Legislature(1995 - 1996)
05/01/1995 09:40 AM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
MINUTES SENATE FINANCE COMMITTEE MAY 1, 1995 9:40 A.M. TAPES SFC-95, #58, Side 1 (050-575) SFC-95, #58, Side 2 (575-end) SFC-95, #60, Side 1 (000-575) SFC-95, #60, Side 2 (575-end) SFC-95, #62, Side 1 (000-250) CALL TO ORDER Senator Rick Halford, Co-chair, convened the meeting at approximately 9:40 a.m. PRESENT Co-chair Halford and Senators Phillips, Sharp, Rieger and Zharoff were present. Co-chair Frank and Senator Donley arrived shortly after the meeting began. Also Attending: Senators Jim Duncan and Judith Salo; Annalee McConnell, Director, Office of Management & Budget; Alison Elgee, Deputy Commissioner, Dept of Administration; Robert Stalnaker, Director, Division of Retirement & Benefits, Department of Administration; Bruce Ludwig, Business Manager, Alaska Public Employees Association/AFT; Marilyn May, Assistant Attorney General, Collection & Support; Mike Greany, Director, Legislative Finance Division; Glenda Straube, Director, Child Support Enforcement Division, Dept of Law; Art Peterson, Attorney, Uniform Law Commissioner; Vernon Marshall, Director, NEA-Alaska; and Wendy Redman, University of Alaska. Teleconference: Marrit Olson, former chairman, Alaska State Pension and Investment Board SUMMARY INFORMATION SB 148 STATE EMPLOYEE DEFINED CONTRIBUTION RETIREMENT PROGRAM Discussion was had with Senator Duncan, Senator Salo, and Robert Stalnaker. Annalee McConnell asked for time during the interim to finite the program. Teleconference with Marrit Olson, he did not support the "O" version. Mr. Stalnaker reviewed the Comparison of Tier II and the proposed Tier III (chart attached to minutes). Four amendments were adopted and CSSB 148 "U" version was REPORTED OUT of committee with a fiscal note of $1,158.8 from the Dept of Administration w i t h individual recommendations. SB 115 UNIFORM INTERSTATE FAMILY SUPPORT ACT Marilyn May, Glenda Straube, and Art Peterson gave testimony to SB 115. Bill was held for further discussion. SENATE BILL NO. 148 "An Act relating to a defined contribution retirement plan for state employees." Senator Rieger brought the committee up to date on the history of the bill. He stated that it was introduced as a simple defined contribution retirement bill that has undergone changes. The administration has felt strongly that they wanted a retirement system RIP provision. A draft was introduced to the Finance Committee which linked the RIP to a defined contribution system. Recently the administration provided a Tier III defined benefit retirement system which does achieve savings, in the percentage cost, for the benefits of a state employee. It does not have all the benefits of a defined contribution, insofar as it does not have the prevention of a possible future unfunded liability, as we have presently in TRS and PERS. The Cramer draft, dated 4/30/95, version "U", selects the Tier III system. He stated that a provisional change provides, that regardless what happens to Tier III, the sum of employer contribution to Tier III defined benefit and the SBS for Tier III employees, totals 12.5% of payroll. To the extent that the cost of the Tier III goes down, the actual SBS can go up. This scenario can reverse as well. As originally costed out, a Tier III employee will get additional SBS compared to Tier II and I employees. The addition is in the range of 7% employer contribution instead of 6.13%. The other provisional change is a clear requirement that a replacement employee will be in Tier III. The administration is not comfortable with this draft. One misunderstanding was an effective date of March 1 which would allow time in the interim to work on corrective amendments that they would want to provide. Senator Rieger stated that he could easily accommodate the change to March 31st. Alison Elgee was invited to join the committee. She stated that the draft incorporating the Tier III program has come late in the session. She stated that the Tier III proposal by the governor is an excellent starting point, but there are no assurances that this is where it should end. Modification to the retirement system may be necessary. The administration would prefer to have the interim to refine the proposal with the effected parties. Senator Sharp asked when the governor introduced his RIP bill? Ms. Elgee responded the first part of March. Co-chair Halford stated that there is a strong connection between this bill and early retirement in this session. He said there will be no support for early retirement without these provisions. He inquired with Ms. Elgee if she still wants to wait and deal with the bill next year? Ms. Elgee responded that the governor feels strongly that the benefits of the retirement incentive program should stand on its own merits and that there are cost savings that can be made when it is used as a tool and strategically implemented. There are still savings to be had by the strategic use of the RIP bill. Senator Rieger inquired if the administration would prefer a March 31st date opposed to the March 1st date. Ms. Elgee indicated that is correct. Senator Rieger MOVED to adopt the 4/30/95 Working Draft CS by Cramer. No objections having been raised, the CSSB 148 version "U" was ADOPTED as a working draft. Senator Rieger MOVED to adopt Amendment #1 which included the date change of March 31st from March 1st. No objections being made, it was ADOPTED. Mr. Stalnaker was invited to join the committee. He stated that the draft CS makes participation by political subdivisions and school districts optional in a Tier III defined benefit plan. It is a substantial change to the current system. In essence there are two totally defined benefit plans. Due to the set up for those who have Tier I and II, or I, II or III, the cost is doubled for actuarial work, with a sizeable cost to administration processing. He stated that preliminary advice from the actuarial firm is that the provision regarding the offset on supplemental benefits would not be allowed under the current plan. He expressed his concerns with a plan that varies from year to year. This would cause the supplemental benefits plan to come out of qualification. He stated that he has came across some very dramatic changes, and more time is needed to analyze the content. He conveyed that the dramatic differences are found in the Tier I to the Tier II system. It effected all participating members of the retirement system. This plan sets up a Tier III that is elected for school districts, and political subdivisions other than the state. The result may be that there will be political subdivisions that elect participation, while others choose not to