HOUSE STATE AFFAIRS STANDING COMMITTEE February 17, 2000 8:05 a.m. MEMBERS PRESENT Representative Jeannette James, Chair Representative Joe Green Representative Jim Whitaker Representative Beth Kerttula Representative Hal Smalley Representative Scott Ogan MEMBERS ABSENT Representative Bill Hudson OTHER HOUSE MEMBERS PRESENT Representative Carl Moses COMMITTEE CALENDAR HOUSE JOINT RESOLUTION NO. 52 Proposing an amendment to the Constitution of the State of Alaska relating to certain public corporations. - MOVED HJR 52 OUT OF COMMITTEE 2d SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 124 "An Act relating to the taxation of income and providing a credit for certain property taxes, and permitting the legislature to use certain income tax proceeds to make appropriations for public schools." - HEARD AND HELD HOUSE BILL NO. 138 "An Act relating to the taxation of income." - HEARD AND HELD HOUSE BILL NO. 137 "An Act relating to the municipal dividend program; and providing for an effective date." - HEARD AND HELD HOUSE BILL NO. 335 "An Act relating to information contained in retirement system records; relating to retirement boards; relating to procedures and hearings under state retirement systems; relating to benefits for reemployed retired members of retirement systems; relating to eligibility for normal retirement for members of the teachers' retirement system who have Alaska BIA credited service; relating to disability benefits for members of state retirement systems; relating to deduction of premiums from retirement benefits; relating to protection of, and assignment and transfer of, amounts held in retirement systems; relating to retirement benefits for certain employees earning high salaries; relating to qualified domestic relations orders in state retirement systems; relating to the definition of 'retirement fund' in the teachers' retirement system; relating to membership of state employees in the teachers' retirement system; relating to refund of contributions made to the judicial retirement system or to the former elected public officers retirement system and repayment of refunded contributions in those systems; relating to self- insurance and excess loss insurance for persons receiving benefits from a state retirement system; relating to participation of elected officials in the public employees' retirement system; relating to reinstatement of credited service in the public employees' retirement system after a refund because of certain levies; relating to the level income option benefit under the public employees' retirement system; relating to participation of employees of political subdivisions and public organizations in the public employees' retirement system; relating to penalties for attempts to defraud the public employees' retirement system; relating to the definition of 'pension fund' in the public employees' retirement system; relating to calculation of years of service and of benefits under the public employees' retirement system for non certificate- holding employees of certain educational employers; and relating to individual accounts maintained for members of the former elected public officers retirement system." - HEARD AND HELD PREVIOUS ACTION BILL: HJR 52 SHORT TITLE: CONFIRM PUBLIC CORP BD MANAGING ASSETS Jrn-Date Jrn-Page Action 2/02/00 2059 (H) READ THE FIRST TIME - REFERRALS 2/02/00 2060 (H) STA, JUD, FIN 2/02/00 2060 (H) REFERRED TO STATE AFFAIRS 2/17/00 (H) STA AT 8:00 AM CAPITOL 102 BILL: HB 124 SHORT TITLE: INCOME TAX ON INDIVIDUALS & FIDUCIARIES Jrn-Date Jrn-Page Action 3/05/99 367 (H) READ THE FIRST TIME - REFERRAL(S) 3/05/99 367 (H) STA, FIN 3/19/99 514 (H) SPONSOR SUBSTITUTE INTRODUCED 3/19/99 514 (H) READ THE FIRST TIME - REFERRAL(S) 3/19/99 514 (H) STA, HES, FIN 1/18/00 1937 (H) 2D SPONSOR SUBSTITUTE INTRODUCED 1/18/00 1937 (H) READ THE FIRST TIME - REFERRALS 1/18/00 1937 (H) STA, HES, FIN 1/18/00 1937 (H) REFERRED TO STATE AFFAIRS 1/25/00 (H) STA AT 8:00 AM CAPITOL 102 1/25/00 (H) Heard & Held 1/25/00 (H) MINUTE(STA) 2/16/00 2224 (H) COSPONSOR(S): AUSTERMAN 2/17/00 (H) STA AT 8:00 AM CAPITOL 102 BILL: HB 138 SHORT TITLE: INCOME TAX ON INDIVIDUALS & FIDUCIARIES Jrn-Date Jrn-Page Action 3/15/99 454 (H) READ THE FIRST TIME - REFERRAL(S) 3/15/99 454 (H) STA, FIN 2/17/00 (H) STA AT 8:00 AM CAPITOL 102 BILL: HB 137 SHORT TITLE: MUNICIPAL DIVIDEND PROGRAM Jrn-Date Jrn-Page Action 3/15/99 454 (H) READ THE FIRST TIME - REFERRAL(S) 3/15/99 454 (H) CRA, STA, FIN 2/03/00 (H) CRA AT 8:00 AM CAPITOL 124 2/03/00 (H) Moved CSHB 137(CRA) Out of Committee 2/03/00 (H) MINUTE(CRA) 2/04/00 2085 (H) CRA RPT CS(CRA) 1DP 4NR 1AM 2/04/00 2085 (H) DP: KOOKESH; NR: MURKOWSKI, HALCRO, 2/04/00 2085 (H) DYSON, JOULE; AM: HARRIS 2/04/00 2085 (H) 2 ZERO FISCAL NOTES (DCED, REV) 2/04/00 2085 (H) REFERRED TO STATE AFFAIRS 2/17/00 (H) STA AT 8:00 AM CAPITOL 102 BILL: HB 335 SHORT TITLE: STATE RETIREMENT SYSTEMS AND BENEFITS Jrn-Date Jrn-Page Action 2/04/00 2091 (H) READ THE FIRST TIME - REFERRALS 2/04/00 2092 (H) STA, FIN 2/04/00 2092 (H) REFERRED TO STATE AFFAIRS 2/17/00 (H) STA AT 8:00 AM CAPITOL 102 WITNESS REGISTER BRETT FRIED, Economist Division of Income & Excise Audit Division Department of Revenue PO Box 110420 Juneau, Alaska 99811-0420 POSITION STATEMENT: Provided information on HB 138. FRANK KELTY, Mayor City of Unalaska PO Box 610 Unalaska, Alaska 99685 POSITION STATEMENT: Testified in support of HB 137. MELINDA HOFSTAD, Legislative Assistant to Representative Bill Hudson Alaska State Legislature Capitol Building, Room 108 Juneau, Alaska 99801 POSITION STATEMENT: Presented sponsor statement for HB 335. GUY BELL, Director Division of Retirement and Benefits Department of Administration PO Box 110203 Juneau, Alaska 99811-0203 POSITION STATEMENT: Provided division's position and answered questions regarding HB 335. ACTION NARRATIVE TAPE 00-6, SIDE A Number 0001 CHAIR JEANNETTE JAMES called the House State Affairs Standing Committee meeting to order at 8:05 a.m. Members present at the call to order were Representatives James, Whitaker, Kerttula, Smalley and Ogan. Representative Green arrived as the meeting was in progress. Representative Hudson was absent. HJR 52-CONFIRM PUBLIC CORP BD MANAGING ASSETS Number 0040 CHAIR JAMES announced the first order of business is HOUSE JOINT RESOLUTION NO. 52, "Proposing an amendment to the Constitution of the State of Alaska relating to certain public corporations." CHAIR JAMES presented the sponsor statement for HJR 52 as follows: Alaska's Constitution currently provides for legislative confirmation of all boards or commissions which are the head of a principal department or a regulatory or quasi-judicial agency. An example would be the Department of Fish and Game. Public corporations, which manage and control billions of dollars of state assets and have a tremendous impact on the economy of our state, are not included in this provision. Their members are not subject to legislative confirmation. An example is the Permanent Fund Corporation. I believe these public corporation boards should also be required to undergo formal appointment and confirmation, thereby making the public and their elected representatives part of the process. House Joint