MINUTES  SENATE FINANCE COMMITTEE  March 23, 2000  9:10 A.M.  TAPES  SFC-00 #59, Side A and Side B SFC-00 #60, Side A CALL TO ORDER    Co-Chair Sean Parnell convened the meeting of the Senate Finance Committee at approximately 9:10 A.M.   PRESENT    Co-Chair Sean Parnell, Co-Chair Torgerson, Senator Dave Donley, Senator Loren Leman, Senator Gary Wilken, Senator Al Adams, Senator P. Kelly, Senator Lyda Green, Senator Randy Phillips.   ALSO ATTENDING: SENATE PRESIDENT DRUE PEARCE; SENATOR TIM KELLY; BOB POE, Commissioner, Department of Administration; ALISON ELGEE, Deputy Commissioner, Department of Administration; DAVID KOIVUNIEMI, Special Assistant, Department of Administration.   SUMMARY INFORMATION  Overview: State Employee Contracts by the Department of Administration DEPARTMENT OF ADMINISTRATION Co-Chair Parnell stated that it is imperative that the State understands the economic consequences of the negotiated contracts. He understood that the role of the commissioner would be to advocate for the negotiated contracts on behalf of the Administration. Co-Chair Parnell noted that the Committee was meeting to further clarify the non-monetary terms of those contracts. He emphasized that the Legislature must know the total costs of the contracts and the changes that the Administration and labor unions had negotiated. He reiterated that the intent of the meeting was to provide further understanding of the contract items. BOB POE, Commissioner, Department of Administration, requested that Deputy Commissioner, Alison Elgee and Special Assistant, David Koivuniemi join him at the table. Commissioner Poe advised that when the Department looked at the labor contracts and determining what would make economic, they created a wage study, comparing key positions in State government with those in the private sector. He added that there is a range of State employees whose work is dangerous and yet, important for the State. Commissioner Poe continued, over the past four years, State employees have received only one half of the Consumer Price Index (CPI) increase in pay for three years. Last year, no union received any increase of any kind. Commissioner Poe commented that State employees contribute significantly to the State economy. There are approximately 21,700 State employees, which includes both part and full time University employees. Senator R. Phillips requested the number be broken down to indicate part-time, full-time, permanent and non-permanent employees. Commissioner Poe offered to provide that information at a latter date. Co-Chair Torgerson asked if any union members had received merit increases in the past year. Commissioner Poe explained that anyone who was eligible had received a merit increase. He pointed out that about $3 million dollars a year goes toward merit increases and that merit increases are absorbed through personal services. Co-Chair Parnell inquired if State employees had received increased payments by the State for health benefits. Commissioner Poe stated they did not. The State stayed with the same employee contribution as had been outlined in previous years. The State was able to do that given the reserves, which had accumulated, at that level. The Department was comfortable that the fund was adequately filled. Co-Chair Torgerson asked if there had been some reclassification studies undertaken. Commissioner Poe acknowledged that there had been some reclassification changes and that some had been downgraded, ongoing personnel activities. Over the last four years, three years of contracts provided specific increased wages into the base of one half of the CPI. Last year, there was no increase in any base, and no increase in the employer contribution to health care. Co-Chair Torgerson countered that a merit increase qualifies as an increase. In response to a query by Senator Phillips, Commissioner Poe stated that increases had been accumulated through employer contributions and based on claims that go against those funds. If the claims are lower than predicted, more could be accumulated. That occurred in the General Government Unit (GGU). There were reserves accumulated because usage was lower than had been allocated for. There are two types of reserves that are tracked: · Reserves for incurred but not reported claims · Reserves for claims fluctuations Senator R. Phillips asked the amount of the State's and employee's contribution. Co-Chair Parnell requested that Commissioner Poe be able to complete his presentation before the Committee questions begin. Commissioner Poe proceeded, of the total State employee number, the payroll is approximately $795 million dollars a year. He believed that would equate to a $1.4 billion dollar in- put into the Alaskan economy. Each employee makes an important contribution in the service that they give Alaska and the money that they spend within Alaska. Commissioner Poe referenced the handout, "Employment & Earnings Summary Report". [Copy on File]. Co-Chair Parnell noted a report from the Office of Management and Budget (OMB) indicating personal services funding by