HOUSE FINANCE COMMITTEE April 10, 1996 1:36 P.M. TAPE HFC 96-109, Side 1, #000 - end. TAPE HFC 96-109, Side 2, #000 - end. TAPE HFC 96-110, Side 1, #000 - end. TAPE HFC 96-110, Side 2, #000 - #360. CALL TO ORDER Co-Chair Mark Hanley called the House Finance Committee meeting to order at 1:36 p.m. PRESENT Co-Chair Hanley Co-Chair Foster Representative Martin Representative Brown Representative Mulder Representative Grussendorf Representative Parnell Representative Kelly Representative Therriault Representative Kohring Representative Navarre was absent from the vote. ALSO PRESENT Representative Jerry Mackie; Bill Munroe, Mat-Su; David Means, Ketchikan Greater Borough School District; Lucy Hope, Mat-Su; Len Murray, Mat-Su; Richard Mauer, Delta Junction/Greely School District; George Hronkin, Administrator Copper River School District; Theresa Stoddard, Kenai; Steven Wright, Kenai Peninsula School Association; Keith Evans, Dilingham City Schools; Bob Stalnaker, Director, Division of Retirement and Benefits, Department of Administration; Carl Rose, Alaska Association of School Boards; Joan Wilkerson, Alaska Public Employees Association; Larry Wiget, Anchorage School District; Kimberly Homme, Special Assistant, Department of Education. SUMMARY HB 2 An Act allowing courts to require certain offenders as a special condition of probation to complete a boot camp program provided by the Department of Corrections; making prisoners who complete the boot camp program eligible for discretionary parole; providing for incarceration of certain nonviolent offenders in boot camps operated by the Department of Corrections; 1 allowing the Department of Corrections to contract with a person for an alternative boot camp program; creating the Boot Camp Advisory Board in the Department of Corrections; and providing for an effective date. HB 2 was rescheduled to another time. HB 354 An Act relating to a retirement incentive program for certain employees of school districts under the teachers' retirement system and the public employees' retirement system; and providing for an effective date." CSHB 354 (FIN) was reported out of Committee with "no recommendation" and with a fiscal impact note by the Department of Administration, dated 3/16/96. SB 226 An Act relating to biennial registration of motor vehicles; imposing biennial registration fees on motor vehicles and authorizing a scheduled biennial municipal tax on motor vehicles; relating to fees for motor vehicle emissions control programs; and providing for an effective date. SB 226 was rescheduled to another time. SB 250 An Act relating to the University of Alaska and to assets of the University of Alaska; authorizing the University of Alaska to select additional state public domain land, designating that land as `university trust land,' and describing the principles applicable to the land's management; and defining the net income from the University of Alaska's endowment trust fund as `university receipts' subject to prior legislative appropriation. SB 250 was rescheduled to another time. HOUSE BILL NO. 354 "An Act relating to a retirement incentive program for certain employees of school districts under the teachers' retirement system and the public employees' retirement system; and providing for an effective date." REPRESENTATIVE JERRY MACKIE, sponsor of HB 354, spoke in support of the legislation. He provided members with letters of support and back-up information (Attachment 1). 2 He also provided members with Amendment 1 and Amendment 2 (Attachments 2 and 3). Amendment 1 addresses the equal protection issue. Amendment 2 defines "school district". He emphasized that the legislation only relates to school districts, does not have an adverse affect on the Teachers Retirement System (TRS) actuarial, and is optional for school districts and teachers. Representative Brown asked if municipalities would be fiscally impacted. Representative Mackie felt that a municipal fiscal note was not needed. He observed that the fiscal note by the Department of Administration would provide funding through general fund program receipts for the program's administration. He emphasized that participating school districts will pay the cost of the program. Each participating teacher will have to contribute the same amount of money they would have contributed if they had remained working. He reiterated that there is no adverse affect on TRS. Representative Mulder stressed that school districts cannot not come back to the legislature for additional funding to defray their participation in the program. Representative Mackie stressed that it is not the intent of the legislation that any future costs be covered by the legislature. The legislation provides that costs involved in the program will be taken from savings that are achieved by the Retirement Incentive Program (RIP) or from school district's current foundation formula amount. Representative Martin asked if other options have been considered. He asked if it would be better to repeal the 20 year retirement period. Representative Mackie noted that the