Legislature(2005 - 2006)CAPITOL 106
04/05/2005 08:00 AM House STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| SB104 | |
| HB238 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 104 | TELECONFERENCED | |
| += | HB 177 | TELECONFERENCED | |
| += | HB 191 | TELECONFERENCED | |
| += | HB 238 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE STATE AFFAIRS STANDING COMMITTEE
April 5, 2005
8:02 a.m.
MEMBERS PRESENT
Representative Paul Seaton, Chair
Representative Jim Elkins
Representative Bob Lynn
Representative Jay Ramras
Representative Berta Gardner
Representative Max Gruenberg
MEMBERS ABSENT
Representative Carl Gatto, Vice Chair
COMMITTEE CALENDAR
CS FOR SENATE BILL NO. 104(JUD)
"An Act relating to the crimes of unsworn falsification in the
first and second degrees and false information or report;
requiring the establishment of a permanent fund dividend fraud
investigation unit in the Department of Revenue; and providing
for an effective date."
- MOVED CSSB 104(JUD) OUT OF COMMITTEE
HOUSE BILL NO. 238
"An Act relating to contribution rates for employers and members
in the defined benefit plans of the teachers' retirement system
and the public employees' retirement system and to the ad-hoc
post-retirement pension adjustment in the teachers' retirement
system; requiring insurance plans provided to members of the
teachers' retirement system, the judicial retirement system, the
public employees' retirement system, and the former elected
public officials retirement system to provide a list of
preferred drugs; relating to defined contribution plans for
members of the teachers' retirement system and the public
employees' retirement system; and providing for an effective
date."
- HEARD AND HELD
HOUSE BILL NO. 177
"An Act relating to employee and employer contributions to the
teachers' retirement system and the public employees' retirement
system; and providing for an effective date."
- SCHEDULED BUT NOT HEARD
HOUSE BILL NO. 191
"An Act relating to defined contribution systems for members of
the teachers' retirement system and the public employees'
retirement system; and providing for an effective date."
- SCHEDULED BUT NOT HEARD
PREVIOUS COMMITTEE ACTION
BILL: SB 104
SHORT TITLE: PERMANENT FUND DIVIDEND FRAUD
SPONSOR(s): SENATOR(s) SEEKINS
02/14/05 (S) READ THE FIRST TIME - REFERRALS
02/14/05 (S) STA, JUD
02/22/05 (S) STA AT 3:30 PM BELTZ 211
02/22/05 (S) Heard & Held
02/22/05 (S) MINUTE(STA)
02/24/05 (S) STA AT 3:30 PM BELTZ 211
02/24/05 (S) Moved CSSB 104(STA) Out of Committee
02/24/05 (S) MINUTE(STA)
02/28/05 (S) STA RPT CS 4DP
SAME TITLE
02/28/05 (S) DP: THERRIAULT, ELTON, HUGGINS, DAVIS
03/01/05 (S) JUD AT 8:30 AM BUTROVICH 205
03/01/05 (S) Heard & Held
03/01/05 (S) MINUTE(JUD)
03/02/05 (S) JUD RPT CS 3DP 2NR
NEW TITLE
03/02/05 (S) DP: SEEKINS, THERRIAULT, HUGGINS
03/02/05 (S) NR: FRENCH, GUESS
03/02/05 (S) JUD AT 8:30 AM BUTROVICH 205
03/02/05 (S) Moved CSSB 104(JUD) Out of Committee
03/02/05 (S) MINUTE(JUD)
03/07/05 (S) TRANSMITTED TO (H)
03/07/05 (S) VERSION: CSSB 104(JUD)
03/09/05 (H) READ THE FIRST TIME - REFERRALS
03/09/05 (H) STA, JUD
04/05/05 (H) STA AT 8:00 AM CAPITOL 106
BILL: HB 238
SHORT TITLE: PUBLIC EMPLOYEE/TEACHER RETIREMENT
SPONSOR(s): STATE AFFAIRS
03/30/05 (H) READ THE FIRST TIME - REFERRALS
03/30/05 (H) STA, FIN
03/31/05 (H) STA AT 8:00 AM CAPITOL 106
03/31/05 (H) Heard & Held
03/31/05 (H) MINUTE(STA)
04/02/05 (H) STA AT 10:00 AM CAPITOL 106
04/02/05 (H) Heard & Held
04/02/05 (H) MINUTE(STA)
04/05/05 (H) STA AT 8:00 AM CAPITOL 106
WITNESS REGISTER
SENATOR RALPH SEEKINS
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Presented SB 104 as sponsor.
SHARON BARTON, Director
Permanent Fund Dividend Division
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Testified on behalf of the division during
the hearing on SB 104.
DANIEL J. BOONE, Investigator III
Permanent Fund Dividend Division
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Testified on behalf of the division during
the hearing on SB 104.
MELANIE MILLHORN, Director
Health Benefits Section
Division of Retirement & Benefits
Department of Administration
Juneau, Alaska
POSITION STATEMENT: On behalf of the division, presented a
proposed medical program prepared by Mercer Human Resource
Consulting, during the hearing on HB 238.
BRAD LAWSON
Mercer Human Resource Consulting
Seattle, Washington
POSITION STATEMENT: Testified as a representative of Mercer
Human Resource Consulting, on behalf of the Division of
Retirement & Benefits, during the hearing on HB 238.
KATHY LEA, Retirement Manager
Division of Retirement & Benefits
Department of Administration
Juneau, Alaska
POSITION STATEMENT: Answered questions from the committee
during the hearing on HB 238.
ACTION NARRATIVE
CHAIR PAUL SEATON called the House State Affairs Standing
Committee meeting to order at 8:02:48 AM. Representatives
Elkins, Lynn, Gardner, and Seaton were present at the call to
order. Representatives Ramras and Gruenberg arrived as the
meeting was in progress.
SB 104-PERMANENT FUND DIVIDEND FRAUD
[Contains discussion of HB 127.]
8:03:12 AM
CHAIR SEATON announced that the first order of business was CS
FOR SENATE BILL NO. 104(JUD), "An Act relating to the crimes of
unsworn falsification in the first and second degrees and false
information or report; requiring the establishment of a
permanent fund dividend fraud investigation unit in the
Department of Revenue; and providing for an effective date."
