Legislature(2007 - 2008)SENATE FINANCE 532
03/20/2007 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB123 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 123 | TELECONFERENCED | |
| + | TELECONFERENCED |
MINUTES
SENATE FINANCE COMMITTEE
March 20, 2007
9:02 a.m.
CALL TO ORDER
Co-Chair Bert Stedman convened the meeting at approximately
9:02:02 AM.
PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Charlie Huggins, Vice Chair
Senator Fred Dyson
Senator Kim Elton
Senator Joe Thomas
Senator Donny Olson
Also Attending: ANNETTE KREITZER, Commissioner, Department of
Administration; KATHY LEA, Retirement Manager, Division of
Retirement & Benefits, Department of Administration; CHARLENE
MORRISON, Chief Financial Officer, Division of Retirement &
Benefits, Department of Administration
Attending via Teleconference: There were no teleconference
participants
SUMMARY INFORMATION
SB 123-PUBLIC EMP./TEACHERS/JUDGES EMP. BENEFITS
The Committee heard from the Department of Administration. The
bill was held in Committee.
SENATE BILL NO. 123
"An Act relating to the public employees' and teachers'
defined benefit retirement plans; relating to the public
employees' and teachers' defined contribution retirement
plans; relating to the judicial retirement system; relating
to the health reimbursement arrangement plan for certain
teachers and public employees; relating to the supplemental
employee benefit program; relating to the public employees'
deferred compensation program; relating to group insurance
for public employees and retirees; making conforming
amendments; and providing for an effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
9:02:31 AM
Co-Chair Stedman explained that this legislation would address
technical issues and clarifying language relative to SB 141, the
Public Employees Retirement System (PERS) reform legislation
which had been enacted into law a few years prior.
9:03:09 AM
Co-Chair Stedman informed the Committee that their bill packets
contained two pieces of material provided by the Department of
Administration: a "Technical Clarification Bill Overview"
handout and a sectional analysis of the bill [copies on file]. A
review of the bill would be conducted today and public testimony
would be scheduled for a later date.
9:04:12 AM
ANNETTER KREITZER, Commissioner, Department of Administration
informed the Committee that this legislation expanded beyond HB
475, a "clean up" bill to SB 141 which had been considered but
not enacted the previous year, in that it also addressed issues
pertaining to the Federal Pension Protection Act and the
Internal Revenue Code [IRC], which had been identified by the
Department's tax counsel. In order to capture Legislative
intent, this bill also includes "technical corrections…
clarifying death and disability benefits for peace officers and
firefighters and other members" under the DCR Plan.
9:05:39 AM
KATHY LEA, Retirement Manager, Division of Retirement &
Benefits, Department of Administration addressed the material in
the aforementioned handout titled "Technical Clarification Bill
Overview" as follows.
9:06:18 AM
Page 2
Extensive Review
· Department of Law
· Independent tax counsel, Ice Miller LLP
· Division of Retirement and Benefits
Ms. Lea:
Good morning. For the record my name is Kathy Lea, I am
the Retirement Manager for the Division of Retirement and
Benefits.
Thank you for the opportunity to provide this overview of
the technical correction bill. This overview is intended to
cover the highlights of the bill with a more in depth
explanation contained within the sectional analysis.
Senate Bill 123 is being introduced by Governor Palin and
contains many of the provisions in last sessions' HB 475
with some additions. Through the adoption of emergency
regulations, the PERS and TRS [Teachers Retirement System]
defined contribution retirement plans received favorable
plan determination letters from the Internal Revenue
Service for the individual accounts and occupational death
and disability benefits. After incorporating the plan
determination and new federal requirements for government
pension plans, SB 123 was created.
This bill has been extensively reviewed for legal, tax and
administrative compliance by the Department of Law, the
division's independent tax counsel, Ice Miller, and the
division of retirement and benefits.
9:07:01 AM
Page 3
Reasons for Legislation
· Ensure Defined Contribution Retirement (DCR) Plan
benefits provided as intended
· Update Defined Benefit (DB) plans for qualification in
2008 per the Pension Protection Act of 2006
· Administrative Changes
Ms. Lea:
The purpose of this legislation is to ensure the benefits
of the defined contribution retirement plans are provided
as intended by the legislature.
It updates the provisions of the defined benefit plans for
compliance with the federal Pension Protection Act of 2006.
