Legislature(2007 - 2008)SENATE FINANCE 532

04/23/2007 09:00 AM FINANCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ SB 104 NATURAL GAS PIPELINE PROJECT TELECONFERENCED
<Above Item Removed from Agenda>
+ SB 84 TESTING & PACKAGING OF CIGARETTES TELECONFERENCED
Moved CSSB 84(JUD) Out of Committee
+= SB 125 PERS /TRS CONTRIBUT'NS;UNFUNDED LIABILITY TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                            MINUTES                                                                                           
                    SENATE FINANCE COMMITTEE                                                                                  
                         April 23, 2007                                                                                       
                           9:22 a.m.                                                                                          
                                                                                                                                
                                                                                                                              
CALL TO ORDER                                                                                                               
                                                                                                                                
Co-Chair  Bert  Stedman  convened the  meeting  at  approximately                                                               
9:22:09 AM.                                                                                                                   
                                                                                                                                
PRESENT                                                                                                                     
                                                                                                                                
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Charlie Huggins, Vice Chair                                                                                             
Senator Kim Elton                                                                                                               
Senator Donny Olson                                                                                                             
Senator Joe Thomas                                                                                                              
Senator Fred Dyson                                                                                                              
                                                                                                                                
Also  Attending: ANNETTE  KREITZER,  Commissioner, Department  of                                                             
Administration; DENISE  LICCIOLI, Staff  to Senator  Olson; JERRY                                                               
BURNETT,  Legislative  Liaison,   Department  of  Revenue;  MILES                                                               
BAKER,   Staff  to   Senator  Stedman;   DAVID  TEAL,   Director,                                                               
Legislative Finance; PAT SHIER,  Director, Division of Retirement                                                               
&   Benefits,   Department   of  Administration;   JIM   CARROLL,                                                               
Representative,  AARP and  Juneau  Retired Teachers  Association;                                                               
DAVID  HULL,  Vice Chair,  Alaska  Council  on Emergency  Medical                                                               
Services                                                                                                                        
                                                                                                                                
Attending  via  Teleconference:  From Anchorage:  JOHANNA  BALES,                                                             
Excise Audit  Manager, Tax Division/Anchorage  Office, Department                                                               
of Revenue;  From Fairbanks:  WARREN CUMMINGS,  President, Alaska                                                               
Fire Chief's Association and Fire  Chief, City of Fairbanks; From                                                               
Kenai:  LARRY  SEMMENS,  Finance  Director, City  of  Kenai,  and                                                               
Member,  Alaska  Retirement  Management  Board;  From  an  Offnet                                                               
Location: MICHAEL LAMB, Chief  Financial Officer, Fairbanks North                                                               
Star Borough                                                                                                                    
                                                                                                                                
SUMMARY INFORMATION                                                                                                         
                                                                                                                                
SB 84-TESTING & PACKAGING OF CIGARETTES                                                                                         
                                                                                                                                
The Committee  heard from the  bill's sponsor, the  Department of                                                               
Revenue,  and  took  public testimony.  The  bill  reported  from                                                               
Committee.                                                                                                                      
                                                                                                                                
SB 125-PERS /TRS CONTRIBUTIONS; UNFUNDED LIABILITY                                                                              
                                                                                                                                
The  Committee heard  from the  bill's sponsor,  the Division  of                                                               
Legislative Finance,  the Department of Administration,  and took                                                               
public  testimony. A  committee  substitute was  adopted and  the                                                               
bill was held in Committee.                                                                                                     
                                                                                                                                
9:23:29 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman called the meeting to order.                                                                                   
                                                                                                                                
Senator Dyson  inquired as  to when  SB 53, the  FY 2008  (FY 08)                                                               
capital budget bill, might again be addressed by the Committee.                                                                 
                                                                                                                                
Co-Chair Stedman expected  SB 53 to be on  the Committee schedule                                                               
within  the  next week.  Governor  Sarah  Palin's capital  budget                                                               
amendments  and other  drafting  revisions to  the original  bill                                                               
were being reviewed.                                                                                                            
                                                                                                                                
Senator  Dyson asked  the deadline  by which  Member's amendments                                                               
should be submitted.                                                                                                            
                                                                                                                                
Co-Chair  Stedman urged  Members  to submit  their amendments  as                                                               
soon as possible.                                                                                                               
                                                                                                                                
In response  to a question  from Senator Dyson,  Co-Chair Stedman                                                               
communicated that a memorandum  outlining the amendment submittal                                                               
timeframe should have been distributed  to Members. The status of                                                               
that  notice  would  be  revisited.   The  bill  is  "a  work  in                                                               
progress".                                                                                                                      
                                                                                                                                
9:25:20 AM                                                                                                                    
                                                                                                                                
                                                                                                                                
     CS FOR SENATE BILL NO. 84(JUD)                                                                                             
     "An Act relating to the testing and packaging of cigarettes                                                                
     to be sold, offered for sale, or possessed in this state;                                                                  
     and providing for an effective date."                                                                                      
                                                                                                                                
                                                                                                                                
This was  the first hearing for  this bill in the  Senate Finance                                                               
Committee.                                                                                                                      
                                                                                                                                
9:25:59 AM                                                                                                                    
                                                                                                                                
Senator Olson, the bill's sponsor,  cited cigarettes as being the                                                               
leading cause of  home fatalities in Alaska and  the nation. One-                                                               
quarter  of cigarette  home fire  fatalities do  not even  smoke.                                                               
This  legislation  is  an  attempt   to  address  this  issue  by                                                               
specifying  that "only  self-extinguishing  cigarettes" could  be                                                               
sold in the State.                                                                                                              
                                                                                                                                
Senator Olson stated that when  he was a practicing physician, he                                                               
had treated a child for  injuries received in a cigarette-related                                                               
home fire. That incident has been  a major factor in his decision                                                               
to sponsor this bill.                                                                                                           
                                                                                                                                
9:27:10 AM                                                                                                                    
                                                                                                                                
DENISE  LICCIOLI,  Staff  to Senator  Olson,  expressed  that  in                                                               
addition  to allowing  only self-extinguishing  cigarettes to  be                                                               
sold  in  the  State,  this  bill  would  establish  testing  and                                                               
certification requirements to support that mandate.                                                                             
                                                                                                                                
Ms. Liccioli communicated  that while it is  impossible to create                                                               
a  "safe" cigarette,  allowing only  self-extinguishing or  "fire                                                               
safe" cigarettes to be sold  would have an impact. These "reduced                                                               
ignition propensity cigarettes …. are  designed to be less likely                                                               
than a conventional cigarette to  ignite soft furnishings such as                                                               
a couch or mattress".                                                                                                           
                                                                                                                                
Ms. Liccioli  stated that in  order to allow these  cigarettes to                                                               
be easily identified, the bill  also included specifics as to how                                                               
self-extinguishing cigarette packages should be marked.                                                                         
                                                                                                                                
Ms. Liccioli  reiterated that cigarettes  are "the  leading cause                                                               
of  home fire  fatalities in  Alaska" and  the nation.  "The most                                                               
common material  first ignited  in home  fires is  mattresses and                                                               
bedding, upholstered  furniture, and floor coverings."  Fires are                                                               
often started by  a dropped or forgotten  cigarette, as evidenced                                                               
in  an April  21, 2007  article  in the  Juneau Empire  newspaper                                                               
[copy  on  file] that  credited  the  cause  of an  April  fourth                                                               
apartment building fire in Juneau  as being a discarded cigarette                                                               
that ignited in a couch.                                                                                                        
                                                                                                                                
Ms.  Liccioli   stressed  that  one-quarter   of  smoking-related                                                               
fatalities are non-smokers  and more than one-third  of that one-                                                               
quarter  are children.  Studies also  indicate that  the risk  of                                                               
dying in  a smoking-related residential fire  increases with age.                                                               
"38 percent of fatal smoking material  fire victims are age 65 or                                                               
older."                                                                                                                         
                                                                                                                                
Ms. Liccioli stated that "the  most common technology utilized by                                                               
cigarette   manufacturers   for    reduced   cigarette   ignition                                                               
propensity [RCIP] … is to make  a paper thicker in places to slow                                                               
down a burning cigarette". She  directed attention to a Coalition                                                               
for Fire-Safe  Cigarettes handout  [copy on file]  which included                                                               
an image of the RCIP "speed bumps".                                                                                             
                                                                                                                                
Ms.  Liccioli  explained  the  speed  bump  technology.  When  an                                                               
unattended cigarette burns  down to the thicker  paper speed bump                                                               
area, the burning will self-extinguish.  In order to qualify as a                                                               
self-extinguishing cigarette, a  cigarette must meet "established                                                               
fire safety performance standards".                                                                                             
                                                                                                                                
Ms. Liccioli  advised that similar  legislation has  been enacted                                                               
in New  York, Massachusetts, Vermont, New  Hampshire, California,                                                               
and  Illinois. Utah,  Kentucky and  Oregon  have recently  passed                                                               
such  legislation.  Canada  has enacted  a  nationwide  fire-safe                                                               
cigarette mandate.                                                                                                              
                                                                                                                                
Ms. Liccioli  pointed out  that the  legislation is  supported by                                                               
the  Alaska  Fire  Chiefs Association,  the  Alaska  Firefighters                                                               
Association,  the Department  of Public  Safety Division  of Fire                                                               
Prevention, AARP, and numerous other  organizations. "There is no                                                               
known opposition to this legislation."                                                                                          
                                                                                                                                
Ms. Liccioli  concluded that this  legislation would  save lives,                                                               
reduce injuries,  and save property.  It would, in  essence, have                                                               
zero  fiscal  impact  as  the   revenue  generated  by  the  fees                                                               
established by the bill would  exceed the expense the legislation                                                               
would  incur on  the Department  of Revenue.  That Department  is                                                               
charged with  tracking the  cigarettes that  are permitted  to be                                                               
sold in the State. She urged the Committee to support the bill.                                                                 
                                                                                                                                
9:32:05 AM                                                                                                                    
                                                                                                                                
Co-Chair Hoffman  asked whether  this legislation  would increase                                                               
the cost of a pack of cigarettes.                                                                                               
                                                                                                                                
Ms.  Liccioli  assured  that  adoption  of  the  bill  would  not                                                               
increase costs to consumers.                                                                                                    
                                                                                                                                
Co-Chair  Hoffman  asked  whether  it  would  increase  costs  to                                                               
cigarette manufacturers.                                                                                                        
                                                                                                                                
