Legislature(2005 - 2006)

05/04/2006 04:11 PM CRA

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04:11:37 PM Start
04:12:04 PM HB475
05:27:23 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                    ALASKA STATE LEGISLATURE                                                                                  
    SENATE COMMUNITY AND REGIONAL AFFAIRS STANDING COMMITTEE                                                                  
                          May 4, 2006                                                                                           
                           4:11 p.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Senator Bert Stedman, Chair                                                                                                     
Senator Gary Stevens, Vice Chair                                                                                                
Senator Thomas Wagoner                                                                                                          
Senator Johnny Ellis                                                                                                            
Senator Albert Kookesh                                                                                                          
MEMBERS ABSENT                                                                                                                
All members present                                                                                                             
COMMITTEE CALENDAR                                                                                                            
CS FOR HOUSE BILL NO. 475(FIN) am                                                                                               
"An Act  relating to the  supplemental employee  benefit program;                                                               
relating  to  teachers'  and public  employees'  defined  benefit                                                               
retirement  plans; relating  to teachers'  and public  employees'                                                               
defined  contribution retirement  plans that  apply to  employees                                                               
first  hired  after  June  30,   2007;  relating  to  the  Health                                                               
Reimbursement  Arrangement   for  certain  teachers   and  public                                                               
employees; clarifying  eligibility for  membership in  the Health                                                               
Reimbursement  Arrangement;  relating  to waiver  of  adjustments                                                               
under  the  teachers' defined  benefit  retirement  plan and  the                                                               
public employees'  defined benefit  retirement plan;  relating to                                                               
the administrator  of the Public Employees'  Retirement System of                                                               
Alaska;  relating  to  employer  contributions  for  occupational                                                               
disability  and death  benefits; repealing  participation in  the                                                               
teachers'  defined contribution  and  defined benefit  retirement                                                               
plans by certain employees of  the National Education Association                                                               
of  Alaska;   relating  to  requirements  for   employer  minimum                                                               
contributions to the teachers' and  the public employees' defined                                                               
benefit  retirement systems;  relating to  the public  employees'                                                               
defined benefit  deferred compensation program; providing  for an                                                               
effective date  by amending  sec. 148, ch.  9, FSSLA  2005, which                                                               
contains  an  effective  date; and  providing  for  an  effective                                                               
     MOVED SCS CSHB 475(CRA) OUT OF COMMITTEE                                                                                   
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: HB 475                                                                                                                  
SHORT TITLE: PUB EMPLOYEE/TEACHER RETIREM'T/SBS/D.C.                                                                            
SPONSOR(s): REPRESENTATIVE(s) SEATON                                                                                            
02/13/06       (H)       READ THE FIRST TIME - REFERRALS                                                                        
02/13/06       (H)       STA, FIN                                                                                               
02/23/06       (H)       STA AT 8:00 AM CAPITOL 106                                                                             
02/23/06       (H)       Heard & Held                                                                                           
02/23/06       (H)       MINUTE(STA)                                                                                            
02/28/06       (H)       STA AT 8:00 AM CAPITOL 106                                                                             
02/28/06       (H)       Scheduled But Not Heard                                                                                
03/02/06       (H)       STA AT 8:00 AM CAPITOL 106                                                                             
03/02/06       (H)       Heard & Held                                                                                           
03/02/06       (H)       MINUTE(STA)                                                                                            
03/07/06       (H)       STA AT 8:00 AM CAPITOL 106                                                                             
03/07/06       (H)       Heard & Held                                                                                           
03/07/06       (H)       MINUTE(STA)                                                                                            
03/14/06       (H)       STA AT 8:00 AM CAPITOL 106                                                                             
03/14/06       (H)       Moved CSHB 475(STA) Out of Committee                                                                   
03/14/06       (H)       MINUTE(STA)                                                                                            
03/17/06       (H)       STA RPT CS(STA) NT 1DP 3NR 3AM                                                                         
03/17/06       (H)       DP: SEATON;                                                                                            
03/17/06       (H)       NR: GATTO, ELKINS, RAMRAS;                                                                             
03/17/06       (H)       AM: GARDNER, LYNN, GRUENBERG                                                                           
04/11/06       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
04/11/06       (H)       Scheduled But Not Heard                                                                                
04/12/06       (H)       FIN AT 8:30 AM HOUSE FINANCE 519                                                                       
04/12/06       (H)       Heard & Held                                                                                           
04/12/06       (H)       MINUTE(FIN)                                                                                            
04/12/06       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
04/12/06       (H)       Heard & Held                                                                                           
04/12/06       (H)       MINUTE(FIN)                                                                                            
04/19/06       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
04/19/06       (H)       Moved CSHB 475(FIN) Out of Committee                                                                   
04/19/06       (H)       MINUTE(FIN)                                                                                            
04/20/06       (H)       FIN RPT CS(FIN) NT 1DP 6NR 3AM                                                                         
04/20/06       (H)       DP: KELLY;                                                                                             
04/20/06       (H)       NR: HOLM, FOSTER, STOLTZE, WEYHRAUCH,                                                                  
                        MEYER, CHENAULT;                                                                                        
04/20/06       (H)       AM: HAWKER, KERTTULA, JOULE                                                                            