One of the provisions of this Act requires previously
qualified government plans to apply for requalification
every five years. The division will submit applications for
requalification of the defined benefit plans in 2008.
The bill also amends or adds sections to provide for the
appropriate administration of the plans.
9:07:40 AM
Page 4
Defined Contribution Plans
Page 5
DCR Plan Changes
· Occupational Death and Disability (D&D) benefit
administration and funding
· Employer participation
· Member participation
· IRC Contribution limits
Ms. Lea:
I have grouped the changes into three major areas, the
first of which are changes to the PERS and TRS Defined
Contribution or DCR Plans.
In summary, the changes include the administration and
funding of occupational death and disability benefits; how
employers participate or terminate participation in the
plans; clarification of who is a member of the DCR plan;
and changes to provide intended benefits while meeting the
Internal Revenue Code contribution limits.
9:08:20 AM
Page 6
Occupational Death & Disability
· Funding the benefits
- TRS Occ D&D fund
- PERS Occ D&D clarification for disabled Peace
Officer/Firefighter at normal retirement
· Annual inflation-proofing
Provides the lesser of:
- Disability-75% of increase in CPI or 9%
- Survivor-50% of increase in CPI or 6%
Ms. Lea:
SB 141 provided occupational death and disability benefits
for both the PERS and TRS DCR plans. However, funding of
the TRS occupational death and disability benefits was
omitted. This bill provides that funding.
Senate Bill 123 also clarifies benefits provided to
disabled peace officers and firefighters when they reach
normal retirement and
Adds a yearly cost of living adjustment to the DCR
disability and survivor benefits similar to Tier III PERS
and Tier II TRS to meet the legislature's intent.
Disabilitants would receive 75% of the increase in the
consumer price index in the Anchorage area or 9%, whichever
is less. Survivor benefit recipients would receive 50% of
that increase or 6%, whichever is less.
9:09:17 AM
Page 7
Occupational Death & Disability
· Periods of disability and survivor benefits constitute
membership service for retirement/medical eligibility
· Member or Survivor not entitled to individual account
until retirement
· Provides medical cost share at normal retirement,
regardless of age
Ms. Lea:
SB 141 is ambiguous regarding how the service accruals
during a period of disability or receipt of monthly
survivor benefits are to be treated. This bill clarifies
that these periods can be used to meet service requirements
for retirement, medical eligibility and the medical premium
cost share at normal retirement.
Both disability and survivor benefits cease when the member
reaches, or would have reached normal retirement
eligibility. The legislature intended to provide retirement
benefits to the disabled member or to the survivor at that
time. To meet that intent, SB 141 required continued
contributions to be made to the individual account while
disability or survivor benefits were paid. This bill
clarifies that while the member is receiving disability
benefits, or the survivor is receiving monthly survivor
benefits, they are not entitled to withdraw the individual
account balance.
Also clarified is that a disabled member who reaches normal
retirement eligibility by service is eligible to have a
percentage of their medical premiums paid by the plan based
on their total service under the plans medical cost share
provisions.
Other technical corrections include clarification that a
member will not be considered disabled if they can perform
the duties of a comparable job for any employer.
9:10:53 AM
Page 8
Employer Participation
· Provides participation and termination authority for new
PERS employers.
· Establishes a time limit on conversion election period
for employees
· Assigns employer retiree health contributions to the
Alaska Retiree Health Trust
Ms. Lea:
The bill adds provisions for new employers to join or
existing employers to terminate from the DCR Plan.
SB 141 provided employers with an opportunity to allow
their nonvested employees to elect to convert from the
defined benefit plan to the DCR plan. This bill limits the
employee election period to 12 months from the date the
administrator approves the employer resolution to
participation in the conversion program. Placing a time
limit on the employee election helps employers estimate and
budget for the required matching employer contributions.
A new health trust is established in this bill. DCR
statutes are being amended to direct retiree health
contributions to the new trust. The bill also establishes
uniform contributions amounts for all employers
participating in the Health Reimbursement Arrangement.
9:11:51 AM
Page 9
Member Participation
· Adds Governor, Lieutenant Governor, and Legislators as
members of the DCR Plan.
· Clarifies that a DB member hiring with a new DCR Plan-
only employer participates in the DCR Plan.
Ms. Lea:
The definition of member in the PERS DCR plan includes
employees but not elected officials. The bill adds elected
state officials as members of the DCR Plan.