Ms.  Liccioli  understood  that manufacturers  would  absorb  any                                                               
increase in  cost if  there were any.  During discussion  on this                                                               
bill in a separate committee  hearing, the industry had testified                                                               
that the "difference in cost to them was negligible".                                                                           
                                                                                                                                
9:32:52 AM                                                                                                                    
                                                                                                                                
Senator   Thomas  asked   for  further   information  about   the                                                               
compliance  markings  that would  be  required  on each  pack  of                                                               
cigarettes.                                                                                                                     
                                                                                                                                
Ms. Liccioli  specified that, in  order to  maintain consistency,                                                               
the bill  would establish marking standards.  The bill's language                                                               
would  allow  the  State's fire  marshal  to  determine  specific                                                               
marking  requirements.   The  bill  does  direct   that  markings                                                               
established in other states should be considered.                                                                               
                                                                                                                                
Senator  Thomas  asked  why  the   bill  included  language  that                                                               
specified that not more than  25 percent of the cigarettes tested                                                               
in a test may exhibit full-length burns.                                                                                        
                                                                                                                                
9:34:12 AM                                                                                                                    
                                                                                                                                
Ms. Liccioli  expressed that  this requirement  was based  on the                                                               
"Certificate of Analysis"  "Cigarette Ignition Strength Standard"                                                               
report  compiled  by  the  National   Institute  of  Standards  &                                                               
Technology  (copy  on  file).   That  analysis  "establishes  the                                                               
standards for what's acceptable".                                                                                               
                                                                                                                                
9:34:47 AM                                                                                                                    
                                                                                                                                
Senator Elton  questioned the $41,600 fiscal  impact reflected in                                                               
the  Department of  Revenue's  fiscal note  #3,  dated March  19,                                                               
2007, as that Department currently  has a division that maintains                                                               
a  listing of  cigarettes. He  thought the  bill would  have "the                                                               
greatest   impact"   on   the  Department   of   Public   Safety,                                                               
specifically the fire  marshal's office, and to  a lesser degree,                                                               
the Department of Law. He  noted, however, that the Department of                                                               
Public Safety had submitted a zero fiscal note.                                                                                 
                                                                                                                                
Senator Elton asked for further  information about the Department                                                               
of Revenue's  determination that  this legislation  would require                                                               
an additional one-half time position.                                                                                           
                                                                                                                                
Ms.  Liccioli  assured  Senator  Elton  that  the  Department  of                                                               
Revenue's  fiscal   note  had  been  discussed.   The  Department                                                               
currently maintains a directory  of cigarettes in compliance with                                                               
existing State tax  laws. That directory is "broad"  in the sense                                                               
that it  would include cigarettes  that would not meet  the fire-                                                               
safe standards identified in this bill.                                                                                         
                                                                                                                                
Ms.  Liccioli  continued.  This  legislation  would  require  the                                                               
Department to maintain two different  lists: one specific to each                                                               
fire-safe brand name and brand style cigarette certified fire-                                                                  
safe  by the  State; the  other specific  to which  cigarettes in                                                               
compliance with State tax laws.  Distributors and retailers could                                                               
only sell cigarettes listed in both directories.                                                                                
                                                                                                                                
Ms. Liccioli advised that expanding  the directory in this manner                                                               
would   initially  require   an  additional   fulltime  position.                                                               
Eventually that position would be reduced to halftime.                                                                          
                                                                                                                                
9:37:23 AM                                                                                                                    
                                                                                                                                
Senator Elton  thought that establishing  and maintaining  a list                                                               
would  "be  simpler  and  less  resource  intensive"  than  being                                                               
professed;  therefore,  he asked  that  the  Department speak  to                                                               
their fiscal note.                                                                                                              
                                                                                                                                
9:37:53 AM                                                                                                                    
                                                                                                                                
Senator Dyson also  asked whether New York and  other states that                                                               
have enacted  fire-safe cigarette legislation have  experienced a                                                               
reduction in cigarette related fires.                                                                                           
                                                                                                                                
Ms.  Liccioli  responded  that  no  in-depth  studies  have  been                                                               
conducted  in this  regard; however,  preliminary reports  in New                                                               
York  indicate there  has been  a reduction  in cigarette-related                                                               
fires.                                                                                                                          
                                                                                                                                
9:38:34 AM                                                                                                                    
                                                                                                                                
JOHANNA  BALES,  Excise  Audit  Manager,  Tax  Division/Anchorage                                                               
Office, Department of Revenue,  testified via teleconference from                                                               
Anchorage to  respond to the  fiscal note question.  She affirmed                                                               
that a  comprehensive directory of cigarettes  "approved for sale                                                               
in  the State"  is currently  maintained by  the Department.  The                                                               
entirety of "those  cigarettes must be stamped  and in compliance                                                               
"with the nationwide Master Settlement Agreement (MSA)".                                                                        
                                                                                                                                
Ms. Bales advised  that this legislation would  change the manner                                                               
in which  the Department conducts  its cigarette  enforcement and                                                               
investigation  practices. Furthermore,  the Department  "would be                                                               
the  primary agency"  tasked with  ensuring  that only  fire-save                                                               
cigarettes were sold in the State.                                                                                              
                                                                                                                                
Ms.  Bales  communicated  that  the  current  directory  includes                                                               
approximately  200  brands  of   MSA  compliant  cigarettes.  The                                                               
Department  would  be  required  to compile  an  additional  list                                                               
specific  to  fire-safe cigarettes.  "Because  of  the way  this"                                                               
legislation's  language  is  written,  that  list  would  contain                                                               
approximately 1,000 different brands of cigarettes.                                                                             
                                                                                                                                
Ms. Bales  specified that the  Department would then  be required                                                               
to compile  a third list  which would depict those  cigarettes in                                                               
compliance with  both the MSA  and the fire-save  regulations. In                                                               
addition,  the  Department  would   be  required  to  conduct  an                                                               
educational campaign for the  approximate 2,000 cigarette product                                                               
retailers and distributors in the State.                                                                                        
                                                                                                                                
Ms.  Bales  surmised  that  "additional  duties"  would  also  be                                                               
assigned to the Department.                                                                                                     
                                                                                                                                
9:41:10 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman asked  whether  the  enforcement process  would                                                               
become less burdensome as more  and more states adopted fire-save                                                               
cigarette legislation.                                                                                                          
                                                                                                                                
JERRY  BURNETT,  Legislative   Liaison,  Department  of  Revenue,                                                               
acknowledged that over time that  could be the case. However, the                                                               
immediate affect  would be that  additional work would  be levied                                                               
on  the  Department. Thus,  it  is  "reasonable" to  request  the                                                               
additional staffing reflected in  the Department's $41,600 fiscal                                                               
note.                                                                                                                           
                                                                                                                                
9:42:19 AM                                                                                                                    
                                                                                                                                
Senator Elton understood  that the testing would  be conducted by                                                               
other  entities and  the test  results would  be provided  to the                                                               
State  Fire   Marshall  in  the  Division   of  Fire  Prevention,                                                               
Department of  Public Safety.  A list would  then be  provided to                                                               
the Department of Revenue. It  appears that the responsibility of                                                               
the Department of Revenue would be  "a data entry issue". To that                                                               
point, he questioned why this  would warrant contractual expenses                                                               
and an additional staffing position  the initial year and a half-                                                               
time position thereafter.                                                                                                       
                                                                                                                                
Mr.  Burnett   asked  Ms.  Bales  to   discuss  the  Department's                                                               
responsibilities in this regard.                                                                                                
                                                                                                                                
9:43:21 AM                                                                                                                    
                                                                                                                                
Ms. Bales clarified that the  Department would be the sole entity                                                               
responsible  for   compiling  the  list.  She   noted  that  each                                                               
cigarette  manufacturer is  required to  provide their  cigarette                                                               
marking  signatures  to  both  the State  Fire  Marshal  and  the                                                               
Department of Revenue.                                                                                                          
                                                                                                                                
Ms.  Bales  asserted  that  the  Department  is  responsible  for                                                               
compiling  and   maintaining  the   directory,  and,   were  this                                                               
legislation enacted the Department  would be required to maintain                                                               
three lists.                                                                                                                    
                                                                                                                                
Ms.  Bales  noted  that  the   Department  is  also  the  primary                                                               
enforcement agency.  They seize  and destroy cigarettes  that are                                                               
non-compliant and they must ensure  that the entity from whom the                                                               
cigarettes were seized has a  hearing. All these activities incur                                                               
expenses to the Department.                                                                                                     
                                                                                                                                
Ms. Bales  pointed out  that the Department  did not  receive any                                                               
additional funding  when the  MSA was  implemented. Nor,  was its                                                               
funding increased  when it was  subsequently directed  to develop                                                               
the  directory of  approved MSA  cigarettes. These  efforts place                                                               
fiscal demands on  the Department year-round as  the directory is                                                               
updated constantly. Similar  efforts would be applied  to the two                                                               
additional lists this legislation would require.                                                                                
                                                                                                                                
Ms.  Bales stressed  that  existing Department  responsibilities,                                                               
including  its auditing  activities,  are  impacted whenever  the                                                               
Department  is   asked  to   absorb  additional   functions.  She                                                               
reiterated  the  expectation  that  additional  duties  would  be                                                               
placed on the Department by this legislation.                                                                                   
                                                                                                                                
Ms. Bales divulged  that the $83,000 the  State annually receives                                                               
from  cigarette certification  fees typically  matches Department                                                               
costs;   however,  this   legislation   would  incur   additional                                                               
expenses.                                                                                                                       
                                                                                                                                
9:45:33 AM                                                                                                                    
                                                                                                                                
WARREN CUMMINGS,  President, Alaska Fire Chief's  Association and                                                               
Fire Chief, City of Fairbanks,  testified via teleconference from                                                               
Fairbanks in  support of  the bill.  "Cigarettes are  the leading                                                               
cause of home  fire fatalities in the United  States, killing 700                                                               
to 900 people" annually, including  both smokers and non-smokers.                                                               
Approximately  four people  die  this way  each  year in  Alaska.                                                               
Numerous  people   are  also   injured  from   cigarette  related                                                               
structure fires.                                                                                                                
                                                                                                                                
Mr.  Cummings noted  that one-quarter  of the  people injured  or                                                               
killed  in  structure fires  are  not  the  person who  had  been                                                               
smoking the cigarette.  34 percent of that number  is children of                                                               
the smoker; 25  percent are their neighbor or  friend; 14 percent                                                               
are their spouse and partner; and 13 percent are their parent.                                                                  
                                                                                                                                
