CSHB 91(FIN)-RETIRED PEACE OFFICER'S MEDICAL BENEFITS      CHAIR GARY STEVENS reconvened the meeting and announced CSHB 91(FIN) to be up for consideration and recognized Representative Anderson. REPRESENTATIVE TOM ANDERSON, sponsor of HB 91, reported that HB 91 had undergone a lot of deserved scrutiny in the House Finance Committee HB 91 is about recruiting and retaining state troopers, firefighters, and correctional officers by providing them with medical coverage at their retirement of 20 years. "No one would disagree that these men and women are risking their lives and their health. ... I think it's really important to differentiate a peace officer versus another occupation because of that health and safety risk." The bill removes the additional five year requirement for peace officers to receive medical benefits and reestablished parity by allowing the full medical benefit in a normal retirement. He noted that the administration has been working on "a realistic and workable" fiscal note and they are beginning to see the potential in cost savings. Peace officers pay a higher PERS contribution to compensate for their fewer years of required service before normal retirement, he said and that fact should be taken into consideration. He asked members to note the letters of support and pointed out that Representative Hawker asked for and received written assurance from the Municipality of Anchorage stating that this wouldn't adversely affect their budget. It is relevant, he said, that the bill came out of the House with so many cosponsors. He observed that Kevin Richie of the Alaska Municipal League was in the audience and would undoubtedly speak against the bill, but to refute his testimony he said, "this is a balance. We're losing men and women to borough, federal, [and] out-of-state jobs. Recruiting is tougher and tougher and this is an incentive for them. They've certainly put in their time. No one will deny that." He asked the committee to address any state affairs issues and pass the bill on to the Finance Committee where fiscal concerns could be addressed. SENATOR BERT STEDMAN said he could appreciate the request to pass fiscal concerns along to the Finance Committee and he could understand why there is a lot of interest in the proposed changes. "I think most folks, given the options, would work less and retire with more benefits." This increases cost to the communities in a financially challenging time. He questioned why the bill was coming forward now instead of later when the committee could respond to the funding issue under the PERS system. REPRESENTATIVE ANDERSON replied the ever-present question is why bring forward a bill that may cause added burden. The answer is because there is a balance here. "It comes down to where we have critical mass and problem and where we don't." The reason he sponsored the bill is because of the difficulty associated with recruitment and retention. Giving this benefit isn't as much about whether these people are deserving; it's more about the necessity of keeping these people applying for and working in these jobs. "We felt it was becoming a detriment not to have better retirement. We wanted to correct back to what the retirement used to be." This is a change that is necessary he insisted. SENATOR STEDMAN remarked that all the current PERS issues aren't related to rising healthcare costs, but those costs are substantial and this bill would increase the weighting. The inability to accurately predict increasing medical costs is of great concern. Referring to a letter from the City of Fairbanks, he noted that they oppose this bill because of the increased funding requirement that they are already facing for their retirement package. This is a contractual obligation and therefore is not open for renegotiation. "There is a five percent cap increase on their contributions every year. They were up against the cap last year and are up against the cap this year and will probably be up against the cap again the following year." It's creating a substantial impact on the municipalities' general funds and cutting services is about their only option. Because some would look at this as an unfunded mandate, he asked what suggestions he might have for municipalities. REPRESENTATIVE ANDERSON replied that is a good question, but the mayor of the largest city in the state is on record saying that they would find ways to comply. He said he would hope that other communities would do the same. The funding debate could go on forever and everyone could pass the buck, but with a partnership it can be done. He wasn't sure what prompted Fairbanks to send the letter as recently as today when the bill has been around for more than a year. The Fairbanks police certainly approve of the bill. He said. SENATOR COWDERY said he has been involved with police and fire for a long time and he found that dispatchers experience a lot of burnout and he wasn't sure whether they have early retirement now or not. REPRESENTATIVE ANDERSON thought that Representative Hawker had a bill addressing that issue. SENATOR COWDERY commented that he thinks they deserve consideration as much as anyone else. REPRESENTATIVE ANDERSON pointed out that Mike Fox would say that this bill isn't costing any money in the end because the state loses when well-trained officers leave early. If a captain retires after 20 years service and a sergeant comes in as the replacement, there is a pay differential. "It's our belief that it's not as expensive as submitted." He deferred to Mr. Fox to respond to Senator Cowdery's comment. CHAIR GARY STEVENS opened public testimony and