Legislature(2015 - 2016)BARNES 124
03/30/2015 03:15 PM House LABOR & COMMERCE
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| Audio | Topic |
|---|---|
| Adjourn | |
| Start | |
| HB47 |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 47 | TELECONFERENCED | |
HB 47-PERS CONTRIBUTIONS BY MUNICIPALITIES
3:17:41 PM
CHAIR OLSON announced that the only order of business would be
HOUSE BILL NO. 47, "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 retirement
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 retirement 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." [Before the committee was CSHB 47(CRA)]
3:18:11 PM
REPRESENTATIVE NEAL FOSTER, Alaska State Legislature, speaking
as sponsor, introduced himself.
3:18:29 PM
PAUL LABOLLE, Staff, Representative Neal Foster, Alaska State
Legislature, explained the changes in the committee substitute,
CSHB 47(CRA) that passed out of committee the House Community
and Regional Affairs Standing Committee on 3/5/2015. He
referred to Section 1, which would change the rules for applying
the new base salaries and exempt one community, the City of
Atka. In order to reset the 2008 salary floor, communities must
have lost 25 percent or more of their population, with fiscal
year (FY) 12 salaries less than their FY (fiscal year) 08
salaries.
MR. LABOLLE directed attention to Section 2, which basically
establishes that if the community's base salaries fell below
what they were in FY 08, the city was required to pay that
amount, with a delinquent amount fee of 8 percent instead of 12
percent. He explained that Senate Bill 125 [, which passed the
25th Legislature in 2008,] enacted that provision. The extra
interest rate was intended to be punitive, based on the
actuarial amount - the amount required to make the system whole
- plus an additional 4 percent. He said that the House
Community and Regional Affairs Standing Committee felt that
communities that were already paying more than their base
salaries into the system didn't really need a punitive rate
applied to them and the 8 percent that would make the system
whole would be sufficient.
3:21:08 PM
REPRESENTATIVE JOSEPHSON asked for further clarification on what
made the 12 percent assessment punitive.
MR. LABOLLE referred to Section 2, of CSHB 47(CRA), which read,"
... interest shall be assessed on the outstanding contributions
at [ONE AND ONE-HALF TIMES] the most recent actuarially
determined rate of earnings for the retirement plan ...." He
said the actuarially-determined rate represents the rate to make
the system whole and the one-half times was the punitive part of
the rate.
3:21:52 PM
REPRESENTATIVE JOSEPHSON asked for the underlying policy
decision for the bill.
MR. LABOLLE stated that it was to provide an incentive for
communities to pay the bills on time. Under CSHB 47(CRA),
communities that were already paying above the fiscal year (FY)
08 floor will still be subject to the punitive rate, but the
assumption was that perhaps communities whose salaries fell
under the FY 08 floor simply couldn't pay so it wasn't deemed
necessary for them to be subject to punitive rates, but the
punitive rates would apply to those communities whose salaries
were above the floor who simply chose not to pay, he said.
3:22:44 PM
REPRESENTATIVE JOSEPHSON asked for further clarification on the
exclusion in CSHB 47(CRA).
MR. LABOLLE said that the sponsor found five communities this
bill would apply to included Atka, St. George, Pelican,
Anderson, and Galena; however, Atka had salaries above the FY 08
floor. Despite Atka's declining population, their salaries were
going up, he said. If this bill was applied to Atka, it would
have the net effect of increasing the floor rather than
decreasing the floor.
3:23:47 PM
MR. LABOLLE offered to provide a brief historical background.
He stated that when Senate Bill 125 passed it provided relief to
municipalities that "had gotten underwater" [with unfunded
liability] in their PERS [Public Employees' Retirement System].
The method used to remedy that was to take solo systems in which
each municipality and the state were considered their own
entities in terms of administering their PERS system. He
explained that Senate Bill 125 lumped municipalities in one
large system, the state appropriated a considerable amount to
address the unfunded liability, and required every PERS employer
to pay 22 percent of their gross salaries into the system,
unless the gross salaries were less than the FY 2008 figures.
