Legislature(2007 - 2008)

03/30/2007 07:17 AM House W&M


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                    ALASKA STATE LEGISLATURE                                                                                  
           HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS                                                                          
                         March 30, 2007                                                                                         
                           7:17 a.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Mike Hawker, Chair                                                                                               
Representative Anna Fairclough, Vice Chair                                                                                      
Representative Bob Roses                                                                                                        
Representative Paul Seaton                                                                                                      
Representative Peggy Wilson                                                                                                     
Representative Sharon Cissna                                                                                                    
Representative Max Gruenberg                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                              
HOUSE BILL NO. 204                                                                                                              
"An Act relating  to the public employees'  and teachers' defined                                                               
benefit retirement  plans; relating to the  public employees' and                                                               
teachers' defined contribution retirement  plans; relating to the                                                               
judicial retirement system; relating  to the health reimbursement                                                               
arrangement  plan  for  certain teachers  and  public  employees;                                                               
relating to  the supplemental employee benefit  program; relating                                                               
to the public employees'  deferred compensation program; relating                                                               
to  group insurance  for public  employees  and retirees;  making                                                               
conforming amendments; and providing for an effective date."                                                                    
                                                                                                                                
     - HEARD AND HELD                                                                                                           
                                                                                                                                
HOUSE BILL NO. 206                                                                                                              
"An Act relating  to the accounting and  payment of contributions                                                               
under  the   defined  benefit  plan  of   the  Public  Employees'                                                               
Retirement  System of  Alaska, to  calculations of  contributions                                                               
under that  defined benefit  plan, and  to participation  in, and                                                               
termination of  and amendments to participation  in, that defined                                                               
benefit plan; making conforming  amendments; and providing for an                                                               
effective date."                                                                                                                
                                                                                                                                
     - HEARD AND HELD                                                                                                           
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: HB 204                                                                                                                  
SHORT TITLE: PUBLIC EMP./TEACHERS/JUDGES EMP. BENEFITS                                                                          
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
03/16/07       (H)       READ THE FIRST TIME - REFERRALS                                                                        
03/16/07       (H)       W&M, FIN                                                                                               
03/28/07       (H)       W&M AT 7:00 AM HOUSE FINANCE 519                                                                       
03/28/07       (H)       Heard & Held                                                                                           
03/28/07       (H)       MINUTE(W&M)                                                                                            
03/30/07       (H)       W&M AT 7:00 AM HOUSE FINANCE 519                                                                       
                                                                                                                                
BILL: HB 206                                                                                                                  
SHORT TITLE: PERS CONTRIBUTIONS; UNFUNDED LIABILITY                                                                             
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
03/16/07       (H)       READ THE FIRST TIME - REFERRALS                                                                        
03/16/07       (H)       W&M, FIN                                                                                               
03/28/07       (H)       W&M AT 7:00 AM HOUSE FINANCE 519                                                                       
03/28/07       (H)       Scheduled But Not Heard                                                                                
03/30/07       (H)       W&M AT 7:00 AM HOUSE FINANCE 519                                                                       
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
ANNETTE KREITZER, Commissioner Designee                                                                                         
Department of Administration (DOA)                                                                                              
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Provided information on aspects and HB 204                                                                 
and answered questions pertaining to HB 204 and HB 206.                                                                         
                                                                                                                                
KATHLEEN LEA, Acting Director                                                                                                   
Retirement Manager                                                                                                              
Division of Retirement and Benefits (DRB)                                                                                       
Department of Administration                                                                                                    
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Presented HB 204 on behalf of the                                                                          
Department of Administration and answered questions on HB 204                                                                   
and HB 206.                                                                                                                     
                                                                                                                                
CHRISTINA MAIQUIS, Acting Chief Financial Officer                                                                               
Division of Retirement and Benefits                                                                                             
Department of Administration                                                                                                    
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Presented HB 206 on behalf of the                                                                          
Department of Administration and answered questions.                                                                            
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CHAIR MIKE HAWKER called the  House Special Committee on Ways and                                                             
Means meeting  to order at  7:17:45 AM.   Present at the  call to                                                             
order  were Representatives  Hawker,  Fairclough, Seaton,  Roses,                                                               
Gruenberg, Cissna, and Wilson.                                                                                                  
                                                                                                                                
HB 204-PUBLIC EMP./TEACHERS/JUDGES EMP. BENEFITS                                                                              
                                                                                                                                
CHAIR HAWKER announced that the  first order of business would be                                                               
HOUSE BILL  NO. 204,  "An Act relating  to the  public employees'                                                               
and teachers'  defined benefit retirement plans;  relating to the                                                               
public employees'  and teachers' defined  contribution retirement                                                               
plans; relating  to the judicial  retirement system;  relating to                                                               
the health  reimbursement arrangement  plan for  certain teachers                                                               
and  public  employees;  relating to  the  supplemental  employee                                                               
benefit  program;  relating  to the  public  employees'  deferred                                                               
compensation  program; relating  to  group  insurance for  public                                                               
employees  and   retirees;  making  conforming   amendments;  and                                                               
providing for an effective date."                                                                                               
                                                                                                                                
