SENATE BILL NO. 125 "An Act relating to the accounting and payment of contributions under the defined benefit plan of the Public Employees' Retirement System of Alaska, to calculations of contributions under that defined benefit plan, and to participation in, and termination of and amendments to participation in, that defined benefit plan; making conforming amendments; and providing for an effective date." This was the fourth hearing for this bill in the Senate Finance Committee. Co-Chair Hoffman moved to adopt committee substitute Version 25- GS1074\K as the working document. There being no objection, the Version "K" committee substitute was ADOPTED. 4:43:47 PM Co-Chair Stedman announced that several spreadsheets and a new Department of Administration fiscal note dated April 20th, 2007 pertinent to Version "K" [copies on file] would be addressed during today's discussion. A side-by-side comparison of Version "K" to the original version of the bill was being developed. MILES BAKER, Staff to Co-Chair Stedman, communicated that his remarks would highlight areas of change in this committee substitute relative to the original version of the bill. As noted, a side-by-side comparison was currently unavailable but would be provided once completed. Mr. Baker identified the first change as being the elimination of a section in the bill pertaining "to the duties and responsibilities" of the Alaska Retirement Management Board (ARMB). The reference to ARMB in the bill's title was also removed. The provisions pertinent to ARMB had not been included in the original version of the bill, but were incorporated by a previous committee substitute adopted by the Committee. Mr. Baker informed the Committee that "some slight drafting differences" resulted in there being minor language changes in Section 1. The substance of the Section had not been changed. In addition, definitions incorporated into Section 1 in the previous committee substitute, Version 25-GS1074\E, had been moved to "the broad definition section" of the Teachers Retirement System (TRS) Statute. 4:45:49 PM Senator Olson asked for confirmation that the Senate's proposed TRS employer contribution rate of 12.56 percent had not been affected by these changes. Mr. Baker affirmed the rate was unchanged. 4:45:58 PM To that point, Mr. Baker directed attention to Section 1 subsection (d) page 2 line 9. In essence, this section specified that "regardless" of that 12.56 rate, "if the normal cost goes above that in the future", then that higher rate would become the normal cost. 4:46:24 PM Mr. Baker indicated that, other than minor "wording differences" resulting from "editorial" changes, no substantial changes were made in Sec. 2. The working differences also resulted in a change in the title of the section: instead of reading "Determination and payment of state contributions", the title now read "Additional state contributions". 4:46:50 PM Mr. Baker stated that the TRS definition removed from Section 1 has been incorporated into Sec. 3, page 3 lines 3 through 5. 4:47:16 PM Mr. Baker specified there being were "no real changes to Sections 4, 5, 6, or 7. 4:47:34 PM Mr. Baker expressed that the first substantial change made by Version "K" is in Sec. 8. The effort being furthered in this bill is to transition entities to a cost-share system. In the case of the Public Employee Retirement System (PERS), all PERS employers would contribute 22 percent of "their active payroll" base. Mr. Baker reminded the Committee of the concern raised in previous hearings on this bill that employers might endeavor to reduce their payroll base by selling off, "for example, their local utility or to decide to outsource something that previously was done by the municipality". While such action would lower that municipality's contribution, other municipalities "would be required to share in the loss of that revenue". Mr. Baker specified that language in Sec. 8 subsection (a) page 5 lines 4 through 11 was reworked to address this concern. Each year, an employer would be required to pay 22 percent of the greater of either their current total payroll base or "the salary base as it was for the fiscal year ending June 30, 2007". This would prevent an employer from contributing less were their payroll to decrease as well as ensure their contribution adequately reflected any increase in their payroll base in the future. 4:49:41 PM Senator Dyson asked whether the municipality would still be held to this obligation if the buyer of one of its political subdivisions "agreed to assume the benefits liability for the employees". 4:50:35 PM Mr. Baker clarified that that issue could be addressed during the negotiations with the buyer. However, the reason for requiring the municipality to pay 22 percent of the "higher payroll base is because built into that 22 percent is the money that this employer currently is putting forward into this new pooled pot to pay off the unfunded liability". Senator Dyson characterized this obligation as "legacy costs" Mr. Baker affirmed. Senator Dyson accepted the explanation. 4:51:21 PM Mr. Baker noted that language in Sec. 9 was slightly reworked. This section clarified the State's additional obligation to the retirement systems. In addition to paying 22 percent on its payroll base, the State, as specified in Sec. 9 line 5 page 6, "shall contribute to the plan each July 1" or as soon after that date as possible, "the amount of money required between the 22 percent and the Board adopted rate to fund the payment for the whole system for the unfunded liability for that year". The date for the payment was allowed some flexibility in consideration of the State's cash flow situation in July, as numerous payment obligations are specified for July first. 