Legislature(2009 - 2010)BELTZ 105 (TSBldg)

03/30/2010 01:30 PM LABOR & COMMERCE

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01:53:39 PM Start
01:55:03 PM HB377
02:32:44 PM Confirmation Hearings
02:48:37 PM SB298
03:22:18 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Governor's Nominations TELECONFERENCED
Heard & Held
Moved HB 377 Out of Committee
+ Bills Previously Heard/Scheduled TELECONFERENCED
        SB 298-ST. EMPLOYEE GEOGRAPHIC PAY DIFFERENTIAL                                                                     
2:48:37 PM                                                                                                                  
CHAIR PASKVAN announced SB 298 to be up for consideration.                                                                      
2:48:51 PM                                                                                                                    
SENATOR DENNIS EGAN,  sponsor of SB 298, said  he introduced this                                                               
bill   by   request   of  constituents.   He   said   the   Palin                                                               
administration  commissioned  the   geographic  pay  differential                                                               
study  in 2008,  but  declined  to introduce  the  bill. He  said                                                               
regional  differences in  the cost  of living  change drastically                                                               
over  time and  the  statute  update on  this  issue  was over  a                                                               
quarter   century  ago.   SB  298   will  bring   the  geographic                                                               
differential statute up  to date and many citizens  believe it is                                                               
a matter of fairness.                                                                                                           
2:50:29 PM                                                                                                                    
DANA OWEN, staff  to Senator Egan, elaborated that  25 years have                                                               
passed  since  this issue  was  updated.  Serious pay  inequities                                                               
developed  over  that  time and  this  inhibits  recruitment  and                                                               
retention in certain areas of the  state. It is time to begin the                                                               
discussion on fixing this problem.                                                                                              
When the  Palin administration requested  the study  McDowell was                                                               
charged with looking at differences  in cost of living in various                                                               
communities  across  the state  and  in  various regions  of  the                                                               
state. SB  298 incorporates the  findings of the  McDowell study.                                                               
It follows the  structure of the current statute in  that is uses                                                               
the  same  original  19 election  districts  that  are  currently                                                               
embedded  in the  statute, but  it would  change the  approach by                                                               
substituting the  McDowell study's  percentage variation  for the                                                               
current  step  variation.  The way  the  statute  recognizes  the                                                               
geographic differential  is by applying one  or two and up  to as                                                               
many as eight pay steps within that geographic area.                                                                            
2:52:23 PM                                                                                                                    
MR. OWEN said it's important  to note that McDowell recommended a                                                               
different  approach to  grouping communities  not in  relation to                                                               
their  geography but  in relation  to their  cost of  living. The                                                               
regions  they  recommended  would  have  a  maximum  differential                                                               
across the region of 10  percent. Using the approach suggested by                                                               
the McDowell  Group raises a new  policy question of how  to pick                                                               
the  number within  the pool.  Within  a pool,  for instance,  if                                                               
there is a 10 percent difference,  do you split the difference or                                                               
pick a  number that is half  between the lowest and  the highest?                                                               
Do you  take a weighted average  or use some other  rationale for                                                               
picking a number within that variation?                                                                                         
SB 298's  approach is  the simplest,  Mr. Owen  said, and  is one                                                               
that people  are familiar with.  However, it is only  intended to                                                               
be a  point of departure  for the  discussion and the  sponsor is                                                               
open to considering other methods.                                                                                              
2:54:13 PM                                                                                                                    
CHRIS CHRISTENSEN,  Deputy Administrative Director,  Alaska Court                                                               
System,  said  this is  the  third  time  he had  addressed  this                                                               
subject with the legislature; the first  time being in 1996 on SB
152 which failed to  pass; the second time in 2002  was on SB 180                                                               
which  passed but  was  vetoed by  Governor  Knowles. Both  bills                                                               
attempted to  fix the geographic  system for non  union employees                                                               
and both failed  over the details. He said  the legislative focus                                                               
in 1996 and 2002 was finding  a way to lower the state's personal                                                               
services  budget,  not  fixing the  inherent  unfairness  in  the                                                               
current system.                                                                                                                 
The current differential  was adopted in 1976 while  the TAPS was                                                               
still  under  construction. Obviously  a  lot  has changed  since                                                               
then.  The   executive  branch's   union  contracts,   which  are                                                               
renegotiated every  three years, have not  reflected this out-of-                                                               
date differential  since around 1985, although  the differentials                                                               
in the  current contracts are  apparently also  substantially out                                                               
of date.                                                                                                                        
He said  while the judiciary is  a tiny branch using  less than 2                                                               
percent  of  the  state's  general  fund  operating  budget  they                                                               
actually employ about  two-thirds of all the  non union employees                                                               
who are  currently getting a  geographic differential.  They have                                                               
266  eligible  employees as  of  late  last year;  the  executive                                                               
