Legislature(2005 - 2006)
05/04/2006 04:11 PM Senate CRA
| Audio | Topic |
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| Start | |
| HB475 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
CSHB 475(FIN)-PUB EMPLOYEE/TEACHER RETIREM'T/SBS/D.C.
4:12:04 PM
CHAIR BERT STEDMAN announced HB 475 to be up for consideration.
He motioned to adopt Version C for HB 475 and objected for
discussion purposes. He asked Ms. Millhorn to provide an
overview of HB 475.
MELANIE MILLHORN, Director, Division of Retirement and Benefits,
Department of Administration, stated that the primary reason for
the bill is to ensure that the benefits for the defined
contribution plan under SB 141 are enacted as intended. She
noted that the benefit provisions are the same for both PERS and
TRS.
She directed attention to the bulleted summary of the 32 changes
contained in HB 475 and noted that further explanation of the
changes could be found in the sectional analysis or the bill
itself. Since SB 141 passed last year the Department of Law, the
Division of Retirement & Benefits, and outside expert legal tax
advisors have conducted extensive research to ensure that the
provisions that are applicable in SB 141 conform to IRS
standards and to what the Legislature intended.
During the review, three areas became the focus and are
encompassed in CSHB 475. Those areas include occupational death
and disability benefits; Internal Revenue Service Code
provisions; and provisions related to employer participation in
the new defined contribution plan.
4:16:25 PM
MS. MILLHORN informed members that 14 of the 32 proposed changes
address occupational death and disability benefits and some of
the key factors found in HB 475 address: funding of the
benefits; annual inflation proofing for the benefits; protection
and clarification of the retirement benefits when a member is on
disability and a survivor is receiving benefits; and a medical
cost sharing provision.
Death and disability benefits are intended to provide income in
the event that a member is occupationally injured or the member
dies while performing job duties. SB 141 also has provisions
that allow for a retirement benefit to be established at the
time that the member goes to normal retirement.
Sections 8 and 46 relate to funding the benefits for
occupational death and disability. They provide statutory
authority for funding for TRS occupational death and disability
benefits and for funding PERS disability for police officer and
fire fighter monthly retirement benefits that may be elected
upon eligibility for normal retirement. Those particular
sections also establish a trust account clarifying that the
contributions are treated differently and are kept separate from
contributions for the individual plan member's defined
contribution account.
Section 54 specifies that the monthly pension benefit elected by
a disabled police officer or fire fighter will be paid first
from the member's individual account and then from the trust
account that is established under AS 39.35.750(e). That change
is consistent with the method of payment that is applied under
the current defined benefit plan.
Sections 18 and 57 describe the annual inflation proofing
associated with death and disability benefits. They add an
annual adjustment for individuals who are receiving disability
benefits and to the retirement benefits elected by disabled
police officer and fire fighter members under AS
39.35.890(h)(2). It is either 75 percent of the increase in the
Anchorage Consumer Price Index (CPI) or 9 percent - whichever is
less.
Sections 22 and 61 add an annual adjustment to the survivor's
pension benefit that is equal 50 percent of the increase in the
Anchorage CPI or 6 percent - whichever is less.
MS. MILLHORN stated that both annual inflation proofings comport
with the existing formula that is found under the defined
benefit plans for Tier 2 and Tier 3 TRS members. She reminded
members that the Legislature wanted the death and disability
benefits to agree with the statutorily defined benefits for Tier
2 and Tier 3 TRS members so that is accomplished here.
Sections 16, 20, 55, and 59 clarify that a disabled member or
the survivor of a deceased member is not entitled to elect
distributions from the member's individual account while
receiving disability or survivor benefits. That's important
because the employer continues to make contributions into the
account while the individual is receiving either disability or
survivor benefits. Therefore the account is preserved and will
be available to the individual at normal retirement age.
Sections 13, 16, 51 and 55 clarify that a period of disability
or survivor benefits constitutes membership service for purposes
of eligibility for the retirement medical benefits including the
Health Reimbursement Arrangement.
Sections 22 and 61 provide that a person whose disability or
survivor benefits are terminated due to eligibility for normal
retirement will be treated as though the person is eligible for
Medicare regardless of age.
Sections 11 and 49 deal with anti selection and require that
members who waive the medical benefit must provide proof of
insurability.