7:19:37 AM                                                                                                                    
                                                                                                                                
ANNETTE   KREITZER,   Commissioner    Designee,   Department   of                                                               
Administration (DOA) addressed some  prior questions by committee                                                               
members.   First, she noted  DOA has requested the  Department of                                                               
Law  (DOL)  further review  of  the  need for  any  retroactivity                                                               
provisions  in HB  204.   Second,  she confirmed  that there  are                                                               
currently  no  statutory provisions  that  empower  the state  to                                                               
intercept  funds  of employers  who  fail  to contribute  to  the                                                               
unfunded liabilities.   Third, she provided the  committee with a                                                               
chart that  compares HB 204  with House  bill 475 [from  the 24th                                                               
Legislative session].   Last, she  stated they have  requested an                                                               
opinion  from  tax  counsel  about  when  elected  officials  are                                                               
considered employees of the governmental  entity they are elected                                                               
to serve.                                                                                                                       
                                                                                                                                
7:22:57 AM                                                                                                                    
                                                                                                                                
KATHLEEN LEA,  Acting Director,  Retirement Manager,  Division of                                                               
Retirement  and  Benefits  (DRB), Department  of  Administration,                                                               
responded  to  a  query  regarding   the  exclusion  of  National                                                               
Education  Association  Alaska   (NEA-Alaska)  members  from  the                                                               
state's retirement plans by confirming  that the Internal Revenue                                                               
Service  (IRS)  does not  allow  private  non-profit entities  to                                                               
participate in a governmental retirement plan.                                                                                  
                                                                                                                                
REPRESENTATIVE ROSES  noted that  it has been  at least  25 years                                                               
since the NEA-Alaska inclusion has been an issue.                                                                               
                                                                                                                                
7:23:59 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  asked  for  clarification  of  the  chart                                                               
provided  to  the committee  by  DOA  and titled  "Comparison  of                                                               
Former HB 475 and HB 204."                                                                                                      
                                                                                                                                
MS. LEA explained  that the intent of the chart  was to set forth                                                               
sections that are in HB 204 that were not in House bill 475.                                                                    
                                                                                                                                
7:26:42 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  FAIRCLOUGH expressed  concern that  if the  state                                                               
switches  to a  cost  share basis  for retirement  contributions,                                                               
some communities will  receive debt relief for  their portions of                                                               
the unfunded  pension plan  liabilities.   She asked  for further                                                               
information  regarding those  employers  that are  in arrears  in                                                               
making  their payments  under  the  Public Employees'  Retirement                                                               
System (PERS) defined benefits (DB) plans.                                                                                      
                                                                                                                                
COMMISSIONER DESIGNEE  KREITZER noted that the  issue of unfunded                                                               
liabilities  is  not a  new  one.    She acknowledged  that  some                                                               
communities  would benefit  greatly should  the state  move to  a                                                               
cost  share  plan.    She   stated  that  DOA  has  offered  some                                                               
suggestions for how  to help communities that  would be adversely                                                               
affected  by  a  cost  share  plan.   She  recognized  that  some                                                               
communities, such as Fairbanks,  would essentially be relieved of                                                               
a  debt,  but  stated that  "what  we  are  trying  to do  is  go                                                               
forward."   She explained that  DOA has prepared a  "heroes list"                                                               
which  sets  forth communities  that  received  rate relief,  but                                                               
applied it towards their unfunded  liabilities.  She offered that                                                               
it is a  policy call of the legislature how  to treat communities                                                               
that  are differently  affected  by imposition  of  a cost  share                                                               
system.                                                                                                                         
                                                                                                                                
The committee took an at ease from 7:29:59 AM to 7:32:45 AM.                                                                
                                                                                                                                
7:33:41 AM                                                                                                                    
                                                                                                                                
COMMISSIONER DESIGNEE  KREITZER said that when  viewing the chart                                                               
comparing HB  204 and House  bill 475, it  may be most  useful to                                                               
ignore the column to the far  left and focus instead on the table                                                               
that lists the new sections that were not in House bill 475.                                                                    
                                                                                                                                
MS. LEA confirmed  that DOL advised that some  sections listed in                                                               
the  chart were  in  House  bill 475,  but  that  they have  been                                                               
modified in HB 204.                                                                                                             
                                                                                                                                
REPRESENTATIVE ROSES  requested details  on which sections  of HB
204 codify existing practices that are not in statute.                                                                          
                                                                                                                                
7:39:16 AM                                                                                                                    
                                                                                                                                
CHAIR HAWKER  asked about the  practice of codifying  an existing                                                               
agency   practice  and   the  requirement,   if  any,   that  the                                                               
codification be made retroactive.                                                                                               
                                                                                                                                
