HOUSE BILL NO. 47 "An Act requiring certain municipalities with a population that decreased by more than 25 percent between 2000 and 2010 that participate in the defined benefit retirement plan of the Public Employees' Retirement System of Alaska to contribute to the system an amount calculated by applying a rate of 22 percent of the total of all base salaries paid by the municipality to employees of the municipality who are active members of the system during a payroll period; authorizing the administrator of the defined benefit retirement plan of the Public Employees' Retirement System of Alaska to reduce the rate of interest payable by certain municipalities that are delinquent in transmitting employee and employer contributions to the retirement plan; and providing for an effective date." Co-Chair Seaton invited Co-Chair Foster to join his staff at the table to present his bill. 1:38:02 PM PAUL LABOLLE, STAFF, REPRESENTATIVE NEAL FOSTER, read the sponsor statement: HB 47 seeks to correct an unintended consequence of the PERS "salary floor" established in SB 125 of the 25th Legislature. SB 125 changed the PERS system from a multiple employer plan to a cost share plan. It transferred the individual liability of the 160 PERS employers and consolidated it so that all the employers share in that liability. SB 125 also created what is commonly referred to as the 2008 salary floor. This requires employer's contribute 22% of annual salaries or 22% of FY08 salaries, whichever is greater. The floor was instituted to ensure that the system could not be "gamed" by discouraging employers from replacing PERS employees with contract hires to reduce their base contribution to the system. Some municipalities have found themselves under the 2008 floor through no fault of their own. A large change in population results in a reduced tax base, which affects the services a city can provide. As that financial reality drives a city to downsize, current law exacerbates this problem by keeping their PERS contribution at the 2008 level. This bill targets the communities whose population has dropped by more than 25% since the previous census. HB 47 will address this issue in two ways: 1. Establish a new floor of FY 2012 for communities whose population decreased by more than 25% between 2000 and 2010. 2. Allows the PERS administrator to negotiate penalty interest rates on delinquent payments. HB 47 does not intend to repeat the "2008 floor" debate but to correct one of the unintended consequences caused by the arbitrary line that debate created. I urge your support of this legislation. 1:40:22 PM Representative Wilson asked whether the bill opened the Public Employees' Retirement System (PERS) and Teachers Retirement System (TRS) to liability issue. Mr. Labolle responded that the bill would "slightly add to the unfunded liability," but eliminated "future exposure" because the qualification period was during a past census. Representative Wilson deduced that the municipalities' contribution would be reduced due to decreased population, but the state remained liable for the retirees, which represented the initial increase in liability. Mr. Labolle responded in the affirmative. 1:41:25 PM Representative Ortiz asked Mr. Labolle to provide an example of how the legislation worked. Mr. Labolle used the example of a fish processing plant that closed in a village causing some residents to move away. He assumed that the villages 22 percent contribution rate was $150 thousand, and the 2008 floor was $100 thousand. After the plant closure, the villages 22 percent of gross salaries dropped to $80 thousand, but the village was still statutorily required to pay the $100 thousand floor. He continued that if the village continued to pay the gross salaries, but was unable to pay the floor amount, the remainder of the difference was considered a delinquent payment subject to a statutory 12 percent interest rate that accrued each year. He related that the state and municipality did not have options to mitigate the debt due to statute. The state was bound by law to charge the 12 percent assessment and indebted municipalities could not declare bankruptcy or dissolve. Representative Ortiz surmised that the bill "moved the floor to a later date, which would presumably be a less burdensome floor" when the population decrease was factored in. Mr. Labolle responded in the affirmative. Co-Chair Foster pointed out that the situation Mr. Labolle provided was hypothetical. He indicated the committee would hear testimony from a real situation in Galena where the military base closed. 