04/26/06       (H)       TRANSMITTED TO (S)                                                                                     
04/26/06       (H)       VERSION: CSHB 475(FIN) AM                                                                              
04/27/06       (S)       READ THE FIRST TIME - REFERRALS                                                                        
04/27/06       (S)       CRA, STA, FIN                                                                                          
05/04/06       (S)       CRA AT 1:30 PM FAHRENKAMP 203                                                                          
WITNESS REGISTER                                                                                                              
Melanie Millhorn, Director                                                                                                      
Division of Retirement and Benefits                                                                                             
Department of Administration                                                                                                    
Juneau, AK 99801                                                                                                                
POSITION STATEMENT:  Introduced HB 475                                                                                        
Mary Beth Braitman                                                                                                              
Ice Miller LLP                                                                                                                  
One American Square, Suite 3100                                                                                                 
Indianapolis, IN 46282-0200                                                                                                     
POSITION STATEMENT:  Provided information related to HB 475                                                                   
David Slishinsky, Actuary                                                                                                       
Buck Consultants                                                                                                                
POSITION STATEMENT:  Provided information related to HB 475                                                                   
Katherine Shows, Staff                                                                                                          
Representative Paul Seaton                                                                                                      
Alaska State Capitol                                                                                                            
Juneau, AK 99801-1182                                                                                                           
POSITION STATEMENT:  Provided information related to HB 475                                                                   
Michael Lamb, Chief Financial Officer                                                                                           
Fairbanks North Star Borough                                                                                                    
P.O. Box 71267                                                                                                                  
Fairbanks, AK 99707                                                                                                             
POSITION STATEMENT:  Testified on HB 475                                                                                      
Pete Hallgren, Administrator                                                                                                    
City of Delta Junction                                                                                                          
P.O. Box 229                                                                                                                    
Delta Junction, AK 99737                                                                                                        
POSITION STATEMENT:  Testified on HB 475                                                                                      
Pat Luby, Director                                                                                                              
Juneau, AK 99801                                                                                                                
POSITION STATEMENT:  Testified on HB 475                                                                                      
Ron Wolf, Chief Financial Officer                                                                                               
City of Fairbanks                                                                                                               
800 Cushman Street                                                                                                              
Fairbanks, AK 99701                                                                                                             
POSITION STATEMENT:  Testified on HB 475                                                                                      
Tom Harvey, Executive Director                                                                                                  
114 Second Street                                                                                                               
Juneau, AK 99801                                                                                                                
POSITION STATEMENT:  Testified on HB 475                                                                                      
ACTION NARRATIVE                                                                                                              
CHAIR  BERT  STEDMAN called  the  Senate  Community and  Regional                                                             
Affairs  Standing  Committee  meeting  to order  at  4:11:37  PM.                                                             
Present  were  Senators  Albert  Kookesh,  Johnny  Ellis,  Thomas                                                               
Wagoner, Gary Stevens, and Chair Bert Stedman.                                                                                  
     CSHB 475(FIN)-PUB EMPLOYEE/TEACHER RETIREM'T/SBS/D.C.                                                                  
4:12:04 PM                                                                                                                    
CHAIR BERT STEDMAN  announced HB 475 to be  up for consideration.                                                               
He  motioned to  adopt  Version C  for HB  475  and objected  for                                                               
discussion  purposes.  He  asked   Ms.  Millhorn  to  provide  an                                                               
overview of HB 475.                                                                                                             
MELANIE MILLHORN, Director, Division  of Retirement and Benefits,                                                               
Department of Administration, stated  that the primary reason for                                                               
the  bill  is  to  ensure  that  the  benefits  for  the  defined                                                               
contribution  plan under  SB  141 are  enacted  as intended.  She                                                               
noted that the benefit provisions are  the same for both PERS and                                                               
She directed attention to the  bulleted summary of the 32 changes                                                               
contained in  HB 475  and noted that  further explanation  of the                                                               
changes  could be  found in  the sectional  analysis or  the bill                                                               
itself. Since SB 141 passed last  year the Department of Law, the                                                               
Division of Retirement  & Benefits, and outside  expert legal tax                                                               
advisors  have conducted  extensive research  to ensure  that the                                                               
provisions  that  are  applicable  in   SB  141  conform  to  IRS                                                               
standards and to what the Legislature intended.                                                                                 
During  the  review,  three  areas   became  the  focus  and  are                                                               
encompassed in  CSHB 475. Those areas  include occupational death                                                               
and   disability   benefits;   Internal  Revenue   Service   Code                                                               
provisions; and  provisions related to employer  participation in                                                               
