Legislature(2015 - 2016)BARNES 124

02/10/2015 08:00 AM House COMMUNITY & REGIONAL AFFAIRS

Audio Topic
08:05:13 AM Start
08:05:59 AM HB47
09:10:02 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Public Testimony --
          HB  47-PERS CONTRIBUTIONS BY MUNICIPALITIES                                                                       
8:05:59 AM                                                                                                                    
CHAIR TILTON announced  that the only order of  business would be                                                               
HOUSE BILL  NO. 47,  "An Act requiring  each municipality  with a                                                               
population that  decreased by more  than 25 percent  between 2000                                                               
and  2010 that  participates  in the  defined benefit  retirement                                                               
plan  of the  Public Employees'  Retirement System  of Alaska  to                                                               
contribute to the system an  amount calculated by applying a rate                                                               
of  22 percent  of the  total of  all base  salaries paid  by the                                                               
municipality  to employees  of  the municipality  who are  active                                                               
members of the system during  a payroll period; reducing the rate                                                               
of  interest payable  by a  municipality with  a population  that                                                               
decreased by more  than 25 percent between 2000 and  2010 that is                                                               
delinquent  in transmitting  employee and  employer contributions                                                               
to the defined  benefit retirement plan of  the Public Employees'                                                               
Retirement System  of Alaska; giving retrospective  effect to the                                                               
substantive  provisions   of  the  Act;  and   providing  for  an                                                               
effective date."                                                                                                                
8:06:34 AM                                                                                                                    
REPRESENTATIVE  NEAL FOSTER,  Alaska State  Legislature, speaking                                                               
as the sponsor  of HB 47, paraphrased from  the following written                                                               
sponsor statement:                                                                                                              
     HB  47 seeks  to correct  an unintended  consequence of                                                                    
     the [Public Employees'  Retirement System] PERS "salary                                                                    
     floor"  established in  [Senate Bill]  125 of  the 25th                                                                    
     Legislature. [Senate Bill] 125  changed the PERS system                                                                    
     from  a   multiple  employer  plan  to   a  cost  share                                                                    
     plan.  It transferred  the individual liability  of the                                                                    
     160 PERS employers and consolidated  it so that all the                                                                    
     employers  share in  that  liability.    [Senate  Bill]                                                                    
     125 also  created what is  commonly referred to  as the                                                                    
     2008 salary  floor, which requires that  the employer's                                                                    
     contribution rate is paid at  or above that floor.  The                                                                    
     floor was  instituted to ensure  that the  system could                                                                    
     not  be   "gamed."  This  discourages   employers  from                                                                    
     replacing PERS employees with  contract hires to reduce                                                                    
     their   base  contribution   to   the  system.     Some                                                                    
     municipalities  have found  themselves  under the  2008                                                                    
     floor through no fault of  their own. A large change in                                                                    
     population  results  in  a   reduced  tax  base,  which                                                                    
     affects  the  services  a city  can  provide.  As  that                                                                    
     financial reality  drives a  city to  downsize, current                                                                    
     law  exacerbates this  problem  by  keeping their  PERS                                                                    
     contribution at  the 2008 level. This  bill targets the                                                                    
     communities whose  population has dropped by  more than                                                                    
     25% since the previous census.  HB 47 will address this                                                                    
     issue in  two ways:    1.  Establish a new floor  of FY                                                                    
     2012  for  communities  whose population  decreased  by                                                                    
     more  than  25%  between  2000 and  2010.  2.  Provides                                                                    
     relief   to   communities   that  are   delinquent   in                                                                    
     transferring    contribution   if    their   population                                                                    
     decreased by more than 25%  between 2000 and 2010.    I                                                                    
     urge your support  of this legislation. HB  47 does not                                                                    
     intend  to  repeat  the "2008  floor"  debate,  but  to                                                                    
     correct one  of the  unintended consequences  caused by                                                                    
     the arbitrary line that debate created.                                                                                    
8:08:47 AM                                                                                                                    
PAUL  LABOLLE, Staff,  Representative Neal  Foster, Alaska  State                                                               
Legislature, began  by characterizing the  City of Galena  as the                                                               
poster child  for HB  47.   He explained that  in 2008  the floor                                                               
from  Senate  Bill  125  [25th   Alaska  State  Legislature]  was                                                               
enacted, it  was the same  year the  Air Force Base  left Galena.                                                               
