Legislature(2007 - 2008)SENATE FINANCE 532

04/28/2007 01:30 PM Senate FINANCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
= SB 125 PERS /TRS CONTRIBUT'NS;UNFUNDED LIABILITY
Heard & Held
+= SB 104 NATURAL GAS PIPELINE PROJECT TELECONFERENCED
Heard & Held
Invited Testimony from Industry on
Issues Addressed
Tony Palmer, VP, AK Business Development
TransCanada
Alaska Gasline Port Authority Testimony
+ Bills Previously Heard/Scheduled TELECONFERENCED
                                                                                                                                
     SENATE BILL NO. 125                                                                                                        
     "An  Act   relating  to  the   accounting  and   payment  of                                                               
     contributions under  the defined benefit plan  of the Public                                                               
     Employees' Retirement  System of Alaska, to  calculations of                                                               
     contributions  under  that  defined  benefit  plan,  and  to                                                               
     participation  in,  and  termination of  and  amendments  to                                                               
     participation   in,  that   defined  benefit   plan;  making                                                               
     conforming  amendments;  and   providing  for  an  effective                                                               
     date."                                                                                                                     
                                                                                                                                
                                                                                                                                
This was the  fourth hearing for this bill in  the Senate Finance                                                               
Committee.                                                                                                                      
                                                                                                                                
Co-Chair Hoffman moved to adopt  committee substitute Version 25-                                                               
GS1074\K as the working document.                                                                                               
                                                                                                                                
There being  no objection, the  Version "K"  committee substitute                                                               
was ADOPTED.                                                                                                                    
                                                                                                                                
4:43:47 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  announced that  several spreadsheets and  a new                                                               
Department of  Administration fiscal note dated  April 20th, 2007                                                               
pertinent  to Version  "K" [copies  on file]  would be  addressed                                                               
during today's  discussion. A side-by-side comparison  of Version                                                               
"K" to the original version of the bill was being developed.                                                                    
                                                                                                                                
MILES  BAKER, Staff  to Co-Chair  Stedman, communicated  that his                                                               
remarks  would  highlight  areas  of  change  in  this  committee                                                               
substitute  relative to  the  original version  of  the bill.  As                                                               
noted, a  side-by-side comparison  was currently  unavailable but                                                               
would be provided once completed.                                                                                               
                                                                                                                                
Mr. Baker  identified the first  change as being  the elimination                                                               
of  a  section  in  the   bill  pertaining  "to  the  duties  and                                                               
responsibilities"  of  the  Alaska  Retirement  Management  Board                                                               
(ARMB).  The reference  to  ARMB  in the  bill's  title was  also                                                               
removed. The provisions  pertinent to ARMB had  not been included                                                               
in the original  version of the bill, but were  incorporated by a                                                               
previous committee substitute adopted by the Committee.                                                                         
                                                                                                                                
Mr.  Baker  informed the  Committee  that  "some slight  drafting                                                               
differences" resulted  in there  being minor language  changes in                                                               
Section 1. The substance of the  Section had not been changed. In                                                               
addition,  definitions   incorporated  into  Section  1   in  the                                                               
previous  committee  substitute,  Version 25-GS1074\E,  had  been                                                               
moved  to   "the  broad  definition  section"   of  the  Teachers                                                               
Retirement System (TRS) Statute.                                                                                                
                                                                                                                                
4:45:49 PM                                                                                                                    
                                                                                                                                
Senator Olson  asked for confirmation that  the Senate's proposed                                                               
TRS  employer contribution  rate of  12.56 percent  had not  been                                                               
affected by these changes.                                                                                                      
                                                                                                                                
Mr. Baker affirmed the rate was unchanged.                                                                                      
                                                                                                                                
4:45:58 PM                                                                                                                    
                                                                                                                                
To  that  point,  Mr.  Baker  directed  attention  to  Section  1                                                               
subsection (d) page 2 line  9. In essence, this section specified                                                               
that "regardless"  of that 12.56  rate, "if the normal  cost goes                                                               
above that  in the  future", then that  higher rate  would become                                                               
the normal cost.                                                                                                                
                                                                                                                                