COMMISSIONER  DESIGNEE  KREITZER  opined  that it  is  common  to                                                               
codify  regulatory  practices  and  opined  that  DOA  has  broad                                                               
regulatory authority.   She stated that it  would provide clarity                                                               
to include these provisions in statute.                                                                                         
                                                                                                                                
REPRESENTATIVE  GRUENBERG commented  that  it is  riskier if  the                                                               
practice  being codified  is  controversial,  but cautioned  that                                                               
careful consideration will help avoid any legal issues.                                                                         
                                                                                                                                
COMMISSIONER  DESIGNEE  KREITZER  emphasized   that  HB  204  was                                                               
crafted by  the DOL in  accordance with independent  tax counsel,                                                               
and she  said she  does not believe  there are  any retroactivity                                                               
provisions in this bill.                                                                                                        
                                                                                                                                
7:42:51 AM                                                                                                                    
                                                                                                                                
CHAIR HAWKER  said that  while he  is generally  comfortable with                                                               
the substance of  the bill, he would  like additional explanation                                                               
of the reasons for exclusion of elected municipal officials.                                                                    
                                                                                                                                
COMMISSIONER  DESIGNEE KREITZER  noted there  had been  extensive                                                               
discussion of the  aforementioned issue, but that  she would need                                                               
to review  this issue  to provide the  committee a  more detailed                                                               
explanation of the reasons for exclusion of municipal officials.                                                                
                                                                                                                                
MS. LEA said  that the section regarding  which elected officials                                                               
are included  in the Defined  Contribution Retirement  (DCR) plan                                                               
is  contained in  HB 204,  section  110 under  the definition  of                                                               
"employee."                                                                                                                     
                                                                                                                                
REPRESENTATIVE CISSNA  expressed concern that exclusion  of other                                                               
elected officials could have unintended consequences.                                                                           
                                                                                                                                
COMMISSIONER  DESIGNEE KREITZER  reiterated she  will review  her                                                               
notes on this issue so she  can recall the reasons for the policy                                                               
choice to recommend exclusion of elected municipal officials.                                                                   
                                                                                                                                
CHAIR  HAWKER  requested  that  review  consider  whether  it  is                                                               
feasible or  appropriate to contemplate  an opt-in  provision for                                                               
municipalities.                                                                                                                 
                                                                                                                                
7:47:39 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON noted there is  a huge difference between a                                                               
cost sharing  plan and one  where an employer  has responsibility                                                               
for  only its  own employees.   He  referenced that  difficulties                                                               
occur when persons are paid  less than the average employee base,                                                               
because that employee's liability  can be substantial despite not                                                               
contributing much  to the wage base.   The result can  be that an                                                               
elected  public employee  can accumulate  a  huge liability  that                                                               
must  be paid  by contributions  from other  employees.   He said                                                               
that  in his  district,  many municipalities  have  opted out  of                                                               
including their elected officials in  retirement plans due to the                                                               
high cost.   He  explained that  Senate bill  141 [from  the 24th                                                               
legislative session] disallowed  new employees from participation                                                               
in the defined  benefit plans, but employees  that had previously                                                               
been  elected to  a city  or state  government position  prior to                                                               
Senate bill 141  would come under the provisions  of the existing                                                               
defined benefit  plans.  He  expressed concern that a  cost share                                                               
system  would  allow  municipalities  to  include  their  elected                                                               
officials  in  the retirement  plans,  and  that other  employers                                                               
would be responsible for payment of costs.                                                                                      
                                                                                                                                
7:51:55 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE WILSON  asked about  the prospective nature  of HB
204 and whether it applies to  persons who have already served as                                                               
an elected official.                                                                                                            
                                                                                                                                
MS.  LEA said  that the  bill's provisions  would apply  from the                                                               
effective date of the bill forward.                                                                                             
                                                                                                                                
7:52:48 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   FAIRCLOUGH  stated   she   would  like   further                                                               
information regarding  the possible  liability that  would result                                                               
from inclusion of municipal elected officials.                                                                                  
                                                                                                                                
MS. LEA  stated that currently municipalities  can choose whether                                                               
to have  their elected officials  participate in  defined benefit                                                               
plans.   However, there are concerns  in the cost share  bill [HB
206] about  allowing municipalities to include  elected officials                                                               
in the defined  benefits plans.  She reminded  the committee that                                                               
elected  municipal   officials  are  currently  not   allowed  to                                                               
participate in the defined contribution retirement plan.                                                                        
                                                                                                                                
REPRESENTATIVE  FAIRCLOUGH  predicted   there  may  be  financial                                                               
reasons  as   to  why  municipal  officials   are  excluded  from                                                               
participation  in  the  DCR  plan  and that  it  would  help  her                                                               
consideration of  this issue  to see  the fiscal  implications of                                                               
this policy decision.                                                                                                           
                                                                                                                                
[HB 204 was held in committee.]                                                                                                 
                                                                                                                                