New employers joining after July 1, 2006 only join DCR as
the DB [Defined Benefit] plan is closed. Because a member
of the DCR plan is defined as an employee who first enters
the PERS on or after July 1, 2006 or a nonvested DB
employee who has elected to convert, this called into
question the status of a defined benefit employee hiring
with a DCR-only employer. The bill clarifies that the DB
member participates in the DCR plan. Without this change,
the employee could not participate in either plan.
9:12:57 AM
Page 10
Member Participation
· Clarifies that a former DB member who does not reinstate
service before July 1, 2010, will be a DCR Plan member if
re-employed after that date.
· Specifies how the IRC § 415(c) limits affect payment of
the employer conversion match for DB to DC conversions.
Ms. Lea:
Senate bill 141 repealed the statutes allowing member's to
reinstate refunded service in order to become eligible for
retirement benefits. The status of former DB members who
do not reinstate their refunded service and contributions
to the DB plan prior to July 1, 2010 was left in question.
Senate Bill 123 clarifies that former members will be DCR
plan members upon reemployment after the July 1, 2010
deadline.
SB 141 specifies that employers of nonvested DB members who
elect to convert to the DCR plan match the employee
contribution account 100%. However, limitations are placed
on the amount of pre-tax contributions that can be
deposited into an individual's account during a tax year.
That limit is the amount of total compensation or $45,000,
whichever is lower, for 2007 and includes all pre-tax
contributions from any qualified plan the member
participates in. In order to meet the legislature's intent
for 100% employer match and comply with the IRC, this bill
allows the remainder of account match to be paid in the
following tax year, subject to the 415(c) limits. The
legislation also clarifies that the service time converted
from the defined benefit plan to the defined contribution
plan can be used towards vesting and eligibility for
retiree medical benefits.
9:14:46 AM
Page 11
IRC Compliance
· Disabled member 100% vested in employer contributions
· Survivor retirement benefit funded from Occupational D&D
fund
· USERRA Compliance
· § 415(c)-Contribution Limits
- contributions on behalf of survivors
- voluntary employee contributions
Ms. Lea:
SB 141 stipulated that the employer (ER) continue to
deposit ER and employee (EE) contributions to disabled
member's individual account while the member is receiving
OCC disability benefits. This provision is permissable by
the IRC only if the contributions are nonforfeitable. The
bill adds this change to comply with this requirement.
SB 141 required the employer to continue to make both ER
and EE contributions to the deceased member individual
account in order to provide a DCR benefit to the survivor
at the time the monthly survivor benefit ceases. The IRC
does not allow for pre-tax contributions to be made to the
deceased member's account past December 31st of the year in
which the member dies. This bill provides a tax-qualified
mechanism to provide the benefit as the legislature
intended. Required contributions will be paid to the
Occupational Death & Disability [ODD] fund. Benefits paid
from the account to the survivor at the time the member
would have reached normal retirement had the member lived
will equal the amount the member and employer would have
contributed plus earnings experienced by the ODD fund.
Ms. Lea also noted that in order to comply with the Uniformed
Services Employment and Reemployment Rights Act [USERRA],
provisions were included in SB 123 to "ensure[s] that members
called to active military duty maintain their level of
retirement benefits as though they had not been called".
Ms. Lea continued:
The sections referring to contributions to a deceased member's
individual account are removed as well as the sections
allowing voluntary employee pre-tax contributions to the plan
based on advice from the division's tax counsel. Because the
IRC restrictions on contributions of this type make the
election and the amount of the contribution irrevocable as
long as an individual works for any employer covered by the
plan, this provision is unappealing when compared with the
flexibility afforded by other retirement savings options, such
as employer sponsored deferred compensation programs. For this
reason, Senate Bill 123 removes this provision.
9:17:38 AM
Page 12
Defined Benefit Plans
Ms. Lea:
The second major focus area of the bill are changes to the
defined benefit or DB plans. This includes the Public
Employees, Teachers' and Judicial Retirement Plan.
9:17:57 AM
Page 13
Pension Protection Act
· Updates rollover provisions and includes a Roth IRA as of
January 1, 2008
· Allows an alternate payee to rollover contributions
· Requires a rollover of pre/post-tax contributions to be
accounted for separately by receiving plan
Ms. Lea:
The pension protection act which became effective in August
of 2006, expanded the types of plans eligible for rollover
into the defined benefit plans for purchasing service or
for rollovers out of the plan. Any IRA described in chapter
26 of the United States Code is eligible for rollover. On
January 1, 2008, this will include a Roth IRA. Members
electing to rollover pre-tax dollars to a Roth IRA,
however, will be subject to taxation at that time.
