Legislature(2005 - 2006)CAPITOL 106
02/02/2006 08:00 AM House STATE AFFAIRS
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|Overview(s): Department of Environmental Conservation, Division of Water, Village Safewater Program|
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 238-PUBLIC EMPLOYEE/TEACHER RETIREMENT CHAIR SEATON announced that the last order of business was HOUSE BILL NO. 238, "An Act relating to contribution rates for employers and members in the defined benefit plans of the teachers' retirement system and the public employees' retirement system and to the ad-hoc post-retirement pension adjustment in the teachers' retirement system; requiring insurance plans provided to members of the teachers' retirement system, the judicial retirement system, the public employees' retirement system, and the former elected public officials retirement system to provide a list of preferred drugs; relating to defined contribution plans for members of the teachers' retirement system and the public employees' retirement system; and providing for an effective date." 9:38:53 AM REPRESENTATIVE GATTO moved to adopt the committee substitute (CS) for HB 238, Version 24-LS0761\R, Wayne, 1/31/06, as a work draft. There being no objection, Version R was before the committee. 9:40:15 AM CHAIR SEATON stated that the purpose of bringing back HB 238 is to address helping employer costs. He directed attention to a PowerPoint presentation, the hardcopy for which is in the committee packet and is [10 pages front and back]. On page one of the PowerPoint, it shows definitions of relevant terms as follows [original punctuation provided]: Blended employer past service cost rate: refers to the average past service cost rate of all non-State non-school district PERS employee Past service cost: refers to the annual lump sum payment made towards the PERS system unfunded liability. Past Service Cost Rate: means the annual payment as a percentage of total wage base of employee salary required to pay the past service cost as an amortized contribution in percentage over a stipulated number of years. Unfunded Liability: refers to amount that would need to be paid into the PERS system to cover all of its liabilities. CHAIR SEATON, regarding the blended rate, said, "If you paid the full normal costs and all of your assumptions were correct, you would fully collect and you would pay for all the benefits that would have accrued to that employee." 9:42:27 AM CHAIR SEATON directed attention to the first "slide" on page 2 of the PowerPoint presentation, which read as follows [original punctuation provided]: What is the Past Service Offset Account? (PSCOA) The PSCOA is a mechanism to help municipalities pay their unfunded liability over 25 years. The payments are based on a municipality's number or Tier IV employees and contributions are limited to the average experience of the system CHAIR SEATON reminded the committee that the rate has always been calculated based on the entire wage base of the employer; therefore, if an employer has 25 employees, it doesn't matter if they are Tier I, II, III, or IV. He directed attention to a hypothetical situation of how the PSCOA is calculated, beginning on page 3 of the PowerPoint. Using "City X" as an example, the page shows that if City X has 25 employees, 20 of whom are Tiers I, II, and III defined benefit (DB) employees and 5 of whom are Tier IV defined contribution (DC) employees, the PSCOA will pay the past service cost (PSC) for those new Tier IV employees who technically do not have a past service cost associated with them. CHAIR SEATON moved on to [page 4 of the PowerPoint] which shows the following in the top slide [original punctuation provided]: Assumptions about City X 2005 Past Service Cost Rate of City X: 30% Average Past Service Cost Rate: 20% Average Salary for City X: $40,000 City's X's Wage Base: $1 million The PSCOA will pay on behalf of the 5 DC employees: (average salary * average employer PSC rate) * number of DC employees = PSCOA assistance ($40,000 * .2) * 5 = $40,000 9:46:02 AM REPRESENTATIVE GARDNER stated her understanding of the benefit of having a DC program is that it is freestanding, meaning each employee's costs and benefits are independent of anything that went before. CHAIR SEATON said Representative Gardner is exactly correct. REPRESENTATIVE GARDNER asked, "So, why is there a past service cost for the new tier employees?" 9:46:19 AM CHAIR SEATON explained that there actually is not; however, the employer has to make a certain amount of payment into the system to pay the debt. Even though the new employee did not have a past service cost, the employer still owes the debt, and the way it's most easily calculated is by looking at the employer's wage base. 9:47:22 AM REPRESENTATIVE GARDNER responded that in some respect this is an artificial construct; it's a bookkeeping decision. 9:47:35 AM CHAIR SEATON confirmed that is correct. 9:47:38 AM REPRESENTATIVE GARDNER asked, "If I am a small public employer and ... I need to hire somebody, am I better off to hire somebody under the new tier or to hire somebody who already is in a tier and comes to me from some other state agency?" 9:48:00 AM CHAIR SEATON reiterated that the debt is a fixed amount that the employer would have to pay. In response to Representative Gardner's restatement of her question, he confirmed that the employer would be better off hiring someone new, rather than someone who is in the old DB system. He said he is waiting on a legal opinion to find out whether an employer can legally make that determination. 9:49:23 AM REPRESENTATIVE GARDNER asked, "If we were to assume that this is a great plan and it would be very effective, why would we limit it to nonstate and nonschool district employers; why not include everybody?" 