4:46:24 PM                                                                                                                    
                                                                                                                                
Mr. Baker indicated that, other  than minor "wording differences"                                                               
resulting from  "editorial" changes, no substantial  changes were                                                               
made  in Sec.  2.  The  working differences  also  resulted in  a                                                               
change  in  the   title  of  the  section:   instead  of  reading                                                               
"Determination  and payment  of state  contributions", the  title                                                               
now read "Additional state contributions".                                                                                      
                                                                                                                                
4:46:50 PM                                                                                                                    
                                                                                                                                
Mr. Baker stated  that the TRS definition removed  from Section 1                                                               
has been incorporated into Sec. 3, page 3 lines 3 through 5.                                                                    
                                                                                                                                
4:47:16 PM                                                                                                                    
                                                                                                                                
Mr.  Baker  specified  there  being  were  "no  real  changes  to                                                               
Sections 4, 5, 6, or 7.                                                                                                         
                                                                                                                                
4:47:34 PM                                                                                                                    
                                                                                                                                
Mr. Baker  expressed that  the first  substantial change  made by                                                               
Version "K"  is in  Sec. 8.  The effort  being furthered  in this                                                               
bill is  to transition  entities to a  cost-share system.  In the                                                               
case of  the Public Employee  Retirement System (PERS),  all PERS                                                               
employers would  contribute 22 percent of  "their active payroll"                                                               
base.                                                                                                                           
                                                                                                                                
Mr.  Baker  reminded  the  Committee of  the  concern  raised  in                                                               
previous hearings on  this bill that employers  might endeavor to                                                               
reduce their  payroll base  by selling  off, "for  example, their                                                               
local  utility   or  to  decide   to  outsource   something  that                                                               
previously  was  done by  the  municipality".  While such  action                                                               
would    lower    that   municipality's    contribution,    other                                                               
municipalities "would  be required to  share in the loss  of that                                                               
revenue".                                                                                                                       
                                                                                                                                
Mr. Baker specified  that language in Sec. 8  subsection (a) page                                                               
5 lines 4  through 11 was reworked to address  this concern. Each                                                               
year, an  employer would  be required  to pay  22 percent  of the                                                               
greater  of  either their  current  total  payroll base  or  "the                                                               
salary base as it was for  the fiscal year ending June 30, 2007".                                                               
This would prevent an employer  from contributing less were their                                                               
payroll  to  decrease  as  well   as  ensure  their  contribution                                                               
adequately reflected  any increase in  their payroll base  in the                                                               
future.                                                                                                                         
                                                                                                                                
4:49:41 PM                                                                                                                    
                                                                                                                                
Senator Dyson asked whether the  municipality would still be held                                                               
to  this  obligation  if  the  buyer  of  one  of  its  political                                                               
subdivisions  "agreed to  assume the  benefits liability  for the                                                               
employees".                                                                                                                     
                                                                                                                                
4:50:35 PM                                                                                                                    
                                                                                                                                
Mr. Baker  clarified that  that issue  could be  addressed during                                                               
the  negotiations  with  the  buyer.   However,  the  reason  for                                                               
requiring  the municipality  to  pay 22  percent  of the  "higher                                                               
payroll base is  because built into that 22 percent  is the money                                                               
that this  employer currently  is putting  forward into  this new                                                               
pooled pot to pay off the unfunded liability".                                                                                  
                                                                                                                                
Senator Dyson characterized this obligation as "legacy costs"                                                                   
                                                                                                                                
Mr. Baker affirmed.                                                                                                             
                                                                                                                                
Senator Dyson accepted the explanation.                                                                                         
                                                                                                                                