In those instances the PERS employer was required to pay 22
percent of the FY 2008 salaries, which is also known as the "08
floor." The underlying concern was that without limiting
payment requirements to the "FY 08 floor," municipalities would
simply layoff workers and hire contract employees to reduce
payments into the PERS system. Thus the "FY 08 floor" was put
in place to avoid detrimental effects to the system; however, he
said that the legislature did not consider legitimate reasons
municipalities might have to eliminate employees other than
"simple gaming" of the system. For example, after the "FY 08
floor" was set the U.S. Air Force Campion Station in Galena was
closed and the community lost 30 percent of its population, but
its PERS gross salaries shrunk from $1.5 million in FY 08 to
[$765,000] in FY 12 due to the economy. Thus with almost half
of its salary base eroded, was impossible for the City of Galena
to make the 22 percent payment on the "08 floor." Currently,
the City of Galena has been making payment on base salaries, but
the state adds the difference between that amount and the "FY 08
floor" to the debt. Thus the net effect has been that the City
of Galena can't afford to pay its debt. The only recourse for
the state would be to garner its revenue sharing, which has the
effect to limit the City of Galena's ability to pay even more.
3:27:37 PM
MR. LABOLLE said the City of Galena, by law, cannot declare
bankruptcy or opt out of the system, but nothing could stop the
city from "shutting off the lights and walking out." If so, the
state would get "stuck" with the entire liability instead of the
portion that the City of Galena finds it is unable to pay.
3:28:07 PM
REPRESENTATIVE JOSEPHSON asked whether this was statutory
language.
MR. LABOLLE agreed it was, noting that the "buck stops" with the
state.
3:28:23 PM
REPRESENTATIVE JOSEPHSON asked whether he meant the City of
Galena could go bankrupt.
MR. LABOLLE agreed that for all intents and purposes that would
be the effect, although the City of Galena cannot legally
declare itself bankrupt.
3:28:44 PM
REPRESENTATIVE HUGHES asked whether Galena was now paying 22
percent on $765,000, but not the 22 percent on the $1.5 million,
which created a gap.
MR. LABOLLE answered yes; absolutely.
3:29:28 PM
REPRESENTATIVE KITO asked for the City of Galena's current total
outstanding debt.
MR. LABOLLE said that according to his figures that as of FY 14,
the debt was $1.5 million.
3:29:59 PM
CHAIR OLSON suggested the fiscal notes needed to be updated.
MR. LABOLLE replied that it requires an actuary to calculate the
debt so the department was waiting until the bill was in a more
final form prior to updating the fiscal note.
3:30:51 PM
REPRESENTATIVE TILTON clarified that the House Community and
Regional Affairs Standing Committee requested an updated fiscal
note, but since it requires an actuary, which is costly, the
committee held off until the bill goes to the next committee of
referral.
MR. LABOLLE surmised it was a good idea, considering the changes
the House Community and Regional Affairs Standing Committee made
to the bill.
3:31:32 PM
MR. LABOLLE directed attention to Section 2, noting the handout
in members' packets entitled "Explanation of Changes from
Version A to Version N" covered the changes.
3:32:03 PM
CHAIR OLSON asked whether it was the "one and one-half times"
language in the bill.
MR. LABOLLE clarified that was the original rate. He explained
that instead of paying "one and one-half times" they would pay
interest at "one times" the rate of earnings.
MR. LABOLLE referred to the retroactive clause in Section 3,
noting it would go back to 2009 and forgive the delinquent
amount up to the date of passage of the bill, he said.
3:32:59 PM
REPRESENTATIVE JOSEPHSON asked where cost was reflected in
fiscal note.