Mr.  Cummings  shared  that  research   conducted  in  the  1980s                                                               
concluded that fire-safe cigarettes  would eliminate three out of                                                               
four cigarette  related fire deaths. Had  cigarette manufacturers                                                               
begun producing fire  safe cigarettes at that  time, an estimated                                                               
15,000 lives would  have been saved to date. 27  lives would have                                                               
been saved in Alaska over the past ten years.                                                                                   
                                                                                                                                
Mr.  Cummings   shared  that  research  conducted   in  New  York                                                               
indicates there  has been "no  decline in cigarette  sales" since                                                               
fire  safe  cigarettes  were  introduced.  However,  a  one-third                                                               
reduction  in cigarette  fire fatalities  was experienced  during                                                               
the  first six  month  period  in 2004  when  the  law went  into                                                               
effect.                                                                                                                         
                                                                                                                                
Mr. Cummings urged the Committee to advance this legislation.                                                                   
                                                                                                                                
9:48:14 AM                                                                                                                    
                                                                                                                                
JIM  CARROLL, Representative,  AARP and  Juneau Retired  Teachers                                                               
Association  spoke   in  support  of   the  bill.  As   a  former                                                               
firefighter,  he  has  experienced  firsthand  the  aftermath  of                                                               
cigarette related fires.                                                                                                        
                                                                                                                                
9:49:50 AM                                                                                                                    
                                                                                                                                
DAVID  HULL,  Vice Chair,  Alaska  Council  on Emergency  Medical                                                               
Services, spoke  in support of  the bill. This issue  impacts all                                                               
the services  associated with  the Council.  It is  a life-safety                                                               
issue.                                                                                                                          
                                                                                                                                
Mr. Hull  avowed that rather  than being an attempt  "to regulate                                                               
the industry  or to  restrict smoking";  this legislation  "is an                                                               
effort to  curb needless  fires from  starting from  a carelessly                                                               
discarded  cigarette".  During  his   32  years  in  the  medical                                                               
services  industry, he  responded to  numerous cigarette  related                                                               
fires, including  a recent  apartment building  fire in  the City                                                               
and Borough of Juneau that  placed numerous people in harm's way.                                                               
The origin of  that fire was a discarded cigarette  that caught a                                                               
couch and ultimately the entire building on fire.                                                                               
                                                                                                                                
Mr. Hull urged  the Committee to pass this  legislation. Its goal                                                               
is to save lives and property.                                                                                                  
                                                                                                                                
9:52:17 AM                                                                                                                    
                                                                                                                                
Senator Thomas,  observing that the safe  cigarette language that                                                               
would  be required  on  each pack  of  cigarettes was  extensive,                                                               
voiced concern that it might  overshadow other required warnings.                                                               
He also  understood that in recent  years cigarette manufacturers                                                               
have  reduced the  number of  additives  included in  cigarettes.                                                               
This  has reduced  the  tendency for  cigarettes  to continue  to                                                               
burn.  He  was surprised  this  had  not  been addressed  in  the                                                               
testimony.                                                                                                                      
                                                                                                                                
9:53:20 AM                                                                                                                    
                                                                                                                                
Senator  Elton, who  had signed  on  as a  bill sponsor,  thanked                                                               
Senator  Olson for  initiating the  effort.  While he  considered                                                               
this "an  important bill" and  supported its being  reported from                                                               
Committee, there were  fiscal note issues that  should be further                                                               
addressed, specifically  that the Department of  Revenue's fiscal                                                               
note did  not address enforcement  efforts. He also  continued to                                                               
question  the Department's  request  for  additional staffing  to                                                               
maintain the directory.                                                                                                         
                                                                                                                                
9:54:24 AM                                                                                                                    
                                                                                                                                
Senator Dyson  shared his  continuing wariness  "about government                                                               
intrusions and  forcing industries to  do things that  they ought                                                               
to be doing on their  own". Nonetheless, he exampled a government                                                               
intrusion  he  had supported  which  dealt  with prostate  cancer                                                               
screening.  He had  asked the  insurance industry  why government                                                               
had to intervene and force them  to cover this since it was "such                                                               
a wise  thing for  them to  do for  their clients".  The response                                                               
"behind  closed doors"  was  that "we  would  if our  competition                                                               
would do it … we don't want to  have to run our rates up a little                                                               
and be at a competitive disadvantage".                                                                                          
                                                                                                                                
Senator  Dyson concluded  that  government  interference in  that                                                               
matter was acceptable; it was  beneficial to both individuals and                                                               
the  industry  as it  placed  them  "on  the same  level  playing                                                               
field".  He  considered  this  legislation  in  the  same  light.                                                               
Cigarette manufacturers  would have  done this  on their  own had                                                               
everyone done  it. Now that  numerous states were  taking similar                                                               
action,   he   surmised   that  cigarette   manufacturers   would                                                               
eventually  switch  to   solely  producing  fire-safe  cigarettes                                                               
rather than maintaining two production lines.                                                                                   
                                                                                                                                
9:56:18 AM                                                                                                                    
                                                                                                                                
Co-Chair Hoffman  moved to  report the  bill from  Committee with                                                               
individual recommendations and accompanying fiscal notes.                                                                       
                                                                                                                                
There  being  no  objection,  CSSB   84(JUD)  was  REPORTED  from                                                               
Committee with two previous fiscal  notes: $41,600 fiscal note #3                                                               
from the Department  of Revenue and zero fiscal note  #4 from the                                                               
Department of Public Safety.                                                                                                    
                                                                                                                                
AT EASE 9:56:57 AM / 10:01:38 AM                                                                                            
                                                                                                                                
                                                                                                                                
     SENATE BILL NO. 125                                                                                                        
     "An  Act   relating  to  the   accounting  and   payment  of                                                               
     contributions under  the defined benefit plan  of the Public                                                               
     Employees' Retirement  System of Alaska, to  calculations of                                                               
     contributions  under  that  defined  benefit  plan,  and  to                                                               
     participation  in,  and  termination of  and  amendments  to                                                               
     participation   in,  that   defined  benefit   plan;  making                                                               
     conforming  amendments;  and   providing  for  an  effective                                                               
     date."                                                                                                                     
                                                                                                                                
                                                                                                                                
This was  the third hearing for  this bill in the  Senate Finance                                                               
Committee.                                                                                                                      
                                                                                                                                
Co-Chair Stedman,  referring to  this legislation "as  the Public                                                               
Employees  cost   share  bill",   informed  the   Committee  that                                                               
discussions  with  Governor  Sarah  Palin's  Administration,  the                                                               
State's  actuaries, and  the Alaska  Retirement Management  (ARM)                                                               
Board have  been ongoing. The intent  today would be to  review a                                                               
new committee  substitute, discuss updated analysis,  and address                                                               
some policy issues. It is  anticipated that the legislation could                                                               
report from Committee within the next few weeks.                                                                                
                                                                                                                                
10:02:57 AM                                                                                                                   
                                                                                                                                
Co-Chair  Hoffman moved  to  adopt  Finance committee  substitute                                                               
Version 25-GS1074\E as the working document.                                                                                    
                                                                                                                                
There being  no objection, the  Version "E"  committee substitute                                                               
was ADOPTED as the working document.                                                                                            
                                                                                                                                
Co-Chair  Stedman  informed  Members that,  like  the  Governor's                                                               
original bill,  Version "E" would  continue to provide  "a 90-day                                                               
window  for  amending  a  participation  agreement".  He  advised                                                               
Members   however,   that   this   issue   is   of   concern   to                                                               
municipalities.                                                                                                                 
                                                                                                                                
Co-Chair Stedman  stated that  today's discussion  should include                                                               
such things as  the risk-sharing component between  the State and                                                               
municipalities  in regards  to the  unfunded  liabilities of  the                                                               
retirement  system as  well as  considering the  establishment of                                                               
"some sort of  a floor to prevent changes in  the payroll base in                                                               
the future". This has been referred to as the "gaming issue".                                                                   
                                                                                                                                
10:04:51 AM                                                                                                                   
                                                                                                                                
MILES BAKER,  Staff to Senator  Stedman, referred Members  to the                                                               
"Analysis  of Changes  CS SB  125 vs.  SB 125"  handout [copy  on                                                               
file] prepared  by Co-Chair Stedman's  office on April  22, 2007.                                                               
The  four  page  handout,  which  compared  Version  "E"  to  the                                                               
original version of the bill, was reviewed as follows.                                                                          
                                                                                                                                
     CS SB 125                                    SB 125                                                                        
     (Ver E 4/20/07)                              Corresponding                                                                 
     Bill Section        Change                   Bill Section                                                                
                                                                                                                                
     Title               Expanded to include      Title -                                                                       
                         "Alaska Retirement       Modified                                                                      
                         Management Board" and                                                                                  
                         "Teachers' Retirement                                                                                  
                         System"                                                                                                
                                                                                                                                
Mr. Baker  stated that the  title change was required  as Version                                                               
"E" included a new bill  section that slightly changed the duties                                                               
of  the  Alaska Retirement  Management  Board  (ARMB). The  title                                                               
change  was   also  required  to   specify  that   the  Teachers'                                                               
Retirement  System (TRS)  would  be changed  to  mirror the  cost                                                               
share  system  currently  in  effect  for  the  Public  Employees                                                               
Retirement System (PERS).                                                                                                       
                                                                                                                                
     CS SB 125                                    SB 125                                                                        
     (Ver E 4/20/07)                              Corresponding                                                                 
     Bill Section        Change                   Bill Section                                                                
                                                                                                                                
     Sec. 1              AS 14.25.070             N/A - New                                                                     
                         *Repeals & Reenacts the                                                                                
                          employer contribution                                                                                 
                          section of the Teachers'                                                                              
                          Retirement System(TRS)                                                                                
                          Define Benefit (DB)                                                                                   
                          statutes                                                                                              
                         *Sets the annual employer                                                                              
                          contribution rate to 12.56%,                                                                          
                          or the DB plan employer                                                                               
                          normal cost - whichever                                                                               
                          is greater.                                                                                           
                         *Rate applies to entire                                                                                
                          payroll base - regardless                                                                             
                          of Tier                                                                                               
                         *Contributions are used to                                                                             
                          pay DB and Defined Contri-                                                                            
                          bution Retirement (DCR)                                                                               
                          normal costs                                                                                          
                         *Money in excess of what                                                                               
                          Is needed to pay system's                                                                             
                          normal costs is applied                                                                               
                          to the accrued unfunded                                                                               
                          liability                                                                                             
                         *Employer contribution rate                                                                            
                          applies to retiree/rehires                                                                            
                          and their salary must be                                                                              
                          included in the payroll base                                                                          
                         *Defines "accrued unfunded                                                                             
                          liability", "employer normal                                                                          
                          cost rate" and "normal cost"                                                                          
                                                                                                                                