participate. There are two arrays of benefits. Employees transferring from one to the other will create questions of portability. The dynamics of adding Tier III changes the original vision of a retirement system; which is to promote or encourage skills that were learned from one employer, to transfer to another employer. He asked if it was the state's responsibility to run a political subdivision retirement system. He stated that this is a totally different structure and requires analyzing. Under the current plan a political subdivision can elect to participate, rather than a separate plan just for political subdivisions. Senator Sharp inquired as to the ability of the political subdivision to opt out of the system. Ms. Elgee responded that it is a contractual right for employees to remain covered. However, the political subdivision can opt out for all future employees. Senator Zharoff responded to a memo from PSEA. The memo stated that the retirement fund would be invested in a mutual fund system. He asked how it is currently being invested. Mr. Stalnaker responded that currently, the systems are invested by the Pension Investment Board with an asset allocation that divides the investments between stocks, bonds and cash equivalencies. Under a defined contribution plan, one approach would be, to invest in an array of mutual funds. The SBS is participant directed with different investment options that could be mutual funds. Under the defined benefit plan, that would not be an investment strategy. He stated that in the past there have been investments in guaranteed investment contracts through insurance companies. Executive Life Insurance Company in California was restructured. There was a question as to the viability of the investment. He stated that the problem is being remedied. Senator Zharoff inquired as to the guarantee of funds available for those ready to retire under this program. Mr. Stalnaker stated that the Tier III, as a defined benefit plan, would be invested with the other assets of the PERS, which would be actuarily funded and monitored every year. The investment risk on a defined benefit plan is traditionally with the employer. Therefore, the employer plays a strong role in how those assets are invested. In a defined contribution plan, the investment is with the employee. Under the defined benefit Tier III, the investment would continue to be professionally managed. It is as secure as the current Tier I and II systems. Senator Rieger stated that previous testimony indicated that under the proposed Tier III, the combination of benefits expected plus the SBS contributions for a 30-year employee (assuming that the investment was just to keep up with inflation) would be between 80-90% of high three-years compensation as a retirement annuity. Annalee McConnell stated that at the time that the first part of the proposal was put together for RIP, the administration was anticipating that it would be used only in cases where the position would be left vacant and eventually eliminate the position. Initially the concern was not with what would happen with employees who were going to be replaced. A later expansion of the RIP occurred for Corrections and other 24-hour institution situations where savings would be considerable, even tho there would be an employee replacement. The administration still anticipates that under the RIP program designed, there would be very few situations where there would be employee replacement. The administration wants the RIP. It is felt that it will be a valuable tool in FY-96 but does not want to be in a position of combining prematurely another proposal which does require consideration. The administration prefers working through the interim on defining the program. One alternative would be to have the RIP go into place for those positions that are intended to be left vacant. The RIP window is designed for 3 years, knowing that it would be used over different periods of time. She suggested incorporating it next year, after administrative and legislative considerations of the retirement has been analyzed. The administration does not want to be in the position of bringing in a program prematurely through this RIP vehicle. Senator Rieger stated that the alternative to that is to have those discussions between now and March 31st of 1996, which is when this whole system takes effect. If there is any corrections that the administration wants to propose, there is time to work through it. Ms. McConnell responded that this idea made sense. She stated her concerns with that approach, which is, that once something is in place, even tho it is not something tested out, that it is a starting point. She was not sure how successful the administration would be in coming to agreement next year on modifications. This proposal is worth looking at, but there should be an agreed upon starting place that makes sense, rather than assume that it could be corrected in the next session. Marrit Olson, speaking via teleconference as a former elected member of the Alaskan State Pension and Investment Board, stated that in the past, he served as a member and former chair of the Teachers Retirement Board. Consequently, his perspective comes from both financial and administrative aspects regarding the pension system. In the 1970's he served as an appointee of the state legislature, on a committee of five, that advised the Senate and the House on all legislative bills coming before those bodies. In reviewing the mass of legislation, the committee turned in "do not pass" recommendations on many measures that were designed to profit a few individuals, or that was deemed adverse to the financial integrity of the fund. He stated that retirement plans are designed to serve the many and not a few individuals. In view of those ideas, he stated that he has numerous concerns and questions about SB 148. He stated that this legislation is being fast-tracked for action without adequate notice or opportunity for public hearing statewide. He only learned of the planned hearings today, originally scheduled for last week. He stated that there are others with similar concerns who are unknowing of this legislation before the committee. He stated that his copy of SB 148, version "O", could have been revised since his version was obtained last week, therefore he spoke to the older version. Ultimately, he proposed that the legislature appoint a committee or commission to study other state proposals and seek solutions to Alaska's problems during the interim. He suggested that the group should include members from the Public Employee's Retirement System, Teacher's Retirement System, and members of the legislature, which should report back to