Legislature(2005 - 2006)BUTROVICH 205
04/25/2006 05:00 PM Senate STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| HJR27 | |
| SB293 | |
| Confirmation – Scott Nordstrand, Commissioner, Department of Administration | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 293 | TELECONFERENCED | |
| + | HJR 27 | TELECONFERENCED | |
| + | TELECONFERENCED |
SB 293-PUBLIC EMPLOYEES'/TEACHERS' RETIREMENT
5:34:35 PM
CHAIR THERRIAULT announced SB 293 to be up for consideration. He
explained that he intended to put the issue on the record and
then forward the bill to the Finance Committee for further
consideration.
SENATOR KIM ELTON, sponsor, explained that SB 293 extends, to
July 1, 2008, the effective date for SB 141, which is a bill
that creates a Tier IV defined contribution retirement system.
The reasons for extending the effective date are that SB 141 is
not well understood and that it's inadvisable to move forward
with implementation prior to a mandated IRS review.
SENATOR ELTON stated that the House "fix it" bill has grown to
34 pages in an effort to address the issues that weren't
considered in SB 141. Some of the changes are fundamental
including: addressing the potential for double dipping on
disability; identifying where death and disability benefits come
from; survivor benefits; and qualifying for both PERS and TRS
before getting access to a health retirement account. Noting
that amendments were added on the House floor, one of which
would extend the effective date for a year, he asserted that it
would be counterintuitive to believe that more issues wouldn't
arise over time.
SENATOR ELTON explained that when a retirement system changes,
the IRS must conduct a review of the plan details and, he said,
it would be presumptuous to think that the IRS review will go
smoothly if the Legislature is still trying to fix the bill. SB
293 isn't an effort to do away with the new Tier IV; it's simply
an effort to slow implementation until the bill is understood
and the problems are fixed.
He advised that extending the effective date comes at no cost;
it does not implicate the unfunded liability or increase costs
to the employer. He encouraged the committee to pass this
important component on to the Finance Committee for further
consideration.
5:42:03 PM
JOHN ALCANTRA, Government Relations Director for NEA-Alaska,
testified that the bill is necessary because of the many flaws
associated with SB 141. He advised that NEA-Alaska would have an
actuary from Washington D.C. available over the weekend to
address the issues that are important to lawmakers and urged
members to move the bill to the Finance Committee for further
consideration.
BRUCE LUDWIG, Business Manager for the Alaska Public Employees
Association and the American Federation of Teachers, stated that
he was also speaking for the Alaska AFL/CIO. He opined that
because SB 141 has many problems and errors and because the plan
does not have IRS approval, it would be dangerous to go forward.
Doing so could result in up to a 20 percent increase in tax
liability on employees' income. He urged the committee to pass
the bill.
5:47:33 PM
VERNON MARSHAL, Lobbyist for the Public Safety Employee
Association (PSEA), testified in support of SB 293. He related
concerns from both employer and employee standpoints and
stressed that additional time is needed so that: new employees
are assured of entering a qualified plan that meets IRS review;
new employees entering PERS and TRS service understand the
workings of the new Alaska 401K; and employers are knowledgeable
regarding the benefits and structure of the system and its new
accounting. This information is necessary to ensure a seamless
transition from one retirement system to another.
MR. MARSHALL reported that PSEA recognizes that Alaska has a
shortage of troopers and it views the retirement plan as a tool
to attract qualified applicants. Furthermore, it believes that
proper marketing of available positions is vital and that higher
levels of information will be required than in past.
Using proper due diligence will reduce ambiguity and the
possibility of error and misunderstanding. Investing additional
time is a prudent step to ensure that a proper workforce is
built in Alaska so that the people can get business done and
provide service, he concluded.
CAREY REARDON, Anchorage Teacher, testified in support of moving
the bill to the Finance Committee for the reasons previously
stated. She described SB 141 as a bill that was passed in haste
and now requires fixing. She urged the committee to take the
same amount of time for state employees and teachers as is being
taken with the oil tax structure.
5:54:29 PM
MELANIE MILLHORN, Director, Division of Retirement and Benefits,
testified that the administration opposes delay of
implementation of SB 141. She recapped SB 141 and said it
recognizes the key factors underlying the unfunded liability,
which are: rising healthcare costs; loss of investment income;
and change in actuarial assumptions.
SB 141 redesigned the medical benefit in a way that aligns with
other state pension programs and the national trend associated
with receiving medical benefits. She elaborated that 75 percent
of the current costs for medical benefits accrue from the normal
retirement age of 55 to 65 for Tier I while other state pension
systems have 50 percent of the costs coming from normal
retirement age of 65.
MS. MILLHORN reported that Buck Consultants, which provides
actuarial services to Alaska and some 300 other state and
government pension systems, states that Alaska is its first
client that cannot increase the deductible, the co-pay, and the
prescription drug costs because they are protected under Article
XII, Section 7 of the Alaska State Constitution. She related
that other states are able to make changes as costs increase.