4:51:21 PM                                                                                                                    
                                                                                                                                
Mr. Baker  noted that language  in Sec. 9 was  slightly reworked.                                                               
This section  clarified the State's additional  obligation to the                                                               
retirement  systems. In  addition  to paying  22  percent on  its                                                               
payroll base,  the State, as specified  in Sec. 9 line  5 page 6,                                                               
"shall contribute to the plan each  July 1" or as soon after that                                                               
date as  possible, "the amount  of money required between  the 22                                                               
percent and  the Board adopted rate  to fund the payment  for the                                                               
whole system for the unfunded  liability for that year". The date                                                               
for the payment was allowed  some flexibility in consideration of                                                               
the  State's cash  flow situation  in July,  as numerous  payment                                                               
obligations are specified for July first.                                                                                       
                                                                                                                                
4:52:55 PM                                                                                                                    
                                                                                                                                
Mr. Baker communicated that no changes were made in Sec. 10.                                                                    
                                                                                                                                
4:53:29 PM                                                                                                                    
                                                                                                                                
Mr.  Baker  deferred  to  the  Department  of  Administration  to                                                               
discuss Sec. 11.                                                                                                                
                                                                                                                                
4:53:53 PM                                                                                                                    
                                                                                                                                
ANNETTE  KRIETZER,  Commissioner, Department  of  Administration,                                                               
informed the  Committee that Sec.  11 would allow  the Department                                                               
"to  claim  monies that's  owed  to  it  under the  system".  The                                                               
language  in  this  section was  rewritten  in  consideration  of                                                               
concerns  of  the  Alaska Municipal  League  (AML).  The  revised                                                               
language is  located on page  7, lines 5  through 8 and  reads as                                                               
follows.                                                                                                                        
                                                                                                                                
     After the  agency submits this amount  to the administrator,                                                               
     the  employer may  appeal the  administrator's claim  to the                                                               
     Office of  administrative hearings (AS 44.64).  If an appeal                                                               
     is timely filed, the administrator shall hold the submitted                                                                
     funds in an escrow account pending a final decision on the                                                                 
     appeal.                                                                                                                    
                                                                                                                                
Commissioner  Kreitzer  stated  that  this  compromised  language                                                               
would assist in addressing some of AML's concerns.                                                                              
                                                                                                                                
4:55:23 PM                                                                                                                    
                                                                                                                                
Senator   Elton   inquired  to   the   cost   of  conducting   an                                                               
administrative hearing; specifically to a small community.                                                                      
                                                                                                                                
Commissioner Kreitzer  responded that  this information  would be                                                               
provided.                                                                                                                       
                                                                                                                                
4:56:08 PM                                                                                                                    
                                                                                                                                
Mr. Baker addressed Sections 12, 13,  14, and 15. They dealt with                                                               
two sections of statute regarding  an employer's termination from                                                               
the  plan or  amending  their participation  agreement. Both  the                                                               
original bill  and the previous committee  substitute "envisioned                                                               
that"  once  the  system  transitioned  to  a  cost  share  plan,                                                               
employers would  have a 90 day  period in which "to  make changes                                                               
to  their participation  agreement":  they could  opt  in or  out                                                               
classes  of employees.  No such  changes would  be allowed  after                                                               
that. The  only recourse after that  would be for an  employer to                                                               
exit the system completely.                                                                                                     
                                                                                                                                
Mr. Baker  advised that Version  "K" would eliminate that  90 day                                                               
window.  An  employer's  ability  to  amend  their  participation                                                               
agreement would  continue to  be allowed  as in  current Statute.                                                               
However,  language in  Sec. 15,  page 8  was required  to address                                                               
costs associated  with an  employer's decision to  opt in  or opt                                                               
out a  group of employees or  sell off a portion  of the business                                                               
which would  in effect  reduce the  employer's payroll  base. For                                                               
instance, a community  could decide not to  cover their municipal                                                               
waste people or their fire chief or city administrator.                                                                         
                                                                                                                                