the new defined contribution plan.                                                                                              
4:16:25 PM                                                                                                                    
MS. MILLHORN informed members that  14 of the 32 proposed changes                                                               
address occupational  death and  disability benefits and  some of                                                               
the  key  factors  found  in  HB  475  address:  funding  of  the                                                               
benefits; annual inflation proofing  for the benefits; protection                                                               
and clarification of the retirement  benefits when a member is on                                                               
disability and  a survivor is  receiving benefits; and  a medical                                                               
cost sharing provision.                                                                                                         
Death and disability  benefits are intended to  provide income in                                                               
the event that  a member is occupationally injured  or the member                                                               
dies  while performing  job duties.  SB 141  also has  provisions                                                               
that  allow for  a retirement  benefit to  be established  at the                                                               
time that the member goes to normal retirement.                                                                                 
Sections  8   and  46   relate  to   funding  the   benefits  for                                                               
occupational  death   and  disability.  They   provide  statutory                                                               
authority for  funding for TRS occupational  death and disability                                                               
benefits and for  funding PERS disability for  police officer and                                                               
fire  fighter monthly  retirement  benefits that  may be  elected                                                               
upon   eligibility  for   normal  retirement.   Those  particular                                                               
sections  also  establish a  trust  account  clarifying that  the                                                               
contributions are treated differently  and are kept separate from                                                               
contributions   for   the   individual  plan   member's   defined                                                               
contribution account.                                                                                                           
Section 54 specifies that the  monthly pension benefit elected by                                                               
a  disabled police  officer or  fire fighter  will be  paid first                                                               
from  the member's  individual account  and then  from the  trust                                                               
account that  is established under  AS 39.35.750(e).  That change                                                               
is consistent  with the method  of payment that is  applied under                                                               
the current defined benefit plan.                                                                                               
Sections  18  and  57  describe  the  annual  inflation  proofing                                                               
associated  with  death  and disability  benefits.  They  add  an                                                               
annual adjustment  for individuals  who are  receiving disability                                                               
benefits  and  to the  retirement  benefits  elected by  disabled                                                               
police   officer    and   fire    fighter   members    under   AS                                                               
39.35.890(h)(2). It is  either 75 percent of the  increase in the                                                               
Anchorage Consumer Price Index (CPI)  or 9 percent - whichever is                                                               
Sections 22  and 61  add an annual  adjustment to  the survivor's                                                               
pension benefit that  is equal 50 percent of the  increase in the                                                               
Anchorage CPI or 6 percent - whichever is less.                                                                                 
MS. MILLHORN stated that both  annual inflation proofings comport                                                               
with  the  existing  formula  that is  found  under  the  defined                                                               
benefit plans  for Tier 2  and Tier  3 TRS members.  She reminded                                                               
members  that the  Legislature wanted  the  death and  disability                                                               
benefits to agree with the  statutorily defined benefits for Tier                                                               
2 and Tier 3 TRS members so that is accomplished here.                                                                          
Sections 16,  20, 55, and  59 clarify  that a disabled  member or                                                               
the  survivor of  a  deceased  member is  not  entitled to  elect                                                               
distributions   from  the   member's  individual   account  while                                                               
receiving  disability  or  survivor  benefits.  That's  important                                                               
because  the employer  continues to  make contributions  into the                                                               
account while  the individual is  receiving either  disability or                                                               
survivor benefits.  Therefore the  account is preserved  and will                                                               
be available to the individual at normal retirement age.                                                                        
Sections 13,  16, 51 and 55  clarify that a period  of disability                                                               
or survivor benefits constitutes  membership service for purposes                                                               
of eligibility for the retirement  medical benefits including the                                                               
Health Reimbursement Arrangement.                                                                                               
Sections  22 and  61 provide  that a  person whose  disability or                                                               
survivor benefits  are terminated  due to eligibility  for normal                                                               
retirement will be  treated as though the person  is eligible for                                                               
Medicare regardless of age.                                                                                                     
Sections  11 and  49 deal  with anti  selection and  require that                                                               
members  who waive  the  medical benefit  must  provide proof  of                                                               
4:24:12 PM                                                                                                                    
MS.  MILLHORN reviewed  plan provisions  related to  the Internal                                                               
Revenue Code. Consultants from Ice  Miller were hired in December                                                               
2005 and they  provided expert tax advice so that  the new hybrid                                                               
plan provisions  comport. In order to  receive plan determination                                                               
letters from  the IRS  the new  hybrid plan  must have  a certain                                                               
structure.  Certain  benefits  are  fixed  and  guaranteed  while                                                               
others are defined contribution plan.                                                                                           
Sections  5,  6, 9,  10,  23,  43, 44,  47,  48,  and 62  provide                                                               
