Legislature(2013 - 2014)BARNES 124

03/28/2013 08:00 AM COMMUNITY & REGIONAL AFFAIRS


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08:06:57 AM Start
08:07:46 AM HB174
08:40:36 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
*+ HB 174 PERS CONTRIBUTIONS BY MUNICIPALITIES TELECONFERENCED
Heard & Held
          HB 174-PERS CONTRIBUTIONS BY MUNICIPALITIES                                                                       
                                                                                                                                
8:07:46 AM                                                                                                                    
                                                                                                                                
CO-CHAIR NAGEAK announced  that the only order  of business would                                                               
be HOUSE BILL  NO. 174, "An Act requiring  each municipality with                                                               
a population that decreased by  more than 25 percent between 2000                                                               
and 2010  that participates  in the defined  benefit plan  of the                                                               
Public Employees'  Retirement System  of Alaska to  contribute to                                                               
the system an amount calculated by  applying a rate of 22 percent                                                               
of the  total of all  base salaries  paid by the  municipality to                                                               
employees  of the  municipality  who are  active  members of  the                                                               
system during  a payroll  period; reducing  the rate  of interest                                                               
payable by  a municipality  with a  population that  decreased by                                                               
more than 25 percent between 2000  and 2010 that is delinquent in                                                               
transmitting employee  and employer contributions to  the defined                                                               
benefit  plan  of  the Public  Employees'  Retirement  System  of                                                               
Alaska;   giving   retrospective   effect  to   the   substantive                                                               
provisions of the Act; and providing for an effective date."                                                                    
                                                                                                                                
8:08:29 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  FOSTER,  speaking  as  the  sponsor  of  HB  174,                                                               
informed  the  committee   that  HB  174  seeks   to  correct  an                                                               
unintended consequence  of the  salary floor  enacted in  2008 by                                                               
Senate  Bill 125  in  the  25th Alaska  State  Legislature.   The                                                               
salary floor  was meant to  prevent Public  Employees' Retirement                                                               
System  (PERS) employers  from gaming  the system  by laying  off                                                               
PERS  employees and  hiring contract  employees  to reduce  their                                                               
contribution to the system.  [The  salary floor] was not meant to                                                               
saddle communities experiencing an  exodus event with a financial                                                               
burden that  can't possibly be  administered.  Therefore,  HB 174                                                               
removes  the 2008  salary floor  for communities  that lost  more                                                               
than 25  percent of  their population between  the 2000  and 2010                                                               
census  period.   For  those communities,  the  interest rate  on                                                               
delinquent payments is  reduced from 22 percent to  either a rate                                                               
agreed upon  with the administration  or three  percentage points                                                               
above  the  Federal  Reserve discount  rate  for  the  applicable                                                               
payroll period.                                                                                                                 
                                                                                                                                
8:09:46 AM                                                                                                                    
                                                                                                                                
PAUL   LABOLLE,  Staff,   Representative  Foster,   Alaska  State                                                               
Legislature, explained that by narrowing  the legislation to only                                                               
those communities  that lost 25  percent of their  population, it                                                               
would  only refer  to the  following five  communities:   Galena,                                                               
Atka, Pelican, Anderson, and St.  George.  Since Anderson and St.                                                               
George don't currently have any  PERS eligible positions they are                                                               
included within the scope of the  legislation as a matter of law,                                                               
but not practically.   He then noted that he  wasn't sure if Atka                                                               
is even a  functioning community.  Therefore,  Pelican and Galena                                                               
are the  communities that  will be directly  impacted by  HB 174.                                                               
In the way of background,  Mr. LaBolle explained that Senate Bill                                                               
125 was  a way to bail  out the PERS  system.  In the  past, each                                                               
municipality was responsible for  its own retirement system under                                                               
PERS,  and  therefore the  system's  benefits  were laid  out  by                                                               
statute  while the  actual management  of that  system was  up to                                                               
each  municipality.   Senate Bill  125 turned  the aforementioned                                                               
into a pooled  resource such that every community is  in the same                                                               
system.   A large amount of  funds were provided by  the state to                                                               
help secure the  unfunded liability while at the  same time there                                                               
was the  desire to ensure  municipalities paid their  fair share.                                                               
The concern, he explained, was  that municipalities would lay off                                                               
employees  in order  to reduce  the number  of PERS  positions on                                                               
which  they would  be paying  into the  system and  hire contract                                                               
employees  to  perform  the same  task.    Unfortunately,  exodus                                                               
events  in certain  communities  weren't foreseen.   A  community                                                               
that loses  more than  25 percent of  its population  won't carry                                                               
the same  amount of  municipal staff.   For  Galena, there  is an                                                               
unfunded liability  of almost $500,000  for a population  of 500,                                                               
and  thus there  is no  way to  carry that  [unfunded liability].                                                               
Since the  aforementioned wasn't the  intent of Senate  Bill 125,                                                               
HB 174 offers a targeted approach to rectify the situation.                                                                     
                                                                                                                                