4:58:47 PM                                                                                                                    
                                                                                                                                
Mr. Baker stated  that while an employer could  continue to amend                                                               
their  participation agreement,  language  in  Sec. 15  specified                                                               
that  an  employer  who  terminates   a  class  of  employees  or                                                               
completely terminates  from the system  would be required  to pay                                                               
termination costs.  He reviewed  how the termination  costs would                                                               
be calculated. For  instance, an employer terminating  a class of                                                               
employees  would be  required to  pay that  groups' past  service                                                               
costs.                                                                                                                          
                                                                                                                                
5:00:20 PM                                                                                                                    
                                                                                                                                
Senator Thomas  expressed concern  that, as  has happened  in the                                                               
past, the  State might  not have  an accurate  unfunded liability                                                               
figure.  Were that  the  case, an  entity  terminating groups  of                                                               
people or  completely terminating  from the  plan, might  be told                                                               
their  obligation was  satisfied, but  then might  un-expectantly                                                               
get a  "huge bill"  later" when  the system's  unfunded liability                                                               
was reevaluated.                                                                                                                
                                                                                                                                
5:01:43 PM                                                                                                                    
                                                                                                                                
Commissioner Kreitzer  pointed out  that "no plan  is foolproof".                                                               
The Department,  Committee members and staff,  and other entities                                                               
and individuals working  on this bill have  worked diligently "to                                                               
identify areas where  we think that there could  be some loophole                                                               
and could  allow for  a situation  where you  might not  have the                                                               
unfunded liability  taken care of".  The bill before you  "is our                                                               
best effort  to deal with that  and to not come  into a situation                                                               
in the  future where  we would  have someone  getting a  big bill                                                               
because the Division of Retirement  and Benefits made a mistake".                                                               
She could  not envision where at  this point, a mistake  might be                                                               
made.                                                                                                                           
                                                                                                                                
Senator  Thomas also  acknowledged being  unable to  identify any                                                               
specific  weakness. Nonetheless,  despite professional  action in                                                               
the past, the State is facing a substantial unfunded liability.                                                                 
                                                                                                                                
5:02:47 PM                                                                                                                    
                                                                                                                                
Mr. Baker pointed out that  "liabilities by individual employers"                                                               
are tracked under  the current retirement system.  Each year, the                                                               
actuary  conducts  an extensive  process  to  determine "the  new                                                               
liability of  the system is  and allocating it as  appropriate to                                                               
all the individual employers".                                                                                                  
                                                                                                                                
Mr. Baker  directed his remarks  to Senator Thomas's  concern. An                                                               
employer  might have  been fine  at one  time, but,  as each  new                                                               
valuation  was determined,  their unfunded  liability grew.  This                                                               
was the experience of most employers.                                                                                           
                                                                                                                                
Mr.  Baker  expressed  that  the  same  valuation  process  would                                                               
continue under  this bill. However,  under the cost  share system                                                               
being proposed,  the unfunded liability would  be "shared amongst                                                               
everybody".                                                                                                                     
                                                                                                                                
5:03:44 PM                                                                                                                    
                                                                                                                                
Mr. Baker stated that, under  the current system, each entity was                                                               
combating "a different number".                                                                                                 
                                                                                                                                
Mr. Baker agreed with Commissioner  Kreitzer that "this is a best                                                               
attempt to  address the  fact that everyone  will be  sharing the                                                               
load and" appropriately allocating it going forward.                                                                            
                                                                                                                                
5:04:15 PM                                                                                                                    
                                                                                                                                
Mr. Baker informed the Committee there was no change in Sec. 16.                                                                
                                                                                                                                
Mr.  Baker noted  that it  was decided  to move  definitions from                                                               
individual areas of  the bill to a more appropriate  place in the                                                               
Statute section. Thus, definitions were added to Sec. 17.                                                                       
                                                                                                                                
5:04:31 PM                                                                                                                    
                                                                                                                                
Mr. Baker  deemed Sec. 19  to be  a significant component  of the                                                               
committee substitute. The spreadsheets earlier referenced by Co-                                                                
Chair Stedman were pertinent to this section.                                                                                   
                                                                                                                                