asked Mr. Fox to begin. MIKE FOX, Public Safety Employees Association employee, gave a 7-minute power point presentation on HB 91. Analysis: This bill provides medical benefits for peace officers at normal retirement instead of working 5 years beyond normal retirement. It removes the disincentives for peace officers to take normal retirement and reestablishes parity with all the PERS members. The Public Employees Retirement System Mission: On January 1, 1961, the Alaska Legislature established the Public Employee Retirement System to attract and retain qualified people in the public service employment. Who is, by statute, affected by this bill: Peace officers, firefighters, chiefs of police, regional public safety officers, correctional officers, correctional superintendents, probation officers, fire chiefs. The 2003 validation report for PERS lists 2,893 active occupation [indisc.] members, but this bill would affect only Tier II and III members. History of the law: Tier I: Major medical is provided to all benefit recipients. Tier II: - In 1986 HB 252 by Representatives Duncan and Miller created Tier II. Major medical is provided at age 60. Tier III - Created in 2001. Major medical is provided after a 10-year vesting period at age 60 or at normal retirement. Except peace officers must work 5 extra years. HB 91 deletes the five extra years for peace officers. The justification for change includes: · The current law withholds benefits from peace officer members of PERS unless an extra 5 years is worked. · It undermines the intent of peace officers' own retirement. · It inhibits recruitment and retention. · It causes inequality among PERS members. Fiscal Note 2: Approximately $.85 million - half from general fund money. Employer contribution change across the board is + .12% or .97% if applied to just police/fire payroll. For a person earning $50,000 per year, the increase in employer contribution would be $60 per year. $30 a year would be from the general fund. The fiscal note did not consider any savings HB 91 would generate in operational costs. It's just one side of the coin. [Mr. Fox showed a graph showing employer contribution as a percent of salary.] Everyone talks about PERS indebtedness in PERS and this graph shows that in FY90 the contribution was about 12 percent. In FY 94 it was about 17 percent. This year it's at 13.42 percent. This fiscal note would raise this by .12 of 1 percent. So the 13.42 percent would go up to 13.54 percent. The employee contribution is steady. All other PERS members contribute 6.75 percent while peace officer PERS members contribute 7.5 percent. They pay that extra to compensate for their shorter period of service required for normal retirement - to maintain equality in PERS. The next graph helps illustrate turnover in corrections and you can see the decline between 0 and 20. Almost 10 percent of the officers have left in one year on the job; another 10 percent have left in two years on the job. There is significant room for improvement in retention of corrections officers. The next graph shows by year class, the percentage of troopers still working compared to those who have left. You can see a steady decline from year 1 troopers to year 20 troopers. The blank year classes are years where no one was hired. Improved retention equals savings. Savings in recruiting and training are enjoyed by reducing turnover. Recruiting and trainings costs equal approximately $104,871 per trooper. Public Safety provided that number. Problems associated with peace officers working past normal retirement include: Increased health problems, increased risk of injury, higher compensation, lower morale from burnout. This graph shows that there is very limited opportunity for peace officers to move into administrative positions. The top bar shows corrections officers and you can see there are over 700 working on the floor of the prisons and there are about 30 administrative officers in the prisons. There's not much room for correction officers to move off the floors of prisons. In the State Troopers, there are about 330 people that are working as sergeants and troopers, which are patrol or investigative positions. There are about 33 in the administrative positions. Once again you can see that it's very likely for a person to work their entire career either on the floor of the prison or on patrol. The normal retirement equals savings. Eliminating the current disincentive to take normal retirement will reduce the number of high-cost 20-year officers. Direct savings: Replacing a 20 year trooper with a 1 year trooper will save approximately $26,644 per year in base pay and leave. That's the difference between a 1-year guy and a 20-year guy. That is based solely on base pay and leave with no shift differential, no overtime, no geographic differential, and no other consideration - all of which would make that higher. Replacing a 20-year CO2 with a 1-year CO2 would save approximately $18,252 per year under the same conditions. This is in the first year. If they defer retirement for five years, as is the current policy, you just multiply that times five and see if you'll save any money when guys leave at 20 for the 20 and out. The cost versus savings balance for this bill: If 20 years are not completed there's no benefit change and there's no cost. The bottom line - if a person doesn't work 20 years this bill doesn't affect them. There is no cost. If an officer retires at 20 years instead of deferring the associated savings help balance the cost. It becomes a policy decision. What do you want to do? Do you want guys to leave at 20 or do you want