conforming provisions for  a favorable plan ruling  from the IRS.                                                               
The  hybrid plan  established  by SB  141  contains both  defined                                                               
benefits  and  defined contributions  and  is  referred to  as  a                                                               
414(k) Plan. She noted that  Ice Miller conformed the benefits in                                                               
SB 141 to  meet legislative intent and to  get positive favorable                                                               
plan determination letters.                                                                                                     
The  plan establishes:  individual  accounts; occupational  death                                                               
and disability  funds; health  and welfare  benefit funds;  and a                                                               
Health   Reimbursement  Arrangement   fund.  Under   the  defined                                                               
contribution (DC)  part of  the plan the  two components  are the                                                               
individual's   defined  contribution   account  and   the  Health                                                               
Reimbursement Arrangement.  Under the  defined benefit  (DB) part                                                               
of  the  plan there  are  five  elements. They  are  occupational                                                               
disability  benefit; the  survivor's benefit;  survivor's pension                                                               
for police and firefighter; and  the retirement benefit chosen by                                                               
police  and   firefighters;  and  a  cost-share   retiree  health                                                               
insurance.  HB 475  provides conforming  language to  ensure that                                                               
necessary criteria are met.                                                                                                     
Sections 14  and 52 relate  to occupational death  and disability                                                               
and they provide "that a  member who receives disability benefits                                                               
from  the  plan  is  100  percent  vested  in  all  the  employer                                                               
contributions   made   to   the  member's   individual   account,                                                               
regardless  of  years  of  service worked,  once  the  member  is                                                               
appointed  to  disability.  The   employer  must  also  make  the                                                               
member's contributions to the individual contribution account."                                                                 
Sections 16, 21,  55, and 60 are survivor benefits  funded by the                                                               
occupational  death  and  disability fund.  It  revises  language                                                               
related to the continuing contributions  employers make on behalf                                                               
of   survivors   of   members  who   died   occupationally.   The                                                               
contributions  will  be  placed  in   a  trust  account  that  is                                                               
established for  occupational and death  benefits and not  into a                                                               
deceased person's account.                                                                                                      
Internal Revenue Code 415(c)  relates to contribution limitations                                                               
in four areas.  Those are: contributions on  behalf of survivors;                                                               
employer    match    upon    conversion;    voluntary    employee                                                               
contributions; and employer conversion window.                                                                                  
Sections  21 and  60 relate  to  the contributions  on behalf  of                                                               
survivors. "Unlike  the special  rules under 26  USC 415(c)(3)(C)                                                               
that allow  the compensation  of a disabled  member for  any year                                                               
subsequent to the  disability to be considered  equivalent to the                                                               
rate of  compensation immediately prior to  the disability, there                                                               
is no corresponding rule for  a deceased participant. Thus, there                                                               
would be no compensation for a  deceased member in the year after                                                               
death and, therefore, no allowable  contributions to the deceased                                                               
member's individual account."                                                                                                   
Sections 24  and 63  address employer  match upon  conversion and                                                               
clarify "that  the employer match  required under  the conversion                                                               
from the  defined benefit plan  to the defined  contribution plan                                                               
is  subject to  Internal Revenue  Code contribution  limitations.                                                               
The  amendment limits  the total  employer match  to the  maximum                                                               
allowed  during  the  limitation   year  in  which  the  transfer                                                               
occurs."  The reason  for this  is  "Because the  amount that  an                                                               
employer must match  under the conversion option  is 'new money,'                                                               
it  has never  been subject  to Code  limitations. 26  USC 415(c)                                                               
imposes   an  annual   limit  on   contributions  to   a  defined                                                               
contribution  plan to  the lessor  of $44,000  or 100  percent of                                                               
employee compensation."                                                                                                         
Sections 7  and 45 address  voluntary employee  contributions and                                                               
clarify  "that any  voluntary contributions  made by  an employee                                                               
under AS  14.25340(b) can  only be made  with pre-tax  dollars to                                                               
the extent permitted under federal law."                                                                                        
4:32:34 PM                                                                                                                    
Sections  26,  27,  65,  and 66  limit  the  employer  conversion                                                               
window, which  is an IRS  specification. They provide  a 12-month                                                               
window  once   the  employer  elects  a   conversion  option  for                                                               
employees. After that  the employee will have up to  12 months to                                                               
make  that  conversion  option.  The  employer  is  also  allowed                                                               
another  12-month  period to  select  the  conversion option  for                                                               
members who didn't make an initial selection.                                                                                   
4:33:52 PM                                                                                                                    
Section 68  deals with the guidelines  for employer participation                                                               
and termination from the defined contribution plan.                                                                             
Sections 1,2, 36, and 37  deal with employer contribution amounts                                                               
and say that the normal cost  is only applied to the payroll base                                                               