Resolution 52 would amend Alaska's constitution to require this. Number 0215 CHAIR JAMES noted that HJR 52 is the same as the corresponding Senate bill. She stated that the Permanent Fund Board manages the largest single state asset, and it seems to her that board management can change overnight on the whim of a governor, as happened when former Governor Hickel and Governor Knowles took office. She does not think such a procedure is good business policy because it wipes out continuity. Although she does approve the appointments being made by a governor, she wants to see continuity in maintaining expertise. CHAIR JAMES noted that she had tried to change the present manner of appointing board members to the Permanent Fund Corporation [in particular] by statute, but found any change had to be by constitutional amendment. She commented that the factor that determines whether a corporation or board is listed in the constitution is if the legislature confirms the appointees. She explained that the Permanent Fund Corporation is not listed in the constitution; therefore, the legislature does not have jurisdiction to confirm appointees to the board. She indicated HJR 52 is important to her and urged its careful consideration. She emphasized that maintaining continuity does not preclude a change in policy to conform with the ruling administration. She reminded the committee that new board members of any organization have to learn the whole process, so she does not approve of replacing an entire board at the whim of any new administration. She said HJR 52 applies to all boards, commissions and public corporations, not just to the Permanent Fund Corporation. She mentioned that many Alaskans even question the need for all the state boards. Number 0501 REPRESENTATIVE OGAN inquired about the exclusion clause on lines 12-14, page 1, which read: "With respect to public corporations, the legislature may by law exclude the applicability of this section based on the type or value, or both, of the State assets that are managed by the public corporation." CHAIR JAMES replied that the legislature could exclude certain public corporations, not necessarily boards and commissions, if it so desired. For example, the legislature could exclude the Alaska Railroad Corporation (ARRC) or the Alaska Housing Finance Corporation (AHFC) by law. Number 0580 REPRESENTATIVE OGAN requested a list of the public corporations. CHAIR JAMES replied that the list she has is a list of boards and commissions. She wondered if the committee might want to allow certain boards and commissions to be excluded also from legislative confirmation; an example is the occupational licensing boards. She said according to her understanding, industries that are monitored by occupational licensing boards submit candidates for the governor's approval. She reminded the committee that many board candidates are confirmed by the legislature since they are already under legislative authority. REPRESENTATIVE OGAN asked if it was Chair James' intent, in accord with lines 12-14, page 1, of HJR 52, to allow legislators to pick and choose among public corporations the ones that the legislators wanted to confirm. Number 0784 CHAIR JAMES answered yes. However, to do that the committee needs to pass a constitutional amendment, HJR 52. Number 0796 REPRESENTATIVE WHITAKER asked if the Aerospace Development Corporation, the AHFC, the Permanent Fund Corporation, the ARRC and the Student Loan Corporation are the only public corporations not currently subject to legislative approval. CHAIR JAMES replied in the affirmative. She said that by HJR 52 she is adding chief administrators of public corporations to Article III, Section 26, of the state constitution. REPRESENTATIVE WHITAKER asked if the current procedure is "broken" and if there are specific areas that Chair James has identified and wants to change. CHAIR JAMES answered yes and cited the Permanent Fund Board as her specific area of concern. For example, when former Governor Hickel came into office, he dismissed the entire Permanent Fund Board and re-established the board with his own appointees. She said she does not believe partisan people should be managing vast amounts of public funds through public corporations. She reiterated the necessity of maintaining continuity on the public corporations because new board members simply do not have the experience that a productive, older board member has to offer. Number 1019 REPRESENTATIVE WHITAKER voiced his understanding that each member of a board would be subject to approval by the legislature. CHAIR JAMES confirmed that. She acknowledged that sometimes the legislature does deny a confirmation, and offered her belief that most members of boards and commissions are chosen on a partisan basis. REPRESENTATIVE KERTTULA said she is thinking about HJR 52 from a different angle. She wonders why Article III, Section 26, was set up the way it is. Alaska has a "strong governor" administration, and yet the legislature requires all boards and commissions to obtain confirmation from the legislature. She also wonders what, if any, public corporations, existed when the state constitution was written. She suspects that maybe the constitution drafters' intention would have been to include all boards, commissions and public corporations if public corporations had existed at that time. She commented that what bothers her regarding HJR 52 is the exception, because that is when things start getting political. Number 1215 CHAIR JAMES said if she found exceptions were to be made, she would find them in boards and commissions rather than in public corporations. The confirmation process is more than the vote on the floor: it is the public process of the hearing and requiring the candidate to appear before the committee. She reiterated that public process is missing in public corporation appointees. Her reasoning is that if boards and commissions are so important as to be confirmed by the legislature, then certainly public corporations are much more important due to the vast amounts of public funds that they control. She suggested that if there are no exceptions for boards and commissions, then maybe there ought not to be any for public corporations. Number 1387 REPRESENTATIVE OGAN made a motion to move HJR 52 out of committee with individual recommendations and the attached fiscal note. There being no objection, HJR 52 moved from the House State Affairs Standing Committee. HB 124-INCOME TAX ON INDIVIDUALS & FIDUCIARIES Number 1410 CHAIR JAMES announced the next order of business is 2d SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 124, "An Act relating to the taxation of income and providing a credit for certain property taxes, and permitting the legislature to use certain income tax proceeds to make appropriations for public schools." CHAIR JAMES explained that 2d SSHB 124 is greatly changed from the last time the committee discussed the bill. It is still a flat income tax and a selected income tax because it only taxes W-2 earnings, business profit/loss, rents, royalties, partnerships, subchapter (S) corporations, trusts and farming. However, it does not tax retirement income, capital gains, dividends