8:03:32 AM
SENATOR RALPH SEEKINS, Alaska State Legislature, presented SB
104 as sponsor. He said the bill would strengthen the
Department of Revenue's ability to investigate fraud associated
with making false applications for the Alaska permanent fund
dividends (PFDs). Under the proposed bill, the submission of a
fraudulent PFD application would become a Class C felony. He
reported that in 2004, the Department of Revenue examined over
1,600 fraud tips and audited over 1,700 PFD applications
suspected of being fraudulent, which resulted in $1.4 million in
denied or assessed dividends. Furthermore, there were three
federal indictments and one conviction for crimes involving PFD
fraud.
SENATOR SEEKINS said currently, under state law, Alaska cannot
prosecute for fraud, but the federal government can. Senator
Seekins revealed that the most common fraud offense involves
persons who forge the signature of another on the PFD
application or related documents with the intent of receiving a
dividend to which they are not entitled. He noted that the bill
is not intended to capture cases, for example, where husbands
and wives sign for each other; the provision of SB 104 would
apply in cases where the individual is attempting to steal from
another person or from the state.
8:05:26 AM
SENATOR SEEKINS discussed categories of offenses. He reiterated
that the bill would make unsworn falsification, as it relates to
a person making an application for a permanent fund dividend, a
violation in the first degree punishable as a Class C felony.
8:06:51 AM
SENATOR SEEKINS said he introduced the bill because he thinks
"we all" know people who are trying to tap into the PFD
illegally. The bill would codify in statute a fraud
investigation unit within the department. He anticipated that
by having the unit in statute, it will be possible to access the
national crime computer system in order to find people who may
be trying to hide.
8:07:35 AM
SENATOR SEEKINS, in response to a question from Representative
Lynn, said the current fraud unit does not have the necessary
statutory authority to be able to [access the national crime
computer system] and would have to "apply to do so."
8:08:02 AM
REPRESENTATIVE GARDNER noted that the House just passed HB 127,
which will allow Peace Corps Volunteers to receive the PFD. One
of the provisions of the bill reduced the fine for fraudulent
claims from $5,000 to $3,000. She offered her understanding
that "it had to do with our ability to actually collect on
that." She observed that SB 104 "addresses that in a much more
severe way."
8:08:49 AM
SENATOR SEEKINS responded that it is a stronger way. He said he
applauds any effort to collect; however, in this case, "it's not
a collection issue; it's a felony."
8:09:07 AM
CHAIR SEATON clarified that the idea behind lowering the fine
[in HB 127] was not to lessen the impact, but to make it so that
it was worth enforcing, because at the higher amount a public
offender had to be provided, which was not always cost effective
for the state. He added that lowering the fine also made
prosecution more likely.
8:10:20 AM
SENATOR SEEKINS said the intention of the bill is to be able to
go after the most serious offenders. He said a warning would be
clearly printed on the application. He stated, "A felony
conviction has a whole lot more ramifications than a misdemeanor
conviction."
8:10:47 AM
REPRESENTATIVE ELKINS asked for an example major fraud.
8:11:04 AM
SENATOR SEEKINS deferred to the Permanent Fund Dividend
Division.
8:11:19 AM
SHARON BARTON, Director, Permanent Fund Dividend Division,
Department of Revenue, testifying on behalf of the division,
stated that the PFD program is particularly vulnerable to fraud.
She said there are 635,000 applications "to shove through the
pipe in just a few months of considerations." She noted that
the division began "beefing up" its investigations of fraud two
years ago, and last year the legislature authorized subpoena
powers for the division, which has helped substantially with
audits.
8:13:05 AM
DANIEL J. BOONE, Investigator III, Permanent Fund Dividend
Division, Department of Revenue, testifying on behalf of the
division, stated that the division is encouraging the public to
file online applications, use an electronic signature - for
those who have "been in the system," and receive a direct
deposit. When everything is done electronically, he said, it
makes it difficult to identify someone who has moved out of the
state. He reported that the division is currently working on
new technology that will help in identifying outside "IP"
[Internet Protocol] addresses in order to tell if the person is
actually in the state. The focus, he indicated, is to work to
find the individuals who are "going after one PFD after another,
year after year ...." He offered examples.
8:16:24 AM
MR. BOONE said the current fine is not a deterrent. The
subpoena power is a help. He stated that approximately 64
percent of the fraud cases are related to dealing with
individuals out of the state. He offered more examples. He
said, "There is no forgery, per se - ... as far as a [PFD}
application - that puts teeth in anything." He said the same
applies to criminal impersonation. He said, "With the [attorney
generals (AGs)] and everything that they're under, it's really
been difficult ... for them to take a Class A misdemeanor versus
a felony case."
8:18:10 AM
CHAIR SEATON noted that the committee is currently considering
another bill which would allow the use of a power of attorney to
submit the [PFD] application. He said, "Under a power of
attorney you can't really tell somebody's intent to return to
Alaska and, therefore, ... basically the intent to return to
Alaska provision is made void by the use of a power of
attorney." He asked if the unsworn falsifications being
discussed under SB 104 often relate to the intent to return to
Alaska, or if that is a totally separate issue.
8:19:12 AM
MR. BOONE answered that that's a totally separate issue. He
said he deals with individuals who have deliberately and
recklessly disregarded material facts pertaining to their
eligibility or the eligibility of others for whom they are
applying. He offered examples. He said, "The ... way we pursue
our cases criminally ... [is] definitely more cut and dry than
in intent, which is a lot of grey area ...."
8:20:10 AM
REPRESENTATIVE GRUENBERG stated his concerned about a possible
constitutional challenge on the basis of equal protection
regarding setting up "this particular type of fraud as a
felony." He stated his strong support of the bill and explained
that he wants to protect it against such a challenge. He asked,
"Is there specific legislative history explaining why this is a
felony and other types of unsworn falsification for similar
types of benefits are only Class A misdemeanors?"
8:22:00 AM
SHARON BARTON recommended asking that question of Chris Poag.
8:22:16 AM
REPRESENTATIVE GRUENBERG directed attention to page 4, [lines 4-
5], which read:
(2) on a form bearing notice, authorized by
law, that false statements made in it are punishable.