the next session of the legislature. He stated that he hoped that no further action would be taken on this legislation until further studies have been done. Senator Rieger responded to Mr. Olson's testimony. He notified him of the newer version of the bill ("U" version) which is in conjunction with a defined benefit modification contribution plan. The Maryland plan is similar to our Tier III proposal. He notified Mr. Olson that this plan incorporates the administration's earlier proposal. Senator Rieger stated that they would fax a copy to him. He stated that the courts have interpreted retirement benefits, a simple law passed without a vote of the people which creates a new benefit creates an entitlement which is as strong as G.O. debt. Bruce Ludwig was invited to testify to the committee. He stated that he just learned of this new proposal, and while not dismissing it, he stated that there were problems with it. He testified that it should not be tied to the RIP bill. Both have merit in their own right and deserve to be passed. The reason for a retirement system is to recruit and retain qualified people. The retirement system is a very big part of that package. There was expressed concern over the fast action of this legislation. Time is needed in order for the Alaska Public Employees Association to receive comment from their membership. He stated that their organization does not work in vacuums, and asked that action not be taken so that it can be analyzed over the interim. He stated that their organization would be happy to work with Senator Rieger in making changes to the plan. Co-chair Halford inquired, if the two bills are not separated, and understanding that the RIP bill stays, could changes be worked out with the retirement program realizing the short time left in this session. Mr. Ludwig responded that the RIP bill is high on the agenda for the membership, but if the cost is gutting the PERS system without giving it sufficient thought, then he didn't feel the RIP bill is that much of a priority. The RIP bill gives management tools to save money without regard to changing the retirement system, and he feels it is a mistake to link them together. He described what gutting the system meant. The system currently pays 2 to 2-1/2%. The proposed system will take it down to 1-1/2% for future employees. He emphasized that a 40% cut is gutting. Senator Rieger stated that according to previous testimony, this plan is in line with other private and public pension plans nationally. He inquired from Mr. Ludwig if public and private employers nationally, with the Tier III system, are having problems recruiting and retaining employees? Mr. Ludwig responded that 1-1/2% benefits is not the standard that he has seen for other states, it is higher. He stated that industry creates tremendous competitiveness, and an excellent retirement system gives the edge for recruitment and retaining employees. Senator Rieger mentioned that he has experienced people who have come to him frustrated because they are working for major Alaskan employers who have taken wage reductions. They are angry at the state for not applying a wage reduction on state employees. He emphasized that there has been a belt tightening in Alaska which has not applied to the state employee. Mr. Ludwig stated that wage cuts are happening. There was an extensive lowering of administrative positions in the last year, wage freezes, wage cuts for new employees. These did not happen through the legislative process, but happened through the civil service system. If there is a salary out of range, the Department of Administration adjusts the salary appropriately. The salary surveys are still not competitive with private sector employees in all the categories. In the last 10 years, the oil industry, has had a 30% increase in salaries. He stated that mining salaries have increased over 20%. Vernon Marshall, Executive Director, NEA-Alaska, gave testimony to the defined contribution system. He stated for the record that NEA-Alaska opposes utilization of RIP along with the other features of this bill. RIP is an issue that needs to be dealt with on its own merit. He stated that it should apply to school districts and be available as a tool to administrators. There is concern with regard to the reduction of benefits to new hires. As it is understood, a 1.5% multiplier would be applied to new hires after 1996. NEA-AK is in opposition. Giving districts the option to trigger various multipliers creates confusion among employees, and districts. NEA-AK has asked to be considered in the discussions regarding retirement. He stated that he did not understand the goal, but that once the goal is clear, the organization would be a willing participant in creating a system that works. Senator Rieger stated that the administration's proposal is to bring the retirement system in line with retirement systems elsewhere. The intention of the original version was to move to a defined contribution, ridding the system of abuses. The reason the costs went up in the early years, was only because the state was forced to acknowledge and pay on the unfunded liability. The purpose of the bill has changed. He would not characterize it as reducing the cost of state government. Co-chair Halford asked for an analysis of early retirement provisions, in this bill versus previous bills, in terms of actual cost per employee. Senator Phillips brought forward two amendments to the working draft. Amendment #2 is an insert on page 18, line 4, after the word "employees": "as part of a permanent reduction in the personal services costs in that section." Amendment #3 is an insert on page 24, line 8, after the word "research": "and does not entitle the individual to receive retirement, health, or leave benefits." Co-chair Halford and the committee agreed to hold the bill on the table and come back to it. CONTINUATION OF THIS BILL CAN BE FOUND ON PAGE 9 OF THE MINUTES. SENATE BILL NO. 115 "An Act relating to the establishment, modification, and enforcement of support orders and the determination of parentage in situations involving more than one state; amending Alaska Rule of Administration 9; amending Alaska Rules of Civil Procedure 79 and 82; and providing for an effective date." Co-chair Halford took up SB 115, mentioning that SB 116 has been rolled into SB 115. Both bills are governor bills and have related topics. Senator Phillips MOVED to adopt SB 115 (FIN), 4/30/95, version G. No objection having been heard, the proposed CS to SB 115 was ADOPTED. Glenda Straube and Marilyn May, from the Department of Law, were invited to join the committee. Co-chair Halford elaborated on the changes in the proposed CS to SB 115. He