to make the current TRS payments. He stated
that the goal was to extend the life of the reserves, which
would be accomplished with HB 278, but not with the
governor's proposed plan. He added that over the upcoming
10 years the governor's plan spent almost the same amount
on TRS as the current payment plan.
2:53:04 PM
MICHAEL BARNHILL, DEPUTY COMMISSIONER, DEPARTMENT OF
ADMINISTRATION, believed the legislature was owed a deep
debt of gratitude for its assistance to TRS since 2008. He
detailed that since 2008 the legislature had appropriated
about $1.7 billion to TRS. He believed the level of support
was impressive. He pointed to other states where
municipalities were going bankrupt under the pressure of
unfunded liabilities from defined benefit systems. The
department appreciated the additional $1.4 billion proposed
in the CS and believed it was needed; it was more than the
governor's $1.1 billion proposal. However, the department
did not know where the money would come from.
Co-Chair Stoltze asked where the department thought the
money would come from. He noted that the governor had a
fund source. He asked if the department thought the
legislature had a different fund source. Mr. Barnhill
replied that if the funding source was not different than
the governor's that helped clarify the issue. Co-Chair
Stoltze replied that it was not.
Mr. Barnhill addressed the complexity of the (retirement
and education) issues. He relayed that the governor
respectfully believed that the two issues should be treated
separately. He pointed to similarities between the
governor's plan and the Legislative Finance Division (LFD)
plan presented in the CS. Both plans sought an
appropriation in excess of $1 billion and both had a
certain amount of money on a go-forward basis from FY 16
moving forward that would be used in the form of state
assistance alongside the BSA formula. The issue came down
to philosophy, where there was a significant difference
between the governor's plan and LFD plan. He detailed that
LFD plan contemplated the possibility that the TRS trust
fund would exhaust in the early 2050s. He elaborated that
the type of plan could be referred to as a "pay-go" plan.
Whereas, the governor's plan proposed fully funding the TRS
trust fund in order to secure promises made to defined
benefit teachers. He stressed the importance of the
philosophical difference. He communicated that the governor
was unwilling to contemplate the possibility that the state
could run the TRS trust fund dry in the future; therefore,
he had put forward a plan that from an actuarial
perspective would fully fund the system. Under the
assumptions made, there was not a risk that the trust fund
would run dry. He noted that the administration found it
problematic that under the bill's plan there could be an
economic downturn at any time that would threaten the
economic security of the TRS trust fund; the governor's
plan did not begin with that assumption.
2:59:18 PM
Mr. Barnhill communicated that many people were impacted by
TRS; currently there were approximately 6,500 active
defined benefit teachers across the state and close to
12,000 defined benefit TRS retirees. When dependents were
factored in there were over 30,000 people impacted by
current decisions on TRS. The administration did not want
to send the message that it would be okay to let the trust
fund exhaust prematurely.
Co-Chair Stoltze asked if the administration had useful
information to provide the committee. Mr. Barnhill replied
in the affirmative.
Representative Gara asked for clarification on the document
being discussed.
Mr. Barnhill was addressing version G of HB 278. He looked
at pages 11 and 12 that made changes to the AADM formula.
The administration believed the intent was to provide
funding for the increased employer contribution rate for
school district employers. He explained that under existing
law the school district employer contribution rate had been
capped at 12.56 percent of payroll; the bill would increase
the cap to 32.56 percent and would provide funding for the
increased rate through changes to the AADM on page 12,
lines 17 through 25. The formula would provide funds to the
school districts to make the increased payment. He turned
to Section 21 on pages 14 and 15. When the money was
appropriated through the amended AADM formula to the Public
Education Fund, the DEED commissioner could withhold the
funds from school districts and pay the money directly to
the Department of Revenue (DOR) for investment. The purpose
of the section was to capture the full-time value of the
funds for investment at the beginning of a year as they
were invested at present.
Mr. Barnhill relayed that the TRS actuarial rate was high
(it would be over 70 percent in the coming year); the
difference between 72 percent of payroll and the employer
contribution rate cap of 12 percent was 60 percent.
Currently the legislature appropriated the entire
difference through state assistance in the operating
budget; the funds were sent to the Department of
Administration and were then provided to DOR for immediate
investment. He relayed that by routing an additional 20
percent through the school districts there was a concern
that the funds would come back to the state in equal
installments over a 10-month period and that DOR would lose
the ability to invest the funds over the 10-month period.
He detailed that the provision resolved the issue by
designating that the money would be given directly to DOR.
3:04:50 PM
Mr. Barnhill moved to Section 25 on page 16 where the
employer contribution rate cap was increased from 12.56
percent to 32.56 percent. The bill also included an
alternative rate on lines 23 to 27. The Legislative Finance
Division had explained to the administration that the
alternative rate (pension benefits divided by salary) would
not take effect until 2050. He addressed an earlier
question from Representative Gara about how the rate
increase would impact the state (the state and the
University of Alaska were both members of TRS). Based on
information collected by the Division of Retirement and
Benefits, state assistance had been paid on behalf of the
state in the amount of $2.3 million and $16.2 million on
behalf of the university in FY 13. He detailed that
approximately one-third of the total would need to be
included in each of the two entity's budgets under the
legislation (approximately $700,000 for the state and $5
million for the university).