bargaining unit, which totaled $886 million dollars - $453 million dollars of that being general funds, $141 million dollars being federal funds and $291 million being "other funds". He emphasized that the personnel costs are higher than the $795 million dollars alluded to by Commissioner Poe. Commissioner Poe inquired if the OMB numbers included benefits. Co-Chair Parnell replied that they were categorized as personal services and funded by bargaining unit. Commissioner Poe pointed out that the study indicates that changes in wages tell a lot about how the State system is fairing. Between 1996 and 1998, private sector employees increased wages by 4.9%, while during that same period, federal employees received a 16% increase; however, Alaska State employees received .1% increase. The Alaska State employees are not fairing well compared to federal government or private sector employees. Senator Phillips inquired the differences between the salary and benefits of the three groups. Commissioner Poe explained that there are many differences. He noted that a common dis-believe about State employees is that they have a tremendous benefit package. He compared such statistics to some of the cities and boroughs from which members of the Senate Finance Committee come. · Fairbanks - The City's monthly contribution is $600 dollars per month for health care and the employee contributes $0. · Kenai Peninsula - The Borough's monthly employee contribution is $559 dollars per month and the employee contributes $0. · Anchorage - The Municipality's monthly contribution is $500 dollars and the employee pays between $17 and $0 dollars per month. · Mat-Su - The Borough's monthly contribution is $500 and the employee pays $0. Commissioner Poe acknowledged that these were comparable plans as offered by the State of Alaska. For State employees, the employer pays between approximately $423 - $550 dollars per month, and 85% of the employees receive a contribution of $488.50 per month while they pay anywhere between $50 and $174 dollars per month out of pocket. Commissioner Poe acknowledged that the federal employees do not have quite as good of a benefit package as the State employees does. The federal government pays $330 per month, while the employees pay $135 dollars per month out of pocket. He added that the federal package plan supports a "preferred provider" program. In the top five private industries in Alaska, the average monthly wage is $3998 dollars. In the federal government, the average wage is $3805 dollars per month, whereas, the Alaska State government average wage is $3078 dollars. He listed the top five industries by pay: · Mining including petroleum production · Durable goods manufacturing · Construction · Transportation · Communications The job classes were divided into three elements: · Starting · Five years into the career · Peak of career In the wage study, in the lower ranges 8, 9, & 10, the State paid more than the private sector. In many of the job classes, the starting salary was frequently higher than the private sector; however, by the time that the employee got to the five-year point, the wage was about even. By the time the employee got to the peak of their career, the salary was significantly less than the private sector. At all three levels, the State of Alaska pay was significantly below the federal government. Commissioner Poe spoke to merit increases. He admitted that the increases cost the State a little over $3 million dollars per year. During the study, it was found that private industry offers a range of benefits, which are difficult to compare as they vary dramatically. He added that the federal numbers include a cost of living adjustment. Commissioner Poe stated that the Department tried to put together an economic package that was fair and would help State employees to deal with the impact of the cost of living and the changes in the cost of health care. Every union was offered the same package which included a $1200 dollar flat payment to each employee in the first year; in the second year, a 2% increase in the base; and in the third year, a 3% increase in the base. Additionally, changes were offered to health care. In the first year of the contract, the employer contribution would be increased to $515 nd dollars; the 2 year, it would increase to $575 dollars and rd in the 3 year, it would increase to $630 dollars. At $630 dollars, every bargaining unit would be receiving the same contribution. That number reflects the total cost of the health care plan today. He added that health care is constantly increasing at a much higher rate than the normal cost-of-living. ALISON ELGEE, Deputy Commissioner, Department of Administration, added that there are employees on various plans, which creates different pricing schedule for health insurance coverages. In the current year, Select Benefits Plans are priced at $624 dollars, an amount found to be insufficient. To adequately fund the reserves for that plan, the price needs to be changed. Ms. Elgee distributed a handout: "Cost of Health Insurance Premiums