8:12:49 AM                                                                                                                    
                                                                                                                                
CO-CHAIR  LEDOUX asked  whether these  communities are  behind in                                                               
their payments  with what she  characterized as a very  high rate                                                               
of interest.                                                                                                                    
                                                                                                                                
MR. LABOLLE replied yes, and  added that Galena is delinquent and                                                               
faces a 22  percent interest rate.  Section  2 addresses interest                                                               
rates for delinquent communities  that fall within the definition                                                               
[provided under HB 174].                                                                                                        
                                                                                                                                
8:13:38 AM                                                                                                                    
                                                                                                                                
CO-CHAIR LEDOUX  surmised then  that HB  174 wouldn't  reduce the                                                               
interest  rate  for other  communities  that  are delinquent  and                                                               
asked whether there are other communities that are delinquent.                                                                  
                                                                                                                                
MR. LABOLLE replied yes.                                                                                                        
                                                                                                                                
8:14:04 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE FOSTER  stressed that the assumption  when [Senate                                                               
Bill 125 passed]  was that communities would grow,  and thus they                                                               
wouldn't  have a  problem with  the  payments as  they would  add                                                               
employees into the system.                                                                                                      
                                                                                                                                
8:15:24 AM                                                                                                                    
                                                                                                                                
MIKE    BARNHILL,    Deputy     Commissioner,    Department    of                                                               
Administration,  said that  he has  a  spreadsheet of  delinquent                                                               
communities as  of January  31, 2013, but  Pelican isn't  on that                                                               
delinquent list.                                                                                                                
                                                                                                                                
8:15:54 AM                                                                                                                    
                                                                                                                                
CO-CHAIR  LEDOUX  asked if  all  the  delinquent communities  are                                                               
paying 22 percent.                                                                                                              
                                                                                                                                
MR. BARNHILL replied  no, recalling that the rate  of interest is                                                               
12 percent.  The interest rate  is the earnings assumption of the                                                               
system, 8  percent, plus another  50 percent of that,  4 percent,                                                               
which totals 12 percent.                                                                                                        
                                                                                                                                
CO-CHAIR NAGEAK opened public testimony.                                                                                        
                                                                                                                                
8:16:38 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE OLSON inquired  as to whether 8  percent is overly                                                               
optimistic.                                                                                                                     
                                                                                                                                
MR.  BARNHILL  noted that  there  is  a  debate in  the  pension,                                                               
actuarial, and economist communities  regarding whether 8 percent                                                               
for a public  pension system is overly optimistic.   The majority                                                               
of pension  systems have  adopted 8 percent  or something  in the                                                               
range of 8 percent.  A  Chicago economist, he related, believes 8                                                               
percent  is very  optimistic and  recommends a  riskless rate  of                                                               
return in  the range of 4-5  percent.  If the  [Alaska Retirement                                                               
Management (ARM)]  Board adopted a  more riskless rate  of return                                                               
that  would  essentially double  the  unfunded  liability of  the                                                               
systems.    Currently,  the  total  unfunded  liability  for  the                                                               
systems  is $11.9  billion,  which would  place  pressure on  the                                                               
state  assistance  payments  that  the  legislature  appropriates                                                               
every year.  Mr. Barnhill  acknowledged that a lengthy discussion                                                               
on the choice to  use 8 percent could be held,  but said that for                                                               
now 8 percent  is in the range of prudent  and it's possible that                                                               
the ARM Board will consider rate reductions in the future.                                                                      
                                                                                                                                
8:18:12 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE OLSON  conjectured that  8 percent is  what placed                                                               
[the state]  in the situation it  is now [with the  PERS unfunded                                                               
liability].                                                                                                                     
                                                                                                                                