Mr. Baker  reviewed the  changes in Section  1 pertaining  to the                                                               
employer contribution provisions of  the TRS Defined Benefit (DB)                                                               
statutes. In the past, the  State "assumed the unfunded liability                                                               
for the TRS  systems" and made its annual payments  to the school                                                               
districts "through  an increase"  in the Base  Student Allocation                                                               
(BSA) formula. Section 1 would  change "the employer contribution                                                               
rate  for the  school districts"  to the  Defined Benefit  normal                                                               
cost rate which currently is  12.56 percent. As a result, "school                                                               
districts would  be required to pay  that rate … on  their entire                                                               
payroll base, regardless of Tier.                                                                                               
                                                                                                                                
Mr. Baker reminded  the Committee that this  payroll base concept                                                               
had  been  discussed during  the  hearings  on SB  123-RETIREM'T/                                                               
BENEFITS:  PUB EMPLYEES/TEACHERS,  the technical  fix bill  which                                                               
had previously reported from Committee.                                                                                         
                                                                                                                                
Mr. Baker  stated that TRS  employer contributions would  be used                                                               
to pay  both the  normal cost  of the DB  members and  the normal                                                               
cost of  the Defined Contribution  (DC) plan members.  Any excess                                                               
money,  which is  anticipated to  be a  minimal amount,  would be                                                               
credited toward the unfunded liabilities of the system.                                                                         
                                                                                                                                
Mr. Baker reiterated  that these provisions are  similar to those                                                               
of the PERS system.                                                                                                             
                                                                                                                                
     CS SB 125                                    SB 125                                                                        
     (Ver E 4/20/07)                              Corresponding                                                                 
     Bill Section        Change                   Bill Section                                                                
                                                                                                                                
                                                                                                                                
     Sec. 2              AS 14.25.085             N/A - New                                                                     
                         *Adds new section to statute                                                                           
                          establishing the state's                                                                              
                          contribution requirements                                                                             
                          within TRS                                                                                            
                         *As an employer, the state                                                                             
                          must make contributions                                                                               
                          on behalf of its own TRS                                                                              
                          members                                                                                               
                         *State also makes one annual                                                                           
                     direct payment to TRS, in an                                                                               
                     amount sufficient to pay the                                                                               
                     system's full unfunded lia-                                                                                
                     bility payment as determined                                                                               
                     by the board for the coming                                                                                
                     fiscal year                                                                                                
                                                                                                                                
Mr. Baker stated that Sec. 2  is new language that is specific to                                                               
the State's contribution. The State  would be required to pay the                                                               
12.56 percent contribution  rate for any of its  employees in the                                                               
TRS system.  The State would also  be required to make  an annual                                                               
payment  "to  the  administrator  of the  system"  for  the  full                                                               
payment of the unfunded liability  amount due. He reiterated that                                                               
"the mechanics"  rather than the  policy that had been  in effect                                                               
for  several  years  has  changed  in  this  regard:  instead  of                                                               
providing this  money via the  BSA to the school  districts which                                                               
then paid  the administrator, the  State would now be  paying the                                                               
retirement system directly.                                                                                                     
                                                                                                                                
Mr.  Baker revisited  Section 1.  SB 141,  the legislation  which                                                               
established  the  new  DC  plan, established  the  concept  of  a                                                               
"floor" for  the normal cost  rate. Thus, the  12.56 contribution                                                               
rate, which was  determined at the last valuation  period, is the                                                               
"floor". The normal cost rate  is recalculated on an annual basis                                                               
and  if the  normal cost  drops below  or exceeds  12.56 percent,                                                               
"the employers  would be  required to  contribute the  greater of                                                               
the two".                                                                                                                       
                                                                                                                                
     CS SB 125                                    SB 125                                                                        
     (Ver E 4/20/07)                              Corresponding                                                                 
     Bill Section        Change                   Bill Section                                                                
                                                                                                                                
     Sec. 3              AS 14.25.220             N/A - New                                                                     
                         *Adds definition of                                                                                    
                          "system" to the TRS                                                                                   
                          DB section of statute                                                                                 
                         *"System" means all                                                                                    
                          TRS plans                                                                                             
                                                                                                                                
Mr.  Baker explained  that  as a  result of  the  changes to  the                                                               
retirement system, it is important  to provide consistency in the                                                               
definitions of both the PERS and TRS plans.                                                                                     
                                                                                                                                
10:12:03 AM                                                                                                                   
                                                                                                                                
     CS SB 125                                    SB 125                                                                        
     (Ver E 4/20/07)                              Corresponding                                                                 
     Bill Section        Change                   Bill Section                                                                
                                                                                                                                
     Sec. 4              AS 37.10.220(a)(8)       N/A - New                                                                     
                         *Amends Alaska Retire-                                                                                 
                        ment Management                                                                                         
                         Board's (ARMB)                                                                                         
                          powers and duties                                                                                     
                         (page 4, lines 17-19)                                                                                  
                         *Board can't set an                                                                                    
                          amortization period                                                                                   
                          for liquidating the                                                                                   
                          accrued unfunded                                                                                      
                          liability of less                                                                                     
                         than 25 years                                                                                          
                                                                                                                                
Mr.  Baker stated  that  this section  addresses  changes to  the                                                               
ARMB. Since  the State  would now be  responsible for  picking up                                                               
the difference  between what employers are  contributing and what                                                               
the  Board establishes  as the  amount required  to pay  down the                                                               
retirement system's  unfunded liability, it was  deemed necessary                                                               
to insure that the ARMB  did not establish a shorter amortization                                                               
period  than was  feasible to  pay off  the liability.  25 to  30                                                               
years is the actuarial industry  standard; establishing a shorter                                                               
time period would increase the rate.                                                                                            
                                                                                                                                
     CS SB 125                                    SB 125                                                                        
     (Ver E 4/20/07)                              Corresponding                                                                 
     Bill Section        Change                   Bill Section                                                                
                                                                                                                                
     Sec. 5              AS 39.35.100             Sec. 1                                                                        
                         *No change                                                                                             
                                                                                                                                
     Sec. 6              AS 39.35.115             Sec. 2-                                                                       
                         *Slightly reworded to    Modified                                                                      
                          match language already                                                                                
                          passed in SB 123-Tech-                                                                                
                          nical Clarification Bill                                                                              
                                                                                                                                
Mr. Baker stated  that this change would align  the language with                                                               
that of SB 123.                                                                                                                 
                                                                                                                                
     CS SB 125                                    SB 125                                                                        
     (Ver E 4/20/07)                              Corresponding                                                                 
     Bill Section        Change                   Bill Section                                                                
                                                                                                                                
     Sec. 7              AS 39.35.125(a)          Sec. 3                                                                        
                         * No change                                                                                            
                                                                                                                                
     Sec. 8              AS 39.35.160(c)          Sec. 4                                                                        
                         * No change                                                                                            
                                                                                                                                
     Sec. 9              AS 39.35.255             Sec. 5 -                                                                      
                         *Adds a new section      Modified                                                                      
                          that rewrites the                                                                                     
                          employer contribu-                                                                                    
                          tion section of the                                                                                   
                          Public Employee's                                                                                     
                          Retirement System                                                                                     
                          (PERS) DB statutes                                                                                    
                        *Sets the annual                                                                                        
                          employer contribution                                                                                 
                          rate to 22%, or the                                                                                   
                          DB plan employer normal                                                                               
                          cost - whichever is                                                                                   
                          greater                                                                                               
                         *Rate applies to entire                                                                                
                         payroll base -                                                                                         
                          regardless of Tier                                                                                    
                         *Contributions are used                                                                                
                          to pay DB and DCR normal                                                                              
                          costs                                                                                                 
                         *Money in excess of what                                                                               
                          is needed to pay                                                                                      
                          system's normal costs -                                                                               
                          are applied to the                                                                                    
                          accrued unfunded liability                                                                            
                         *22% employer contribution                                                                             
                        rate applies to                                                                                         
                          retire/rehires and their                                                                              
                          salary must be included                                                                               
                          in the payroll base                                                                                   
                         *Defines "accrued                                                                                      
                          unfunded liability",                                                                                  
                          "employer normal cost                                                                                 
                          rate" and "normal cost"                                                                               
                                                                                                                                
Mr. Baker noted  that the provisions in Section 1  applied to TRS                                                               
and the provisions  in Sec. 9 would apply to  PERS. Both the PERS                                                               
and TRS systems  would be cost share systems in  which all assets                                                               
and  liabilities   would  be  "pooled"  and   shared  across  all                                                               
employees. Employers  would be required  to "pay a fixed  rate of                                                               
22 percent  on their entire  payroll, regardless of  Tier". Those                                                               
contributions would  then be  used by  the administrator"  to pay                                                               
the DB normal  cost as well as the DC  normal cost. Any remaining                                                               
balance would be directed toward the unfunded liability.                                                                        
                                                                                                                                
     CS SB 125                                    SB 125                                                                        
     (Ver E 4/20/07)                              Corresponding                                                                 
     Bill Section        Change                   Bill Section                                                                
                                                                                                                                
     N/A                 AS 39.35.260             Sec. 6 -                                                                      
                         *No longer necessary.    Deleted                                                                       
                          Incorporated into                                                                                     
                          AS 39.35.255                                                                                          
                                                                                                                                
     N/A                 AS 39.35.260             Sec. 7 -                                                                      
                         *No longer necessary.    Deleted                                                                       
                          Incorporated into                                                                                     
                          AS 39.35.255                                                                                          
                                                                                                                                
[NOTE: These sections were not discussed.]                                                                                      
                                                                                                                                
10:14:22 AM                                                                                                                   
                                                                                                                                
     CS SB 125                                    SB 125                                                                        
     (Ver E 4/20/07)                              Corresponding                                                                 
     Bill Section        Change                   Bill Section                                                                
                                                                                                                                
     Sec. 10             AS 39.35.280             N/A - New                                                                     
                         *Repeals and reenacts                                                                                  
                          the section of statute                                                                                
                          dealing with the                                                                                      
                          state's contribution                                                                                  
                          requirements within PERS                                                                              
                         *As an employer, state                                                                                 
                          must make the 22%                                                                                     
                          contribution on behalf                                                                                
                          of its own PERS members                                                                               
                         *State also makes one                                                                                  
                          annual direct payment to                                                                              
                          PERS, in an amount                                                                                    
                          sufficient to pay                                                                                     
                          the system's full                                                                                     
                          unfunded liability                                                                                    
                          payment as determined                                                                                 
                          by the board for                                                                                      
                          the coming fiscal year                                                                                
                                                                                                                                