3:06:52 PM
Mr. Barnhill addressed Section 27 on page 17 that would
implement the pay-go provision. The section amended AS
14.25.085 that was originally enacted into law in 2008 as
part of SB 125; the section had provided that for TRS the
state could appropriate the difference between the
actuarial rate and 12.56 percent in the form of state
assistance. To date the appropriations amounted to
approximately $1.7 billion. Under changes proposed in the
bill no appropriation would be made if the balance of the
trust funds (the amount appropriated to the trust fund
appropriated from the reserve account established by the
bill) and employee and employer contributions were
insufficient to pay anticipated benefits for the upcoming
year. He believed the change was fairly radical. He
reiterated that the section contemplated a pay-go approach
to TRS.
Mr. Barnhill addressed Section 33, page 19, lines 21 and 22
that established the Alaska Retirement Management Board
(ARMB) as the trustee of a new Teachers' Pension Reserve
Fund (created in Section 35 and established as a sub-fund
of the general fund). Section 34 amended AS 37.10.220
related to the powers of ARMB. Page 31, lines 5 and 6
removed the power of ARMB to conduct past service liability
rate making, which the board had done since 2005. Page 22,
lines 7 and 8 authorized ARMB to manage the Teachers'
Pension Reserve Fund.
3:09:52 PM
Co-Chair Stoltze wondered whether bond raters would have
concern about the state's pension reserve even if the state
was making the payments and had a record of making
payments.
GARY BADER, CHIEF INVESTMENT OFFICER, TREASURY DIVISION,
DEPARTMENT OF REVENUE, deferred the question to
Commissioner Rodell.
Co-Chair Stoltze requested that DOR enable Mr. Teal on
behalf of the House and Senate to make inquiries of some of
the state's bond rating agencies. Mr. Bader deferred to
Commissioner Rodell.
Co-Chair Stoltze asked if Mr. Bader could foresee a problem
with the request. Mr. Bader replied in the negative.
Co-Chair Stoltze asked that Mr. Teal act as a fact checker
to help the legislature make an independent determination.
Representative Wilson did not appreciate the administration
insinuating that the committee did not take teacher
retirement seriously because it did not agree with the
governor's plan. She believed the legislature was taking
the issue more seriously because it was working to put the
payment plan in statute. She wondered where the
administration planned to obtain $500 million annually for
the fund and how many years the annual payments would be
needed.
Mr. Barnhill replied that the governor's plan called for
$343 million for TRS annually from FY 16 to FY 36. He
referred back to his testimony that the legislature was
owed a huge debt of gratitude for the commitment it had
shown TRS.
Co-Chair Stoltze referred to Mr. Barnhill's testimony that
there was not a gulf of disagreement between the governor
and the legislature.
Mr. Barnhill believed the statement was fair. He detailed
that the amount of money under the legislative plan
beginning in FY 16 was $157 million grading up over time;
whereas, the governor's plan was $343 million. He stated
that the difference was small in terms of numbers, but the
philosophy was significantly different. He concluded that
there was a respectful disagreement between the governor's
and legislature's proposals.
Representative Wilson asked where the administration
believed the $343 million would come from. Mr. Barnhill
deferred the question to the Office of Management and
Budget.
JOHN BOUCHER, SENIOR ECONOMIST, OFFICE OF MANAGEMENT AND
BUDGET, OFFICE OF THE GOVERNOR, answered that some of the
cost drivers the administration was working to address
(e.g. retirement, Medicaid, growing prison populations, and
investment in infrastructure) would be challenges for the
administration going forward. In the immediate future the
general fund (primarily through petroleum revenue) would be
the driving force in addition to the state's reserves. The
administration believed that the combination of the two
fund sources would cover the costs until gas production
began.
3:13:43 PM
Representative Wilson stated that she did not hear an
answer to her question. She equated the plans to taking out
a home mortgage. She detailed that one plan looked at the
state's ability to afford a 15-year loan or a 40-year loan
based on its revenue. She opined that selecting the 40-year
plan did not mean she took the debt less seriously; it just
used what she believed the state could afford. She believed
that if the state chose the 40-year debt option it could
continue to make major payments; the plans would be very
similar if the $343 million could be infused annually. She
was interested in an apples-to-apples comparison. She
wondered if there was anything preventing the
administration from using the 40-year plan while providing
$343 million installments to reduce the debt quicker.
Mr. Boucher replied that the bill did not prohibit extra
money from going to the fund should the legislature or the
governor propose it. He believed the administration just
had a different target in terms of where it would like to
be in 25 years related to a healthy, in-tact reserve fund
(versus exhausting the funds). He stated that there was a
downside to not having a trust fund in place to pay down
the ongoing debt.
Representative Wilson understood that the governor's plan
used a shorter timeframe. She surmised that HB 278 would
require an annual infusion of $343 million in order to make
its timeframe shorter. She asked for verification that the
plans would get to the same place.
Mr. Boucher answered that the governor's plan to allocate
$343 million to TRS was based on the $1.2 billion
appropriation in the first year; if a higher number was
used the $343 million figure would drop. He referred to the
home mortgage scenario and explained that a larger down
payment would change the ongoing level payment. He
explained that by short-funding the fund the models
indicated that the trust would be exhausted. He concluded
that if the trust fund were to go bankrupt the only ongoing
revenue would be contributions from employers.