for the  defined benefit members.  The past service rate  will be                                                               
applied to the entire payroll  base for employers. That provision                                                               
will  keep employer  contribution rates  for the  defined benefit                                                               
plan lower than would otherwise be calculated.                                                                                  
Sections 3, 38,  75, 78, 79 and 81 address  the normal cost rate.                                                               
The change  delays "the effective  date of the requirement  of SB                                                               
141 that the employer contribution rate  must be not les than the                                                               
normal cost rate."                                                                                                              
Section  33  deals  with the  health  reimbursement  contribution                                                               
amount. It "changes the employer  contribution from an individual                                                               
employer contribution  amount to a uniform  employer contribution                                                               
amount  for   all  participants   of  the   Health  Reimbursement                                                               
Arrangement   Plan."  There   are  currently   214  participating                                                               
employers under  PERS and  TRS and each  has a  different payroll                                                               
base so the contribution amounts  are diverse. Without the change                                                               
the IRS might view the disparity as discriminatory.                                                                             
MS. MILLHORN disputed  the assertion that the  division must have                                                               
positive plan determination letters from  the IRS before the bill                                                               
is  implemented  because  the  division filed  with  the  IRS  in                                                               
January 2006  and that preserves  the right to make  plan changes                                                               
during  a remedial  period.  She directed  attention  to the  two                                                               
letters  from  Ice  Miller   discussing  the  plan  determination                                                               
4:40:22 PM                                                                                                                    
MARY BETH  BRAITMAN, Ice Miller  LLC, explained that  her primary                                                               
role  is  to work  with  public  pension  plans and  related  tax                                                               
qualification matters.  Her firm  was asked to  offer suggestions                                                               
on  the  design of  the  hybrid  plan  in  terms of  the  defined                                                               
contribution  benefits  and  the  guaranteed  or  fixed  benefits                                                               
related  to  occupational  death   and  disability  and  survivor                                                               
benefits.  Their purpose  was to  match  legislative intent  with                                                               
Internal Revenue structures and based  on that they suggested the                                                               
clarifying amendments found in HB 475.                                                                                          
She explained that the IRS  determination letter process is a way                                                               
of  guaranteeing  that  the  structure  of  the  plan  meets  IRS                                                               
requirements. The process isn't  required, but there are benefits                                                               
to  having  a  favorable   determination  letter,  including  the                                                               
ability to  self-correct and  to ensure that  the plan  meets the                                                               
latest IRS requirements.                                                                                                        
According to  IRS rules  for a new  government plan  the remedial                                                               
amendment period for  the new program will run  until January 31,                                                               
2008. She noted  that the IRS appreciates that  these are complex                                                               
plans that require time to work out the administrative details.                                                                 
She  advised  that  the  Department  of  Administration  and  the                                                               
members  of  the plan  are  protected  because of  that  remedial                                                               
amendment period  and the fact  that a plan  determination letter                                                               
has been submitted. The IRS  can provide comments and suggestions                                                               
and  ask questions,  but Ice  Miller is  confident that  the plan                                                               
will  ultimately  be  approved  so the  department  will  have  a                                                               
favorable  determination letter  to rely  on in  future years  as                                                               
well   as  the   additional  benefits   described  earlier.   She                                                               
emphasized that  this isn't an  unusual process and it  does take                                                               
time for the IRS to complete the review.                                                                                        
4:47:15 PM                                                                                                                    
DAVID SLISHINSKY,  Actuary with Buck Consultants,  explained that                                                               
his  company was  hired  in November  2005  to perform  actuarial                                                               
services for  the State  of Alaska  retirement plans.  He advised                                                               
that using  representative sample employees hired  7/1/06 through                                                               
6/30/07, they evaluated the cost  of employer paid benefits under                                                               
the current  defined benefit plans  versus the  implementation of                                                               
the new  arrangement under SB  141 with the  defined contribution                                                               
plans.  They looked  at values  of the  pension benefits  and the                                                               
post employment health care benefits.                                                                                           
The value  of employer paid  benefits for PERS was  calculated to                                                               
be  $21,652 under  the current  defined  benefit arrangement  and                                                               
$16,791  under  the new  defined  contribution  plan. The  $4,861                                                               
difference  indicates  that  the   continuation  of  the  current                                                               
defined benefit plans would be slightly more expensive.                                                                         
The same calculations  were made for the TRS and  the value under                                                               
the  current defined  benefit arrangement  was $56,550  while the                                                               
value  under the  new defined  contribution plan  arrangement was                                                               
$41,667. Continuing  the current  program for another  year would                                                               
result in an increase in cost  of $14,883 for an average new hire                                                               
during the  year. Actual cost would  depend on the number  of new                                                               
KATHERINE  SHOWS, Staff  to Representative  Paul Seaton,  advised                                                               