MR. BARNILL  responded that  a number of  issues resulted  in the                                                               
state's  current situation  with the  [PERS unfunded  liability].                                                               
Certainly, one of  those issues is not targeted  the assumed rate                                                               
of return.   Over the past 5  years, the rate of  return has been                                                               
well  below 8  percent a  year.   Going  forward, the  investment                                                               
advisor for the  ARM Board has indicated there  is practically no                                                               
likelihood that 8 percent will be reached in the next 10 years.                                                                 
                                                                                                                                
8:19:04 AM                                                                                                                    
                                                                                                                                
CO-CHAIR LEDOUX inquired as to the  average rate of return over a                                                               
20-year period.                                                                                                                 
                                                                                                                                
MR.  BARNHILL   offered  to  provide  that   information  to  the                                                               
committee.                                                                                                                      
                                                                                                                                
CO-CHAIR  LEDOUX  questioned  the  choice of  8  percent  if  the                                                               
assumed rate  of return hasn't  been 8  percent over the  last 20                                                               
years,  now, and  little  hope  reaching it  over  the next  five                                                               
years.                                                                                                                          
                                                                                                                                
MR. BARNHILL reminded the committee  that there are boom and bust                                                               
markets, and therefore  there is at least one  slice during which                                                               
the average rate of return was in  excess of 8 percent.  He noted                                                               
that  per  statute the  ARM  Board  is  required to  provide  the                                                               
legislature 1-, 4-, 7-, and 10-year average rate of returns.                                                                    
                                                                                                                                
8:20:31 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON  referred to  the sponsor  statement, which                                                               
relates that the  salary floor was instituted to  ensure that the                                                               
system couldn't  be gamed.   However,  he questioned  whether the                                                               
system is being  gamed anyway because of the  high expectation of                                                               
the ARM Board.                                                                                                                  
                                                                                                                                
MR. BARNHILL  said that  the ARM  Board adopts  many assumptions,                                                               
the point of  which in a defined benefit system  is to attempt to                                                               
project the  savings necessary in  order to pay  defined benefits                                                               
in the future.  In  addition to the earnings reserve assumptions,                                                               
there   are  assumptions   for  mortality,   retirement,  medical                                                               
expenses, health  care cost  growth, and inflation.   He  said he                                                               
could guarantee that  one or more of those  assumptions about the                                                               
future  will be  incorrect,  which  is the  nature  of a  defined                                                               
benefit plan.   By  statute and  guaranteed by  the constitution,                                                               
the state  has committed to  pay certain defined benefits  in the                                                               
future.   The only way to  achieve the aforementioned is  to make                                                               
assumptions  regarding what  the future  holds in  order to  save                                                               
money and invest it.                                                                                                            
                                                                                                                                
8:22:17 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  OLSON  requested  the   average  rate  of  return                                                               
reports from the ARM Board.                                                                                                     
                                                                                                                                
MR. BARNHILL agreed to provide those.                                                                                           
                                                                                                                                
8:22:51 AM                                                                                                                    
                                                                                                                                
KATHIE  WASSERMAN, Executive  Director,  Alaska Municipal  League                                                               
(AML),  said   that  the   municipalities  understand   the  huge                                                               
liability  faced  with  the PERS  liability  and  appreciate  the                                                               
agreement between  the state and  PERS employers to settle  on 22                                                               
percent of  the past service  cost and the present  service cost.                                                               
However, some municipalities just can't  pay this kind of penalty                                                               
on losing employees  due to a decrease in population.   The [PERS                                                               
salary  floor]  has taken  away  their  ability to  manage  their                                                               
employees and their city.   She recalled that originally Galena's                                                               
bill was about $129,000, but with  the 12 percent interest it has                                                               
now  grown to  about  $500,000.   The  original  amount was  very                                                               
difficult to impossible for Galena  while $500,000 is impossible.                                                               
Ms. Wasserman provided  an example with the City  of Pelican that                                                               
she  recalled having  a population/tax  base of  150 people  that                                                               
decreased    to    62    people.        In    such    situations,                                                               
[reductions/layoffs] have to occur and  that incurs a cost of its                                                               
own.   Therefore, AML  supports HB  174 as there  has to  be some                                                               
relief  for  these  smaller communities.    Although  the  larger                                                               
municipalities  are probably  in a  better position  to game  the                                                               
system, they  are also  in a  better position to  be able  to pay                                                               
penalties.  With  regard to gaming, Ms.  Wasserman didn't believe                                                               
the smaller  communities, which aren't  close to  main population                                                               
areas, would know how to game the system.                                                                                       
                                                                                                                                
