HB 152-PERS TERMINATION COSTS  4:36:18 PM VICE CHAIR REINBOLD announced that the final order of business would be HOUSE BILL NO. 152, "An Act requiring certain employers who terminate participation in the defined benefit retirement plan or the defined contribution retirement plan of the Public Employees' Retirement System to make contributions related to past service liability and pay termination costs; repealing a requirement that employers who terminate participation in the defined contribution retirement plan or the defined benefit retirement plan of the Public Employees' Retirement System pay for a termination cost study; and providing for an effective date." 4:36:33 PM JANE PIERSON, Staff, Representative Steve Thompson, Alaska State Legislature, speaking on behalf of the sponsor of HB 152, Representative Thompson, said the state's termination studies, laws, and regulations make it difficult and more expensive for municipal employers to deliver their programs and services by requiring an employer that terminates participation of a department group or other classification of employee to pay a series of actuarially-determined costs. The municipalities are working toward modernizing and standardizing job classifications and although that may result in fewer job classifications, it may not necessarily result in fewer employees. Current law unnecessarily requires termination studies and costs for such actions. The municipalities really need the operational flexibility to effectively manage and deliver programs and services while continuing to contribute toward paying off their debts associated with the Public Employees' Retirement System (PERS). Paying off the unfunded PERS liability is predicated upon a stable and reasonably growing system-wide salary base. System-wide salaries for defined contributions and defined benefits have increased by $325 million or 18.6 percent over the base salary floor, which was established in 2008 by Senate Bill 125 in the 25th legislature. As a result, contributions for the unfunded liability have increased at a rate greater than the actuarially assumed annual growth rate of 4 percent. This bill would maintain the PERS contribution floor while employers must pay whichever is greater, 22 percent of their current combined defined benefit and defined contribution salary base or an amount based on their total payroll for the period ending June 30, 2008. 4:39:28 PM MS. PIERSON said HB 152 would replace the requirement for termination studies with formula driven partial termination cost, as follows: 20 percent flexibility for employers whose total payroll is greater than $5,000,000, which is 93 percent of employers in FY 12; 50 percent flexibility for employers whose total payroll is between $1-$5 million, which was 6 percent of employers in FY 12; and the study would not be applicable for employers whose total payroll is less than $1,000,000, which was 1 percent of employers in FY 12. Using the data that is readily available, the amount by which an employer's terminated salaries are calculated to exceed the 20-50 percent threshold would be applied to the current past service contribution rate, which is currently 24.19 percent, and would then be paid annually until the unfunded PERS liability is paid off. 4:40:24 PM MS. PIERSON provided a brief sectional analysis of the bill. Section 1 would retain the minimum requirement for employers to make contributions based on 22 percent of the greater of their current salary base or the salary base as of 6/30/2008 regardless of termination participation from the defined benefit plan. Section 2 would place the requirement for termination costs studies performed by the actuary with termination costs determined via formula as follows: partial termination thresholds, based on 20 percent for employers whose total payroll is greater than $5,000,000 and 50 percent for employers whose total payroll is greater than $1-5 million; [termination costs] are not applicable for employers whose total payroll is under $1 million. Section 2 would establish a rolling-tier period for which costs from partial terminations would be determined, it use readily available data, and establishes the formula for determining termination costs. Thus any terminated salary beyond the threshold of 20-50 percent would be applied to the current past service contribution rate and be paid annually until the past service liability is paid in full. The formula is simple and does not require any consultant fee. She explained it would be an amount by which an employer's salary base exceeds its salary base from two years prior by 20-50 percent, depending on the current salary base level multiplied by the past service contribution rate multiplied by the total years to pay down the total unfunded liability. For example, $100,000 multiplied by 24 would equal $24,000 annually multiplied by 30 years would equal $720,000, she said. 4:42:18 PM MS. PIERSON related that Sections 3, 4, and 5 correlate to Section 2, but pertain to the defined contribution plan. Section 6 would repeal language requiring a termination study for an employer that requests termination from the plan altogether, but such an employer would still be subject to the base floor. This would also annul the regulation that covers the calculation of termination cost studies. Sections 8 and 9 would add applicability retroactively to allow employers to discontinue any payments after the effective date of the act in which an employer would not have had to pay if a new formula were in place after June 30, 2008. The last section, Section 10, would add the effective date. 4:43:07 PM REPRESENTATIVE JOSEPHSON asked for clarification on the amount of the fiscal note. MS. PIERSON answered that the fiscal impact is $6,772,000 for FY 14 and continues to FY 19 in the amount of $7,462,000. She acknowledged this bill has quite a hefty fiscal note. 4:44:20 PM REPRESENTATIVE JOSEPHSON asked whether the fiscal note is indefinite until the terminated employees are deceased. MS. PIERSON answered that it would be indefinite until PERS and the Teachers Retirement System (TRS) of $11 billion in unfunded liability is paid off. 4:44:53 PM REPRESENTATIVE JOSEPHSON asked whether this would add to the $11 billion. MS. PIERSON clarified that it would not add to the $11 billion but rather would be a shift away from municipalities to the state. REPRESENTATIVE JOSEPHSON asked whether some municipalities have instituted plans to stay on top of these obligations while others have not. MS. PIERSON related her understanding that every municipality is now required to adhere to same standards, but some have not been able to pay their portion of the unfunded liability. 