Mr. Baker  stated that Sec.  10 would apply  to PERS in  a manner                                                               
similar to  how Sec. 2 applied  to TRS. In addition  to paying 22                                                               
percent on  its own  employees, this  section would  require "the                                                               
State  to make  an  appropriation  to the  system  of the  amount                                                               
required above the  22 percent collected from  all PERS employers                                                               
to meet the  Board's adopted rate to fund  the unfunded liability                                                               
for that fiscal year".                                                                                                          
                                                                                                                                
     CS SB 125                                    SB 125                                                                        
     (Ver E 4/20/07)                              Corresponding                                                                 
     Bill Section        Change                   Bill Section                                                                
                                                                                                                                
     Sec. 11             AS 39.35.520(a)          Sec. 8                                                                        
                         *No change                                                                                             
                                                                                                                                
     Sec. 12             AS 36.35.610             Sec. 9                                                                        
                         *No change                                                                                             
                                                                                                                                
     Sec. 13             AS 39.35.615(a)          Sec. 10                                                                       
                         *No change                                                                                             
                                                                                                                                
     Sec. 14             AS 39.35.615             Sec. 11                                                                       
                         *No change                                                                                             
                                                                                                                                
     Sec. 15             AS 39.35.620             Sec. 12                                                                       
                         *No change                                                                                             
                                                                                                                                
[NOTE: Sections 11, 12, 13, 14, and 15 were not discussed.]                                                                     
                                                                                                                                
10:15:20 AM                                                                                                                   
                                                                                                                                
     CS SB 125                                    SB 125                                                                        
     (Ver E 4/20/07)                              Corresponding                                                                 
     Bill Section        Change                   Bill Section                                                                
                                                                                                                                
     Sec. 16             AS 39.35.625             N/A - New                                                                     
                         *Addition requested by                                                                                 
                          the Administration                                                                                    
                         *Adds a new section                                                                                    
                          of statute indicating                                                                                 
                          how PERS termination                                                                                  
                          costs will be deter-                                                                                  
                          mined under a new                                                                                     
                          cost share system                                                                                     
                                                                                                                                
Mr. Baker informed that this section  was added at the request of                                                               
the Administration as  the original bill they  introduced did not                                                               
clarify "how termination costs would  be determined going forward                                                               
if an employer decided to completely exit from the system".                                                                     
                                                                                                                                
     CS SB 125                                    SB 125                                                                        
     (Ver E 4/20/07)                              Corresponding                                                                 
     Bill Section        Change                   Bill Section                                                                
                                                                                                                                
     Sec. 17             AS 39.35.650             Sec. 13                                                                       
                        *No change                                                                                              
                                                                                                                                
[NOTE: Sec. 17 was not discussed.]                                                                                              
                                                                                                                                
10:15:40 AM                                                                                                                   
                                                                                                                                
     CS SB 125                                    SB 125                                                                        
     (Ver E 4/20/07)                              Corresponding                                                                 
     Bill Section        Change                   Bill Section                                                                
                                                                                                                                
     Sec. 18             Repeals                  Sec. 14                                                                       
                        *Adds AS 39.35.260 to                                                                                   
                          the list of repeals                                                                                   
                          (see SB 125 Sec. 6 &                                                                                  
                          Sec. 7 comments above)                                                                                
                         *Removes AS 39.35.280                                                                                  
                          (see CSSB 125 Sec. 10                                                                                 
                        comments above)                                                                                         
                                                                                                                                
Mr. Baker noted that Sec. 18 would repeal AS 39.35.260 and                                                                      
remove references to AS 39.35.280, as new provisions in the bill                                                                
addressed those issues.                                                                                                         
                                                                                                                                
     CS SB 125                                    SB 125                                                                        
     (Ver E 4/20/07)                              Corresponding                                                                 
     Bill Section        Change                   Bill Section                                                                
                                                                                                                                
     Sec. 19             Transition Language      Sec. 15 -                                                                     
                         *Subsection (a)- No      Modified                                                                      
                          change                                                                                                
                         *Subsection (b) - Adds                                                                                 
                         new sentence (Page                                                                                     
                         12, Lines 5-8)                                                                                         
                              -Sentence added                                                                                   
                               at the request                                                                                   
                               of the Adminis-                                                                                  
                               tration to conform                                                                               
                               to House amendments                                                                              
                               to SB 123 - Technical                                                                            
                               Clarification Bill                                                                               
                              -Elected officials                                                                                
                               cannot be amended                                                                                
                               into participation                                                                               
                               agreements unless                                                                                
                               they make at least                                                                               
                               the same monthly                                                                                 
                               salary as Legislators                                                                            
                            ($2,001)                                                                                            
                         *Subsection (c) - New                                                                                  
                          subsection                                                                                            
                              -Sets FY 08 contri-                                                                               
                               bution rates below                                                                               
                               22% for certain poli-                                                                            
                               tical subdivisions                                                                               
                               that make PERS contri-                                                                           
                               butions in excess of                                                                             
                               what was required                                                                                
                               between FY05 - 07                                                                                
                              -Rates are for 1 year                                                                             
                               only and will allow                                                                              
                               these employers to recoup                                                                        
                               their excess contributions                                                                       
                            in FY 08                                                                                            
                                                                                                                                
Mr. Baker  reviewed the changes  in Sec. 19, subsections  (b) and                                                               
(c), page  12 of the bill.  Language was added to  subsection (b)                                                               
at  the  request of  the  Administration.  It would  conform  the                                                               
Version  "E"  committee  substitute  to language  adopted  "in  a                                                               
technical fix  bill in the  House that  says that if  an employer                                                               
opts  in their  elected officials"  only those  elected officials                                                               
who are drawing a salary equal  or above that made by Legislators                                                               
would be allowed.                                                                                                               
                                                                                                                                
Mr.  Baker  pointed  out  that  were  this  legislation  adopted,                                                               
employers  would have  90 days  after the  effective date  of the                                                               
bill,  "to  make any  participation  agreement  changes to  their                                                               
current  PERS plan".  They  could opt  out of  the  plan, add  or                                                               
delete classes of employees,  including elected officials meeting                                                               
the aforementioned  criteria. No  changes would be  allowed after                                                               
the close of that 90-day window.                                                                                                
                                                                                                                                
10:17:57 AM                                                                                                                   
                                                                                                                                
Mr. Baker identified  Sec. 19 subsection (c) as  new language. He                                                               
explained that  when the  Administration introduced  the original                                                               
version of  the bill,  a packet  of spreadsheets  had accompanied                                                               
it. Those  spreadsheets included a  reference to a group  of PERS                                                               
employers, referred  to as  "Heroes", who,  "during the  last two                                                               
years", in addition to paying  the amount required of them, "paid                                                               
an additional  amount of  money, assuming  that they  were paying                                                               
off their own individual liability".  One of the Heroes, the City                                                               
of Soldotna,  had also made  a one  million dollar deposit  in FY                                                               
2005 (FY 05).                                                                                                                   
                                                                                                                                
Mr. Baker stated that consideration  must be given to the Heroes,                                                               
else wise,  "those payments  would have been  for naught"  if the                                                               
retirement  system  simply  transitioned   "to  a  pooled  shared                                                               
liability system". "The  whole pool is now  benefiting from their                                                               
generosity."                                                                                                                    
                                                                                                                                
Mr. Baker thus informed the  Committee that transitional language                                                               
was  included in  Sec. 19  subsection  (c) of  Version "E"  "that                                                               
would set a one year contribution  rate" for the Heroes for FY 08                                                               
"that would allow them to  recoup the money they contributed over                                                               
the last two years". Then,  beginning with the FY 09 contribution                                                               
rate   period,  the   Heroes  rates   would   align  with   other                                                               
municipalities at the 22 percent rate.                                                                                          
                                                                                                                                
Mr.  Baker  referred  the Committee  to  a  one-page  spreadsheet                                                               
titled "FY  08 Rate  Adjustments Required  to Recoup  Excess Muni                                                               
PERS Contributions from  Prior 3 Years" [copy  on file], prepared                                                               
by Co-Chair Stedman's office on  April 22, 2007. This spreadsheet                                                               
depicted the mechanics of the calculations.                                                                                     
                                                                                                                                
Mr. Baker  pointed out, however,  that the City of  Soldotna's FY                                                               
08 contribution rate  at the 22 percent level  would be $537,000.                                                               
They have contributed an excess  of $1,276,229, and even if their                                                               
contribution level  dropped to  zero in FY  08, they  would still                                                               
have  an excess  balance under  the proposed  formula in  Version                                                               
"E".  Thus,  "it  is contemplated  that  the  Legislature"  would                                                               
address  this and  other Heroes'  excess  payments in  the FY  08                                                               
Capital Budget.                                                                                                                 
                                                                                                                                
     CS SB 125                                    SB 125                                                                        
     (Ver E 4/20/07)                              Corresponding                                                                 
     Bill Section        Change                   Bill Section                                                                
                                                                                                                                
     Sec. 20             Transition Language      Sec. 16                                                                       
                         *No change                                                                                             
                                                                                                                                
     Sec. 21             Revisor's Instructions   Sec. 17                                                                       
                         *No change                                                                                             
                                                                                                                                
                                                                                                                                
     Sec. 22 &           Effect Date Clauses      Sec. 18 &                                                                     
                                                                                                                                
     Sec. 23             *No change               Sec. 19                                                                       
                                                                                                                                
[NOTE: Sections 20, 21, 22, and 23 were not discussed.]                                                                         
                                                                                                                                
Mr. Baker  concluded his overview  of the changes in  the Version                                                               
"E" committee substitute.                                                                                                       
                                                                                                                                
10:20:53 AM                                                                                                                   
                                                                                                                                
                             SB 125                                                                                             
         Setting Employer Contribution Rates in Statute                                                                         
  PowerPoint Presentation by the Legislative Finance Division                                                                   
                                                                                                                                
DAVID TEAL,  Director, Legislative  Finance Division,  utilized a                                                               
PowerPoint  presentation [copy  on  file] to  address the  fiscal                                                               
component of the bill.                                                                                                          
                                                                                                                                
     Page 2                                                                                                                     
                                                                                                                                
     Categorization of the Governor's FY 08 GF Increments                                                                       
     ($750.8 Million Total from FY 07 Base)                                                                                     
                                                                                                                                
     [Pie chart depicting General Fund increments as proposed in                                                                
     the Governor's FY 08 budget.]                                                                                              
                                                                                                                                