legislation does not address the structure of the current teacher's retirement system. He stressed that the intent is to provide an incentive for high end salaried teachers to retire and be replaced with lower paid teachers. Representative Martin noted that out-of-state teachers can buy into TRS after a period of service in Alaska. He expressed concern that the program will result in the loss of qualified teachers. Representative Mackie noted that 40 to 50 percent of the state's teachers are at the high end of the salary schedule. The legislation allows school districts to address the problem. Representative Martin questioned if superintendents and principals are covered under the legislation. Representative Mackie replied that the legislation covers school districts' PERS and TRS employees. 3 Representative Therriault noted that the legislation allows school districts to opt in to the retirement incentive program. Once school districts opt in they must participate for three years. He questioned if the legislation could be amended to allow participation for "up to" three years. Representative Mackie noted that the change could be made, but was not certain it would be advantageous. RICHARD MAUER, DELTA/GREELY SCHOOL BOARD, LEGISLATIVE LIAISON testified via the teleconference network. He spoke in support of HB 354. He noted that attendance is receding in the Delta/Greely School District. The School District cannot reduce tenured teachers and administrators. There is a $600.0 thousand dollar anticipated shortfall. Without a retirement incentive program reductions must come from supplies, maintenance and student services. There are seventeen teachers that would qualify for the program. He clarified that these teachers are not currently eligible for retirement. In response to a question by Representative Martin, Mr. Mauer stressed that the program is needed to cover the shortfall. The pupil/teacher ratio is high. He maintained that there are too many teachers for the number of students. He stated that the shortfall could be covered if in addition to other reductions, three or four teachers took advantage of the program. STEVE WRIGHT, KENAI PENINSULA EDUCATION SUPPORT ASSOCIATION testified via the teleconference network. He maintained that HB 354 is a win/win situation. He expressed concern that support employees be included in the legislation. He asserted that the legislation is desperately needed. Representative Mackie clarified that non-certified employees are covered by the legislation. In response to a question by Co-Chair Hanley, Representative Mackie noted that between 175 and 200 employees are eligible in the Kenai Peninsula School District. Representative Martin reiterated concerns regarding the loss of qualified teachers. Representative Mackie noted that 72 individuals in the Kenai Peninsula School District retired under the last RIP program for an estimated savings of $1.9 million dollars. KEITH EVANS, SUPERINTENDENT, DILLINGHAM CITY SCHOOLS testified via the teleconference network. He testified in 4 support of HB 354. He noted that 12 people would qualified under the program. He stressed that savings could be experienced if even 1 or 2 individuals elected to retire. GEORGE HRONKIN, ADMINISTRATOR, COPPER RIVER SCHOOL DISTRICT testified via the teleconference network. He spoke in support of HB 354. He emphasized that the legislation would provide an opportunity to revitalize staff in addition to providing a savings. Representative Martin asserted that teachers are being bashed. In response to a question by Representative Martin, Mr. Hronkin noted that 8 individuals participated in the last RIP program. There are 16 individuals that could qualify for the program. He stated that the Copper River School District paid its participation for the last RIP program. DAVID MEANS, BUSINESS MANAGER, KETCHIKAN SCHOOL DISTRICT testified via the teleconference network. He spoke in support of HB 354. He expressed concern that replacement teachers be recruited to replace retiring teachers. LUCY HOPE, MAT-SU EDUCATION ASSOCIATION testified via the teleconference network. She testified in support of HB 354. She stressed that school districts need tools to deal with the flat funding of education. She noted that 110 teachers will be laid off in Mat-Su. She stressed that it makes more sense to allow teachers to retire than to lay off teachers who are at the beginning of their careers. She provided members with testimony from others that support HB 354 (Attachment 4). BILL MUNROE, PRESIDENT, CLASSIFIED EMPLOYEES ASSOCIATION testified via the teleconference network. He spoke in support of the legislation. He observed that there are at least 70 classified employees interested in the program. He read testimony in support of HB 354. Representative Martin questioned if the retirement requirement should be lowered to 17 years. LENARD MURRAY, MAT-SU testified via the teleconference network. He spoke in support of HB 354. He maintained that the legislation will provide a cost savings. JOAN WILKERSON, ALASKA PUBLIC EMPLOYEES