SB 232-RETIREMENT:TEACHERS/JUDGES/PUB EMPLOYEES  CHAIR GARY STEVENS announced SB 232 to be up for consideration. ANSELM STAACK, Department of Administration (DOA), said he is the chief financial officer for the public employees' and the teachers' retirement systems and any others that operate within the Division of Retirement and Benefits including SBS and deferred compensation. He explained that the Internal Revenue Service (IRS) reviewed the entire plan reviewed by the Internal Revenue Service (IRS) and the process took three years. He noted that to remain a qualified plan, the division must ensure that their plans conform to tax law, which requires modifications whenever tax laws change. More importantly, the division had to get a private letter ruling from the IRS for employees to be able to pay indebtedness to the system with pre tax dollars rather than with post tax dollars. For the public employees' retirement system (PERS), the teachers' retirement system (TRS), the judicial retirement system (JRS), and the supplemental benefits system (SBS) the division sought a private letter ruling and a plan determination letter. The latter is an IRS letter approving the plan. As long as the established rules are followed, monies may be paid pre tax and the plan is eligible for IRA rollovers. The plan document or the rules for a tax-qualified plan for PERS, TRS and JRS are in statute and therefore any changes require legislative action. The original bill on this subject, SB 245, addressed the first series of changes suggested by the IRS. It was at that time that the Division of Retirement and Benefits came to realize that the process was going to take longer than initially anticipated SBS has a separate plan document from PERS, TRS, and JRS and it contains little statutory language. Therefore, when the IRS mandates certain changes to the SBS plan, the division is able to make those changes without legislative action. He assured members that just the changes that the IRS required were made to the SBS plan. On April 30 2003, the division received the IRS positive plan determination letters for the PERS, TRS, and JRS plans. Because the positive determination was conditioned on making all the suggested changes in statute within 210 days, the division asked that SB 232 and HB 331 be introduced. They realized there wasn't time to get the legislation passed before the end of the session, but felt this showed a good faith effort. In August 2003, the division received the positive private letter rulings related to PERS, TRS, and JRS. At the same time they received a negative letter ruling for including village public safety officers (VPSO) in PERS. This means VPSOs must be statutorily removed from PERS. In the first session of the 22nd Legislature SB 145 placed VPSOs into PERS and required the placement by March 2002. Mr. Staack said the division, and he in particular, did not implement the placement because IRS had not made a ruling and there were indications that IRS would question the placement. Placing VPSOs in PERS without a positive ruling from the IRS would have exposed PERS to unqualified plan status. The risk was too great to test. MR. STAACK said he personally argued the VPSO case before the IRS in Washington D.C. but the ruling was negative. He noted a copy of the ruling was in member's packets. CHAIR GARY STEVENS remarked that tax code reading is tedious. MR. STAACK chuckled and admitted that he's one of the few people that enjoy it. CHAIR GARY STEVENS announced there was a work draft CS before the committee and he asked for a motion to adopt it as the working document. SENATOR JOHN COWDERY made a motion to adopt CSSB 232 as the working document. There being no objection, it was so ordered. CHAIR GARY STEVENS asked Mr. Staack to outline the changes between the original bill and the CS. A sectional analysis may be found in the bill file. MR. STAACK noted the original bill had 19 sections and the CS has 32 sections. He pointed to page 2, lines 6-9 and read, "No amendment to this chapter provides any person with a vested right to a benefit if the Internal Revenue Service determines that the amendment will result in disqualification of the plan under the Internal Revenue Code." That addition is to prevent the general fund from being liable if a state law exists allowing benefits that cannot be paid out of plan assets because of an IRS determination. Section 3 relates to changing any reference to "teacher(s)" to the term "member(s)." That change occurs throughout the bill and applies to PERS as well. The IRS determined that using terms other than "members" could lead to confusion and a single definition was preferable. Sections 5 and 6 are conforming. Section 7 is to allow members to purchase permissible service credits such as military time. Section 10 adds additional sections to satisfy eligibility requirements and use service history. Sections 11 and 12 are to conform to the tax code in effect for 1980. Section 13 was a hard fought and long negotiated addition. If a member has any reduction from the 100 percent based benefit, the actuarial factors that apply have to be specified in regulation. The IRS originally wanted the factors outlined in statute rather than regulation so to satisfy them, the division was required to prove the basis for every actuarial factor in terms of the mortality table. He emphasized there is good reason for this because members should be able to find out how their benefit is computed. He continued, "You have a right to know that yes, we use the 1973 mortality table and we used a 2 percent interest rate." That is in regulation and not the bill. Section 14 speaks to the interchangeability between "teacher" and "member." Section 15 defines the prescribed interest rate used for the actuarial