Mr.  Baker stated  that Sec.  19  subsection (a)  of Version  "K"                                                               
contained  a  listing of  employers  who  had contributed  excess                                                               
funds to their retirement plans  during the prior three years and                                                               
their  contribution rates,  as adjusted,  for the  first year  of                                                               
program implementation. This information  had been re-verified by                                                               
the Department.                                                                                                                 
                                                                                                                                
Mr. Baker directed attention to  a spreadsheet titled "FY 08 Rate                                                               
Adjustments  Required to  Recoup Excess  Muni PERS  Contributions                                                               
from  Prior 3  Years (Revised  4/28/07) Prior  to application  of                                                               
Hold Harmless Provision" [copy on  file], which pertained to this                                                               
section.                                                                                                                        
                                                                                                                                
5:05:40 PM                                                                                                                    
                                                                                                                                
Mr. Baker  addressed Column  "9" of  the spreadsheet.  Changes on                                                               
this  spreadsheet,  as  compared  to the  previous  version,  are                                                               
highlighted.  For instance  the City  of Barrow  and the  City of                                                               
Klawock have been added to the list.                                                                                            
                                                                                                                                
5:06:26 PM                                                                                                                    
                                                                                                                                
Mr. Baker next addressed the  spreadsheet titled "Impact of a 22%                                                               
Employer  PERS  Rate  on  Municipalities,   with  CSSB  125  Hold                                                               
Harmless Provision" [copy on file].  In addition to the desire to                                                               
assist  the  "Heroes"  communities,   those  entities  which  had                                                               
contributed  excess  funds  toward  their  retirement  plans,  an                                                               
effort  was  made "to  be  equitable.  As we  set  a  rate of  22                                                               
percent, many  municipalities are going  to see quite  a windfall                                                               
or  credit to  what they  previously thought  they were  going to                                                               
have to pay if their rates were substantially higher than 22".                                                                  
                                                                                                                                
Mr.  Baker  also   pointed  out  that  there  were   also  a  few                                                               
communities that  had rates significantly lower  than 22 percent.                                                               
They  would  be  experiencing  a substantial  increase  in  their                                                               
payments.                                                                                                                       
                                                                                                                                
Mr.  Baker  signified  that the  "Impact"  spreadsheet  reflected                                                               
communities'  estimated  FY  08  payroll; their  FY  07  employer                                                               
contribution  rate; and  the FY  08 Board  recommended rate  they                                                               
would  have been  required to  pay absent  this legislation.  For                                                               
example, the City of Fairbanks  would have paid $13,271,641 under                                                               
the  FY 08  Board Requested  Rate. Under  this legislation,  they                                                               
would  pay $1,578,676  for  a  savings of  $11,692,965  or an  88                                                               
percent "credit gain".                                                                                                          
                                                                                                                                
Mr. Baker stated that the City  of Fairbanks would not be subject                                                               
to the  hold-harmless provision in  the bill because,  under this                                                               
bill, they  would be  experiencing a  tremendous decrease  in the                                                               
contribution level as compared to the status quo system.                                                                        
                                                                                                                                
5:08:33 PM                                                                                                                    
                                                                                                                                
Mr.  Baker  stated  that  the City  of  Fairbanks  situation  was                                                               
opposite to  that of the  City of  Seldovia in that  the proposed                                                               
cost  share system  would require  them to  contribute more  than                                                               
they would under the status  quo system. Therefore, hold harmless                                                               
provisions  were incorporated  into  the bill  in  an attempt  to                                                               
provide equality.                                                                                                               
                                                                                                                                
Mr. Baker explained that the  hold harmless provision would apply                                                               
to those  entities whose FY  07 rate  or FY 08  Board Recommended                                                               
Rate  was less  than 22  percent. They  would be  subject to  the                                                               
lower of those two years' contribution rates.                                                                                   
                                                                                                                                