9:49:40 AM CHAIR SEATON said the school district and state agencies basically have no funding other than from the legislature. He said, "This is a mechanism to try to get to those nonstate funded." REPRESENTATIVE GARDNER said, "So, we're setting up a mechanism for indirectly funding those obligations that are not directly ours, but we're accepting them as ours and setting up a funding mechanism. But we still could do the same for all the different pots. We're just saying, 'This gets paid out of this pot and this gets paid out of this pot.'" CHAIR SEATON responded, "We could, and we might want to have different funding mechanisms for the others, because it gives us more flexibility, because we're paying those bills anyway." In response to a comment made by Representative Gardner, he said, "Under this mechanism we would help pay, and we're creating a mechanism to help the municipalities." 9:51:21 AM CHAIR SEATON continued with the PowerPoint, bringing focus to the second slide on page 4, which read as follows [original punctuation provided]: The PSCOA payment reduces City X's PSC contribution from $300,000 to $260,000 , or their PSC rate from 30% to 26% CHAIR SEATON reviewed that another bill dealing with pension obligation bonds (POBs), offered a scenario in which the POB could lower the [past service cost] by 2.6 percent. The scenario shown on page 4 of the PowerPoint, he noted, would lower the past service cost by 4 percent. CHAIR SEATON directed attention to page 5 of the PowerPoint, which shows City X at "20 years out," to show how much of the employers' past service cost the PSCOA would pay in the future. [The first slide on page 6 shows that City X has 30 employees, three of which are DB and 27 of which are DC.] The second slide on page 6 read as follows [original punctuation provided]: Assumptions about City X 2025 Past Service Cost Rate of City X: 30% Average Past Service Cost Rate: 20% Average Salary for City X: $40,000 City's X's Wage Base: $1.2 million The PSCOA will pay on behalf of the 27 DC employees: (average salary * blended employer PSC rate) * number of DC employees = PSCOA assistance ($40,000 * .2) * 27 = $216,000 CHAIR SEATON noted that [the first slide on page 7] shows that the PSCOA payment reduces City X's past service cost contribution from [$360,000 to $144,000], or the past service cost rate from 30 percent to 12 percent. Chair Seaton referred to [the second slide on page 7], which read as follows [original punctuation provided]: Why not a greater reduction in PSC payments for City X? City X is only receiving aid for the average PSC rate (20%) when there [sic] actual rate is 30% If city X had the same PSC rate as the system (20%) the PSCOA would pay 18% of the city's PSC for the twentieth year, the city left to make up the difference of $24,000 CHAIR SEATON explained that is the example of City X, "we're only funding to the average past service cost rate for all employees." He said cities make choices. He said there are cities that sell off a section of a business and retain that money within the city's account. Chair Seaton said the most glaring example is Fairbanks, which sold off a utility and put $100 million in an account, but kept the past service cost liability. He said, "So, what we're saying is we're not going to go in and absorb, from the state level, those voluntary changes that you make. So, we'll only come up to the average." 9:57:05 AM CHAIR SEATON noted that the [first slide on page 8] shows a graph correlating with the employer's 30 percent past service cost rate, with the average being 20 percent, a scenario in which the employer would pay about 12 percent with PSCOA assistance. The same slide shows the employer having the same past service cost rate as the system average of 20 percent. With the PSCOA, that scenario would mean that the employer would pay only 2 percent. CHAIR SEATON cited [the second slide on page 8], which read as follows [original punctuation provided]: PSCOA payments will increase over time until by the end of the amortization period the PSCOA is paying almost all of the past service cost payment for that year CHAIR SEATON drew attention to [the first slide on page 9], which he noted contains a graph showing the PSCOA contributions as percent of total past service cost. The graph, he noted, begins in 2005 at about 8 percent and goes to almost 100 percent [by 2027]. The next slide on page 9 read as follows: System Impact of PSCOA Unfunded liability of PERS non-State non-school district: 679 million What the PSCOA will pay over 25 years: 299 million CHAIR SEATON suggested a better way to look at this is that "we would pay 44 percent of the amount due for employers" [which is shown on the final slide on page 10]. He said, "To make this function, it would be a little less than $300 million in present dollars that would have to go into the present dollar offset account to create this funding mechanism." 9:59:03 AM CHAIR SEATON directed attention to the sponsor statement, which he indicated will clarify some of the information. He referenced a two-page graph entitled, "Payment to Unfunded Liability per Tier - Actual Dollar Value." He said the graph offers a look at a five-year breakdown of communities for Tiers I, II, III, and IV, and totals. CHAIR SEATON asked the committee to remember that this plan would set up a long-term mechanism; it's not an instant shot to reduce the employers' contribution amounts today. He said: We've heard a lot of complaints, but in reality, the contribution rates for municipalities haven't gone up at all, because we made a 5 percent contribution last year. There's 5 percent, plus the other 5 percent. ... At least in the governor's budget, there's a proposal to pay the 10 percent for this year. ... What's going to happen over time though, is if we take a long-term look, we want to make sure that on the further end of things that cities aren't constrained so that they can't offer their services that we want all communities to offer. 10:01:08 AM CHAIR SEATON, in response to a question from Representative Gardner, reminded everyone that the bill that dealt with pension obligation bonds had passed out of the House State Affairs Standing Committee and is currently in the House Finance Committee. He explained he had offered that example to show another plan with quite a different effect. CHAIR SEATON announced that HB 238 was heard and held.