HOUSE FINANCE COMMITTEE March 20, 1996 1:40 P.M. TAPE HFC 96-81, Side 1, #000 - end. TAPE HFC 96-81, Side 2, #000 - end. TAPE HFC 96-82, Side 1, #000 - end. TAPE HFC 96-82, Side 2, #000 - #215. CALL TO ORDER Co-Chair Mark Hanley called the House Finance Committee meeting to order at 1:40 p.m. PRESENT Co-Chair Hanley Co-Chair Foster Representative Martin Representative Brown Representative Navarre Representative Grussendorf Representative Parnell Representative Kelly Representative Therriault Representative Kohring Representative Mulder was absent from the meeting. ALSO PRESENT Mark Boyer, Commissioner, Department of Administration; Mila Doyle, Labor Relations, Department of Administration; Diane Corso, Labor Relations Manager, Department of Administration; Alison Elgee, Deputy Commissioner, Department of Administration; Katherine Strasbaugh, Assistant Attorney General, Department of Law; Terry Cramer, Attorney, Legislative Affairs Agency; Pat Gullafson, Assistant Attorney General, Department of Law. SUMMARY INQUIRY INTO MONETARY TERMS AND INTERIM LABOR AGREEMENTS MARINE HIGHWAY SYSTEM COST OF LIVING DIFFERENTIAL OVERPAYMENTS Co-Chair Hanley reviewed the issues before the Committee. He noted that the first area of concern relates to the conversion of sick leave to personal leave. He noted that the second area of concern was brought to the attention of the Committee by Representative Martin. The Committee will review Cost of Living Differentials (COLD) overpayments to Marine Highway System employees. He noted that in-state employees are paid between 18 and 22.5 percent more than 1 out-of-state employees. Some out-of-state employees claimed and received in-state COLD payments. Co-Chair Hanley provided members with back-up information regarding the issues under Committee consideration (Attachment 1). INQUIRY INTO MONETARY TERMS AND INTERIM LABOR AGREEMENTS Co-Chair Hanley noted that monetary terms of an agreement must be submitted before the legislature for approval. Monetary terms of an agreement are defined as changes in the terms and conditions of employment resulting from an agreement that will require an appropriation for implementation or will result in a change in state revenues or productive work hours for state employees. The Committee reviewed two contracts negotiated by the Administration. The interim agreements allowed conversion of employee sick and annual leave to personal leave. Under certain conditions employees can cash-in annual and personal leave. They cannot cash-in sick leave. MARK BOYER, COMMISSIONER, DEPARTMENT OF ADMINISTRATION stressed that the Administration is given maximum flexibility regarding requirements for the submission of monetary terms in negotiation of contracts. Commissioner Boyer asserted that his management style is inclusive, thorough, and collaborative. He stressed that he entertains all points of views. He maintained that counsel is sought in regards to decisions made by his Department to assure sound principles. KATHLEEN STRASBAUGH, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF LAW addressed legal questions. She stressed that monetary terms as defined by in statute is not what an ordinary person would customarily think of as something with cash value. Monetary terms have been defined as that which requires an appropriation for its implementation or a change in productive work hours. She emphasized that no appropriation was required for the interim conversion of employee leave. Ms. Strasbaugh observed that on an average, employees use 60 percent of their sick leave. She pointed out that the cash value of sick leave converted to annual leave may never be paid. The leave may be entirely used. She asserted that the conversion will result in less leave usage. She stated that an appropriation may never be required. Ms. Strasbaugh stated that the Administration expects that leave usage will be reduced. She observed that similar 2 conversions occurred in 1989. She emphasized that the practice of leave conversion is consistent with the wording of the law. Ms. Strasbaugh disagreed with Ms. Cramer's assessment of how the Court would rule in regards to leave conversions (see Ms Cramer's memorandum dated 3/20/96 in Attachment 1). She noted that she would inform the Court that no appropriations would be needed to pay for the leave conversion. She would not be able to tell the Court how many productive work hours would be gained or lost as result of leave conversions. She did not think that the Court would allow an employer to speculate in regards to future costs. Co-Chair Hanley asked if unions requested the conversion of sick leave to annual leave. He asked if this is generally viewed as a benefit to the union or to the State. DIANE CORSO, LABOR RELATIONS MANAGER, DEPARTMENT OF ADMINISTRATION discussed the bargaining process. She stressed that the State proposed implementing personal leave systems in previous negotiations. She observed in most circumstances 24 hour institutions must pay overtime for employee's leave replacement. She maintained that employee hours off the job are reduced when sick and annual leave is converted to personal leave. She