HOUSE BILL NO. 78 "An Act relating to the Public Employees' Retirement System of Alaska and the teachers' retirement system; providing certain employees an opportunity to choose between the defined benefit and defined contribution plans of the Public Employees' Retirement System of Alaska and the teachers' retirement system; and providing for an effective date." 1:38:42 PM Co-Chair Foster noted that a new Committee Substitute (CS) work draft was before the committee. Co-Chair Schrage MOVED to ADOPT the proposed committee substitute for HB 78, Work Draft 34-LS0493\N (Wayne, 4/28/25). Co-Chair Foster OBJECTED for discussion. Co-Chair Foster asked to hear from his staff and Representative Kopp regarding the changes in the bill. BRODIE ANDERSON, STAFF, REPRESENTATIVE NEAL FOSTER, explained the CS. He explained that the CS contained one change that was addressed in two locations in the bill. He pointed to the Explanation of Changes in members' bill packets. He read the following: 1. Section 23 (page 14, line 16) and Section 76 (page 42, line 27) both were subsection (g): a. Adds new subsections that would reduce the Post Retirement Pension Adjustments (PRPA) to 50 percent for nonresidents ineligible for Permanent Fund Dividend (PFD), as the qualifications read on the effective date of the Act. b. This change is an incentive for retirees to stay in the state. Mr. Brodie elaborated that the reason the change was in two locations was due to a reference to Public Employees' Retirement System (PERS) in Section 23 and Section 76 reflected the Teachers' Retirement System (TRS). The change was made because it would align with the Gallagher actuarial report presented the previous day. He added that the 50 percent provision was in previous versions of the bill, and the actuary had assumed it was in the current version of the bill. 1:42:16 PM Co-Chair Foster interjected that one of the main purposes of the change was it would reduce the amount of necessary funding. REPRESENTATIVE CHUCK KOPP, replied that the change would reduce the cost of the bill by $70 million from FY 2027 through FY 2039. Co-Chair Foster WITHDREW the OBJECTION. Representative Stapp OBJECTED. He thought there were numerous changes in the CS. He pointed to places in the bill he deduced had also changed. 1:43:58 PM AT EASE 1:46:02 PM RECONVENED Mr. Anderson replied that the only changes that were made in the version were outlined in the explanation of changes and some renumeration. He offered to submit a redline version to illustrate his answer. Representative Stapp WITHDREW the OBJECTION. Representative Bynum OBJECTED. A roll call vote was taken on the motion. IN FAVOR: Stapp, Galvin, Jimmie, Allard, Hannan, Josephson, Schrage, Foster OPPOSED: Tomaszewski, Bynum, Johnson The MOTION PASSED (8/3). 1:48:49 PM Representative Hannan asked if the fiscal notes had been written to the original or the updated CS. Mr. Anderson replied that they were written to the recent actuarial report, and they should be reflective of the CS. Representative Bynum cited the language regarding qualifying for the PFD. He asked if the qualification for the PFD was required by the state retirement system. Representative Kopp answered that he had struggled with the issue. He pointed out that 40 percent of state retirees moved to warmer climates after retirement and whether they should receive the inflation proofing PRPA as retirees who remained in state. The bill that removed the penalty was introduced but Mr. Kershner [David J Kershner, Principal, Consulting Actuary, Gallagher] had inadvertently assumed the penalty was included in the bill. The fiscal notes accurately reflected the CS. He furthered that the PFD eligibility standard was the standard that proved state residency. The language tied the provision to a standard in law. Representative Bynum offered that Alaska currently had other qualifiers to be a resident without meeting the PFD standard. He deduced that it did not take into consideration travel, traveling for medical need, etc. He observed that many residents in the state did not qualify for the PFD. He found it disappointing that the bill would discriminate against people who provided lifelong service to the state and diminish their retirement because they were not going to be able to qualify for the PFD. He would likely try to fix the issue during the amendment process. Representative Hannan asked if the Cost of Living Adjustment (COLA) was different than the PRPA adjustment. Representative Kopp replied affirmatively. He reported that the bill lacked a COLA that was tied to housing, energy, and transportation costs. The prior Defined Benefit (DB) tiers do have a 10 percent COLA, which was not present in the bill because of the cost. He delineated that the post retirement pension adjustment was simply inflation proofing dollars. He reiterated that the provision saved the state $70 million from FY 27 through FY 39 by allowing the 50 percent reduction if someone no longer met residency requirements. He addressed Representative Bynum points regarding the PFD residency standard and indicated that it allowed for medical and other travel. 