branch has  190 and the legislative  branch has 10. He  said this                                                               
situation  is especially  problematic for  his employees  because                                                               
most of  them are clerical workers  at ranges 10 and  12, whereas                                                               
many  of the  executive  branch employees  are  attorneys in  the                                                               
Department of Law  and the Public Defender Agency who  get a much                                                               
higher base salary to live on.                                                                                                  
Assuming that  the differential rates  reflected in  the McDowell                                                               
study  are accurate,  he  has clerical  employees  who, in  rural                                                               
Alaska  for example  Dillingham, are  being  paid as  much as  25                                                               
percent less than  the actual cost of living. To  put it a little                                                               
differently, those employees are  effectively being paid about 25                                                               
percent  less than  employees in  Anchorage for  doing the  exact                                                               
same work. Conversely,  he has employees in  certain urban areas,                                                               
such as Fairbanks  and Palmer, who are effectively  being paid 5-                                                               
10  percent more  than  Anchorage employees  for  the exact  same                                                               
MR.  CHRISTENSEN  said every  year  they  go without  fixing  the                                                               
unfairness inherent in the current  system it gets more expensive                                                               
because  the  differential  between   Anchorage  and  most  rural                                                               
communities has increased compared to  what it was the last times                                                               
they tried  to fix it.  It's complicated because  those employees                                                               
who  are  benefiting  from  a  too  high  differential  in  their                                                               
communities like Fairbanks have  based their economic decisions -                                                               
like  mortgage payments,  car payments,  and rate  at which  they                                                               
save for  retirement and their  children's education -   on their                                                               
current  salaries,  projected  longevity increases  and  cost  of                                                               
living  adjustments  granted by  the  legislature.   Under  those                                                               
circumstances  they  think  it  would be  unfair  to  reduce  the                                                               
differential of  those employees as  was proposed in the  past or                                                               
even  to freeze  those employees  in  place as  the current  bill                                                               
proposes. Some employees would not  get a merit increase for 5-10                                                               
years if  this would pass  because their  geographic differential                                                               
has been  changed so much.  In conclusion, Mr.  Christensen urged                                                               
them to do  something that would address  the inherent unfairness                                                               
in the current system.                                                                                                          
2:58:24 PM                                                                                                                    
SENATOR  JOE  THOMAS   asked  what  he  used   to  determine  the                                                               
differential in places like Bethel versus Anchorage.                                                                            
MR. CHRISTENSEN  answered that those  figures were based  on what                                                               
the law  currently gives  employees and  what the  McDowell study                                                               
would give those employees in those communities.                                                                                
SENATOR  THOMAS  asked  if  the real  problem  wasn't  finding  a                                                               
meaningful  formula that  everyone  can agree  on.  He said  they                                                               
should have  compared a  comprehensive list  of things  that were                                                               
done the  same way every  time. He  said he received  a complaint                                                               
that  a lot  of  the Fairbanks  housing data  was  used when  the                                                               
military troops were  gone and that applied  downward pressure to                                                               
the housing market  as far as what rents were  or sale of houses.                                                               
He didn't know what the right answer  was, but he did know that a                                                               
lot of people were excited about it.                                                                                            
MR. CHRISTENSEN said  he didn't know if the  committee received a                                                               
letter  from  the  Association   of  Alaska  Magistrates  stating                                                               
concern  about the  McDowell study  because  they disagreed  with                                                               
some  of  the  methodology  and   the  way  it  affected  certain                                                               
communities. He  agreed that  deciding what is  fair is  the most                                                               
difficult thing.                                                                                                                
SENATOR  CON  BUNDE  asked  what  he  thought  would  be  a  good                                                               
MR. CHRISTENSEN replied  their preferred method would  be to give                                                               
people who are  getting paid substantially less than  the cost of                                                               
living relative  to Anchorage a  raise and freeze people  who are                                                               
getting paid too much. He said  the court system has a great deal                                                               
of turnover, about  10 percent per year, and that  would make the                                                               
fiscal note  for the  first year  the same  either way;  the cost                                                               
would go  down more slowly if  they were allowed to  retain their                                                               
current salaries and continue to get merit increases.                                                                           
He explained that a merit  system gives annual merit increases to                                                               
employees,  if they  deserve it,  but  often it  isn't used  like                                                               
that. In the Court System  merit increases are withheld if people                                                               
aren't performing  adequately. When  you tell people  they aren't                                                               
going to be  eligible for merit increases for  4-10 years because                                                               
of this change  in the law, you  have to wonder what  is going to                                                               
happen in your organization. So, there are practical problems.                                                                  
SENATOR BUNDE remarked  that very few state  employees think they                                                               
