HOUSE BILL NO. 47 "An Act requiring each municipality with a population that decreased by more than 25 percent between 2000 and 2010 that participates in the defined benefit retirement plan of the Public Employees' Retirement System of Alaska to contribute to the system an amount calculated by applying a rate of 22 percent of the total of all base salaries paid by the municipality to employees of the municipality who are active members of the system during a payroll period; reducing the rate of interest payable by a municipality with a population that decreased by more than 25 percent between 2000 and 2010 that is delinquent in transmitting employee and employer contributions to the defined benefit retirement plan of the Public Employees' Retirement System of Alaska; giving retrospective effect to the substantive provisions of the Act; and providing for an effective date." 9:16:41 AM Co-Chair Neuman MOVED to ADOPT the proposed committee substitute for HB 47 (FIN), Work Draft (29-LS0285\I). There being NO OBJECTION, it was so ordered. Co-Chair Thompson queried the changes in the committee substitute. BRODIE ANDERSON, STAFF, REPRESENTATIVE STEVE THOMPSON, relayed the changes to the bill. He stated that there was a title change to conform to the changes made within the bill. He shared that the bill added a new Section 1, and the sponsor will explain the new section. He relayed that the CS deleted the old Section 3, which had a retroactive clause. He stated that the CS added a new Section 4, and the sponsor was prepared to explain that new section. REPRESENTATIVE NEIL FOSTER, SPONSOR, indicated his staff would be presenting the bill. PAUL LABOLLE, STAFF, REPRESENTATIVE NEIL FOSTER, reviewed the bill. He looked at Section 1, page 1, line 12, which was the new subsection under 39.35.610 allowing the administrator to determine the rate of assessed interest. He stated that Section 2 was the old Section 1. He relayed that Section 3 added a reference to the new subsection that was created in Section 4. He shared that Section 4 allowed for the administrator of Public Employees' Retirement System (PERS) to assess an interest rate at a lower value than otherwise dictated in the section, if the employer was a municipality who had lost more than 25 percent of their population between the 2000 and 2010 census. Representative Munoz queried the issue of a community regaining its population. Mr. Labolle responded that it would have to be done through additional legislation. 9:20:36 AM Co-Chair Neuman asked about the migration from rural communities. Representative Foster responded that, overall, there were some small migration numbers from rural to urban areas. He remarked that Galena had a major migration out of the area, because of the relocation of the military base. Mr. Labolle agreed that the military base was relocated from Galena. He stressed that the legislation was specified to those communities who lost population from the 2000 to 2010 census. Therefore, future population loss would not be affected by the confines of the legislation. He pointed out that the census affected Galena, Pelican, Atka, St. George, and Anderson. He explained that St. George and Anderson did not have any PERS employees, so they were not affected by the legislation. He deferred to the department to explain why Pelican and Atka were not affected by the legislation. Representative Guttenberg noted that the bill's language was permissive, and not required. He wondered if that was the intent of the legislation. Mr. Labolle replied in the affirmative. He furthered that the intent of the bill was to allow for negotiation. The original version of the bill had a retroactive effective date, and changed the delinquency rate in statute for affected communities. It was determined that there should be negotiation between the administrator of the program and the affected employer. Representative Guttenberg wondered how the 2020 census would affect Anderson and the legislation. Mr. Labolle replied that the legislation was a "floor not a ceiling." He explained that the current payments were 22 percent of the current salaries or 22 percent of the 2008 floor, whichever is greater. He explained that a growing community with growing employees, the community would pay the greater of the floor. Furthermore, Anderson would not need to pay the 22 percent of current employee salaries. 9:25:28 AM Representative Gara looked at page 2 of the bill, and noted the two possible calculations for how much the municipality should pay for the PERS employees: the greater of 22 percent of the number of current employees; or the number of employees in 2008. He remarked that he did not understand why the 2008 year was specified. He surmised that if the number of current employees was larger than what was in the new section, then the payment was 22 percent of the number of current employees. Mr. Labolle responded in the affirmative. He explained that there was a bill in 2008, which took the failing PERS systems, and pooled them into one state system. He remarked that there was a concern that employers could lay off employees, hire contract employees, and therefore only pay the 22 percent of the current employees. Thereby leaving the remaining outstanding liability on the state. The floor was created to prevent that possibility. Representative Kawasaki asked for Mr. Labolle to explain the retroactivity. Mr. Labolle thought Representative Kawasaki was looking at a previous version of the bill. Representative Kawasaki asked if there was not retroactivity. Mr. Labolle confirmed that there was no retroactivity in the bill. Co-Chair Thompson OPENED public testimony. 