ASSOCIATION testified in support of HB 354. She stressed that the legislation will save school districts money. Representative Martin asked if the retirement requirement should be lowered to 17 years. Ms. Wilkerson stressed the 5 need for further research. She emphasized that the whole system would have to be restructured. Co-Chair Hanley pointed out that some individuals who qualify will not participate in the program. KIMBERLY HOMME, SPECIAL ASSISTANT, DEPARTMENT OF EDUCATION testified in support of HB 354. She provided members with a report by the Legislative Budget and Audit Committee, 1991 (copy on file). She observed that the report concluded that the 1989 RIP program resulted in a savings. She requested that state operated schools be included. She noted that there are three state operated schools. Ms. Homme noted that the legislation on page 2, line 14, requires the commissioner of the Department of Education to certify that each school district's plan will result in a savings. She emphasized the difficulty of certifying savings. She maintained that the purpose of the provision is to obtain additional information regarding the RIP program. Representative Martin asked if the Department of Education is involved in contract negotiations of individual school districts. Ms. Homme was not aware of involvement by the Department of Education in school district contracts. She noted that HB 398 would allow school districts to lay off teachers due to declines in revenues. Representative Parnell stressed that school districts need to be able to find savings if flat funding of education remains. He emphasized that school districts will not implement the program if a savings is not anticipated. Co-Chair Hanley observed that if school districts attempted to pass on increased costs to the State the legislature would not be supportive. He noted that if the actuarial soundness is threatened that school districts will look to the State. (Tape Change, HFC 96-109, Side 1) Representative Mackie noted that the Anchorage School District and others have offered cash incentives for retirements. These programs are only available to those that are qualified for 20 year retirement. The legislation will allow individuals that have less than 20 years to qualify. He emphasized that school districts will not implement the program unless a savings is anticipated. He noted that a plan is required to demonstrate a savings. The local school board has to agree that the plan represents a savings to the district before it can be implemented. He 6 spoke in support of certification by the commissioner of the Department of Education. He observed that the commissioner would not be held responsible for a savings. There are no additional state funds to cover mistakes. Representative Therriault noted that the 1989 RIP program required that a savings be demonstrated. He stated that savings would be defined by the cost difference for the replacement position. LARRY WIGET, DIRECTOR OF GOVERNMENT RELATIONS, ANCHORAGE SCHOOL DISTRICT testified in support of HB 354. He recognized that other districts may benefit from the program. He emphasized that the intent is not to get rid of highly qualified teachers. He stressed that in a time of declining resources the program provides a means to reduce costs. In response to a question by Representative Martin, Mr. Wiget noted that the Anchorage School District has offered a retirement incentive program. Representative Martin restated the question of dropping the retirement qualification to 17 years. Mr. Wiget stressed that the issue will need to be analyzed. He observed that not all teachers retire after 20 years. He maintained that a number of highly qualified teachers will continue to teach. Representative Martin asked, "just because they are getting paid too much, we have got to motivate them to quit early?" Mr. Wiget emphasized that the program appears to be a way in which school districts can help reduce costs. Representative Martin asked if the retirement requirement should be reduced to 17 years. He stated that he did not want to have teachers paid more to leave. Mr. Wiget did not think the retirement requirement should be lowered. In response to a question by Representative Parnell, Mr. Wiget discussed the Anchorage School District's RIP program. He noted that $10.0 thousand dollar incentive is offered to individuals that have completed 20 or more years and are full-time employees to retire. The $10.0 thousand dollars is paid as a compensation increase for the school year. The incentive would increase the employee's three highest years. Representative Kelly stressed that the intent is to give districts flexibility to use the program where it would produce savings. He added that a 17 year retirement 7 requirement would not necessarily realize a savings. Representative Mackie pointed out that the legislation is designed to address existing law. Representative Therriault noted that the pressure for instituting RIP programs is increasing. He maintained that RIP should only be applied when problems need to be