4:24:12 PM
MS. MILLHORN reviewed plan provisions related to the Internal
Revenue Code. Consultants from Ice Miller were hired in December
2005 and they provided expert tax advice so that the new hybrid
plan provisions comport. In order to receive plan determination
letters from the IRS the new hybrid plan must have a certain
structure. Certain benefits are fixed and guaranteed while
others are defined contribution plan.
Sections 5, 6, 9, 10, 23, 43, 44, 47, 48, and 62 provide
conforming provisions for a favorable plan ruling from the IRS.
The hybrid plan established by SB 141 contains both defined
benefits and defined contributions and is referred to as a
414(k) Plan. She noted that Ice Miller conformed the benefits in
SB 141 to meet legislative intent and to get positive favorable
plan determination letters.
The plan establishes: individual accounts; occupational death
and disability funds; health and welfare benefit funds; and a
Health Reimbursement Arrangement fund. Under the defined
contribution (DC) part of the plan the two components are the
individual's defined contribution account and the Health
Reimbursement Arrangement. Under the defined benefit (DB) part
of the plan there are five elements. They are occupational
disability benefit; the survivor's benefit; survivor's pension
for police and firefighter; and the retirement benefit chosen by
police and firefighters; and a cost-share retiree health
insurance. HB 475 provides conforming language to ensure that
necessary criteria are met.
Sections 14 and 52 relate to occupational death and disability
and they provide "that a member who receives disability benefits
from the plan is 100 percent vested in all the employer
contributions made to the member's individual account,
regardless of years of service worked, once the member is
appointed to disability. The employer must also make the
member's contributions to the individual contribution account."
Sections 16, 21, 55, and 60 are survivor benefits funded by the
occupational death and disability fund. It revises language
related to the continuing contributions employers make on behalf
of survivors of members who died occupationally. The
contributions will be placed in a trust account that is
established for occupational and death benefits and not into a
deceased person's account.
Internal Revenue Code 415(c) relates to contribution limitations
in four areas. Those are: contributions on behalf of survivors;
employer match upon conversion; voluntary employee
contributions; and employer conversion window.
Sections 21 and 60 relate to the contributions on behalf of
survivors. "Unlike the special rules under 26 USC 415(c)(3)(C)
that allow the compensation of a disabled member for any year
subsequent to the disability to be considered equivalent to the
rate of compensation immediately prior to the disability, there
is no corresponding rule for a deceased participant. Thus, there
would be no compensation for a deceased member in the year after
death and, therefore, no allowable contributions to the deceased
member's individual account."
Sections 24 and 63 address employer match upon conversion and
clarify "that the employer match required under the conversion
from the defined benefit plan to the defined contribution plan
is subject to Internal Revenue Code contribution limitations.
The amendment limits the total employer match to the maximum
allowed during the limitation year in which the transfer
occurs." The reason for this is "Because the amount that an
employer must match under the conversion option is 'new money,'
it has never been subject to Code limitations. 26 USC 415(c)
imposes an annual limit on contributions to a defined
contribution plan to the lessor of $44,000 or 100 percent of
employee compensation."
Sections 7 and 45 address voluntary employee contributions and
clarify "that any voluntary contributions made by an employee
under AS 14.25340(b) can only be made with pre-tax dollars to
the extent permitted under federal law."
4:32:34 PM
Sections 26, 27, 65, and 66 limit the employer conversion
window, which is an IRS specification. They provide a 12-month
window once the employer elects a conversion option for
employees. After that the employee will have up to 12 months to
make that conversion option. The employer is also allowed
another 12-month period to select the conversion option for
members who didn't make an initial selection.
4:33:52 PM
Section 68 deals with the guidelines for employer participation
and termination from the defined contribution plan.
Sections 1,2, 36, and 37 deal with employer contribution amounts
and say that the normal cost is only applied to the payroll base
for the defined benefit members. The past service rate will be
applied to the entire payroll base for employers. That provision
will keep employer contribution rates for the defined benefit
plan lower than would otherwise be calculated.
Sections 3, 38, 75, 78, 79 and 81 address the normal cost rate.
The change delays "the effective date of the requirement of SB
141 that the employer contribution rate must be not les than the
normal cost rate."