that the sponsor  believes that the technical  changes are needed                                                               
for the successful implementation of SB 141.                                                                                    
At ease from 4:54:24 PM to 4:54:53 PM.                                                                                      
MICHAEL  LAMB,  Chief  Financial Officer,  Fairbanks  North  Star                                                               
Borough,  stated  support for  HB  475  and  advised that  as  an                                                               
employer  the borough  is committing  resources to  implement the                                                               
new benefit  plan. The sooner  there is certainty and  an ability                                                               
to  respond  to new  employees'  questions,  the better  off  the                                                               
borough,  as  an  employer,  will be.  He  suggested  that  other                                                               
employers that  are faced with  implementation probably  feel the                                                               
4:56:44 PM                                                                                                                    
PETE  HALLGREN, Municipal  Administrator  for the  City of  Delta                                                               
Junction,  stated   support  for   HB  475   with  no   delay  in                                                               
implementation.   A    delay   would   have    serious   negative                                                               
repercussions for municipalities and  the state government itself                                                               
because it would  add thousands of new PERS/TRS  employees to the                                                               
roster and further increase the unfunded liability indebtedness.                                                                
4:58:51 PM                                                                                                                    
PAT LUBY, Advocacy  Director for AARP, stated support  for HB 475                                                               
with  the  one-year  delay  in  implementation.  The  IRS  hasn't                                                               
accepted  the  plans  as  qualified  and  offering  them  to  new                                                               
employees  before they're  accepted  would be  gambling with  the                                                               
security of future educators, fire  fighters, police officers and                                                               
state municipal employees.                                                                                                      
AARP  urges the  Legislature to  take time  to do  this right  by                                                               
voting for  a one-year delay and  reviewing the impact of  SB 141                                                               
on  employees  who  don't  have the  defined  benefit  of  Social                                                               
At ease from 5:01:10 PM to 5:02:29 PM.                                                                                      
RON  WOLF, Chief  Financial Officer  for the  City of  Fairbanks,                                                               
stated support  for HB 475 with  no delay in the  effective date.                                                               
He reported that the municipality  has confidence that the change                                                               
to defined contribution plans is the right thing to do.                                                                         
TOM  HARVEY, Executive  Director  of  NEA-Alaska, referenced  his                                                               
letter supporting the delay in  implementation of SB 141 and said                                                               
he was  pleased to note that  some of the testimony  that day was                                                               
clearly  in   response  to  findings  presented   by  independent                                                               
actuaries that were hired by labor organizations.                                                                               
He stated  that NEA-Alaska  believes there  is a  better solution                                                               
than  the one  before the  committee and  he finds  it reassuring                                                               
that Ice Miller acknowledges that there  is more than one way for                                                               
states  to get  compliance.  Having gone  through remediation  he                                                               
said he knows  that the process isn't as enjoyable  as having the                                                               
determinations made ahead of time.                                                                                              
MR. HARVEY continued to say:                                                                                                    
     What  we are  providing to  you is  the opportunity  to                                                                    
     have a fixed  cost defined benefit plan -  a fixed cost                                                                    
     to the  State of  Alaska. That  plan is  been developed                                                                    
     and  we can  put that  into legislative  form for  this                                                                    
     legislature to consider  at a cost of  about $15,000 in                                                                    
     terms of the  IRS compliance and in terms  of $5,000 of                                                                    
     actual drafting of the legislation.  And you would have                                                                    
     a  plan in  front of  you  that would  provide you  the                                                                    
     guaranteed  fixed cost  - no  extra  liability. All  of                                                                    
     what  you wanted  in SB  141  but one  step further.  A                                                                    
     better hybrid plan  than the one that's in  SB 141 that                                                                    
     had to  be fixed  by HB  475. But a  plan in  which the                                                                    
     employees  can support.  I think  that's important  for                                                                    
     the State of Alaska.                                                                                                       
     We know we've got the  opportunity to present that plan                                                                    
     to  you if  we have  the one-year  delay. We  obviously                                                                    
     don't  have that  opportunity  without  having to  roll                                                                    
     back a defined contribution plan.                                                                                          
Referencing the  calculations that  Ice Miller  made, he  said it                                                               
appears that it would cost the  state money to move from the Tier                                                               
3  PERS and  Tier  2 TRS  to the  defined  contribution plan.  He                                                               
stated agreement  with Ms.  Millhorn that the  changes in  HB 475                                                               
are needed to become compliant with  the IRS, but that the change                                                               
in  the  calculation  of  the  payroll base  that  is  used  will                                                               
drastically  affect the  Municipality of  Anchorage and  probably                                                               
the  City of  Kenai.  Their  payroll bases  are  below the  state                                                               
average so their contribution rates will be increased.                                                                          
He urged  the committee to  adopt HB 475  as it passed  the House                                                               
and not the Senate committee substitute presented here.                                                                         
CHAIR STEDMAN asked  Mr. Harvey to send his letter  to his office                                                               
