Legislature(2007 - 2008)
04/02/2007 07:11 AM House W&M
| Audio | Topic |
|---|---|
| Start | |
| HB204 | |
| HB206 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
April 2, 2007
7:11 a.m.
MEMBERS PRESENT
Representative Mike Hawker, Chair
Representative Anna Fairclough, Vice Chair
Representative Bob Roses
Representative Paul Seaton
Representative Peggy Wilson
Representative Sharon Cissna
MEMBERS ABSENT
Representative Max Gruenberg
COMMITTEE CALENDAR
HOUSE BILL NO. 204
"An Act relating to the public employees' and teachers' defined
benefit retirement plans; relating to the public employees' and
teachers' defined contribution retirement plans; relating to the
judicial retirement system; relating to the health reimbursement
arrangement plan for certain teachers and public employees;
relating to the supplemental employee benefit program; relating
to the public employees' deferred compensation program; relating
to group insurance for public employees and retirees; making
conforming amendments; and providing for an effective date."
- HEARD AND HELD
HOUSE BILL NO. 206
"An Act relating to the accounting and payment of contributions
under the defined benefit plan of the Public Employees'
Retirement System of Alaska, to calculations of contributions
under that defined benefit plan, and to participation in, and
termination of and amendments to participation in, that defined
benefit plan; making conforming amendments; and providing for an
effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 204
SHORT TITLE: PUBLIC EMP./TEACHERS/JUDGES EMP. BENEFITS
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
03/16/07 (H) READ THE FIRST TIME - REFERRALS
03/16/07 (H) W&M, FIN
03/28/07 (H) W&M AT 7:00 AM HOUSE FINANCE 519
03/28/07 (H) Heard & Held
03/28/07 (H) MINUTE(W&M)
03/30/07 (H) W&M AT 7:00 AM HOUSE FINANCE 519
03/30/07 (H) Heard & Held
03/30/07 (H) MINUTE(W&M)
04/02/07 (H) W&M AT 7:00 AM HOUSE FINANCE 519
BILL: HB 206
SHORT TITLE: PERS CONTRIBUTIONS; UNFUNDED LIABILITY
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
03/16/07 (H) READ THE FIRST TIME - REFERRALS
03/16/07 (H) W&M, FIN
03/28/07 (H) W&M AT 7:00 AM HOUSE FINANCE 519
03/28/07 (H) Scheduled But Not Heard
03/30/07 (H) W&M AT 7:00 AM HOUSE FINANCE 519
03/30/07 (H) Heard & Held
03/30/07 (H) MINUTE(W&M)
04/02/07 (H) W&M AT 7:00 AM HOUSE FINANCE 519
WITNESS REGISTER
ANNETTE KREITZER, Commissioner Designee
Department of Administration (DOA)
Juneau, Alaska
POSITION STATEMENT: Explained committee handouts related to HB
204 and the Department of Administration's position on aspects
of HB 206. She responded to questions.
KATHLEEN LEA, Acting Director
Retirement Manager
Division of Retirement and Benefits (DRB)
Department of Administration
Juneau, Alaska
POSITION STATEMENT: Presented HB 206 on behalf of the
Department of Administration and responded to questions.
ACTION NARRATIVE
CHAIR MIKE HAWKER called the House Special Committee on Ways and
Means meeting to order at 7:11:11 AM. Present at the call to
order were Representatives Hawker, Fairclough, Wilson, Seaton,
and Roses. Representative Cissna arrived as the meeting was in
progress. Representative Gruenberg was excused.
7:11:11 AM
HB 204-PUBLIC EMP./TEACHERS/JUDGES EMP. BENEFITS
CHAIR HAWKER announced that the first order of business would be
HOUSE BILL NO. 204, An Act relating to the public employees' and
teachers' defined benefit retirement plans; relating to the
public employees' and teachers' defined contribution retirement
plans; relating to the judicial retirement system; relating to
the health reimbursement arrangement plan for certain teachers
and public employees; relating to the supplemental employee
benefit program; relating to the public employees' deferred
compensation program; relating to group insurance for public
employees and retirees; making conforming amendments; and
providing for an effective date."
ANNETTE KREITZER, Commissioner Designee, Department of
Administration (DOA) provided the committee with a document
titled "Comparison of Former HB 475 and HB 204". She went on to
reference an email sent to her on March 31, 2007 which provides
a synopsis of the participation of the National Education
Association, Alaska branch (NEA-Alaska) in the Teachers'
Retirement System (TRS) as requested by the committee.