Co-Chair Stoltze asked if bankrupt was the correct word.
Mr. Boucher clarified that exhausted was a more appropriate
term.
Representative Wilson surmised that the fund would only be
exhausted if the $343 million was not paid in. She shared
that she had purchased a car based on her husband's
projected overtime payments; subsequently, he had not
received as much overtime as planned and they had to cut in
other areas to account for the car payment. She wanted to
ensure that the state was paying what it could afford
(accounting for Medicaid, education, and other). She hoped
that the legislature could find the $343 million for annual
infusions that would pay the debt off in a quicker
timeframe. However, until she knew where the money was
coming from she did not want to give the appearance that
the funds would be available one year and not available the
next. She opined that the funds may not be as easy to come
by as believed.
Co-Chair Stoltze referred to another one of the governor's
bills (SB 138). He wondered where the funds would come
from.
3:20:00 PM
Mr. Barnhill noted that Representative Wilson made a fair
point about different terms used to amortize the unfunded
liability; sometimes the unfunded liability was likened to
a home mortgage. The administration had considered various
amortization terms (20 to 40 years); it had selected the
term because it believed the state could afford it. He
pointed to another option of amortizing a debt through an
interest-only loan where the interest was paid off at the
end of the loan term and the borrower was faced with paying
the principal in-full or foreclosing on the property. He
believed the proposal by LFD was closer to an interest-only
loan than it was to a fully amortizing loan under any
particular term. The administration had submitted the
numbers to its actuary and was waiting for the judgment. He
believed it queued up a policy discussion about whether the
state wanted to address the issue with an interest-only
approach where the entire principal would be due at the end
of the loan period.
Representative Gara was uncomfortable taking everyone's
interpretation of the bill. He discussed that at the
beginning of the year the governor had proposed a $3
billion pay-down of PERS/TRS (roughly $2 billion would be a
pay-down and $1 billion would be the annual payment). He
understood that the idea was to put a substantial sum down
in order to reduce future annual payments. He thought the
proposal had covered both PERS and TRS. He expressed
confusion in relation to the current debate about TRS.
Co-Chair Stoltze clarified that the proposal in HB 278
would bifurcate the $3 billion between PERS and TRS. He
added that it would appropriate more to the TRS side.
Representative Gara asked for verification that the
governor's original plan had not split PERS and TRS
payments (roughly $2 billion would be a pay-down and $1
billion would be the annual payment). Mr. Barnhill replied
that the summary was roughly accurate. He detailed that the
governor's plan was $3 billion with $1.88 billion allocated
to PERS and $1.12 billion to TRS. Each allocation
encompassed the FY 15 payment that was due. Under the ARMB
level dollar methodology, $900 million of the total would
be the FY 15 payment. Under the previous percentage of pay
methodology $703 million would be the FY 15 payment.
Representative Gara wondered when the PERS and TRS debt had
been split up. Mr. Barnhill replied that the change had
occurred in the new CS.
Co-Chair Stoltze noted that there had been an awareness of
discussion.
Mr. Barnhill added that there were different ways of
addressing PERS and TRS. He relayed that the employer
contribution rate cap in TRS was intended for the state to
pay nearly the entirety of the past-service liability.
Co-Chair Stoltze equated it to a single-payer system. Mr.
Barnhill replied that the current structure reflected an
understanding that the debt was the state's liability.
3:25:21 PM
Representative Gara believed that all presentations to-date
had involved a combined way to address PERS and TRS
together.
Co-Chair Stoltze replied that there had not been a
governor's bill to analyze; there had been a budget
submission.
Representative Gara referred to the discussion about the
governor's plan to put $343 million into TRS and the plan
in HB 278 to put $157 million into TRS. He thought the
governor's only plan had been the $3 billion budget plan.
He wondered where the governor's plan had been related to
the $343 million into TRS.
Mr. Barnhill replied that the governor's plan was as he had
described earlier in the meeting. The governor had proposed
a $3 billion payment to PERS/TRS and to appropriate $500
million annually ($157 million to PERS and $343 million to
TRS) from FY 16 to FY 36.
Representative Gara wondered whether the PERS and TRS
sections in the bill would impact the BSA in any way. Mr.
Barnhill clarified that the bill contained no provisions
related to PERS. He replied that the change in the capped
rate from 12.56 percent to 32.56 percent also included a
change to the AADM formula that was intended to provide the
difference in funding (it was intended to hold the school
districts harmless).
Representative Gara asked for the section where school
districts would be made whole by the funding. Mr. Barnhill
directed attention to Section 16, page 12, lines 17 through
25. Co-Chair Stoltze noted that the administration was not
a proponent of the approach, which he believed added to the
veracity of Mr. Barnhill's statement.
Representative Gara looked at page 11. He stated that there
was currently a public education fund for the types of
things the BSA was used for. He pointed to language that
would allow the fund to be used for BSA-type classroom
items, transportation, or TRS (without specifying an
amount). He wondered what would prevent the funding from
going entirely to TRS so that less money went to schools.
3:31:32 PM
Mr. Barnhill pointed to Sections 15 and 21. The change to
the AADM was intended to provide funding to school
districts to make up the 20 percent difference (from 12.56
percent to 32.56 percent). When the legislature
appropriated the money it would go to the Public Education
Fund. Under Section 21 the DEED commissioner could provide
it directly to DOR for investment. As he understood, the
intent was to protect the time-value of the funds by
investing them at the beginning of the year (as they were
currently) rather than sending the funds to school
districts and bringing the money to DOR in 10 equal
installments over the course of a year.