effective 2/1/00". [Copy on File]. Commissioner Poe explained that the Administration had requested four basic items from the unions in exchange for an economic package. · First - a three-year agreement. · Second - adoption of Workplace Alaska. · Third - formation of a labor management committee. · Fourth - the encouragement of moving unions to labor trust. One of the reasons that Alaska is so expensive is that we are the last State having full indemnity health care. Other states use the preferred provider program, managed care and HMO's. He acknowledged that there are strong positives to the preferred provider agreements. When employees are empowered to make the decisions where their dollars go, they generally make "tougher" decisions regarding those funds. The idea behind the trust would be to empower the employees to make the decisions about how their health care dollars should be used. Commissioner Poe referenced the handout: "Collective Bargaining Agreement". [Copy on File]. Contained within the document is a list of the total costs of all the contracts broken out by wages and health insurance. The total cost is broken out by fund source. Additionally, cumulative costs are included. The total general fund cost would be $12.9 million dollars for all twelve contracts and total funds would be $24.7 million dollars. Co-Chair Parnell asked if the general fund number excluded the mental health subsidy, which amounts to $1.6 million dollars. Commissioner Poe reiterated the total first year costs of the contracts. The total cost would be $66.5 million general fund dollars with total funds of $118.6 million dollars for the three years. Senator Leman asked the amount of the incremental cost. Commissioner Poe explained that cost would incorporate the year one, two and three columns and then would add those numbers together. He noted that the packet included the spreadsheets for each bargaining unit. · Public Safety Employees Association (PSEA) · Local 71 - Labor trade and crafts · Correctional Officers (some represented by PSEA) · Masters, Mates and Pilots SENATOR DRUE PEARCE asked the cost of health insurance [comments inaudible]. Ms. Elgee responded that the health insurance provisions under State contracts are for full-time employees. They exist for part-time employees only if they work 30 hours or more per week. If a part-time employee works less than that, they have the option to privately purchase health care in the program. Ms. Elgee clarified that the cost contracts are authorized positions and that they are not all full at any one time. There is a vacancy assessment calculation on those dollars. SENATOR TIM KELLY asked if benefits were paid only on those employees currently working. Ms. Elgee responded that health benefits were paid to only those employees in paid status and working. Tape: SFC - 00 #59, Side B 9:57 AM Co-Chair Torgerson asked if the non-permanent and the temporary employee would both receive the $1200 dollars. Commissioner Poe replied that different bargaining units would make separate arrangements. The rule was that the numbers could not be "pushed" but rather prorated. Co-Chair Torgerson asked about the job classifications. Commissioner Poe reminded members that there has been a long history in creating the contracts. Merit increase differences have occurred over a long period of time. The bargaining unit did not try to change those relationships. Recipients for the $1200 dollars were agreed upon with the unions. He added that the package, as delivered to Senator Parnell's office, itemizes point-by-point each contract and all the changes made. Commissioner Poe continued listing the components. · General Government Unit - GGU Co-Chair Parnell asked the changes made to the leave-area of that contract. Commissioner Poe explained that there had been a significant change made to the manner in which leave was addressed in that contract. GGU is the only unit remaining that has sick leave and annual leave. The overall accrual, when adding sick leave and annual leave is a "gray" area when compared to the other bargaining units. The Administration agreed to allow those employees to have the sick leave, and to convert 50% of it to personal leave on a one-time election. That action would allow GGU to get off the dual system. He acknowledged that there was a significant financial value associated with that change. Co-Chair Torgerson questioned what "significant financial value" meant to the Legislature. Commissioner Poe did not have that figure available but offered to provide the information. Co-Chair Parnell asked the average number of sick leave days that an employee uses. Ms. Elgee replied that number could vary. Some employees use all of their sick leave every year. Unless there is a threshold reached, the entire unit could go into the personal leave environment. Co-Chair Parnell asked when that threshold could be reached. Ms. Elgee did not know. The sense of employees desire to move into the personal leave environment is stronger than the union leadership's sense of that. The Union's want the membership