Section 33 deals with the health reimbursement contribution
amount. It "changes the employer contribution from an individual
employer contribution amount to a uniform employer contribution
amount for all participants of the Health Reimbursement
Arrangement Plan." There are currently 214 participating
employers under PERS and TRS and each has a different payroll
base so the contribution amounts are diverse. Without the change
the IRS might view the disparity as discriminatory.
MS. MILLHORN disputed the assertion that the division must have
positive plan determination letters from the IRS before the bill
is implemented because the division filed with the IRS in
January 2006 and that preserves the right to make plan changes
during a remedial period. She directed attention to the two
letters from Ice Miller discussing the plan determination
process.
4:40:22 PM
MARY BETH BRAITMAN, Ice Miller LLC, explained that her primary
role is to work with public pension plans and related tax
qualification matters. Her firm was asked to offer suggestions
on the design of the hybrid plan in terms of the defined
contribution benefits and the guaranteed or fixed benefits
related to occupational death and disability and survivor
benefits. Their purpose was to match legislative intent with
Internal Revenue structures and based on that they suggested the
clarifying amendments found in HB 475.
She explained that the IRS determination letter process is a way
of guaranteeing that the structure of the plan meets IRS
requirements. The process isn't required, but there are benefits
to having a favorable determination letter, including the
ability to self-correct and to ensure that the plan meets the
latest IRS requirements.
According to IRS rules for a new government plan the remedial
amendment period for the new program will run until January 31,
2008. She noted that the IRS appreciates that these are complex
plans that require time to work out the administrative details.
She advised that the Department of Administration and the
members of the plan are protected because of that remedial
amendment period and the fact that a plan determination letter
has been submitted. The IRS can provide comments and suggestions
and ask questions, but Ice Miller is confident that the plan
will ultimately be approved so the department will have a
favorable determination letter to rely on in future years as
well as the additional benefits described earlier. She
emphasized that this isn't an unusual process and it does take
time for the IRS to complete the review.
4:47:15 PM
DAVID SLISHINSKY, Actuary with Buck Consultants, explained that
his company was hired in November 2005 to perform actuarial
services for the State of Alaska retirement plans. He advised
that using representative sample employees hired 7/1/06 through
6/30/07, they evaluated the cost of employer paid benefits under
the current defined benefit plans versus the implementation of
the new arrangement under SB 141 with the defined contribution
plans. They looked at values of the pension benefits and the
post employment health care benefits.
The value of employer paid benefits for PERS was calculated to
be $21,652 under the current defined benefit arrangement and
$16,791 under the new defined contribution plan. The $4,861
difference indicates that the continuation of the current
defined benefit plans would be slightly more expensive.
The same calculations were made for the TRS and the value under
the current defined benefit arrangement was $56,550 while the
value under the new defined contribution plan arrangement was
$41,667. Continuing the current program for another year would
result in an increase in cost of $14,883 for an average new hire
during the year. Actual cost would depend on the number of new
hires.
KATHERINE SHOWS, Staff to Representative Paul Seaton, advised
that the sponsor believes that the technical changes are needed
for the successful implementation of SB 141.
At ease from 4:54:24 PM to 4:54:53 PM.
MICHAEL LAMB, Chief Financial Officer, Fairbanks North Star
Borough, stated support for HB 475 and advised that as an
employer the borough is committing resources to implement the
new benefit plan. The sooner there is certainty and an ability
to respond to new employees' questions, the better off the
borough, as an employer, will be. He suggested that other
employers that are faced with implementation probably feel the
same.
4:56:44 PM
PETE HALLGREN, Municipal Administrator for the City of Delta
Junction, stated support for HB 475 with no delay in
implementation. A delay would have serious negative
repercussions for municipalities and the state government itself
because it would add thousands of new PERS/TRS employees to the
roster and further increase the unfunded liability indebtedness.
4:58:51 PM
PAT LUBY, Advocacy Director for AARP, stated support for HB 475
with the one-year delay in implementation. The IRS hasn't
accepted the plans as qualified and offering them to new
employees before they're accepted would be gambling with the
security of future educators, fire fighters, police officers and
state municipal employees.
AARP urges the Legislature to take time to do this right by
voting for a one-year delay and reviewing the impact of SB 141
on employees who don't have the defined benefit of Social
Security.
At ease from 5:01:10 PM to 5:02:29 PM.