MR. LABOLLE answered that it was not currently reflected, but it
will be reflected in the forthcoming fiscal note from the
actuary. He explained the retroactive clause in Section 2 would
provide a straight forgiveness for communities who are paying
below the floor [FY 08] and lost [25 percent] of their
population. However, the delinquent amounts for communities
without the exemption would be charged interest at 8 percent
instead of 12 percent.
3:34:10 PM
REPRESENTATIVE KITO clarified that this does not represent a
cash cost to the state, but reflects revenue that will not be
collected by the state.
MR. LABOLLE agreed. He said that the system was legally bound
not to make cash distributions other than for retirement costs.
He characterized it was foregone revenue.
3:34:41 PM
CHAIR OLSON related his understanding that it would not have an
impact until the person reaches retirement.
MR. LABOLLE agreed.
3:34:47 PM
REPRESENTATIVE HUGHES asked whether the state would make up the
difference if municipalities contribute less.
MR. LABOLLE deferred to the Office of Management and Budget to
respond.
3:35:18 PM
MIKE BARNHILL, Policy Analyst, Office of the Director, Office of
Management & Budget (OMB), Office of the Governor, stated that
if the state doesn't collect revenue in a particular year, with
all other things being equal, it will count as an actuarial loss
for the year. He stated that the actuary calculates all gains
and losses and amortizes them over a 25-year period. Therefore,
it would add to the unfunded liability and to the state
assistance that the state pays per the statute.
3:36:10 PM
CHAIR OLSON said that basically it will cost the state at the
"back end."
MR. BARNHILL answered that the amount would be rolled into the
state assistance in the next fiscal year.
CHAIR OLSON asked whether it was safe to assume the new fiscal
note will be higher than $187,000.
MR. BARNHILL replied that the fiscal analysis was completed by
the actuarial analysis last week and the fiscal note will be
provided to the committee. He suggested that the amount will go
down somewhat, which may be the result of Atka being exempt.
3:36:59 PM
REPRESENTATIVE HUGHES suggested that if the rate was also being
reduced from 12 to 8 percent that it seemed like the revenue
will also be reduced and the state assistance will increase.
MR. BARNHILL suggested that the committee wait for the fiscal
note before holding further discussions.
3:37:40 PM
CHAIR OLSON asked whether the retroactivity would have an
impact.
MR. LABOLLE answered yes; that the fiscal impact for the first
fiscal year will be substantially larger than the fiscal impact
for subsequent years due to retroactivity, with four years being
lumped into one.
3:38:23 PM
MR. BARNHILL stated that the administration supports this bill
in concept. Since 2008, the state has continuously examined the
appropriate relative participation by the state and the
collective municipalities to pay down the unfunded liability.
This bill was just one more piece after the legislature held
fairly protracted discussions last session. With the $3 billion
appropriation and the extension of the amortization for an
additional nine years, municipalities participated at a greater
level than previously in paying down the unfunded liability.
This happens with the extension of the time in which
municipalities will pay at 22 percent. He considered this as
yet another instance in which the state was examining the
relative share and in this instance this bill considers the
relative share and the cost shifting as being fairly small.
CHAIR OLSON suggested he will have additional questions once the
fiscal note is released.
3:40:12 PM
REPRESENTATIVE HUGHES related her understanding that it was
important to set the floor so employees will not be laid off and
replaced with contract employees. She asked whether there was
any way to follow staffing changes when the population was
declining and the salaries being paid out are also reduced.
MR. LABOLLE offered his belief she was referring to two
different things. First, the bill helps to ensure that the
state continues to have a backstop against municipalities hiring
contract employees instead of municipal employees who must pay
into PERS [the Public Employee's Retirement System], which is
one reason the FY 08 floor was reset to FY 12 instead of "going
away." Secondly, he directed attention to a list in members'
packets [entitled PERS Employer Salaries for FY 08-FY 12] that
lists communities affected by the floor. He next directed
attention to the far left column that indicates the employee
count [changes] in FY 2008, and the column on the far right
lists the employee count for FY 2012. Further, this chart also
lists the gross salaries from FY 2008 to FY 2012. For example,
the City of Galena's employees were reduced from 35 to 17 since
the municipality could not afford to pay them.