In the event of a divorce and a request to refund the
member's defined benefit account balance, a former spouse
(or alternate payee) who has had a qualified domestic
relations order accepted by the division that provides the
alternate payee with a portion of the account, may now
rollover contributions to a qualified plan.
Codifies requirement for a plan accepting a rollover
containing pre and post tax contributions to separately
account for them.
The bill also clarifies that 415(c) limits apply to
employee post-tax contributions and benefit payments.
9:19:23 AM
Page 14
Employer Participation
· Normal cost and past service rate applied to total
payroll dollars
· Establishes a deadline for terminated employers to pay
termination costs
Ms. Lea:
Changes to employer participation in the DB plan include
redefining normal cost and past service rate so the rate
can be applied to total employer payroll, DB and DC. This
does not change the amount the employer will have to pay to
the defined benefit plans for current and past service
costs. It simply reduces the rate and increases the salary
base the rate applies to. It also provides a salary base to
apply the past service rate to for employers who no longer
have active DB employees.
Requires that employers terminating participation in the
plan must pay for the actuarial study to determine their
termination costs and to pay the termination cost in a lump
sum or enter into a payment plan within 60 days of the
termination date.
9:20:30 AM
Page 15
Employer Participation
· Allows the plan to intercept other state funds for
payment of delinquent contributions.
· Codifies use of forfeitures to be applied to future
employer contributions.
Ms. Lea:
The PERS or TRS will be allowed to intercept other state
funds held for an employer by state agencies or other
political subdivisions when contributions are not paid as
long as those funds are not restricted by statute or
appropriated for a specific purpose.
Forfeitures occur when a defined benefit member terminates
employment and elects to refund their own contributions.
The employer contributions made on behalf of the employee
remain in the employer's assets and are used to pay
benefits for the members who remain in the plan.
9:21:11 AM
Page 16
Member Participation
· Repeals the ability to reinstate service for Conditional
or Public Service benefits as of July 1, 2010
· DB members who hire with a DCR Plan-only employer
participate in the DCR Plan
· Former DB members who do not reinstate by July 1, 2010,
are DCR Plan members upon rehire
Ms. Lea:
SB 141 removed the member's ability to reinstate forfeited
service effective July 1, 2010. However, similar changes to
the reinstatement provisions for conditional service or public
service benefits were omitted. This bill conforms Conditional
and Public Service benefits in the PERS/TRS DB plans to the
repeal of the reinstatement statutes.
Clarifies that DB members who hire with a DCR only employer or
former DB members who did not reinstate before July 1, 2010
will participate as DCR members. Without these amendments
these members would not be able to participate in either plan.
9:22:05 AM
Page 17
Administrative
Page 18
New Trust
· Alaska Retiree Health Trusts
- ARMB Trustees
- Receive employer health contributions
- Pay retiree medical premiums
Ms. Lea:
In order to separately account for retiree medical benefits
a new retiree health trust separate from the pension trusts
is created. This trust will be an IRC irrevocable section
115 trust with the Alaska Retirement Management board as
trustees and the Commissioner of Administration or the
Commissioner's designee as the administrator.
9:22:40 AM
Page 19
Administrative
· Removes NEA as an eligible employer
· Removes Social Security tax wage base cap from
employee/employer contributions
· Conforms Administrator's duties across plans
Ms. Lea:
Although The National Education Association was included in
both the PERS and TRS as an eligible employer, NEA is a
private non-profit and is not eligible to participate in a
government retirement plan. The Division, the Department of
Law and NEA came to an agreement in the early 1990s that
NEA would not enroll any new employees into either the PERS
or the TRS. Members participating at the time were
grandfathered in. Currently, NEA has no active members in
either plan.
The Social Security tax wage base cap for 2007 is $97,500
which means no employee or employer contributions for the
DCR plan members can be accepted for the remainder of the
year once the wage cap is reached. The wage limit is not
required for qualification of the plans. This bill
eliminates the cap.
Conforms administrator's duties as changed by SB 141 across
PERS/TRS DB and DC, Supplemental Benefits System, Deferred
Compensation Plan and the Health Reimbursement Arrangement.