REPRESENTATIVE GRUENBERG asked if the language would be changed
so that it would apply to all PFD applications and would be
"punishable as unsworn falsification in the first degree." He
explained, "Because an argument could be made if you don't that
it would only be [a] misdemeanor."
8:23:10 AM
MS. BARTON said that the division has not drafted that language
but would certainly take it under advisement.
8:23:25 AM
CHAIR SEATON noted that the bill would be heard by the House
Judiciary Standing Committee; therefore, he said he would like
most of those [kinds of questions] asked at that time.
8:23:40 AM
REPRESENTATIVE GRUENBERG asked if the attorney general would
testify.
8:23:57 AM
CHAIR SEATON answered yes.
8:24:01 AM
REPRESENTATIVE GRUENBERG recommended inserting some findings in
the bill. He talked about the federal implications and
mentioned the unlawful flight to avoid prosecution (UFAP). He
asked Ms. Barton if one of her intentions was to be able to "get
federal assistance in the enforcement of this."
8:25:37 AM
MS. BARTON said most of the cases have not "flown before they've
perpetrated the crime," but rather have moved out of state
first. In response to a question from Representative Gardner,
she said the division's approach generally has been
conservative; it imposed fines just this year and the five-year
forfeiture for the first time only a year ago. She said the
division proceeded carefully with the first cases to determine
where it was appropriate to apply the civil penalties. She
said, "Now that we are looking at a Class C felony, we will
certainly consult with our good [attorney general (AG)] support
before we ... proceed with any ... action." She offered further
details.
8:27:23 AM
REPRESENTATIVE LYNN moved to report CSSB 104(JUD) out of
committee with individual recommendations and the accompanying
fiscal notes.
8:27:55 AM
REPRESENTATIVE ELKINS interjected that he has first-hand
knowledge of fraud regarding dividends and there is a surprising
amount of money involved. He offered examples.
8:28:43 AM
CHAIR SEATON stated that, there being no objections, CSSB
104(JUD) moved out of the House State Affairs Standing
Committee.
HB 238-PUBLIC EMPLOYEE/TEACHER RETIREMENT
8:29:04 AM
CHAIR SEATON announced that the next order of business was HOUSE
BILL NO. 238, "An Act relating to contribution rates for
employers and members in the defined benefit plans of the
teachers' retirement system and the public employees' retirement
system and to the ad-hoc post-retirement pension adjustment in
the teachers' retirement system; requiring insurance plans
provided to members of the teachers' retirement system, the
judicial retirement system, the public employees' retirement
system, and the former elected public officials retirement
system to provide a list of preferred drugs; relating to defined
contribution plans for members of the teachers' retirement
system and the public employees' retirement system; and
providing for an effective date."
CHAIR SEATON clarified that the committee would hear a
presentation of the tier task force regarding the medical
portion of HB 238.
8:30:23 AM
MELANIE MILLHORN, Director, Health Benefits Section, Division of
Retirement & Benefits, Department of Administration, on behalf
of the division, presented a proposed medical program prepared
by Mercer Human Resource Consulting ("Mercer"). She said the
material was worked on extensively by the tier proposal
committee for a number of months. She told the committee that
Mercer engaged in a great deal of analysis by asking Aetna - the
state's third party administrator - to provide the actual claims
experience, from which Mercer analyzed the cost to the system
and redesigned those costs going forward with a new tier medical
plan design. A survey was sent out to "all employers," and
those employers emphasized the importance of the medical
component of the retirement benefits package.
MS. MILLHORN noted some key elements from the feedback of the
employers. She specified that she would be referring to
presentation material dated November 19, 2004, that was provided
to the full Public Employees' Retirement System (PERS) and
Teachers' Retirement System (TRS) Boards; that material is found
in the survey information [included in the committee packet].
MS. MILLHORN listed some of the key elements as follows: One,
members should bear a greater share of the cost of medical
benefits; two, members should have to retire from the system in
order to be eligible for medical benefits; and three, system
benefits should favor longer service members. Regarding the
third element in the list, she explained that the criteria for
medical coverage can be satisfied after an employee vests and is
age eligible. For the current Tier I, that would mean after
five years and at age 55. In contrast, the proposed medical
plan design would recognize the years of service of the member
and would provide a greater benefit based on "greater years of
service."
8:34:15 AM
MS. MILLHORN continued with the list as follows: Four, employer
contributions should be predictable and stable; five, health
care inflation risk should not be borne solely by employers;
six, benefits must take the form of new tiers; and seven, the
annual cost of benefits should not be designed to exceed current
systems' normal cost rates. In response to a question from
Chair Seaton, she confirmed that number seven means that the
medical component should not exceed the current medical
component.
8:35:59 AM
MS. MILLHORN turned to a Power Point presentation, [hard copy
included in the committee packet, entitled, "State of Alaska
PERS & TRS Proposed Medical Program, House State Affairs" and
dated April 2, 2005]. She directed attention to Slide 2, which
lists the key features of the proposed post-retirement medical
program as follows [original punctuation provided with some
formatting changed]:
Members must retire directly from the System to be
eligible
System sponsored health plan with varying levels of
subsidy or cost to members
Early retirees get "access only" prior to normal
retirement eligibility
Defined dollar benefit from normal retirement to
Medicare eligibility (currently age 65)
Defined health benefit after Medicare eligibility,
similar to the current program with the following key
exceptions:
Method of coordination with Medicare
Retired members share in the cost through premium
contributions
MS. MILLHORN explained that "access only" means that the member
can apply [prior to normal retirement eligibility], but would
have to pay 100 percent of the medical premium costs in order to
receive the medical coverage.
8:38:32 AM
MS. MILLHORN directed attention to Slide 3, which shows the
system sponsored health care plan under the proposed bill. She
explained that the slide compares medical, prescription drug,
and dental, vision, and audio costs under the current and
proposed "alternative" plans. She said other states' medical
plans were studied in order to "compare and contrast." Alaska's
medical plan costs are one of the primary drivers for the
retirement systems' underfunded status; however, the studies
done show that Alaska's medical plan benefits are rich compared
to other [states'] medical plans. She offered some examples.