Mr. Baker informed the Committee  that the total fiscal impact of                                                               
the hold  harmless provision was  then calculated. The  State, in                                                               
addition to  its 22  percent contribution,  would be  required to                                                               
contribute an additional $1.3 million  as specified at the bottom                                                               
of Column (7).                                                                                                                  
                                                                                                                                
5:10:21 PM                                                                                                                    
                                                                                                                                
Senator  Elton asked  whether there  were  school districts  with                                                               
employees in  the PERS  system which  might require  similar hold                                                               
harmless considerations.                                                                                                        
                                                                                                                                
5:11:00 PM                                                                                                                    
                                                                                                                                
Mr.  Baker  stated  that  this   issue  is  under  review.  Until                                                               
recently, only municipalities and  cities had been considered. In                                                               
addition to  considering whether  any school districts  with PERS                                                               
employees should be included, attention  is being expanded to the                                                               
category  referred  to  as  "PERS  Others".  This  would  include                                                               
entities  such  as  a  housing  authority  or  Bartlett  Regional                                                               
Hospital in Juneau.                                                                                                             
                                                                                                                                
Mr.  Baker  calculated that  an  additional  one million  dollars                                                               
could be added  to the hold harmless total  were school districts                                                               
considered. "PERS  Others" might add an  additional three million                                                               
dollars.                                                                                                                        
                                                                                                                                
Mr. Baker  concluded that  applying the  hold harmless  clause to                                                               
these  entities  would be  doable;  it  would  be a  policy  call                                                               
matter.                                                                                                                         
                                                                                                                                
Senator Elton appreciated the foresight given to this issue.                                                                    
                                                                                                                                
5:12:23 PM                                                                                                                    
                                                                                                                                
Mr. Baker referred the Committee  to the spreadsheet titled "CSSB
125 Sec (19)  Rate Adjustments" [copy on  file]. This spreadsheet                                                               
reflects  communities  "recoup" rates  as  affected  by the  hold                                                               
harmless provisions.  For instance,  the Aleutian  East Borough's                                                               
recoup rate  for FY 08  would have  been 10.01 percent.  Once the                                                               
hold harmless rate is factored in,  their rate for FY 08 would be                                                               
3.24 percent.                                                                                                                   
                                                                                                                                
5:14:16 PM                                                                                                                    
                                                                                                                                
Mr.  Baker stated  that communities  who qualified  for both  the                                                               
recoup  and  hold harmless  provisions  would  contribute at  the                                                               
adjusted rate for  FY 08. The hold  harmless provision adjustment                                                               
would  continue  to  apply  to   qualifying  communities  for  an                                                               
additional four years.                                                                                                          
                                                                                                                                
Mr. Baker specified that all  communities would be subject to the                                                               
22 percent contribution rate beginning in FY 13.                                                                                
                                                                                                                                
5:15:20 PM                                                                                                                    
                                                                                                                                
Mr. Baker noted  that the communities depicted at the  top of the                                                               
spreadsheet were those  that qualified for the  recoup and/or the                                                               
hold harmless rate provisions specified in Sec. 19(a) for FY 08.                                                                
                                                                                                                                
Mr.  Baker   stated  that  19(b)   contains  the   hold  harmless                                                               
provisions  specific to  the additional  four years.  Communities                                                               
subject  to that  provision are  depicted  at the  bottom of  the                                                               
spreadsheet.                                                                                                                    
                                                                                                                                
5:15:45 PM                                                                                                                    
                                                                                                                                
Commissioner  Kreitzer "commended"  Co-Chair Stedman's  staff for                                                               
their   efforts  in   developing   the   Version  "K"   committee                                                               
substitute.                                                                                                                     
                                                                                                                                
Co-Chair Stedman  asked Members to review  Version "K" thoroughly                                                               
and advise his office of any concerns or suggestions.                                                                           
                                                                                                                                
The bill was HELD in Committee.                                                                                                 
                                                                                                                                

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