Representative Gara did not see anything limiting the
amount of money that could be taken out of the public
education fund for TRS. Mr. Barnhill did not believe it was
the intent to take any more funding out above the 20
percent.
Representative Gara understood the intention, but wanted to
ensure the bill clarified the intent.
Co-Chair Stoltze stated that the bill recognized retirement
as a cost driver of education. He stated that the
legislature had intent and a track record of holding the
school districts harmless. He believed the items were
indisputable.
Mr. Barnhill believed the comments were fair.
Co-Chair Stoltze discussed that the committee would hear
from Mr. Teal.
Representative Munoz stated that through the formula the
legislation included reimbursement for the additional cost
to districts, but did not address additional costs to the
university, DEED, the Southeast Regional Resource Center,
or the Special Education Services Agency. She believed a
better understanding of the total costs was needed. She
stated that the costs would clearly have an impact on
future operating budgets. She stated that in the current
year the university had taken an $11 million cut; she
surmised that the bill would mean an additional $5 million
to $7 million cut. She was concerned that under the bill's
plan the payoff would increase from 20 years to 40 years,
but at the end of the 40 years the trust funds would be
gone and the obligation would remain. The benefit payments
were estimated to be around $3.5 billion for PERS and TRS.
She wondered how to contemplate covering future costs
without the benefit of the trust funds.
Mr. Bader replied that when the trust funds were exhausted
the contribution rate (based on payrolls at the time)
should be sufficient to cover benefits. The trust fund
would essentially go to zero, but the employer contribution
rate should be enough to cover benefits. He added that if
the contributions were not sufficient, the state would have
missed an opportunity to have earnings of the trust fund
pay the benefits. The crux of the governor's proposal was
that benefits would be paid out of earnings and not solely
from employer contributions after the initial deposit into
the fund.
3:36:31 PM
Representative Munoz asked what the trust funds had earned
in the past year. Mr. Bader replied that the funds had
earned 18.7 percent in the past calendar year.
Representative Munoz asked about the dollar amount of the
earnings. Mr. Bader responded that he would need a
calculator to provide the dollar amount. He detailed that
the earnings were substantially higher than what was
anticipated in the ARMB earnings assumption.
Co-Chair Stoltze asked about the fund's historic earnings.
Mr. Bader answered that historic earnings depended on the
specific time period. He detailed that returns for the TRS
fund over 20 years were about 7.9 percent. Returns for a
period of 3 years were much higher than the 8 percent
earnings assumption. Whereas, returns were significantly
lower in 5-year period that included 2008. He elaborated
that the administration believed the governor's proposal
that would put money into the trust fund for investment
over a long period of time was preferable way to obtain
earnings due to volatility that existed in investment
returns. He explained that investing the money on an annual
basis (instead of over the long-term) ran the risk of a
significant market decline.
Representative Munoz wondered what the approach did to the
state's creditworthiness and how it would impact the
state's ability to seek financing for a gasline.
Commissioner Rodell believed the plan before the committee
would raise flags with ratings agencies. She noted that the
agencies may just flag the change in a report initially.
She believed it would cause credit concerns because the
change would be viewed as a backing away from a commitment
made by the state; therefore, there was concern about how
the change would impact the state's ratings in the long-
term. She opined that agencies would take some time to
react because they would watch to ensure that the issue was
on-going as opposed to something that may be corrected.
Placing items in statute led to a more immediate concern
from ratings agencies. She relayed that DOR had envisioned
that the state was taking care of current liabilities so
that in 2018 the state would be in the best financial
position possible (to make the most flexible and lowest-
cost decisions) when it looked for a final investment
decision on the gasline. She was concerned that actions
considered under the bill would tie the state's hands and
would eliminate its flexibility to make the best decision
for the gasline and other decisions due to a deferred
liability.
3:41:05 PM
Co-Chair Stoltze requested that DOR enable Mr. Teal on
behalf of the House and Senate to make inquiries of some of
the state's bond rating agencies.
Commissioner Rodell replied that DOR could set up
conversations with ratings agencies. She offered to invite
state analysts as well. She provided the caveat that
ratings agencies were operating under a stricter regulatory
environment and would not necessarily respond to direct
proposals. For example, it was unlikely the agencies would
provide an answer if they were asked whether they would
downgrade the state's rating if it took certain actions.
However, it was possible to obtain good information about
how the agencies viewed liabilities, pensions, debt
capacity, and other.
Co-Chair Stoltze asked Commissioner Rodell to work with the
committee on the issue. Commissioner Rodell was happy to
facilitate any conversations.
Co-Chair Stoltze asked for verification that DOR would not
be an impediment to the agencies' ability to provide
information. Commissioner Rodell replied in the
affirmative.
Representative Munoz referred to a prior conversation where
Commissioner Rodell had discussed her experience in the
Commonwealth of Virginia, Chicago, and possibly Puerto
Rico. She recalled the commissioner's comment that some of
the jurisdictions had implemented a system similar to the
one under consideration by the committee. She believed the
commissioner had stated that the system had been
unsuccessful. She asked for further detail.