MS. MILLHORN turned to Slide 4, which shows eligibility criteria
of the proposed medical program and read as follows [original
punctuation provided with some formatting changes]:
Normal retirement eligibility for medical benefits
will be defined as the earlier of
(1) age 60 with 10 years of service
(2) 25 years of service (30 years for PERS
"others" retirees).
Disabled participants will be eligible
Terminated vested participants are not eligible. A
member must retire directly from active service in
order to receive coverage
MS. MILLHORN explained that the 25 years of service pertains to
police, firefighters, and teachers, and the 30 years pertains to
all other PERS employees who retire. She opined that an
important feature of the plan design is that terminated vested
participants would not be eligible. Currently, the Division of
Retirement & Benefits covers 54,000 members and its claims cost
for 2004 was $225 million. She said:
If you just look at the parties that are eligible for
our medical plan right now and you project into the
future, and you expect that all of those ...
individuals will receive a benefit, there's
approximately 90,000 members and the dependent ratio
is 1.9. So, if you were to look into the future to do
some projections, you would be able to see that there
would be a population if there's some ... vested
members here who will receive that benefit. But
there's also members who have to satisfy some ...
additional service in order to be eligible. But you
could be easily looking at a population in the future
of 180,000 members.
8:43:18 AM
MS. MILLHORN directed attention to Slide 5, which shows details
of early retirement under the proposed medical program. Slide 5
read as follows [original punctuation provided with some
formatting changed]:
Early retirees who have not reached normal retirement
eligibility
Receive "access only" plan
Will not be eligible for subsidized retiree
health plan costs
Pay 100% of the pre-Medicare eligible (currently
pre-age 65) per member per year (PMPY) claim costs
Dependent spouses of early retirees will pay 100% of
the appropriate pre-Medicare or Medicare eligible PMPY
claim cost
MS. MILLHORN explained that "access only" means that [the
retiree] would pay the full premium to receive coverage. She
said it's important to note that that is still a very good
benefit. She explained that there are a lot of people who may
leave their employment or have breaks in their health insurance,
and having access to health care can be cost prohibitive.
8:44:36 AM
MS. MILLHORN highlighted the key points of Slide 6, which shows
normal retirement to Medicare eligibility as follows [original
punctuation provided with some formatting changed]:
Members who retire directly from the Systems will be
eligible for a "defined dollar" benefit upon reaching
eligibility for normal retirement
Fixed dollar subsidy toward system sponsored health
coverage
Access to system sponsored retiree medical plan as
outlined above
Subsidy amount is based on length of service
Subsidy amount indexed each year by healthcare
inflation up to a maximum of 5 percent
8:46:05 AM
MS. MILLHORN, in response to a question from Chair Seaton,
referred back to Slide 4 and explained that there are two ways a
person can be eligible for medical benefits: one is to be age
60 with 10 years; or two is to be of any age as long as the
retiree has 25 years of service for police, firefighters, and
teachers or 30 years of service in PERS.
8:46:48 AM
MS. MILLHORN returned to discussion of Slide 6. She said, "The
employers wanted to build in recognition for long service, and
this medical plan does that."
8:48:49 AM
MS. MILLHORN turned to Slide 7, the second component addressing
normal retirement to Medicare eligibility, which read as follows
[original punctuation provided with some formatting changed]:
Upon becoming eligible for Medicare, such members will
become eligible for the "defined health" benefit
Pre-Medicare dependent spouse is eligible for the same
subsidy as retiree
Medicare eligible dependent spouse is eligible for the
Medicare eligible benefit level, with contribution
percentage based on retiree length of service
MS. MILLHORN continued:
If you look at those segments for a member, it's pre-
65 and post-65. And the post-65 portion is a defined
health benefit, and that includes that the members
will make a contribution based ... on their years of
service. But I think we all recognize that the cost
to the system, pre-65, is much higher. What the
research and analysis has shown through the tier study
is that 75 percent of our medical cost are attributed
to and can be allocated to pre-65 members, and 25
percent of those costs are allocated to post-65
members, because there is a coordination with Medicare
that occurs on the post-65 period of a member's health
care coverage. And that cost is quite a bit
different, because Medicare's primary and the Alaska
Care plan is secondary. So, the costs are reduced to
25 percent for that segment.
8:49:56 AM
CHAIR SEATON queried:
Although we have higher expenses currently ...
projected in the pre-65 - those five years ... -
that's a defined dollar amount. And yet, on the post
Medicare eligibility we're talking about defined
benefit amount. And though we're identifying 25
percent, if Medicare eligibility changes, if Medicare
reimbursement rates change, we could be looking at an
unfunded liability on the post-65 or post-Medicare
eligibility that we don't have ... control over,
whereas with the defined dollar contribution on the
pre-Medicare eligibility, haven't we contained that
growth, especially with the 5 percent escalated?
8:50:50 AM
MS. MILLHORN responded as follows:
The premium amount - when there's not a coordination
with Medicare we bear all of those costs. So, right
now, when you look at the existing claims cost and you
look at the premium amounts that we established for
that, 75 percent of the costs are allocated there.
There could be some changes in Medicare that would
change the post-65 cost and could increase those costs
to the system, depending on those changes - Medicare
reform in 2006, for example.
8:51:52 AM
CHAIR SEATON stated that the intent of going through this whole
process is to get the state "out of the prospect of having
unfunded liabilities." He offered his understanding that Ms.
Millhorn is saying, "It's really not a defined dollar
contribution; it's a defined percentage of an unfixed premium."
He stated concern that "we're back to a defined benefit post-
65." He said at some point in time it will be necessary to get
clarification regarding "what we're calling a defined dollar
amount when I'm not sure it's defined."
8:52:44 AM
BRAD LAWSON, Mercer Human Resource Consulting, offered to
address Chair Seaton's concerns. He said there's a lot of risk
and volatility associated with the defined benefit plan,
primarily driven by fluctuations in interest rates. He said
"the medical side of the current benefit" not only has that
interest rate volatility and risk, but also has a "trend
volatility and risk." He explained that the latter is the risk
that the medical benefits will grow at a greater or even lesser
rate than has been presumed in projections. He explained that a
defined dollar approach is a defined benefit component because
it does have the same interest rate risk. He said, "So, what we
have done by having a fixed escalator of 5 percent, we've
eliminated ... what we would call the trend risk, or the health
inflation risk. So, in one sense we have contained that
component of the risk; that health inflation risk then is being
borne by the retiree versus by the system at that point."