8:25:51 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON  inquired as to the  alternative for Galena                                                               
if HB 174 doesn't make it this legislature.                                                                                     
                                                                                                                                
MS. WASSERMAN surmised that it would be in the state's hands.                                                                   
                                                                                                                                
8:26:24 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON, appealing to  Ms. Wasserman being a former                                                               
city  manager, inquired  as to  what she  would recommend  to her                                                               
community.                                                                                                                      
                                                                                                                                
MS. WASSERMAN recalled  that for a community to  dissolve it must                                                               
fill  out  a  petition,  which  requires  enough  work  that  the                                                               
community,  particularly  smaller  ones,  would have  to  hire  a                                                               
consultant.   However, it's  probably not worth  it for  those on                                                               
the brink of dissolving to hire  a consultant for a year petition                                                               
system.   Therefore,  she would  suggest mailing  the key  to the                                                               
city hall to the state.                                                                                                         
                                                                                                                                
8:27:33 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  DRUMMOND inquired  as  to  why other  communities                                                               
listed  on the  chart  as  having had  employees  that don't  now                                                               
aren't included in the bail out.                                                                                                
                                                                                                                                
MR. LABOLLE clarified that the  chart doesn't show the population                                                               
percentage but rather shows the  salary floor.  Communities could                                                               
be  impacted by  the  salary  floor for  any  number of  reasons,                                                               
including loss of employees or lowering of the salary base.                                                                     
                                                                                                                                
8:28:47 AM                                                                                                                    
                                                                                                                                
MR.  LABOLLE  explained that  in  2008  Senate  Bill 125  took  a                                                               
snapshot  of that  fiscal year  and said  that going  forward the                                                               
community's  contribution  will  be  22 percent  of  the  current                                                               
salary base or  22 percent of the 2008 salary  base, whichever is                                                               
more.  As mentioned earlier,  when populations increase, salaries                                                               
increase and thus the salary floor shouldn't be an issue.                                                                       
                                                                                                                                
8:29:33 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE OLSON  requested the list of  the communities with                                                               
their  populations  and  change in  population.    Representative                                                               
Olson expressed concern  that [HB 174] may create  a situation in                                                               
which there  are a number  of communities that fall  just outside                                                               
the  current  parameters  and the  legislation  could  "Christmas                                                               
tree."                                                                                                                          
                                                                                                                                
MR.  LABOLLE deferred  to Mr.  Barnhill,  DOA.   He reminded  the                                                               
committee that  the communities that  fall within  the definition                                                               
in HB  174 are Galena,  Pelican, Atka, Anderson, and  St. George.                                                               
However,  Anderson  and  St.  George  don't  currently  have  any                                                               
eligible PERS positions,  and thus aren't functionally  a part of                                                               
HB  174.   Furthermore,  the legislation  defines the  population                                                               
loss  within  the  2000  and  2010  census  period  and  anything                                                               
occurring  beyond that  census period  would be  applicable under                                                               
the definition in HB 174.                                                                                                       
                                                                                                                                
8:30:48 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  OLSON  clarified  that  his  point  is  that  the                                                               
legislation has  an arbitrary line  that could be changed  in the                                                               
next  committees of  referral to  include those  communities that                                                               
fall  just  outside  of  the   existing  definition  in  HB  174.                                                               
Therefore, it  would be  helpful to  know which  communities fall                                                               
just outside of the definition in HB 174.                                                                                       
                                                                                                                                
8:31:32 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HERRON  opined  that   the  danger  is  that  the                                                               
legislation is being  pre-loaded, which is why  it's necessary to                                                               
further analyze it.                                                                                                             
                                                                                                                                
