Legislature(2007 - 2008)HOUSE FINANCE 519

05/08/2007 08:30 AM House FINANCE


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08:46:26 AM Start
08:47:24 AM SB125
09:44:45 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 125 PERS /TRS CONTRIBUT'NS;UNFUNDED LIABILITY TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                        May 8, 2007                                                                                             
                         8:46 a.m.                                                                                              
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Meyer called the House  Finance Committee meeting to                                                                   
order at 8:46:26 AM.                                                                                                          
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Mike Chenault, Co-Chair                                                                                          
Representative Kevin Meyer, Co-Chair                                                                                            
Representative Bill Stoltze, Vice-Chair                                                                                         
Representative Harry Crawford                                                                                                   
Representative Richard Foster                                                                                                   
Representative Les Gara                                                                                                         
Representative Mike Hawker                                                                                                      
Representative Mike Kelly                                                                                                       
Representative Mary Nelson                                                                                                      
Representative Bill Thomas, Jr.                                                                                                 
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Reggie Joule                                                                                                     
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Kevin    Brooks,   Deputy    Commissioner,   Department    of                                                                   
Administration; Pat  Shier, Director, Division  of Retirement                                                                   
and  Benefits,  Department  of   Administration;  Kathy  Lea,                                                                   
Retirement  Manager,  Division  of  Retirement  and  Benefits                                                                   
Department of Administration                                                                                                    
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
None                                                                                                                            
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
CSSB 125(FIN)  "An   Act  relating  to  the   accounting  and                                                                   
          payment  of  contributions   under  the  retirement                                                                   
          plans  of the Public  Employees' Retirement  System                                                                   
          of Alaska  and the Teachers' Retirement  System, to                                                                   
          calculations    of   contributions    under   those                                                                   
          retirement  plans,  and  to participation  in,  and                                                                   
          termination of and amendments  to participation in,                                                                   
          the  defined   benefit  plans  of   those  systems;                                                                   
          relating  to employer  contributions to the  health                                                                   
          reimbursement  arrangement plan; making  conforming                                                                   
          amendments; and providing for an effective date."                                                                     
                                                                                                                                
          CSSB 125 (FIN) was heard and HELD in Committee for                                                                    
          further consideration.                                                                                                
                                                                                                                                
8:47:24 AM                                                                                                                    
                                                                                                                                
CS FOR SENATE BILL NO. 125(FIN)                                                                                               
                                                                                                                                
     "An  Act  relating  to the  accounting  and  payment  of                                                                   
     contributions under  the retirement plans  of the Public                                                                   
     Employees'   Retirement   System  of   Alaska  and   the                                                                   
     Teachers'   Retirement   System,  to   calculations   of                                                                   
     contributions  under  those  retirement  plans,  and  to                                                                   
     participation in,  and termination of and  amendments to                                                                   
     participation  in, the  defined benefit  plans of  those                                                                   
     systems;  relating  to  employer  contributions  to  the                                                                   
     health    reimbursement    arrangement   plan;    making                                                                   
     conforming  amendments; and  providing for an  effective                                                                   
     date."                                                                                                                     
                                                                                                                                
KEVIN    BROOKS,   DEPUTY    COMMISSIONER,   DEPARTMENT    OF                                                                   
ADMINISTRATION, introduced testifiers for SB 125.                                                                               
                                                                                                                                
Representative Gara asked how  this bill works in conjunction                                                                   
with the  PERS fix bill  that passed  out of committee.   Co-                                                                   
Chair Meyer replied that SB 125  is the cost share bill.  Mr.                                                                   
Brooks  pointed out  that the  two bills  work together;  one                                                                   
makes  some technical  fixes  and this  bill  creates a  cost                                                                   
share program  so that  PERS mirrors TRS  in that  regard and                                                                   
provides funding to cover the  transition as well as unfunded                                                                   
liability costs of the systems.                                                                                                 
                                                                                                                                
8:49:45 AM                                                                                                                    
                                                                                                                                
PAT  SHIER, DIRECTOR,  DIVISION OF  RETIREMENT AND  BENEFITS,                                                                   
DEPARTMENT OF  ADMINISTRATION, provided a  sectional analysis                                                                   
of the bill:                                                                                                                    
                                                                                                                                
     Section   1   repeals   and    reenacts   the   employer                                                                   
     contribution  section of the  TRS defined benefits  (DB)                                                                   
     status  to 12.56 percent.   It  specifies that  the rate                                                                   
     applies to the entire payroll  base - regardless of tier                                                                   
     -  for  DB and  Defined  Contribution  Retirement  (DCR)                                                                   
     normal costs.   It stipulates  that any money  in excess                                                                   
     of what  is needed to pay  the system's normal  costs is                                                                   
     applied to the accrued unfunded liability.                                                                                 
                                                                                                                                
