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