9:24:09 AM
Page 20
Administrative
· Returns authority to the Commissioner of Administration
to adopt regulations for the SBS, DCP and HRA plans.
· Provides OAH authority to hear appeals for the SBS, DCP
and HRA plans.
· Provides OAH authority to hear PERS/TRS requests for
waivers of timeliness and adjustment.
Ms. Lea:
The last set of administrative changes are to correct
omissions or drafting errors to SB 141 regarding
regulations and appeals.
Part of the reform to the retirement systems was a change
in the regulation authority from the prior Public
Employees' Retirement Board (PERB) and the Teachers
Retirement Board. The reference to the PERS Board in the
Supplemental Benefits System (SBS) statutes pertaining to
authority for adoption of regulations was inadvertently
changed to the ARMB along with the many other reference
changes. SBS regulations, like PERS regulations, relate to
administrative matters and should be adopted by the
Commissioner. This change returns the regulation adoption
authority to the commissioner of administration.
SB 141 changed the appeal authority from the former PERS
and TRS boards to the Office of Administrative Hearings for
PERS and TRS but inadvertently omitted transfer of appeal
authority for SBS, DCP or to provide for appeal authority
for the Health Reimbursement Arrangement (HRA). Without
this change, appeals of decisions of the administrator
would have to go directly to superior court.
Members of both the PERS and TRS may appeal an adjustment
to benefits to the Commissioner of Administration. TRS DCR
statutes allow an appeal of the commissioner's decision to
the Office of Administrative Hearings (OAH), however the
PERS statutes do not. This section of the bill corrects
that drafting error.
9:25:50 AM
Page 21
Technical Clarification Bill Overview
· Allows State to administer benefits intended by the
legislature
· Provides funding mechanisms for all benefits
· Addresses IRC requirements
· Removes administrative ambiguities
Ms. Lea restated the targeted objectives of SB 123 and concluded
the presentation.
9:26:20 AM
Co-Chair Stedman sought further clarification as to how the July
1, 2010 reinstatement deadline date of July 1 2010 would affect
the health care benefits of an individual with previous PERS
service in the DB Plan who rehired on or after that date and, as
a result, is enrolled in the new DCR Plan.
Co-Chair Stedman pointed out that transitioning to the DCR Plan
was deemed "the major cost-saving issue" in the retirement
system reform effort.
Ms. Lea explained that a prior service PERS individual who
rehired prior to July 1, 2010 could "vest and become eligible
for a health benefit". However, that individual would "lose
their Tier and they lose that health plan" if they rehired on or
after that date. They would be enrolled in the DCR Plan and
their health benefits would be based as such. "Lower health
costs for that employee" would be experienced since the health
benefits of the DCR Plan were "designed as a cost savings
measure".
9:28:16 AM
Co-Chair Stedman identified another of the DCR Plan's primary
cost savings measures as its approach to health benefits for the
time between when a DCR Plan employee separates from service and
they reach 65 years of age.
In response to a question from Co-Chair Stedman, Ms. Lea
elaborated on this matter. Under the DB Plan, a Tier 1 PERS
member could be eligible for system paid medical benefits at age
50. A PERS Tier 111 member could be eligible at age 60 provided
they had ten years of service. The issue addressed in the DCR
Plan is that the health benefits paid between retirement and
when the member becomes Medicare eligible incur the most expense
to the DB system.
Ms. Lea advised that the DCR Plan requires that the member "be
Medicare eligible before" he or she could qualify for the
medical benefits, thereby "eliminating that high cost period of
time" being experienced by the DB Plan.
Co-Chair Hoffman understood the reinstatement timeframe to be
between July 1 2006 and July 1 2010.
Ms. Lea affirmed.
9:29:41 AM
Senator Elton specified that a former PERS Tier 1 or 11 employee
who left State employment and cashed out their retirement
account, would, after being rehired, be required to repay their
retirement account in order to re-establish their participation
in the DB Plan.
Ms. Lea affirmed.
Senator Elton inquired to the pay-back responsibilities of such
an employee who was rehired in 2011; specifically whether they
would be subject to the obligations of the DB or the DCR Plan.
Ms. Lea clarified that a former PERS Tier 1 or II individual who
rehired after the July 1, 2010 date would not be required to pay
back anything as their previous Tier status would be forfeited.
They would "start fresh in the DCR Plan".
