HOUSE FINANCE COMMITTEE March 6, 1996 1:36 P.M. TAPE HFC 96-64, Side 1, #000 - end. TAPE HFC 96-64, Side 2, #000 - #302. CALL TO ORDER Co-Chair Mark Hanley called the House Finance Committee meeting to order at 1:36 p.m. PRESENT Co-Chair Hanley Representative Martin Co-Chair Foster Representative Mulder Representative Brown Representative Navarre Representative Grussendorf Representative Parnell Representative Kelly Representative Therriault Representative Kohring ALSO PRESENT Mark Boyer, Commissioner, Department of Administration; Representative Con Bunde; Mila Doyle, Labor Relations, Department of Administration; Robert Stalnaker, Director, Division of Retirement; Dave Tonkovich, Legislative Analyst, Legislative Finance Division; Bruce Cummings, Division of Personnel, Alaska Marine Highway System, Department of Transportation and Public Facilities; Beverly Reaume, Director Division of Personnel; Mike Greany, Director, Legislative Finance Division. SUMMARY CONTRACT LABOR AGREEMENTS & COMPENSATION INCREASES: Co-Chair Hanley provided members with a spreadsheet compiled by the Legislative Finance Division, Approximate Cost of Bargaining Unit Contracts and Other Non-Covered Employee Compensation (Attachment 1). He reviewed Attachment 1. He explained that the calculations for University of Alaska and the Alaska Court System were divided between non-covered and covered employees. The increase for Court non-covered employees is 5.2 percent. MARK BOYER, COMMISSIONER, DEPARTMENT OF ADMINISTRATION noted that this proposal would treat Court System non-covered employees differently than other non-covered employees. Co-Chair 1 Hanley restated comments made by Arthur H. Snowden, II, Administrative Director, Alaska Court System during the 3/6/96, 8:00 a.m. meeting. He noted that the spreadsheet shows what has been requested by the Alaska Court System. Commissioner Boyer suggested that all non-covered employees be treated similarly. He cautioned against creating disparity among non-covered employees. Co-Chair Hanley noted that the Administration recommends a 1.5 percent increase for exempt employees. To put exempt employees and legislative employees on par with Alaska Court System employees they would have to receive an additional 3.6 percent increase. Commissioner Boyer noted that the University of Alaska has a different system for compensation based on performance. BOB STALNAKER, DIRECTOR, DIVISION OF RETIREMENT AND BENEFITS, DEPARTMENT OF ADMINISTRATION clarified that health insurance increases for SU and PSEA were included in the upper part of the spreadsheet. A separate line for health benefits includes costs for GGU and Labor, Trades and Crafts (LTC). Co-Chair Hanley noted that these units would go to a set amount in 1998. Commissioner Boyer observed that the LTC Health Trust Fund is speculative. Mr. Stalnaker stressed that the State has gone four years without increases for health costs. Co-Chair Hanley stated that merit costs will remain regardless of contract approval. Some estimated health benefit increases will also remain. He clarified that the health benefits assumption is based on a 3 percent increase for the last 6 months of 1997. Mr. Stalnaker stated that the intention is to convert to a fiscal year basis to adjust health costs. The assumption for the next 2 years would be 6 percent. Commissioner Boyer emphasized that the line listing health benefit costs at $137.9 thousand dollars is speculative. Co-Chair Hanley agreed that these costs are speculative. Commissioner Boyer noted that $2,148.9 million dollars is the entire amount for estimated merit increases based on actuals from FY 95. He stressed that the impact of contracts is 1.5 percent of this amount. He stated that merit costs are not driven by the contracts. Co-Chair Hanley agreed that the merit increase line is not driven entirely by the contracts. Representative Brown asked how merit increases are normally handled. She clarified that merit increases are absorbed by the agencies as higher paid employees retire. Co-Chair Hanley questioned if retirements of people at higher steps actually cover merit increases. He noted that there may be 2 reallocations of spending as opposed to savings. He questioned the value of early retirement legislation. Representative Brown asked how much of the $12,298.6 million dollar subtotal is in the Governor's proposed budget. Commissioner Boyer stated that the Governor's proposal includes $8,33.0 million general fund dollars and $5,820.0 million other fund dollars. He observed that PSEA and Alaska Court System costs are not included in this amount. In response to a question by Co-Chair Hanley, Mr. Stalnaker clarified that SBS and PES are included in the numbers calculated in Attachment 1. Co-Chair Hanley observed that the line for Non-Add SBS Incremental Costs is an estimate of the dollars in the above lines that are attributed to SBS costs. In response to a question by Representative Therriault, Mr. Stalnaker stressed that the employment force is dynamic. He argued that personnel costs remain consistent as employees leave and are replaced by employees at a lower range or step. He observed that vacancies are also a factor. Co- Chair Hanley pointed out that a person who remains in the system will get an average annual increase of 1.5 to 2 percent. Commissioner Boyer provided members with copies of pay schedules (Attachment 2). He noted that an employee can anticipate an accumulative increase of 33 to 38 percent over an 18 year career. He pointed out that over the same time frame there is a 150 percent increase in the CPI. Co-Chair Hanley pointed out that if contracts are accepted employees will get an accumulated 3.4 percent increase during the life of the contract which will out pace the anticipated CPI. Commissioner Boyer noted that the Anchorage CPI grew by 226 percent from 1973 through 1996. Employee wages in the GGU unit grew by 182.9 percent during the same time. Co-Chair Hanley pointed out that the addition of 33 percent for merit increases would bring them even