3:42:36 PM
REPRESENTATIVE LEDOUX asked what the problem would be if some
municipalities hire contract employees instead.
MR. LABOLLE answered that municipalities would still be required
to pay 22 percent of the FY 2012 salaries. Even if the
municipalities cut all of its employees, the municipalities
would still need to make a 22 percent payment to the PERS system
based on FY 08 figures, he said.
3:43:28 PM
REPRESENTATIVE LEDOUX asked for the effect on municipalities if
this bill passed and whether municipalities without contract
employees would pay less, but if they had contract employees the
rate would stay at 22 percent.
MR. LABOLLE answered that any existing contract employees would
be unaffected by the bill since HB 47 will only affect PERS
employees. Referring to the City of Galena, with 35 PERS
employees in FY 2008, but 17 in FY 2012, the new floor will be
based on the 17 employees, he said.
3:44:30 PM
REPRESENTATIVE LEDOUX said she was unsure how contract employees
were involved.
MR. LABOLLE reiterated that Senate Bill 125 created the current
PERS system floor payment of FY 2008, set as a backstop, as a
disincentive for municipalities to fire PERS employees and
replace them with contract employees in an effort to reduce
their liability to the PERS.
3:45:14 PM
REPRESENTATIVE COLVER asked for further clarification on
declining employment and the liability accrued for paying the
PERS. He recalled that the termination study means
municipalities can't even delete a position. He suggested that
this was a single fix for communities that fall within these
guidelines. He asked for the "big picture" in terms of unfunded
liability for cities and school districts.
MR. BARNHILL answered that what he was referring to was
termination studies, which is not encompassed by this bill. He
explained that in 2008, there were basically two backstops to
secure a certain level of participation by participating
employers and the unfunded liability. One was the 2008 salary
floor that required payment at the FY 2008 floor for each
employer at 22 percent. The other related to termination costs
so if an employer terminates a group classification or
department, it would trigger a termination study to figure out
the new unfunded liability. The employer would need to pay that
plus all of the past service costs associated with the
terminated positions, not capped, until the unfunded liability
was extinguished. He reminded members this time period was
extended from 2031 to 2039 last legislature.
MR. BARNHILL acknowledged this issue has been an issue in the
past that the legislature may wish to continue, but it is not
part of this bill.
MR. LABOLLE added that those termination studies applied whether
or not those terminations would bring the municipality below the
FY 08 floor.
3:48:20 PM
CHAIR OLSON commented that it was a flat charge for the
employee.
MR. BARNHILL said the cost of the study was from $2,500 to
$5,000, but the study would also identify the costs.
CHAIR OLSON suggested that it was a pretty healthy disincentive.
3:48:55 PM
MR. BARNHILL said he was not sure he could comment on whether it
was an incentive or disincentive, but it has certainly been
perceived by the municipal employer community as a burden that
impairs their ability with to be flexible in how they staff
their governments.
3:49:36 PM
KATHIE WASSERMAN, Lobbyist; Executive Director, Alaska Municipal
League (AML), stated that the AML has been working with PERS for
many years. She added that the AML worked closely with the
Senate Finance Committee in creating Senate Bill 125 in 2008.
She recalled the 22 percent figure was used since the state had
no ability to separate out the cost per municipality.
Therefore, all municipalities and the state were lumped together
and a price was negotiated at 22 percent, which seemed to be
fair and enough to pay off the unfunded liability.
3:50:55 PM
MS. WASSERMAN stated that the legislature appropriated a $3
billion infusion last year, which AML supported, even though it
included some aspects that may not be entirely positive for
municipalities. Since municipalities believe they can handle an
extended amortization rather than all at once, nine years was
added, and municipalities will pick up an additional $2.5
billion at the end of amortization. She offered her belief that
municipalities are picking up their fair share of the costs, but
the below the floor issue has proven to be a bad business
process. Due to the state's deficit, municipalities will see
more cuts and many small communities simply have no wiggle room.