The 25  percent population  decrease [specified  in HB  47] would                                                               
encompass  the following  five cities:    Galena, Atka,  Pelican,                                                               
Anderson,  and  St.  George.    Galena lost  30  percent  of  its                                                               
population,   which   resulted   in  downsizing   its   municipal                                                               
government while still  being required to make  payments based on                                                               
its 2008  salaries.   Galena was unable  to make  those payments,                                                               
which resulted in the difference  between the actual payments and                                                               
the required  2008 floor  to accrue.   Additionally,  the accrued                                                               
amount  has  a  12  percent interest  rate,  which  Galena  can't                                                               
possibly administer.   Further,  bankruptcy is  not an  option as                                                               
the  state doesn't  provide  for it  nor  is dissolution  without                                                               
canceling  out the  debts.   Therefore, the  real possibility  is                                                               
that the city would close down  everything and stop being a city,                                                               
which has happened elsewhere.   Should the aforementioned happen,                                                               
the state  is on the hook  for that entire liability  whereas now                                                               
the City of Galena, although  it's not making its floor payments,                                                               
is at least making its contribution rate on its actual salaries.                                                                
8:11:27 AM                                                                                                                    
REPRESENTATIVE   HUGHES   requested   an   explanation   of   the                                                               
indeterminate  fiscal  note as  she  thought  there would  be  an                                                               
additional cost to the state if the [salary floor is changed].                                                                  
MR.  LABOLLE   explained  that  fiscal  notes   that  require  an                                                               
actuarial  assessment  aren't due  until  the  legislation is  in                                                               
possession  of the  House Rules  Standing Committee.   Therefore,                                                               
the indeterminate  fiscal note  for HB 47  only deals  with state                                                               
appropriations not  the actuarial  account that touches  the PERS                                                               
or  Teachers'  Retirement System  (TRS)  liability.   Within  the                                                               
fiscal  note statute,  PERS  and TRS  liabilities  are their  own                                                               
separate item in fiscal notes.   The indeterminate fiscal note is                                                               
not what  it will cost the  retirement system but rather  what it                                                               
will cost the state.                                                                                                            
8:12:35 AM                                                                                                                    
REPRESENTATIVE SEATON  inquired as to how  many other communities                                                               
have fewer employees now than when the salary floor was set.                                                                    
MR. LABOLLE  said that he  has numbers  from last year  that will                                                               
need  to be  updated.    Last year,  the  communities with  fewer                                                               
employees now than  when the salary floor was set  were:  Tanana,                                                               
Sand  Point,  Dillingham,   Ketchikan,  Craig,  Galena,  Pelican,                                                               
Whittier,  Thorne Bay,  Aleutians East  Borough, Husila,  Kaltag,                                                               
Noorvik,  Lake and  Peninsula, Mekoryuk,  St. George,  Allakaket,                                                               
Quinhagak, Toksook Bay, Anderson, Upper Kalskag, and Shaktoolik.                                                                
REPRESENTATIVE SEATON remarked that  although he wasn't sure that                                                               
list  would be  different because  HB 47  would reset  the salary                                                               
floor  to  the 2010  census,  he  expressed interest  in  updated                                                               
information.   He  requested that  the  updated information  also                                                               
include  the  number  of  employees   as  a  percentage  of  lost                                                               
MR. LABOLLE agreed to provide  that updated information.  He then                                                               
noted that  part of  the impetus of  HB 47 is  to silo  what [the                                                               
state] covers  as sort of  a cost control  measure.  Since  HB 47                                                               
only involves those  communities that lost 25 percent  or more of                                                               
their  population  between the  2000  and  2010 census,  no  more                                                               
communities will  be added to  the list.  The  aforementioned, he                                                               
stressed,  is  by design.    He  suggested that  any  communities                                                               
facing similar problems in the  future should be addressed as the                                                               
problem  arises rather  than creating  a measure  to identify  it                                                               
without legislative oversight.                                                                                                  
8:16:05 AM                                                                                                                    
MR. LABOLLE, in response to  Representative Ortiz, specified that                                                               
the communities  he listed were  communities that  are underneath                                                               
their floor  payment and  it's not  respective of  any population                                                               
loss.  In  fact, those communities could have had  an increase in                                                               
population, but they just aren't making their floor.                                                                            
8:16:43 AM                                                                                                                    