4:45:38 PM REPRESENTATIVE JOSEPHSON noted that he filed a bill that would increase revenue sharing to municipalities; however, he expressed concern. He recalled that in 2008 or 2010 the legislature devised a plan that was curative and supposed to solve this problem. MS. PIERSON replied that in 2008, the state discovered the actuarial figures were not accurate. At the time a base rate was put on all municipalities and termination studies were required when an employee is terminated. However, she recalled a scenario in which the Municipality of Anchorage (MOA) transferred its weatherization department to another [municipal] agency and although no employees were actually terminated, the MOA still had to pay termination costs and studies. 4:47:15 PM LUCINDA MAHONEY, Chief Fiscal Officer (CFO), Municipality of Anchorage (MOA), stated at the time termination studies were implemented in 2008, there was a concern that employers might contract out municipal positions to avoid the 22 percent PERS cost, thus shrinking the PERS base needed to pay off the unfunded liability. As Ms. Pierson indicated this has not happened, she said. In fact, since 2008, on a system-wide basis, the salaries have increased by $325 million, which is at a rate which is higher than what the actuary uses in determining and calculating the unfunded liability. In essence, the fear that initiated the change in statute in 2008 has not materialized. As the CFO of the largest city in Alaska, it is important the MOA has flexibility to manage its workforce. For example, the MOA may not receive a state or federal grant, and if so, may need to lay off employees when the federal grant is not received. Additionally, the MOA may transfer employees within job classifications and a job classification may no longer be used, which would also trigger a termination study; however, the MOA has been standardizing many of its job classifications, which may not result in fewer employees, but may result in fewer classifications. Therefore, the aforementioned could trigger a termination study and cause the MOA to unnecessarily pay into the program. She asked members to consider this bill since municipalities, such as the MOA and very small cities, are being punished for creating efficiencies to modernize the workforce. 4:51:12 PM REPRESENTATIVE JOSEPHSON questioned whether this legislation would be necessary, if the administration had not introduced Administrative Order (AO) 37 in early February. MS. MAHONEY answered that the bill has no effect on AO 37. REPRESENTATIVE JOSEPHSON questioned whether the MOA would still need to cover some of the prior PERS if some of the MOA municipal workforce is privatized as the MOA will not have the salary base. MS. MAHONEY answered that if the MOA were to privatize any portion of workforce, the bill would look to the sliding scale proposed. For example, the MOA would consider the average two years' worth of salaries and if the change is greater than 20 percent, the MOA would pay for that component of the PERS termination study and would pay the liability until 2030. In brief, this bill recognizes the goal of municipalities to continue to contribute to help bring down the unfunded liability. However, the MOA has suggested a sharing of the cost depending on triggers and the size of the community. 4:53:20 PM LUKE HOPKINS, Mayor, Fairbanks North Star Borough (FNSB), offered the FNSB's support for HB 152. He acknowledged that the unfunded liability needs to be paid off and agrees to fairly sharing these obligations. However, in considering the PERS termination aspect based on the number of employees, the salary floor is important. He pointed out that the salary has increased about 19 percent and the termination study, law, and regulations have created unintended consequences, which adversely impact municipalities with regard to managing their workforce. He offered his belief that this bill, with its sliding scale, would be a fair and equitable method to continue to pay the FNSB's portion of the debt as it has done each year. He reiterated support for HB 152. 4:54:57 PM SALLIE STUVEK, Director, Human Resources, Fairbanks North Star Borough (FNSB), stated that HB 152 is a positive bill that addresses serious concerns with the existing statutes relating to the triggering of termination studies. Management of municipal employees is dynamic and fluctuates based on service needs. She said that flexibility is necessary, based on programs and services that are offered. For example, the FNSB might need to hire additional librarians based on public demand, but may need fewer lifeguards this year. This type of flexibility is critical for efficient delivery of services. She offered her belief that tying the need for a termination study to the base salary makes more sense than tying it to the classification, department, or division. As Ms. Mahoney testified earlier, the FNSB shares concern about the lack of flexibility. She thanked members for consideration of HB 152. 4:56:14 PM KATHIE WASSERMAN, Executive Director, Alaska Municipal League (AML), stated the AML is in support of HB 152. She emphasized the main thing is to get this topic on the table. She reminded the committee that the AML represents all 162 municipalities in the state who feel the repercussions from this statutory structure. Accordingly, the biggest outcome is municipalities cannot manage their personnel. For example, [termination costs] affect small municipalities, such that if a municipality has four employees and the population decreases or finances are reduced and one person is placed in layoff status, it will trigger a termination study. Under AS 39.35, this means the municipality must pay termination costs over the long term until the liability is paid off. This could take up to 25 years and represents a huge expense for a small community. For this reason, the state needs to find a solution to work with the municipalities to resolve this issue. She acknowledged this may not be easy, since the unfunded liability represents an $11 billion shortfall; however, the termination study provision adversely impacts all communities and prevents them from managing their personnel. In fact, some municipalities have decided not to lay off employees since they can't afford the outcome, which seems backwards. She remarked that it has taken her many years to get to the point of fully understanding this issue since it is complicated. 4:58:30 PM REPRESENTATIVE JOSEPHSON understood this bill raises two issues. First, it raises the issue of the cost of termination studies and second, it raises the issue of the even greater cost of funding vested liability for those employees not on payroll. MS. WASSERMAN answered yes. In further response, she said the obligation is not based on the individual, but on the position that no longer exists. For example, this first came to the AML's attention when a municipal fire chief position was changed to an emergency medical services director, but the person was retained by the municipality, yet the change triggered a termination study since the position was dissolved. [HB 152 was held over.]