HOUSE BILL 107 An Act making appropriations for qualified regional seafood development associations, for investigation and litigation relating to the public employees' retirement system and the teachers' retirement system, and for a special advisory election; and providing for an effective date. Co Chair Chenault noted that the Committee would hear testimony, but would not entertain any amendments at this meeting. KAREN REHFELD, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET, provided testimony on the legislation. DEPARTMENT OF COMMUNITY & ECONOMIC DEVELOPMENT Office of Economic Development Regional Seafood Development Tax pass-through to the Copper River/Prince William Sound Marketing Association. The appropriation was inadvertently omitted from the FY07 budget bills. The 1% tax assessment generated $152,464 during calendar year 2005, which was to be appropriated to the association as of July 1, 2006. $152.4 Pass Through Ms. Rehfeld noted that the request is for pass-through funds for the Copper River/Prince William Sound Marketing Association, who was the first group to organize as a regional seafood development association. The Department of Revenue collected the tax but there was not an appropriation to flow those collected taxes back to the development association. Representative Hawker pointed out that the request had been an oversight. Ms. Rehfeld agreed and clarified that the appropriation language is now included in the FY 08 budget. Representative Thomas advised that the funds were monies used for marketing last year and is now desperately needed by that community. 3:06:07 PM DEPARTMENT OF LAW Civil Division, Labor & State Affairs Funding for the investigation and proposed litigation related to actuarial services received by the State of Alaska. The investigation would be completed during FY07, and the proposed litigation is contemplated to begin before the end of the FY07. The amount of the appropriation is the estimated costs to complete the investigation and take the case from inception through trial. $12.0 million Department of Law/PERS/TRS Ms. Rehfeld noted that the request was in the amount of $12 million dollars to be used for the Department of Law's proposed litigation against actuarial services provided to the State. She observed the estimated amount of unfunded liabilities for the retirement system. It is complicated litigation; the anticipated time of the case is approximately two years. 3:07:51 PM Representative Gara asked for an overview of the litigation. MICHAEL BARNHILL, ASSISTANT ATTORNEY GENERAL, LABOR & STATE AFFAIRS SECTION, DEPARTMENT OF LAW, explained that there was not the expertise within the State of Alaska, Department of Law for actuarial malpractice suits. In 2006, the Department received a request from Senator Hollis French asking for a review of the matter. Money was received for outside counsel. He noted that $400 thousand was appropriated & the Paul Weis Law Firm out of New York was hired, a firm that has taken such cases to a jury verdict. The Firm advised the State Department of Law that there are actually valid claims against Mercer. The Department of Law is now seeking funds to pursue with that legal case. The Department believes that these are extraordinary times and it is not an ordinary case. 3:13:05 PM Representative Gara wanted reassurance that the State is not spending "bad money". He thought that the defense will be that "even if they failed to tell the State to place the money into the pension fund, there was no harm, because the State kept those funds". 3:14:39 PM Mr. Barnhill acknowledged the question, noting that he could not comment in detail. He acknowledged that such arguments previously had been raised. He acknowledged there are not a lot of cases, however, there is some case law to support the claim. 3:16:29 PM Representative Gara advised that there are differences between the two cases referenced by Mr. Barnhill, observing that the previous case did not go retroactively after the funds. In the State of Alaska's case, the funds remained or were spent in other categories. 3:17:32 PM Mr. Barnhill did not agree with the characterization of the State's situation. There are 160 participating employers & many school districts in the Teacher's Retirement System (TRS). Representative Gara acknowledged that a portion could not be accessed and wondered if there was sufficient grounds to proceed. Mr. Barnhill advised that he was "uncomfortable" discussing the defense for the State of Alaska. 3:19:44 PM Mr. Barnhill reiterated that good arguments could be made to support the State's claims. 3:20:07 PM Representative Hawker pointed out that the funding source was the pension trust assets for the Public Employees Retirement System (PERS) and Teacher's Retirement System (TRS). Mr. Barnhill stated that the $400 thousand dollars came from the PERS & TRS Trust as will the requested appropriation. He was confident that the fund source was appropriate and that the Alaska Retirement and Management (ARM) Board concurs. Representative Hawker questioned if there is an argument that the Trust itself did not cause its own injury, but was caused by administrative decisions made outside the Trust. Mr. Barnhill acknowledged that the Trust did not create the injury. 3:22:41 PM Representative Hawker questioned if the funding source could be questioned. Mr. Barnhill reiterated that the fund source was appropriate. Representative Hawker asked if $12 million dollars would be sufficient to try the case. Mr. Barnhill estimated the costs to litigate the case to run between $10 - $15 million dollars. 3:23:37 PM Representative Gara asked if the ARM board approves the expenditure from the Trust. Mr. Barnhill stated that they have approved the request. Representative Gara inquired if it was possible for the funds to come out of the General Fund and if the State wins, then place the proceeds into the pension fund. Mr. Barnhill emphasized that this case was "not a lark". He said since the Trust is the recipient, it is an appropriate funding source. He added that he would be remiss to not pursue recovery of the damages. 3:25:59 PM Representative Gara stressed that the Administration is pursuing the suit with someone else's money [State employees]; it would be a stronger statement to back it with its own General Fund money. He noted that a contingency fee could be negotiated at a high rate. He inquired if the case had been put out for a competitive biding process. Mr. Barnhill advised he has had experience with similar cases. Contingency fees have been negotiated around 8 to 8.5 percent in other cases. He added that some law firms operate on a contingency fee. He stated it would be preferable to pay on an hourly fee basis. Contingency fee agreements have been negotiated, but they were not found to be as beneficial as the hourly fees. Fees could double or triple over the hourly rate. The issue remains whether to pay up front or in the end. 3:30:28 PM Representative Thomas requested that further discussion be held in executive session or individual meetings with the attorney, Mr. Barnhill. 3:31:14 PM Representative Gara pointed out that "contingency" representation is one of the measures regarding whether a law firm believes there is a good case; he asked if any firms agreed to take the case on a contingency base. Mr. Barnhill responded that at least one firm had offered. 3:32:10 PM Ms. Rehfeld asked that the Legislature consider changing the effective date for an appropriation made in Section 2, from February 16, 2007 to November 1, 2006. That change would allow the Administration to pay a couple bills that occurred on the investigation portion of the supplemental. Co-Chair Chenault said okay. 3:32:52 PM OFFICE OF THE GOVERNOR Elections Funding for the costs associated with the April 3, 2007, special advisory election required by ch.1, FSSLA 2006, on the subject of employment benefits for same- sex partners of public employees and retirees. $1.2 million General Funds Ms. Rehfeld reviewed Section 3, pertaining to a special advisory election on April 3, 2007. She pointed out that there was no fiscal note or appropriation accompanying the legislation. At this point, the Division has incurred costs for printing of ballots in preparation for the election. Representative Gara asked about the high cost of the election. WHITNEY BREWSTER, DIRECTOR, DIVISION OF ELECTIONS, noted that the Municipality of Anchorage (MOA) does conduct a rd special election also on April 3. No final agreement has been made regarding workers that might be jointly shared. She acknowledged that no other municipality holds an election in April outside of Anchorage. HB 107 was HELD in Committee for further consideration.