9:28:35 AM SHANDA HUNTINGTON, CITY OF GALENA, GALENA (via teleconference), spoke in favor of the policy of imposing a floor. She remarked that HB 47 did not change PERS policy. She provided some history. Galena declined its activity in recent years, and city services plummeted. She pointed out that there were 17 employees in 2012. The difference between the two floors was significant. Galena's contribution was significantly high. She provided some statistical information regarding PERS contributions paid by Galena. She added that HB 47 was not a loophole. 9:36:42 AM KATHIE WASSERMAN, ALASKA MUNICIPAL LEAGUE, ANCHORAGE, indicated that the League was in favor of HB 47. She relayed the difficulty of conveying to the legislature the challenges. She spoke to her previous experience as the mayor of Pelican. Co-Chair Thompson CLOSED public testimony. Representative Gara asked about the penalties. Mr. Labolle replied that previous versions of the bill had penalties and retroactivity. Representative Munoz asked if the past liabilities had been paid. Mr. Labolle believed the amount was the amount unpaid, but deferred to the administration for the actual amount. Representative Munoz asked for an explanation of termination study. Mr. Labolle replied that the bill did not address termination studies. Representative Munoz noted that a testifier had addressed a termination study. Co-Chair Thompson agreed to provide that information, but remarked that that it did not relate to the bill. Representative Munoz disagreed, because a community must initiate a termination study when an employee was terminated because the employer could not afford the employee. It would affect their finances, because they needed to pay toward the costs. She wanted a fuller understanding of the requirement of a termination study. 9:42:04 AM KATHY LEA, CHIEF PENSION OFFICER, DIVISION OF RETIREMENT AND BENEFITS, DEPARTMENT OF ADMINISTRATION, shared that there were two types of termination costs in PERS. One was with PERS since the inception in 1961, which was a common feature in multi-employer plans. She stated that there were some plans that required the study. She remarked that, if an employer eliminates coverage for a group, classification, or department, the employer must pay the cost that arises from the action. The costs were based on a change in the behavior of people who were close to retirement. She stressed that the majority of people who reach normal retirement age, did not retire at that point. She pointed out that only 16 percent of people retire at normal retirement age. She stated that most retire approximately four years after the normal retirement date, which was how the plan was funded. She remarked that terminating a group changed that behavior. Therefore the person who was not currently covered by PERS would draw the retirement at the first eligible date. At that point, the fund was not fully funded. The employer must then pay the difference in the funding from the point at normal retirement to the point the plan anticipated it would be funded at 100. Terminating employees who were not vested then become 100 percent vested in the PERS benefits. She explained that in 2005, with the creation of the defined contribution plans, termination costs were covered and again in 2008 in SB 125. She explained that as part of a change to a cost share system, there was a fear that employers would remove groups, classifications, or departments in order to lower their contribution amount and leave the accrued liability for the other PERS employers to pay. She stated that SB 125 created a second type of termination cost, which required that the employer pay a continuing contribution for the employees that were removed from coverage based on the unfunded liability percentage. The employee would continue to pay every payroll until the unfunded liability was exhausted. She stated that a termination study would not trigger, unless there was a removal of a department, classification, or group when an employee was looking to reduce the number of employees. 9:46:50 AM Representative Munoz wondered if the smaller communities that were discussed paid the termination costs. Ms. Lea replied that Galena did not have a termination study. Representative Wilson surmised that employees were still paying for employees that were no longer employed. Ms. Lea replied that, in Galena's case, they were paying the salary score from 2008. Representative Wilson felt that additional boroughs may face a similar issue as Galena. Ms. Lea stated that any time an employer removed an entire group, classification, or department there would be a termination study. Representative Wilson surmised that an employer would still pay into PERS even without a termination study. She stressed that the municipalities would still have a cost to the employee, even though the employee would not be employed. Ms. Lea agreed that the municipality would still be subject to the 2008 salary floor. Vice-Chair Saddler reviewed the fiscal notes. Co-Chair Neuman MOVED to REPORT CSHB 47 (FIN) out of committee with individual recommendations and the accompanying fiscal note. Co-Chair Neuman rescinded his action. Co-Chair Thompson commented that the correct fiscal note had not been read. Vice-Chair Saddler reviewed the correct fiscal note. Co-Chair Neuman MOVED to REPORT CSHB 47 (FIN) out of committee with individual recommendations and the accompanying fiscal note. There being NO OBJECTION, it was so ordered. CSHB 47 (FIN) was REPORTED out of committee with a "do pass" recommendation and with one new fiscal impact note by the Department of Administration. 9:52:20 AM AT EASE 9:56:04 AM RECONVENED