noted that the State proposed a personal leave system during negotiations with the Labors, Trades and Crafts union (LTC). She observed that many LTC employees are involved in 24 hour operations. She emphasized that the combined accrual rate is higher under a sick and annual leave system. In response to a question by Co-Chair Hanley, Ms. Corso explained that the personal leave accrual rate was reduced below the combined accrual rate for sick and annual leave. Co-Chair Hanley noted that not all employees use all of their sick leave before they retire. The balance of sick leave would not be of value to the individual employee. Personal leave is of cash value to the employee. In response to a question by Co-Chair Hanley, Commissioner Boyer explained that there was a one time transfer of 50 percent of each employee's sick leave to personal leave in the Labors, Trades and Crafts (LTC) union. Supervisory Unit (SU) employees were also allowed to convert 50 percent of their sick leave to personal leave. This change has occurred. According to the Office of Attorney General leave conversion is not a monetary term. Co-Chair Hanley questioned if a change in employee health 3 premiums can be made as part of an interim agreement. Commissioner Boyer stated that if the health premium amount was changed up or down it would be a monetary term. He observed that changes in health premiums were submitted in the LTC and SU contracts. He noted that these changes would require additional appropriations. Co-Chair Hanley referred to 23.01, Employee Health Insurance (see Attachment 1). Commissioner Boyer clarified that the state health premium contribution of $524 dollars was carried forward from the currently approved contract. Ms. Corso noted that the only change was the addition of a provision allowing the union to increase the employee contribution rate after a notice period to the State. This would not incur additional cost to the State. Co-Chair Hanley pointed out that a previous document prepared by the Administration erroneously indicated that the health premium amount was $500 dollars. Co-Chair Hanley noted that the Commissioner's letter, dated 3/18/96, contained in Attachment 1, stated that a change in departments' rate of contribution for the leave account was not needed in this fiscal year. He asked if any changes are anticipated in the future based on leave conversions. Commissioner Boyer stated that the Administration does not expect any changes in leave cash out calculations based on the conversion. He stressed that their calculations are based on the history of previous conversions. ALISON ELGEE, DEPUTY COMMISSIONER, DEPARTMENT OF ADMINISTRATION discussed leave conversions. The Department budgets actual leave utilization on an annual basis. All departments are assessed the same terminal leave percentage. Leave cash out is adjusted on a quarterly basis based on utilization by department. She explained that contracts allow employees to cash in a certain number of hours if thresholds are met. Additional leave cash in is at the option of the employer. A quarterly review was instituted to provide employer responsibility for additional leave cash in. Ms. Corso explained that there are no caps on personal leave accrual. She noted that personal leave has to be used to cover any medical absences for the employee or family. Commissioner Boyer pointed out that the contracts contain a mandatory usage provision. A standard of 37.5 hours must be used annually or lost. The employee can cash out five days if they have a 10 day mandatory usage. Co-Chair Hanley noted that the estimated value of the leave 4 conversion would be approximately $7 million dollars if it were all cashed out. He stressed that upon termination sick leave which was converted to personal leave would be available for cash in. This leave that would not have a cash value if it had not been converted. Commissioner Boyer stated that the statute does not address the question of value. The statute refers to required appropriations. There is no increased appropriation required. The personal services budget of each department is billed a standard 1.4 percent. This is billed to a bank that is drawn down from by the employer. Co-Chair Hanley questioned if the draw down would be increased by the conversion. Commissioner Boyer responded that there are limitations on the draw down of active employees within the contracts. Co-Chair Hanley stressed that some employees will terminate within the next year. He asserted that their leave cash in will be greater due to the interim contract. Commissioner Boyer acknowledged that their cash opportunity will be greater. He restated that an additional appropriation will not be needed. He stressed that the 1.4 factor is historically reflective of previous leave conversions. He stressed that if the Legislature laid off 1,000 employees the rate would be eschewed. Co-Chair Hanley concluded that there is a cash value to the employee that does not require an additional appropriation. He asked if additional leave value was placed on the books. Commissioner Boyer clarified that leave was taken from an account that