HB 254-STATE RETIREMENT SYSTEMS/WARRANTS BARBARA COTTING, staff to Representative Jeannette James, introduced the legislation to keep the State of Alaska retirement system in compliance with Internal Revenue Service (IRS) code changes. It allows buy-ins with pre-tax dollars. The fiscal note is zero. It is a technical bill that is not intended to and does not enhance benefits in any way. CHAIRMAN THERRIAULT asked Mr. Bell to comment on whether the bill addressed this single issue. GUY BELL, Director of the Division of Retirement and Benefits, explained that everything else in the legislation is confirmation of current practice. The only substantial change is the allowance of pre-tax payment of indebtedness in the retirement system for public employees and teachers. The new language needs to be put into state law to comply with provisions of the IRS code to ensure continued tax qualification. CHAIRMAN THERRIAULT called for teleconferenced testimony. CHIEF MONEGAN from the Anchorage Police Department said he wanted to speak to Senator Halford's proposed amendment. CHAIRMAN THERRIAULT made a motion to adopt amendment #1 for the purpose of discussion. CHIEF MONEGAN said the amendment would provide local option for local governments to enhance or offer a series of enhancements to existing public employee retirement systems (PERS). The Anchorage Police Department is experiencing difficulty recruiting and retaining personnel because people are looking elsewhere for retirement and benefits packages. Other departments are similarly affected. The amendment would allow local municipalities to bargain individually and bear the cost for their own enhancements to the basic state retirement package. The fiscal impact to the state would be nominal. CHAIRMAN THERRIAULT questioned why this needs to be incorporated into the state system. Why couldn't a municipality just as easily offer an attractive option that is controlled and operated entirely at the local governmental level? CHIEF MONEGAN replied they may end up bargaining no increase, but they need this kind of legislation before they can even get to the table. They haven't found any options that would be as attractive as this one. CHAIRMAN THERRIAULT questioned the statement that there would only be minimal administrative costs to the state. If the municipality isn't able to make it work separately, it sounds as though there would be reliance on the overall state system and probably have associated costs. CHIEF MONEGAN said there was none they could tell. Their police union contacted Mr. Bell and they thought they received a favorable response from him initially. When they were in Juneau the previous week to explore this further, Mr. Bell was somewhat cool. He indicated there might be a more complicated bookkeeping/administrative situation than they originally thought. The Anchorage mayor was also supportive of the legislation. SERGEANT ROD HUEN, President of the Anchorage Police Department Employees Association, said he shares the same concerns that Chief Monegan has regarding recruitment and retention. It is a statewide problem. Amendment 1 addresses the issue of the legality of when an officer is moved from an area with an enhanced PERS program to an area without an enhanced PERS program by increasing the employer contribution. The amendment makes it clear there would be no expectation of any enhanced benefits. The goal is to have the local government bear the burden of any enhancement that is on top of the basic PERS program through employer contribution. This could become a piece to a long-term recruitment and retention program, which is the goal. They want to work with the state, but place the burden and control at the local level. WILL AITCHISON said the difficulty with doing this as a supplemental program at the local level is that when going to a local option some governmental bodies that might want to take advantage of this might have existing retirement systems while others might not and would be solely reliant of PERS. Anchorage falls into a category in which there are retirement systems in place that are closed. The possibility of doing this at the local level is too complicated with the variety of retirement systems. Even those with a retirement system that could potentially handle supplemental benefits would find it difficult to administer only supplemental benefits. The types of benefits range from the calculation of basic retirement benefits to the administration of death benefits and occupational disability benefits. Setting up a system like that at the local level rather than changing the benefit level as an optional plan under PERS would be far too expensive. When put into PERS it is a matter of no new benefit being added rather different benefit levels are being offered. Put into PERS, the additional cost would be the minimal administrative costs associated with keeping track of the optional benefits and doing the initial actuarial assessment to determine what the employer would pay. CHAIRMAN THERRIAULT noted Senator Halford handed out a copy of a memo that suggested additional language to the amendment to deal with the concern. He ran through a brief description of the current system and noted that adding additional governmental bodies could result in a very cumbersome system. While there may be little impact or cost individually, collectively it could be burdensome. MR. AITCHISON replied it is not at all unusual to see retirement systems with a variety of different options. One of the purposes of this legislation is to meet a challenge that large city police departments are facing because of the existence of such a local option in California. On a jurisdiction-by-jurisdiction basis, the agencies in California are able to elect a 3 percent benefit and 50 years of age. This sort of optional benefit, is a relatively common feature of state retirement systems and is manageable within the context of those retirement systems. He has not heard any complaints about administration difficulties from PERS type administrators that have gone to this sort of supplemental retirement benefit. SENATOR STEVENS asked how many agencies in Alaska employ peace officers that could be eligible for this option. DELL SMITH, Deputy Commissioner of the Department of Public Safety, replied there are probably about 35 municipal police departments. SENATOR STEVENS asked whether there would be any that would not be eligible to participate. MR. SMITH replied this is an option for municipalities so