Commissioner Rodell replied that she did not work directly
with Puerto Rico, but was familiar with the case history.
She detailed that Puerto Rico had closed its defined
benefit system in 2000; it had subsequently run into budget
problems and began to rely on the trust fund to pay
benefits. At present the trust funds for the public
employees were 4.5 percent funded. For a variety of other
reasons Puerto Rico had to borrow funds on a regular basis
to manage its own cash liquidity needs; its credit rating
was currently at BB (junk-grade). The rating meant that
bond funds were no longer allowed to buy Puerto Rico's
debt. She detailed that Puerto Rico had recently sold debt
the same week as the State of Alaska. Alaska had sold a
one-year note at 0.001 percent; Puerto Rico had to sell 30-
year debt with a term maturity for one year of cash at 8.78
percent.
3:46:01 PM
Commissioner Rodell provided a second example that
pertained to the State of Illinois. She detailed that
Illinois had an open benefit plan; its issue related to
over extension and not funding pensions as a mechanism to
fund other state priorities. Due to the actions, the
state's unfunded liability had grown considerably, which
impacted the state's ability to borrow; its rating was
currently an A- (speculative grade). The state was looking
at cutting benefits. She believed Alaska had been given
significant credit for continuing to fund pensions even
under revenue volatility.
Representative Munoz asked about an actuarial analysis of
the proposal. Commissioner Rodell replied that Buck, the
ARMB actuary was in the process reviewing the proposal. She
hoped to receive the results shortly.
Co-Chair Stoltze asked about the size of Puerto Rico's
permanent fund, earnings reserve, and statutory and
constitutional budget reserve accounts. Commissioner Rodell
replied that Puerto Rico's accounts were at zero.
Co-Chair Stoltze surmised that the lack of funds could be
part of the reason for Puerto Rico's BB rating.
Commissioner Rodell agreed.
3:48:04 PM
Representative Costello spoke to her understanding of the
administration's proposed plan that would have the state
make larger contributions of $343 million per year for a
shorter period of time. She believed the plan meant the
state would coast on earnings. She stated that under HB 278
the state would make a larger upfront contribution and
contributions would pay for the liability. She asked how
coasting on earnings was more reliable and secure than a
statutory commitment to pay the liability with
contributions.
Commissioner Rodell replied that she was more confident in
putting money in the trust fund and providing it with 10 to
20 years to earn the needed money and to deposit additional
contributions. She relayed that the strategy equated to
forward funding. She had more confidence in the ability of
the trust funds to have and earn the money under ARMB
management. She was concerned that under the contribution
scenario the needed contributions could compete with other
funding items. She believed a system where earnings were
generated removed the subject from future political
dialogue about what to fund.
3:49:57 PM
Representative Costello observed that the administration
had not commented on the interest earning reserve account
established in the bill. She wondered if it was
insignificant from the administration's perspective.
Mr. Bader replied that $100 million was never
insignificant, but compared to the scale of the total
proposal it did not match the importance of the philosophy
behind the other component in the bill. He elaborated that
the bill contemplated that the state would invest money in
a way that would generate the required rate of return to
fund the system. The funds could not be invested
identically to the trust funds because the department would
have to consider that the legislature may call on the funds
at some point. He believed the legislature would be
disappointed with the department if there were long-term
illiquid funds that were inaccessible. He added that the
funds could be invested to earn close to what the ARMB
believed the other funds would make.
Mr. Boucher added that when neutral parties looked at
things like the reserve fund that they did not allow the
accrued interest in the models due to the risk of
reappropriation for other purposes. He stated that if the
primary goal was to address the unfunded liability it would
be no different than having the $100 million in the
constitutional budget reserve fund from the actuary's
perspective. He agreed that the money would earn, but it
would be difficult to convince any actuary that the money
or the earnings were dedicated towards paying the unfunded
liability.
Representative Costello stated that under the governor's
proposal the $343 million would be offered as a budget item
that would compete against all other demands on the general
fund including the operating and capital budgets, cash
calls for the gasline, education, and Medicaid; whereas,
the HB 278 plan would include the funding in statute. She
asked for verification that Commissioner Rodell saw the
plan under HB 278 as less certain option.
Commissioner Rodell replied in the affirmative. She stated
that the legislature had a history of funding the items and
recognizing the importance of the requests. She was
concerned that if the legislature wrote it in statute that
"it might have needed to be something different."
Mr. Boucher understood that in the current proposal the
amount dedicated to TRS (outside of the education formula)
would be approximately $156 million and would grow
annually. He surmised it would be a built-in annual
increment until at least 2050. He believed the item would
grow to over $600 million. Although the governor's plan was
more expensive upfront, it would remain at $343 million
annually. From a budgetary standpoint, the administration
believed that a more predictable, stable, and higher
payment that would ultimately fully fund the trust fund was
a better alternative.
3:54:57 PM
Representative Costello saw the two proposals being couched
as philosophical in nature. She believed the conversation
was about whether the legislative or the administrative
branches provided bond raters with more assurance. She
looked at the challenge in light of other challenges facing
the state. She understood that under ideal circumstances it
would be best to pay down more upfront to shorten the
payoff period; however, the state had other budgetary
concerns as well, which made the pay-as-you-go plan
appealing instead of a plan that was based on earnings. She
believed that both plans had risk. She opined that it was
not possible to address a $12 billion unfunded liability
without risk. She asked for verification that under the
governor's plan it was conceivable that additional payments
may be necessary even after the scheduled end-date.