Mr. Teal informed the Committee  that the information depicted on                                                               
page 2, mirrored information provided  earlier in the Legislative                                                               
Session  when Governor  Sarah Palin  first introduced  her FY  08                                                               
budget.                                                                                                                         
                                                                                                                                
Mr. Teal  noted that this  information was included solely  "as a                                                               
reminder  of   the  magnitude"   of  the   retirement  increments                                                               
supported by  the State's  general funds  (GF). For  example: the                                                               
School District TRS/PERS FY 08  GF increment of $207,400,000; the                                                               
Agency Retirement, Health, and Wage  increases FY 08 GF increment                                                               
of $186,400,000;  and the  Political Subdivisions  PERS FY  08 GF                                                               
increment  of $77,500,000.  In excess  of $450  million would  be                                                               
spent to support these retirement increases in the FY 08 budget.                                                                
                                                                                                                                
     Page 3                                                                                                                     
                                                                                                                                
     ·  The pie chart is  based on June 2005  actuarial valuation                                                               
        (and a PERS contribution rate just under 40%).                                                                          
     ·  Preliminary June  2006 actuarial  valuation put  the PERS                                                               
        rate near 47%.                                                                                                          
     ·  Each point  means a  $17  million cost  increase, so  the                                                               
        amount of PERS contributions could increase another $120                                                                
        million in FY09.                                                                                                        
                                                                                                                                
Mr.  Teal   reviewed  the  information.   Each  percent   of  the                                                               
approximately  $1,700,000,000  wage  base "carries  with  it  $17                                                               
million   worth   of   additional   contributions".   "The   PERS                                                               
contribution could be understated by as much as $120 million."                                                                  
                                                                                                                                
10:22:39 AM                                                                                                                   
                                                                                                                                
     Page 4                                                                                                                     
                                                                                                                                
     Liability/Asset Gap                                                                                                        
     PERS/TRS Funding Ratio                                                                                                     
                                                                                                                                
     [Chart comparing  the PERS/TRS  Accrued Liability  to Assets                                                               
     for the time  period FY 97 through Rate Year  FY 08. The gap                                                               
     between  accrued  liabilities  and assets  is  the  Unfunded                                                               
     Liability of  the PERS/TRS  Systems. The  Unfunded Liability                                                               
     in FY 08 is anticipated to be $6.9 billion.]                                                                               
                                                                                                                                
Mr.   Teal  stated   that  this   chart  reflects   the  unfunded                                                               
liabilities of the systems.                                                                                                     
                                                                                                                                
10:22:59 AM                                                                                                                   
                                                                                                                                
     Page 5                                                                                                                     
                                                                                                                                
     Recap of Major Points                                                                                                      
                                                                                                                                
     1. The gap will grow before it begins to fill.                                                                             
          - 5 point cap on annual rate increases                                                                                
          - lag between action and response                                                                                     
     2. Unfunded liability is not going  away by itself - it is a                                                               
          bill that must be paid.                                                                                               
     3.  The  State  will  pay   most  of  the  bill,  either  by                                                               
          appropriating money to agencies and school districts                                                                  
          (so they can pay their bills) or by appropriating                                                                     
          money directly to DOA.                                                                                                
     4. The cost of the  direct and indirect methods is identical                                                               
          in most cases.                                                                                                        
    5. Paying the bill is not the same as fixing the system.                                                                    
                                                                                                                                
Mr. Teal reviewed the information  and stressed that the unfunded                                                               
liability  gap  would  continue  to  grow  before  it  begins  to                                                               
decrease. This is  because, for a period of time,  the system was                                                               
under-funded  as a  result of  there being  a five  point maximum                                                               
annual  rate  increase  limit imposed  on  employer  contribution                                                               
rates. Another reason  is the two to three year  lag time between                                                               
when  a rate  was  adopted and  when the  payments  at that  rate                                                               
impacted the unfunded liability.                                                                                                
                                                                                                                                
10:24:13 AM                                                                                                                   
                                                                                                                                
     Page 6                                                                                                                     
                                                                                                                                
     Moving Forward                                                                                                             
                                                                                                                                
     Goal: Find  a permanent fix  that is affordable to  both the                                                               
     state and its political subdivisions.                                                                                      
                                                                                                                                
     1. Paying TRS  costs directly to DOA in order  to reduce the                                                               
          employer contribution rate will save $11 million                                                                      
          annually in the University's Optional Retirement Plan.                                                                
          (In the operating budget; SB 125 makes the fix                                                                        
          permanent)                                                                                                            
     2. Cap the employer contribution rate to PERS.                                                                             
     3. Revise actuarial methods.                                                                                               
                                                                                                                                
Mr. Teal  reviewed the  goal sought  by this  bill and  the three                                                               
components  that would  support that  effort. He  noted that  the                                                               
ARMB  supports making  payments for  the  costs of  PERS and  TRS                                                               
directly to  the Department of Administration.  This effort would                                                               
allow the TRS employer contribution  rates to be reduced to 12.56                                                               
percent. This  would save the University  of Alaska approximately                                                               
$11 million a year on its annual optional retirement system.                                                                    
                                                                                                                                
Mr. Teal advised that the  savings to the University have already                                                               
been considered in the FY 08  operating budget as the TRS rate is                                                               
funded in that budget. Thus, "in  the perspective of SB 125, this                                                               
first point is not particularly interesting."                                                                                   
                                                                                                                                
Mr.  Teal  informed  the  Committee   that  ARMB  "has  passed  a                                                               
resolution in  support of  direct payments  to the  Department of                                                               
Administration".  This direction  is included  in both  the House                                                               
and Senate operating budgets, and  there is no impact beyond that                                                               
unless,  the discussion  was expanded  to address  K-12 education                                                               
funding.                                                                                                                        
                                                                                                                                
Mr. Teal advised  that he would not be  addressing K-12 education                                                               
funding at  this point, as the  intent is to keep  the discussion                                                               
focused on  the retirement funding issue.  Nonetheless, when K-12                                                               
education funding legislation was  before the Committee, it would                                                               
include some TRS issues that would require addressing.                                                                          
                                                                                                                                
10:26:14 AM                                                                                                                   
                                                                                                                                
     Page 7                                                                                                                     
                                                                                                                                
     Impact of SB 125's Fixed PERS Rate                                                                                         
                                                                                                                                
     1. The impact  is primarily on political  subdivisions - the                                                               
          state pays the full bill for agencies.                                                                                
          A fixed rate can make retirement costs more affordable                                                                
          to political subdivisions by shifting costs to the                                                                    
          state; a fixed rate for employers does not reduce the                                                                 
          total amount that must be paid.                                                                                       
     2 Implements  two of AML's three  pillars - a fixed  rate is                                                               
          as stable and predictable as possible.                                                                            
     3. The third  pillar - affordability - is  more complex. The                                                             
       bill must be paid; the question is "Who pays it?"                                                                        
                                                                                                                                
     Resolution: SB 125  set employer rates in statute  at 22% of                                                               
     payroll, with the state picking up the remainder.                                                                          
                                                                                                                                
Mr. Teal reviewed the information  and noted that when the Alaska                                                               
Municipal  League   (AML)  testified  on  this   bill,  they  had                                                               
requested  the retirement  funding fix  consider three  "pillars:                                                               
stability, predictability, and affordability".                                                                                  
                                                                                                                                
Mr. Teal stated  that the 22 percent fixed rate  proposed in this                                                               
legislation  clearly addresses  the stability  and predictability                                                               
pillars. However,  a tremendous amount of  consideration has been                                                               
given   to  the   more  complex   affordability  pillar   in  the                                                               
development of this bill.                                                                                                       
                                                                                                                                
Mr. Teal concluded  however, that the bill must be  paid, and the                                                               
question  is whether  the State  or the  municipalities would  be                                                               
responsible for  paying it. The  resolution is that  the employer                                                               
rate  would be  set at  22 percent  of payroll,  "with the  State                                                               
picking up the remainder of the cost".                                                                                          
                                                                                                                                
10:27:57 AM                                                                                                                   
                                                                                                                                
     Page 8                                                                                                                     
                                                                                                                                
     Contribution Rates on Total Alaska PERS Payroll                                                                            
     Based on Buck's 2006 Actuarial Valuation                                                                                   
                                                                                                                                
     [A   chart  comparing   four  employer   contribution  level                                                               
     scenarios  over  the  period from  2008  through  2032:  the                                                               
     employer  contribution  levels  that would  have  been  paid                                                               
     based  on actuarial  valuations;  the employer  contribution                                                               
     levels that  would have  been paid based  on a  Level Dollar                                                               
     Rate   mechanism  recommended   by  the   actuary  "as   the                                                               
     appropriate  method to  use for  a  closed" Defined  Benefit                                                               
     System; the fixed 22 percent  contribution level proposed in                                                               
     this bill; and a contribution  rate level recommended by the                                                               
     actuarial for an open Defined Benefit System plan.]                                                                        
                                                                                                                                
Mr. Teal  stated that this  chart is best explained  by realizing                                                               
that  under  the  provisions  of   this  bill,  the  municipality                                                               
employer  contribution   rate  would   be  set  "at   22  percent                                                               
regardless  of what  the full  rate  is". He  cautioned that  the                                                               
chart  solely  depicts  contribution  rate levels  and  does  not                                                               
reflect costs.                                                                                                                  
                                                                                                                                
10:28:55 AM                                                                                                                   
                                                                                                                                
     Page 9                                                                                                                     
                                                                                                                                
     State Spending for Municipal PERS Assistance                                                                               
     Based on Buck's 2006 Valuation                                                                                             
     (Real 2008 Dollars)                                                                                                        
                                                                                                                                
     [A chart reflecting  the costs to the State  under the fixed                                                               
     municipal  22 percent  contribution  rate  proposed in  this                                                               
     legislation as  calculated by either  the Actuarial  Rate or                                                               
     the Level Dollar Rate.]                                                                                                    
                                                                                                                                
     Page 10                                                                                                                    
                                                                                                                                
     Reading the Charts                                                                                                         
                                                                                                                                
     ·  The cost  of  municipal PERS  assistance  is expected  to                                                               
        decline over time.                                                                                                      
     ·  Both payment schedules  eliminate the  unfunded liability                                                               
        in 25 years or less, but the Level Dollar method costs                                                                  
        more, especially in the near-term.                                                                                      
     ·  The amortization  methods used  by the  actuaries produce                                                               
        rates that are too low in the distant future, implying                                                                  
        that near-term rates are too high.                                                                                      
     ·  Risk Sharing is not  likely to be  needed - it  is likely                                                               
        that municipalities will push for a rate reduction in a                                                                 
        few years.                                                                                                              
                                                                                                                                
