CS FOR SENATE BILL NO. 180(FIN)(efd fld) "An Act implementing pay differentials based on geographic areas for certain state employees and for members of the Alaska State Defense Force; relating to cost-of-living differentials for state aid to municipalities." MARILYN WILSON, STAFF, SENATOR DONLEY, testified in support of the legislation. Ms. Wilson read the sponsor statement into the record: Committee Substitute for Senate Bill 180 adopts the most recent study to determine geographic differential payments for cost-of-living differences paid to state employees who are not union members. This legislation adopts the most current geographic differential report. The current statutory formula has not been updated since June 1976 and unfairly discriminates against some state employees while unfairly benefiting others. All union state employees are already under the new formula based on the most recent 1995 study. A similar change in law was passed by the legislature in 2000. That legislation contained other changes effecting public employees and was vetoed by the governor. This bill does not contain the provisions the governor cited as the reason for his veto of the 2000 bill. The geographic differential calculation utilizes a percentage above a specific measurement baseline. In Alaska, Anchorage is the only federal measurement of the cost-of-living. Therefore, Anchorage is used as the baseline measurement for determining the cost-of-living in the various Alaska election districts and "out of state" locations. This legislation will affect employees in the executive branch of government in partially exempt service or not covered by union contract, and members of the Alaska State Defense Force whenever they are called to active service. Committee Substitute for Senate Bill 180 effects employees hired on or after the effective date. Current employees will remain under AS 39.27.020, even if they leave and return to state employment after AS 39.27.02 1 goes into effect. Committee Substitute for Senate Bill 180 purposely holds harmless other programs that use these statutory sections for calculation of revenue sharing cost-of- living adjustments. It also makes no change to the current differential applicable to state employees who work in another state. Committee Substitute for Senate Bill 180 will ensure all new state employees receive fair pay adjustments based on a new fairer cost-of-living analysis. Fiscal Notes indicate that immediate savings in FY 03 will be approximately $55,000, increasing to $370,000 by FY 08. Co-Chair Williams provided members with proposed committee substitute, work draft 22-LS0324/R, 5/10/02 (copy on file). MIKE TIBBLES, STAFF, REPRESENTATIVE WILLIAMS, provided information on the legislation. He explained that the new cost of living differential would only apply to new employees. A new employee in an area where the cost of living differential was higher would receive the higher cost, but the old employee would not. It would be possible for an employee who had been working in an area for several years to receive less than a brand new employee. The proposed committee substitute resolves the equity issue by providing that everyone gets the old cost of living differential unless that area went up; then everyone would receive the increase. Co-Chair Mulder MOVED to ADOPT work draft, 22-LS0324\R, 5/10/02. Representative Croft OBJECTED. Representative Croft questioned if the change would depend on the two employees staying in the same area. Mr. Tibbles noted that the new schedule applies to all employees. The old schedule would apply to old employees only if it is better. There being NO OBJECTION, it was so ordered. Ms. Wilson explained that the issue was brought up in the House State Affairs Committee. She provided members with Amendment 1 (copy on file). She observed that the intent is to save money. The amendment would exempt election districts 11, 14, 16c and 17 from the provisions of the legislation. These areas would receive the current cost of living differential. Co-Chair Williams noted that the amendment had not been moved. Co-Chair Williams OBJECTED. Representative Croft questioned why 1961 election districts were used. Ms. Wilson responded that they are the election districts that were used in statute. She clarified that Kotzebue, Bethel, and Barrow would be affected. Representative Harris WITHDREW Amendment 1. ALISON ELGEE, DEPUTY COMMISSIONER, DEPARTMENT OF ADMINISTRATION, testified in support of the legislation as and effort to bring equity to the state employee salary schedule. She explained that the last comprehensive cost of living differential study was done in 1985. The legislation incorporates the salary schedule for non-covered employees. She stated that the Administration would support the committee substitute, but not the amendment proposed by the sponsor. The four districts that would receive increases under the proposed committee substitute are: Kotzebue, Kodiak, Bethel, and Barrow. In