     Section 2  talks about the state's commitment  to adding                                                                   
     money to the plan in excess  of the set rate, determined                                                                   
     by what  the actuary calculates  the plan needs  for the                                                                   
     coming year.   That is the sum total of  both the normal                                                                   
     cost and the past service cost.                                                                                            
                                                                                                                                
     Section 3 defines "past service  liability" and "system"                                                                   
     and makes clear the calculation methodology.                                                                               
                                                                                                                                
     Section  4  clarifies  the   health  reimbursement  plan                                                                   
     contributions that are established  in AS 39.30.370, not                                                                   
     AS 39.30.300.                                                                                                              
                                                                                                                                
     Section  5 says there  is no  longer any employer  asset                                                                   
     reserve  account.   It also  talks about  how the  state                                                                   
     will  disperse  any  payments  made by  employees  of  a                                                                   
     voluntary basis.                                                                                                           
                                                                                                                                
     Section  6  is  slightly   reworded  to  match  language                                                                   
     already passed in SB 123.                                                                                                  
                                                                                                                                
     Sections  7  and  8  move  references  to  participation                                                                   
     amendments, if  employers want to  opt in or out  of the                                                                   
     plan.                                                                                                                      
                                                                                                                                
     Section 9 is  similar to Section 1 in  that it addresses                                                                   
     the PERS rate,  sets the annual rate to  22 percent, and                                                                   
     applies  it to  the entire  payroll  base regardless  of                                                                   
     tier.   The  payroll  base used  in  calculation is  the                                                                   
     current year or FY 07, whichever  is greater.  Any money                                                                   
     in excess of  what is needed to pay the  system's normal                                                                   
     costs, are  applied to  the accrued unfunded  liability.                                                                   
     The  22 percent  rate applies  also  to retiree  rehires                                                                   
     that  may be  in the payroll  base.   This section  also                                                                   
     defines "normal cost".                                                                                                     
                                                                                                                                
     Section  10, as  in  Section 2  for  TRS, describes  the                                                                   
     state's  commitment to  make up  the difference  between                                                                   
     the actuarial rate of 22  percent and what the actuaries                                                                   
     say  the plan  needs in order  to pay  off the  unfunded                                                                   
     liability and cover normal costs.                                                                                          
                                                                                                                                
     Section 11  moves references as mentioned  earlier, some                                                                   
     that are repealed in Section 20.                                                                                           
                                                                                                                                
     Section   12   describes   the   process   whereby   the                                                                   
     administrator  may claim  funds from  other agencies  of                                                                   
     the  state  if  an  employer  is  behind  in  retirement                                                                   
     contributions or interest  owed.  It was discovered that                                                                   
     there  was no  language that  brought  employers to  the                                                                   
     table  to have discussions  about  how arrears  might be                                                                   
     solved.    This  section  establishes  such  a  process,                                                                   
     including appeal rights.                                                                                                   
                                                                                                                                
     Section  13  is language  to  prevent an  employer  from                                                                   
     awarding  past  service  credit to  employees  who  were                                                                   
     added  to  the plan  by  amendment.   Elected  officials                                                                   
     cannot be added  unless they make a minimum  of $2,001 a                                                                   
     month.                                                                                                                     
                                                                                                                                
     Section 14 discusses  that an entity must be  paid up if                                                                   
     they want to  re-enter or if they want to  bring a group                                                                   
     in that has been excluded.                                                                                                 
                                                                                                                                
     Section 15 talks about a  previously terminated employer                                                                   
     having  the opportunity  to re-enter  if they pay  costs                                                                   
     associated  with  the  termination.    They  would  only                                                                   
     participate in the DCR plan.                                                                                               
                                                                                                                                
     Section  16  deals  with   termination  costs.    If  an                                                                   
     employer  terminates completely  from  the system,  they                                                                   
     will be  required to pay  the past service cost  on that                                                                   
     terminated wage base.                                                                                                      
                                                                                                                                
     Section 17 conforms to other  section changes in the CS.                                                                   
                                                                                                                                
     Section  18   adds  the  definition  of   "past  service                                                                   
     liability".                                                                                                                
                                                                                                                                
     Section   19   discusses    the   health   reimbursement                                                                   
     arrangement plan.                                                                                                          
                                                                                                                                
     Section 20 repeals various  portions of statute that are                                                                   
     no longer effective.                                                                                                       
                                                                                                                                
