HB 152-PERS TERMINATION COSTS  4:41:53 PM CHAIR OLSON announced that the final order of business would be HOUSE BILL NO. 152, "An Act requiring certain employers who terminate participation in the defined benefit retirement plan or the defined contribution retirement plan of the Public Employees' Retirement System to make contributions related to past service liability and pay termination costs; repealing a requirement that employers who terminate participation in the defined contribution retirement plan or the defined benefit retirement plan of the Public Employees' Retirement System pay for a termination cost study; and providing for an effective date." [Before the committee was Version Y, labeled 28-KS9272\Y, Wayne, 2/26/14.] 4:42:23 PM JANE PIERSON, Staff, Representative Steve Thompson, Alaska State Legislature, explained that HB 152 does away with termination studies, the costs associated with conducting termination studies, the actuarial costs to employers for future benefits to employees whose coverage is terminated, and the past service cost annually on each position terminated until the unfunded obligation is paid off decades from now. 4:43:07 PM MICHAEL BARNHILL, Deputy Commissioner, Department of Administration (DOA), stated shortly prior to the last hearing [March 10, 2014] the DOA did not have the backup information from the actuary, Buck Consultants, but has since received it. He remarked that the fiscal note is complex, but he was somewhat surprised at the $75 million fiscal note. MR. BARNHILL explained termination studies. When an employer terminates a group classification under current statute a termination study is required and costs are accrued for three different items. First, a termination study costs from $2,500- $5,000. Secondly, costs accrue when a new unfunded liability is created by a new group of employees being terminated. Under Alaska statutes employees have the option of refunding the PERS balance or immediately vesting. The actuary assumes some of the employees will immediately vest; however, when that date is prior to the anticipated date of retirement, an unfunded liability is associated with that because the state hasn't had time to collect enough funds to pay the expected benefit. Third, costs accrue when an employer terminates a group classification in a department. In this instance, an employer must pay the entire past service liability cost, not capped at 22 percent, until the unfunded liability is entirely extinguished, which is currently projected at 2031. 4:46:08 PM MR. BARNHILL related that various PERS employers have objected to Senate Bill 125, the statute enacted in 2008. These employers have raised concerns about this impairing their ability to be flexible with their payroll and employers wanting to avoid the unfunded liability costs just described. The department recognizes their concerns but there will be cost shifting from the state. Last year, one version of the bill had a sliding-scale threshold when termination studies would "kick in." Under the prior version of the bill, the sliding scale depended on the size of the payroll. For large employers, with $5 million or more in annual payroll, the employers would need to terminate 20 percent or more of their payroll before a termination study will "kick in." Anything under that, such as new unfunded liability or past service cost would be picked up by the state. For medium-sized employers with $1-$5 million in payroll, the threshold was set at 50 percent or more. Thus, the employers would need to terminate 50 percent or more of their employees in order for a termination study to "kick in." And for small employers, with $1 million or less in payroll, the state would pick up the costs, he said. 4:47:59 PM MR. BARNHILL related that Buck Consultants used an assumption that all employers terminated all employees from PERS service to determine the new unfunded liability when someone retires earlier than expected, which cost $375 million. Thus the system, due to the early retirements, would not collect $375 million. The actuary then allocated that amount on the sliding scale using the aforementioned threshold. Buck Consultants determined the state would end up picking up $99 million and employers would pick up $375 million. The $99 million represented the amounts under the sliding scale, including the costs to pick up all the small employer costs, 50 percent of the mid-range employer costs, and 20 percent of the large employer costs, he said. MR. BARNHILL said that Buck Consultants made another assumption, which was that only 20 percent of the employees would opt out. He acknowledged that the percentage could be debated, but it was the figure that Buck Consultants used, so 20 percent of the costs fall to the state, which is approximately $20 million. In addition, the past service costs shifted to the state because as the payroll costs shrink the amount of past service cost also shrinks. He related a scenario in which an employer had a $1 million payroll with 22 percent of the employees terminated. In that scenario, the payroll would be multiplied by the 22 percent contribution rate on $800,000 instead of $1 million, which means the state collects less money and must pick up the difference. 