or investments. She noted that she had exempted investments from the flat income tax to encourage investments because she believes investments in Alaska serve to provide jobs for Alaskans. She stated that the Department of Revenue had prepared a fiscal note for 2d SSHB 124. In preparing 2d SSHB 124, she said she not only wanted to target specific income but also wanted to make sure that Alaska had its own tax, and not "piggyback" on to federal tax. Number 1610 CHAIR JAMES indicated the $12,500 threshold is applied to each individual in Alaska and that 2d SSHB 124 is a very simple tax, easy to administer and easy to pay. It almost excludes the need for auditing because any auditing that does arise will be accomplished by the federal government. One important change, she said, is that an individual is required to pay tax on the amount that was required to be reported, not on what an individual actually did report. This closes a loophole in the original bill for people who do not report all their income correctly. REPRESENTATIVE KERTTULA asked whether investments are exempt. CHAIR JAMES answered in the affirmative. Number 1819 REPRESENTATIVE KERTTULA asked if a straight salary is all that would be counted toward the $12,500 threshold. CHAIR JAMES replied in the affirmative and specified that if a person only earned wages, that is all that would be taxed; there would be no tax on stocks or retirement income. REPRESENTATIVE KERTTULA said she saw a problem with that very thing. She feels that people who are wealthy enough to have stocks normally would have an easier time paying this tax than people who are on straight wages. CHAIR JAMES responded that most people who have stocks are also making money in other ways. It is her opinion that wealthy people invest their money and create jobs for people who do not have much money. She believes 2d SSHB 124 will result in a tax collection of $250 million, but she does not have the figures yet to prove her belief; the Department of Revenue is still working on producing a valid fiscal note. Her personal belief is that within the next three years, the legislature will have to impose some form of tax on Alaskans. In presenting 2d SSHB 124, she proposes to introduce the idea to Alaskans and get them to think about the best way to impose a fair tax; she also hopes to avoid a complicated tax law or a tax that simply "piggybacks" onto the federal income tax. Number 2071 REPRESENTATIVE GREEN inquired as to the status of the property tax credit that had been offered with the original HB 124. CHAIR JAMES answered that the property tax credit and school tax are no longer part of 2d SSHB 124. Number 2215 REPRESENTATIVE KERTTULA made a motion to adopt the proposed CS for 2d SSHB 124, version 1-LS0232\N, Kurtz, 2/15/00, as a work draft. There being no objection, it was so ordered. [HB 124 was held for further discussion.] HB 138-INCOME TAX ON INDIVIDUALS & FIDUCIARIES Number 2232 CHAIR JAMES announced the next order of business is HOUSE BILL NO. 138, "An Act relating to the taxation of income." REPRESENTATIVE MOSES, speaking as sponsor of HB 138, presented the following sponsor statement: House Bill 138 is intended to raise revenue for the State of Alaska. With a steadily growing fiscal gap, the time is long overdue for us, as the policy makers of this great state, to take a long hard look at our future. House Bill 138 implements a state income tax upon the taxable income of every resident, nonresident and part- year resident individual and fiduciary in the state. The tax imposed is determined as a percentage of the taxpayer's entire federal income tax liability. The tax is introduced to the taxpayer on a gradual basis, starting at 5 percent under $20,000; 10 percent over $20,000 for the first year of implementation, 10 percent/15 percent the second year and finally to 15 percent/20 percent thereafter. The tax will be levied only against income earned within the state of Alaska. House Bill 138 allows credits against the tax for: (a) income sources earned in other states or territories, (b) the amount of any real and personal property paid to a municipality within the state. Number 2337 REPRESENTATIVE MOSES said HB 138 brings Alaska into the tax picture where it was 20 years ago when Alaskans paid a percentage of their federal income tax to the state. He informed the committee that a great portion of the Alaskan workforce, 70,000 workers, is nonresident. It is his opinion that they make money but spend as little as possible in the state so that they can take money back to wherever they originally came from. He noted that nonresident workers take $1 billion of non-taxed money out of the state. REPRESENTATIVE MOSES explained that he had drafted into HB 138 a 100 percent credit for personal property tax so that nonresidents would bear the greater impact of HB 138. Nevertheless, a nonresident who purchased property in the state also would receive the property tax credit. By writing in a property tax credit, he proposed to encourage municipalities to institute a property tax where they do not have one in place now. REPRESENTATIVE MOSES emphasized that the legislature has to do something to raise revenue. He suggested that the state cannot continue to function without revenue, and further delay will only make matters worse. He prefers to see both HB 138 and HB 137 move on to the Finance Committee, hoping that that committee will produce a complete tax package to eliminate the deficit facing Alaska. Number 2483 REPRESENTATIVE MOSES mentioned that in 1995 a nonpartisan task force had recommended that the legislature reinstate an income tax. He recognized that many people other than nonresidents come to Alaska with no intention of staying; they want to make a nest egg and return to their original homes; these people do not want to pay taxes because it reduces their nest egg, and neither do they want to spend money in the state, if at all possible. That is his summary as he sees the situation in Alaska. Number 2544 REPRESENTATIVE SMALLEY asked if Representative Moses had income and administrative cost projections for HB 138 to show the committee. BRETT FRIED, Economist, Division of Income & Excise Audit Division, Department of Revenue (DOR), said he did have projections for revenue and costs for HB 138, although it was difficult to figure. The DOR had arrived at a revenue figure by using Internal Revenue Service (IRS) estimates of income, gathered from tax returns submitted by Alaskans to the IRS. However, the IRS statistics of income data are broken out by adjusted gross income categories, not federal tax liability, which makes it difficult to project revenue forecasts. MR. FRIED noted that one reason the DOR experienced difficulty in figuring revenue income for HB 138 is because HB 138 is a graduated income tax based on federal income tax liability. Also, there is no method currently available to match property tax and personal income tax. Therefore, the DOR had used the U.S. Census Bureau figure of 67 percent home ownership in order to adjust revenues for the property tax credit. MR. FRIED told members he envisions the HB 138 tax resulting in $19.6 million of revenue in fiscal