get paid too much.                                                                                                              
3:04:15 PM                                                                                                                    
JIM  CALVIN,   principal,  McDowell  Group,  Juneau,   said  they                                                               
provided the geographic differential  survey. He said two primary                                                               
methodological tasks  were involved  in this  project. One  was a                                                               
household  survey of  2500 Alaskan  households in  74 communities                                                               
scattered throughout  the state;  the purpose was  to essentially                                                               
understand the  size and  shape of  the Alaskan  household budget                                                               
relative  to  housing,  food, transportation,  medical  care,  et                                                               
cetera. The  second was a  retail price survey conducted  in over                                                               
600  retail  outlets  throughout   the  state  and  58  different                                                               
communities to  understand the difference  in prices of  a market                                                               
basket  of about  200 typical  household items  over the  state -                                                               
like the price of  a loaf of bread in Angoon versus  a price of a                                                               
loaf of bread in Anchorage.                                                                                                     
He  stated clearly  that the  study never  addressed nor  implied                                                               
that anyone was being overpaid  in state government. In fact they                                                               
didn't measure the cost of  living; they measured the differences                                                               
in cost of living between Anchorage  as the base community, and a                                                               
differential of 1  and a range of other districts.  So the equity                                                               
of pay  overall is not  part of what they  were trying to  do and                                                               
they don't want that suggested.                                                                                                 
MR. CALVIN said one last  methodological background point is that                                                               
they initially  departed from the election  district structure of                                                               
the  previous  differential  and   focused  instead  on  defining                                                               
geographic differential pools,  which are essentially collections                                                               
of  communities that  exhibit like  characteristics  in terms  of                                                               
size,    geographic    location,   climactic    conditions    and                                                               
transportation   infrastructure.    One   of    the   overarching                                                               
conclusions the  study found is that  if you're on a  road system                                                               
you're in  a very  different situation  than if  you are  off the                                                               
road system,  although small Southeast communities  are different                                                               
because  they have  ferry service.  Road access  is probably  the                                                               
most critical aspect in the cost of living.                                                                                     
3:08:01 PM                                                                                                                    
In regards  to Senator  Thomas's issues about  the impact  of the                                                               
deployment of  troops on the  Fairbanks economy,  there certainly                                                               
was an  impact. But typically  about 60 percent of  the residents                                                               
in  a community  own their  own home;  so that  deployment didn't                                                               
affect  anyone's   mortgage  payment.  It  would   affect  rental                                                               
payments if a typical renter  were moving into a different rental                                                               
situation  during the  period  and new  people  coming into  town                                                               
might have  experienced slightly  lower rents if  property values                                                               
were slightly  lower. But overall, if  you think of the  slice of                                                               
the population  that might have  been affected because  they were                                                               
moving in or out of the community it was pretty small.                                                                          
MR. CALVIN said  turnover in Fairbanks housing  is relatively low                                                               
and  it is  typically about  one-third of  the household  budget.                                                               
Some minor  variation in that  aspect of the household  budget is                                                               
possible,  but they  didn't  see that  as  having any  meaningful                                                               
impact   on   the   differential.    What   really   matters   is                                                               
transportation   infrastructure    and   Fairbanks    has   great                                                               
transportation  infrastructure. Essentially  they  have the  same                                                               
overall cost  of living as  Anchorage and many  other communities                                                               
on a highway system.                                                                                                            
SENATOR  THOMAS  said  he appreciated  that  and  would  probably                                                               
agree, but  he wanted to know  how values were assigned  to these                                                               
things. Rents and housing costs,  for instance, vary dramatically                                                               
from one  part of town to  another whether the town  is Anchorage                                                               
or  Fairbanks.  The  cost  of   fuel  is  extremely  volatile  in                                                               
Fairbanks  but  not in  Anchorage,  and  the  cost of  fuel  also                                                               
affects the  price of  electricity because  Fairbanks has  a fuel                                                               
surcharge that  doubled the  electric costs  last year.  It still                                                               
exists now  as it  is getting  paid off.  That made  his electric                                                               
bill go  from $100/mo. to $200/mo.  and doubled the cost  of fuel                                                               
for   his  car.   He  had   difficulty  with   understanding  the                                                               
methodology in the survey. He  thought there should be relatively                                                               
fair way of  establishing it and then some  adjustment would have                                                               
to  be made  for up  and down.  People probably  looked at  their                                                               
survey and  compared it to  what took place  in 2009 and  said it                                                               
didn't make  sense because  the cost  of fuel went  way up  and a                                                               
variety of  other things. He  wasn't so much concerned  about the                                                               