REPRESENTATIVE HUGHES  inquired as  to whether the  assumption is                                                               
that  the  amount   of  employees  will  decrease   by  the  same                                                               
percentage  as the  population decreases.   She  said she  didn't                                                               
believe  it  really worked  that  way  because certain  positions                                                               
would be necessary;  for instance, a school would  need a janitor                                                               
no  matter the  size of  the school.   Therefore,  she questioned                                                               
whether the number of positions  is being decreased such that the                                                               
[salary  floor]  rate aligns  the  population  decrease with  the                                                               
position decrease.   Or, are adjustments being  made because some                                                               
positions have  to stay regardless of  the size of the  town, she                                                               
MR. LABOLLE clarified  that HB 47 simply resets the  floor to the                                                               
salary [floor] of 2012.   Mr. LaBolle further clarified that it's                                                               
not really  the number of  positions but rather the  total salary                                                               
amount.  Theoretically, the salary base  could stay the same in a                                                               
situation in  which there  was a decrease  in one  position while                                                               
everyone  else  received a  raise.    Therefore, it's  about  the                                                               
actual expenditure not the number of positions.                                                                                 
8:18:35 AM                                                                                                                    
REPRESENTATIVE HUGHES  asked whether an adjustment  is being made                                                               
to  realize that  some positions  will have  to remain  no matter                                                               
whether it's salary or positions.                                                                                               
MR.  LABOLLE  answered  that  in   concept  that's  addressed  by                                                               
resetting  the floor  to 2012,  acknowledging that  the requisite                                                               
employees  are being  retained even  though  the community  isn't                                                               
making the 2008 floor.                                                                                                          
8:19:25 AM                                                                                                                    
REPRESENTATIVE  HUGHES, returning  to the  [indeterminate] fiscal                                                               
note, related her understanding that  lowering the rate for these                                                               
communities  places  the  state  on the  hook  through  PERS/TRS.                                                               
Therefore, she  surmised that although the  [fiscal impact] might                                                               
not have to be in the budget this  year, it would be felt at some                                                               
MR. LABOLLE replied  yes.  In further  response to Representative                                                               
Hughes, Mr.  LaBolle noted that  he has last year's  fiscal note,                                                               
which is  out of date.   The bulk of  the expense would  arise in                                                               
the first year of implementation  due to the retroactivity clause                                                               
embodied in Section  3.  The fiscal note from  last year reported                                                               
an expense of  $706,000 and then decreased  every year following.                                                               
He  pointed  out  that  the  current payment  to  the  state  for                                                               
PERS/TRS  is about  $226  million,  and thus  the  $700,000 is  a                                                               
rounding error.                                                                                                                 
REPRESENTATIVE HUGHES surmised then  that the forthcoming [fiscal                                                               
note] will have slightly higher amounts.                                                                                        
MR.  LABOLLE replied  yes, pointing  out that  there has  been an                                                               
additional year of delinquent payments  and an additional year of                                                               
12  percent  interest rate  running  on  the previous  delinquent                                                               
payments.   In  further  response to  Representative Hughes,  Mr.                                                               
LaBolle  agreed   that  the  costs  should   be  considered,  but                                                               
suggested that  one should  definitely consider  the cost  of not                                                               
solving this problem.                                                                                                           
8:22:17 AM                                                                                                                    
REPRESENTATIVE SEATON inquired as  to factors that would increase                                                               
the fiscal note  as it refers to a limited  number of communities                                                               
and the floor  is reset to 2012.  He  indicated his understanding                                                               
that last  year's fiscal note  would accurately reflect  the cost                                                               
to the system.                                                                                                                  
MR.  LABOLLE  explained  that  Section 3  makes  the  changes  in                                                               
Sections 1 and 2 retroactive to  July 1, 2009, which was when the                                                               
floor  was  implemented.    The  retroactivity  eliminates  those                                                               
delinquent  payments, and  thus every  year there  are delinquent                                                               
payments  going forward  would add  to the  fiscal impact  to the                                                               
system.   He further explained  that costs  will be added  to the                                                               
system because since the last  fiscal note there has been another                                                               
year of delinquent payments as well as the retroactivity aspect.                                                                