addressed. He asked the District's expense to buy out three years under the legislation. Mr. Wiget could not answer Representative Therriault's question. He observed that 600 employees could apply for the program. Representative Mackie noted that 306 individuals in the Anchorage School District participated in the last RIP program for a savings of $2.8 million dollars. Representative Therriault asked if the Anchorage School District would need to participate for 3 years. Mr. Wiget did not know how many years would be needed. He agreed that an option for up to three years would provide more flexibility. Co-Chair Hanley noted that a flexible program would allow a district to withdraw when their goals are met. Representative Martin discussed out-of-state teachers that buy into TRS. Mr. Wiget noted that out-of-state teachers must pay for their service plus 7 percent interest on the service. He emphasized that it is costly to buy service. CLAUDIA DOUGLAS, PRESIDENT, NEALASKA spoke in support of HB 354. She provided members with written testimony (Attachment 5). She asserted that RIP is cost effective and fair. She maintained that RIP offers school district administrators an opportunity to reduce staff at the top end of the salary schedule and replace those with employees who could be hired at the lower end of the salary scale. Absent RIP school districts will be forced to lay off the less experienced employees. In response to a question by Representative Therriault, Ms. Douglas stated that an option of up to three years would be acceptable. Representative Therriault asserted that there will be no personnel cost savings. Ms. Douglas pointed out that the plan has to demonstrate savings. Representative Therriault noted that savings can be used to hire additional teachers. He maintained that the overall amount of money spent can remain the same. 8 Representative Mackie reiterated that a savings must be demonstrated. He acknowledged that the savings can be used to fund programs that would have been deleted. Representative Therriault reiterated his belief that the overall amount of money spent will not be reduced. He stressed that funding will be spent differently. Representative Mackie noted that some districts are facing shortfalls and will have to realize a savings. In response to a question by Representative Martin, Ms. Douglas stressed that the legislation is not an attempt to dismiss highly qualified teachers. She did not think that teachers or school districts are trying to implement a 17 year retirement system. She emphasized that the legislation is a way for school districts to save money. Co-Chair Hanley pointed out that a 17 year retirement system would not necessary result in a cost savings. Representative Therriault asked how long it takes the average teacher to reach their maximum salary. Ms. Douglas noted that teachers reach the top of their salary scale at approximately 12 years. Top salaries are approximately $58.0 thousand dollars and beginning salaries are approximately $30.0 thousand dollars. Representative Therriault noted that TRS is built on a 20 year actuarial. The system would be undermined if it were changed to 17 years. He emphasized that some teachers that are not eligible for this RIP will lobby for another RIP when they become eligible. Representative Mackie emphasized that the legislation was introduced on behalf of school districts and administrators. CARL ROSE, EXECUTIVE DIRECTOR, ASSOCIATION OF ALASKA SCHOOL BOARDS testified on behalf of the legislation. He pointed out that school boards are governed by legislative statutes and Department of Education regulations. Funding is largely through the legislature. He maintained that the ability of school boards to fix their own problems is dependent on the State and legislature. He noted that education has been flat funded at a 2 percent increase. At the same time, there have been increased mandates from local communities. The local authority to raise money is restricted. Many school districts are restricted by the cap. There is a statutory obligation to negotiate. He emphasized political and economic pressure from the "right to strike". He stressed that HB 354 is fair and comprehensive. He expressed concern that the legislation must be acted on quickly to allow school districts to utilize it as a tool. 9 Representative Martin maintained that Alaska has one of the lowest teacher/pupil ratios. Mr. Rose stated that the statistics of teacher/student ratio are misleading. He noted that there are many large classes. He added that special education teachers make the pupil/teacher ratio lower. He stressed that pupil/teacher ratio is of concern to many parents. He questioned the State's interest in providing public education and its responsibility for funding. He asked the responsibility and interest of local governments. He maintained that it is in the best interest of the State to provide a quality education and recognize the cost. Mr. Rose noted that funding have been kept constant. Expectations and real costs have increased. He emphasized that