Senator Elton deduced therefore that the previous time accrued
by that individual would not count toward that person's vesting
in the DCR Plan.
Ms. Lea affirmed. Since that person "did not reinstate their DB
rights before July 1, 2010, they forfeit their Tier and they
forfeit the accumulated service".
9:31:45 AM
Senator Huggins asked for further information about the DCR
Plan's new Alaska Retiree Health Trust (ARHT).
Ms. Lea explained that ARHT would be established as a Section
115 health trust, and as such would allow "pre-tax contributions
and benefits for the medical plans" similar to what is currently
available to employees. It would also provide additional
flexibility beyond what is currently available to employers in
other types of qualified plans. In light of some of the
accounting challenges experienced in the past year, the Division
"felt it prudent to establish a health trust account separate
from the pension trusts".
9:32:39 AM
Senator Huggins asked whether provisions regarding Roth IRAs
rollovers would also apply to regular IRAs.
Ms. Lea affirmed. The provision would expand PERS members'
options by allowing them to establish a Roth IRA after July 1,
2008.
Senator Huggins inquired to NEAs' position regarding its
employees being excluded from either PERS or TRS.
Ms. Lea responded that NEA accepts "the distinction" of being an
ineligible employer. An agreement on this matter was established
in the 1990s.
9:33:34 AM
Senator Huggins asked for further information regarding PERS
employees who had opted out of the federal social security (SS)
tax system.
Ms. Lea communicated that all State employees and 14 other
political subdivisions had opted out of SS and instead
participate in the State's supplemental annuity benefits annuity
program, referred to as SBS. Other PERS employers either
participate in SS or utilize PERS as their social security
substitute. She also noted that no teachers in the State
participate in SS at this time.
9:34:27 AM
Senator Huggins asked whether employees have expressed any
concerns regarding their non-SS status.
Ms. Lea communicated that no concerns have been reported.
9:34:42 AM
Senator Elton referred to the "Member Participation" information
on page 9 and hypothesized about a future situation in which a
PERS employer, specifically a small community, with the minimum
required PERS normal cost rate obligation of 14.48 percent,
decides to terminate from PERS. The question is whether that
employer, after terminating from the PERS system could rejoin
it, and thereby "force" their employees into either the DCR plan
or into a situation in which the employee would be required to
make a decision regarding their retirement plan.
9:36:15 AM
Ms. Lea advised that such a scenario could occur. An employer
terminating their participation in PERS would be required to pay
"termination costs and close out their account before they can
rejoin. If they rejoin they are a DCR member", as would be their
employees, even those who were DB members. She clarified that,
at the time of the employer termination from PERS, its "non-
vested Defined Benefit members" would have "the option to become
vested in the Defined Benefit plan".
Co-Chair Stedman asked that the focus of the discussion be to
health insurance cost issues.
Ms. Lea qualified that a Tier 1 or 11 DB member "who becomes
vested at the time the employer terminates… would become vested
in the … DB health plan at that time". A Tier 111 member would
be required "to have ten years of service in order to be
eligible for the Defined Benefit medical plan". Some of the
vested DB employees "would earn a medical entitlement from the
DCR Plan as well as the Defined Benefit plan", were their
employer to participate as a DCR Plan member.
9:38:01 AM
Senator Elton asked the termination costs a small community
employer with only three employees might experience.
9:38:32 AM
Ms. Lea explained that the termination costs for each employer
would differ depending on such things as "the number of retirees
they have, the number of active members they have, the age of
those members, the amount of service they have". Sample cost
scenarios would be developed.
9:39:07 AM
Senator Elton assumed there would be costs associated with
terminating participation, however, wondered if there might be a
situation in which a terminating employer might receive a
payment from the State.
Ms. Lea was not sure, but would investigate.
9:39:33 AM
Co-Chair Stedman identified the State, the University of Alaska,
and municipalities and cities as being PERS system employers. A
few "very small" participating communities have a surplus rather
than a deficit in the system. While this might be an issue, one
must recognize that the benefit obligation to employees extends
into "perpetuity". In contrast to large private corporations
with "very rich" pension plans, the State "is running
substantial deficits".
Co-Chair Stedman pointed out that a community could elect to opt
out of the PERS system and start their own DB Plan. While a
community could rejoin the PERS system as a DCR member, the bill
would likely contain provisions "blocking" that community's
employees' former TIER status from being recognized, as that
would not be "fair play".