RON WOLF, Chief Financial Officer for the City of Fairbanks,
stated support for HB 475 with no delay in the effective date.
He reported that the municipality has confidence that the change
to defined contribution plans is the right thing to do.
TOM HARVEY, Executive Director of NEA-Alaska, referenced his
letter supporting the delay in implementation of SB 141 and said
he was pleased to note that some of the testimony that day was
clearly in response to findings presented by independent
actuaries that were hired by labor organizations.
He stated that NEA-Alaska believes there is a better solution
than the one before the committee and he finds it reassuring
that Ice Miller acknowledges that there is more than one way for
states to get compliance. Having gone through remediation he
said he knows that the process isn't as enjoyable as having the
determinations made ahead of time.
MR. HARVEY continued to say:
What we are providing to you is the opportunity to
have a fixed cost defined benefit plan - a fixed cost
to the State of Alaska. That plan is been developed
and we can put that into legislative form for this
legislature to consider at a cost of about $15,000 in
terms of the IRS compliance and in terms of $5,000 of
actual drafting of the legislation. And you would have
a plan in front of you that would provide you the
guaranteed fixed cost - no extra liability. All of
what you wanted in SB 141 but one step further. A
better hybrid plan than the one that's in SB 141 that
had to be fixed by HB 475. But a plan in which the
employees can support. I think that's important for
the State of Alaska.
We know we've got the opportunity to present that plan
to you if we have the one-year delay. We obviously
don't have that opportunity without having to roll
back a defined contribution plan.
Referencing the calculations that Ice Miller made, he said it
appears that it would cost the state money to move from the Tier
3 PERS and Tier 2 TRS to the defined contribution plan. He
stated agreement with Ms. Millhorn that the changes in HB 475
are needed to become compliant with the IRS, but that the change
in the calculation of the payroll base that is used will
drastically affect the Municipality of Anchorage and probably
the City of Kenai. Their payroll bases are below the state
average so their contribution rates will be increased.
He urged the committee to adopt HB 475 as it passed the House
and not the Senate committee substitute presented here.
CHAIR STEDMAN asked Mr. Harvey to send his letter to his office
and he'd distribute copies.
CHAIR STEDMAN closed the public hearing and removed his
objection to adopting Version C as the working document.
SENATOR ELLIS objected and said:
HB 475 that's before the committee seems to me to be
an admission that the bill from last year, SB 141,
that was represented to us as a well thought through,
well articulated, well detailed plan has turned out in
retrospect ... after thorough analysis to have been -
although with lots of good intensions, lots of good
work, lots of long hours - to have had a lot of
deficiencies and shortcomings. I think we all know
that, admit that, understand that. I think there is
probably more good work that could be done in this
regard and a one-year delay would allow that so that
we could be very careful and build support for a new
approach to this.
I can't support the committee substitute that you put
before us that eliminated the one-year period for
further work.
5:12:05 PM
SENATOR ALBERT KOOKESH said he didn't know whether the Chair was
planning to move the bill that day but he'd like the time to
read and digest Mr. Harvey's letter.
CHAIR STEDMAN stated the intent is to move the bill today.
He asked for a roll call. The motion to adopt Version C Senate
committee substitute for HB 475 as the working document passed
with Senator Gary Stevens, Senator Wagoner, and Chair Stedman
voting yea and Senator Ellis and Senator Kookesh voting nay.
SENATOR ELLIS motioned to conceptually amend Version C delaying
implementation until July 1, 2008.
CHAIR STEDMAN objected and said that the only change in Version
C is that the effective date was changed back to the original
July 1, 2006.
SENATOR GARY STEVENS asked Ms. Millhorn how much it would cost
to delay for one year.
CHAIR STEDMAN observed that the motion is for a two-year delay.
SENATOR ELLIS said that is preferable.
SENATOR GARY STEVENS asked the cost for a two-year delay.
MS. MILLHORN explained that the plan has now been delayed by one
year and Buck Consultants has indicated that for a Tier 3 PERS
member, the cost is about 29 percent higher and about 36 percent
higher for TRS. Each year it's calculated that there would be
about 4,400 new members or 8,800 new members over a two-year
period. Those new member would have constitutionally protected
benefits for pension and medical.
Other costs are not quantifiable, but in the division's view,
there are certainly large costs associated with a delay, she
said.