year (FY) 2001. For FY 2002, FY 2003, and FY 2004, the DOR estimates an annual revenue of $54.9 million, $86.2 million, and $101.9 million, respectively. These revenue projections are based upon a first-year tax rate of 5 percent, a second-year tax rate of 10-15 percent, and a third- year tax rate of 15-20 percent. He suggested that the cost of administering HB 138 would be about $1.2 million for operating expenses in FY 2001; $2.6 million operating expenses and capital expenses at $2.2 million in FY 2002; and $3.6 million for operating expenses and $1.2 million capital expenses in FY 2003. There would only be operating expenses of $3.5 million each fiscal year after FY 2003. Number 2814 REPRESENTATIVE KERTTULA asked how HB 138 tax percentages compare with other states. She said 20 percent is high, in her opinion. MR. FRIED replied that Rhode Island, North Dakota and Vermont use a percentage of the federal income tax liability to collect state income tax. Vermont charges 25 percent state income tax of the federal income tax liability, and Rhode Island charges 27 percent. Number 2907 CHAIR JAMES mentioned that Alaska's tax percentage was 16 percent at the time the state income tax was abolished. She said she is not willing to move the bill today. [HB 138 was held.] TAPE 00-6, SIDE B HB 137-MUNICIPAL DIVIDEND PROGRAM Number 2957 CHAIR JAMES announced the next order of business is HOUSE BILL NO. 137, "An Act relating to the municipal dividend program; and providing for an effective date." REPRESENTATIVE MOSES spoke about the sponsor statement for HB 137. He said HB 137 is a simple, noncontroversial bill for a municipal dividend-sharing program. He explained that one way to reduce the state budget would be to pass services back to local government. For example, the state maintains roads; perhaps that service could be passed back to local government. He believes that the legislature should take some of the permanent fund earnings and give them to local government because, in his opinion, that gives government back to the people. He envisions increasing municipal sharing for local education under HB 137. However, he acknowledged that many people in the state want their permanent fund dividend to grow, whereas HB 137 would slow its growth rate. He emphasized that HB 137 would encourage communities to incorporate so that they could collect the tax. Nevertheless, he realizes it is difficult to arrive at a fair formula for HB 137. Number 2739 CHAIR JAMES indicated she agrees with the general concept of HB 137. She remarked that the famous [permanent fund advisory] vote of September 14, 1999, is the driving motivator behind some of the proposed tax legislation. She emphasized that everyone seems to have a different idea of what the September vote meant. Personally, she had voted "yes" because she is a "constitutionalist" and the Alaska State Constitution specifically says that the legislature has control over how the permanent fund earnings are spent. She acknowledged that without having a spending plan, however, government grows naturally and would soon have spent all of the permanent fund earnings. She does believe that Alaska should have a dividend program because it protects the corpus of the fund, she added. She believes the public might support the expenditure of permanent fund earnings by the legislature if the public could see that it benefited their local communities. CHAIR JAMES noted that some public services - such as infrastructure, police protection and public health - might be better administered at the local level. She said she is willing to consider HB 137 as an aid in designing a use of the permanent fund earnings in a way that the public would accept. She acknowledged that the higher the dividend amount, the more danger results to the public mentality in regard to productive effort. However, she is not in favor of a cap, and before the legislature touches one cent of the permanent fund earnings, the legislature needs to design a dividend program that will work for the long term. She said the permanent fund dividend (PFD) program now in place does not function properly because it is based on a five- year average. The legislature should design a system to provide a dividend that allows the public to buy the things they need and, at the same time, gives the legislature authority from the constituency to protect the permanent fund. This will take much effort on the part of the legislature, and the legislature should start now. Number 2502 REPRESENTATIVE MOSES commented that the September 14, 1999, election was flawed and really did not tell the legislature anything. He emphasized that the legislature is a policy-making body and knows what should be done and what the state needs. He expanded on that subject by saying that as leaders, legislators need to work to change the public mind set of "cut the budget." CHAIR JAMES said that the legislature has raised taxes anyway, despite the September vote, by imposing user fees on many state services. She reminded the committee that when the legislature cut municipal assistance and revenue sharing, the legislature automatically caused people in local communities to pay more for the same services that they had been receiving. She added that, in her opinion, a government service for which an individual pays is a tax; therefore, she does not see any difference between user fees and taxes. Number 2349 FRANK KELTY, Mayor, City of Unalaska, testified via teleconference from Unalaska in support of HB 137, which he said is very important legislation. Noting that his community had experienced cuts to municipal revenue sharing, he said Unalaska subsidizes the state jail contract at a cost of $250,000 per year. Furthermore, two years ago the water quality employee was laid off, and last year the food safety inspector was laid off and the office was completely closed; consequently, he envisioned that HB 138 would help Unalaska offset some of those costs. He said that the City of Unalaska takes care of all of its own road maintenance, ports and harbors. He indicated that he believes HB 137 is a program that communities could use to address their needs. He explained that Unalaska is not looking for a handout but already has a 3 percent sales tax, an 11.75 percent mil rate, and a 2 percent local landing tax on all fish delivered; they also fund their school at the maximum amount allowed. He emphasized that Unalaska does take pride in its community. He urged the committee to move HB 138 forward. Number 2219 CHAIR JAMES asked Mayor Kelty how the statewide initiative to limit property tax will affect Unalaska. MR. KELTY replied that Unalaska would feel the impact in personal property tax revenues. Right now, Unalaska realizes about $2.7 million each year from real property tax. He emphasized that Unalaska will definitely oppose the initiative. CHAIR JAMES noted that HB 137 needs some more drafting; it says Alaska needs a municipal dividend program but does not say how that will be accomplished. She agreed with Representative Moses' statement that government closest to the people is the most effective. She emphasized that decision making needs to return to the local level