spoke to disestablishment and how it applies. The bill is a result of a commission on uniform law. Art Peterson was asked to join the committee. He testified as a uniform law commissioner for Alaska. The original SB 115 was a product essentially of the National Conference of Commissioners and Uniform State Laws. It is the body that produced the URESA. URESA has been established in all 50 jurisdictions. The bill, revised act, started out as amendments to URESA, cleaning up incidentals that had occurred over the 4 decades since URESA was first promulgated. The most significant was the elimination of multi-state and thus, the potential for conflicting, court orders. The advantage is the ease in understanding for both the obligor and the obligee. It makes certain that the appropriate amount of support goes to the child, the one we are protecting, and makes the system efficient and easier to administer for both the agency and courts involved. It is a result of several years of committee drafting work involving debate and consultation with people in the areas of social services, adoption law, and child support law. The bill then went to the national conference and was fully debated for two years resulting in this product. Mr. Peterson asked Co-chair Halford, where in the uniform act there are changes? Co-chair Halford responded that there were no changes unless they were made by the administration or previous to this committee's action. He stated that there were references to differences. Mr. Peterson stated that he knew of one difference from the national version that was in the original bill in the definition of the word, "state". Marilyn May stated that in the original draft of the bill, the primary changes were in the definition of the word, "state". She noted that there is the removal of a section within the uniform act, which provided oversight by the attorney general's office on the child support agency. She stated that it was never in the bill presented here, but in the national version there was a section that said, "duty of attorney general, if the attorney general determines that the support enforcement agency is neglecting or refusing to provide services to an individual, the attorney general may order the agency to perform its duties under this act, or may provide those services directly to the individual." She stated that it will not be handled that way in Alaska. Mr. Peterson stated that the removal of that particular section would not be opposed, or the elimination of the references to tribes in the definition of state. He stated that he has sent the original bill to the chair of the national drafting committee and he has indicated that it was acceptable in that form. Mr. Peterson stated that there is opposition to any further significant changes to the Uniform Act. He mentioned that uniform acts should not be changed. To achieve the benefits of the uniformity, it is essential for those dealing with the law, to maintain the consistency throughout the nation. Anything that deviates significantly from the national version would be opposed, but would receive attention, item by item. Co-chair Halford asked the definitional question on tribes? Mr. Peterson responded that in the national version, the definition of state includes tribes. He read the language in the bill, "includes an indian tribe and includes foreign jurisdiction". He stated that the purpose was to pick up native tribunals. He said, if a particular tribe has a tribunal, or native court, then the decisions of that court will be treated as though they were the decisions of a state court. He emphasized that there have been several questions raised. He cited an example whereby, under federal law, 9th circuit decision, states are required to give full faith and credit to tribal tribunal decisions. The deletion of the word tribes, does not mean that natives are not covered by the paternity provisions, or by the support provisions. Co-chair Halford spoke to the "Alaskan independence" attitude. Mr. Peterson stated that the attitude of "Alaskan independence" has nothing to do with the relationship with people, businesses, or governments in other states, and that is what the uniform acts deal with. He stated that Alaska could not operate in commerce without the uniform commercial code, nor would Alaskans be protected without the child support enforcement act. Co-chair Halford asked to have explained, "limited immunity of petitioner"? Mr. Peterson responded that someone who comes to Alaska, responding to a proceeding, to appear in court or before the agency, is not subjecting himself to the general jurisdiction of this state. End Tape #58 Start Tape #60 The meeting RECESSED at 11:45 a.m. The meeting RECONVENED at 12:20 p.m. Present were Co-chairs Halford and Frank, along with Senators Rieger, Sharp and Zharoff. Senators Phillips and Donley joined the committee shortly after it began. SB 148 STATE EMP DEFINED CONTRIB RETIREMENT PROG Senator Phillips offered amendment #1. Page 18, line 4, after the word, "employees", insert, "as part of the permanent reduction in the total number of employees in that agency". There were objections, Co-chair Halford asked to define "the agency". There was considerable discussion regarding a more appropriate category. Senator Sharp stated that in evaluating past performance on previous RIP bills in this state, he is reluctant to pass another RIP bill without assurances built-in that there is going to be employee reduction. Employee reduction has not happened in the past, and in incurring future past service debt or obligations by a RIP bill, there must be reductions of employees in the long term. He suggested that if a Division cannot make a permanent reduction then they cannot receive the benefit of a RIP bill. Ms. Elgee was asked to respond to the language in question, should it be a division, department, section, agency? She responded that it does preclude some of the uses envisioned for the program. She gave an example in the Pioneer Home Program. The department is in the process of converting the Pioneer Homes from the previous medical model home environment to a social model home environment. In the change over, there is less need for registered nurses. As the nurses turn over, we are replacing them with Pioneer Home Maid's. The difference in pay is 1-1/2 Home Maid's to one registered nurse. This is at the section level. In this example, there would be more employees but they would be more effectively utilized in the home care environment created and less expensive individually than the employees currently on staff. Ms. McConnell stated that Ms. Elgee's example was just what OM&B wants to avoid, where we are tied from