REPRESENTATIVE SEATON relayed that, at the last meeting, there
was discussion of the effect of allowing elected officials to
participate in the Public Employees' Retirement System (PERS).
He explained that his office did some research on different
employment scenarios and their effect on PERS. He noted that
the largest cost component is for medical costs.
CHAIR HAWKER confirmed that the aforementioned research was for
PERS Tiers I, II, and III only.
REPRESENTATIVE SEATON reminded the committee that an employee's
PERS participation tier is based on the date that person was
first employed, so an elected official with previous employment
with a PERS employer will fall under the system that applied at
the time that person was first employed. He noted that while it
is against the law for an employer to use retirement status in
employment decisions, there is no prohibition against voters
considering the retirement system status of a candidate when
making their decision.
[HB 204 was held in committee.]
7:18:20 AM
HB 206-PERS CONTRIBUTIONS; UNFUNDED LIABILITY
CHAIR HAWKER announced that the next order of business would be
HOUSE BILL NO. 206,"An Act relating to the accounting and
payment of contributions under the defined benefit plan of the
Public Employees' Retirement System of Alaska, to calculations
of contributions under that defined benefit plan, and to
participation in, and termination of and amendments to
participation in, that defined benefit plan; making conforming
amendments; and providing for an effective date."
KATHLEEN LEA, Acting Director, Retirement Manager, Division of
Retirement and Benefits (DRB), Department of Administration,
provided the committee with a PowerPoint presentation dated
April 2, 2007. She said that employers have expressed concern
regarding the current employer level accounting method used for
the PERS defined benefit plan. Although PERS now has two plans,
the defined benefit (DB) plan, and the defined contribution
retirement (DCR) plan, today will only address concerns with the
DB plan, she explained.
7:20:42 AM
MS. LEA reminded the committee that PERS is an agent multiple-
employer plan which provides benefits to employees of more than
one employer. Separate accounts are set up for each employer to
pay for the benefits of only that employer's employees. She
explained that there are some administrative and investment
functions which are pooled to the advantage of the employer.
MS. LEA explained that AS 39.35.100(b)(3) requires that separate
accounts be maintained for each employer and that these accounts
be credited with that employer's contributions. Furthermore, AS
39.35.250 states that the past service rate portion of each
employers' contribution rate is that "required to amortize the
unfunded obligations of the employer ...." She relayed that the
state's actuary, Buck Consultants, amortizes the unfunded
obligations over a 25 year period. She went on to explain that
PERS assets include contributions by employers and employees as
well as investment income. Liabilities include pension benefits
and health costs. If there is a deficit between assets and
liabilities, the employers are liable for funding the shortfall.
MS. LEA explained that employer contributions are accounted for
in two separate accounts. In the active account, all employer
contributions are accounted for separately. However, the
retiree account is one account and employer contributions are
not accounted for separately. She explained that once funds are
transferred into the retiree reserve account, the funds are no
longer the employer's, but are used to pay benefits.
7:22:58 AM
REPRESENTATIVE ROSES asked what happens when a retiree is re-
hired by a PERS employer after funds for that employee have been
transferred to the retiree reserve account.
MS. LEA explained that a re-hired retiree will continue to
receive retirement benefits. The employer will continue to pay
any past service cost contributions, but the employee makes no
contributions and does not accrue any additional service towards
retirement.
7:23:54 AM
MS. LEA described the retiree reserve account as funded from
employer and employee contributions, as well as a share of PERS
net investment income. When actively employed, a member makes
contributions to their own account. Once an eligible member
retires, their contribution account transfers to the retirement
reserve account. Benefits are first paid from the employee's
contributions, then from the employer's contributions. This is
because the employee's portion is transferred to the retiree
reserve account immediately upon retirement, but the employer's
share is calculated during the next valuation cycle, which can
be up to a year later. She relayed that it is the calculation
of the employer's share that has caused some concerns.
MS. LEA explained that the retiree reserve account is to be 100
percent funded. The DRB looks at the actuarial calculations and
considers the amount of employee contributions to determine the
employer's final liability. When members retire, their employee
contributions will be transferred to the retiree reserve.
Thereafter begins the statutory evaluation process to determine
the amount the employer must contribute to fully fund benefits
due its retired members. An employer's share is determined with
reference to the total retiree liabilities and assets. The
employer's allocated share of assets and liabilities is
calculated to determine the amount necessary to fund the retiree
reserve account as determined by the actuary. In some cases,
employers can over fund the account she explained, referring to
slides 15 to 17 which show calculations from an actual
situation.