7:59:37 AM                                                                                                                    
                                                                                                                                
HB 206-PERS CONTRIBUTIONS; UNFUNDED LIABILITY                                                                                 
                                                                                                                                
CHAIR HAWKER announced  that the next order of  business would be                                                               
HOUSE  BILL NO.  206,  "An  Act relating  to  the accounting  and                                                               
payment of  contributions under the  defined benefit plan  of the                                                               
Public Employees'  Retirement System  of Alaska,  to calculations                                                               
of  contributions  under  that   defined  benefit  plan,  and  to                                                               
participation   in,  and   termination  of   and  amendments   to                                                               
participation in,  that defined  benefit plan;  making conforming                                                               
amendments; and providing for an effective date."                                                                               
                                                                                                                                
8:00:38 AM                                                                                                                    
                                                                                                                                
COMMISSIONER DESIGNEE  KREITZER set forth that  DOA would provide                                                               
an overview  of accounting  issues in  the defined  benefit plans                                                               
prior to a detailed analysis of HB 206, the cost share bill.                                                                    
                                                                                                                                
8:00:57 AM                                                                                                                    
                                                                                                                                
CHRISTINA MAIQUIS,  Acting Chief  Financial Officer,  Division of                                                               
Retirement and  Benefits, Department of  Administration, referred                                                               
to a PowerPoint presentation on  the Public Employees' Retirement                                                               
System  (PERS) Defined  Benefit (DB)  Plan, which  was sub-titled                                                               
"Accounting Issues"  and dated March  28, 2007.  She  stated that                                                               
there are  concerns about  employer level  accounting for  the DB                                                               
plan  as  the  current  accounting  system  results  in  employer                                                               
contribution  rates   not  being  supported  by   employer  level                                                               
accounting  records.   The cost  share legislation  introduced by                                                               
the governor  presents a proposal whereby  the administration and                                                               
accounting  of  the  PERS  DB  plan  would  mirror  that  of  the                                                               
Teachers' Retirement System (TRS) plan.   Under HB 206, the state                                                               
will assume  65 percent of  the unfunded PERS' DB  plan liability                                                               
as of June  30, 2006.  The unfunded liability  is estimated to be                                                               
$5.5 billion;  under HB 206  the state would assume  $3.6 billion                                                               
of  that amount.   She  opined  that the  cost share  legislature                                                               
would  result in  simplified  plan  administration and  eliminate                                                               
employers'   level  accounting   concerns.     Furthermore,   all                                                               
employers would  share in the  cost of  benefits, administration,                                                               
and investment.                                                                                                                 
                                                                                                                                
MS.  MICAS reminded  the  committee  that the  PERS  is a  multi-                                                               
employer, multi-agent system whereby  assets are accounted for by                                                               
employer  as they  come in.    The assets  are consolidated  with                                                               
those  of  other employers  once  transferred  to the  retirement                                                               
account.  She  went on to say that part  of the proposed solution                                                               
to  the unfunded  pension  fund liability  is  to possibly  issue                                                               
pension   obligation  bonds   (POBs)  to   reduce  the   unfunded                                                               
liability.                                                                                                                      
                                                                                                                                
8:00:12 AM                                                                                                                    
                                                                                                                                
MS. MICAS responded  to a question by explaining that  out of the                                                               
169  PERS  employers,  one  is  the state,  while  the  rest  are                                                               
municipal and other governmental employers.                                                                                     
                                                                                                                                
CHAIR HAWKER  requested clarification  as to whether  the Elected                                                               
Public Officials Retirement System (EPORS)  is part of PERS Tiers                                                               
I, II, or III.                                                                                                                  
                                                                                                                                
MS.  MICAS answered  that the  EPORS is  a separate,  stand alone                                                               
plan and that  the proposed changes to PERS would  have no effect                                                               
on that system.                                                                                                                 
                                                                                                                                
REPRESENTATIVE FAIRCLOUGH  queried who pays  the costs of  the 27                                                               
members  of the  EPORS  and noted  that  a witness  affirmatively                                                               
nodded that the payment for this plan was from general funds.                                                                   
                                                                                                                                
8:08:26 AM                                                                                                                    
                                                                                                                                
MS.  MICAS explained  that the  proposed change  to a  cost share                                                               
plan does  not affect TRS, benefits  paid to DB members,  PERS DB                                                               
plan level  accounting as a  whole, and  the PERS DCR  Plan (Tier                                                               
IV).  She  explained that in a multiple employer  plan, there are                                                               
separate  accounts  for  each  employer  and  that  the  employer                                                               
provides benefits  only for  its employees.   However,  there are                                                               
pooled administrative  and investment  functions.   She explained                                                               
that  AS 30.35.100(b)  (3) requires  that a  separate account  be                                                               
maintained for  each employer; this  account is charged  with the                                                               
employer's  actuarial  charge  for pension  and  other  benefits.                                                               
Furthermore, AS 39.35.250 requires  amortization of an employer's                                                               
unfunded   obligations   in    determining   the   past   service                                                               
contribution rate                                                                                                               
                                                                                                                                