doing something that makes common sense. In terms of the overall plan, OM&B is not going to leave positions vacant, but rather eliminate the position so there is greater control by what is being done by the departments. The environment for this RIP is different than the environment for previous RIPs. In order to accomplish the reduction of the budget, there must be a close out of positions. Co-chair Halford suggested that in making it work with a minimum of problems, he would apply it to personnel costs and would come back to the section. It is a restriction that has both security and costs. It was agreed that this was the least damaging way to adopt this amendment to their flexibility. He stated that his support in a RIP program and whatever provisions represented provide savings commensurate with the cost of the RIP. Senator Phillips WITHDREW the original amendment. No objection being made it was WITHDRAWN. Senator Phillips offered an amendment to amendment #1. OBJECTION was heard by Senators Zharoff and Rieger. Further considerable discussion was had over the language of amendment #1. Senator Phillips MOVED to adopt a technical amendment changing the amendment to read, "as part of a permanent reduction in the total personal services costs in that section. Senator Zharoff asked the department if they have changed their position on the bill? Ms. McConnell responded that the other alternative would be "department". She stated that it is the departments that need to show the savings. Co-chair Frank stated that he could support the word "section". If this does not work, then next year it could be redefined in an amendment. Senators Zharoff and Donley OBJECTED. The question is the adoption of the amendment, by a show of hands the amendment was ADOPTED. In favor were Co-chairs Halford and Frank, along with Senators Sharp and Phillips. Opposed were Senators Zharoff and Donley. Senator Phillips offered amendment #2 on page 24, line 7. He asked Wendy Redman to give testimony. Ms. Redman responded against the combination of these two bills and against this amendment in particular. This amendment has been in the last two RIP bills for a specific purpose, for faculty positions only. Out of the 400 people involved in RIP in faculty position, only 42 people were hired back. She stated that the reason this was needed for faculty positions is that in many of the disciplines, especially in engineering and business, it often takes a year or more to actually recruit replacements. During that period of time, it has been extremely helpful to hire back faculty. There is still a savings of money. They are able to cover the courses. Without this provision the University would be in a difficult position with faculty. It is restricted to faculty. Co-chair Halford asked if this was University faculty RIPPED out, who have come back to teach under contract directly? Ms. Redman responded that it was still at a cost saving. Senator Rieger stated that he did not have a problem with the language staying in the bill. He said it was as if the individual left the retirement system entirely. If they enter into a personal services contract, the assumption is that means exclusive of continued participation in TRS. It is the same concept that Tier III has. There will be savings which will be more than the RIP. Senator Sharp stated that it would allow for abuses by meeting the personnel reduction, but still covering it under contractual. Ms. Redman reiterated that they are not hired back as permanent employees either part-time or full-time, they are hired back as a per course basis. Co-chair Frank said that in analyzing RIP for the state budget, there is a realization that the budgets come back with a request for more personnel. At the committee level there is debate whether the request should be approved. There is a frustration because it does not turn out to be a reduction in overall personnel. With the University, the committee does not get into looking at requests for more personnel. In other departments and other areas, the committee does get into item by item cases and if more money should be provided which we previously thought was RIPPED. He supports the University utilizing this tool and living with the consequences. He said that the legislature is not going to be giving them more money if they did not utilize it properly. Co-chair Halford questioned the return of employees without benefits. He stated that the terminology of double-dipping is working for one agency building retirement, and going on to work for another agency and building another retirement. If the employee cannot get a retirement and benefit package from the contract, then the abuse is avoided. In the section that says they can work for the legislature, it adds, "and does not entitle the individual to receive retirement, health or leave benefits". He asked if it is intended to be, by inference, in the section to deal with the University employees? It is very clear that if they come back on a contract, they were not getting those benefits which they previously RIPPED out of. Ms. Redman stated that she had no idea why that was in the University section. Co-chair Halford asked Ms. Redman if she would object if this amendment were not adopted to adding, "and does not entitle the individual to receive retirement, health, or leave benefits" in this section? Ms. Redman stated that she would not object. Mr. Stalnaker clarified the difference between the two references. As Ms. Redman stated, the University enters into employment contracts, they have varying contracts. For their nonpermanent instructors it is $2500/yr. There is a small annuity that every employee receives. The reason that subsection 2 for legislative employees, has that additional language, is because legislative employees generally are hourly employees. It was meant to differentiate that in the case that the legislature felt the need to hire a person to do a short research project, etc., that it was clearly defined that it was an hourly employee ineligible for other benefits. That is the only reason that additional language is written in. Ms. Redman stated that under personal services contracts, the University does not pay retirement, health or leave benefits on any contracts. The wording the way it is works the way it is. She stated that University faculty has a defined contribution program, which works for faculty not necessarily wanting to retire in Alaska. Senator Zharoff stated that an employee in the University is in the TRS system. In accepting employment with the legislature, the PERS system is again activated. If there is a RIP out of one and involvement with another, there is a penalty. Everything must be paid back