to elect that environment. Co-Chair Parnell emphasized that these are real costs that the Committee must have access to. Ms. Elgee interjected that it would amount to a 50% conversion, not the entire amount. Commissioner Poe offered to provide that information to the Committee. Co-Chair Parnell asked, when Legislative workers convert to that system, would they get to cash in their sick leave. Commissioner Poe replied it would go into a medical bank. Ms. Elgee added that all non-covered employees were converted at a 60/40 ratio. The balance that was not converted into a cash environment went into a catastrophic leave account, which would remain with the employee until there was a break in service. Co-Chair Parnell requested a cost estimate of that cash value. Commissioner Poe pointed out that a similar occurrence had happened within the supervisory unit. Co-Chair Torgerson understood that the departments believe that they can absorb the cash-out. Commissioner Poe agreed, pointing out that there is a significant leave bank at this time. He stated that the departments would be able to absorb it because it would not come all at one time. Co-Chair Torgerson voiced his concern that the departments would be responsible for such a payout. Ms. Elgee explained how terminal leave and leave protection is funded at the present time. The State has two different working reserve accounts for those two particular elements of pay. They are calculated on a three-year rolling average based on the actual activity of employees. In response to Senator Kelly, Ms. Elgee advised that the State would anticipate that those employees that do not actually use their leave as leave, would end up taking it either as a leave cash-in or as a terminal leave over the life of their employment. The average State employee works for the State about seven years. She indicated that the cash-out would be a minimal impact in terms of departmental budgets. The cash-out would not impact a specific department or a specific appropriation. It would be budgeted separately through the personal service factor. Ms. Elgee explained that it is important to remember is that as these employees are converted to a new leave environment, they would be accruing less leave than they currently are. Co-Chair Parnell countered that in current contracts, there is a cap on the accumulated leave; however, there is no cap on accumulated leave for those that transition to the new personal leave system. Ms. Elgee responded that the leave cap was specific to annual leave and would not impact sick leave. Co-Chair Parnell asked the cash exposure to the State for not having a cap in place. Commissioner Poe responded that personal services would be "hit" from time to time to cover the expense. None of the leave accrual changes are reflected in the spreadsheet. If the employee is accumulating leave and not using it, those are productive work hours that would otherwise be vacant. He commented that this is an "opportunity cost" that must be compared against the financial liability. Senator R. Phillips referenced the leave of absence concern and how that compared to the federal and private sector employees. Commissioner Poe replied that the study had indicated that the State system is close to that used by the feds; however, State employees receive more holidays than the private sector does. State employees receive eleven paid holidays. Senator Leman requested further information on each unit, indicating the number of days of sick leave not taken. Commissioner Poe explained that "abuse" is in the eye of the beholder. Senator Leman asked for a comparison of the sick leave used in relationship to personal leave used. He claimed that people "get healthier" when the sick leave has been used up. Mr. Elgee noted that many State employees were converted in the late 1970's, at which time, an audit was performed that investigated implications voiced by Senator Leman. She offered to research that audit. Commissioner Poe spoke to sick leave balances as of March 1999. Of 7,748 State employees, 3,300 had less than 100 sick leave hours. Only 24 employees had over 2,000 hours of sick leave. The number of employees with between 0-200 hours of sick leave totaled 4,493. The total value of the sick leave, when using the 50% conversion rate, would amount to $24 million dollars. The value of sick leave hours varies according to the range or step within that range. Co-Chair Parnell asked if there had been a projection regarding the amount of the annual cash out. Commissioner Poe stated that he would provide that information to the Committee. In response to Senator P. Kelly, Ms. Elgee explained that the reserve accounts are accumulated through a payroll charge. The State calculates the necessary amount as one of the budgeting factors, looking at a three-year history. She agreed that there are tax implications to cashing out all of an employees leave. Most employees would reserve a portion of their leave, recognizing that they could get sick. She concluded that most of the employees that use sick leave, use it