MS. MICAS  referred to slides  10-11 and explained  that employer                                                               
contributions are  accounted for  in two  separate accounts.   In                                                               
the  active employer  asset accounts,  one account  is maintained                                                               
for each  individual employer.   In the retiree  reserve account,                                                               
all payments  are maintained  in a  consolidated account  for all                                                               
participating employers.   She emphasized that it  is the retiree                                                               
reserve account that  has raised concerns as it is  not split out                                                               
by employer.   She said the retiree reserve account  is funded by                                                               
investment income  and transfers  from the active  employer asset                                                               
account.   Once  assets are  transferred to  the retiree  reserve                                                               
account,  assets are  no longer  tracked by  individual employer.                                                               
In response to a question, she  confirmed that once assets are in                                                               
the  retiree  reserve  account,  payments  to  retirees  are  not                                                               
tracked by employer.                                                                                                            
                                                                                                                                
8:14:04 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  asked whether  benefits are paid  from the                                                               
retiree reserve account.   He further queried whether  the DOA is                                                               
aware  of  how much  each  employer  contributed to  the  retiree                                                               
reserve account,  how much  interest the  account makes,  and the                                                               
amount  being  paid  for  each   employer's  liability  to  their                                                               
employees.                                                                                                                      
                                                                                                                                
MS. MICAS confirmed that retirement  benefits are paid out of the                                                               
retiree reserve  account.  As  to the  second part of  his query,                                                               
she responded that DOA is  aware of which employer is responsible                                                               
for payment, but  that the amount of payment is  not allocated to                                                               
the  responsible  employer's assets  once  the  money is  in  the                                                               
retiree reserve account.                                                                                                        
                                                                                                                                
8:15:33 AM                                                                                                                    
                                                                                                                                
MS. MICAS explained  the allocation process used  to calculate an                                                               
employer's past  service contribution  rate, referring  to slides                                                               
13 to  14.  She  responded to a  question by explaining  that the                                                               
retiree   reserve  account   does  not   separately  track   each                                                               
employer's funds.   She went on to explain that  once an employer                                                               
has retirees,  a calculation is  done to establish the  amount of                                                               
retiree reserve  account assets  that need  to be  transferred to                                                               
the retiree reserve account, referring to slides 15 and 16.                                                                     
                                                                                                                                
8:19:27 AM                                                                                                                    
                                                                                                                                
COMMISSIONER DESIGNEE  KREITZER reminded the committee  that this                                                               
allocation  process  has been  going  on  about  20 years.    She                                                               
assured  the  committee that  her  department  has met  with  the                                                               
Alaska  Municipal  League  (AML)  and considered  this  issue  in                                                               
deciding to  put forward  a cost share  approach.   She explained                                                               
that it may be possible  to determine the amounts that individual                                                               
employers have  contributed to the  retiree reserve  account, but                                                               
cautioned  that  such an  accounting  would  be expensive.    She                                                               
opined that as  the committee reviews the  allocation process, it                                                               
will become clear  why the suggestion has been made  to move to a                                                               
cost share system.                                                                                                              
                                                                                                                                
CHAIR  HAWKER  relayed  that   although  the  current  allocation                                                               
process was  perhaps a valid  policy process  at time, now  is an                                                               
appropriate time to  assess whether the current system  is in the                                                               
best interest of the state and other plan participants.                                                                         
                                                                                                                                
8:21:04 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON   expressed  strong  concern  as   to  the                                                               
accuracy  of actuarial  determinations of  past employer  service                                                               
costs  in light  the fact  that plan  assets are  not tracked  by                                                               
individual employer  once they are  transferred into  the retiree                                                               
reserve account.  He indicated  concern that determinations of an                                                               
employer's  unfunded  liability  and contribution  rate  must  be                                                               
accurate.   He referenced  some extensive  actuarial calculations                                                               
that were done in conjunction with  House bill 238 [from the 24th                                                               
legislative session].                                                                                                           
                                                                                                                                
COMMISSIONER   DESIGNEE  KREITZER   replied  that   DOA  is   not                                                               
necessarily unaware  of individual employer liabilities,  but she                                                               
emphasized  it would  "not be  cheap"  to go  back and  determine                                                               
these figures.                                                                                                                  
                                                                                                                                
REPRESENTATIVE SEATON noted  that part of the reason  for some of                                                               
the actuarial  work last year  was to determine the  average cost                                                               
per employer so as to  lessen the possibility that some employers                                                               
would be over-funded and others under-funded.                                                                                   
                                                                                                                                
8:24:57 AM                                                                                                                    
                                                                                                                                
CHAIR HAWKER offered that there has  been a mechanism in place to                                                               
assign  assets  to  individual employers  and  to  compare  those                                                               
assets  to   liabilities  to   determine  the   unfunded  portion                                                               
allocated to each employer.  He  opined that the issue before the                                                               
committee was  to review that  mechanism and evaluate  whether it                                                               
is appropriate to change that approach.                                                                                         
                                                                                                                                