because there is still an accruing of benefits? Ms. Redman stated that the intent is for people not returning under any retirement system. Mr. Stalnaker responded that if an employee were to retire under the TRS, they could not go back to work under the PERS without having the penalty and paying it all back. They could not go back to work under the option retirement plan for the University without having the penalty and having to pay it all back. The provision on subsection 2, beginning on line 9, puts these employees into what is considered a nonpermanent position that is for short duration and is not a full time employee. If the employee does go into a position that is covered by the other retirement plan, there is a penalty and it does have to be paid back. Co-chair Halford stated that before the committee is the adoption of Phillips amendment #2. No further debate, and by a show of hands, the amendment FAILED. Those in favor of the amendment Senators Sharp, Phillips and Donley. Those opposed were Co-chairs Halford and Frank along with Senators Rieger and Zharoff. Senator Donley offered amendment #3, page 24, line 8, after the word "research" insert: "and does not entitle the individual to receive retirement, health, or leave benefits." Ms. Redman stated that her understanding is that personal service contracts do not include retirement, health, or leave benefits, and that this is an unnecessary amendment. Co-chair Halford asked if there was further debate on the amendment? No further debate, amendment #3 was ADOPTED. Senator Donley offered amendment #4, proposing a limit on how much the returning employee contract could total based on the percentage of their former annual salary. He offered language, "personal service contracts shall not exceed 10% of their former annual salary". Ms. Redman urged the committee to vote against the amendment. The statute provides that the maximum that anyone can be brought back on a personal services contract, without becoming a full time employee, is 49%. Co-chair Halford stated that the question before the committee is the adoption of Senator Donley's amendment #4. By a show of hands the amendment FAILED. Senator Duncan referred to the comparison table of Tier II and III. He asked Mr. Stalnaker to go through the comparison table giving savings figures to the state. Mr. Stalnaker explained that he would go through the table using an example of what a $40,000/yr employee comparison would be between Tier II and III. The cost savings is obvious as the difference in cost is compared. Tier II teachers will be contributing over 3% more than the Tier III teachers. The Tier II public employees will be contributing 1.25% more of their dollars than the Tier III public employees. He stated that the Tier II people will be contributing less than the Tier III. The employer and employee contribution in Tier III is lower. He referred to the categories on the chart. Normal retirement age is 60. A peace officer in the PERS for an early unreduced retirement can, under Tier II, retire after 20 years. Under Tier III it would take them 5 more years to retire with an unreduced retirement benefit before age 60. A teacher can retire with 20 years of service under Tier II; under Tier III, a teacher would have to work until age 60, or until a combination of age and service that would equal 85. He offered the example of a teacher at age 55 with 30 years of service. That would be the same for any other public employee covered under Tier III. Currently, under Tier II, a public employee can work 30 years and retire with an unreduced benefit. Under Tier III, the public employee would have to equal 85 in age and service to retire with an unreduced benefit. Senator Duncan confirmed with Mr. Stalnaker that the savings comes because actuarial pay off comes later. Mr. Stalnaker stated that the reduction in retirement benefit would be with a teacher who is 45 years old and retires now after 20 years of service, and receives an unreduced retirement benefit based on 20 years of service. That teacher would have to meet one of the other requirements under Tier III. There is a dollar reduction in comparison to Tier II. Senator Zharoff inquired how and when would someone under Tier III be able to benefit or utilize a RIP program. Mr. Stalnaker responded that under Tier III program, at age 52 a person would be eligible because the three years would take them to age 55, which is an early retirement date. He stated that the rule of 85 is just one of the ways to reach a point of a normal retirement benefit. It is designed to recognize a person who starts very early on with an employer and works 30 years. It is to recognize long term service with age approaching retirement. Early retirement does not change, it starts at age 55. The calculation is defined to be 1/2% per month of early retirement. Tier II under Hoffbeck vs Hammond allows an employee, under their period of employment, to take the most profitable actuarial factor. The most advantageous actuarial factor available is the 1/2% per month. This is more beneficial over the PERS and TRS and puts it in statute so that there is no uncertainty. Mr. Stalnaker advanced to the next section dealing with the post retirement pension adjustment. The department refers to the cost-of-living as PRPA's. Currently, under Tier II, a retiree at age 60 receives a 50% cost-of-living adjustment from the prior year. At age 65, the retiree gets 75% of the actual cost-of-living for the prior calendar year. An alternative is 1/2 of the cost-of-living with retirement for 8 years, under the age of 60 in the TRS; or, retirement for five years under the age of 60 in the PRS. Tier III retiree would receive 50% of the CPI from age 60 forward. That is a reduction in benefit. Co-chair Halford asked if that is a cumulative CPI? Mr. Stalnaker responded that once the employee retires, if they meet the eligibility of age 60, they then are eligible for the PRPA for that year. Each year it adds on. Senator Salo asked for an understanding of the Tier II system for the benefits to employees who are retiring. Mr. Stalnaker responded that in 1986, the public employees worked with the administration to enact an automatic, prefunded, cost-of-living increase. Prior to that point, there was the ad hoc, it was not prefunded, it became a burden on the system each time it was granted as an additional cost that would then extend through time. Tier II was then implemented, which increased the normal retirement age to 60. It also increased the benefit multiplier from 2% to 2-1/2% and had other changes incorporated into the package for the automatic PRPA. The same approach was passed for the teachers in 1990. They elected