the program provides incentives for high end employees to retire and make room for low end employees. (Tape Change, HFC 96-110, Side 1) BOB STALNAKER, DIRECTOR, DIVISION OF RETIREMENT AND BENEFITS, DEPARTMENT OF ADMINISTRATION noted that the Administration strongly supports HB 354 as an additional tool for school districts and any public employer. In response to a question by Representative Martin, Mr. Stalnaker stressed that RIP programs have not impacted the actuarial soundness of TRS. No employers are delinquent. Funding volatility and fluctuation was due to legislation passed in 1991 which provided for guaranteed cost of living increases. The funding ratio of TRS is above 91 percent and is increasing. He reiterated that RIP programs have not detrimentally affected the soundness of TRS. Employers must pay the cost to the system for benefits and the cost to administer the program within three years. This is included in calculations of savings. In response to a question by Representative Martin, Mr. Stalnaker noted that COLA is prefunded. Employers must include COLA costs in their estimated savings. Representative Martin referred to superintendent contracts. Mr. Stalnaker noted that increases in salary are factored into the benefit payment. In response to a question by Representative Therriault, Mr. Stalnaker explained that only 30 percent of eligible teachers participate in RIP programs. He pointed out that a sliding scale program would incur more administrative costs. The actuarial will have to compensate for different options. 10 Mr. Stalnaker agreed that timing is critical. He noted that the bill will not be enacted until the middle of May. He emphasized that the more complex the program that more difficult it will be to utilize it for the coming school year. He explained that different people will be effected by the different years offered as an incentive. There could be a whole array of projected costs depending on 1, 2 or 3 years. The actuarial will have to be run for each option. Representative Therriault noted that employees receive more than they pay in to the program. Mr. Stalnaker acknowledged that the employee contribution is rarely sufficient to fund their benefit. Interest to the fund provides additional revenues to offset the employer's cost. Most actuarial methods assume that there will be growth in the system. The State targets 95 percent funding. Representative Therriault asked if there will be instability in the system due to retirements from growth years. Mr. Stalnaker explained that the average age of the TRS and PERS populations are growing. This trend is considered in the actuarial. The last RIP program was originally for 3 years and was expanded to 5 years. The longer the period to show a savings, the more likelihood that greater numbers will qualify. The longer the program the easier it is for an employer to demonstrate a savings. Representative Therriault provided members with a graph (Attachment 6). He asked if savings are being shifted to the future. Mr. Stalnaker clarified that there is a two tier system in TRS. Tier II employees cost less. Most teachers retiring are under Tier I. He stressed that the average teacher works in access of 20 years. Representative Therriault noted that the Fairbanks School District retires an average of 25 to 30 teachers a year. He pointed out that the number of teachers participating in RIP will include teachers that would have retired anyway. He stated that the program can be limited to teachers that are between 17 and 20 years. Mr. Stalnaker agreed that the program can be based on defined criteria without discriminating. Mr. Stalnaker noted that the state of Alaska prefunds its health insurance. If the health insurance is excluded the State's actuarial is above 100 percent. With the health insurance funded the actuarial was 85 percent for June 1994. The funding level in TRS as of June 1995, is 91 percent. The value of assets for TRS is approximately 2.5 billion dollars. The unfunded liability is approximately $200.0 million dollars. 11 Representative Grussendorf noted that many teachers keep working past their 20 years of service. He stressed that the incentive has to be big enough to encourage teachers to participate. Co-Chair Hanley asked the cost per person to buy their participation. Mr. Stalnaker explained that the employee's cost is approximately 25 percent of their annual salary for the three years, $15.0 thousand dollars. The school district pays the remainder of the cost. Savings have to be shown to overcome the cost. School districts would pay approximately twice as much, $30.0 thousand dollars. The employer would pay the additional cost of administration. Employee's retirement is raised by approximately 2 percent for each additional year of participation. Mr. Stalnaker explained that if an employee retires with 17 years of service they retire with a benefit based on 17 years of service. Their benefit does not increase by 2 percent for each of the additional 3 years. The additional 3 years is used to meet the 20 year requirement. They