4:50:39 PM MR. BARNHILL explained last year's fiscal note, which computed the annual cost. The first line referred to the retroactive effect, which is no longer relevant in Version Y; the second line related to the shift of the past service cost payments to the state [due to the repeal of AS 39.35.625] due to a smaller payroll, and the third line represented the new past service costs associated with the new unfunded liability of $800,000, and when computed would be $25 million. That is the methodology behind last year's fiscal note, he said. MR. BARNHILL related that this year under Version Y, the requirement for termination costs and studies all would be repealed. Under this version, all of the costs shift to the state, which means a new unfunded liability of $75 million; however, since Buck Consultants assumed only 20 percent will terminate, the computation for 20 percent of $375 million is $75 million. This provides the background on the $75 million projected for the unfunded liability, which is reflected on page 2 of Buck Consultants' letter of 3/18/14. He said the effect of shrinking payrolls by 20 percent is that since payroll costs are smaller, that amount is not available to compute past service costs on so the past service costs also shift to the state. 4:52:38 PM MR. BARNHILL turned to the letter of 3/18/14 from Buck Consultants and noted that line one is incorrect since there is not any retroactive effect in Version Y. The second line relates to the shift of past serve cost payments to the state due to the repeal of AS 39.35.625 due to smaller municipal payrolls. The third line represents the new past service liability associated with the $75 million new unfunded liability due to people retiring earlier than anticipated. 4:53:17 PM REPRESENTATIVE HERRON expressed concern about the bill, noting he has served on the Alaska Public Entity Insurance Board. He said that everything is based on 2008 legislation as a starting point and suggested reviewing the figure used as a base for 2008. He further asked whether a six-year window should be defined and updated as the base. MR. BARNHILL acknowledged a whole variety of approaches could be used to accomplish the objective of the 2008 legislation, which was essentially to prevent or limit cost shifting from municipalities to the state. He explained that effort was taken since the state was picking up a fair amount of additional liability in the form of state assistance under Senate Bill 125. As previously stated, the state has contributed over $600,000 on behalf of municipalities to PERS. Furthermore, Senate Bill 125 had two ways to address cost shifting: One, through the 2008 salary floor. For example, if a PERS employer payroll dipped below the 2008 salary floor, the 22 percent employer contribution rate would be computed on 2008 instead of the current payroll. Second, the bill would address the cost shifting through the termination cost and study requirements. Both are important since the further removed from 2008, assuming payroll are growing at a rate of two to five percent per year, the 2008 salary floor becomes less and less meaningful. For some PERS employers, the 2008 salary floor is quite meaningful since their PERS payrolls have declined below the 2008 salary floor; however, he estimated that would only affect a handful of employers. He agreed it may be worth it at some point to take a fresh look at how to preserve a certain portion of the payment of the unfunded liability within the PERS municipal community. 4:56:36 PM REPRESENTATIVE HERRON said the fundamental question everyone is facing is that although the 2008 legislation was important at the time, whether it is still relevant six years later. MR. BARNHILL said that for certain employers it is still quite relevant. The largest employer whose PERS payroll dipped below the 2008 salary floor is the University of Alaska, primarily since it offers other retirement programs to new professors, with a 14 percent employer contribution rate and a 401(k) style retirement plan, which he deemed as being pretty attractive. 4:57:39 PM REPRESENTATIVE HERRON commented that the Elected Public Officials Retirement System (EPOR) is almost finished since these legislators are gradually dying. He remarked that those legislators were careful to craft a provision that allowed them to receive raises each time current EPOR members receive raises. 4:58:36 PM CHAIR OLSON asked how many people were covered under EPOR. MR. BARNHILL answered 34 people. He related that this type of linkage is also found in the judicial retirement system so when judges receive a raise, it also boosts benefits for the retired judges. He explained that the department delivers its fiscal note and a letter from the actuary to the legislature. Last week the DOA submitted [dated 3/14/14] the fiscal note with the $75 million [page 2 of the fiscal note], and the backup letter from Buck Consultants arrived today, he reported. 