where every individual has a right to contact his or her borough assembly members and attend borough assembly meetings. She offered her opinion that Alaskans want the state to stop spending money, which is a psychology that the legislature can overcome by putting government closer to the people. [HB 137 was held.] HB 335-STATE RETIREMENT SYSTEMS AND BENEFITS Number 2076 CHAIR JAMES announced that the next order of business is HOUSE BILL NO. 335, "An Act relating to information contained in retirement system records; relating to retirement boards; relating to procedures and hearings under state retirement systems; relating to benefits for reemployed retired members of retirement systems; relating to eligibility for normal retirement for members of the teachers' retirement system who have Alaska BIA credited service; relating to disability benefits for members of state retirement systems; relating to deduction of premiums from retirement benefits; relating to protection of, and assignment and transfer of, amounts held in retirement systems; relating to retirement benefits for certain employees earning high salaries; relating to qualified domestic relations orders in state retirement systems; relating to the definition of 'retirement fund' in the teachers' retirement system; relating to membership of state employees in the teachers' retirement system; relating to refund of contributions made to the judicial retirement system or to the former elected public officers retirement system and repayment of refunded contributions in those systems; relating to self-insurance and excess loss insurance for persons receiving benefits from a state retirement system; relating to participation of elected officials in the public employees' retirement system; relating to reinstatement of credited service in the public employees' retirement system after a refund because of certain levies; relating to the level income option benefit under the public employees' retirement system; relating to participation of employees of political subdivisions and public organizations in the public employees' retirement system; relating to penalties for attempts to defraud the public employees' retirement system; relating to the definition of 'pension fund' in the public employees' retirement system; relating to calculation of years of service and of benefits under the public employees' retirement system for non certificate- holding employees of certain educational employers; and relating to individual accounts maintained for members of the former elected public officers retirement system." Number 2060 MELINDA HOFSTAD, Legislative Assistant to Representative Bill Hudson, Alaska State Legislature, read the following sponsor statement: House Bill 335 has been introduced at the request of the Division of Retirement and Benefits, and is essentially a cleanup bill. According to the department, there are federal laws, court settlements and other technical issues that need to be addressed in an updated state law. Also addressed in this legislation are some efficiency measures requested by the various retirement boards. There has not been a cleanup bill in many years and many of the issues addressed in HB 335 are longstanding ones. This legislation is aimed at addressing issues involving clarification of current practices and law, compliance with new federal laws, compliance with various settlements, and board efficiencies. We have made every effort to stay away from policy changes and just address the cleanup issues. There is nothing in this legislation that enhances or diminishes any retirement benefit for active employees or retirees in any public retirement system, and no section in this bill will increase the employers' costs. Number 1946 REPRESENTATIVE SMALLEY made a motion to adopt the proposed CS for HB 335, version 1-LS1217\H, Cramer, 2/13/00, as a work draft. There being no objection, Version H was before the committee as a proposed CS. GUY BELL, Director, Division of Retirement and Benefits, Department of Administration, said the proposed CS has 65 sections, each of which is explained in a detailed sectional analysis. He noted that he has cooperated with the Teachers' Retirement Board, the Alaska Public Employees' Retirement Board, and a number of groups that represent public employees to ensure that all cleanup items were included. He explained that statutes pertaining to the Teachers' Retirement System (TRS), the Public Employees' Retirement System (PERS) and the Judicial Retirement System have not been cleaned up for many years. His focus is on addressing administrative issues, some court issues, some settlements, and board procedural issues as requested by the boards. Number 1837 MR. BELL mentioned that many sections are repetitive and he would indicate which those were. He indicated Section 1 establishes statutory authority for the Division of Retirement and Benefits to maintain confidentiality of member records. Section 1 would allow the release of member records only under specific authorized circumstances; the release would only be to the individual or to the individual's guardian; to the individual's employer or former employer; to a state agency authorized to obtain confidential records; or to a retiree organization that represents members of the system. MR. BELL explained that Section 2 addresses a problem that the boards have had regarding lack of attendance and participation on the part of physician members. Two five-member boards serve the TRS and PERS, and when assigned a medical disability appeal, each board has an additional two licensed physicians who are supposed to participate in the medical hearing and the decision. As the law is written now, two physician members are appointed by the governor from each judicial district in the state. He believes HB 335 would simplify the procedure by requiring the appointment of only two physician members and two alternate physician members to serve on the board, thus limiting physician members to four and not having it be subject to judicial districts. The bill also allows only one physician board member to sit on a medical disability appeals hearing if there is difficulty in finding two physician board members to attend. Number 1698 MR. BELL indicated Section 3 does cause fiscal impact. He informed the committee that the boards [TRS and PERS] are requesting an honorarium of $150 per day for members who participate on the board, which is the same amount as paid to the Alaska State Pension Investment Board members. He reminded the committee that the PERS board meets from 20 to 30 days a year, mostly regarding disability appeals that last all day. A fiscal note has been submitted for Section 3 of the proposed CS, and it is funded by the retirement funds [TRS and PERS]. Number 1517 MR. BELL discussed Section 4. He said that the TRS Board does establish a quorum to conduct business, but there is no specific authority set in statute to do so. Therefore, Section 4 gives the TRS Board specific authority to adopt regulations at finding a quorum for the conduct of its business. MR. BELL explained that Section 5 addresses the hearing procedures of the TRS Board. The purpose is to simplify