nonparticipation in 1986, and in 1990 they worked together with the administration to receive a guaranteed post retirement pension adjustment in legislation. Senator Salo injected that it also increased contributions for the new teachers entering the system. She pointed out that for the older retirees, when they were having a problem making it on their retirement salary with the automatic PRPA, they were rescued by the new people coming in (Tier II) who then paid significantly more in their retirement contributions to pay for it. She mentioned that there was a change that was detrimental relative to Medicaid or Medicare. Mr. Stalnaker responded that there was no change to that. He stated that a retiree, when they reach age 65, has to participate with Medicare B, and they pay the premiums. That was a subject of litigation. Mr. Stalnaker continued with the comparison table. The next section addresses major medical insurance. Under Tier II, currently anyone age 60 must pay one-half the cost of health insurance. Until, and upon, age 65 the full cost of health insurance is paid by the system. He noted that under Tier II, the health insurance policy covers the retiree, spouse and dependent children. Under Tier III, it would cover retiree only; age 60-65, the retiree would be required to pay one-half the cost; age 65 and older, the system would pay the full cost of health insurance. The critical savings is that the retiree would have the health insurance. They could purchase health insurance through the plan for their dependents and spouse, but it would not be covered by the plan. Senator Duncan asked for a dollar figure for Tier III at present day costs. Mr. Stalnaker responded that the cost for health coverage for the retiree at age 60-65 would pay less than the Tier II retirees. A retiree would be paying for themselves at a cost of $400/mo. If covering a dependent, the cost would be an additional $200/mo for the retiree. There is a $200 savings to the state, plus the actuarial, which is what Senator Duncan mentioned in the anticipation that health costs will increase faster than inflation into the future. Mr. Stalnaker said that the health component of the retirement plan is the most expensive single component of the plan. It is the only component that is estimated to increase faster than inflation. Alaska prepays the fund. It is an expensive benefit, prepaying accounts for a large savings. Mr. Stalnaker advanced to the section on vesting. Under Tier II, an employee works for five years before they vest in the PERS, and eight years before vesting in the TRS. Under Tier III, all members, teachers and public employees would vest after five years. Senator Duncan asked what the small percentage of savings is in a TRS due to early vesting? Mr. Stalnaker said, that when a person terminates without vesting, it is not uncommon for them to pull out their contribution. Those contributions do not gain earnings to help pay for benefits in the future. The difference in 5 and 8 years in the teachers plan is considered by the actuaries, in that there would be a small savings in the vesting provision. This is because more teachers would leave their contributions which would earn money to outlay for benefits in the future. Mr. Stalnaker went on to the next section covering the benefit multiplier. Under Tier II for PERS employees who are not peace officers or fire fighters, the employee receives a benefit multiplier of 2% for the first 10 years of service, 2.25% for the next 10 years and 2.5% per year thereafter. For the PERS peace officers and fire fighters, the formula is 2% for the first 10 years and 2.5% thereafter. For the TRS benefit formula it is 2% for the first 20 years, and 2.5% thereafter. Tier I is the same as Tier II in the benefit multiplier. In Tier III, the benefit would be 1.5% for all years of service. He stated that 1.5% is an average rate in the private sector, and a common rate in the public sector. This would be a substantial savings to the system. A retiree of $40,000, with 30 years service, under Tier III would receive in the defined benefit program, 45% of $40,000 a year. Under Tier II, the retiree would receive 67-1/2% of $40,000 a year. The difference is 22%. He said that at 3%, assuming all employees for the state were Tier III, and state salaries totaled $600 million, the savings would be $18 million a year. Senator Duncan asked if retirees can afford to retire under Tier III? He noted that for a TRS employee, with 30 years service, retirement with all the same conditions under Tier III that they have under Tier II, will yield approximately $11,000 less in retirement income a year. On top of that, it will cost $200/mo or $2400/yr more for health benefits for their spouse, and they are going to have a lower cost of living adjustment than at present. Essentially, the income is an estimated $15,000 less in the first year for the retiree. That is substantial. The state is trying to encourage people to stay in this state. The state is trying to attract people to work in the public sector. Senator Duncan stated that this is what is being overlooked in all this discussion, is the impact on the individuals. There is great emphasis on the government side, forgetting about the impact it will have on individuals. Mr. Stalnaker stated that he could not agree more with Senator Duncan. The department proposes working through this during the interim with the unions, and effected individuals. Some of the effected individuals are the employers who are bearing the costs. The people that Mr. Stalnaker has spoken with are willing to sit down and talk about it. How do you achieve savings in a defined benefit plan? It means lower benefits, or more costs to the employee, one way or the other. Whether this is reasonable or not, this was not our idea without sitting down and working through it in the interim. He reiterated that he agreed with Senator Duncan, that these will be traumatic effects for employees not yet hired. Senator Phillips inquired about the 1.5% benefit formula for the Tier III employees, and how that compares. Mr. Stalnaker said it is close to that in the private sector. Senator Rieger noted that in addition to Tier III being comparable to other plans, prior testimony indicated that the state employees have two retirement systems: a defined contribution plan, and a defined benefit plan. The defined contribution is SBS. That combination under Tier III allows the employee to retire at 80-90% of the high 3-years. The possibility is 45% out of Tier III and 45% out of SBS. Is a $15,000 annual reduction unreasonable considering that there is an income equal to 80-90% of what they were making before they retired. Is it