with inflation. In response to a question by Representative Martin, Commissioner Boyer observed that the contracts would provide for increases of only half of the CPI. Representative Martin suggested that state salaries have kept up with the CPI better than private salaries. Mr. Stalnaker noted that an average of 400 employees retire each year. The average PERS retiree receives $700.0 dollars a month. An average of 2,000 employees leave state employment each year. In response to a question by Representative Therriault, Mr. 3 Stalnaker noted that a member of the retirement system can pull out their contributions regardless of whether they are vested. The employer contribution cannot be withdrawn. Representative Therriault maintained that there is more job security in the state system. Mr. Stalnaker agreed that private sector employees are nervous. He asserted that public sector employees are also nervous about their employment. He observed that the average age of an employee in TRS is increasing. He suggested that an older employee is less likely to prematurely leave their employment. He stressed that the aging of the baby boomer generation is effecting all retirement systems. Representative Therriault restated that employees want job security. Commissioner Boyer agreed that employees have made concessions in order to protect employment. Mr. Stalnaker gave a brief history of the SBS system. He noted that the State initiated withdrawal from Social Security in 1978. He noted that SBS was part of the agreement reached in order to achieve employee support. After the state of California applied for withdrawal from Social Security the federal government shut the door. He observed that public sector employers could withdraw from Social Security until after the withdrawal of the state of Alaska. He observed that SBS was not set up as a requirement of the federal government. It was the result of collective bargaining to allow benefit options equal to Social Security. The benefit to the employer was that the contribution rate would be fixed. Social Security costs had increased to 6.13 percent when the State pulled out. Social Security has since increased to 7.6 percent. He maintained that the State is saving money by virtue of being in SBS. He observed that public sector employees now must participate in Social Security unless there is an alternative plan that is at least equal to Social Security. A defined contribution plan must have contributions combined of at least 7.6 percent. He observed that PERS would satisfy this requirement. He concluded that SBS is not needed to satisfy federal requirements. He noted that there has been enlarged growth in PERS. Mr. Stalnaker observed that the State Constitution states that retirement benefits should not be diminished or impaired. He observed that the opinion of the Office of Attorney General is that contributions could be stopped in SBS because the constitutional protection does not protect future contributions of a defined contribution plan. He stressed that any change to the SBS system would result in lawsuits. He noted that statutes state that SBS was designed to replace Social Security. It also states in statute that contributions can be reduced or stopped if the 4 employer goes back into Social Security. Co-Chair Hanley noted that benefits for new employees have been reduced in PERS. (Tape Change, HFC 96-64, Side 2) Representative Grussendorf observed that there is a higher percentage of Alaska Court System employees at lower level ranges. Co-Chair Hanley observed that judges are at the upper end of the salary scale and would receive the same pay increase as clerical staff. Co-Chair Hanley observed that salaries of employees at the lower end receive a lower percentage of total increases over time. He asked the justification for variations in step increases at different ranges. Discussion ensued regarding the variation in range and step percentages. BEVERLY REAUME, DIRECTOR, DIVISION OF PERSONNEL, DEPARTMENT OF ADMINISTRATION noted that in the late 70's the statutory schedule tracked with general government. She explained that variations occurred over a number of negotiations which occurred over a number of years. BRUCE CUMMINGS, DIVISION OF PERSONNEL, ALASKA MARINE HIGHWAY, DEPARTMENT OF TRANSPORTATION AND PUBLIC FACILITIES observed that prior to collective bargaining the salary schedule in AS 39.27 was fully integrated with fixed percentages between every step. Every step was 3.75 percent higher than the preceding step. He noted that percentage increases were applied across the board with collective bargaining. At times uneven percentages were distributed. He noted that over a period of years the integrated schedule of 3.75 percent has been changed. Higher salary ranges receive a higher percentage due to implementation of increases based on a higher salary. Representative Brown asked the rationale for not including all employees under the merit system. Mr. Cummings noted three classifications of employees; fully exempt employees, partially exempt employees and fully classified employees. A five step schedule was set at statehood based on the premise that an employee could work five years before they would have maximized their learning curve. In the 70's the Legislature added four additional longevity steps. In response to a question by Representative Brown, Commissioner Boyer clarified that the three marine bargaining units and the Labor, Trades and Crafts unit are not included under the merit and longevity system. 5 In response to a question by Representative Brown, Commissioner Boyer noted the bargaining unit that applies to each salary schedule. He observed that the statutory salary schedule is in current statute. The other schedules reflect current contracts. Salary schedules have not been adjusted in the negotiated contracts. Co-Chair Hanley asked for more information regarding vesting in the state retirement system. There is a five year vesting period for PERS. ADJOURNMENT The meeting adjourned at 2:39 p.m. 6