REPRESENTATIVE  SEATON reiterated  his concern  that the  current                                                               
approach may not result in  an accurate determination of employer                                                               
contributions and liabilities.   He indicated that some employers                                                               
have over-funded  their share of  the pension  liabilities, while                                                               
others have under-funded their share.   He expressed unease as to                                                               
whether  these differences  were  being fairly  accounted for  in                                                               
light  of the  fact that  the  retiree reserve  account does  not                                                               
track individual employer contributions.                                                                                        
                                                                                                                                
CHAIR  HAWKER  summarized  that  once funds  are  placed  in  the                                                               
retiree  reserve  account,  they  become  co-mingled  with  other                                                               
assets.                                                                                                                         
                                                                                                                                
8:29:41 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  WILSON  expressed  concern that  once  funds  are                                                               
transferred  to   the  retiree  reserve  account,   there  is  no                                                               
accounting to  keep track of whether  an employer's contributions                                                               
are adequate to  pay its retirees.  She asked  what happens if an                                                               
employer is  paying out more  in retirement benefits than  it has                                                               
contributed.                                                                                                                    
                                                                                                                                
COMMISSIONER DESIGNEE  KREITZER answered that  the aforementioned                                                               
scenario is a  concern, but that it is  not necessarily occurring                                                               
at present.  She emphasized  that the past accounting practice is                                                               
not  necessarily unfair  and  untrue, but  the  process could  be                                                               
better administered  through a cost  share plan.   She emphasized                                                               
that this process  has been in place  20 years and that  it is as                                                               
accurate as  possible, but  that she believes  a cost  share plan                                                               
provides a better method for administration of PERS.                                                                            
                                                                                                                                
CHAIR  HAWKER  relayed  his  understanding  that  the  accounting                                                               
mechanism  has been  used  with integrity  and  as accurately  as                                                               
possible.  He  suggested that the committee  consider whether the                                                               
current system remains the best policy.                                                                                         
                                                                                                                                
COMMISSIONER DESIGNEE KREITZER relayed she  does not know why the                                                               
past  system was  set  up like  it  is.   She  conveyed that  the                                                               
administration has  had discussions with  AML, and that  a result                                                               
of  those discussions,  there  was agreement  that  a cost  share                                                               
approach would be preferable to the present system.                                                                             
                                                                                                                                
8:34:21 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON noted it is common  for the state to have a                                                               
single manager  for funds.  He  charged that it is  imperative to                                                               
accurately determine  employer's unfunded liabilities to  be able                                                               
to  assign employer  contribution  rates.   He  noted  he is  not                                                               
adverse  to a  change for  policy reasons,  but sought  assurance                                                               
that   the   current   system    does   not   result   inaccurate                                                               
determinations of employer contribution rates.                                                                                  
                                                                                                                                
COMMISSIONER  DESIGNEE  KREITZER  offered that  persons  may  not                                                               
agree  with  the current  system,  but  that  does not  make  the                                                               
numbers wrong.   She went on  to say that because  of issues with                                                               
the current plan, it makes sense to change to a cost share.                                                                     
                                                                                                                                
8:37:12 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROSES asked  if part of the cost share  plan is an                                                               
attempt to  get to one contribution  rate for all employers.   He                                                               
suggested that  it may be  easier to allocate payments  to reduce                                                               
the system  liabilities if a  one-rate system is  established for                                                               
PERS.                                                                                                                           
                                                                                                                                
COMMISSIONER DESIGNEE  KREITZER answered that part  of the change                                                               
is designed to establish a  one-rate system for all employees and                                                               
that it  may indeed be easier  to use various payment  methods to                                                               
reduce the unfunded liabilities with a cost share system.                                                                       
                                                                                                                                
8:37:57 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROSES  asked how many  of the PERS  employers have                                                               
no tax  base, such  as the university  system or  school systems.                                                               
He  expressed  concern  regarding   how  much  of  the  suggested                                                               
allocation results  in a re-direction  of state funds,  since the                                                               
state funds some  employers that have no tax base.   He stated he                                                               
understands the  risk of not  enacting some measures to  help fix                                                               
the past  pension fund problems.   However, he expressed  that he                                                               
still has  some discomfort with  changes brought about  by Senate                                                               
bill  141,  but  ventured  that   he  understands  the  political                                                               
difficulties inherent in any attempt  to change the provisions of                                                               
Senate bill 141.  He said he  has concerns over attempts to fix a                                                               
system that  may not accomplish  all it was  intended to do.   He                                                               
noted  that  in  some  circumstances,  it  is  important  to  fix                                                               
problems in  current system  even if there  is a  possibility for                                                               
change in the future.                                                                                                           
                                                                                                                                