5:00:16 PM REPRESENTATIVE JOSEPHSON said he was pretty convinced that smaller communities have a larger problems with termination costs. He questioned what certainty exists if an agreement was reached in 2008 but now the plan is to "back end" the costs. He asked how the legislature will know that won't be revised. MR. BARNHILL said he thought Representative Josephson was referring to the governor's proposal to appropriate $1.9 billion to PERS, which is part A of the proposal and that Part B is a $157 million capped payment from 2015-2036. That capped payment is very important since it can secure certainty with respect to the demands on the undesignated general funds of the state. If that were to go into effect, one idea is that it would mean that any new unfunded liability associated with PERS employers - taking 20 percent of payroll out of service - will be tacked on to the end in 2036. He acknowledged that there is a cost to that, but any new unfunded liability will be shared by state and municipalities. He said that hasn't been the case since 2008 when Senate Bill 125 was enacted. Any new unfunded liabilities are borne entirely by the state, which has had some fairly dramatic impacts on the state's general fund. Thus, state assistance to PERS employers has increased substantially so that combining PERS and TRS would place a call on the general fund of upwards of $1 billion, he said. REPRESENTATIVE JOSEPHSON asked whether the compromise is that the relief will be afforded to local governments now, but the quid pro quo will be a sharing of new unfunded liability later. MR. BARNHILL acknowledged that is a fair statement, but the flip side of that is that if the reverse of unfunded liability is created - an actuarial gain - happens it will also be shared and under the governor's proposal these gains will be shared in the form of a shorter amortization term. The municipal employers would pay up to 22 percent contributions rate through 2036 if there were actuarial gains during that time period and the 22 percent employer contribution rate cap could be adjusted prior to 2036. He said this is entirely speculative since the state can't predict the net gains or losses. 5:04:02 PM REPRESENTATIVE MILLETT asked what will happen to MOA if the municipality is short funded by $5 million and HB 152 doesn't pass. MR. BARNHILL said then the status quo continues and it will depend on whether the MOA pulls PERS employees out of service, for example, if the municipality were to terminate a group classification or department. In smaller municipalities, sometimes a fire chief position is terminated. He related a scenario in which MOA privatized a utility of $5 million. This would trigger a termination study, the MOA would pay $5,000 for the study, and Buck Consultants would project how many people will vest early and it would create a new unfunded liability, for example, perhaps $600,000. The DOR would bill the MOA, and the entire past service cost for those employees would need to be paid via the final payoff of the unfunded liability in 2036. 5:06:32 PM REPRESENTATIVE MILLETT asked whether the MOA could pay this at 22 percent over the life span. MR. BARNHILL said the current statutes provide municipalities to work out a plan with the Division of Retirement and Benefits. He acknowledged options could be explored. 5:07:23 PM KATHY LEA, Deputy Director, Retirement and Benefits, Department of Administration (DOA), answered that the statutes are broad and an increased contribution over time is a possibility. REPRESENTATIVE MILLETT asked whether a payment plan could be flexible. MS. LEA answered yes; it would be payable upon receipt or the municipality would work out a payment plan with the division. 5:08:10 PM KATHIE WASSERMAN, Executive Director, Alaska Municipal League (AML), stated that the AML represents 161 communities. Depending on what happens with this bill, municipalities will need help and more tools. She anticipated that if lean times are forthcoming, municipalities will need to lay people off. She said that municipalities need help in finding tools to deal with any consequences that might come their way. The AML has been supporting the governor's cash infusion, hoping that termination costs can be tacked on the end of the 25-year amortization. The amount of termination study costs would be so small compared to a potential $12 billion liability that municipalities could pay the costs. She assured members that they are not "trying to get out of anything" but also to recognize municipalities can only pay so much in order to keep rates at a steady, predictable 22 percent that can be budgeted. 5:10:42 PM REPRESENTATIVE MILLETT said that her municipality is concerned that at some point in time it will need to increase property taxes to the cap, which still won't cover the unfunded liability to PERS. This means that smaller municipalities will need to take on a greater cost percentage based on their property taxes and population base. MS. WASSERMAN said that is exactly right. She added that some small communities without a tax base don't have any way to make up those costs, which leaves everyone in a bind. She stated that municipalities are not trying to get out of obligations, but the legislature must find an affordable solution. [HB 152 was held over.]