Mr.  Teal noted  that,  under the  Actuarial  Rate scenario,  the                                                               
State would be responsible for  approximately $45 million dollars                                                               
in FY 08.  The amount would peak at approximately  $65 million in                                                               
2010  and  then  decline.  While  the  State's  obligation  would                                                               
initially be higher under the  Level Dollar Rate scenario than it                                                               
would be  under Actuarial Rate  scenario, both would  peak around                                                               
2010  and then  decline. It  should be  noted that  "both payment                                                               
schedules eliminate the unfunded liability in 25 years or less".                                                                
                                                                                                                                
Mr. Teal  stated that the  unfunded liability is  eliminated when                                                               
the rate  reaches the Normal Rate,  which "is the cost  of simply                                                               
funding  the  system on  a  continuing  basis".  It is  the  Past                                                               
Service Cost, which  is "the cost to pay  the unfunded liability"                                                               
that encompasses everything above the Normal Rate cost.                                                                         
                                                                                                                                
Mr. Teal stated  that by the end of the  amortization period, the                                                               
payment schedule would be below  the Normal Cost rate. This would                                                               
indicate  that  "the  unfunded  liability  has  been  paid  off".                                                               
However, the  fact that "the  rates actually go below  the Normal                                                               
Cost rate and don't just meet  it gradually … implies that rates"                                                               
in the initial years are too high.                                                                                              
                                                                                                                                
Mr. Teal noted  that, as mentioned in  Co-Chair Stedman's initial                                                               
remarks, another  issue of  concern is  that of  "'risk sharing'.                                                               
The Administration has expressed concern  that" there is too much                                                               
risk to  the State involved  in the  22 percent rate  plan. While                                                               
municipalities would  be given stability and  predictability, the                                                               
State  would   subject  itself  to   risks  by  agreeing   to  be                                                               
responsible for the balance of the unknown costs.                                                                               
                                                                                                                                
Mr.  Teal  stated that  risk  sharing  was  not included  in  the                                                               
original  bill  and  has  not been  addressed  in  the  committee                                                               
substitute. It  was not addressed  in the original bill  as rates                                                               
are declining  and risk levels  decline in tandem  with declining                                                               
rates.                                                                                                                          
                                                                                                                                
Mr. Teal pointed  out that rates are not  anticipated to continue                                                               
their upward  trend as originally  "feared when we  first started                                                               
looking" at establishing a fixed 22 percent rate.                                                                               
                                                                                                                                
     Page 11                                                                                                                    
                                                                                                                                
     What is not in the Charts                                                                                                  
                                                                                                                                
     · Money to fund the "blue line" amortization schedule is in                                                                
        the operating budget; the $125 million required to follow                                                               
        the "black line" schedule has not been appropriated.                                                                    
     · The revised revenue forecast essentially eliminates the                                                                  
        FY 08 surplus projected earlier, and a deficit is                                                                       
        projected for FY 09. This raises questions about the                                                                    
        wisdom of paying as much as possible as soon as possible.                                                               
     · We are no longer required to follow the black line                                                                       
        because the full wage base is subject to contributions,                                                                 
        meaning that PERS no longer operates as a closed system                                                                 
        for funding purposes.                                                                                                   
                                                                                                                                
Mr. Teal  advised that funding  of the Level Dollar  Rate funding                                                               
method, depicted  by the "black  line" on the chart,  is included                                                               
in the  FY 08  operating budget. Funding  for the  Actuarial Rate                                                               
funding method, depicted  by the "blue line" on  the chart, which                                                               
was adopted by the ARMB, is not.                                                                                                
                                                                                                                                
Mr. Teal  next reminded the  Committee that the  recently revised                                                               
revenue   forecast  eliminated   the   surplus   that  had   been                                                               
anticipated in FY  08. Due to the deficit anticipated  for FY 09,                                                               
the  State would  not have  the cash  flow required  to pay  high                                                               
rates and  high cash  flow toward the  unfunded liability  in the                                                               
initial years.                                                                                                                  
                                                                                                                                
Mr. Teal also advised there is  a lack of certainty in regards to                                                               
whether  to adopt  the Actuarial  Rate or  the Level  Dollar Rate                                                               
methodology. During  discussions with  the State's  actuary, Buck                                                               
Consultants, the  Division learned that  the rate adopted  by the                                                               
ARMB was  appropriate for  a closed system;  however, if  SB 123-                                                               
RETIREM'T/  BENEFITS:PUB EMPLYEES/TEACHERS  is enacted,  the full                                                               
wage base  would be  subject to  contribution. Thus,  even though                                                               
"it  is technically"  a closed  system in  that employees  cannot                                                               
join  the  Defined Benefit  System,  "the  PERS system  would  no                                                               
longer  act  as  a  closed  system".  However,  "from  a  funding                                                               
perspective, the  employer will be paying  the same contributions                                                               
on new employees  as they are on existing employees,  so that the                                                               
system, for actuarial purposes, acts like an open system".                                                                      
                                                                                                                                
Mr. Teal concluded  therefore that "there would be no  need to go                                                               
to the higher rate schedule".                                                                                                   
                                                                                                                                
10:34:02 AM                                                                                                                   
                                                                                                                                
     Page 12                                                                                                                    
                                                                                                                                
     Where Do We Go From Here?                                                                                                  
                                                                                                                                
     Work with the ARM Board to Revise Actuarial Methods and                                                                    
     Reset FY 08 Rates                                                                                                          
                                                                                                                                
     Objectives:                                                                                                                
          1. A permanent, affordable fix for the burden that                                                                    
          contribution rates above 22% would place on political                                                                 
          subdivisions.                                                                                                         
          2. A smooth curve that pays off the unfunded liability                                                                
          in 25 years.                                                                                                          
                                                                                                                                
Mr. Teal reviewed actions that  should be taken. Buck Consultants                                                               
has been working  on developing a proposal that  would provide "a                                                               
smooth curve that pays off  the unfunded liability and meets the"                                                               
Normal Cost Rate in 25 years.                                                                                                   
                                                                                                                                
Mr. Teal concluded his remarks.                                                                                                 
                                                                                                                                
10:35:06 AM                                                                                                                   
                                                                                                                                
Senator  Thomas  asked  for  further  information  regarding  the                                                               
information  on  page 3  that  specified  that each  contribution                                                               
point increase would equate to a $17 million PERS cost increase.                                                                
                                                                                                                                
10:35:35 AM                                                                                                                   
                                                                                                                                
Mr.  Teal  explained  that  the  total wage  base  for  all  PERS                                                               
employees is approximately  $1.7 billion. Thus, the  cost of each                                                               
percent   required  to   pay  into   the  retirement   system  is                                                               
approximately   $17   million.   For  example,   increasing   the                                                               
contribution rate from 40 percent to  47 percent would be a seven                                                               
percent  increase.  This  would   equate  to  approximately  $120                                                               
million.                                                                                                                        
                                                                                                                                
AT EASE 10:36:14 AM / 10:37:38 AM                                                                                           
                                                                                                                                
ANNETTE  KREITZER,  Commissioner, Department  of  Administration,                                                               
informed  the Committee  that  the  Administration debated  about                                                               
whether or  not to include  a 90-day "window" in  this cost-share                                                               
bill. Ultimately the decision was made  to support it as a matter                                                               
of  fairness   to  the  municipalities.  During   this  "window",                                                               
municipalities could  "amend their participation  agreements" and                                                               
opt groups  of employees in or  out of the PERS  system. She also                                                               
noted   that  the   House  added   language   that  would   allow                                                               
municipalities to  opt in local elected  officials, provided they                                                               
met specified criteria, during this 90-day period.                                                                              
                                                                                                                                
Commissioner Kreitzer  stated that  an effort  was made  to craft                                                               
the 90-day window  language in a manner which  would both provide                                                               
flexibility  to  municipalities and,  at  the  same time,  negate                                                               
their ability to conduct "gamesmanship",  a term that refers to a                                                               
situation in which a municipality might  opt in and out groups of                                                               
employees   to  their   benefit.   Further   discussion  on   the                                                               
appropriate language  should occur  before the bill  reports from                                                               
Committee.                                                                                                                      
                                                                                                                                
10:39:44 AM                                                                                                                   
                                                                                                                                
Co-Chair  Stedman   asked  for  further  information   about  the                                                               
potential for gaming.                                                                                                           
                                                                                                                                
10:39:55 AM                                                                                                                   
                                                                                                                                
Commissioner Kreitzer  understood "gamesmanship" is a  term for a                                                               
situation in which  "you [an employer] move  covered employees in                                                               
and out of  your participation agreement", and  in effect "shrink                                                               
the amount of  your payroll base". Thus, when  transitioning to a                                                               
cost  share system,  the concern  is whether  "you [an  employer]                                                               
should force folks to pay for  members that you had opted out of,                                                               
that you had  taken out of the  PERS system that now  you may, in                                                               
this 90-day period, want to add back in".                                                                                       
                                                                                                                                
Senator  Elton characterized  gamesmanship "as  a semi-pejorative                                                               
term". He exampled  a situation in which the City  and Borough of                                                               
Juneau rehired a  retired individual as the  airport manager "and                                                               
that position  was removed from  the PERS plan because  of that".                                                               
He understood  that under this  legislation, the City  would have                                                               
90 days  to decide whether or  not to opt back  in that position,                                                               
for, in the future, a  person with a different circumstance might                                                               
hold that position.                                                                                                             
                                                                                                                                
Commissioner Kreitzer  affirmed. As exhibited by  Senator Elton's                                                               
example, many  types of circumstances  could be addressed  in the                                                               
90-day   period.   She   apologized  for   utilizing   the   term                                                               
gamesmanship in a blanket fashion.                                                                                              
                                                                                                                                
10:41:45 AM                                                                                                                   
                                                                                                                                
PAT  SHIER,   Director,  Division   of  Retirement   &  Benefits,                                                               
Department of  Administration, advised  that Sec.  9 of  the bill                                                               
addresses the issue  of rehiring a retired  person; including the                                                               
situation exampled by  Senator Elton. Sec. 9  specifies that that                                                               
individual must be included in the municipality's payroll base.                                                                 
                                                                                                                                
10:42:35 AM                                                                                                                   
                                                                                                                                
Due  to the  anticipation  of the  State  experiencing cash  flow                                                               
problems in  the next few years,  Commissioner Kreitzer expressed                                                               
concern  that the  State  would be  responsible  for funding  any                                                               
shortfall  beyond  the amount  paid  by  municipalities. She  has                                                               
communicated to both Mr. Teal  and members of the Legislature the                                                               
fact that she does not consider either  this bill or SB 123 to be                                                               
"a permanent fix".                                                                                                              
                                                                                                                                