     Section  21  is transition  language.    It talks  about                                                                   
     those  entities  that had  contributed  excess funds  or                                                                   
     funds  provided by the  state or  other source  to their                                                                   
     unfunded   liability.    This   bill  would   hold  them                                                                   
     harmless.   New subsection  (b) sets contribution  rates                                                                   
     for those  employers who are  below 22 percent  to allow                                                                   
    them significant time to adjust to the higher rate.                                                                         
                                                                                                                                
8:58:36 AM                                                                                                                    
                                                                                                                                
Representative Gara requested  more information about section                                                                   
21  (a).    Mr. Shier  explained  that  (a)  describes  those                                                                   
employers that  had made  contributions above those  required                                                                   
in  an  effort  to  build  employer-specific  asset  reserves                                                                   
against  future   rate  increases.    Subsection   (b)  is  a                                                                   
description  of  a  solution  for  those  employers  who  are                                                                   
currently  experiencing  rates   less  than  the  22  percent                                                                   
statutory rate.   It is an  effort to hold  those communities                                                                   
harmless  from  the negative  effects  of raising  the  rate.                                                                   
Representative Gara  asked how that is done and  if it is for                                                                   
PERS employers.   Mr. Shier  referred to  pages 12 and  13 to                                                                   
answer.   He said  it is PERS  and it fixes  their rate.   In                                                                   
response  to a  question by  Representative  Gara, Mr.  Shier                                                                   
pointed  out  that  subsection  (a) is  forward  funding  and                                                                   
subsection (b) it is merely that  employer's experience rate.                                                                   
                                                                                                                                
Mr.  Brooks addressed  fiscal note  #2 by  the Department  of                                                                   
Administration  for $193,113.2  million.   He explained  that                                                                   
currently $180  million is appropriated  in HB 95,  leaving a                                                                   
difference of $13,113.2 that would  be required by the fiscal                                                                   
note.   That amount is comprised  of $5.4 million  that would                                                                   
hold  harmless  current  employers  that  are  below  the  22                                                                   
percent rate  for a five-year  period.  The rebate  provision                                                                   
of $7.2  million recognizes that  some communities  have made                                                                   
additional payments and levels the playing field.                                                                               
                                                                                                                                
Representative  Gara asked  if in the  five-year period,  the                                                                   
communities  that  had  overpaid  would  have  received  full                                                                   
compensation.    Mr. Brooks  replied  that would  happen  the                                                                   
first year.                                                                                                                     
                                                                                                                                
9:03:09 AM                                                                                                                    
                                                                                                                                
Representative  Kelly asked  about the  13.32 percent  floor.                                                                   
Mr. Shier said  it was the actuarially set  normal cost rate.                                                                   
Representative  Kelly asked if  the five-year time  allotment                                                                   
accomplishes the  goal of not  losing employers.   Mr. Brooks                                                                   
thought it was a reasonable approach.                                                                                           
                                                                                                                                
Representative  Hawker inquired  if the  bill deals  with the                                                                   
unfunded  past service  cost liability.   Mr. Brooks  related                                                                   
that it requires the state to  pay the difference between the                                                                   
actuarially determined  rate, which includes the  normal cost                                                                   
as  well  as  the  past  service  cost,  and  the  two  rates                                                                   
established  in   statute.     The  fiscal  note   shows  the                                                                   
contribution  that will  be required  by the  state over  the                                                                   
next  couple years  will continue  to rise  through 2010  and                                                                   
then go  down.   By 2032 the  state will  be at normal  cost.                                                                   
Representative Hawker  summarized that the mechanism  is that                                                                   
communities  are limited to  a certain  amount and  the state                                                                   
pays  the  rest.   Mr.  Brooks  concurred.     Representative                                                                   
Hawker spoke in support of that mechanism.                                                                                      
                                                                                                                                
9:06:24 AM                                                                                                                    
                                                                                                                                
Representative  Hawker voiced concern  about the  amount that                                                                   
the state  must provide,  as identified in  Section 2  of the                                                                   
bill.   He noted that  TRS is paid  at the contribution  rate                                                                   
determined by the  board.  He asked if the  board is required                                                                   
to adopt  a contribution rate  that fully amortizes  the past                                                                   
service cost  liability.   Mr. Shier  related that  there are                                                                   
guidelines about determining those  rates.  He explained that                                                                   
there  is a mechanism  that returns  it to  a normal  payment                                                                   
rate.                                                                                                                           
                                                                                                                                