7:32:29 AM
CHAIR HAWKER expressed his concern that the aforementioned
example provided by DRB shows an employer with a potential
unfunded liability of $112,353 in 2004 becoming over-funded by
$192,428 one year later, after the completion of actuarial
calculations.
MS. LEA agreed that the example helps explain why employers are
concerned with the allocation method. She went on to explain
that liabilities are annually calculated by employee and
allocated to individual employers based on pro-rata service
earned with an employer. However, this calculation does not
take into account salary earned with an employer, which is
another area of employer concern.
7:33:41 AM
MS. LEA said that the cost share model of the bill addresses
concerns with accounting. She explained that under the current
system, the retirement calculation is based on the employee's
three highest salary years. Therefore, if a person worked for
two different employers for five years each, earning $150,000
total with employer A, and $200,000 total with Employer B,
employer A's liability is based on the higher salary paid by
employer B. The effect of this rule becomes more extreme if a
person is an elected official who earns a small stipend of
$1,000 for five years of elected service for City X. That
person could then work for City Z and receive a wages of
$200,000 over a five year period. City X will share 50 percent
of the total liability even though the retiree only received a
small stipend from his or her time as an elected official with
that city. She noted that scenario shown on slides 21 to 23 is
extreme, but that there are approximately 735 persons, or about
1.2 percent of PERS members, who are elected officials and that
the example clearly illustrates a problem with the allocation
method.
7:35:54 AM
MS. LEA offered that the cost share model addresses concerns of
account allocation and employer liability. She explained that,
in a cost share program, all employers share the costs of
benefits, administration, and investment. Under HB 206, the
PERS DB plan will be administered more like the TRS DB plan and
the state will assume 65 percent of the unfunded liability, or
approximately $3.6 billion of $5.5 billion total unfunded
liabilities as of June 30, 2006. She opined this approach could
simplify plan administration and allow the plan to avail itself
of issuance of pension obligation bonds (POBs) to further reduce
the unfunded liability. She described HB 206 as a long range
plan which will allow a more uniform, less volatile contribution
rate. She said that the Alaska Retirement Management Board
(ARMB) and the Alaska Municipal League (AML) support the concept
of the cost share approach.
7:40:11 AM
COMMISSIONER DESIGNEE KREITZER pointed out that AML does support
a cost share approach, but indicated that AML would like the
state to take a larger share of the unfunded liability. She
went on to explain that HB 206 as proposed allows municipalities
90 days after the bill's effective date to choose whether to be
covered by the cost share legislation. She explained that under
the bill's provisions, costs are shared among employers and it
is estimated that it will bring employer contribution rates down
and save local governments money by fiscal year (FY) 2008. She
said that the bill allows the state to intercept funds bound for
non-paying employers. She opined that this tool, while it may
sound drastic, should be available to the state since the state
is ultimately responsible for payment of benefits. The bill
also has a provision that requires local governments to pay for
termination studies, which she opined would save the state and
employers from paying for unnecessary accounting costs.
COMMISSIONER DESIGNEE KREITZER offered that in considering this
issue, DOA has considered methods to take a longer range view
that will have a positive effect on FY 08 budgets and still pay
down the unfunded liability. She referred to HB 204, which she
said allows the state to calculate the employer contribution
rate across the entire wage base. She opined that although this
would not have an effect for several years, it would help lower
the contribution rates. Employers would be contributing the
same amount, but the rate will appear lower, she explained.
COMMISSIONER DESIGNEE KREITZER said that if the state adopts the
cost share plan, pays 65 percent of the unfunded liability,
holds harmless employers who would have to pay more in FY 08,
and pays 30 percent of the unfunded liability through POBs, it
will save the state $10 million. She opined that the cost share
approach offers a long term solution, noting that POBs are "not
without risk." She told the committee that Governor Palin is
concerned that local governments not be unduly over-burdened.
She opined that this solution does not cause undue burden to
local governments when taken as a whole. In response to a
comment, she reiterated that she is continuing to meet with
interested parties to discuss the cost share approach until "we
come to a solution."
7:46:27 AM
CHAIR HAWKER emphasized that HB 206 has some significant
components. First is the calculation of the employer rate
across all public employees, not just those in the DB plan.