legitimately. Commissioner Poe clarified when sick leave can be used. The employee must adhere to the agreements made by the State and that medical disability claims only receive 20-days of pay. Ms. Elgee explained that the average length of service of a State employee is about seven years. The State calculates the activity moving for the life of that employee. Ms. Elgee clarified that the reserve was available for any employees that are doing leave cash-in. Those funds are not segregated or pooled by bargaining unit. Co-Chair Torgerson inquired the working balance left in that account. Ms. Elgee explained that it is replenished through payroll each month. The Department attempts to maintain a balance on an annual basis to meet the annual demand. She noted that there is a separate account for unemployment insurance. Co-Chair Torgerson asked if there was a financial liability with the new bargaining agreement attached to the annual leave. He commented that $24 million dollars was a huge financial stake. Commissioner Poe noted that the manner, in which the statute reads, indicates that the things that affect useful work hours would require appropriation. He stated that it had not been included, as the Administration does not believe that it would require appropriation and that over time, it would be absorbed. He reiterated that there has been no change to the annual leave liability. Ms. Elgee clarified that there was approximately $10 million dollars in each of the accounts. She added that the Worker's Comp Claim payments pool through the Risk Management budget. There is no accrual basis available for worker's comp. She reiterated that account is completely cash funded. Co-Chair Torgerson claimed that did not follow what the work reserve account stipulates. He asked if Risk Management was paid before those funds were placed into the account. Ms. Elgee offered to check the terminology being referenced. In the early 1990's, the Legislature made a choice to discontinue funding Worker's Comp on an accrued base and moving to a cash base. She believed that the statute had not been amended to reflect that change. Commissioner Poe continued with testimony. He noted that in the first year, there would be a new merit step effective for the life of the contract. Employees benefiting from the merit step would not be receiving the $1200 dollars. That the State has attempted to calculate how to maintain the experienced State employee, with a lot of institutional knowledge. GGU tried to find something that would benefit the employees who had been working for the State for a longer period of time. GGU suggested the merit increase. The $1200 dollar flat payment would go to anyone that did not benefit from the merit step and would be prorated on a $50 dollar per pay period, for all employees that worked from July 1, 1999 through June 30, 2000. Tape: SFC - 00 #60, Side A Commissioner Poe noted that the 2% and 3% increase would not take effect until six months after the first year. He reiterated that the increase would be delayed for six months and that the $1200 dollars would only be paid out in the first year. The Longevity Step, the new "G" step, was established for employees that had been at step "F" for more than one year. The costs were calculated, with a small number of employees in that area. Commissioner Poe offered to provide that information to the Committee. Co-Chair Torgerson referenced the contract and asked what the $50 dollar one-time payment was. Commissioner Poe clarified that the $50 dollar one-time payment was the $1200 dollar flat payment for a year broken out by paid periods. Co-Chair Torgerson asked if there was a cost associated with the State-maintaining employees in the plan, if they were terminated from the State workforce. Ms. Elgee indicated that the employee would pay all the costs associated with that plan. Commissioner Poe stated that each bargaining unit has certain employees that they attune to their specific needs. Delaying the implementation of the base and pro-rating the $1200 dollars, would provide a larger "bump" in later years of employment. The Administration attempted to level the longevity steps, making a 3.75% increase between each step. DAVID KOIVUNIEMI, Special Assistant, Department of Administration, corrected that some steps have a 3.4% increase. Co-Chair Parnell pointed out that the longest served employees make almost 4.2% more than other employees over the life of the contract. Commissioner Poe agreed with that statement, stressing that negotiating is a "give and take process". Co-Chair Torgerson asked if some employee were being frozen in specific step ranges so that they do not automatically receive merit increases. Commissioner Poe stated that in the longevity steps, the employee would not receive a merit increase every year. There are different time periods used to calculate longevity increases. In the end, no more are received. Ms. Elgee added that in the past, employees had been "frozen" when other types of action have been taken. As a result of the labor trade and crafts