Representative Hawker asked when  the bill would take affect.                                                                   
Mr. Shier  said FY  09.  Representative  Hawker asked  if the                                                                   
board has revised  its actuarial rates for FY 08.   Mr. Shier                                                                   
replied  that the  ARM board  did consider  and supports  the                                                                   
action of  the legislature.   Representative Hawker  asked if                                                                   
the decision  is neutral or has  a consequence on  the growth                                                                   
of  the unfunded  past  service cost  liability.   Mr.  Shier                                                                   
said, given the fiscal notes, it should suffice.                                                                                
                                                                                                                                
9:10:11 AM                                                                                                                    
                                                                                                                                
Representative Hawker asked if  rates are high enough to stop                                                                   
the  rate  of  growth  of  the  unfunded  past  service  cost                                                                   
liability.   Mr. Brooks repeated  that the costs would  go up                                                                   
for  two years  and  then  decrease.   Representative  Hawker                                                                   
noted the  proposal is a long  way from the 65/35 split.   He                                                                   
asked  if two  years of  growth  is anticipated,  and then  a                                                                   
decrease.   Mr. Brooks said the  payment would go up  for two                                                                   
years and then the unfunded liability  would go to zero in 25                                                                   
years.     Representative   Hawker   requested   to  see   an                                                                   
amortization chart.                                                                                                             
                                                                                                                                
Co-Chair Meyer compared  it to taking out a  25-year mortgage                                                                   
on a  home.   Mr. Brooks  noted that  the unfunded  liability                                                                   
does go down.   It is a 25-year payment based  on a number of                                                                   
actuarial assumptions and is updated yearly.                                                                                    
                                                                                                                                
9:14:24 AM                                                                                                                    
                                                                                                                                
Representative Kelly  summarized that the 22  percent exceeds                                                                   
the  normal  cost   rate  and  will  pay  off   the  unfunded                                                                   
liability.  He stated support  for that concept.  He asked if                                                                   
the  legislature can  change the  22 percent  in the  future.                                                                   
Mr. Brooks  said it  could.  Under  the defined  contribution                                                                   
system, the 9.75  contribution rate should remain  flat.  The                                                                   
number of defined benefit plan  members will decrease, so the                                                                   
normal cost  of that  plan, which is  just under  15 percent,                                                                   
could climb.                                                                                                                    
                                                                                                                                
Representative Kelly  said the defined contribution  rate can                                                                   
be changed.   He said it  is the legislature's intent  not to                                                                   
change the 22  percent.  He stressed that there  is exposure,                                                                   
and  it  is important  not  to  change  back to  the  defined                                                                   
benefits plan.                                                                                                                  
                                                                                                                                
9:18:31 AM                                                                                                                    
                                                                                                                                
Representative Gara  asked if the major cost  shown in fiscal                                                                   
note #2  shows numbers above  this year's contribution.   Mr.                                                                   
Brooks replied  that they  are numbers  above the 22  percent                                                                   
and  12.56   percent   -  the  equivalent   of  this   year's                                                                   
calculation of the difference.   Representative Gara asked if                                                                   
this  year's $193  million  is $193  million  more than  last                                                                   
year.   Mr.  Brooks reported  that coincidentally  the FY  07                                                                   
rate is  at 22 percent.   The amount  of $193 million  is the                                                                   
amount required  over the current year.   Representative Gara                                                                   
asked about the "stacking trend".   Mr. Brooks explained that                                                                   
the base  amount will  be 22 percent,  and the  appropriation                                                                   
will be  in addition to that  and not building  on subsequent                                                                   
years.                                                                                                                          
                                                                                                                                
9:21:31 AM                                                                                                                    
                                                                                                                                
Representative Gara asked if the  12 percent TRS contribution                                                                   
and  the  22 percent  PERS  contribution  is  the  employer's                                                                   
contribution obligation  based on percentage of  salary.  Mr.                                                                   
Brooks said that is correct.   Representative Gara asked when                                                                   
the rates expire.   Mr. Brooks said they are  set in statute.                                                                   
Representative  Gara requested  an  explanation  of the  PERS                                                                   
rate which  will be leveled at  22 percent.  Mr.  Brooks said                                                                   
that is correct.  He referred  to a spreadsheet which depicts                                                                   
the impact on all employers of the hold harmless provision.                                                                     
                                                                                                                                