Second, the intercept provision recognizes the need for a
mechanism for the state to pursue recovery of payments if
municipalities fail to pay. Furthermore, the bill proposes that
employers pay termination study costs. Last, Section 7 proposes
the state assume 65 percent of the unfunded actuarial unfunded
liability as of June 30, 2006. He noted that as of 2006 the
state had not been fully funding the pension plans due in part
to a state law which limited increase to the annual rate of
employer contributions to 5 percent. He asked why that date was
chosen to calculate the state's proposed assumption of
liabilities.
COMMISSIONER DESIGNEE KREITZER explained that she wanted to use
the "worst case, known scenario" which is the June, 2006
determination that there is approximately $8.8 billion in
unfunded pension plan costs.
CHAIR HAWKER noted that the unfunded liability will grow in FY
07 and FY 08, and perhaps stabilize after that. He asked how
the anticipated, but unknown, growth will be considered in
determining municipal contribution rates.
7:50:25 AM
COMMISSIONER DESIGNEE KREITZER told the committee she has
discussed the aforementioned issue with AML and agreed that
there are various ways to approach the likely, but currently
unknown, increases in the amount of unfunded liabilities. She
explained that for FY 07 and 08, DOA is aware of the level of
assistance rate relief necessary to hold communities harmless.
She opined that one approach to "leveling it out" would be to
offer a percentage of that assistance in the future. She opined
that much of the discussion of funding issues will take place in
the House and Senate Standing Finance Committees.
REPRESENTATIVE WILSON asked which section of the bill contains
the hold harmless provisions and whether it is for one year.
COMMISSIONER DESIGNEE KREITZER explained that the "hold
harmless" aspects of the proposed cost share plan have not yet
been presented to this committee. She explained that DOA has
considered different approaches to a cost share plan. In one
scenario, if the state goes to a cost share plan without giving
some relief to employers, it would save the state money, but
cost plan participants. However, holding communities to their
FY 07 rates would require a state contribution of $82 million to
the unfunded liabilities. The budget as introduced by the
governor proposes to provide $115 million in rate relief for
municipalities. She indicated that it would cost the state $82
million to hold the communities harmless; however the state
would still save $10 million in FY 08. She agreed that the hold
harmless process is for one year. She explained that in her
discussions with AML, she has broached the possibility that for
future years the state could pay a percentage of what it is
paying this year to hold communities harmless.
7:55:56 AM
REPRESENTATIVE SEATON asked whether the hold harmless
discussions concern an individual employer's calculated rate, or
a blended rate. He explained that while discussion of pension
issues often refers to general rates, employers actually pay
based on their individual rates, which may vary. He sought
clarification as to what rate the hold harmless provisions would
be based on, noting that some employers are paying at high
rates.
COMMISSIONER DESIGNEE KREITZER noted that HB 204 allows the
state to spread the cost across the entire wage base of both DB
and DCR employees.
REPRESENTATIVE SEATON noted he was not asking about which
salaries are included in the wage base. He sought further
information as to how the state would determine which rate an
employer will be held to for purpose of the hold harmless
provision.
COMMISSIONER DESIGNEE KREITZER indicated she believed it was the
individual employer rate.
7:58:46 AM
CHAIR HAWKER summarized that his understanding is that the state
will take responsibility for a fixed amount as a way to provide
some rate predictability and stability for municipal employers
so that they can afford to pay the escalating pension obligation
rates. He noted that the one approach, as taken by HB 206, has
the state taking responsibility for a fixed amount of the
unfunded pension obligations. Under this approach, individual
employer's rates would be reduced to a reasonable rate.
However, since the state is only taking responsibility for a
fixed amount for one year, the future rates are still unknown,
he observed. An alternate approach would have been for the
state to take responsibility to guarantee a fixed rate for
municipal employers, with the state having responsibility for
any amount over the fixed rate.
8:01:55 AM
REPRESENTATIVE SEATON offered his understanding that the hold
harmless approach will hold municipalities to their current
individual contribution rate.
COMMISSIONER DESIGNEE KREITZER agreed with the aforementioned
explanation.
COMMISSIONER DESIGNEE KREITZER referred to an exhibit titled
"Cost Share Exhibits" and explained that it presents the various
results that a change to a cost share system will have on
different employers. She reminded the committee that if the
state moves to cost share without providing some type of hold
harmless relief, the state will save approximately $36 million.
However, she said this approach will cost the municipalities
approximately $52 million, a result she characterized as not
fair. Therefore, the state considered other approaches, such as
rate relief, to address negative impacts on employers. To hold
municipalities to their FY 07 contribution rate would cost the
state $82 million, she said. This approach contemplates the
state assuming 65 percent of the unfunded liability and
potentially using other fund sources, such as POBs.