traumatic to bring an employee into line with other retirement systems, especially when what is being talked about is prospective, and not effecting any of the $600 million current payroll? Mr. Stalnaker took up the last section and stated that for purposes of analysis, the department has taken in the two systems to come into about 5-1/2% of employer costs. If the old percentages were multiplied by payroll versus the new percentages and multiplied them by payroll, the difference would be the savings assuming 100% conversion. Tape #60 End Tape #62 Begin Mr. Stalnaker stated that his previous explanation in response to Senator Phillips was comparing defined benefit plans. He believes that there are differences in the private sector in terms of bonuses, and other incentives, that do not necessarily align themselves. The other variable in the private sector is that all employees participate in social security. The argument of a defined contribution is widely used in the private sector, it is based on the fact that they are contributing 7-1/2% to social security and not getting near the benefit that you do under a defined benefit plan such as this. The issue of defined benefit versus defined contribution is a very difficult issue and is not an "apples to apples" comparison. To look at it in totality of the private sector plans, 1.5% is reasonable when even comparing it to other public sector plans. Senator Duncan stated that the 1.5% national average is not accurate. He cited other state percentages: Alabama, 2.1%; California 2.5%, etc. He asked about the SBS system and the changes effected by this bill. Mr. Stalnaker said that the department does not support the change to SBS. He said that under the current qualifications of the supplemental benefits, the rate must be fixed, which, by federal regulations means there cannot be a rate change for SBS. He said it was not fair to put all investment risks on the backs of the employees. There is a role for the employer to play in defining the investment strategy. He said that if they do well with the investment, they could consider lowering the employer contribution. Senator Salo asked Mr. Stalnaker, if the goal is to reduce the number of state employees, then would the savings realized in creating a new Tier in the retirement system, be minimized by this action? Mr. Stalnaker responded that a calculation of savings, when there is downsizing, will be automatic. However, he stated, that if a less costly benefit provision or statute is incorporated for new employees leaving, the actual dollars may change because of the downsizing as well as eliminating positions. The difference in cost remains fairly stable. Senator Salo stated that for both retirement systems, the beginning of the statute starts out with the purpose, which is having a retirement system to attract and retain quality employees for the State of Alaska. The drastic reduction in benefits and increase in cost makes that a less important philosophy. She stated that there is enough time to figure out what the actual savings to the State of Alaska is, to see if it is worth the cost. She feels it will make a drastic difference to the types of people the state will be able to attract and retain. Senator Rieger asked if the RIP program was a way to retain state employees? Senator Salo stated that the drastic change in this plan deserves input from the people it effects. She expressed her concerns regarding the increased length of service before eligibility for retirement goes into effect. Senator Duncan asked if this proposal has been formally submitted by the department to the Administration Retirement Board? Mr. Stalnaker responded that there was nothing specific presented to the Retirement Board. He said he presented it to the Retirement Board as a form of updating them on where legislation was, and what was stirring in the legislative ranks. It has been an on-going issue along with defined contribution that has been discussed in years past with the Retirement Board. The fact that it was brought to the Board's attention is true. Senator Duncan asked if the Retirement Board had a position? Mr. Stalnaker responded that the general feeling of the Retirement Board is that it should be a process that is exposed to those it effects, and that they themselves were not in favor of reducing retirement benefits. Senator Duncan defined that those effected, that need to go through the process are: the administration, unions, teachers, and employees. Mr. Stalnaker stated that the proper process would be to bring everyone together and discuss it in the interim. Annalee McConnell stated that the administration does not support combining the RIP proposal with the change in the RIP retirement program. There was agreement that the department would make a good faith effort to look at an alternative defined contribution plan. The department does not feel comfortable without internally or externally checking on the impact of the program. She reiterated that the department does not support the committee substitute on the table. Senator Duncan reiterated that it was his understanding that the administration did not support the committee substitute. He stated that this should not be rushed through, it should go through the State Affairs Committee, the Health & Social Services Committee. Co-chair Frank called for a short recess at 2:15 p.m. The meeting RECONVENED at 2:17 p.m. Senator Rieger stated that the representative for the University responded to the Donley amendment and requested that page 24, line 8 continue to read....., except social security replacement." Senator Sharp OBJECTED he felt that they were self-employed and should pay for it out of their own pocket, not employer contribution if self-employed. There was discussion regarding this issue. Co-chair Frank spoke to the definition of an independent contractor. Senator Rieger offered an amendment to the amendment to read, "except social security replacement if required by IRS code". No objection being heard, it was added to the amendment. Co- chair Halford asked if there was objection to the amendment. Without objection the amendment was ADOPTED. Co-chair Frank MOVED to pass out CSSB 148 (FIN) with individual recommendations and accompanying fiscal notes. OBJECTIONS from Senator Zharoff and Senator Donley. The question is, shall CSSB 148 (FIN) pass from committee? Members voted by a show of hands. In favor were Co-chairs Halford, Frank and Senators Rieger and Sharp. Opposed were Senators Donley and Zharoff. CSSB 148 (FIN) was REPORTED OUT of committee with individual recommendations and a fiscal note from the Department of Administration for $1,158.8. The meeting RECESSED at 2:25 p.m.