1:53:45 PM Representative Hannan understood that nothing in the bill diminished any earned benefit a DB member would be receiving. Representative Kopp agreed with her statement. He explained that a reduced PRPA would not diminish anyone's base retirement benefit. Co-Chair Josephson shared that his Mother was a state DB retiree who moved out of the state later in life to New Hampshire and suffered the loss of the 10 percent COLA. He noted that the PRPA adjustment was in alignment with the loss of COLA. He remarked that the PFD standard had a similar standard. The PRPA reduction was not novel, it was the same for COLA. Representative Kopp agreed with Co-Chair Josephson's statements. He reminded the committee that the COLA cost hundreds of millions, whereas the PRPA adjustment cost a much smaller amount. However, they were the same principle philosophically. Co-Chair Foster noted the committee had to get to the House floor session. Co-Chair Foster set the amendment deadline for HB 78 for Monday, May 5, 2025, at noon. Representative Stapp objected and asked for a delay in the deadline until Tuesday. Co-Chair Foster set an amendment deadline for Tuesday May 6, 2025, at 5:00 p.m. 1:57:39 PM RECESSED 4:28:44 PM RECONVENED Co-Chair Foster noted the committee previously adopted the CS for the bill. He asked members if there were additional questions. Representative Stapp asked about the fiscal notes and indicated there was a discrepancy between the prior fiscal note and the new fiscal note. Co-Chair Foster asked him to identify which fiscal note he referred to. Representative Stapp pointed to the new fiscal impact note dated April 15, 2025, that showed $40.6 million in FY 2027 and none in FY 2026, versus the note it replaced had a $17.4 million appropriation in FY 2026. He asked about the material difference. Representative Kopp answered that the prior fiscal note was a House Finance Committee fiscal estimate prior to receiving the valuation from Gallagher and was no longer valid. He deferred to Mr. Anderson for further answer. Mr. Anderson replied that the notes created by the House Finance Committee were considered null and void after receipt of the Gallagher analysis. He identified the two new relevant fiscal notes. One fiscal impact note was for the Department of Administration allocated to Retirement and Benefits dated February 7, 2025, and reflected the administrative cost of the new retirement program. He noted that the other fiscal impact note for Various allocated to All Branches lacking an OMB component number [dated April 15, 2025, written by DOA] was the other relevant fiscal note. 4:35:05 PM Representative Stapp asked why the new note did not include an appropriation for FY 26. Mr. Anderson believed it was because the program would be developed in FY 26, and the program would begin in FY 27. Representative Bynum remarked that the bill's effective date was July 1, 2025, on page 52, line 17. He did not know where the provision saying it would not be implemented until FY 2027 was in the bill. Representative Kopp answered that the effective date of the bill gave the administration permission to set up the program. He detailed that election into the plan was over an 180 day period. He suggested asking the department to provide an explanation. He guessed that it would take DOA some time to stand up the program in the first year, which lowered initial costs. He referenced the new Various fiscal note written to the actuarial report. He cited the fiscal note and Gallagher analyses stating that the plan started off fully funded in FY 26 until FY 27. The Gallagher analysis projected net total increases to the PERS and TRS state contributions from FY 2027 to FY 2039. 