8:43:17 AM                                                                                                                    
                                                                                                                                
COMMISSIONER  DESIGNEE  KREITZER  responded   to  a  request  for                                                               
information by explaining  that there is an  exhibit titled "Cost                                                               
Share  Exhibits," which  lists the  effect  on various  employers                                                               
from  a change  to a  cost share  system.   [A copy  of this  was                                                               
provided  to the  committee  and is  on the  DRB  website].   She                                                               
explained  that  the first  pages  of  the exhibit  explain  what                                                               
happens if the  state changes to a cost share  system.  Under the                                                               
first scenario,  the state would  save about $36 million,  but it                                                               
would cost  the communities  about $52  million.   Therefore, she                                                               
considered how to hold employers  harmless from their fiscal year                                                               
(FY) 2007 to FY 08 rate.                                                                                                        
                                                                                                                                
8:44:31 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  FAIRCLOUGH  asked  about   the  situation  of  an                                                               
employer that  has overpaid  into the system  and opined  that an                                                               
employer that  had overpaid into  the system, such  as Anchorage,                                                               
would perhaps withdraw from the  system if its contributions were                                                               
not recognized.                                                                                                                 
                                                                                                                                
COMMISSIONER    DESIGNEE   KREITZER    replied   that    in   the                                                               
aforementioned scenario,  termination costs  for an  employer the                                                               
size of  Anchorage would  be fairly  costly.   She said  that the                                                               
cost share solution will require "some  give and take."  She said                                                               
that she believes that Anchorage is  a member of AML and is aware                                                               
of AML's  support of  the cost  share approach,  yet she  has not                                                               
heard from Anchorage.                                                                                                           
                                                                                                                                
8:45:36 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  expressed  concern  over  the  effect  of                                                               
calculating contribution rates  across the entire wage  base.  He                                                               
asked  whether the  calculations  provided  consider whether  the                                                               
changes in contribution  rates are based on the effect  of a cost                                                               
sharing  plan,  or  whether  they  are  based  on  re-calculation                                                               
against the  entire wage base instead  of just the DB  wage base.                                                               
He opined that  inclusion of the DCR wage base  would result in a                                                               
lower  contribution rate  based on  inclusion of  that wage  base                                                               
rather than a change to a cost share approach.                                                                                  
                                                                                                                                
COMMISSIONER   DESIGNEE   KREITZER   noted  she   could   address                                                               
aforementioned issue at a later date.                                                                                           
                                                                                                                                
8:48:32 AM                                                                                                                    
                                                                                                                                
CHAIR HAWKER  noted the  amount allocated to  an employer  in the                                                               
retiree reserve account does not  represent contributions made by                                                               
the  employer, rather,  it  is  a mechanism  used  to assign  the                                                               
account's assets.   He  suggested that mechanism  is at  issue in                                                               
the cost sharing proposal.                                                                                                      
                                                                                                                                
8:51:39 AM                                                                                                                    
                                                                                                                                
MS. MICAS explained  the current allocation system  from the time                                                               
an employer has no retirees  to the process whereby contributions                                                               
are made to the retiree reserve when an employer has retirees.                                                                  
                                                                                                                                
8:53:26 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE WILSON  requested clarification as to  when assets                                                               
move from the active to the retiree account.                                                                                    
                                                                                                                                
CHAIR  HAWKER  explained that  before  an  employee retires,  the                                                               
funds  attributable to  that employee  are placed  in the  active                                                               
employer asset  accounts.   When an  employee retires,  the funds                                                               
are transferred to the retiree reserve account.                                                                                 
                                                                                                                                
8:55:45 AM                                                                                                                    
                                                                                                                                
MS.  LEA explained  that  an annual  actuarial  accounting of  an                                                               
employer's  responsibilities  under  the  active  asset  accounts                                                               
determines  the normal  cost rate.   There  will also  be a  past                                                               
service  rate  assigned  if  the prior  year's  funding  was  not                                                               
adequate to  cover the employer's  responsibilities.  It  is this                                                               
past service  rate that creates  the liabilities,  she explained.                                                               
When  a  member  retires,  an actuarial  process  determines  the                                                               
present value of the potential  benefits the employee will accrue                                                               
during  his   or  her  remaining   lifetime.    That   amount  is                                                               
transferred  to the  retiree reserve  account,  and benefits  are                                                               
paid from that  account, she explained.  Benefits  are first paid                                                               
from the employee  account, which allows time  for the evaluation                                                               
process to  occur and for  the funds  to transfer to  the retiree                                                               
reserve  account.   She said  that under  a multi-employer  plan,                                                               
assets may be pooled for  expenses and benefits are considered an                                                               
expense.    At  that  point,  the funds  are  not  accounted  for                                                               
separately, she indicated.                                                                                                      
                                                                                                                                
8:58:00 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  WILSON  clarified  that   there  is  no  separate                                                               
accounting in  the retiree reserve  account, and  questioned what                                                               
factors are  considered to determine the  retiree reserve account                                                               
obligations.                                                                                                                    
                                                                                                                                
MS. LEA  agreed that when a  member retires, a valuation  is done                                                               
to determine  the costs associated  with that  retiring employee.                                                               
Each employer the employee worked  for then transfers the present                                                               
value  of  that employee's  liability  into  the retiree  reserve                                                               
account.  The  goal is that the transfer results  in full funding                                                               
of  the  benefits  due  during   the  lifetime  of  the  retiring                                                               
employee, she said.                                                                                                             
                                                                                                                                