4:52:55 PM Mr. Baker communicated that no changes were made in Sec. 10. 4:53:29 PM Mr. Baker deferred to the Department of Administration to discuss Sec. 11. 4:53:53 PM ANNETTE KRIETZER, Commissioner, Department of Administration, informed the Committee that Sec. 11 would allow the Department "to claim monies that's owed to it under the system". The language in this section was rewritten in consideration of concerns of the Alaska Municipal League (AML). The revised language is located on page 7, lines 5 through 8 and reads as follows. After the agency submits this amount to the administrator, the employer may appeal the administrator's claim to the Office of administrative hearings (AS 44.64). If an appeal is timely filed, the administrator shall hold the submitted funds in an escrow account pending a final decision on the appeal. Commissioner Kreitzer stated that this compromised language would assist in addressing some of AML's concerns. 4:55:23 PM Senator Elton inquired to the cost of conducting an administrative hearing; specifically to a small community. Commissioner Kreitzer responded that this information would be provided. 4:56:08 PM Mr. Baker addressed Sections 12, 13, 14, and 15. They dealt with two sections of statute regarding an employer's termination from the plan or amending their participation agreement. Both the original bill and the previous committee substitute "envisioned that" once the system transitioned to a cost share plan, employers would have a 90 day period in which "to make changes to their participation agreement": they could opt in or out classes of employees. No such changes would be allowed after that. The only recourse after that would be for an employer to exit the system completely. Mr. Baker advised that Version "K" would eliminate that 90 day window. An employer's ability to amend their participation agreement would continue to be allowed as in current Statute. However, language in Sec. 15, page 8 was required to address costs associated with an employer's decision to opt in or opt out a group of employees or sell off a portion of the business which would in effect reduce the employer's payroll base. For instance, a community could decide not to cover their municipal waste people or their fire chief or city administrator. 4:58:47 PM Mr. Baker stated that while an employer could continue to amend their participation agreement, language in Sec. 15 specified that an employer who terminates a class of employees or completely terminates from the system would be required to pay termination costs. He reviewed how the termination costs would be calculated. For instance, an employer terminating a class of employees would be required to pay that groups' past service costs. 5:00:20 PM Senator Thomas expressed concern that, as has happened in the past, the State might not have an accurate unfunded liability figure. Were that the case, an entity terminating groups of people or completely terminating from the plan, might be told their obligation was satisfied, but then might un-expectantly get a "huge bill" later" when the system's unfunded liability was reevaluated. 5:01:43 PM Commissioner Kreitzer pointed out that "no plan is foolproof". The Department, Committee members and staff, and other entities and individuals working on this bill have worked diligently "to identify areas where we think that there could be some loophole and could allow for a situation where you might not have the unfunded liability taken care of". The bill before you "is our best effort to deal with that and to not come into a situation in the future where we would have someone getting a big bill because the Division of Retirement and Benefits made a mistake". She could not envision where at this point, a mistake might be made. Senator Thomas also acknowledged being unable to identify any specific weakness. Nonetheless, despite professional action in the past, the State is facing a substantial unfunded liability. 5:02:47 PM Mr. Baker pointed out that "liabilities by individual employers" are tracked under the current retirement system. Each year, the actuary conducts an extensive process to determine "the new liability of the system is and allocating it as appropriate to all the individual employers". Mr. Baker directed his remarks to Senator Thomas's concern. An employer might have been fine at one time, but, as each new valuation was determined, their unfunded liability grew. This was the experience of most employers. Mr. Baker expressed that the same valuation process would continue under this bill. However, under the cost share system being proposed, the unfunded liability would be "shared amongst everybody". 5:03:44 PM Mr. Baker stated that, under the current system, each entity was combating "a different number". Mr. Baker agreed with Commissioner Kreitzer that "this is a best attempt to address the fact that everyone will be sharing the load and" appropriately allocating it going forward. 5:04:15 PM Mr. Baker informed the Committee there was no change in Sec. 16. Mr. Baker noted that it was decided to move definitions from individual areas of the bill to a more appropriate place in the Statute section. Thus, definitions were added to Sec. 17. 