8:32:11 AM                                                                                                                    
                                                                                                                                
GREG MOYER,  Interim City Manager,  City of Galena,  informed the                                                               
committee  that 11  months ago  he was  hired to  restructure and                                                               
ultimately  save Galena,  which is  still reeling  from the  2008                                                               
closer  of the  Galena Air  Base.   He opined  that the  military                                                               
became Galena's  economic engine as it  provided residents, jobs,                                                               
and  economic  stability.    In  1994,  the  Galena  airbase  was                                                               
realigned in 1994 and its population  fell from 800 to 650, which                                                               
was a  20 percent reduction.   In 2005, the Base  Realignment and                                                               
Closure  (BRAC)  Commission  decided  to move  forward  with  the                                                               
closure of  the Galena Air Base  by September 2008, which  is the                                                               
same time the  state took the snapshot of  Galena's salaries that                                                               
required that salary  floor be met every year or  Galena would be                                                               
penalized by 22 percent of the  difference plus interest.  As has                                                               
been mentioned, Galena's  population is just below 500  now.  Mr.                                                               
Moyer  told the  committee that  he developed  an austere  fiscal                                                               
year (FY) 2013  budget with total PERS salaries in  the amount of                                                               
about  $800,000.   Unfortunately,  those PERS  salaries are  over                                                               
$600,000 less  than the state's  salary floor.  That  2008 salary                                                               
snapshot is $1.5  million, which must be met every  year.  Galena                                                               
is  being charged  22 percent  of  the difference,  approximately                                                               
$139,000 every  year plus  interest.   Galena, he  stressed, will                                                               
never meet  its salary  floor amount.   He further  stressed that                                                               
there is  no gaming in  Galena.   Mr. Moyer acknowledged  that he                                                               
has the option to add  15-20 positions or give existing employees                                                               
a raise.   He then  pointed out that  current law leaves  no room                                                               
for DOA to consider hardships.   Therefore, Mr. Moyer requested a                                                               
legislative  fix for  this situation  that  developed through  no                                                               
fault of  Galena.  In  conclusion, Mr. Moyer emphasized  the need                                                               
for  a common  sense solution  and  reiterated that  there is  no                                                               
gaming on the part of Galena.                                                                                                   
                                                                                                                                
8:37:19 AM                                                                                                                    
                                                                                                                                
BROOKS CHANDLER,  Attorney, Partner,  Boyd, Chandler  & Falconer,                                                               
LLP, speaking  as the  attorney for the  City of  Galena, pointed                                                               
out that  the salary floor in  2008 was created was  created as a                                                               
disincentive for municipal  employers to bail out of  PERS due to                                                               
the  increase in  the  contribution rate  to 22  percent.     The                                                               
overall  policy of  the salary  floor isn't  impacted by  HB 174,                                                               
which recognizes  that a  one-size-fits-all statewide  policy has                                                               
unintended  and  unduly  punitive  consequences  in  that  salary                                                               
decreases due  to population decreases  is out of the  control of                                                               
these  communities.   The solution  proposed  in HB  174 is  very                                                               
focused,  narrow, and  limited to  communities with  a population                                                               
loss that existed  between the 2000 and 2010  census and provides                                                               
an  alternative  contribution  rate  that  isn't  fixed  on  what                                                               
salaries were in 2008 but rather existing salaries.                                                                             
                                                                                                                                
8:39:37 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON  questioned whether  a new  snapshot should                                                               
be taken.                                                                                                                       
                                                                                                                                
8:40:06 AM                                                                                                                    
                                                                                                                                
CO-CHAIR NAGEAK announced that HB 174 would be held over.                                                                       

Document Name Date/Time Subjects
HB 174 ver A.pdf HCRA 3/28/2013 8:00:00 AM
HB 174
HB 174 Sponsor Statement.pdf HCRA 3/28/2013 8:00:00 AM
HB 174
HB 174 Hearing Request.pdf HCRA 3/28/2013 8:00:00 AM
HB 174
HB174-Fiscal-Note-DOA-DRB-3-22-13.pdf HCRA 3/28/2013 8:00:00 AM
HB 174
HB 174 Total Active PERS employees.pdf HCRA 3/28/2013 8:00:00 AM
HB 174
HB 174 PERS Employer Salaries for FY08 - FY12.pdf HCRA 3/28/2013 8:00:00 AM
HB 174
HB 174 PERS Employer Salaries for FY08 - FY12 Affected Muniticaplities.pdf HCRA 3/28/2013 8:00:00 AM
HB 174
HB 174 Employers Impacted by Salary Floor.pdf HCRA 3/28/2013 8:00:00 AM
HB 174
HB 174 Email on Effected Employers.pdf HCRA 3/28/2013 8:00:00 AM
HB 174