8:59:15 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  WILSON surmised  that the  reason funds  were not                                                               
tracked in  the retiree  reserve account  is because  the payment                                                               
was designed to  fully fund the retiring  employee's benefits for                                                               
life.                                                                                                                           
                                                                                                                                
MS. LEA  agreed that explains  why the  funds are not  tracked in                                                               
the retiree reserve account -  the calculations are done prior to                                                               
the  funds being  transferred.   In response  to a  question, she                                                               
said that  she believes  that when  the retiree  reserve accounts                                                               
fall short it becomes part of the unfunded liability.                                                                           
                                                                                                                                
9:00:47 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  ROSES suggested  that those  in the  retired pool                                                               
are  generating  the unfunded  liability  due  to increased  life                                                               
spans and health care costs.   However, since the retirees do not                                                               
pay into  the system, the state  has to look to  active employees                                                               
and employers for funds to pay the unfunded liability.                                                                          
                                                                                                                                
MS.  LEA  stated that  in  general,  she  agreed with  the  above                                                               
statement.    She explained  that  the  presumption is  that  the                                                               
retiree  reserve account  assets will  be invested  so as  to pay                                                               
benefits.  She opined that  unforeseen factors can escalate costs                                                               
beyond what was predicted at the time of valuation.                                                                             
                                                                                                                                
9:02:22 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  ROSES  observed  that  an employer  that  has  an                                                               
unfunded liability is still liable  for the costs attributable to                                                               
its  retired employees  even if  it  has no  active employees  to                                                               
contribute to  the liabilities.  He  asked if part of  the reason                                                               
for proposing  a level payment  approach is  to help pay  for the                                                               
unfunded  liability of  past employees  even though  the employer                                                               
has no active employees.                                                                                                        
                                                                                                                                
MS.  LEA explained  the aforementioned  situation  occurs when  a                                                               
system has closed because at some  point an employer will have no                                                               
active employees.   If the rate is calculated across  both DB and                                                               
DCR salaries, it will provide a  mechanism for an employer to pay                                                               
their liability for all their retirees.                                                                                         
                                                                                                                                
9:04:26 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROSES  asked if employers  must pay for  the costs                                                               
of their  unfunded liabilities if they  decide to opt out  of the                                                               
PERS  so as  that  their  liability is  not  passed  on to  other                                                               
employees in the system.                                                                                                        
                                                                                                                                
MS. LEA replied that is how termination cost is calculated.                                                                     
                                                                                                                                
9:06:20 AM                                                                                                                    
                                                                                                                                
MS.  LEA  responded   to  a  question  by   explaining  that  the                                                               
contribution rate may change when  it is calculated on the entire                                                               
salary base, but the amount the employer owes does not change.                                                                  
                                                                                                                                
REPRESENTATIVE   SEATON  noted   that  even   without  employees,                                                               
employers have liability for their employee costs.                                                                              
                                                                                                                                
REPRESENTATIVE  WILSON offered  her belief  that loss  of revenue                                                               
sharing funds has negatively effected  the financial situation of                                                               
many municipalities.                                                                                                            
                                                                                                                                
COMMISSIONER   DESIGNEE  KREITZER   stated   she   is  aware   of                                                               
municipality  concerns  and  that  is   why  this  bill  and  the                                                               
technical  fix  bill  contain  hold  harmless  provisions.    She                                                               
indicated her  willingness to work towards  resolving the varying                                                               
issues of  each employer  without causing  financial harm  to the                                                               
state or municipalities.                                                                                                        
                                                                                                                                
COMMISSIONER  DESIGNEE  KREITZER  explained  that  an  employer's                                                               
retiree liabilities are calculated as  a percent of total retiree                                                               
liabilities.                                                                                                                    
                                                                                                                                
REPRESENTATIVE  WILSON   asked  about  the  situation   where  an                                                               
employer's account is short when an employee retires.                                                                           
                                                                                                                                
9:17:14 AM                                                                                                                    
                                                                                                                                
CHAIR HAWKER  suggested that this  complex subject may  be better                                                               
served  with  a  more  succinct presentation  detailing  the  key                                                               
points of this issue.                                                                                                           
                                                                                                                                
REPRESENTATIVE SEATON asked about potential state savings as set                                                                
forth in the fiscal note to HB 206.                                                                                             
                                                                                                                                
COMMISSIONER DESIGNEE KREITZER explained that Exhibit 5 of the                                                                  
Cost Share Exhibit addresses the issue of savings to the general                                                                
fund.                                                                                                                           
                                                                                                                                
[HB 206 was held in committee.]                                                                                                 
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being no further business before the committee, the House                                                                 
Special Committee on Ways and Means meeting was adjourned at                                                                    
9:23:56 AM.                                                                                                                   

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