and he'd distribute copies.                                                                                                     
CHAIR  STEDMAN   closed  the  public  hearing   and  removed  his                                                               
objection to adopting Version C as the working document.                                                                        
SENATOR ELLIS objected and said:                                                                                                
     HB 475  that's before the  committee seems to me  to be                                                                    
     an  admission that  the bill  from last  year, SB  141,                                                                    
     that was represented  to us as a  well thought through,                                                                    
     well articulated, well detailed  plan has turned out in                                                                    
     retrospect ...  after thorough analysis to  have been -                                                                    
     although  with lots  of good  intensions, lots  of good                                                                    
     work,  lots of  long  hours  - to  have  had  a lot  of                                                                    
     deficiencies  and shortcomings.  I  think  we all  know                                                                    
     that,  admit that,  understand that.  I think  there is                                                                    
     probably  more good  work that  could be  done in  this                                                                    
     regard and  a one-year delay  would allow that  so that                                                                    
     we could  be very careful  and build support for  a new                                                                    
     approach to this.                                                                                                          
     I can't support the committee substitute that you put                                                                      
       before us that eliminated the one-year period for                                                                        
     further work.                                                                                                              
5:12:05 PM                                                                                                                    
SENATOR ALBERT KOOKESH said he  didn't know whether the Chair was                                                               
planning to  move the  bill that  day but he'd  like the  time to                                                               
read and digest Mr. Harvey's letter.                                                                                            
CHAIR STEDMAN stated the intent is to move the bill today.                                                                      
He asked  for a roll call.  The motion to adopt  Version C Senate                                                               
committee substitute  for HB 475  as the working  document passed                                                               
with  Senator Gary  Stevens, Senator  Wagoner, and  Chair Stedman                                                               
voting yea and Senator Ellis and Senator Kookesh voting nay.                                                                    
SENATOR ELLIS  motioned to conceptually amend  Version C delaying                                                               
implementation until July 1, 2008.                                                                                              
CHAIR STEDMAN objected  and said that the only  change in Version                                                               
C is  that the effective  date was  changed back to  the original                                                               
July 1, 2006.                                                                                                                   
SENATOR GARY  STEVENS asked Ms.  Millhorn how much it  would cost                                                               
to delay for one year.                                                                                                          
CHAIR STEDMAN observed that the motion is for a two-year delay.                                                                 
SENATOR ELLIS said that is preferable.                                                                                          
SENATOR GARY STEVENS asked the cost for a two-year delay.                                                                       
MS. MILLHORN explained that the plan  has now been delayed by one                                                               
year and  Buck Consultants has indicated  that for a Tier  3 PERS                                                               
member, the cost is about 29  percent higher and about 36 percent                                                               
higher for  TRS. Each  year it's calculated  that there  would be                                                               
about  4,400 new  members or  8,800 new  members over  a two-year                                                               
period. Those  new member  would have  constitutionally protected                                                               
benefits for pension and medical.                                                                                               
Other costs  are not  quantifiable, but  in the  division's view,                                                               
there  are certainly  large costs  associated with  a delay,  she                                                               
5:18:48 PM                                                                                                                    
SENATOR GARY STEVENS said he was looking for a dollar amount,                                                                   
but he could understand her reluctance to say.                                                                                  
SENATOR ELLIS asked  if there had been an analysis  of the impact                                                               
of SB  141 on  the state's ability  to attract  quality employees                                                               
because  a  number of  folks  believe  it  will have  a  negative                                                               
MS. MILLHORN replied:                                                                                                           
     We really believe  if you look at the  research and the                                                                    
     redesign  of the  benefits that  are provided  under SB                                                                    
     141,  those are  rich  and very  generous benefits  and                                                                    
     actually   Stateline   just  provided   some   research                                                                    
     recently   -  and   we  know   we've   had  a   chronic                                                                    
     recruitment/retention  issue with  teachers -  and what                                                                    
     Stateline  has just  recorded is  that those  graduates                                                                    
     from  college who  are  pursuing teaching  certificates                                                                    
     ... will  change careers five  to seven times  and that                                                                    
     50  percent of  teachers right  now going  forward turn                                                                    
     over after  five years. So  I really believe  - because                                                                    
     there  is an  eight-year  vesting schedule  - I'm  very                                                                    
     confident that  what we have  in place, because  of the                                                                    
     design of those benefits  that provide mobility without                                                                    
     penalty - that we will be attractive.                                                                                      
     Moreover,  because  there  is a  medical  benefit  that                                                                    
     right now Workplace Economics  researched all the state                                                                    
     pension systems  and 68 percent of  those state pension                                                                    
     systems right now provide a  less rich benefit than our                                                                    