does not have a cash value and placed in an account that does have a cash value. Ms. Elgee explained that non-covered employees were converted in the late 70's from an annual/sick leave system to a personal leave system. A review was conducted to ascertain the average actual leave utilization of state employees. It was determined that employees use 60 percent of their sick leave on an annual basis. Annual leave and 60 percent of the accrued sick leave were converted to personal leave. The total leave value remained the same as had been previously utilized. She stated that there was a net zero cost to the state of Alaska. Commissioner Boyer emphasized that the economies of scale allow a net zero result. Co-Chair Hanley observed that payments to leave accounts are adjusted periodically. Ms. Elgee explained that adjustments are only made for leave cash in. She noted that prior to the Hickel Administration a flat amount was assessed all departments for terminal leave and leave cash in. It was discovered that the Department of Public Safety's leave cash 5 in practices were increasing the rate statewide by a noticeable percentage. The decision was made that managers should be responsible for leave cash in. Leave cash in is adjusted on a quarterly basis. It is assessed through payroll and goes into the working reserve account to be used for terminal leave, leave cash in and unemployment insurance benefits. Ms. Elgee explained that the Administration budgets the annual leave need on a cash basis. Co-Chair Hanley maintained that there is going to be an increase in the cash amount that is needed to cover additional leave. He stressed that employees can retire or quit with more personal leave than they had before the interim agreement. Commissioner Boyer emphasized that some employees will wait 10 - 20 years before they cash their leave in. Commissioner Boyer estimated that sick leave not used would be 40 percent on an annual basis. Co-Chair Hanley noted that there is a 10 percent employee turnover. Ms. Elgee pointed out the size of the employee pool results in a wide variety of situations. Co-Chair Hanley stressed that there is a cash difference to the State. He questioned if personnel costs include contributions of employee leave. Ms. Elgee restated that the State does not accrue liability for leave. The Department of Administration budgets based on an annual usage pattern. (Tape Change, HFC 96-81, Side 2) In response to a question by Co-Chair Hanley, Commissioner Boyer stated that the leave conversion was considered a win/win situation. The State gained reduced accrual and utilization rate. The employee gained more flexibility. He restated that it was an employer desire for many years. He added that the city of Fairbanks bargained for similar provisions. He maintained that it makes good business sense. In response to remarks by Representative Navarre, Ms. Corso noted that personal leave systems, in most of the contracts, were modeled on the state statutory scheme. Ms. Elgee observed that members of the Teachers Retirement System (TRS) have the ability to convert sick leave to retirement credit. She pointed out that this would need to be taken into account in terms of any uniform application. Co-Chair Hanley noted that the Teachers Retirement System differs from other groups. Ms. Corso added that there are members of TRS in other state employee groups. 6 Representative Therriault noted that legislation was introduced to allow cash in of unused sick leave. Commissioner Boyer pointed out that the legislation would have allowed a 100 percent conversion. The interim contracts provide for a 50 percent conversion and a reduced accrual rate. Co-Chair Hanley clarified that if an employee had 100 hours of sick leave 50 hours would be converted to personal leave and 50 would remain as sick leave. Commissioner Boyer stressed that personal leave must be used before the remaining sick leave can be accessed. Co-Chair Hanley observed that the requirement to access sick leave was reduced from 30 to 20 days. Commissioner Boyer emphasized that it is a defined environment that disappears over time. Representative Martin expressed concern that there may be an impact to the State's long term retirement costs. In response to a question by Representative Martin, Ms. Corso explained that the decision was reached to consult the Attorney General. Commissioner Boyer noted that the position of the Attorney General was that leave conversion was not a monetary term that required notification of the Legislature. He maintained that the Department of Administration is conforming to past practices of Administrations of both parties. Representative Martin maintained that sick leave should be for sick people. Ms. Corso noted that the only kind of leave that can be donated to another individual is personal leave. She observed that there has been an increase in personal leave donations for sick leave use by other employees. Co-Chair Hanley concluded that there is a cash value to the conversion. He observed that employees are allowed to convert 50 percent and keep 50 percent of their sick leave. Co-Chair Hanley referred to the