Most of these communities cannot afford to hire a contract
employee. She stated that the City of Pelican reduced its
employees to three employees, with the top one earning $12 per
hour. She emphasized that these communities do not have money
to pay their salaries, much less this bill. It's just not going
to happen, she said, adding that municipalities do not have any
means for bankruptcy.
3:52:51 PM
MS. WASSERMAN said the AML would like to see this bill pass.
These are the communities in dire need [the foregoing 23 cities
listed]. For example, the City of Galena received its first
bill four to five years ago for $194,000, which has since
escalated due to interest rates. Further, there isn't much that
can be taken away from these communities, she said. She hoped
the committee would pass the bill.
3:53:54 PM
CHAIR OLSON stated that these communities do not have much of a
tax base.
MS. WASSERMAN agreed, noting that tribal lands also limit some
of the communities' ability to achieve a tax base.
3:54:12 PM
REPRESENTATIVE LEDOUX asked how much it would cost to save the
four communities.
MS. WASSERMAN said she did not know the annual payment.
3:54:46 PM
REPRESENTATIVE LEDOUX said she didn't understand how it saves
the communities so much money.
CHAIR OLSON acknowledged that could be addressed when the next
fiscal note was released.
MS. WASSERMAN commented that the relative percentage of money to
the City of Galena may not look like much from the state's
perspective, but it is a lot for the City of Galena. She
recalled that in reducing its staff from [35] employees to 17,
meant it reduced about half its staff. Thus, the municipality
will pay below the FY 2008 floor on half of its employees.
3:56:21 PM
SHANDA HUNTINGTON, City Manager, City of Galena, said she was a
life-long resident of Galena. She provided some information on
the population decline. First, the US Air Force base officially
closed in 2008, following a multi-million dollar "draw down."
In 1990, prior to the base realignment, Galena's population was
847. Galena has always been a small city and the military base
was an economic driver. According to the 2000 census the
population was 675, but it dropped to 470 in 2010. She stated
that 205 people may not seem a lot, but it represents a 30
percent decline in the city's population between the two census
periods. Although 30 percent of the population moved away, the
decline in the city's economic activity was much greater. In FY
2008, the City of Galena's salary total was $1.5 million for 36
employees, with a required minimum annual contribution of
$332,000. In FY 12, the amended floor year, the City of
Galena's payroll was $765,000 for 17 employees. Between FY 2008
to FY 2012, Galena's payroll was cut in half reflecting the
decrease in population and economic activity.
MS. HUNTINGTON said that the City of Galena's minimum annual
PERS contribution represented nearly half of the city's FY 2012
total payroll cost. In FY 2012 the City of Galena's minimum
PERS contribution to the state was $168,000. However, the
difference in PERS contribution between FY 2008 and FY 2012
actual payroll was $164,000. This difference will continue
going forward creating an ever increasing obligation, she said.
By statute any unpaid amount will accrue interest at 12 percent.
This ever increasing obligation adds to the city's already
stressed situation. She said the city's financial situation was
so severe in FY 2009 that the City of Galena had to acquire a
low-interest loan through the Alaska Municipal Bond Bank to deal
with a severe cash flow crisis, which prevented the city from
securing fuel, heat, and electricity. Simply put, if Galena
can't pay its bills, the lights will go out, she said.
4:00:14 PM
MS. HUNTINGTON said that reasonably adjusting the floor for
several cities does not mean the city will only pay the minimum
amount. She said that modifying the floor year changes the City
of Galena's annual contribution from $332,000 to $168,000, but
the actual contribution might be higher. In fact, FY 2013, the
City of Galena had an amended minimum for its total payroll for
18 employees at $895,000. She said that for FY 2013, the City
of Galena's contribution would have been above the 2008 floor by
$30,000. She stated that this bill recognizes the drastic
population decreases experienced by some Alaskan cities using a
clearly defined metric of a 25 percent decrease in population.