Mr. Boucher replied that there was the risk. He spoke to
the difference between the two approaches. He discussed
that a world with the trust fund was similar to a current
situation with the constitutional budget reserve fund;
there were ongoing bills that were paid and incoming cash
flow. A trust fund to pay benefits provided a much less
risky situation than relying on employers to consistently
make payrolls and contributions to pay benefits on a
monthly basis.
3:57:26 PM
Co-Chair Stoltze asked Mr. Teal to address the committee.
He noted that items highlighted by Representative Munoz had
come from an LFD document. He noted that the items would be
included in a fiscal note.
Representative Munoz requested to hear from the university.
She believed the amount in the [LFD] memo was lower than
the university's estimate.
Co-Chair Stoltze asked for verification that Chris
Christensen III, Associate Vice President for State
Relations, University of Alaska was present on a lobbying
function.
CHRIS CHRISTENSEN III, ASSOCIATE VICE PRESIDENT FOR STATE
RELATIONS, UNIVERSITY OF ALASKA, replied that he was
representing the university. He relayed that the bill would
have an impact of approximately $7.2 million on the
university (the amount was higher than the $5 million
mentioned earlier in the meeting). He highlighted that the
FY 15 operating budget had received a $15.9 million
unallocated reduction; the budgets covered less than 40
percent of fixed cost increases the university would have
in the coming year for items such as pay raises and the
opening of four new buildings. He communicated that the
university would need to reallocate $28 million internally
through cuts to operations, existing programs, or by
raising new revenue. He commented on the large size of the
figure. He stated that under the bill's proposal if TRS was
unfunded it would create a hole of $35 million that the
university would have to begin covering on July 1, 2014. He
did not know where the funds would come from. The
university had created a defined contribution Optional
Retirement Plan (ORP) in 1990; 16 years prior to the
creation of other state defined contribution plans. He
detailed that the plan was optional but many faculty
members had opted in over the years because they wanted a
portable plan they could take elsewhere, which was why the
impact would only be $7.2 million. He communicated that it
had always cost the university and state less money for
university employees to be enrolled in ORP as opposed to
TRS or PERS; the state had saved approximately $90 million
since the plan's creation. He detailed that 24 years
earlier the Board of Regents had decided to start getting a
handle on the university's retirement costs. The university
requested funding for the rate increase if adopted.
Co-Chair Stoltze requested that the university keep the
legislature involved in the conversation in the future. He
appreciated having the information on the record.
4:01:33 PM
Mr. Teal spoke to the fiscal note. He communicated that
there were two issues with the university's funding level.
There was no intention for there to be a reduction to
university funds. The bill's intention was to include
fiscal notes that restored funding to the four agencies in
addition to school districts. He stated that the formula
addressed school districts; there were four agencies that
could not be affected by the formula. He relayed that a
couple of ways to get funds to the entities included using
current statutes to pay off their share of the unfunded
liability and to leave the rate the same. He stated that
there were ways to get the entities money to pay just as
was done for school districts. He did not know what option
the committee may choose, but it was not a new issue. He
knew that the university was preparing the fiscal note.
4:03:45 PM
Mr. Teal recognized that Mr. Bader, Mr. Boucher, and Mr.
Barnhill all understood the issue. He addressed the
testimony that the governor's plan secured promises and
that the trust fund would not be exhausted prematurely. He
believed the statements implied that the plan under HB 278
did not secure retirement. He understood existing concerns
about the retirement plan. He reassured the committee that
any plan under consideration was intended to pay benefits
when due. He stressed that the benefits were not in danger.
The plans used the same numbers with different
philosophies. He believed the governor's plan was solid
because in intended to pay benefits when due, but no
legislation had been proposed to change the schedule of
payments. He paraphrased earlier testimony that the
administration did not want the plan in statute and wanted
to have flexibility. He believed flexibility implied that
the administration wanted the ability to pay less than the
$343 million or the statutory rate. He relayed that without
a change in statute the state would owe the full statutory
rate. He detailed that paying $343 million did not comply
with statutes. He explained that under the governor's plan
the legislature could always choose to reduce the amount
paid; if the state needed liquidity for a gasline or other
projects it could choose to reduce payments to statute. He
believed there was protection built in under the plan in HB
278; the rate was set in statute. He believed the mortgage
analogy used by the committee was appropriate; the
legislature could choose to pay more.
Co-Chair Stoltze asked Mr. Teal to respond to the proposal
in the CS.
Mr. Teal replied that the flexibility of having the rates
in statute was that state assistance was relatively low.
The legislature could choose to pay higher annual payments
than the amount the bill would set in statute. He relayed
that payments did go up with payroll, but $600 million in
2050 was less than the $150 million to $160 million that
would be paid at present; the cost rose with inflation. He
elaborated that the numbers in real terms would remain at
the $150 million to $160 million level. The second
protection was a cash infusion plus contributions on an
annual basis that should pay benefits until the state could
move to a pay-as-you-go plan. Additionally, the bill
created a reserve fund as another backup; if the trust fund
was insufficient money would be transferred from reserves.