8:54:33 AM
CHAIR SEATON said he thinks there is still a question among
committee members regarding "why we're calling it defined dollar
amount ahead of pre-65 when actually what we've got is a
percentage of premium ...."
8:54:43 AM
MR. LAWSON explained as follows:
The defined dollar terminology comes from the fact
that, while we start with a premium base, that base
actually does not grow as a premium would, or a health
cost would. It grows in a defined manner of 5 percent
or less. And in our current environment, it's
unlikely that health inflation will be less than the 5
percent. So, we can actually go forward maybe 10
years and, based on a member's years of service, we
can have a very accurate picture or a defined amount
that the system will be contributing towards their
health cost. So, even if health inflation was 15 or
20 percent - heaven forbid - ... in 10 years we could
still predict or define the amount of premium dollars
that the state would be subsidizing that individual.
And that's why we call that a defined dollar approach.
8:55:48 AM
CHAIR SEATON, regarding post-Medicare eligibility, asked:
If ... Medicare melts down and the rates increase
significantly, or their contribution rates or their
payment rates decrease, are we - with the plan as
suggested - looking at a defined benefit unfettered
above that in ... post-Medicare eligibility?
8:56:31 AM
MR. LAWSON proffered that in an extreme scenario in which
Medicare fails and provides no benefits, health costs would
increase substantially because the system would then be
responsible for providing the medical benefits for which
Medicare had previously paid. He added, "Probably an unfunded
liability would be generated from that scenario."
8:57:19 AM
MS. MILLHORN requested that Mr. Lawson continue with her
presentation because she had to leave to give another
presentation.
8:57:41 AM
MR. LAWSON revisited Slide 7.
8:59:50 AM
MR. LAWSON directed attention to Slide 8, the third component
addressing normal retirement to Medicare eligibility, which read
as follows [original punctuation provided with some formatting
changed]:
Apply percentages to the applicable subsidy base to
arrive at the appropriate subsidy amount.
Defined Dollar Subsidy Base Annual PMPY for fiscal
year 2004:
Pre Medicare $5,962*
Subsidy Percentage
Service (yrs) Subsidy %
10-14 30%
15-19 45%
20-24 60%
25-29 75%
30+ 90%
Member contributions are determined by subtracting the
annual subsidy amount from the annual claims cost for
a given year.
*Equivalent to FY2004 pre-Medicare projected claim
cost.
MR. LAWSON said it's important to note that the subsidy base of
$5,962 will grow only at 5 percent; it will not grow as actual
claims costs grow. He explained, "If claims costs are going to
grow at 10 or 15 percent, and the subsidy base only grows at 5
percent, the retirees will be responsible for a larger and
larger portion of their health care expenses."
9:02:27 AM
CHAIR SEATON said the grouping of service years in five-year
increments concerns him, because that may raise issues such as
an employee quitting earlier because the next jump up in subsidy
doesn't happen soon enough or working longer than desired to get
to the next level. He noted that HB 238 would increase the
subsidy by 3 percent a year from 30 percent to a maximum of 90
percent and asked Mr. Lawson if he perceives any problem with
that plan.
9:03:28 AM
MR. LAWSON responded that there are two considerations in going
to that valid approach. The first consideration is an
administrative one: the more details that are inserted, the
more administratively challenging it will be. The second
consideration he described as follows:
As you ... add a 3 percent subsidy for somebody with
11 years and add another 3 for someone with 12 years,
you are increasing the overall subsidy that's provided
to retirees in the system. And I think that's
probably not a huge impact, but it will increase the
cost somewhat from the numbers we've presented here
today and the numbers that were looked at in the tier
redesign project.
MR. LAWSON added that he does not think there is anything that
would "stop or hinder you from going to an approach of 3 percent
per year of service."
9:05:15 AM
MR. LAWSON referred to Slide 9, which highlights the aspect of
the proposed medical program after Medicare eligibility as
follows [original punctuation provided with some formatting
changed]:
Defined health benefit similar to current program
Retirees who were previously eligible for 100% subsidy
of retiree health plan costs will now participate in
the premium cost.
Contributions are per covered individual
Pre-Medicare dependent spouses are eligible to receive
a defined dollar subsidy with percentage based on
retiree length of service
Medicare eligible dependent spouses are eligible to
receive the same defined health benefits as the
retiree and pay the same contributions
MR. LAWSON, regarding contributions, explained that a person
paying for two participants will pay twice as much as someone
paying for a single person. Regarding dependents, he said the
intent is to recognize the fact that "if there is a pre-Medicare
spouse, they're going to have a lot higher claims cost than that
Medicare eligible retiree and they ... will receive benefits
under the ... defined dollar component until they reach Medicare
eligibility age."
CHAIR SEATON asked if the "5 percent escalator" has "gone away."
MR. LAWSON answered that's right.
9:07:19 AM
MR. LAWSON moved on to Slide 10, which shows information
regarding contributions after Medicare eligibility as follows
[original punctuation provided with some formatting changed]:
Contribution Base PMPY for fiscal year 2004:
Medicare Eligible $2,667
Contribution Percentage
Service (yrs) Contribution%
10-14 30%
15-19 25%
20-24 20%
25-29 15%
30+ 10%
Apply percentages to the contribution base to arrive
at the applicable contribution amount
MR. LAWSON stated, "To me it's very striking that even though
... these individuals are, on average, quite a few years older
than those individuals in the pre-Medicare group, their claims
costs are still well under half of that pre-Medicare group."
CHAIR SEATON added that that's because Medicare "picks up the
primary health care." In response to a remark from Chair
Seaton, he reiterated that the intent is to have each individual
covered under the program to be paying a contribution amount -
even those who are participants of the program, but not members
[such as spouses or dependents]. He added, "We do not want to
penalize those individuals who are only covering themselves to
be subsidizing those individuals who cover multiple dependents."