memorandum by Ms. Cramer in Attachment 1. He pointed out that the memorandum states that the fact that the cost does not need an immediate appropriation does not circumvent the need to submit the contracts. If a future cost can be demonstrated the conversions would be a monetary term. TERRY CRAMER, ATTORNEY, ALASKA LEGAL SERVICES stated that she would argue that the conversion is a monetary term if a 7 future cost is determined. She stressed that there is an ascertainable period of time that the terms will apply. She pointed out that the State will be bound by the terms in subsequent years. MARINE HIGHWAY SYSTEM COST OF LIVING DIFFERENTIAL OVERPAYMENTS Co-Chair Hanley summarized that some Department of Transportation and Public Facilities, Marine Highway employees were compensated at the in-state level when they should have been compensated at a lower out-of-state level. Representative Martin noted that he received a copy of a memorandum by Commissioner Boyer to Jim Ayers, dated 6/30/95 (see Attachment 1). He also received an anonymous letter, dated 11/26/96 (see Attachment 1). He noted that statements made in the memorandum were reprinted in newspaper editorials. Representative Martin reviewed other documents contained in Attachment 1. He maintained that he was mislead by Commissioner Boyer in regards to the status of negotiations between the State and marine highway employees. He asserted that these employees should make 100 percent restitution to the State. He questioned Commissioner Boyer's authority to forgive the indebtedness to the State. Commissioner Boyer stressed that he did not believe an agreement had been reached when he spoke to Representative Martin in December 1995. He emphasized that an offer had been made and agreed to in principal. The agreement was contingent upon acceptance by all ten members of the Marine Engineers' Beneficial Association (MEBA). He did not receive indication that this qualification was met. There were no signatures from MEBA members on the agreement until after December 20. 1995. He had no firm agreement with the other two units involved. Representative Navarre pointed out that the commissioner of Department of Administration is not required to inform the chairman of the Legislative Budget and Audit Committee or legislature in regards to negotiations. He observed that employees disputed the claim that the Cost of Living Differential (COLD) was wrongly taken. No determination had been made. He suggested that a state asset was not given away because it has not determined if COLD payments were wrongly paid. Ms. Corso gave an overview of the issue. She explained that in March 1992, as a result of recommendations made by the Governor's Task Force on Organization Efficiency, 8 investigations were made into COLD payments. The investigation was conducted through the Office of Management and Budget. Meetings were held with the Department of Law, Department of Administration and Department of Transportation and Public Facilities. In July 1992, a working group was formed. The working group recommended in August 1992, that the Office of Management and Budget send out new certification forms. Under the agreement employees that claim COLD are required to certify annually that they meet the requirements and are entitled to receive COLD payments. Additional information including rental agreements were required. Approximately 700 people received inquiries at this time. Members of the working group began meeting with the Labor Relations Steering Committee. The majority of members were certified. Two hundred and fifty files were turned over to the Labor Relations Section in the Division of Personnel, Department of Administration to continue the investigations. Of these, 125 needed more information and 125 were suspect. In March 1993, a private investigator was hired. The suspect group was narrowed to 90 employees to be interviewed. The State decided to attempt to seek global settlements with all three bargaining units involved; Marine Engineers' Beneficial Association, Inlandboatmen's Union (IBU), and Master, Mates and Pilots (MMP). The State would agree not to seek criminal prosecution of employees and not to terminate employees if employees would agree to a lengthily suspension and pay back money claimed by the State. She stressed that the State felt it would be worthwhile to settle in order to avoid the cost of lengthy investigations. The agreement was rejected by IBU. Only eight members of MMP and one individual in MEBA signed up for the settlement. Interviews began in January 1994. In June 1994, a number of employees were terminated. Global settlement negotiations were begun again. Ms. Corso noted that MEBA signed up for the agreement but IBU rejected the agreement. Investigations were completed by November 1994. Twenty nine employees were found to be inappropriately collecting COLD payments. These were dismissed. The remainder were issued some form of discipline. In December 1994, arbitrations were held. (Tape Change, HFC 96-82, Side 1) Ms. Corso noted that the MEBA decision was received in March 1995. The Arbitrator found for the State on all points. In three other cases the State won one, lost one and split the third decision. There are additional cases awaiting arbitration. 