8:23:47 AM                                                                                                                    
REPRESENTATIVE SEATON requested last year's fiscal note.                                                                        
MR. LABOLLE  said that  it should be  in the  committee's packet.                                                               
He  then related  his understanding  that the  department doesn't                                                               
intend to  provide an updated  fiscal note until  the legislation                                                               
reaches the House Rules Standing Committee.                                                                                     
8:24:42 AM                                                                                                                    
REPRESENTATIVE  SEATON  asked  if   any  of  the  earlier  listed                                                               
communities  have  actually  made  their  payments,  which  might                                                               
result  in  taking money  from  the  general  fund (GF)  to  make                                                               
reimbursement payments.   If that is the case, he  inquired as to                                                               
the size of that impact.                                                                                                        
MR. LABOLLE  noted that he  had asked the department  about that,                                                               
but had not received a response from them.                                                                                      
8:25:34 AM                                                                                                                    
CHAIR TILTON opened public testimony.                                                                                           
8:25:59 AM                                                                                                                    
KATHIE  WASSERMAN, Executive  Director,  Alaska Municipal  League                                                               
(AML), stressed the importance of HB  47 since the 2008 floor has                                                               
had a negative effect on  communities.  As explained earlier, the                                                               
2008 floor was  placed into law by Senate Bill  125 because there                                                               
was fear  that municipalities would  pull out employees  and hire                                                               
contractors in order to avoid  the PERS liability.  Although that                                                               
could have  happened, she said  she hadn't heard of  it happening                                                               
and the unintended consequence is not  worth it.  She pointed out                                                               
that  no municipality  or  business would  find  themselves in  a                                                               
position in which they were  penalized for having fewer employees                                                               
than  they  had  before,  especially in  the  face  of  impending                                                               
deficits.   She suggested that  the list of  communities impacted                                                               
by the 2008 floor could  increase when municipalities [due to the                                                               
deficit] find  they have to  lay off employees.   Thankfully, the                                                               
state doesn't face  the same penalty or consequence  when it lays                                                               
off employees.   She acknowledged that addressing  this issue may                                                               
incur  a  small  cost  to  the state,  but  emphasized  that  not                                                               
addressing the  issue will cause  larger costs to the  state when                                                               
some  of these  municipalities  can't function.   Although  those                                                               
communities who  can't function are  required to file  a petition                                                               
with  the Local  Boundary  Commission and  pay  their bills,  she                                                               
characterized that as crazy since  the reason they can't function                                                               
is  because they  can't  pay their  bills.   At  some point,  the                                                               
responsible party for those bills will  be the state.  She opined                                                               
that a  concerted decision has  to be made  in regard to  what is                                                               
going  to be  done with  these  small municipalities.   The  very                                                               
entity that is intended to  keep these communities healthy is now                                                               
charging them and charging them  with a 12 percent interest rate.                                                               
She recalled  Galena's first bill was  approximately $150,000 and                                                               
now  it's up  to $600,000.   She  characterized Galena's  case as                                                               
hopeless as  its budget  will never  allow it to  catch up.   Ms.                                                               
Wasserman  echoed Mr.  LaBolle's testimony  that there  are other                                                               
communities in  the same situation  and although they may  not be                                                               
as deeply  mired, they will be  over time.  For  three years, AML                                                               
has been  trying to  get this addressed  by the  legislature, she                                                               
8:30:02 AM                                                                                                                    
REPRESENTATIVE  SEATON  asked if  AML  is  supportive of  the  25                                                               
percent reduction  in population  as the [trigger  for] resetting                                                               
the [salary] floor.                                                                                                             
MS. WASSERMAN  answered that for the  five communities specified,                                                               
REPRESENTATIVE SEATON clarified that  he is interested in whether                                                               
there  are  other  communities similarly  situated  to  the  five                                                               
communities identified in  terms of the [salary]  floor, but that                                                               
haven't  lost 25  percent of  their  population.   He then  asked                                                               
whether AML  is supportive  of the legislation  if it  applies to                                                               
communities that have lost over 25 percent of their population.                                                                 
MS. WASSERMAN  related that AML  is supportive  of HB 47  for the                                                               