He confirmed that from an actuarial perspective the trust
fund would not be counted as part of the system reserve. He
asked how annual appropriations could be counted as a
given. He did not believe there was any guarantee that $343
million would be paid annually under the governor's plan.
4:09:46 PM
Mr. Teal opined that using reserve was not essential; it
was a helpful buffer, but was not the underlying issue. The
bill included a provision that made the state the payer of
last resort. He disputed the administration's testimony
that the trust fund could run out of money prematurely. He
elaborated that the fund would run out of money when
benefits could be paid strictly with contributions at a
rate of 32 percent or lower. The state would become a payer
of last resort if anything happened; there were several
layers of protection built in for the trust fund and future
benefits. He disagreed with the administration's comparison
of the bill's plan to an interest-only loan. He stated that
unfunded liability made sense in a big-balance approach to
the system, which meant having a large trust fund and using
earnings to make the payments. He opined that there was
nothing wrong with the approach.
Mr. Teal addressed relying on contributions rather than
earnings. He stated that the big balance related to the
timing of contribution payments; it was possible to make
payments at present, to build up a balance and then coast
or to pay them later when benefits were due. Under the pay-
go plan there was not a balance, which resulted in an
unfunded liability. He contended that it was a nonsense
number because there was a plan to pay the benefits with
contributions, not with the trust fund. He reiterated that
the plans constituted a difference in philosophy; one
coasted on earnings and the other assumed that
contributions were more reliable. He stated that the latter
was more stable and predictable. He relayed that there
would be a balance of $10 billion or more if the state
relied on earnings; reliance on an 8 percent return meant
that the state could pay benefits as long as it earned $800
million per year. He stressed that if there were zero
earnings in one year the state would be $800 million short,
which meant a contribution from the state would be
required. He questioned where the money would come from.
The numbers in the plans were very similar because costs
were very similar. He reiterated that one plan required
significant money upfront and coasting versus what he
characterized as the more affordable route of lower
contributions. He did not believe there was a great
difference between the plans. He relayed that the plans
became identical if the legislature chose to allocate $343
million annually instead of the required amount. He
questioned how bond rating agencies would react if the
state fell off its schedule.
Co-Chair Stoltze hoped the committee would get to discuss
the issue with bond raters. Mr. Teal hoped to have the DOR
commissioner involved in a conversation with the bond
rater. Co-Chair Stoltze replied that it was the intention.
Mr. Teal concluded that both plans under consideration
would work. The choice pertained to which plan was more
affordable.
4:14:53 PM
Representative Gara referred to PERS. He did not believe
that either plan under consideration was bad. He
communicated that he had supported a plan similar to the
governor's in the past. He opined that one of the benefits
of infusing an extra $2 billion cash infusion (plus another
$1 billion that was already owed) the state's annual
payments would be significantly lower. The cash infusion
would bring annual payments down to $500 million for 20
years. He believed the plan would leave money to fund
infrastructure, children's services, and other important
items. He surmised that if nothing was done the annual ARMB
recommended payments would be well over $1 billion per
year, which meant less money for other items. His concern
with the bill's plan was that it began with a low payment
of roughly $100 million for TRS; however, the PERS
component would also need to be paid. He referred to
earlier testimony that in the future the TRS portion would
exceed $600 million per year and payments would go on for a
longer period. He noted that in the mortgage world people
preferred to take out shorter mortgages if they could
afford it. He surmised that the governor's plan left more
money on the table to address the state's needs over the
long-term.
Mr. Teal chose not to address the PERS issue because it was
not included in the bill. He confirmed that the bill called
for TRS payments that escalated over time; however, he
stated that the payments in real dollars did not escalate
by much. He added that they would increase due to increases
in payroll and inflation. He stated that in real dollars
$600 million 40 years out was worth less than $160 million
in current dollars. He argued that the governor's plan took
$343 million off the table every year; whereas the bill's
plan left $200 million more per year on the table (which
would decline over time). He explained that the whole point
was that people chose a lower term mortgage if they could
afford it. He agreed that the cheapest way to solve the
problem was to pay the entire unfunded liability off at
present. He remarked that people chose 30-year mortgages
not because they were cheaper, but because they were more
affordable. That was the call the legislature had to make.
He noted that the issue centered on how much money should
be left on the table for other things.
4:20:07 PM
Representative Gara did not believe Mr. Teal was wrong, but
he preferred the governor's approach. He would also be more
comfortable if the governor's plan was included in
legislation. He contended that the $500 million annual
payment under the governor's approach would be reduced in
real dollars just like the $600 million in the future was
less in real dollars. The problem was that the state's
revenue was not increasing with inflation. He noted that
state revenue was declining and wondered how it played into
the issue.
Mr. Teal replied he had been instructed to find a plan that
worked. He noted that any model that did not pay benefits
was a nonstarter. He communicated that the situation was
different than that in Illinois or Puerto Rico. He
emphasized that the payment plan needed to work. He
detailed that the needed return under the pay-go plan was
as low as 4.8 percent. He believed the earnings estimates
under the bill's plan were actually understated. He
observed that if earnings exceeded expectations the state
could contribute less later on. He did not want to begin
with an assumption that the state would earn optimistic
returns. He had been instructed to keep a cash infusion
below $3 billion due to concern about maintaining reserves.