Senator Elton agreed. The bill should contain language clearly
prohibiting such action.
9:41:32 AM
Senator Huggins asked which employers have provided their
employees the option to transition from the DB Plan to the DCR
Plan.
Ms. Lea responded that the State and the Bering Straits School
District have provided this option to their employees. One other
entity was considering doing so.
9:42:15 AM
Senator Huggins asked whether employees of other entities have
complained about not being provided this option.
Ms. Lea replied that the Division has not received any employee
complaints in this regard.
Senator Huggins asked whether a State employee, for example, who
opted to change to the DCR Plan, would be subject to any
associated expenses.
Ms. Lea responded in the negative. Were an employee to elect to
transition to the DCR Plan, the balance of their employee
contribution account in the DB Plan would be rolled over to the
DCR Plan. Their employer would provide a 100 percent match to
that balance. An employee electing to transition to the DCR Plan
would forfeit all their rights to the DB Plan.
Co-Chair Stedman sought for further discussion on the 100
percent employer match; specifically the issue of accessing
retirement system trust funds.
9:43:35 AM
Ms. Lea qualified that the employer match to the employee
account balance must be "new money"; utilizing assets previously
contributed to the DB Plan by the employer on behalf of the
employee was prohibited as those contributions were required to
remain in the DB account. A 12-month deadline by which an
employee must decide whether or not to transition to the DCR
Plan was included in the bill in an effort to help employers
with budgeting and estimating for that new cost.
Co-Chair Stedman asked which employees were eligible to convert.
Ms. Lea informed the Committee that any non-vested employee was
eligible: "they have up until either they vest or one year from
the date the option is allowed by their employer to convert."
Co-Chair Stedman identified "the targeted group here as Tier
111".
Ms. Lea concurred, but advised there were still some non-vested
Tier 11 employees.
9:45:06 AM
Senator Elton hypothesized a situation in which the City &
Borough of Juneau, for example, terminated its status as a PERS
employer, and later made the decision to rejoin the system and
thereby convert its employees to the DCR Plan. The question was
"how do you assess how much Juneau owes given the fact we don't
identify by PERS employer what their individual liabilities
are."
9:45:59 AM
Ms. Lea deferred to Charlene Morrison, the Division's Chief
Financial Officer.
9:46:11 AM
Commissioner Kreitzer interjected to remind Members of the
accounting issues that were discussed by Ms. Morrison during a
separate hearing on SB 125-PERS CONTRIBUTIONS; UNFUNDED
LIABILITY on March 19, 2007. That discussion included specifics
regarding how the liability would be assessed.
9:46:34 AM
CHARLENE MORRISON, Chief Financial Officer, Division of
Retirement & Benefits, Department of Administration reviewed the
process accompanying an employer's decision to terminate from
the PERS system. After receiving written correspondence from the
employer affirming their decision to terminate, the Division
would mail all that employer's non-vested employees a letter
detailing their option to either vest or refund. This
information is necessary in order for the actuary to calculate a
termination liability for that employer. In this case, a person
with only "one year of service could choose to vest and if they
are a Tier 1 individual, they actually vest in the health care,
which is a very expensive benefit, as well as in their pension".
Ms. Morrison continued that after the actuary determined the
termination liability, that information is compared to the
assets the terminating employer has in the system. The
difference between the two is the termination cost to the
employer. She allowed that some accounting concerns have been
raised in regards to the assets. This issue should be further
reviewed.
9:48:04 AM
Co-Chair Stedman acknowledged Senator Elton's concern about the
possibility of an entity "gaming" or "manipulating" the system
by terminating a plan and forcing its employees to go into the
new DCR Plan. An effort to prevent this is paramount.
Co-Chair Stedman pointed out that in addition to this bill, the
Legislature is considering separate legislation about how to
address the immense retirement systems' unfunded liability
facing municipalities. The Legislative effort to date includes
"some kind of a sharing mechanism" through which the State could
"help municipalities pay that liability".
Co-Chair Stedman continued. Were a community such as the City
and Borough of Sitka, which has a retirement system deficit, to
terminate their PERS participation, they would be required "to
deal with that unfunded liability with no help from the State".
This would be a "financial obstacle". Practically any community
in the State which chose to terminate from the plan would be
obligated to pay "tens of millions of dollars".