9 Representative Martin observed that $700.0 thousand dollars are in question. He referred to the memorandum by Commissioner Boyer. He pointed out that the memorandum indicated that members of Commissioner Boyer's staff were opposed to a settlement. Commissioner Boyer stressed that the labor relations perspective is only one perspective which is narrowed to that field of expertise. He acknowledged that he was counseled against the settlement by members of Department of Administration. He emphasized that this is the third attempt at settlement. The current settlement only affects 10 of 28 employees. The total monetary environment under the agreement is $430.0 thousand dollars. He maintained that the Administration is aggressively pursuing prosecution of employees not covered by the agreement. He acknowledged that the offer was made to all the employees. He pointed out that IBU believes they have won the issue. Representative Martin maintained that the settlement was overly generous. He questioned Commissioner Boyer's right to give away the State's assets. He noted that if the other unions get a better deal that MEBA will get the same deal. PAT GULLAFSON, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF LAW maintained that the commissioner of Department of Administration has the authority to settle labor disputes. He demonstrated that the Commissioner has the authority to settle employee disputes. He emphasized that a disputed dollar is not considered worth 100 cents. The cost of collecting each dollar must be taken into consideration. He reiterated that there have been four negotiations with mixed results. Co-Chair Hanley noted that the memorandum by Commissioner Boyer indicated that Mr. Gullafson was not supportive of the deal. Commissioner Boyer clarified that the memorandum did not address the March 11, 1995 or August 8, 1995 agreements. He noted that the memorandum discussed an offer from the unions. In response to a question by Co-Chair Hanley, Mr. Gullafson stated that there is probably a 50/50 chance of an arbitrator ruling in favor of the State. He pointed out that arbitration is difficult to argue against. He noted that the agreement establishes clarity between the State and MEBA regarding qualifications for the Cost of Living Differential. He stressed that there will be a future savings through a reduction in disputes. Co-Chair Hanley stated that residency should not be a negotiating point. He felt that residency requirements for COLD payments should be clarified statutorily. 10 Representative Martin acknowledged the importance of setting residency requirements in regards to COLD eligibility. He asserted that employees mislead the State. He maintained that the state of Alaska should take the cases to court. Mr. Gullafson observed that it has not been established that the employees were clearly ineligible for COLD payments. Representative Martin restated that employees should be pursued for false claims. In response to a question by Co-Chair Hanley, Mr. Gullafson noted that attorney fees are paid by the party that did not win the arbitration. Co-Chair Hanley questioned if the agreement between the State and MEBA is fair. He referred to comments made by Commissioner Boyer in the memorandum to Jim Ayers (see Attachment 1). He observed that the memorandum questioned the political benefit of an agreement. He noted that repayment will only be 15 percent. He observed that the memorandum questioned if there is a benefit in helping the union representative deliver for the union in an election year. Commissioner Boyer also asked in the memorandum what the press fallout would be and if there is a political need that could be met. He stressed that these statements make the settlement more questionable. He questioned if the agreement was motivated by political aims. Commissioner Boyer stated that he knew the answers to most of the questions posed by the memorandum. He maintained that it is healthy to ask political questions. He asserted that his decision was not based on political considerations. He reiterated that it was a good business decision. He emphasized the time and energy the issue has absorbed. There are 18 cases pending. He stressed the decision not to throw good money after bad. He emphasized the importance of providing a criteria for future disputes. He asserted that millions of dollars will be saved by removing individuals from future COLD eligibility. Commissioner Boyer noted that the permanent fund dividend criteria for residency has been withheld in court. He stated that his goal was to implement an agreement which embraced the best set of criteria for determining residency and put it in place by the agreement. He noted that legislation will be introduced to place this criteria in statute. He restated that the goal is to contain the drain of future resources. He estimated that the State saves $20.0 thousand dollars a month in benefits that are not being paid as a result of actions taken by the current and previous Administrations. He