5:18:48 PM
SENATOR GARY STEVENS said he was looking for a dollar amount,
but he could understand her reluctance to say.
SENATOR ELLIS asked if there had been an analysis of the impact
of SB 141 on the state's ability to attract quality employees
because a number of folks believe it will have a negative
impact.
MS. MILLHORN replied:
We really believe if you look at the research and the
redesign of the benefits that are provided under SB
141, those are rich and very generous benefits and
actually Stateline just provided some research
recently - and we know we've had a chronic
recruitment/retention issue with teachers - and what
Stateline has just recorded is that those graduates
from college who are pursuing teaching certificates
... will change careers five to seven times and that
50 percent of teachers right now going forward turn
over after five years. So I really believe - because
there is an eight-year vesting schedule - I'm very
confident that what we have in place, because of the
design of those benefits that provide mobility without
penalty - that we will be attractive.
Moreover, because there is a medical benefit that
right now Workplace Economics researched all the state
pension systems and 68 percent of those state pension
systems right now provide a less rich benefit than our
existing plan. So we know why those costs are there.
25 percent provide no medical cost, 44 percent in 2003
had a cost-share. What our medical plan is doing is
it's realigning with the other pension systems that
have a normal age retirement at age 65 and it is also
cost sharing with the member to provide that benefit.
So I believe that, based on the research and based on
the demographics of people moving from job to job and
not wanting to have that penalty, that we actually are
positioning ourselves very well. GASB, the Government
Accounting Standards Board, has ruled that those other
pension systems that provide a medical benefit, as of
2007 will have to report those pension medical
benefits on an accrual basis. And what that suggests
to me is that as soon as they have to account for
those on an accrual basis their accounting and funding
ratio is going to go down. It could have some impacts
to their ... bond rating. It can have all those kinds
of impacts and there are media accounts of those
benefits right now. What the State of Alaska has is it
has well positioned itself to provide this medical
benefit. It has a Health Reimbursement Arrangement
that's a deferred vested benefit that an individual
will be able to pay for medical expenses on a tax-
preferred basis. Ten years, that's very attractive
because we're asking the individual to cost-share.
Our plan design is very generous and it actually, the
employers are the parties who have to look at
recruitment and retention and also balance their
budget. When they were surveyed in 2004, they
indicated that they were no longer willing to pay for
all of the rising medical costs and the loss of
investment income and that they wanted a predictable
stable employer contribution rate. At the same time
they had to look at that plan design and align that
with recruitment and retention and so we've received
favorable support in that process.
I just do not see it. I realize that there is that
issue out there and that people are concerned about
it. I just believe that as soon as this plan is
implemented and stood up that that is just not going
to be an issue at all.
SENATOR ELLIS said time will tell.
CHAIR STEDMAN maintained his objection and asked for a roll
call.
The conceptual amendment to Version C to delay implementation
until July 1, 2008 failed with Senator Ellis and Senator Kookesh
voting yea and Senator Wagoner, Senator Gary Stevens, and Chair
Stedman voting nay.
5:24:44 PM
SENATOR ELLIS motioned to conceptually amend Version C delaying
implementation until July 1, 2007.
CHAIR STEDMAN objected and asked for a roll call.
The motion failed with Senator Ellis and Senator Kookesh voting
yea and Senator Wagoner, Senator Gary Stevens, and Chair Stedman
voting nay.
SENATOR KOOKESH asked how many Senate committees would hear HB
475.
CHAIR STEDMAN replied he thought a couple were left.
SENATOR KOOKESH commented he hopes somebody would spend more
time on the bill than this committee.
CHAIR STEDMAN responded a lot of time has been spent on this.
SENATOR KOOKESH said the Senate just got the bill.
CHAIR STEDMAN responded he understands.
SENATOR ELLIS commented he'd tell all the folks who write to him
via e-mail that he tried.
SENATOR WAGONER motioned to report SCS CSHB 475(CRA) and
attached fiscal notes from committee with individual
recommendations.
SENATOR ELLIS objected.
CHAIR STEDMAN asked for a roll call.
The motion passed with Senators Gary Stevens, Senator Wagoner,
and Chair Stedman voting yea and Senator Kookesh and Senator
Ellis voting nay and so SCS CSHB 475(CRA) from committee.
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