cost of tooth paste and Campbell's soup.                                                                                        
MR. CALVIN  responded that  the basic  methodology in  the survey                                                               
was to  measure the cost  of housing  as people experience  it in                                                               
each community.  Their challenge was  to compare how  people live                                                               
in Anchorage versus  how they live in Fort Yukon  and look at how                                                               
important the  cost of housing is  to a household budget  in Fort                                                               
Yukon  versus Anchorage.  Housing  is the  single most  important                                                               
factor;  urban areas  typically  have higher  mortgage rates  and                                                               
housing costs.  Anchorage's are among  the highest in  the state.                                                               
So,  using Anchorage  as the  base doesn't  mean it's  the lowest                                                               
cost by  any stretch of  the imagination  for all aspects  of the                                                               
household budget.                                                                                                               
3:15:23 PM                                                                                                                    
SENATOR  THOMAS said  it's important  for  him to  know how  they                                                               
settle on particular items that  they think are indicative of the                                                               
economy in that  specific area and how they  are adjusted because                                                               
a lot of things are based  on that - like salaries, for instance.                                                               
They are  talking about percents;  so even  if there was  a minor                                                               
impact  to  housing,  it  is  such a  big  item  in  the  overall                                                               
household budget  that 1 or  2 percent  would have a  big impact.                                                               
Also, he  wanted to  know what McDowell  used when  they compared                                                               
the heating  cost - a  dollar value or  a barrel of  equivalent -                                                               
for the  heating value that one  gets out of a  certain increment                                                               
of a particular fuel.                                                                                                           
MR. CALVIN  replied that they collected  a great deal of  data on                                                               
what  people paid  in  each community  regardless  of the  energy                                                               
efficiency of their home or the  price of fuel in their community                                                               
and  calculated how  important it  was to  the average  household                                                               
budget there.                                                                                                                   
He said  they conducted their  household survey and all  of their                                                               
secondary research  where they collected  price data in  the fall                                                               
of 2008. The  peak of fuel prices  was in the summer  of 2008; so                                                               
fuel  prices  were  changing   dramatically  right  during  their                                                               
research effort,  but they weren't  at a peak. They  asked people                                                               
to tell  them about  their average  monthly expenditures  for the                                                               
year of 2008.  It interested them to understand if  they had done                                                               
the study in  2009 or 2007 what differences they  might have seen                                                               
in  the   differentials.  There   is  some  sensitivity   in  the                                                               
differentials  if  prices had  been  30  percent lower  for  fuel                                                               
primarily  in the  small remote  rural communities,  not so  much                                                               
Fairbanks  that   might  be  1.05   instead  of  1.04   or  1.06.                                                               
Sensitivity to  prices is  much more evident  in the  rural areas                                                               
where they are  not only paying higher prices for  their fuel but                                                               
the effect of a spike in  fuel prices is multiplied because first                                                               
you have to  get the fuel out  to the community and  then you pay                                                               
the additional  price on that.  It's really a  geometric increase                                                               
in prices when you look at a fuel change in Bethel. for example.                                                                
3:18:00 PM                                                                                                                    
CHAIR PASKVAN asked  if the McDowell Group knew  that the Striker                                                               
Brigade had deployed.                                                                                                           
MR. CALVIN answered yes, certainly;  they keep close track of the                                                               
CHAIR  PASKVAN  asked what  numbers  left  Interior Alaska  as  a                                                               
result of that deployment.                                                                                                      
MR. CALVIN answered if 2000 people  were deployed that might be a                                                               
population change of 3 percent or so.                                                                                           
CHAIR PASKVAN  asked if triple  those numbers would that  have an                                                               
immediate effect on selling prices of homes and rents.                                                                          
MR. CALVIN answered certainly in  the rental market. The turnover                                                               
in the  population is what  is meaningful. People leaving  is not                                                               
going to change  anyone's mortgage nor will it change  rent for a                                                               
CHAIR PASKVAN asked if he didn't  believe that rents dropped as a                                                               
result of the deployment.                                                                                                       
MR.  CALVIN said  they probably  did,  but it  didn't change  the                                                               
rental  rates for  people  already living  in  the community  pre                                                               
Striker Brigade  deployment. He said  a guy wasn't going  to drop                                                               
his rental  rates; although someone  who lost renters  because of                                                               
the deployment might need to  offer lower rental rates to someone                                                               
new coming in.                                                                                                                  
3:22:18 PM                                                                                                                    
CHAIR  PASKVAN said  this discussion  has shown  SB 298  to be  a                                                               
complex issue; he  thanked everyone for their  testimony and said                                                               
it would be held for more  work. He adjourned the meeting at 3:22                                                               

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