SENATE BILL NO. 55 "An Act relating to employer contributions to the Public Employees' Retirement System of Alaska; and providing for an effective date." 4:11:19 PM NEIL STEININGER, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET, OFFICE OF THE GOVERNOR, thanked the committee for hearing the bill. He introduced the PowerPoint presentation: "SB 55 - Employer Contributions to PERS." began with slide 2 titled HB75 Employer Contributions to PERS: Removes cap on Public Employee Retirement System (PERS) payroll contributions made by the State of Alaska as an employer. ? Continues to fully fund the state's obligation to the PERS system. Applies only to the State of Alaska, does not impact other PERS employers. ? Does not impact Teachers Retirement System (TRS). ? Does not change retiree or active employee benefits. ? No change to employee contributions. ? Does not reduce employer contributions to PERS. ? Allows for full cost share with federal programs and other sources used to fund state programs, thereby reducing general fund expenditures by $25.7 million in FY22. 4:13:17 PM Mr. Steininger provided a background of Alaska's retirement obligations on slide 3 titled HB75 Background: Alaska's Retirement Obligations: ? The PERS unfunded liability was estimated to be $4.6 billion in FY20. ? Current annual cost to pay down the unfunded liability is split between employer contributions and the state assistance payment, or "on-behalf" payment: O Employer contributions (22%) on employee salaries mixed fund sources. O On-behalf payments for Municipalities and other PERS employers 100% UGF. O On-behalf payment for State of Alaska as an employer 100% UGF. ? This bill addresses the on-behalf payment for State of Alaska as an employer. 4:14:37 PM Mr. Steininger continued to slide 4: "State of Alaska PERS On-Behalf Payments:" In 2008, the legislature established a uniform rate for payroll contributions for all PERS employers 22%. The State of Alaska is required to pay the difference between capped employer payroll contributions and the full actuarial liability (30.11% in FY22). Called the state assistance or "on-behalf" payment. For FY22, the total on-behalf payment to PERS is $193.5m (UGF). $95.7m of that amount is made by the state on behalf of itself. The remaining $97.8m is made on behalf of 153 other active PERS employers. He explained that the other active Public Employees' Retirement System (PERS) employers were municipalities and school districts throughout the state. 4:15:57 PM Mr. Steininger reviewed slide 5 titled HB 75 State of Alaska as an Employer Retirement Obligation Current Law. He explained that currently the state payroll contribution was 22 percent of payroll totaling $246.3 million. The state made the $95.8 million on-behalf payment with unrestricted general funds (UGF). The slide showed the breakdown in types of funding; Undesignated General Funds (UGF), Designated General Fund (DGF), Other, and Federal Receipts. He noted that the total retirement obligation was $342.2 million, which $202 million or 59 percent was comprised of UGF. He examined slide 6 titled "HB 75 State of Alaska as an Employer Retirement Obligation Proposed Law." He elucidated that by uncapping the 22 percent and allowing the full 30.11 percent to be charged to state payroll, the state still paid the full contribution, but the state could apply the 30.11 percent to the other fund sources. Consequently, eliminating the commiserate increases in UGF that was apparent on the prior slide. He pointed out that under the proposed law the total UGF was $176.4 million or roughly 50 percent of the total $349.8 million cost, which was a net reduction of $25.7 million in UGF costs to meet the same obligation. He qualified that the $25.7 million was only the savings realized in the first year. Savings would grow over time because as indirect charges were charged to federal programs the state had to provide justifications for the costs. The different programs were on different schedules for providing the information to the federal agencies on the way the state charged indirect costs to the programs. He added that some federal agencies would allow the change in the first year and some would take up to three years to implement the changes due to the way the state interacted with the federal agencies to justify the programs costs. Some programs capped the amount charged to the grants and savings could not be realized in those cases. He relayed that OMB analyzed various federal programs that the state charged for payroll and found that the state could offset the costs with UGF to ensure the programs were not harmed and still realized the $25.7 million in savings. Over the next several years as state agencies renegotiated the cost allocation agreements with federal partners, the savings number will increase in the outyears. 4:19:47 PM Representative Josephson wanted to make sure that if an agency received $100 million in federal matching funds, the service would not be diminished because whatever the service was would become part of the PERS liability. Mr. Steininger replied that it was something that OMB worked on in the production of the fiscal note. He explained that if the fixed grant amount, such as the $100 million example, could not be adjusted for changes in costs such as for PERS than the state would not be able to collect additional money from the federal grant. He furthered that as OMB calculated the fiscal note, it identified federal programs that had a fixed dollar value to ensure that OMB was not hampering the ability to perform the work under the grant. He delineated that as departments identified fixed dollar programs OMB adjusted the fiscal note down because the federal receipts could not be collected. Currently, the full amount of the costs was covered by UGF, so where the costs could not be covered UGF was used. The bill was necessary to capture additional federal revenues on grants that could be increased as costs increased. 