1:44:47 PM Representative Grenn referred to an email from the Division of Retirements and Benefits {Jim Puckett, Division Director (copy on file)] listing the communities that between 2000 and 2010 lost 25 percent of their population as; St. George, Galena, and Pelican. He asked for confirmation. Mr. Labolle responded that 5 communities qualified, but only the three Representative Grenn mentioned were affected. He noted that Atka was already paying above the floor. In addition, the community of Anderson had zero active PERS eligible employees [St. George was also listed.] Representative Wilson wanted to understand the fiscal note. She reported that the state was required to pay $129 thousand in the FY 2017 Supplemental Budget bill and an additional $121 thousand in 2018. Co-Chair Seaton asked Mr. Worley to come to the table. 1:47:17 PM KEVIN WORLEY, CHIEF FINANCIAL OFFICER, DIVISION OF RETIREMENT AND BENEFITS, DEPARTMENT OF ADMINISTRATION, explained that the figures were estimates from the actuary based on the reduced floor that shifted the remaining liability to the state. Representative Wilson asked whether the state was required to deposit the stated amounts in the PERS and TRS funds. Mr. Worley responded that the figures would be an additional state contribution for PERS only. Co-Chair Seaton asked whether the fiscal note satisfied the statutory requirement that an actuarial analysis was required. Mr. Worley responded in the affirmative. 1:49:19 PM Co-Chair Seaton OPENED Public Testimony. 1:49:35 PM JON KORTA, MAYOR, CITY OF GALENA, GALENA (via teleconference), spoke in favor of HB 47. He read from a prepared statement: My name is Jon Korta. I am the mayor of Galena, Alaska. I would like to thank the committee for taking time today so that I may explain the importance of HB47 for communities like Galena that have seen significant population decreases in the last decade. As you may know, the Galena Forward Operating Location was closed by the United States Air Force. As part of the BRAC process, the Galena FOL closure was effective October 1, 2010, but had been in process for four years. The Air Force base was the main source of employment for Galena residents. Not surprisingly, the base closure resulted in a reduction of the population. In 2000, Galena had 675 residents. In 2010, 470 residents, representing a 30% decline. Galena was again struck by hardship in spring of 2013 when ice dammed the Yukon River and inundated the City, leading to a disaster declaration. The 2008 "Floor" established by the current law exists to prevent a municipality from gaming the PERS system by contracting out work previously performed by municipal employees in order to avoid making ongoing contributions to PERS. The current minimum PERS contribution is based on the level of salaries that existed in 2008. This purpose does not account for Galena's situation. It was not intended, nor does it contemplate, municipalities with sharply declining populations. HB 47 does not change the PERS policy, but rather recognizes nuance. The amendment affects only communities that suffered a minimum 25% decline in population between 2000 and 2010, like Galena. To put that in perspective, the 25% threshold would represent the loss of 75,000 people from Anchorage or 8,000 people from Juneau. What would happen to Fairbanks if the Borough's population declined by 30,000, while at the same time seeing the closure of Eielson and Fort Wainwright? The demand for municipal administrative and public services would decline sharply; so would the municipality's ability to provide these services having lost the region's economic driver. HB 47, which moves the floor year from 2008 to 2012 for the communities that experienced these huge losses, does not provide a "loophole" allowing Galena or any other community with a similar population loss between 2000 and 2010 to "game" the system now or in the future. The 2008 floor for these communities is replaced with a 2012 floor. Galena's budgeted payroll for FY 2015 is above the 2012 amount for 17 employees. Galena's circumstances are not a result of any choice the city made. The base closure and concomitant loss of close to 1/3 of the city's population was entirely involuntary. The relationship between a declining population and declining payroll is clear: fewer residents = fewer public employee = lower public payroll. Based on the 2008 floor, Galena is required to pay an amount owed by a city substantially larger than Galena. Galena's required PERS contribution approaches half of the City's entire payroll. Galena's FY 2008 salary total was $1,513,365.19 for 36 employees. Therefore, Galena's annual minimum PERS contribution is $332,940. In FY 2012 Galena's payroll was $765,776 for 17 employees. That is the year this amendment would move the floor to for cities that saw a 25% decrease in population between 2000 and 2010. Under the 2008 floor, Galena's annual minimum PERS contribution is nearly half of the City's entire payroll costs. For Galena, the difference in PERS contributions