     existing plan.  So we know  why those costs  are there.                                                                    
     25 percent provide no medical  cost, 44 percent in 2003                                                                    
     had a  cost-share. What  our medical  plan is  doing is                                                                    
     it's  realigning with  the other  pension systems  that                                                                    
     have a normal  age retirement at age 65 and  it is also                                                                    
     cost sharing with the member to provide that benefit.                                                                      
     So I believe  that, based on the research  and based on                                                                    
     the demographics of  people moving from job  to job and                                                                    
     not wanting to have that  penalty, that we actually are                                                                    
     positioning ourselves  very well. GASB,  the Government                                                                    
     Accounting Standards Board, has  ruled that those other                                                                    
     pension systems  that provide a medical  benefit, as of                                                                    
     2007  will   have  to  report  those   pension  medical                                                                    
     benefits on  an accrual  basis. And what  that suggests                                                                    
     to  me is  that as  soon as  they have  to account  for                                                                    
     those on an accrual  basis their accounting and funding                                                                    
     ratio is going  to go down. It could  have some impacts                                                                    
     to their ...  bond rating. It can have  all those kinds                                                                    
     of  impacts  and  there are  media  accounts  of  those                                                                    
     benefits right now. What the  State of Alaska has is it                                                                    
     has  well positioned  itself  to  provide this  medical                                                                    
     benefit.  It  has  a Health  Reimbursement  Arrangement                                                                    
     that's  a deferred  vested benefit  that an  individual                                                                    
     will  be able  to pay  for medical  expenses on  a tax-                                                                    
     preferred  basis.  Ten  years, that's  very  attractive                                                                    
     because we're asking the individual to cost-share.                                                                         
     Our plan design  is very generous and  it actually, the                                                                    
     employers  are   the  parties  who  have   to  look  at                                                                    
     recruitment  and  retention   and  also  balance  their                                                                    
     budget.  When   they  were   surveyed  in   2004,  they                                                                    
     indicated that they  were no longer willing  to pay for                                                                    
     all  of  the  rising  medical costs  and  the  loss  of                                                                    
     investment income  and that  they wanted  a predictable                                                                    
     stable  employer contribution  rate. At  the same  time                                                                    
     they had  to look  at that plan  design and  align that                                                                    
     with recruitment  and retention  and so  we've received                                                                    
     favorable support in that process.                                                                                         
     I just  do not  see it.  I realize  that there  is that                                                                    
     issue  out there  and that  people are  concerned about                                                                    
     it.  I  just believe  that  as  soon  as this  plan  is                                                                    
     implemented and  stood up that  that is just  not going                                                                    
     to be an issue at all.                                                                                                     
SENATOR ELLIS said time will tell.                                                                                              
CHAIR STEDMAN maintained his objection and asked for a roll                                                                     
The  conceptual amendment  to Version  C to  delay implementation                                                               
until July 1, 2008 failed  with Senator Ellis and Senator Kookesh                                                               
voting yea and  Senator Wagoner, Senator Gary  Stevens, and Chair                                                               
Stedman voting nay.                                                                                                             
5:24:44 PM                                                                                                                    
SENATOR ELLIS motioned to conceptually amend Version C delaying                                                                 
implementation until July 1, 2007.                                                                                              
CHAIR STEDMAN objected and asked for a roll call.                                                                               
The motion failed  with Senator Ellis and  Senator Kookesh voting                                                               
yea and Senator Wagoner, Senator  Gary Stevens, and Chair Stedman                                                               
voting nay.                                                                                                                     
SENATOR KOOKESH  asked how many  Senate committees would  hear HB                                                               
CHAIR STEDMAN replied he thought a couple were left.                                                                            
SENATOR  KOOKESH commented  he  hopes somebody  would spend  more                                                               
time on the bill than this committee.                                                                                           
CHAIR STEDMAN responded a lot of time has been spent on this.                                                                   
SENATOR KOOKESH said the Senate just got the bill.                                                                              
CHAIR STEDMAN responded he understands.                                                                                         
SENATOR ELLIS commented he'd tell all  the folks who write to him                                                               
via e-mail that he tried.                                                                                                       
SENATOR  WAGONER  motioned  to   report  SCS  CSHB  475(CRA)  and                                                               
attached   fiscal   notes    from   committee   with   individual                                                               
SENATOR ELLIS objected.                                                                                                         
CHAIR STEDMAN asked for a roll call.                                                                                            
The motion  passed with Senators  Gary Stevens,  Senator Wagoner,                                                               
and  Chair Stedman  voting yea  and Senator  Kookesh and  Senator                                                               
Ellis voting nay and so SCS CSHB 475(CRA) from committee.                                                                       
There being  no further  business to  come before  the committee,                                                               
Chair Stedman adjourned the meeting at 5:27:23 PM.                                                                            

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