response to a question by Vice-Chair Bunde, Ms Elgee explained that, under the legislation, the existing employees would be protected from any loss of pay as long as they remain continuously employed; this is similar to the method used under the collective bargaining agreements. Vice-Chair Bunde summarized that there is equity between union and nonunion employees, but inequity between new hires and old. TAPE HFC 02 - 108, Side B  Representative Croft questioned how the amendment would affect the four areas that were identified for increases: Kotzebue, Kodiak, Bethel, and Barrow. Ms. Elgee explained that a new differential would be adopted but not applied to the four election districts, which would increase under the study. Collective bargaining agreements use the same differentials. The legislation would apply the results of the study, which determined that there should be an increase in the four areas. Co-Chair Mulder questioned if the amendment would result in greater savings to the state of Alaska in the long or short term. Ms. Elgee explained that the legislation would result in a savings of approximately $26 thousand dollars for the executive branch. There would be an initial cost of $8 thousand dollars under the proposed committee substitute. She clarified that the proposed committee substitute would be cost neutral in the first year. The cost savings by the third year would be almost identical to the House State Affairs version. By FY08 there would be a savings of $134 thousand dollars in the executive branch. The amendment would retain the old differential in districts 11, 14, 16c and 17 and result in greater savings. She observed that the amendment would provide greater savings in both the long and short terms. Co-Chair Mulder provided members with Amendment 2 (copy on file). Ms. Elgee clarified that the proposed committee substitute would grandfather in existing employees in districts that would see a decrease in the cost of living differential. These employees would continue to get cost of living adjustments and merit increases as if the new differential had not been adopted. Amendment 2 would freeze those employees at their July 2002 salary level until such time as the cost of living adjustments applied to their salary in conjunction with the new differential was equal or greater than the salary that they had been frozen at. The amendment would apply to executive branch employees in Fairbanks, Palmer, Kenai, Sitka, and Dillingham. There are 60 employees in Fairbanks, 15 in Palmer and, 10 in the Kenai. Co-Chair Mulder observed that the amendment would establish a floor until they grew into the floor. Then they would grow with the floor. He questioned the savings. Ms. Elgee acknowledged that the savings would be greater than the fiscal note and stated that the department would have to recalculate the savings. Representative Lancaster asked if employees transferred in and out of the four areas. Ms. Elgee noted that personnel transfers occur. The majority of the non-covered employees in the executive branch are with the Department of Law or Alaska Public Defenders Agency. CHRIS CHRISTENSEN, STAFF COUNSEL, ALASKA COURT SYSTEM, noted that the legislation would affect some employees positively and some negatively. He observed that 240 court employees would be affected. He observed that 170 employees work in communities in which the differential would be reduced and 70 work in communities in which the differential would be increased. He stressed that the union employees receive a 42 percent differential in rural areas such as Barrow. The court non-union employees are being paid a 31 percent differential. He noted that the previous version proposed to pay new employees more than existing employees. He pointed out that this would have resulted in cases where range 12 supervisors would be paid less than new range 10 employees. The previous senate version would have saved the Alaska Court System $28 thousand dollars in the first year and $235 thousand dollars by year six. The proposed committee substitute would not start saving money until year three. The first year would cost $70 thousand dollars; the second year it would save $15 thousand dollar; it would save $40 thousand dollar in year three; and over $200 thousand dollars by year six. The proposed committee substitute would treat all employees fairly by grandfathering existing employees. Vice-Chair Bunde observed that there would be an urban/rural fairness issue. Mr. Christensen acknowledged the urban/rural fairness issue but observed that new employees know what they are getting when they take the job. Tiered systems are not unusual. The Senate version would reduce the salaries of existing employees. In response to a question by Representative Croft, Mr. Christensen observed that Amendment 1 would carve out four rural areas that would have received the greatest increase. He pointed out that the sponsor statement indicated that the intent was to treat employees