observed that 3 out 10 of the individuals in the agreement are receiving COLD again. He 11 emphasized that the Department of Administration and the Department of Transportation and Public Facilities should not be in the position of policing employees when there is a permanent fund dividend fraud division that works. Commissioner Boyer noted that the State claims that employees were overpaid $800.0 thousand dollars. If arbitrator awards followed the estimated 50/50 pattern the State would receive repayment of $400.0 thousand dollars. The State has already spent $300.0 thousand dollars to pursue these claims. He stressed that the State is approaching the break even point. He maintained that the agreement trades a break even proposition for a permanent fix to a problem that would have continued to perpetuate the drain of state resources to employees that are not qualified to receive COLD. Representative Martin observed that the most other groups will have to pay is 15 percent. He questioned if one union could sue if anther union receives a better settlement. Commissioner Boyer pointed out that employees are currently being treated differently. He added that the offer was made to the other unions. The offer stood for four months. The offer was not accepted by IBU or MMP unions. He maintained that there will be no better settlement than what was offered all three unions and accepted by MEBA. In response to a question by Co-Chair Hanley, Ms. Corso reiterated that the offer was made to all three bargaining groups. MILA DOYLE, LABOR RELATIONS, DEPARTMENT OF ADMINISTRATION explained that the initial global settlement offer, which was offered by Commissioner Usera, had two components. The offer required that the union agree to withdraw all class action grievances and unfair labor practices around the issue of COLD. Both MEBA and MMP agreed to this requirement. In addition, the agreement gave the opportunity for individual members to sign up for protection under the settlement offer. The settlement provided that individual members would not be prosecuted or lose their jobs. The employees would receive a lengthy suspension which could not be disputed through arbitration. Employees would be required to pay the full amount of restitution claimed by the State. The agreement provided for a neutral third party to review disputes regarding the amount owed. Eight members of MMP and one member of MEBA accepted this agreement. Commissioner Boyer concluded that there are 18 employees remaining with disputed amounts totaling just under $400.0 thousand dollars. 12 In response to a question by Representative Martin, Commissioner Boyer explained that employees fill out a form and attest to their residency. He reiterated that the Department's priority was to change the venue to the Permanent Fund Dividend Division's fraud unit. He noted that there was no structure in place to accomplish this prior to the agreement. Employees will have to recertify their eligibility based on permanent fund dividend criteria. The Department of Transportation and Public Facilities will transfer the forms to the Department of Revenue for review. The Department of Transportation and Public Facilities, Marine Highway System has been responsible for certification. Commissioner Boyer restated that legislation will be proposed to permanently make the permanent fund dividend criteria the criteria for future COLD qualification. In response to a question by Representative Therriault, Ms. Corso clarified that the current collective bargaining agreement includes general provisions for COLD qualifications. This is consistent with permanent fund dividend requirements. Further negotiations will clarify specific criteria and the process for determining that an employee has meet the criteria. (Tape Change, HFC 96-82, Side 2) Representative Therriault asked if there was any willingness by employees to police themselves. Commissioner Boyer replied that guilt or wrong doing was never admitted by any of the employees. Co-Chair Hanley reiterated concerns regarding terms of the agreement. He restated that the political comments contained in the 6/30/96 memorandum by Commissioner Boyer has caused concern regarding the validity of the agreement. He observed that the lack of information given to lawmakers was seen as misleading by some legislators. Representative Martin stated that he wished that Commissioner Boyer had been more "straight" with him regarding the potential agreement of August 8, 1995. He asserted that the overpayments are "out right theft". Commissioner Boyer urged members to support legislation to place COLD residency requirements and certification provisions in statute. Co-Chair Hanley assured him he would assist in addressing the issue. Representative Therriault noted that IBU took a vote in 13 August 1995 to authorize a walk out due to the lack of a contract. He questioned if this issue would have caused IBU members to vote for a walk out. Commissioner Boyer stated he could not speculate what effect the issue would have had on the vote. He noted that the atmosphere was very intense. ADJOURNMENT The meeting adjourned at 2:15 p.m. 14