HOUSE BILL NO. 375 "An Act relating to the retirement benefit liability account and appropriations from that account; relating to deposits of certain income earned on money received as a result of State v. Amerada Hess, et al., 1JU-77- 847 Civ. (Superior Court, First Judicial District); and providing for an effective date." Representative Hawker MOVED to ADOPT Amendment 2, labeled 24-LS1467\L, which would insert on page 3, line 13, the words "85% of the employer's past service cost rate during the fiscal year that precedes the distribution fiscal year under (c) of this section by three fiscal years." JACQUELINE TUPOU, STAFF, REPRESENTATIVE WEYHRAUCH, explained that expediency is a key component of the bill. There is a concern that all communities be treated fairly under this legislation. Amendment 2 is a blanket amendment for all communities regarding the formula previous to three years ago. 8:59:20 AM JEFF JOHNSON, FAIRBANKS, explained that on June 30, 2001, the net pass on unfunded liability was approximately $11.3 million. On June 30, 2004, it was bumped up to $95 million. It is predicted to go up by $15 million in 2005. There has been a decline in the number of employees that participate in PERS. He explained that the bill favors large employers, not those with past service costs. He related a scenario where the formula would equal zero for Fairbanks. He proposed a way for the city to solve their debt problem by transferring the $11 million from June 30, 2001, to a separate account, which is funded from general state revenue sources. 9:02:50 AM Representative Kelly recalled when the utility in Fairbanks was sold, Pat Cole questioned the impact of the sale on the system. He asked Mr. Johnson if it was his understanding that this situation would not happen. Mr. Johnson said that is correct. Had the Division of Retirement closed out the MUS, which was treated as a separate account at the time of the sale, there would not have been a problem. He related that in 2001, the city owed $11 million. He deemed it reasonable to have to pay back that amount. 9:05:45 AM Representative Weyhrauch stated that how this would work depends on the administration, so he has tried to make the language workable. 9:05:59 AM GARY BADER, CHIEF INVESTMENT OFFICER, TREASURY DIVISION, DEPARTMENT OF REVENUE, explained that each year gains and losses of the retirement plan are calculated. The loss, in this case, is amortized over 25 years. The whole system experienced losses since the year 2000, first, because of changes in health care assumptions and experience in the plan, secondly, because of investment returns, and thirdly, because many of the assumptions were changed in terms of estimating future costs. All PERS and TRS employers were caught in these changes. Fairbanks had additional impacts. They made changes based on what they believed to be reliable information, and reduced the number of their PERS employees. The rate escalated to a 125 percent past service rate. The Alaska Retirement Management (ARM) Board proposed to the House Finance Committee that TRS receive 85 percent of the past service cost rate. It used a different approach to explain how the Committee might allocate funds to repay employers under PERS. It proposed that no community would get more than the average of all PERS employers taken together. Mr. Bader shared that there is another approach, the one in Amendment 2, which is similar to the TRS approach. The ARM Board has several goals: that the systems be fully funded within 30 years, that it not cause severe disruption to public services, that the state should participate in the solution, that accelerated contributions from employers should be rewarded, that the state support should be equitable, and that it should not attempt to subsidize federally-funded positions. Amendment 2 is consistent with those goals. It would take out the calculation based on past service rate, less 5 percent or the average past service rate, whichever is less, and replace it with 85 percent of the community's past service rate. This would have an additional cost to the system, but would be equitable. The distribution to Fairbanks would be closer to $5 million more than the $1 million currently available. 9:10:37 AM Co-Chair Meyer questioned the 85 percent figure. Representative Kelly requested more time to look at the amendment and to get a reaction from Fairbanks. Co-Chair Meyer agreed. 9:11:25 AM Representative Weyhrauch agreed with allowing more time. He noted that people have to be comfortable with this policy change. Representative Hawker concurred, but said he is prepared to vote yes on the amendment at the request of the sponsor. He stated that the bill is a critical step toward getting rid of the $7 billion unfunded liability. He pointed out that there are many unresolved complications, but he suggested that time is running out. Representative Weyhrauch related that this is not a silver bullet, but a way to deal with the problem. The bill could be changed later on. He said the empirical analysis has to end at some point. HB 375 does not require a huge appropriation this year, but is putting policies in place. Co-Chair Meyer said he is prepared to vote yes on Amendment 2, but would allow for Fairbanks' input. Representative Weyhrauch asked for a vote. Representative Holm agreed that the bill is a good vehicle for the state to resolve the retirement past service cost liability. Representative Kelly said he would get Fairbanks' input today. 9:16:02 AM Representative Weyhrauch said the message has to be that the burden is on [Fairbanks] because the legislature has done its job. Representative Stoltze WITHDREW his objection. Representative Weyhrauch OBJECTED. He suggested that Fairbanks examine the advice that they received in the past. He WITHDREW his objection. There being NO further OBJECTION, Amendment 2 was adopted. HB 375 was heard and HELD in Committee for further consideration. 9:18:04 AM