between the 2008 "floor" and FY 2012 actual payroll is $164,000. This difference will continue going forward creating an ever-increasing obligation. By statute, any amount unpaid accrues interest at 12%. This ever- increasing obligation adds to an already stressed situation. The City's financial situation was so severe in FY 2011 that it required a low interest loan through the Alaska Municipal Bond Bank to deal with a severe cash flow crisis that was preventing them from being able to secure fuel for heat and electricity. Simply put, if Galena cannot pay its bills, the lights go out in Galena. The 2008 Floor is, overall, a sound piece of legislation, furthering sound policy, but it does not account for all situations. It does not account for cities that have suffered massive population contractions. This amendment furthers the underlying policy goals of the regulatory structure: It helps ensure that municipalities are able to continue contributing to PERS, while recognizing that a city cannot, and should not, have to make the contribution of a city that has a significantly larger population. Recognizing that Galena is not the same city it was before the base closed and 30% of its population moved away is simply good policy, policy that helps ensure that Galena continues to contribute to PERS and that the lights stay on. Recognizing the reality of sharply declining populations is a worthy amendment and is just plain fair. Thank you for your time this morning. I would be happy to answer any questions you may have. 1:56:13 PM SHANDA HUNTINGTON, CITY MANAGER/CLERK - CITY OF GALENA, GALENA (via teleconference), read a prepared statement: My name Shanda Huntington and I am the city manager for Galena, Alaska. Before serving as the city manager, I served as the city clerk for 6 years. I was also born in Galena, grew up there, and raised my children in Galena. I would like to follow up on Mayor Korta's testimony with information relating to Galena's population decline, the base closure, and the effects on city payroll and finances. As Mayor Korta said, the air force base officially closed in 2010, following a multi-year drawdown. In 1990, before base realignment, Galena's population was 847. Galena has always been a small city and the base was the driver of economic activity. According to the 2000 census, the number of residents, which does not include all of the Air Force personnel, was 675. That number had dropped to 470 with the 2010 census. 205 people may not sound like a lot, but it represents a 30% decrease in the city's resident population between the two censuses. 30% of residents moved away, but the decline in the city's economic activity was much greater. Without the base, the decline in demand for city services was disproportionate to the population decrease. For FY 2008, the current floor year, Galena's salary total was $1,513,365.19 for 36 employees. Therefore, Galena's annual minimum PERS contribution is $332,940. In FY 2012, the amended floor year, Galena's payroll was $765,776 for 17 employees. Between FY 2008 and FY 2012, Galena's payroll was cut in half, reflecting the decrease in population and in economic activity. Galena's current annual minimum PERS contribution of $332,940 is nearly half of the City's FY 2012 total payroll costs. Allowing a floor year of 2012 for cities that experienced a drastic decrease in population changes Galena's annual minimum contribution to $168,940. For Galena, the difference in PERS contributions between the 2008 floor and FY 2012 actual payroll is $164,000. This difference will continue going forward creating an ever-increasing obligation. By statute, any amount unpaid accrues compounded interest at 12%. This ever-increasing obligation adds to an already stressed situation. The City's financial situation was so severe in FY 2011 that it required a low interest loan through the Alaska Municipal Bond Bank to deal with a severe cash flow crisis that was preventing us from being able to secure fuel for heat and electricity. Simply put, if Galena can't pay its bills, the lights go out in Galena. Reasonably adjusting the floor year for severely impacted cities does not mean that the cities will pay the minimum amount only. Modifying the floor year changes Galena's minimum annual contribution from $332,940 to $168,940; the actual contribution may be higher. For FY 2013, Galena would in fact pay more than that amended minimum. For FY 2013, Galena added one employee, for a total payroll of $895,784.53. For FY 2013, Galena's contribution would have been above the 2012 floor by approximately $30,000. HB 47 simply recognizes that reality of drastic population decreases experienced by some Alaska cities, using a clearly defined metric: a 25% decrease in population according the 2000 and 2010 censuses. The base