MS. HUNTINGTON said that the base closure has been very
difficult for the City of Galena. For the past several years,
its finances have stabilized; however, it isn't possible to say
what will happen to Galena's long-term population, but she hoped
it has turned a corner. Although its finances have improved,
the City of Galena PERS contribution could weaken the City of
Galena and threatens its ability to provide any contribution to
PERS. The City of Galena has been cautiously optimistic that
the city will become strong and even grow over time to the 2008
levels. If that occurs, the City of Galena will be required to
pay a PERS contribution comparable with that size and that
payroll and will do so; however, it is not that city right now,
she said. The oversize PERS contribution inhibits it becoming
so. She offered that recognizing the drastic declining
population was a matter of simple fairness. This bill
recognizes this and ultimately promotes the PERS' goals to
ensure that Alaska municipalities continue to contribute their
fair share to the system. She thanked members for the
opportunity to testify.
4:03:31 PM
JON KORTA, Mayor, City of Galena, thanked the committee for
taking time to listen to his explanation of the importance of HB
47. He stated that the US Air Force base was closed effective
in October 2010, although the closure was in process for four
years. The Air Force base was the main source of employment for
Galena residents so when the base closed the population was
reduced by 50 percent in 2010. He reported that Galena was
again struck by hardship in 2013 when ice dammed the Yukon River
and inundated the city leading to a federal disaster
declaration. The FY 2008 floor established by current law
exists to prevent a municipality from gaming the PERS system by
contracting out work previously performed by municipal employees
in order to avoid making ongoing contributions to PERS. The
current minimum PERS contribution was based on a level of
salaries that existed in 2008. It does not account for the City
of Galena's situation. It was not intended for, nor did it
contemplate municipalities with sharply declining populations.
Although this bill does not change the PERS policy, it
recognizes communities who have suffered a minimum of 25 percent
decline in population between 2000 and 2010, such as Galena. He
offered that a 25 percent threshold would represent the loss of
75,000 people from Anchorage or 8,000 people from Juneau.
Further, he wondered what would happen to Fairbanks if its
population declined by 30,000 or if Eielson Air Force Base and
Ft. Wainwright were closed.
4:06:03 PM
MR. KORTA said that this bill would move the floor from 2008 to
2012 for those communities that experience huge loses. However,
it does not provide a loophole that allows any community to
"game the system." He stated that Galena's FY 2015 salaries
fall above the 2012 amount for 17 employees. He said that the
City of Galena's circumstances are not the result of any choices
being made. Base closure and loss of close to one-third of the
city's population was entirely involuntary, he said.
4:06:59 PM
MR. KORTA said the relationship between declining population and
declining payroll is clear. Based on the FY 2008 floor, the
City of Galena was required to pay an amount equivalent to the
amount paid by cities substantially larger than Galena. In
fact, the City of Galena's required PERS contribution approaches
nearly half of the city's entire payroll. He said that the FY
2008 floor does not account for all situations, including cities
that have suffered massive population contractions. This bill
furthers the underlying policy goals of the regulatory
structure, and helps ensure that the municipalities are able to
continue contributing to PERS while recognizing that a city
cannot and should not have to make a contribution of a city with
a significantly larger population. Recognizing that City of
Galena is not the same city it was before the base closed and 30
percent of its population moved away is simply good policy;
policy that helps ensure that City of Galena can continue to
contribute to PERS and recognizing sharply declining populations
is just plain fair.
4:08:19 PM
CHAIR OLSON pointed out that nearly all members of the House
Labor and Commerce Standing Committee live in smaller
communities and one member currently residing in Anchorage
previously lived in Kodiak.
4:08:57 PM
CHAIR OLSON, after first determining no one wished to testify,
kept public testimony open for HB 47.
[HB 47 was held over.]