9:24:25 AM                                                                                                                    
                                                                                                                                
Representative  Gara  asked if  the  legislation  is fair  to                                                                   
schools with more PERS employees.   Mr. Brooks thought it was                                                                   
fair.   Mr. Shier thought  relative fairness is  difficult to                                                                   
access.  An attempt at a solution  was found with involvement                                                                   
from  communities  around  the state.    Representative  Gara                                                                   
wondered how many  school districts have more  PERS than TRS.                                                                   
Mr. Brooks listed several that  do.  Representative Gara gave                                                                   
an example of a PERS school district  that does not get equal                                                                   
treatment.  Mr. Brooks said that  the PERS system has been in                                                                   
place for  years.  Mr.  Shier referred  to page 13  and noted                                                                   
that  schools   districts  are  participating  in   the  hold                                                                   
harmless  provision.    Mr.  Brooks  noted  that  the  school                                                                   
districts decide which plan to participate in.                                                                                  
                                                                                                                                
9:28:45 AM                                                                                                                    
                                                                                                                                
Representative  Gara gave another  hypothetical situation  of                                                                   
unequal benefits in school districts.                                                                                           
                                                                                                                                
KATHY  LEA, RETIREMENT  MANAGER, DIVISION  OF RETIREMENT  AND                                                                   
BENEFITS  DEPARTMENT OF  ADMINISTRATION,  clarified that  all                                                                   
school  district teachers  participate  in TRS.   All  school                                                                   
districts  can   choose  PERS   or  TRS  for   non-classified                                                                   
personnel.   The  issue  of fairness  is  in the  eye of  the                                                                   
beholder.                                                                                                                       
                                                                                                                                
Representative Hawker  opined that the bill is  an attempt at                                                                   
an elegant  solution  to a complex  problem.   He pointed  to                                                                   
transition language that deals  with the districts that would                                                                   
lose  out  because  of  this   bill  unless  a  solution  was                                                                   
included.  The  current structure says that  the current rate                                                                   
is frozen  and then readjusted  in five  years.  He  spoke in                                                                   
favor of the hold harmless provision.                                                                                           
                                                                                                                                
9:36:12 AM                                                                                                                    
                                                                                                                                
Representative Hawker  asked about alternative  transitionary                                                                   
mechanisms.   Mr. Brooks said  that has been considered.   He                                                                   
concurred    with    Representative     Hawker's    analysis.                                                                   
Representative  Hawker spoke to  the five years  of insurance                                                                   
and suggested it be revisited  from time to time.  Mr. Brooks                                                                   
noted that there will be a high level of scrutiny.                                                                              
                                                                                                                                
Co-Chair Meyer said the magic  number is 40 percent, which is                                                                   
to be shared  by communities and  the state.  On top  of that                                                                   
the state has to pay for its own  state employees at the full                                                                   
40 percent  rate.  Mr. Shier  reported that the  original ARM                                                                   
board rate  was 40 percent.   The ARM  board supports  the 32                                                                   
percent as allocated in the bill.                                                                                               
                                                                                                                                
Co-Chair  Meyer  concluded  the  rate  would  be  40  percent                                                                   
without the  bill.   He asked  if this is  a form of  revenue                                                                   
sharing.  Mr. Brooks declined to answer.                                                                                        
                                                                                                                                
9:41:50 AM                                                                                                                    
                                                                                                                                
Representative  Kelly   asked  for  an  opinion   of  Pension                                                                   
Obligation Bonds (POB)'s and their  relationship to the bill.                                                                   
He  related  how  the  five-year  timeframe  came  about  and                                                                   
suggested that it shouldn't be messed with.                                                                                     
                                                                                                                                
Mr. Brooks  saw the  use of POB's  as a  tool to address  the                                                                   
state's payment  in excess  of 22  percent or 12.56  percent.                                                                   
It  would  help  address appropriations  in  the  out  years.                                                                   
Representative  Kelly  requested administrative  support  for                                                                   
POB's  given   the  timing  and   the  interest   rates  now.                                                                   
Representative Hawker concurred with Representative Kelly.                                                                      
                                                                                                                                
9:44:45 AM                                                                                                                    
                                                                                                                                
Representative  Gara addressed the  issue of new  legislators                                                                   
being left out  of the system for nine months.   He suggested                                                                   
adding an  amendment to  the bill.   Co-Chair Meyer  asked if                                                                   
that  has  been  addressed.    Mr. Shier  said  it  has  not.                                                                   
Representative  Hawker pointed to  an effort to  correct that                                                                   
language during another bill hearing.                                                                                           
                                                                                                                                
Representative  Gara thought  no other  state employees  were                                                                   
excluded.   He asked Mr. Brooks  to research the issue.   Mr.                                                                   
Brooks agreed.                                                                                                                  
                                                                                                                                
CSSB 125  (FIN) was heard and  HELD in Committee  for further                                                                   
consideration.                                                                                                                  
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
The meeting was adjourned at 9:47 AM.                                                                                           

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