would receive 3 additional years of benefit at 17 years of service that they would not have received. Co-Chair Hanley pointed out that if an employee is at 20 years of service and buys out an additional three years they will actually receive their retirement based on the additional 3 years. The person that is over 20 years would pay off their cost to buy out three additional years after 4 years of benefits. In response to a question by Co-Chair Hanley, Mr. Stalnaker reiterated that there will be additional savings by replacing Tier I employees with Tier II employees. Representative Brown asked how difficult it will be for the commissioner of the Department of Education to certify the plans. Mr. Stalnaker noted that the plans will have to go through the Department of Education before they are sent to the Department of Administration and reviewed by the Division of Retirement and Benefits. He noted that the Division accepts the school district's calculations. Representative Brown questioned the lack of a fiscal note by the Department of Education. Mr. Stalnaker observed that the Department of Education would prefer not to certify the plans. Representative Mackie noted that the House State Affairs Committee added the provision to have the commissioner of Department of Education certify the plans. He stated that 12 he would have no objection to allowing the Department of Administration to certify the plans. (Tape Change, HFC 96-110, Side 2) In response to a question by Representative Martin, Mr. Stalnaker explained that the statutes include only two tiers in the retirement system. He noted that only 30 percent of those eligible participate. The legislation is elective for employees and employers. Co-Chair Hanley asked if the legislation allows savings to be used to hire more teachers in addition to the replacement teachers. Mr. Stalnaker stated that the legislation does not speak to how the savings can be used. He pointed out that some school districts are facing deficits. Mr. Rose noted that not all retiring teachers will be replaced. He added that savings may be used to reduce the pupil/teacher ratio. The pupil/teacher ratio is critical in some areas. In response to a question by Co-Chair Hanley, Representative Mackie noted that the Anchorage School District saved $2.8 million dollars from the previous RIP. Co-Chair Hanley summarized that the money will be available for reallocation to the school district's highest priority. In response to a question by Representative Therriault, Mr. Stalnaker noted that the yearly health insurance premium for a retiree is $330 dollars a month. Representative Mackie reiterated that two amendments were provided the Committee. He addressed Amendment 1, 9- LS0634\G.2, dated 4/9/96. He noted that the amendment provides the criteria that a school district must follow to maintain equal protection. Mr. Stalnaker stated that Amendment 1 is consistent in current practices and advise from the Office of Attorney General. Representative Parnell MOVED to adopt Amendment 1. There being NO OBJECTION, it was so ordered. Representative Mackie explained that Amendment 2 would define "school district" as a city or borough school district or a regional educational attendance area. He stated that the bill was drafted to include school districts with a locally elected school board. Representative Parnell MOVED to adopt Amendment 2. There being NO OBJECTION, it was so ordered. 13 Representative Brown MOVED to adopt Amendment 3, delete "education" and insert "administration" on page 2, lines 4 and 18; delete page 2, lines 15 - 17; and insert on page 2, line 17 after "shall" "review the plan and advise the commissioner whether it complies with the requirements of this section. The administrator shall..." She explained that the amendment would transfer certification to the Department of Administration. There being NO OBJECTION, it was so ordered. Representative Mulder MOVED to report CSHB 354 (FIN) out of Committee with individual recommendations and with the accompanying fiscal note. Representative Mulder WITHDREW his motion to allow further amendments. Representative Therriault discussed reducing the time in which savings must be demonstrated from 5 to 3 years. Mr. Stalnaker noted that previous RIP programs allowed savings to be demonstrated in 5 years. He noted that the five year allowance would be an advantage to the employer. Co-Chair Hanley noted that school districts must reimburse the system within three years after the end of the fiscal year from which the employee is appointed to retirement. Representative Mackie explained that the savings would be eliminated if the debt had to be paid off in the first year. Representative Mulder MOVED to report CSHB 354 (FIN) out of Committee with individual recommendations and with the accompanying fiscal note. There being NO OBJECTION, it was so ordered. CSHB 354 (FIN) was reported out of Committee with "no recommendation" and with a fiscal impact note by the Department of Administration, dated 3/16/96. ADJOURNMENT The meeting adjourned at 4:20 p.m. 14