closure has been very difficult for Galena. As previously noted, Galena required a low interest loan through the Alaska Municipal Bond Bank to secure fuel for heat and electricity in FY 2011. In the last several years, Galena's finances have stabilized and there are even indicators of recovery after the catastrophic decline. We cannot say what will happen to Galena's population long-term, but we believe that we have turned a corner in terms of population and finances. The City of Galena is adjusting to a new reality following the base closure and loss of 30% of the population. This legislation is one part of that adjustment. I became city manager during a difficult period for the City. Our finances have stabilized somewhat over the last several years. Requiring the City of Galena to pay to PERS a contribution owed by a much larger city weakens Galena, and threatens its ability to provide any contribution to PERS. We are cautiously optimistic that the City will become stronger and even grow over time. If and when Galena becomes the city it was in 2008, the city will be required to make a PERS contribution commensurate with that size and payroll, and will do so gladly, but it's not that city right now and the oversized PERS contribution inhibits it from becoming so. Recognizing the reality of drastically declining populations is a matter of simple fairness. The amendment recognizes this and ultimately promotes the goals of PERS: ensuring that Alaska municipalities continue to contribute their fair share to the system. I would like to thank the committee for taking time today so that I may explain the importance of this amendment for communities like Galena that have seen significant population decreases in the last decade. 2:02:58 PM KATHIE WASSERMAN, EXECUTIVE DIRECTOR, ALASKA MUNICIPAL LEAGUE, ANCHORAGE, spoke in support of HB 47. She reported that the league had been working on the issue for several years. She was the previous mayor of Pelican, Alaska. She relayed an example when the local cold storage facility was purchased by Kake Tribal, subsequently went bankrupt resulting in the city's 2008 floor dramatically decreasing due to population loss. She emphasized that the 12 percent assessment was incredibly high. She voiced that in some instances municipalities fall into a situation where they could never get out of the debt. The league offered its full support of HB 47. 2:06:10 PM Representative Guttenberg wondered about the ability to collect what a city owed for a liability. He related a prior conversation with Michael Lamb, [Interim Executive Director and Chief Financial Officer, Alaska Energy Authority, Department of Commerce, Community and Economic Development] who was "instrumental" in a prior settlement agreement. He relayed that Mr. Lamb stated a community would never be able to pay off its indebtedness to PERS. He stated that communities were paying through a formula, but it was unknown whether the payments were underpayments or overpayments. He asked whether the statement was accurate. Ms. Wasserman responded in the affirmative. She spoke of a historical arbitrary percentage that had been decided between the league and the Senate Finance Committee. She acknowledged that some communities might be overpaying, and some were likely underpaying. Representative Guttenberg commented that the purpose of the bill was to ensure that payments could continue and were made more affordable. Ms. Wasserman explained that the bill did not provide relief from the liability, but simply moved the floor and adjusted the interest. The municipality still owed the principal of their past debt. 2:09:04 PM Representative Pruitt asked whether Ms. Wasserman expected other cities coming to the legislature requesting adjustments in the future. Ms. Wasserman replied in the negative. She explained that wages continued to increase, and the floor issue will likely resolve itself in the future. She deemed that it would be very difficult to revert further than 2008 due to inflation. Representative Pruitt commented that the municipalities were asking the state to take on more of its burden. He wondered if the rest of the league's membership was supportive of the bill. Ms. Wasserman thought the other member communities were supportive. However, every municipality was waiting for the state to address the "termination studies and the PERS floor," which were the larger issues. She claimed that the legislation was only a temporary fix for communities that were in a desperate situation. She was still working on additional legislation to provide a more permanent fix for the larger issues. 2:12:51 PM Co-Chair Seaton CLOSED Public Testimony. Co-Chair Foster indicated amendments were due on the following Monday by 5:00 PM. HB 47 was HEARD and HELD in committee for further consideration.