and make consistent the hearings process for both TRS and PERS Boards. Section 5 gives authority to appoint hearing officers, and even then an appellant can go directly to the board for final review of his/her case. He mentioned that this section also places into statute what to do in a tie vote; basically, the hearing arises from a denial of benefits by the administrator [Director of the Division of Retirement and Benefits], burden of proof is on the appellant, and if there is a tie vote, effectively the administrator's decision is upheld. Finally, the appellant can go to court if he/she does not agree with the Division of Retirement and Benefits' decision. Number 1366 MR. BELL noted that Section 6 addresses an inequity in the law relating to people who elect early retirement but then return to work for a TRS employer. He explained that a person who elects early retirement accepts an actuarially reduced benefit. If that person is re-employed, the second benefit is based on re- employment but no adjustment is made for an early retirement benefit reduction. Therefore, Section 6 allows a make-whole adjustment after a person returns to TRS employment. He assured the committee that there is no cost to the retirement system for Section 6. CHAIR JAMES asked how early retirement and return to work functions currently; in particular, does the employee now receive two paychecks, one for retirement and one for employment? Number 1253 MR. BELL answered that when a retiree returns to work in the retirement system, the retirement benefit stops and then that person starts to accrue additional service toward a second retirement benefit. A person who elects early retirement accepts an actuarial adjustment reducing his/her retirement because the person will be receiving benefits for several extra years. When a person returns to work, the early retirement choice should not apply anymore, but it does currently. When the person retires the second time, he added, he/she is paid the original early retirement benefit choice plus a small-increment benefit for the additional time worked. Section 6 would allow adjustment for the retiree's return to work and suspension of early retirement benefits. Number 1055 CHAIR JAMES said she understands how Section 6 works but expressed concern about the effect. She emphasized that she is not a real supporter of retirement incentive programs (RIPs) because they result in "brain drain" and there is a cost to the public. She reminded the committee that she is not totally convinced that "retiree return to work" is beneficial to the public or that retiree return repays the public for lost expertise. Section 6 allows the returning retiree to be made whole, but it does not make the heavy loss whole for the public, and she is not convinced that this is a good policy decision. It is a policy issue. MR. BELL said he personally knows people who have elected early retirement from state work but not as RIP employees. He acknowledged that these retirees went out of state, worked for a while at something else, then decided to return to Alaska and finish out their working years within the state retirement system. Number 0842 CHAIR JAMES asked if the RIP employees had the same opportunity as non-RIP employees to return to state service. MR. BELL answered no because specific requirements are placed on RIP employees. MR. BELL said Section 7 addresses an odd quirk in the TRS law relating to Bureau of Indian Affairs (BIA) service. A teacher must work eight years to become vested in TRS. However, TRS allows a credit of three years of Alaskan BIA service toward the eight-year vesting requirement. The history of BIA teacher service is that a number of teachers in Alaska started out as BIA teachers. However, the way the law reads now is "a person who has attained an age of at least 60 years, has at least five years of membership service, and has at least three years of Alaska BIA service." Therefore, Section 7 of the proposed CS would change the wording to say "BIA service added to TRS service must equal eight years." He said he envisions that a teacher could have an increment of whatever years of BIA service and not be bound to a minimum of three years BIA service in order to attain TRS vesting. Number 0689 MR. BELL informed members that Section 8 is a clarification of the Division of Retirement and Benefits policy with respect to inflation adjustments made to a disability benefit. He mentioned that TRS allows a 50 percent base benefit for disability plus 10 percent increments for each dependent child. The Division of Retirement and Benefits policy has been to apply inflation adjustment just to the base benefit; that will be put in statute in Section 8. MR. BELL said Section 9 addresses disabilities and when they discontinue. The law now says the person is no longer disabled when he/she has recovered. Section 9 would add an income test to recovery from a disability, and it would say that the person is considered to have recovered if he/she is re-employed and earning at least 75 percent of his/her pre-disability compensation adjusted for inflation. Number 0577 REPRESENTATIVE KERTTULA asked Mr. Bell how a person might be earning more and still be on disability at 75 percent and not a full 100 percent. She added that she sees the percentage of return from disability as a policy issue. MR. BELL noted that theoretically a person could be receiving a disability benefit and earning some income, which would make that person's total compensation more than 100 percent of what he/she was earning before the disability. The Division of Retirement and Benefits' view is that if a person has recovered, he/she is going to return to work; the division thought a 75 per cent rule was reasonable. Number 0456 CHAIR JAMES said she understood, then, that Section 9 contains no provision to add a person's new earning capacity and the disability payment, and to reduce the disability payment to make- whole. MR. BELL answered that nothing in the law now would accomplish a 100 percent make-whole arrangement. REPRESENTATIVE KERTTULA said she is still worried about leaving Section 9 at 75 percent rather than 100 percent. CHAIR JAMES agreed with Representative Kerttula that there should be a flat, across-the-board 100 percent make-whole arrangement until the disabled person is made whole from the disability, particularly if the disability is work-related. She asked Mr. Bell whether Section 9 could be drafted to authorize a 100 percent make-whole arrangement - but not more than 100 percent whole. Number 0261 MR. BELL replied that the Division of Retirement and Benefits can draft Section 9 as requested. REPRESENTATIVE KERTTULA agreed with Chair James' 100 percent make-whole request. MR. BELL stated his understanding that Chair James requests not less than and not more than 100 percent. CHAIR JAMES answered in the affirmative, reiterating that she thinks 100 percent is a better policy. She requested that Mr. Bell come up with an amendment to Section 9 of the proposed CS to that effect. REPRESENTATIVE GREEN asked whether Section 9 would automatically adjust for inflation. MR. BELL replied in the affirmative. Number 0199 MR. BELL turned attention