fairly, but Amendment 1 would discriminate against employees by continuing to pay certain employees too little. Mr. Christensen referred to Amendment 2. He summarized that the intent of the amendment is to make sure that existing employees would continue to get the new differential, in an area where the geographical differential would go down, but would not be entitled to COLA's or merit increases until they catch up. The provision would not apply to internal promotion; the provision would only apply to longevity and COLA increases. PAUL LYLE, FAIRBANKS, testified via teleconference in support of the committee substitute. He urged the Committee not to adopt Amendment 1, which would freeze their pay. He maintained that the non-covered employees are already behind in their pay. He stressed that it would mean that many in state service would not receive another pay increase during their employment. He stated that the committee substitute would be a fair treatment of employees. JOHN ATHENS, FAIRBANKS, testified via teleconference in support of the committee substitute. He observed that the differential change is based on a 1985 study by the Department of Administration. He felt that it would be unfair to reduce salaries of career state employees based on a 1985 study. Representative Whitaker observed that he would object to the amendments. Co-Chair Mulder MOVED to ADOPT Amendment 2, 22-LS0324\R.1, 5//10/02. He noted that Fairbanks has a 15 percent COLA, which he thinks is unjustified. The new COLA is 4 percent. He felt that it would be fair to hold those employees to the existing COLA until they reach the floor. He observed that the legislation would not generate real savings without the amendment. Representative Davies argued against the amendment. He observed that the savings would be delayed for the first couple of years, but that the full savings would be realized as employees retire. He noted that employees have been hired based on a certain pay rate and argued that it is not fair to change the amount after employment. He emphasized that employees have made financial commitments based on the anticipation of their pay. He spoke in support of the grandfather provision of the employees. Representative Whitaker spoke against the amendment. Representative Croft noted that the grandfather provision would fade out through attrition. He questioned if the data is really based on a 1985 study. Ms. Elgee acknowledged that the last full differential study was in 1985. She observed that similar legislation has been introduced every year. Representative Croft stressed that the data is not good enough to justify Amendment 2. Vice-Chair Bunde spoke in support of the amendment. Co-Chair Mulder argued that employees do not base their finances on anticipated raises or COLA increases. He pointed out that COLA's are adjusted periodically. He maintained that it would be fair to hold the floor. Representative Davies argued in opposition to the amendment. He maintained that the fairest method would be to protect current employees and set up a standard for those that are hired with the understanding [of the new differential]. A roll call vote was taken on the motion. IN FAVOR: Lancaster, Moses, Bunde, Williams, Mulder OPPOSED: Whitaker, Croft, Davies, Harris, Representative Foster and Hudson were absent from the vote. The MOTION PASSED (5-4). Co-Chair Mulder MOVED to report HCS CSSB 180 (FIN) out of Committee with the accompanying fiscal note. Representative John Davies OBJECTED. Representative Croft stressed that the legislation is based on 1985 data, which could result in radical different calculations. He maintained that it would be appropriate to do another study and implemented it quickly. Representative Lancaster stated that he has a philosophical problem with COLAs. Vice-Chair Bunde spoke in support of the legislation. He observed that the cost of living in Anchorage is no longer significantly higher than other west coast cities in the United States. Representative Davies spoke in opposition to the legislation. He stressed the inequities and maintained that it would be challenged in court. Co-Chair Mulder argued in support of the legislation. He stressed that the numbers still pertain and that the intent is to save money for the state. Representative Davies stressed that the primary reason for the COLA is to provide equity. The savings to the state of Alaska is only $300 thousand dollars. He did not think that the denial of someone's pay increase for the next five years based on unsubstantiated data would stand up in court. Co-Chair Mulder pointed out that the legislation protects rural Alaska. A roll call vote was taken on the motion to move CSSB 180(FIN)(efd fld) from Committee. IN FAVOR: Moses, Bunde, Williams, Mulder OPPOSED: Lancaster, Whitaker, Croft, Davies, Harris, Representative Foster and Hudson were absent from the vote. The MOTION FAILED (4-5). CSSB 180(FIN)(efd fld) was heard and HELD in Committee for further consideration.