to keep them after 20? If they leave before 20, there is no cost to you. If your policy is to keep them beyond 20, there is a cost but there is also a savings. It's a policy choice. In conclusion: Current law undermines the intent of normal retirement of peace officers and it inhibits PERS mission to recruit and retain in public service. HB 91 removes the disincentive for peace officers to take normal retirement and reestablishes parity among all PERS members. It's good for peace officers and it's good policy. CHAIR GARY STEVENS thanked Mr. Fox and noted there were no questions. CHARLIE HANSON, Lemon Creek corrections officer, testified in support of HB 91. He has an undergraduate degree in human development and a masters degree in human services, is a Tier I employee and has more than 19 years service. He recounted the difficulty, danger and stress associated with being a corrections officer. Because inmates are often involved in high-risk behavior, the instances of HIV, and hepatitis A, B, and C are higher than the public population. This puts corrections officers at higher risk and increases the potential need for long-term health care benefits. He said he was bringing a message sent from the hearts of correctional officers throughout the system. Corrections officers seldom make their 20-year retirement goal. "I've watched over 250 floor staff come and go without reaching that magic time of service within the Lemon Creek Correctional Center alone." Recently he asked his superintendent to look back over his 27- year career and tell him how many corrections officers he knew of that were able to reach the 20-year mark. "The figure he came up with was four." That has since been increased by one. "The likelihood that a corrections officer will reach the 20-year mark for full retirement is bad enough. Pushing the mark to 25- years for full medical benefits is next to impossible and demeaning to us when we are at risk of serious long-term illness because of our jobs." "HB 91 will ensure an appropriate retirement package for those of us who make it that far. It isn't cost effective to continually pay to train new people in order to replace those who see that the 25-year goal is unobtainable." KEVIN RICHIE, Alaska Municipal League, apologized for entering the process so recently and advised that a number of municipalities recently joined to form a PERS committee because of the impact PERS is having. Currently the issue is the five percent increase in salary cost for the retirement program. This is a huge issue for municipalities because in addition to the increased 5 percent to the retirement program, they are losing revenue sharing and have to take on more responsibility such as DOT match. Prior to this year the average PERS employer contribution was 6.77 percent of salary. The new actuary says that percentage must be increased to about 25 percent of salary for each of the next 20 years for the PERS system to achieve about 90 percent funding. This year it's a $19-$20 million cost that municipalities must absorb. Those that have a cap have no other option than to cut services. Certainly municipalities are very concerned about any increased PERS obligation and would like the opportunity to address the structure of the process. Currently municipalities, school districts, and the University of Alaska fund two-thirds of the PERS/TRS system. Finding a way to increase municipality involvement in the analysis process of cost increases and in the management of the program would be desirable. According to the fiscal note, this bill would amount to a .97 percent annual cost increase in police salaries. The PERS/TRS Board is currently considering a radical overhaul of the entire system so "looking at the long-term, it's important to put this change in the context of the system could be radically different in a few years for everybody new entering the system." CHAIR GARY STEVENS summarized that the primary testimony spoke of the impact the bill would have on state troopers, but the last testimony related to city police. He questioned how to put a dollar figure on that and asked Mr. Richie whether he had a fiscal note for local communities. MR. RICHIE explained that the annual fiscal impact would amount to the total police salaries multiplied times .97 percent. SENATOR STEDMAN referred to draft fiscal note number 4 and noted that, "using the current Valuation Assumptions, this legislation will increase the PERS accrued liability by $8 million." SENATOR COWDERY asked how many police in Anchorage are Tier I employees. MR. RICHIE said he didn't have that information. SENATOR COWDERY said, "We all agree they're not all in PERS, right?" MR. RICHIE was unable to provide an answer. SENATOR COWDERY said, "I believe some are in PERS - some of the later hires, but the early hires I don't believe are. I think they have their own." There were no further questions or comments for Mr. Richie. MELANIE MILLHORN, director of the Division of Retirement & Benefits, said she would address her comments to draft fiscal note number 4. She agreed with Representative Anderson that the division has met with PSEA and that they are looking at the suggested savings, but at present they are unable to quantify the savings. Therefore fiscal note number 4 is the one that Mercer Human Resources Consulting (Mercer) worked on and those are the calculations she would address. With regard to the concern about turnover rate, she said they are comfortable with the information Mercer provided from a 1997 through 1999 report showing a 3 percent turnover rate. "So we don't have anything we can use to look