to Section 10, which addresses the filing deadlines for disabilities and sets them at six months from the date the member's disability began or 90 days after the member terminates employment, whichever is later, unless there are extraordinary circumstances. He said this is a requirement in the occupational disabilities section of PERS. There are no filing deadline requirements in the TRS with respect to one type of appeal, he explained, and the division is trying to make deadlines consistent between PERS and TRS. He stated that extraordinary circumstances could include a member's incapacitation or the member's not even being aware that he/she could apply for disability [benefits]. Number 0067 MR. BELL explained that Section 11 confirms current practice relating to the ad hoc post-retirement pension adjustment, which is an inflation/consumer-price-index-based adjustment to retiree benefits. Section 11 confirms that the TRS Board does have an advising role regarding the pension adjustment. MR. BELL pointed out that Section 12 clarifies that the Division of Retirement and Benefits can deduct retiree insurance premiums from retirement checks. He noted that insurance premiums are for the medical plan, the dental plan, the vision plan, the audio plan and the long-term care plan. This is a current practice of the division that Section 12 confirms [in statute]. TAPE 007, SIDE A Number 0014 MR. BELL indicated Section 14 removes duplicative language out of a TRS statute, AS 14.25.037 [listed under Section 5 of the proposed CS], related to hearings. The proposed CS establishes a single statute that deals with hearings. MR. BELL informed the committee that Section 15 clarifies language relating to divorces and distribution of member contributions accounts under a divorce through a qualified domestic relations order (QDRO). Section 15 allows the division to divide member contribution accounts in addition to the benefits, which people have asked the division to do in order to end frustration caused by only one account. Currently, once the division writes a check to the member, the member then has to write a check to the former spouse. Number 0139 REPRESENTATIVE OGAN asked if QDROs are done by court order. MR. BELL replied in the affirmative. He emphasized that a QDRO has to be filed with a court and the court has to approve it; essentially, a QDRO is an order from a court. MR. BELL explained Section 16. It allows a person to roll over his/her member contribution account balance directly to an individual retirement account (IRA). Currently, the division has to send the money to the member, who must write a check to his/her IRA provider. A subsection to Section 16 also allows deductions, subject to member authorization, to pay membership dues to nonprofit retirement organizations that represent system members such as National Education Association (NEA) retirees, the Retired Public Employees Association of Alaska, and a number of other retirement organizations. Number 0243 MR. BELL said Section 17 and 18 address the fraud section of the TRS code. He indicated fraud is a class A misdemeanor. Thus, this brings the TRS statute up to date with the appropriate section to the Criminal Code. Section 19, he noted, is required by the Internal Revenue Service (IRS), as set out in 26 U.S.C. 401)a)(17), which limitation is set at $150,000. REPRESENTATIVE OGAN asked what happens if the U.S.C. code changes. Does a change void the state statute? MR. BELL replied that by including the U.S.C. in Section 19, the division is trying to anticipate any changes in the future. If the U.S.C. limitation increases, Section 19 increases; if the U.S.C. is repealed, Section 19 is repealed. Number 0465 REPRESENTATIVE OGAN asked what would happen if the meaning of U.S.C. 401(a)(17) changes or the code numbering changes, for example. Number 0528 MR. BELL replied that one way to address that possibility would be to say "or its successor." He said he does not know how often U.S. codes change. CHAIR JAMES said she thinks it is very remote that the code numbering would change; generally, the changes are incremental and not whole. The only change she could imagine happening is if the federal government changed the entire 26 U.S.C. code; and, of course, the federal government understands that they would be affecting 50 states if they made such a change. REPRESENTATIVE KERTTULA said it is a drafting question, and all the committee has to do is request new drafting from the drafters. CHAIR JAMES replied that she would follow up with the drafting request regarding "or its successor." Number 0680 MR. BELL explained that Section 20, a companion to Section 15, addresses the definition of what the QDRO can include, which is the member contribution account. MR. BELL explained that Section 21 was drafted at the request of division auditors. One year, division auditors had examined records and found that the division needed a statute to clarify that income earned by the TRS fund does belong to the fund. That has been the practice of the division since the fund was established in the 1950s. MR. BELL indicated Section 22 addresses a problem with the definition of "teacher" as it applies to the Department of Education and Early and Early Development. Currently, the statute says that the commissioner and all supervisory employees of the department are in the TRS. However, there are departmental supervisors who are not in TRS, so Section 22 changes the law to include a person in the department whose job description requires certification as a teacher or administrator. Number 0809 MR. BELL informed the committee that Section 23 deals with missing and inconsistent language regarding the judicial retirement system; the first missing language is the IRS-related 26 U.S.C. 401(a)(17), in parallel with Section 15 in TRS. Section 24 adds language to the judicial retirement system that is already in other systems relating to receiving a principal and interest refund when a person has made indebtedness payments; once again the issue is language consistency. Section 25 addresses the Division of Retirement and Benefits under a QDRO paralleling TRS Section 14 and also allows deduction of retiree membership dues paralleling TRS Section 14. MR. BELL noted that Section 26 authorizes the deduction for insurance premiums of retirees that was already discussed in Section 12. Sections 27 and 28 discuss QDROs as they apply to the judicial retirement system and the National Guard Naval Militia retirement system, respectively. Section 29 specifically authorizes self-insurance of medical, dental, vision, audio and long-term care plans, which confirms current practice. MR. BELL explained that Section 30 addresses membership of the PERS Board. The board has five members, two who are elected by the membership and three who serve by virtue of their being appointees to the Personnel Board. Because of numerous PERS meetings and the workload, PERS members have requested that appointments be made separate from the Personnel Board. The last part of Section 30 staggers appointments by retaining current PERS board appointees until their current terms on the Personnel Board expire. MR. BELL indicated