4:38:16 PM Representative Bynum was trying to determine where in the bill it specified the initial cost would be delayed. He noted that an employee may opt into the program immediately and there were costs associated with that. He deduced from the answer given by Representative Kopp that participants would need to wait until July 2026 to become members of the plan. Representative Kopp clarified that there was no delay in the implementation of the plan. He restated that the Division of Retirement and Benefits, DOA, could better explain the fiscal note. He reminded the committee that new participants had six months to decide whether to join the plan, which was halfway through FY 26 before the election period ended. Mr. Anderson clarified that he did not intend to use the word delay" in his answer. He did not mean to cause confusion. 4:40:20 PM Co-Chair Foster asked if it was possible to hear from the Division of Retirement and Benefits. Representative Bynum asked which fiscal notes were no longer valid. Representative Kopp repeated the answer from earlier in the meeting. Mr. Anderson interjected and noted the control codes for the voided notes. Representative Tomaszewski cited Section 23, page 14 of the legislation and asked about the Alaska Retirement Management Board (ARMB) ability to terminate a reduction made under the subsection. He asked if it was individually or for the entire plan. Representative Kopp replied that it applied to all members of the plan. He added that if the plan became less than 90 percent funded the ARMB could make an adjustment. Representative Tomaszewski asked about the eligibility requirements for a PFD. He ascertained that if a person lived out of state, they may only receive half of their COLA. Representative Kopp replied affirmatively. Representative Tomaszewski asked if any other states did so and if they had run it by Legislative Legal Services. He asked if it was constitutional to penalize a person living in another state. Representative Kopp answered that it was constitutional. He elaborated that any retirement plan could be structured in any way as long as members were aware of the plan's specifics. However, once a person joined a retirement plan the benefits could not be diminished. He reiterated that if retirees chose to move out of state, they would lose 50 percent of their inflation adjustment [PRPA]. 4:46:01 PM Representative Hannan noted that under current DB plans retirees lost their COLA if they were gone for more than 90 days; therefore, the Permanent Fund Dividend eligibility option was looser than the proposed plan. Representative Bynum reminded the committee that there was a difference between a COLA from Tiers 1, 2, and 3 and PRPA in HB 78. He pointed out for the record they were not discussing a COLA but were deliberating about the PRPA. Representative Kopp agreed with the statement. He reiterated that a COLA was an entirely separate matter reflecting the cost of living. Representative Hannan interjected that she did not intend to confuse or conflate the two. She wanted to provide an example of the constitutionality of including a provision based on residency and that it already did exist in the DB system. Co-Chair Foster thanked Representative Kopp and Mr. Anderson. Representative Kopp provided closing remarks. He referenced the actuary's testimony from the previous day. He relayed that the plan was structured so soundly it would take a "remarkable event" to drop the plan liability under 90 percent. The actuary did not see the state incurring any additional liabilities because of the plan's structure or unseen event to spur the need to activate a PRPA. He believed that the plan was remarkable and was structured to keep the costs down. The heart of the bill recognized that public workforce stability was key to the economic viability of the state. The cost of the bill was about $600 million over the next 14 years, totaling about $50 million per year. He shared that the burn rate of recruitment, training, and retention losses costs were over $76 million per year. He felt that the legislation was a net revenue positive for the state. The bill would establish a way to address a real structural problem. He used a fishing analogy to describe that state's problem of vacancy rates in education, public safety, and transportation "compromising the vitality of the state." The structural risk was that the public service agencies "were overtaxed and underperforming and in many cases completely failing to deliver many of the services that people depended on." He mentioned the state's out migration creating a "toxic narrative" about the state. He noted that the governor's Recruitment and Retention Task Force reported that the state experienced a $20 million burn rate just for the loss of teachers alone. He believed that the plan was imminently affordable and attractive enabling the state to turn towards a more attractive and competitive place to live. 4:52:32 PM HB 78 was HEARD and HELD in committee for further consideration.