state troopers, fish and wildlife protection officers, airport security police and village public safety officers wouldn't be eligible. It appears to be for municipal firefighters and police officers only. CHAIRMAN THERRIAULT said he has heard that the state has retention problems and frequently loses troopers to the Anchorage Police Department. MR. SMITH said some have transferred over but his experience is that there are transfers both ways. Within the last six months, three Alaska State Trooper transferred to the Anchorage Police Department. SENATOR STEVENS asked whether there are individual negotiations for each employee's benefit package. CHIEF MONEGAN said there is one bargaining unit and they would negotiate for the enhanced benefit for all police officers covered under that contract. SENATOR STEVENS asked whether passage would make the benefit packages for municipal officers and state officers similar or would one be more enticing. SERGEANT HUEN said anyone in Anchorage who was hired after 1994 is in PERS Tier III. Anyone hired before 1994 is in the local and closed retirement plan. Those in PERS Public Safety Plan III who were hired in Anchorage after 1994 reflect the people who have been hired on to the troopers. SENATOR STEVENS said the trooper plan and municipal plan after 1994 are the same. SERGEANT HUEN said they are as far as the retirement plan is concerned. SENATOR STEVENS asked if this would allow municipalities to offer incentives and make the plan more attractive than the state incentives. SERGEANT HUEN said this language doesn't exclude, it simply says "employer" so it would be up to the state. The intent was to localize the control of the work force. SENATOR STEVENS asked if the money would come from a local revenue source and that is why it wouldn't be a cost to the state. SERGEANT HUEN said that's correct. The retirement contribution by the employer would cover that cost and that would vary with the employer. Employer contributions range from six percent in Long Beach, California to 12 or 13 percent in Eugene, Oregon. Anchorage is now at seven percent. SENATOR STEVENS asked if he would object to the statement that if the same option were available to state law enforcement it would be an expense to the state. SERGEANT HUEN said if the state chose to do that for their law enforcement personnel it would incur whatever the relative employer contribution would be to ensure those enhancements were funded. CHAIRMAN THERRIAULT asked Mr. Smith whether the department had taken a position on the concept. What would the department do if local systems became more enticing than the state system? MR. SMITH said he became aware of this very recently but he does have concerns and believes it would put the state at a disadvantage. In fact, they are already at a disadvantage to some degree. CHIEF MONEGAN said they don't currently have the Supplemental Benefits System (SBS) so the troopers actually have a better system than they have. They believe this legislation would bring some parity. CHAIRMAN THERRIAULT replied SBS is similar to a 401K and APD could add that rather easily. SENATOR PHILLIPS noted the state replaced social security with SBS about 20 years ago. CHAIRMAN THERRIAULT asked Chief Monegan whether local officers got social security benefits. CHIEF MONEGAN replied some do; those that were in the police and fire departments were told they were no longer eligible, but the new hires under PERS Tier III do pay in and will receive social security. SENATOR DAVIS thought the federal government determined SBS was no longer an option and everyone was going to eventually have to return to the Social Security System. She asked if there was anyone present that could tell her whether or not that was correct. GUY BELL, Director of the Division of Retirement and Benefits, explained that SBS is closed to other options, but there are other options such as 401K available to local governments. The federal government is making more pension options available to government than in the past through reform legislation that was recently enacted. Although he isn't an expert on all the options, he can provide information on other options that might be available other than social security and SBS. He noted the state contributes 6.13 percent to SBS while the social security contribution is 6.2 percent so the state saves a bit through SBS. CHAIRMAN THERRIAULT asked whether it would be available for the state to take advantage of since the bill says "employer." GUY BELL said it is placed in AS 39.35.655, which is under the political subdivision and public organization portion of statute. It is Article 7 of the PERS statute, which doesn't include the State of Alaska. This could be changed but, as written, they interpret it to exclude the state. CHAIRMAN THERRIAULT asked whether he had seen the memo to Mr. Bravo (ph). MR. BELL had not seen the memo and was given a copy to read. SENATOR PHILLIPS asked whether he had an opinion from the Attorney General's office. GUY BELL replied it would probably help clarify that one issue. The question is if you're in a higher tier area and are with an employer that opted for higher tier benefits then move to a lower tier employer, are you entitled to the higher tier benefits with that new employer? The language says you cannot take that higher level of benefits with you. However, this is just a legal opinion, it has not been litigated. "In the benefits/entitlement world we do have a constitutional prohibition against the diminution of retirement benefits and that's being tested all the time." Currently there are three separate lawsuits relating to retirement and benefits and he couldn't be sure this wouldn't be tested at some time in the future. This is a cafeteria plan for retirement benefits that can shift between employers and under (c) of the amendment the optional benefits could change each year. That might mean that newly hired employees may be entitled to less after a certain point in the year than employees that were hired in the previous year. An employer would have different benefits for employees depending on their year of hire. There is a great deal of variety and complexity as currently drafted. The three-tier system is difficult to administer now and this would more than double the number of tiers because of the number of choices an employer could make. There was no further testimony. CHAIRMAN THERRIAULT announced he would hold HB 254 in committee while they reviewed the wording of the amendment.