at a higher turnover rate. So the amount that would cost is correct according to Senator Stedman. That is an $8 million and it would be l97 percent for police and firefighter payroll for the next 25 years." That is calculated by looking at the population that would be impacted and according to the evaluation report of June 30, 2002 there are 2,695 police and firefighter classifications for PERS. For that same evaluation period, the number of Tier II and Tier III members was 1,961. "Those are the members who would derive benefit from this piece of legislation." When Mercer looks at retirement rates and applies actuarial assumptions, they project that of the 1,961 potential beneficiaries there would be 411 that would anti-select. "Anti- select is an insurance term meaning that those parties who derive benefit would make that selection." CHAIR GARY STEVENS apologized for interrupting, but he wanted to know if the data included municipal employees. MS. MILLHORN replied all PERS employees were included. SENATOR COWDERY chimed in to ask if he was correct that not all police and fire are in PERS. MS. MILLHORN said it is her understanding that there is a different municipal retirement program for some employees. Continuing her testimony, she repeated that Mercer calculated that 411 employees would benefit from this legislation, which represents about 25 percent of the 1,961 who would be eligible. "For the State of Alaska, the amount we would pay for this legislation would be $856,000 annually." The evaluation report of June 30,2002 shows that PERS is at a 75 percent funding ratio. This means that if all the assets and liabilities were calculated and everything that was due on that date was in fact paid, there would be a 25 percent shortfall. PERS hasn't been in this funding circumstance for about 20 years she warned. There are two primary drivers that account for this situation. First, healthcare costs represent about 30 percent of the total PERS costs, which is significant. The second driver is the investment earnings. CHAIR GARY STEVENS asked whether the annual $856,000 cost included municipal costs. MS. MILLHORN replied municipal costs are separate. So the annual cost to the Municipality of Anchorage would be $246,000, she said. CHAIR GARY STEVENS noted that there would be a number of other municipalities that would be added to the list if there were a thorough analysis. MS. MILLHORN said yes and there are a total of 161 PERS employers. There were no further questions for Ms. Millhorn. MAURICE HUGHES testified via teleconference from Kodiak to say that he has been an Alaska State Trooper for 14 years and he was speaking for the 330 state troopers and the other police officers that are in PERS. The message he wanted to impart was that, "The policy intending to influence police officers to work beyond their normal retirement by withholding a retirement is wrong." Burnout is a serious issue in this field and young officers find it demoralizing to have to work the five extra years. TAPE 04-19, SIDE B  5:45 pm LARRY SEMMENS testified via teleconference as finance director for the City of Kenai in opposition to HB 91. He advised that he faxed opposing resolution 2003-04 from the Alaska Government Finance Offices Association. The resolution was dated April 18, 2003, "so although some people were not aware of this, the finance officers were and we registered our opposition at that time." MR. SEMMENS reported that he also sent his written testimony to the committee and he wanted to read it into the record as well. [A full copy may be found in the bill file.] The primary reason for his opposition is because the PERS system is already in trouble and this legislation would cost money. "For Kenai, the unfunded actuarial accrued liability is $7.4 million - almost a whole year's general fund budget." He noted that employers have alternatives to increasing retirement benefits if they are having difficulty attracting and retaining qualified applicants. Raising wages is one such option and individual municipalities could even choose to pay health benefits after 20-years of service. That makes it a local control issue and not an unfunded mandate. CHAIR GARY STEVENS told Mr. Semmens that he received the resolution and letter some time ago. He noted that it was after 6:00 pm and he would hold the bill for future consideration and the committee would return to HB 414. SENATOR GUESS stated that the bill was straightforward and you should know where you stand on the issue so she could see no reason why the committee shouldn't move the bill. She was ready to make a motion. CHAIR GARY STEVENS said he would accept the motion if she wanted to move HB 91. SENATOR HOFFMAN commented that the Senate President spoke of working cooperatively, but he had seen no cooperation that day. CHAIR GARY STEVENS said, "Well I'm certainly going to accept that motion if you want to make it Senator Guess." After a pause he asked, "Senator Guess, if you'll make a motion fine, if not well go..." SENATOR GUESS replied, "Oh I'm sorry I didn't - I'm a little confused at where you're running your meeting. I was trying to find my notes on the amendment of the earlier stuff." CHAIR GARY STEVENS said, "I'm ready to move on to the other bill, but if you'd want to make a motion on HB 91 we would accept it." SENATOR GUESS replied, "You're doing a very good job of putting me between failing this bill so it stops and putting you guys on record against police officers. So with that, we'll go to 414. If the sponsor left, I will confer with him." CHAIR GARY STEVENS announced he would hold HB 91 for further study.