Section 31 addresses how the division handles PERS board elections. Currently, the winner must have an absolute majority of the votes cast, which means that there is a runoff whenever the division holds an election. By eliminating the majority requirement, the division hopes to save money; they believe it is an appropriate change. If Section 31 is adopted, the person with the most votes cast in an election will be the winner. Number 1143 REPRESENTATIVE OGAN suggested that perhaps Section 31 should allow for an instant runoff provision. CHAIR JAMES said she has belonged to other organizations that allow instant runoffs, especially when there are multiple candidates, and she believes it is easy to administer. She asked Mr. Bell to think about that election change option between now and the next time the committee discusses the proposed CS. MR. BELL noted that Section 32 addresses physician membership to the PERS board and introduces the same language already discussed in TRS Section 2. Section 33 is the honorarium payment for PERS Board members that is parallel to TRS Section 3. Section 34 allows the board to adopt regulations to finding a quorum, and in a subsection gives the PERS board the authority to set the contribution surcharge for non-certificated school district employees who elect to have their service calculated using the TRS schedule. He mentioned that as a result of SB 9 (passed last year), a lawsuit and a settlement, the division has agreed that it would be appropriate for the PERS board to set the contribution surcharge; therefore, it is done through a public process, with the PERS aboard having final authority over the surcharge. Number 1330 MR. BELL indicated Section 35 is similar to TRS Section 5, which has to do with hearings authority and procedure. Section 36 addresses elected officials and their membership in PERS. Currently, he informed the committee, the law says it is up to the elected official as to whether he/she wants to be in PERS, but the law also says that the employer will determine who is in PERS. For example, a borough assembly will determine that assembly members will not be in PERS, but an individual member theoretically, under the law, has the ability to determine whether he/she is in PERS. Therefore, Section 35 rids the statute of that contradiction by allowing the borough assembly to decide whether they will be in PERS. MR. BELL remarked that Section 37 is the early retirement deduction change discussed in TRS. Sections 38 through 42 clarify provisions regarding irrevocable election by non- certificated school employees mandated by SB 9, passed last year. Currently, the law says that an early retirement election is irrevocable, but the division has agreed through the lawsuit and settlement process with NEA and other groups that a person can revoke that election. Number 1492 MR. BELL explained that Section 43 discusses the filing deadlines for non-occupational disability benefits parallel to TRS Section 10. Section 44 discusses when a person is recovered under the compensation rule; Mr. Bell said he would return to the committee with an amendment of 100 percent versus 75 percent. He mentioned that Section 45 is the same as Section 43 except with respect to occupational disability, and Section 46 is the same as Section 44 except for occupational disability. Section 47, he indicated, is a very technical clarification to allow "level income option" as one of the benefit options in the PERS. He said the "level income option" was repealed, but people who were hired prior to that repeal can still choose that option because the state constitution says that the [state] cannot diminish benefits or options. MR. BELL informed members that Section 48 recognizes the PERS board's role in ad hoc post-retirement pension adjustments and is a parallel to TRS Section 11. Section 49 is parallel to Section 15 relating to QDROs; Section 50 is parallel to TRS Section 14 on the rollover of IRAs; and Sections 51 through 54 are parallel to TRS language already discussed. Number 1632 MR. BELL commented that Section 55 is about when employees can choose to vest; for example, if an employer removes itself from PERS, employees with less than five years are given the option of immediately vesting. The division waives the five-year vesting requirement, but now, under Section 55, the waiver would only apply if it is at the employer's request. If the employees have gone to the employer through collective bargaining and requested that they be removed from the retirement system, the five-year waiver does not apply to them because it is a cost to the employer. MR. BELL mentioned that Section 56 addresses clarification of fraud as a class A misdemeanor, the same as TRS Section 17. Section 57 clarifies "SB 9 application of service credit" in agreement with NEA and the lawsuit process. Section 58 is the highly-compensated-individual IRS code compliance section for PERS. Section 59 clarifies that PERS invested income does belong to the PERS fund, parallel to TRS Section 17. He indicated that Section 60 is QDRO language paralleling TRS sections dealing with the subject. Section 61 would remove PERS physician members from Alaska Public Offices Commission (APOC) requirements. He said the division has had problems in recruiting physician members because they are required to disclose their patients, which the division does not feel it is appropriate that physicians do. Number 1772 REPRESENTATIVE OGAN asked if it would be appropriate to have a disclaimer for a physician assigned to a hearing in which his/her patient happens to be involved. MR. BELL answered that a disclaimer is provided, and all division board members are required to disclose any conflict. Physician board members do excuse themselves if the appellant has had any connection to that physician, whether in person or through partnership. Number 1803 MR. BELL stated that Section 62 repeals sections that are no longer necessary with this addition to the hearings language in PERS. Sections 63 and 64 make the Elected Public Officers Retirement System (EPORS) language consistent with PERS and TRS language. Finally, Section 65 concerns initial appointment of PERS board members with conversion from the Personnel Board; existing Personnel Board members will continue to serve through the end of their terms. REPRESENTATIVE SMALLEY announced for the record that he is a BIA- accredited teacher, a retired teacher in the TRS, has participated in the RIP, and also is vested in PERS, but that he does not believe his involvement in any of those will impact his decision regarding the proposed CS. Number 1896 REPRESENTATIVE KERTTULA announced that she, her husband, her father and her sister all have involvement with the retirement systems. CHAIR JAMES said she thinks all the committee members have involvement in one way or another regarding the proposed CS. She reminded Mr. Bell that he is to work with her staff to draft amendments for the proposed CS, which would be discussed at the next committee meeting. [HB 335 was held.] ADJOURNMENT Number 1917 There being no further business before the committee, the House State Affairs Committee meeting was adjourned at 10:05 a.m.