Commissioner  Kreitzer  also  recommended  that  the  Legislature                                                               
continue to consider "a cash infusion into TRS…"                                                                                
                                                                                                                                
10:43:45 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman  emphasized that  the current effort  is focused                                                               
on this  bill and  the "fix-it  bill", SB  123; "they're  two big                                                               
pieces" of the effort to  address the liability of the retirement                                                               
systems. Once  the liability is  "isolated", the next  step would                                                               
be "to  look at  the cash flow  and work on  slicing that  up and                                                               
minimizing the impact on the general fund draw.                                                                                 
                                                                                                                                
Commissioner Kreitzer  corrected a  component of the  Division of                                                               
Legislative  Finance's   presentation;  the   unfunded  liability                                                               
estimated  for FY  08,  as depicted  on page  4,  should be  $8.6                                                               
billion rather than $6.9 billion.                                                                                               
                                                                                                                                
Co-Chair Stedman agreed with  Commissioner Kreitzer. The unfunded                                                               
liability  could  range between  eight  and  ten billion  dollars                                                               
depending on  such things as  which year the valuation  was based                                                               
on. There have been incremental  increases in the liability level                                                               
for the past several years.                                                                                                     
                                                                                                                                
10:45:13 AM                                                                                                                   
                                                                                                                                
Senator Elton  asked the Commissioner  to provide  information on                                                               
the  affect  the  90-day  window  might  have  on  administrative                                                               
hearings, such  as the dispute  currently being  considered about                                                               
how  the City  & Borough  of Juneau  manages some  of its  police                                                               
department employees.  A decision on  this issue is  not expected                                                               
until the fall of 2007.                                                                                                         
                                                                                                                                
Commissioner  Kreitzer stated  that clarification  on this  issue                                                               
would be provided,  as she has an opportunity to  discuss it with                                                               
the Department of Law.                                                                                                          
                                                                                                                                
10:46:13 AM                                                                                                                   
                                                                                                                                
Senator  Thomas  questioned how  the  rehire  of a  past  service                                                               
employee during the  90-day period would be  treated. Language in                                                               
the bill specifies  that "an employer may not  award past service                                                               
to employees  added during the  90-day period. To that  point, he                                                               
asked whether  "past service is  considered unearned" in  that an                                                               
employer could "grant service to  employees that are not previous                                                               
employees".                                                                                                                     
                                                                                                                                
Commissioner  Kreitzer thought  not. The  language was  carefully                                                               
developed with  the objective  to be very  clear on  what options                                                               
were available to municipalities.  Nonetheless, she would clarify                                                               
this with the Department of Law.                                                                                                
                                                                                                                                
Senator  Huggins  noted  that the  bill  also  contained  similar                                                               
provisions regarding individuals with military service.                                                                         
                                                                                                                                
Senator Dyson also understood that to be the case.                                                                              
10:47:44 AM                                                                                                                   
                                                                                                                                
LARRY  SEMMENS,  Finance Director,  City  of  Kenai, and  Member,                                                               
ARMB, testified  via teleconference from Kenai  and thanked those                                                               
who  have worked  so diligently  on addressing  the PERS  and TRS                                                               
funding issues.                                                                                                                 
                                                                                                                                
Mr.  Semmens asked  for clarification  on the  ARMB's ability  to                                                               
specify  the  amortization  period   as  25  years;  specifically                                                               
whether  the intent  was to  adopt  a rolling  25-year period  in                                                               
which  each year  the  ARM Board  would  re-finance the  unfunded                                                               
liability  over  the remaining  years  depending  on that  year's                                                               
valuation.                                                                                                                      
                                                                                                                                
Co-Chair  Stedman   acknowledged  that  for  several   years  the                                                               
unfunded  liability  was  addressed  in  a  rolling  amortization                                                               
manner; however,  "the intent here  is to amortize  and liquidate                                                               
this liability over next 25 years".                                                                                             
                                                                                                                                
Mr. Semmens approved of this approach.                                                                                          
                                                                                                                                
Mr. Semmens next addressed language in  Sec. 9 of the bill. While                                                               
a  rate lower  than  the 22  percent  employer contribution  rate                                                               
specified  in  this bill  would  have  been preferred,  employers                                                               
would accept the  certainty of a set  rate. Nonetheless, numerous                                                               
employers  set their  FY 08  rate based  on the  language in  the                                                               
Governor's  budget   which  specified  a  maximum   five  percent                                                               
increase "over their FY 07 out-of-pocket costs".                                                                                
                                                                                                                                
Mr.  Semmens noted  that under  the Governor's  budget plan,  the                                                               
City of Kenai  would have experienced a 36  percent increase over                                                               
their  FY 07  budget, absent  consideration of  the State's  five                                                               
percent  PERS assistance.  That  increase was  factored into  the                                                               
City's  FY 08  budget.  Increasing the  contribution  rate to  22                                                               
percent  as proposed  in this  legislation would  amount to  a 60                                                               
percent increase.  Therefore, he asked the  Committee to consider                                                               
the Governor's budget plan for FY 08.                                                                                           
                                                                                                                                
Mr. Semmens also questioned the  intent of the "regardless of the                                                               
employee's employment status at  date of termination" language in                                                               
Sec. 13, page 9, line 31. In  his view, a former employee, who he                                                               
defined  as an  active employee,  "should not  be impacted  by an                                                               
employer's termination, and therefore should not vest".                                                                         
                                                                                                                                
Mr.  Semmens  next  addressed  language   in  Sec.  15  regarding                                                               
termination. "60 days is not a  very long time for a municipality                                                               
to  either pay  their termination  bill or"  establish a  payment                                                               
plan that must be approved by their local legislative body.                                                                     
                                                                                                                                
10:52:22 AM                                                                                                                   
                                                                                                                                
While Mr. Semmens  agreed with language in Sec.  16 that provided                                                               
the  State the  ability  to calculate  an employer's  termination                                                               
plan, he questioned the mechanics of  the process as the State is                                                               
currently  unable to  determine  either an  employer's assets  or                                                               
liabilities.                                                                                                                    
                                                                                                                                
While Mr.  Semmens appreciated  the ability  provided in  Sec. 19                                                               
that would allow  a municipality to include  elected officials in                                                               
its  plan, he  was concerned  that going  forward, municipalities                                                               
would be limited  to the classes of employees that  were in place                                                               
at the  90-day period. This  is bad  public policy; it  would not                                                               
consider an "immediate  or abrupt change in  an employer's salary                                                               
base". An example  of this would be the City  of Kenai opting out                                                               
or contracting  out its  street department.  While that  class of                                                               
employee  would continue  to  be  part of  the  City's plan,  the                                                               
city's salary  base would  drop significantly.  "And the  rest of                                                               
the members, particularly the State, would pay for it".                                                                         
                                                                                                                                
Mr. Semmens strongly  objected to the provision in  the bill that                                                               
would prohibit a  municipality from being able "to  add or delete                                                               
classes of  employees". This is  an important issue.  A different                                                               
method in this regard should be adopted.                                                                                        
                                                                                                                                
10:55:04 AM                                                                                                                   
                                                                                                                                
MICHAEL  LAMB,  Chief  Financial Officer,  Fairbanks  North  Star                                                               
Borough,  testified via  teleconference from  an offnet  location                                                               
and concurred with Mr. Semmens' remarks and concerns.                                                                           
                                                                                                                                
Mr.  Lamb   then  referenced  Commissioner   Kreitzer's  comments                                                               
regarding the 90-day window and  the associated concern about the                                                               
possibility  of a  municipality "shrinking"  its salary  base and                                                               
forcing other  employers "to  end up sharing  or having  to cover                                                               
the costs".                                                                                                                     
                                                                                                                                
Mr. Lamb contended that the  90-day window option was unlikely to                                                               
be  the  best way  to  avoid  the  gamesmanship issue.  While  he                                                               
thought this  might be a  universal concern, an  alternate method                                                               
to address it  should be sought. He agreed that  the shrinking of                                                               
the salary base due to opting  out or contracting out services is                                                               
a real concern.                                                                                                                 
                                                                                                                                
Mr. Lamb  suggested that an  AML suggestion  to specify FY  06 as                                                               
the salary  base year could be  a preferred option to  the 90-day                                                               
window method.                                                                                                                  
                                                                                                                                
Mr.  Lamb concluded  that a  flat TRS  rate, adopting  a 25  year                                                               
amortization  schedule, and  other provisions  in the  bill would                                                               
"make a  huge difference to understanding  the State's volatility                                                               
out into  the future".  He looked  forward to  the receipt  of an                                                               
updated report  from Buck Consultants  as mentioned by  Mr. Teal.                                                               
In  summary,  while  there  are  still  a  few  items  that  need                                                               
addressing, he is  "pleased with the effort"  and appreciated the                                                               
work to date.                                                                                                                   
                                                                                                                                
Co-Chair Stedman  asked Mr. Lamb  to provide further  comments to                                                               
his  office  once  he  had  time  to  review  the  new  committee                                                               
substitute more thoroughly.                                                                                                     
                                                                                                                                
10:59:06 AM                                                                                                                   
                                                                                                                                
Senator  Elton  stated  that in  addition  to  the  consideration                                                               
afforded  the  Hero  communities; consideration  should  also  be                                                               
given to  those communities that  might experience  a substantial                                                               
increase in their contribution rate.  There is concern that those                                                               
communities might decide to entirely opt out of the plan.                                                                       
                                                                                                                                
AT EASE 10:59:52 AM / 11:00:03 AM                                                                                           
                                                                                                                                
Co-Chair Stedman  noted the intent  to re-address this bill  in a                                                               
few days.                                                                                                                       
                                                                                                                                
11:00:22 AM                                                                                                                   
                                                                                                                                
Commissioner   Kreitzer  announced   that   the  Department   had                                                               
developed  a response  to  a question  asked  earlier by  Senator                                                               
Thomas.                                                                                                                         
                                                                                                                                
Mr.  Shier communicated  that individuals  with military  service                                                               
would be unaffected by this bill.  The intent of the language was                                                               
to  prevent  credit for  non-PERS  service  for those  groups  of                                                               
employees that may, in that period of time, opt in".                                                                            
                                                                                                                                
11:01:06 AM                                                                                                                   
                                                                                                                                
The bill was HELD in Committee.                                                                                                 
                                                                                                                                
                                                                                                                                
ADJOURNMENT                                                                                                                 
                                                                                                                                
Co-Chair Bert Stedman adjourned the meeting at 11:01:13 AM.                                                                   

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