classification and with the geographic differentials changed, portions of the State that would be subject to substantially less money than they currently receive, were frozen until they caught up on the page scale. She reiterated that there are a variety of circumstances in which an employee could be "frozen". Co-Chair Parnell asked what would happen with the health insurance plan in the new contract. Commissioner Poe stated that the intent was to move labor unions to an employee directed trust. The concern for GGU was that they wanted the State to commit that there would be $4 million dollars left in the reserve at the time that the contracts were signed. That amount would allow them official reserves enough to move to a trust and know that they had a sufficient cushion to begin. He pointed out that the Administration could not guarantee that there would be $4 million dollars in that account. However, the Administration agreed that there would be a sufficient balance to move to a trust. The Administration wanted to make sure that the State did not get "stuck" with all the liability and no reserves for the health care plan. The agreement at this time is that as soon as the Administration knows that there is $4 million dollars available, GGU will then be able to move to a health trust. Co-Chair Parnell asked where the $4 million dollars would come from. Commissioner Poe advised that there are two reserves that are watched. The first is that which is incurred but not reported (IBR). The IBR is a reserve for claims existing that are logically based on historic data. There is an "additional cushion" or "claims fluctuations" reserves resulting from unanticipated kinds of claims. He clarified that it was not indented that these reserves would come from the general fund. Senator T. Kelly inquired the amount that would be remaining for the other unions. Commissioner Poe replied that would depend on what the claim projections might be. Ms. Elgee added that within the health trust, all the select benefit people are pooled, as are the GGU employees. Those employees have different premiums and different plan designs. Senator T. Kelly understood that three of the twelve unions have gone to a trust system. He questioned if funds had been transferred over to the other trusts. Ms. Elgee explained what at the Administration had done for the Labor, Trades and Crafts unit. She did not know what had happened with the PSEA unit and offered to check out that information. Commissioner Poe interjected that the PSEA unit buys their own health insurance. Ms. Elgee stated that there were advantages to the membership from a tax perspective in doing it that way, which was one of the appeals for that unit. Co-Chair Parnell asked if that trust had been front-loaded. Ms. Elgee responded that the Labor, Trades and Crafts trust was created in 1984 and at that point, most of the specifics were settled through an arbitration agreement. That agreement identified which portion of the reserves were being maintained and belonged to them. It was then, that portion of the reserves was moved into the trust. She commented that the same scenario is being discussed and considered by GGU. In response to a request by Co-Chair Torgerson, Commissioner Poe commented that the numbers were part of the health trust and were used relative to the claims. He stipulated that this was not separate claims or statutory authority. Ms. Elgee pointed out that the health trust was located in AS 39. Senator Green asked when the change had been made to the "self insured". She questioned if any of the bargaining units were part of that population. Ms. Elgee commented that the State went self insured in July, 1997. At that point, the Labor, Trades and Crafts and the PSEA unit already had trusts. Also, at that time, correspondence teachers moved into the National Education Association (NEA) trust environment. Co-Chair Parnell asked how many were left in the self- insured trust. Ms. Elgee replied that there are over 4,000 employees outside of GGU. Commissioner Poe interjected that the largest category, GGU was not included in select benefits. In response to concerns voiced by Senator Green, Ms. Elgee clarified that there would be no sharing of risk between the various groups. All of the costs and all of the premiums are accounted for separately as is the pricing. Commissioner Poe stressed that health care costs are increasing everywhere. GGU and the select benefits are significant sides of the "pool". He noted that the risks had been separately considered. The health trust provides the opportunity for the units to make decisions for themselves. In the end, it would reduce the cost of health care. He summarized that theory had been proven throughout the country. Co-Chair Torgerson requested a breakdown of all the costs associated with the agreements. That figure could allow the Committee to consider total costs. Co-Chair Parnell voiced appreciation to the Department and advised that there would be additional hearings scheduled. ADJOURNED  Co-Chair Parnell adjourned the meeting at 11:11 A.M.