CHAIR HAWKER clarified that Exhibit 2a of the Cost Share Exhibit
set forth the scenario under HB 206 where the state assumes 65
percent of the unfunded liability as of June 30, 2006 and pays
$1.7 billion of that liability through issuance of POBs.
COMMISSIONER DESIGNEE KREITZER clarified that it is the state
and municipalities that pay as it is "built into the rate."
8:12:23 AM
REPRESENTATIVE FAIRCLOUGH expressed concern regarding
municipalities that have not paid their contributions.
COMMISSIONER DESIGNEE KREITZER agreed that there seem to be some
issues regarding the adequacy of payments by the City of
Fairbanks, as well as issues to be addressed concerning cities
that have paid additional amounts to reduce their unfunded
pension liabilities. She stated that this may be an issue the
legislature may address in a specific manner.
8:14:00 AM
REPRESENTATIVE SEATON asked if the various scenarios shown in
the Cost Share Exhibit are affected by factors such as rate
calculation across the entire wage base, not just the defined
benefit portion of the wage base.
8:15:50 AM
COMMISSIONER KREITZER opined that it was likely the calculations
referred to do take into account factors such as inclusion of
the entire wage base in the determination of the employer
contribution rate. She stated that her approach has been to
work with AML and focus on the "worst case" scenario in trying
to determine a solution. She explained that the Cost Share
Exhibit shows how employers will be differently affected if the
state assumes 65 percent of the unfunded liabilities.
REPRESENTATIVE FAIRCLOUGH reminded the committee that she
previously requested information as to which communities are
behind in their employer contributions.
REPRESENTATIVE ROSES asked how many employers are funded by the
state, such as the university system, noting in those cases the
state pays all the costs for that employer through the general
fund. He noted that other employers have some type of tax base,
but that the state ends up paying much of the obligation anyway
through revenue sharing or area cost differentials allocated to
those communities.
8:24:59 AM
MS. LEA agreed that at the point of allocation process, the
employee's portion has already been transferred to the retiree
reserve account. In response to further inquiry, she noted that
at one point in the TRS system the state paid a contribution in
addition to the employee and employer. The state did not make
an additional contribution for the PERS, she clarified.
8:26:22 AM
REPRESENTATIVE ROSES asked whether there is a method to
determine which PERS employers can be considered "stand alone"
employers that have a tax base or other revenue source besides
the state.
MS. LEA said DRB can provide information that shows how many
employers are in different categories, such as how many are
school districts. However, DRB is not aware of the funding
sources for all employers.
CHAIR HAWKER noted that Exhibit 1 on page 5 of the Cost Share
Exhibit delineates employers by category, which may help answer
Representative Roses' query.
8:29:09 AM
REPRESENTATIVE FAIRCLOUGH relayed that there are likely
communities that the state funds at 100 percent, therefore all
employer contributions by those communities are really state
funds.
REPRESENTATIVE WILSON opined that some communities impose local
property taxes despite the burden it causes, while other larger
communities do not impose local property taxation despite their
ability to do so.
8:31:34 AM
COMMISSIONER KREITZER agreed that the are many issues to
consider related to PERS/TRS funding. She offered that HB 206
is the administration's suggested long-term approach to address
the unfunded liability. She expressed concern over the growing
$8.6 billion liability and stated the administration presented
the cost share approach as a fair solution. She noted that
there are concerns that some municipalities will receive debt
relief under this approach. There are also concerns that other
communities should receive acknowledgement of additional
contributions made to their unfunded liabilities. Additionally,
she reminded the committee that market forces will determine the
ability to issue pension obligation bonds to reduce the TRS
indebtedness. In summary, while there are "six ways to Sunday"
to criticize the cost share plan, she offered that it is an
approach through which to address and pay down the unfunded
liabilities.
8:32:50 AM
CHAIR HAWKER recapped that testimony indicates that municipal
employers support the cost share approach, although details of
the proposal remain to be determined. He noted that there is a
significant issue regarding "winners and losers" that still
needs to be considered as well as issues of the ability to
intercept funds, and termination study costs. He expressed some
concern over the payment mechanism proposed in Section 7 of HB
206, which he described as the single largest component of the
bill. He noted that while Section 7 offers a sound approach, it
is likely to undergo some changes as the bill moves through the
system.
[HB 206 was held in committee.]
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
8:37:25 AM.
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