He continued as follows:
While we have not eliminated the trend risk and
volatility as we have with the ... defined dollar
component, retirees will still be sharing in that
trend component to the amount of the percentage that
they're paying. So, an individual with 10-14 years of
service will be absorbing essentially 30 percent of
that trend risk. So, in here we meet the objective of
the redesign of sharing that trend risk somewhat with
those retirees.
Here it was also felt that, due to the lower claim
volume, ... about 25 percent, it was desired to give
retirees a larger benefit in this category and to
maybe offer a little bit more subsidy in the Medicare
eligible stages of retirement.
9:10:26 AM
CHAIR SEATON asked if a 5 percent escalator could be applied in
this category.
9:10:40 AM
MR. LAWSON replied that it could be applied. He continued:
The thinking here was that they actually wanted to
provide additional subsidy to those Medicare eligible
individuals; the thought being that the second
component - going from normal retirement to Medicare
eligibility - was going to kind of provide a bridge
into an area that -- you know, if an individual
retires before Medicare eligibility, it's often very
difficult for them to find coverage. And that was the
access issue that ... [Ms. Millhorn] was referring to.
And if they do find coverage it's often very
expensive. So, the individuals here have the
opportunity, no matter when they retire, to have
guaranteed access to that health coverage with no
penalty for their own particular health status, as
they would if they went out and bought insurance on an
individual basis.
... The second component was designed to provide more
of a bridge; ... if an individual chose to retire
before their Medicare eligibility, we would offer them
access and offer them some subsidy, but not a
particularly large subsidy. The ceiling for the
Medicare eligible individual was that there was a
desire to provide an additional benefit or to provide
... additional levels of subsidy there and not tie
that to a fixed dollar approach.
MR. LAWSON, regarding the fixed dollar approach, stated that as
the years project into the future, retirees will be covering a
larger and larger percentage of the premium costs due to the
fact that the premium cost is growing at a larger rate - the
trend rate at 10-15 percent - versus the subsidy base which
would only grow at 5 percent.
MR. LAWSON indicated that Mercer ran some scenarios with a fixed
dollar approach for Medicare eligible individuals and the final
recommendation of the tier committee was to merge a defined
benefit and defined dollar approach.
9:13:18 AM
CHAIR SEATON asked if it was estimated that a 5 percent
escalator would actually limit the amount that would be paid by
the system or if, after Medicare eligibility, the 5 percent
would not be reached.
9:13:50 AM
MR. LAWSON answered that [the 5 percent] would be reached and
would result in an elimination of dollars paid by the system.
He said there was a feeling that the medical component was being
cut so much and the cost of that program was being reduced
substantially, and there was not a desire to reduce it further.
9:15:03 AM
MR. LAWSON directed attention to Slide 11, which shows the types
of Medicare integration, with the headings of "Traditional,"
"Exclusion," and "Maintenance of Benefits" - three widely
accepted methods of coordination of benefits. He explained that
coordination of benefits is a process of integrating a planned
benefit package with the benefits that Medicare will pay. The
process is used to determine how much the plan sponsor and plan
participants will pay and how much will be paid by Medicare.
All three methods are designed to ensure that at no point is
more than 100 percent of the claims cost paid. Mr. Lawson
provided examples of the three plans, which Slide 11 defines as
follows [original punctuation provided with some formatting
changed]:
Traditional - Calculates what the plan would have paid
as sole provider and adds what Medicare pays. If the
total is more than 100% of the bill, the plan pays
only enough to total 100%. The retiree often pays no
deductible or coinsurance.
Exclusion - Determines the total expenses covered
under the plan, reduces them by Medicare benefits and
then applies the deductibles, coinsurance and other
plan limits.
Maintenance of Benefits - Calculates the plan's
payment as if there were no Medicare coverage, applies
the deductibles, coinsurance and other plan limits and
pays the remaining amount minus what Medicare pays.
Also call [sic] Carve-Out.
9:21:13 AM
REPRESENTATIVE GRUENBERG stated, "This looks like it's
fantastically more expensive for the retiree than what we've had
before, isn't it?"
9:21:14 AM
MR. LAWSON stated his belief that "this was the same cost share
design prior to ... 2000 or 2001." He said he thinks the system
went from a Maintenance of Benefits to a Traditional approach
about 3-5 years ago.
9:21:57 AM
MS. MILLHORN said Kathy Lea, [Retirement Manager, Division of
Retirement & Benefits] confirms that is correct.
MR. LAWSON said he does not have the background on why it was
changed. However, he said it's clear there's an impact from
going from a pre-Medicare status where the individual would have
paid $300 and would have been used to the cost sharing element
to a Medicare eligible status when all of a sudden the cost
sharing is eliminated. He said, "It really removes them from
feeling the pain of their healthcare cost."
9:23:00 AM
REPRESENTATIVE GRUENBERG offered his understanding that "all
these people at the time they were paying this were getting
longevity bonuses."
MS. MILLHORN interjected, "Some of them ..."
9:23:29 AM
MR. LAWSON stated that another important consideration is that
there is an out of pocket maximum for these charges; therefore,
the charges would not be indefinite. He offered an example,
referring back to Slide 3. He said there was a desire to keep
cost sharing consistent from when retirees were in a pre-
Medicare status to when they went to a Medicare status.
9:25:06 AM
REPRESENTATIVE GRUENBERG asked Ms. Lea to confirm how many years
ago the change [from using the maintenance of benefits method to
using the traditional method] took place.
9:25:23 AM
KATHY LEA, Retirement Manager, Division of Retirement &
Benefits, Department of Administration, on behalf of the
division, stated her belief that that change took place in
approximately 2000. She explained the reason for the change is
that the funds appeared well funded at the time and the retirees
were notifying both the division and the boards that with
increasing Medicare costs, they weren't getting anything for
their Medicare premium.
9:26:34 AM
REPRESENTATIVE GRUENBERG asked, "If we went to this plan now,
how would that negatively affect these people vis a vis back
then when they still had their longevity bonus?"
9:26:53 AM
MS. LEA responded that some of the members were receiving a
longevity bonus and have not since received it; therefore,
returning back to [the maintenance of benefits method] would
increase their out of pocket share up to the out of pocket
limit.
9:27:09 AM
CHAIR SEATON asked if it is known what proportion of the
retirees were or were not receiving a longevity bonus.