Third, benefits were fixed; the governor's plan had to pay
the same benefits that any other plan had to pay. Given a
down payment and the fact that the debt would be paid off
the question became how much was required on an annual
basis and for how long, which was the only difference
between the plans. The concern was not so much about which
plan was cheapest in the long-term, but about which was
cheapest for the next 10 to 15 years when there may be a
cash call for a gasline and other items. The plan in the
bill reduced annual costs at the consequence of higher
payments later on.
4:24:19 PM
Co-Chair Stoltze asked if members had any additional
questions about the TRS component of the bill.
Representative Holmes directed attention to pages 13 and
14. She observed that the section changed the percentage of
a district's basic need used to calculate required local
contributions from 45 to 40 percent. She asked for detail
on the proposed change.
Mr. Teal answered that as TRS payments were run through the
foundation formula the funds were added to basic need. He
detailed that basic need would be increased in every
district and was totaled by $150 million or more per year.
In most communities the required local effort was unrelated
to BSA and basic need in any way; the payment was 2.65
mills multiplied by a property. He detailed that in the
North Slope Borough, Skagway, and Valdez due to expensive
nonresidential property it became a huge amount of money;
therefore, the amount was limited to 45 percent of basic
need. He elaborated that if basic need was going to be
increased by the large sum; 45 percent of basic need would
be increased. He explained that the school districts
received their share of the $150 million, but it did not
add to the total they had to spend. Reducing the required
local contribution from 45 percent to 40 percent allowed
school districts to escape paying tax on the TRS portion.
Representative Holmes asked for verification that the
provision was not intended to change the amount of local
contribution once the funds were funneled through the
formula. The intent was to hold required local
contributions steady. Mr. Teal replied in the affirmative.
He added that it only applied to three communities.
Representative Wilson surmised that the districts would
look at the 2.65 mills or the 40 percent; whichever was
more. She wondered if the 2.65 mills could be lowered. Mr.
Teal replied in the affirmative. He elaborated that if the
communities paid 2.65 mills they would pay significantly
more money; the 40 percent would cap their local
contribution. He confirmed that the 2.65 mill rate could be
changed; it would not change the amount received by school
districts, but would shift costs from local to state or
vice versa. He expounded that if the mill rate was
increased costs would be shifted from state to local
government; whereas, a reduced rate meant the state would
pay more.
Representative Wilson wondered whether the change from 45
percent to 40 percent would alter the amount the three
districts received from the state. Mr. Teal replied in the
negative. He detailed that it was a rough attempt to keep
the district's current contributions the same. Basic need
was increased; the districts would receive the same amount
of money, only the share would differ. He elaborated that
40 percent of basic need plus TRS was equal to 45 percent
of what the districts currently received.
Representative Wilson surmised that the adjustment was
necessary because the TRS component had been added. Mr.
Teal replied in the affirmative.
4:30:08 PM
Representative Gara spoke to the amounts of money the BSA
raised for various districts under the bill. He referred to
an $8 million deficit in the Fairbanks school district. He
asked for verification that the bill raised roughly $6.5
million [for Fairbanks]. Mr. Teal did not know.
Representative Gara referred to projections that under the
bill the BSA increase would result in an extra $6.5 million
for Fairbanks. He wondered if LFD had looked at the
figures. Mr. Teal replied that he had only looked at
totals.
Co-Chair Stoltze interjected that concise documents
including the information would be provided to the
committee.
Representative Gara asked for verification that the money
projected to be raised assumed that the $25 million
included in the operating budget (and distributed as if it
was BSA funding) remained.
Mr. Teal replied in the affirmative. He noted that the bill
was seen as "what does this bill do." He did not know what
the legislature would decide on the money in the operating
budget.
Co-Chair Stoltze surmised that Mr. Teal assumed the money
was new. Mr. Teal replied that his assumption was that the
bill raised the BSA by $185. He elaborated that if the
operating budget conference committee took the Senate
position that included $100 million outside the BSA there
would be substantial money designated for school districts.
However, if the decision was made that the $185 increase
allowed other funding to be reduced to zero, it would back
off $25 million of the increase.
Representative Gara asked if the $25 million was no longer
in the budget the BSA increase under the bill would be
roughly $100 less than projections. Mr. Teal replied that
the BSA increase in the bill was $185. He relayed that if
the operating budget outside of the formula money were
removed the effective increase would fall to $85.
Co-Chair Stoltze remarked that irrespective of other
actions there would be $185 in the BSA; with the additional
increment the figure would increase to $243. The BSA would
increase by $301 in two years' time.
4:34:24 PM
Mr. Teal replied in the affirmative.
Co-Chair Stoltze stated that the increases would all be
permanent, but were "not subject to the vagaries of year-
to-year appropriations."
Representative Gara noted that no one legislator spoke for
another legislator; however, he had concerns about a
statement he had heard that the $25 million would be
removed. He surmised that if the $25 million was removed
the BSA increase in the bill would be $85. Mr. Teal replied
in the affirmative.
Co-Chair Stoltze asked members to provide amendments to his
office by 5:00 p.m. that day.
HB 278 was HEARD and HELD in committee for further
consideration.
ADJOURNMENT
4:38:21 PM
The meeting was adjourned at 4:38 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 278 email messages.pdf |
HFIN 4/1/2014 1:30:00 PM |
HB 278 |