4:22:31 PM Representative Josephson ascertained that there had been a lost opportunity over the years and the bill was trying to capture the opportunity and benefit from it. Mr. Steininger agreed with the statement. 4:22:57 PM Mr. Steininger continued to the spreadsheet on slide 7 titled HB75: FY 2022 Budget Impact. He explained that the provisions shifted the $100 million cost from the language section of the operating budget and moved it into the state personal services line. It would appear as a $1 million increase in all funds to state agency payroll. He conveyed that it was not an actual increase, it was simply shifting a cost from one part of the budget to another. The slide depicted where the cost would apply in each agency. He could provide further detail by budget component or program. He provided a handout in the bill file that provided more information regarding the offsets [titled HB75 FY 2022 Budget Impact Handout A (copy on file)]. 4:24:46 PM Representative Josephson looked at slide 7 on the Department of Commerce, Community and Economic Development (DCCED) line. He inquired whether professional licensing fees would increase. Mr. Steininger responded that it was an area in which fees would have to be revisited and possibly recalculated. It was one area that the department looked at to determine if the current fee collections could cover the related costs of the program without adjustment to the fee or what amount could be accommodated over time. He assured that the implementation of the change would not result in excessive changes to fees. 4:26:14 PM Mr. Steininger advanced to the graph on slide 8 titled "Historical PERS Contribution Rates." The slide illustrated the on-behalf payment or actuarial rate of the state's PERS contribution. He elaborated that the on-behalf portion was the difference between the blue line at 22 percent and the orange line representing the actuarial rate. The bill was trying to address the difference between the two lines. He noted the variability in the rates and pointed out that at its peak the actuarial rate was 38.4 percent compared to the current 30.1 percent. The on-behalf payment rose and fell with the actuarial rate each year. If SB 55 was enacted, some of the variable amount would be moved into the personal service line of the state agency operating budget. He alerted the committee that in future years the committee would encounter salary adjustment change records to accommodate the variability. It would simply shift to agency operations versus the language section of the operating budget. 4:28:08 PM Representative Wool asked about the on-behalf payment made by the state. He wondered if the bill would alter anything for the municipalities. Mr. Steininger answered in the negative. He indicated that OMB limited the focus of the bill to where there was a benefit to the state. He clarified that there was a benefit to the state but not to the municipalities. Representative Wool thanked Mr. Steininger for the clarification. 4:29:28 PM Co-Chair Merrick OPENED public testimony. 4:29:36 PM Co-Chair Merrick CLOSED public testimony. Co-Chair Merrick asked Mr. Steininger to address the fiscal notes. Mr. Steininger indicated that the Department of Administration fiscal note [FN 5 (ADM)] was prepared by the Division of Retirement and Benefits. He explained that since the bill impacted the PERS system it was an actuarial fiscal note. He pointed to the additional $200 thousand cost. He noted that in the current system, the state assistance payment was made in a lump sum at the beginning of the fiscal year. Moving it to the personal services line meant the payments would be made monthly with payroll. He expounded that there was a little bit of an investment loss by not having a lump sum payment applied at the beginning of the year; thus, the pension system earned slightly less. The $200,000 cost was significantly less than the state GF savings. 4:30:55 PM Mr. Steininger reported that fiscal note 4 [FN4 (State Retirement Payments)] FN 4 was prepared by OMB. He explained that it reflected the consolidation of many budget transactions in every place where there was a state employee in the budget. It was the aggregate of applying the 8.11 percent to get to the 30.11 percent costs for PERS contributions to state employee payroll. He noted the mix of fund sources and the distribution of the roughly $100 million in costs in FY 2022. 4:31:44 PM Mr. Steininger indicated that the fiscal note [FN 3 (State Retirement Payments)] was prepared by OMB and reflected the reduction to the language section of the operating budget where the state assistance payment was made and was added back in fiscal note 4. 4:32:14 PM Co-Chair Merrick thanked Mr. Steininger for finding the cost savings. 4:32:32 PM AT EASE 4:32:56 PM RECONVENNED Representative Rasmussen MOVED to report SB 55 out of Committee with individual recommendations and the accompanying fiscal notes. There being NO OBJECTION, it was so ordered. SB 55 was REPORTED out of committee with a "do pass" recommendation and with Co-Chair Merrick reviewed the agenda for the following day.