When PERS and TRS employers were surveyed in 2004 regarding tier
redesign, those stakeholders indicated that they didn't want to
shoulder the rising healthcare costs and loss of investment
income. Their voice is important, she said.
MS. MILLHORN advised that delaying implementation of SB 141
would add approximately 8,800 new members to the retirement
system who would have constitutionally protected benefits. The
medical normal cost already exceeds the pension normal cost
making it clear that the escalation of healthcare costs are a
primary driver. SB 141, if implemented on July 1, 2006, deals
with that issue.
MS. MILLHORN addressed the comments related to IRS plan
determination process saying that Ice Miller LLP was hired to
use its tax expertise to review the provisions of SB 141 and
conform the benefits in the way the Legislature intended. The
division did file for plan determination in a timely fashion
thereby preserving the opportunity to move forward and make
changes to provide beneficial tax benefits to members and
employers. She assured the committee that there is no adverse
consequence in the sequence of events or the measures that the
division has undertaken in concert and partnership with Ice
Miller.
She asked for the opportunity to move forward and implement the
plan in accordance with legislative intent from the previous
session and not add additional unfunded liability to the pension
system.
6:02:09 PM
SENATOR WAGONER remarked he found it hard to comprehend that
delaying the program for the requested time wouldn't add a
burden to the state.
MS. MILLHORN responded the fiscal note speaks to the division's
operational costs and not to the cost of adding an additional
8,800 members and their dependents if implementation is delayed.
SENATOR WAGONER questioned whether someone is working to
determine the additional cost if implementation is delayed
MS. MILLHORN replied the actuaries haven't been charged with
that task as yet, but it could be necessary depending on
development of SB 293.
SENATOR ELTON asked Ms. Millhorn, as administrator of the
program, if she would outline the difference in future costs to
the retirement system for Tier III versus Tier IV employees.
MS. MILLHORN replied SB 141 redesigned the benefit plan to make
costs going forward predictable for employers and it was very
generous. Under SB 141 the fixed and guaranteed benefits for
death and disability and healthcare have been redesigned so that
costs going forward are known. With Tier III members the costs
are all defined benefit components so there is associated
volatility. Buck Consultants is looking at all 21 assumptions
for the past four years and then recalibrating them to determine
whether or not they will recommend changes.
SENATOR ELTON reiterated he would like her to outline the
difference in future cost between someone hired on June 30, 2006
and someone hired on July 2, 2006.
MS. MILLHORN responded the difference is about two percentage
points in normal cost and the new defined contribution members
would bring in no past service cost.
SENATOR ELTON said he'd like to see the numbers when they're
available. He wouldn't dispute that a Tier I or Tier II employee
is more expensive than a Tier IV employee, but he hasn't seen
any figures outlining the difference between a Tier III and Tier
IV employee. Before a decision is made there must be some
understanding of the real cost of a delay, he said.
CHAIR THERRIAULT agreed that the Finance Committee would want
that information.
SENATOR HUGGINS asked if Tier I benefit plans would change in
any way.
MS. MILLHORN replied the benefits for Tier I, Tier II, and Tier
III employees are constitutionally protected and would not
change.
SENATOR HUGGINS asked if that includes cost of living
adjustments.
MS. MILLHORN said yes. She elaborated saying there are two post
retirement pension adjustments (PRPAs). One is automatic and the
other is ad hoc. The change in SB 141 establishes a ceiling such
that the funding level must be at 105 percent before the
administrator can authorize the ad hoc PRPA. The automatic PRPAs
are still benefits that all members are entitled to in accords
with the statute provisions.
SENATOR ELTON asked if it's true that new employees' retirement
contracts can't be changed retroactively so any errors that
aren't identified and corrected by HB 475 won't be changed until
a future Legislature corrects the mistake.
MS. MILLHORN explained that Ice Miller would have the ability to
file a revision to the plan determination letter that has been
filed and the IRS would provide a determination associated with
the filings. If additional changes are needed, the State would
be given the opportunity to deal with the issue(s) that would
result in any adverse action.
SENATOR ELTON clarified he wasn't asking about IRS filings that
could lead to plan revisions; he was asking about new employees'
retirement contracts and whether or not they could be revised if
errors are subsequently found.
MS. MILLHORN expressed confidence that that problem has been
addressed because the Department of Law has analyzed SB 141 and
dealt with all benefit provisions. Some of the suggested changes
are incorporated in HB 475 so the areas of benefit provision and
the administration of the benefits have undergone due diligence
and the bill will be implemented as the Legislature intended.
SENATOR ELTON referenced the timetable for receiving IRS
determination and asked if the process might require legislative
action.
MS. MILLHORN replied it would depend on the determination from
the IRS.
SENATOR ELTON questioned whether the 90-day deadline might not
be problematic if the Legislature isn't in session.
MS. MILLHORN said her understanding is that the IRS could ask
for a course correction when it issues the determination. When
the State submits the correction it would include information
relating to the timing of the next legislative session.
CHAIR THERRIAULT asked for the will of the committee.
SENATOR WAGONER motioned to report SB 293 and attached fiscal
note(s) from committee with individual recommendations. There
being no objection, it was so ordered.
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