9:50:18 AM
Co-Chair Stedman appreciated Senator Elton's concern and assured
him that the process pertaining to employers opting out of and
then back into the system would be further reviewed.
Senator Elton acknowledged. "The sticking point" might be the
inability "to allocate liabilities by PERS employer". This could
result in there being different opinions "over what the
terminating PERS employer liability actually may be. The State
might have a difficult time countering those arguments."
9:51:03 AM
Senator Thomas asked for further information about the removal
"of the social security tax wage base cap from employer/employee
contributions" as depicted on page 19.
Ms. Morrison explained that in the "definition of compensation"
contained in SB 141, it was indicated "that the compensation for
members in this plan is subject to just their wages up to the
social security wage base". Language in this bill would "remove
that limitation so that contributions can be made into this plan
by both the employer and the employee on all of the wages made
by that employee and not limit them by the social security wage
base". This would allow more contributions to go into the
employee's account.
Co-Chair Stedman appreciated Senator Thomas' question as he had
also wondered about that provision.
Senator Huggins asked whether the Department was concerned about
the prospect of employers terminating from the plan.
Commissioner Kreitzer did not feel qualified to speak to the
question as she had only been with the Department a short while.
She deferred to Ms. Morrison.
Ms. Morrison believed it important that an employer have the
right to terminate if they so choose. However, any employer
choosing to terminate from the plan should devise their own
benefit plan.
Senator Huggins clarified his question to be whether the
Department had any concerns regarding the number of employers
who might choose to terminate from the plan.
Ms. Morrison expressed that terminating from the PERS plan might
not be a financial obstacle for shorter-term smaller
participants; however, it might prove too much of a financial
hardship for long-term PERS employers. She could not commit to
being concerned "one way or the other".
Senator Huggins asked whether there was concern that the level
of the employers' unfunded liability exceeded the ability of the
State to fix.
Commissioner Kreitzer responded that the State must continue to
move forward. It had the benefit of the historical experience of
the system, as well as people, such as her, who were willing to
address the issue.
9:54:59 AM
Senator Elton directed attention to DB Plan employees who have
left State service and cashed out their SBS account. He asked
whether that person would be required to repay their SBS account
were they rehired into the DCR Plan.
Ms. Morrison advised that a DB Plan member, who withdrew their
SBS but not their DB Plan contributions, would continue to be
classified as a DB Plan member. Their employment would only
change to the DCR Plan status were they to have withdrawn their
defined benefit contributions and "not reinstate[d] their
employment with a covered employer by July 1, 2010".
Senator Elton asked whether the option to cash out their SBS
account would be available to a DB member after 2010.
Ms. Morrison communicated that only the option to buy back one's
defined benefit service would terminate by July 1, 2010; the
option to withdraw one's SBS would not change.
9:56:50 AM
Co-Chair Stedman asked to the plan's obligation in the case of a
domestic order pertaining to the separation of a husband and
wife, one of which might be either "an employee or a beneficiary
of the plan".
Ms. Morrison deferred to Ms. Lea.
Ms. Lea explained that in a qualified domestic order, the member
is not required to terminate. Essentially, the order would serve
to assign a portion of the employee's accounts, "whether it be
the SBS account, a defined benefit account, or the new DCR
account, to their former spouse". Since SBS and DCR Plan
accounts are individual monetary accounts, "a separate account
would be created for the former spouse" and the monies
determined to be the property of the former spouse would be
moved into that account.
Ms. Lea continued that a domestic order that splits the DBR
contribution account is uncommon. The experience has been that
the order "splits the retirement benefit and any future medical
benefits depending on whether the divorce is before or after
retirement".
9:58:54 AM
Senator Thomas revisited the issue of the social security cap,
by asking whether allowing the contribution to increase beyond
the social security contribution salary limit "might create a
further disparity between the participating employers".
Ms. Lea expressed the belief that eliminating the limit did not
create "any disparity. The provision basically applied to the
SBS annuity program which is the State's replacement program for
social security and that's why the social security wage cap was
included in that language. It should not have been included in
the DCR Plan because there was no need for it".
10:00:11 AM
There being no further discussion, Co-Chair Stedman ordered the
bill HELD in Committee.
AT EASE 10:00:21 AM / 10:00:35 AM
Co-Chair Stedman reviewed the Committee's schedule for the
remainder of the week.
ADJOURNMENT
Co-Chair Bert Stedman adjourned the meeting at 10:01:25 AM
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