9:27:52 AM
MS. LEA replied that there are a portion of members who were
receiving the longevity bonus, but the division is not aware of
how many. She said it's still important to note that "there is
still the health reimbursement arrangement portion of the health
plan that would be paying deductibles and premiums as well."
9:28:18 AM
CHAIR SEATON asked for those numbers to be given to the
committee.
9:29:03 AM
MR. LAWSON continued on to Slide 12, which shows the normal cost
rates for Alternative 2 as follows [original punctuation
provided with some formatting changed]:
"Normal cost" rates for Alternative 2 are expected to
be as follows:
Normal Cost Rates
TRS PERS
Medical normal cost rate 3.75% 3.5%
Defined contribution rate 13.5% 11.5%
HRA contribution rate 1.5% 1.0%
Gross normal cost rate 18.75% 16.0%
Member contribution rate (10.0%) (8.0%)
Employer normal cost rate 8.75% 8.0%
MR. LAWSON noted that, in comparison, [the medical normal cost
rate] prior to program changes previously discussed, those costs
were 9.07 percent and 8.68 percent. He said there is already,
even with the health benefit portion there is significant
savings to the system with this program.
9:30:49 AM
MS. MILLHORN clarified that those numbers - 9.07 percent and
8.68 percent - reflect the normal cost rate right now for PERS
and TRS, respectively.
9:33:19 AM
MR. LAWSON indicated that Slide 13 is [the title page for] the
next section regarding Health Reimbursement accounts (HRAs), and
Slide 14 is [the first of four slides] overviewing HRAs, which
read as follows [original punctuation provided with some
formatting changed]:
Arrangement that:
Is solely employer paid
Reimburses employees for medical expenses
Provides reimbursements up to a maximum dollar
amount for a defined coverage period
Unused funds are carried forward to the next coverage
period
Usually, but not required to be, associated with high-
deductible health plans or consumer directed health
plans
Includes aspects of FSAs
Also known as
Health Reimbursement Arrangements
Defined contribution health care plans
MR. LAWSON said it's important to note that [the HRAs] were
something that was discussed later during the tier redesign
process; therefore, it did not have the opportunity to be
flushed out in detail and discussed in as much depth as some of
the other components of the medical program. He offered further
details.
9:35:34 AM
MR. LAWSON turned to Slide 15, the second of four slides
covering the overview of HRAs, which read as follows [original
punctuation provided with some formatting changed]:
Funding
Employer only
Employer sets own limits
Eligibility
Current and former employees (including retired
employees), spouses and dependents
COBRA participants
Dependent medical expenses on death of employee
MR. LAWSON, in response to a request from Chair Seaton,
explained that [the Comprehensive Omnibus Budget Reform Act
(COBRA)] allows for individuals to retain their health care
coverage for 18-36 months for a fee. Employers can charge those
individuals up to 102 percent of the current active medical
cost.
9:37:25 AM
MR. LAWSON directed attention to slide 16, the third of four
slides covering HRAs, which read as follows [original
punctuation provided with some formatting changed]:
Benefits
Reimbursements for medical expenses as defined in
IRC section 213(d)
No IRS limit on reimbursements
Employee responsible for substantiating expenses
Cannot use for over-the-counter drugs
Cannot have any right to receive cash benefit
[In Slide 16, IRC stands for Internal Revenue code and IRS
stands for Internal Revenue Service.]
9:38:36 AM
MR. LAWSON moved on to Slide 17, the fourth of four slides
covering HRAs, which read as follows [original punctuation
provided with some formatting changed]:
Plan design
Plan sponsor dictates plan design
Contribution amount
Covered expenses
Termination provisions
Tax Treatment
Requirements for exclusion from employee/retiree
income:
Employer funding only - no employee contributions
Only reimbursed for qualified medical expenses
Subject to non-discrimination rules under IRS code
section 105(h)
MR. LAWSON said he thinks the theme is flexibility.
CHAIR SEATON asked Mr. Lawson to explain to the committee the
implications of the non-discrimination rule.
9:39:28 AM
MR. LAWSON responded that that's not his area of expertise.
Notwithstanding that, he proffered that that would be the case
where, for example, a high-salaried individual would not be
permitted to receive a substantially larger contribution than a
lower salaried individual.
CHAIR SEATON said he has discussed this issue with Ms. Millhorn
and asked her to speak to it.
9:41:08 AM
MS. MILLHORN stated:
In my discussion with [Chair] Seaton, I needed to
provide a little bit of background about the HRA and
how the amounts were arrived at, because I think it is
confusing if you were not there and worked through
that process. And I'm not sure that the presentation
material really lends itself to a clear understanding
about the 1 percent portion. Because the 1 percent
portion that is the cost to employer for HRA is really
derived by looking at a system-wide average salary
amount in order to make that computation, and that
goes back to the nondiscriminatory language to ensure
that an individual that is less compensated as
compared to an individual who would have a higher
level of compensation would - under an health
reimbursement arrangement - receive the same level of
benefit. So, the 1 percent portion - the cost to the
employer - the projections were to look at a system-
wide average of $35,000 and make a computation of a
system-wide average salary in order to determine what
that benefit amount is for all members.
9:42:06 AM
MR. LAWSON added, "The other issue that we ran into by doing a
percentage of an individual salary is that very closely linked
that contribution amount to that account to the employee's
personal salary." He explained that, for tax purposes, there
can be no direct or indirect funding related to an employee's
personal compensation."
9:42:53 AM
CHAIR SEATON offered an example for clarification.
9:44:53 AM
MS. MILLHORN concurred with Chair Seaton's example.
9:45:10 AM
MR. LAWSON said, "I think each year the intent was to determine
an average salary for the system as a whole and ... to apply
that 1 or 1.5 percent to that average salary, ... thereby
becoming a fixed dollar amount."
9:45:18 AM
CHAIR SEATON explained that that fixed dollar amount will not be
seen in "any of the materials" but "we need to remember that
because it's going to affect different employees differently."
9:45:31 AM
MS. MILLHORN, in response to a question from Chair Seaton, said
there are approximately 155 PERS employers.