tables. Sections 16 - 20 relate to the JRS. Section 18 says no one is entitled to a benefit unless the code says they are. Section 20 is the actuarial assumption factors. Sections 21 - 31 relate to PERS. Section 21 stipulates no amendment can be made if it results in a disqualification. Section 22 deletes VPSOs. Section 25 deletes a mistake in the original HB 245 relating to forcing a member to cash out their account. Section 26 shows corrections for VPSOs for permissible service credit. Sections 27 and 28 are conforming. Section 29 is for the actuarial assumptions. Sections 30 and 31 are the last of the VPSO removal. Sections 32 - 35 are for redesignations of some systems and outlines when certain parts are effective. TAPE 04-3, SIDE B  4:24 pm CHAIR GARY STEVENS thanked Mr. Staack then outlined the process by which the state passes money to village nonprofits that pay the VPSOs. He asked how that process is dissimilar to the state funding school districts that use the money to pay teachers. MR. STAACH replied there are two issues involved. When the state gives money to a school district, the district employees may be TRS members because they are employees of a governmental entity. In contrast, VPSOs are not employees of a governmental entity; they are employees of a 501(c) (3) nonprofit corporation. He emphasized that the division tried very hard to include VPSO and even argued that the state was leasing an employee of a regional Native corporation for the purpose of doing public safety services. The IRS didn't agree with that argument or any other. Their point is that the state is asking the IRS to rule that a small portion of the regional Native corporation, specifically the VPSOs, are government employees and are working for a government. At the same time, those employees will provide services to villages that are members of PERS. IRS asked why the village couldn't employ those individuals. IRS said asking them to declare that part of the regional corporation is a governmental entity raises the question of whether or not the entire corporation is a governmental entity. There is considerable tax law stating you can't be both a 501 (c)(3) nonprofit corporation and a governmental entity. If the IRS were to rule that the regional corporation is a governmental entity for purposes of the VPSOs, their nonprofit status would be jeopardized. CHAIR GARY STENVENS referred to page 4 of the IRS letter and asked for clarification. MR. STAACK replied the IRS letter provides background information up to page 8. He read: Thus, we conclude that the K Corporation(s) is not an agency or instrumentality of the State or a political subdivision thereof. Accordingly, as for the first ruling requested, we find that the inclusion in Plan X of Community Officers, who are employees of a K Corporation which does not qualify as an agency... He explained the following paragraph states that it is not legal for the plan to take contributions from VPSOs and the employer may not pick them up. He continued, "The only reason your SBS money that you pay into the supplemental benefit system or the pretax contributions you make into the Public Employees' Retirement System is pretax is because a 'fiction' of the law converts it to employer money for purposes of being picked up and deposited in the plan." With regard to VPSOs, IRS is clear in stating there is no authority to do that. CHAIR GARY STEVENS remarked it's unfortunate that this is occurring at the same time that the Department of Public Safety is encouraging the regional Native corporations to assume responsibility for the VPSO program. In this time of budget cuts it makes it difficult for the Native corporations to continue the program. MR. STAACK verified that all parties tried very hard to find a solution and even the tribal section of the IRS was involved. SENATOR BERT STEDMAN questioned whether the division is actually using mortality tables from the 1970s. MR. STAACK replied the table that is used depends on when the member was first hired in the system. Some would use those tables, but in 2000 the division switched from the 1983 tables to the 1994 mortality tables for the purposes of calculating liabilities in PERS and TRS. SENATOR STEDMAN observed the two options are to bring the plan into compliance or not. If the latter choice is made then the entire plan becomes noncompliant thereby triggering tax consequences. MR. STAACK replied if a plan is determined non-qualified, the pretax contributions stop immediately. It's also possible that the money that is already in the plan would become immediately taxable. The legal liability associated with an unqualified plan is tremendous. SENATOR STEDMAN asked if changes could be expected every so often as the IRS evolves their rulings. MR. STAACK assured him that any time the tax law changes the division is automatically required to become compliant. SENATOR STEDMAN asked how the 457 (B) plan is handled. MR. STAACK said the 457(B) plans are deferred compensation plans for governments and other nontaxable entities and are called eligible retirement plans. The PERS, TRS, JRS, teacher 403(B)s and the supplemental benefits system, which is a defined contribution plan are all qualified plans. For the most part, the rules for both are now identical to all other retirement plans. Previously they were not the same, but there is no need to make a change in this legislation, he said. However, just to be on the safe side, they adopted any changes that applied to SBS to deferred compensation. CHAIR GARY STEVENS asked for the pleasure of the committee. SENATOR JOHN COWDERY made a motion to move CSSB 232(STA) to the next committee of referral with individual recommendations and the attached fiscal note. There being no objection, it was so ordered.