5:04:31 PM Mr. Baker deemed Sec. 19 to be a significant component of the committee substitute. The spreadsheets earlier referenced by Co- Chair Stedman were pertinent to this section. Mr. Baker stated that Sec. 19 subsection (a) of Version "K" contained a listing of employers who had contributed excess funds to their retirement plans during the prior three years and their contribution rates, as adjusted, for the first year of program implementation. This information had been re-verified by the Department. Mr. Baker directed attention to a spreadsheet titled "FY 08 Rate Adjustments Required to Recoup Excess Muni PERS Contributions from Prior 3 Years (Revised 4/28/07) Prior to application of Hold Harmless Provision" [copy on file], which pertained to this section. 5:05:40 PM Mr. Baker addressed Column "9" of the spreadsheet. Changes on this spreadsheet, as compared to the previous version, are highlighted. For instance the City of Barrow and the City of Klawock have been added to the list. 5:06:26 PM Mr. Baker next addressed the spreadsheet titled "Impact of a 22% Employer PERS Rate on Municipalities, with CSSB 125 Hold Harmless Provision" [copy on file]. In addition to the desire to assist the "Heroes" communities, those entities which had contributed excess funds toward their retirement plans, an effort was made "to be equitable. As we set a rate of 22 percent, many municipalities are going to see quite a windfall or credit to what they previously thought they were going to have to pay if their rates were substantially higher than 22". Mr. Baker also pointed out that there were also a few communities that had rates significantly lower than 22 percent. They would be experiencing a substantial increase in their payments. Mr. Baker signified that the "Impact" spreadsheet reflected communities' estimated FY 08 payroll; their FY 07 employer contribution rate; and the FY 08 Board recommended rate they would have been required to pay absent this legislation. For example, the City of Fairbanks would have paid $13,271,641 under the FY 08 Board Requested Rate. Under this legislation, they would pay $1,578,676 for a savings of $11,692,965 or an 88 percent "credit gain". Mr. Baker stated that the City of Fairbanks would not be subject to the hold-harmless provision in the bill because, under this bill, they would be experiencing a tremendous decrease in the contribution level as compared to the status quo system. 5:08:33 PM Mr. Baker stated that the City of Fairbanks situation was opposite to that of the City of Seldovia in that the proposed cost share system would require them to contribute more than they would under the status quo system. Therefore, hold harmless provisions were incorporated into the bill in an attempt to provide equality. Mr. Baker explained that the hold harmless provision would apply to those entities whose FY 07 rate or FY 08 Board Recommended Rate was less than 22 percent. They would be subject to the lower of those two years' contribution rates. Mr. Baker informed the Committee that the total fiscal impact of the hold harmless provision was then calculated. The State, in addition to its 22 percent contribution, would be required to contribute an additional $1.3 million as specified at the bottom of Column (7). 5:10:21 PM Senator Elton asked whether there were school districts with employees in the PERS system which might require similar hold harmless considerations. 5:11:00 PM Mr. Baker stated that this issue is under review. Until recently, only municipalities and cities had been considered. In addition to considering whether any school districts with PERS employees should be included, attention is being expanded to the category referred to as "PERS Others". This would include entities such as a housing authority or Bartlett Regional Hospital in Juneau. Mr. Baker calculated that an additional one million dollars could be added to the hold harmless total were school districts considered. "PERS Others" might add an additional three million dollars. Mr. Baker concluded that applying the hold harmless clause to these entities would be doable; it would be a policy call matter. Senator Elton appreciated the foresight given to this issue. 5:12:23 PM Mr. Baker referred the Committee to the spreadsheet titled "CSSB 125 Sec (19) Rate Adjustments" [copy on file]. This spreadsheet reflects communities "recoup" rates as affected by the hold harmless provisions. For instance, the Aleutian East Borough's recoup rate for FY 08 would have been 10.01 percent. Once the hold harmless rate is factored in, their rate for FY 08 would be 3.24 percent. 5:14:16 PM Mr. Baker stated that communities who qualified for both the recoup and hold harmless provisions would contribute at the adjusted rate for FY 08. The hold harmless provision adjustment would continue to apply to qualifying communities for an additional four years. Mr. Baker specified that all communities would be subject to the 22 percent contribution rate beginning in FY 13. 5:15:20 PM Mr. Baker noted that the communities depicted at the top of the spreadsheet were those that qualified for the recoup and/or the hold harmless rate provisions specified in Sec. 19(a) for FY 08. Mr. Baker stated that 19(b) contains the hold harmless provisions specific to the additional four years. Communities subject to that provision are depicted at the bottom of the spreadsheet. 5:15:45 PM Commissioner Kreitzer "commended" Co-Chair Stedman's staff for their efforts in developing the Version "K" committee substitute. Co-Chair Stedman asked Members to review Version "K" thoroughly and advise his office of any concerns or suggestions. The bill was HELD in Committee.