9:45:50 AM
CHAIR SEATON observed that if the calculation was based on the
average wages of the 155 PERS employers then there wouldn't be
discrimination within that employer pool. Using system wide
averages would get rid of the discrepancy between higher wage
and lower wage employers. He asked if a system of averages
would qualify under the new program and not fall under the
nondiscriminatory provision in the IRS code.
9:46:04 AM
MS. MILLHORN said Mr. Lawson was asked to make a determination
"if that would create a discrimination kind of issue for us."
She said because the division manages the system as a whole, she
would like to have that question answered definitively. She
said it could be argued that by treating one employer within the
whole system differently for benefit calculation purposes may
cause a problem. She said there is merit to Chair Seaton's
asking his question; however, she would like to hear response
from the experts "to get some confidence that it's not
problematic."
9:47:56 AM
CHAIR SEATON clarified that $500 dollars in the charts doesn't
mean that "at one percent of their salary you were limited at
$500." Instead it means "$500 is growth over time." He
explained, "If the average salary gets up to $60,000, it would
still be limited to $500 in the future. He said it's confusing
to figure this out based on the limited data available. He
asked Ms. Millhorn if what he said is a fair representation.
9:48:32 AM
MS. MILLHORN replied that she believes that's accurate. She
said there's also additional information available. She
described the presentation given today as a "broad brush." She
suggested to Mr. Lawson that it would be beneficial if he would
provide the committee members with projected benefit amounts
that would be available to members who retired under the system
under the HRA, because she said she thinks "this feature is a
very key feature; it provides a very powerful vehicle for
members to start thinking about health care costs for themselves
...."
MS. MILLHORN said she thinks everyone recognizes that health
care costs are a national issue, "and this is one vehicle that
is thought to be very powerful for the individual on a tax-
deferred basis to plan for those expenditures in the future, and
then to make some corresponding decisions about that." The
current plan doesn't make an employee have to think about
medical expenses, because they are simply provided. She added,
"And by providing a vehicle that accumulates assets, it triggers
you to be cognizant of those assets and make some key decisions
based on that." She offered an example wherein a person would
have the opportunity to choose whether it was more economical to
have a surgical procedure done in Juneau, or in Anchorage. She
continued:
This is that type of vehicle that looks at consumer-
driven health care for the future. And it's asking
members to share in those costs, recognizing that 40
percent of the accrued liabilities for our underfunded
status is medical cost for PERS, 28 [percent] for TRS.
This particular medical plan goes a long way toward
addressing medical costs in the future, and still
provides a very solid benefit to the members.
9:51:40 AM
CHAIR SEATON stated that the primary purpose is to have a
benefit that will attract and maintain employees. He said a
huge portion of the unfunded liability comes from the current
health care system and must be fixed. He described that his
experience in private health care plans is: "doubling the
deductible almost halves the premium." He suggested that it
might be better to have a slightly higher deductible, even if
the amount of the health care reimbursement has to increased.
He speculated that having that higher deductible would save
money over time because the base contribution into the premium
amount would be less.
9:53:05 AM
MS. MILLHORN said that is an area in which Mr. Lawson
specializes exclusively. Notwithstanding that, she offered:
In benchmarking with some of the other pension systems
that were looked at, including two employers in the
State of Alaska, it appears that that deductible kind
of aligns itself when you compare across those various
different benchmarks.
9:53:47 AM
CHAIR SEATON clarified that he is not meaning to say he wants to
reduce a benefit, but he just wants to know if a lot of money
could be saved in the system by having a higher deductible
coupled with a higher contribution into the health care
reimbursement account, which would offset that amount for
individual employees.
9:54:16 AM
MR. LAWSON recollected that when [Mercer] went through its
design-processing phase, it arrived at "the $250." He noted
that a few years ago that was the benchmark for cost sharing.
He said there were deductible level proposals of $500 and $350,
and during the process those levels were felt to be too high.
He said the deductible "definitely can get you some mileage,"
but sometimes it needs to be increased "more than you might
intuitively expect" in order to get substantial savings. He
mentioned the effect of catastrophic claims. He noted the other
element of the deductible, particularly in the State of Alaska's
case, is the inability to increase it in future years. He said
many plan sponsors that Mercer has worked with will, every
couple of years, increase the deductible by $50-$100 in order to
keep pace with inflation. He explained, "When you have a
constant deductible, but you have a growing health care cost,
... the value of that constant deductible tends to erode over
time. And so, if we look back 10 years ago or 15 years ago, a
$200 or $250 deductible would mean a lot more back then than it
does today."
MR. LAWSON said one challenge is the "nondiminuation of the
benefits." He said that protected status of the benefits is
probably the largest factor preventing the implementation of
such a strategy where a cost share can be changed over time as
costs change. When faced with that kind of restraint, he
advised, the next best place to try to establish a cost sharing
is by a percent of premium. By establishing a constant percent
of premium contribution to save on costs, as costs continue to
grow, so will the contributions. He said, "So, we kind of felt
that it was better to focus on the contribution aspect of it,
because that was a percentage of the cost and could grow with
time."
9:57:54 AM
CHAIR SEATON said he would like Aetna or someone to supply the
committee with a spreadsheet regarding that issue. He said,
"We're building in a new tier on these, so we're not talking
about diminishing past accrued benefits. So, is there any
reason why we can't build in whatever that deductible is and
have it change at a fixed 5 percent rate?"
9:58:36 AM
MR. LAWSON responded that he thinks that would be outstanding.
He said that was explored a little bit, and he said he thinks
the [PERS/TRS] Board's attorney was of the opinion that that was
"dangerous" or "uncertain" territory, which could provide
grounds for challenge based on past case history.
9:59:03 AM
CHAIR SEATON said, "Well, I ... guess I'm just having a problem
figuring out how we can say that we're going to have [a] premium
escalating at 5 percent and say that that's ... not going to be
subject to the same challenge as the deductible escalating at a
maximum of 5 percent. I mean, it seems that we have the same
exact thing. We're building a new tier; if everybody knows the
benefit when they come in and the benefit is this escalating at
5 percent, ... there's no question of changing the deal, because
they know the deal when they come in."
[HB 238 was heard and held.]
10:00:11 AM
CHAIR SEATON made committee announcements.
ADJOURNMENT
There being no further business before the committee, the House
State Affairs Standing Committee meeting was adjourned at
10:01:44 AM.
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