five communities  identified as  there are  discussions regarding                                                               
how to address the other communities.                                                                                           
8:31:59 AM                                                                                                                    
JOHN  KORTA,   Mayor,  City  of  Galena,   paraphrased  from  the                                                               
following written remarks [original punctuation provided]:                                                                      
     I'd like to  thank the committee for  taking time today                                                                    
     so  that   I  may   explain  the  importance   of  this                                                                    
     legislation for communities like  Galena that have seen                                                                    
     significant population decreases in the last decade.                                                                       
     As you may know,  the Galena Forward Operating Location                                                                    
     (FOL) was  closed by  the United  States Air  Force. As                                                                    
     part  of  the  [Base   Realignment  and  Closure]  BRAC                                                                    
     process, the  Galena FOL closure was  effective October                                                                    
     1, 2008,  but had been  in process for four  years. The                                                                    
     Air Force  base was the  main source of  employment for                                                                    
     Galena  residents. Not  surprisingly, the  base closure                                                                    
     resulted in  a reduction of the  population. Galena had                                                                    
     almost 50% more residents in  2000 than it had in 2010.                                                                    
     Galena was again  struck by hardship in  spring of 2013                                                                    
     when  ice  dammed the  Yukon  River  and inundated  the                                                                    
     City, leading to a disaster declaration.                                                                                   
     The 2008 "Floor" established by  the current law exists                                                                    
     to prevent  a municipality from gaming  the PERS system                                                                    
     by  contracting   out  work  previously   performed  by                                                                    
     municipal employees  in order  to avoid  making ongoing                                                                    
     contributions  to   PERS.  The  current   minimum  PERS                                                                    
     contribution  is based  on the  level of  salaries that                                                                    
     existed  in 2008.  This purpose  does  not account  for                                                                    
     Galena's situation.  It was not  intended, nor  does it                                                                    
     contemplate,  municipalities   with  sharply  declining                                                                    
     populations. The  legislation does not change  the PERS                                                                    
     policy, but rather recognizes nuance.                                                                                      
     The legislation affects  only communities that suffered                                                                    
     a minimum  25% decline  in population between  2000 and                                                                    
     2010, like Galena. To put  that in perspective, the 25%                                                                    
     threshold  would represent  the loss  of 75,000  people                                                                    
     from Anchorage or 8,000 people  from Juneau. What would                                                                    
     happen  to   Fairbanks  if  the   Borough's  population                                                                    
     declined by 30,000,  while at the same  time seeing the                                                                    
     closure of Eielson and Fort  Wainwright? The demand for                                                                    
     municipal  administrative  and  public  services  would                                                                    
     decline  sharply; so  would the  municipality's ability                                                                    
     to  provide these  services  having  lost the  region's                                                                    
     economic driver.                                                                                                           
     The legislation,  which moves the floor  year from 2008                                                                    
     to  2012 for  the  communities  that experienced  these                                                                    
     huge  losses, does  not provide  a "loophole"  allowing                                                                    
     Galena   or  any   other  community   with  a   similar                                                                    
     population  loss between  2000 and  2010 to  "game" the                                                                    
     system now or  in the future. The 2008  floor for these                                                                    
     communities  is replaced  with a  2012 floor.  Galena's                                                                    
     budgeted payroll for  FY 2015 is above  the 2012 amount                                                                    
     for 17 employees.                                                                                                          
     Galena's circumstances  are not a result  of any choice                                                                    
     the city made. The base  closure and subsequent loss of                                                                    
     close  to 1/3  of  the city's  population was  entirely                                                                    
     involuntary.  The  relationship   between  a  declining                                                                    
     population  and  declining   payroll  is  clear:  fewer                                                                  
     residents  =  fewer  public  employee  =  lower  public                                                                  
     payroll. Based  on the 2008  floor, Galena  is required                                                                  
     to pay  an amount owed  by a city  substantially larger                                                                    
     than  Galena.   Galena's  required   PERS  contribution                                                                    
     approaches half of the City's entire payroll.                                                                              
     The  2008   Floor  is,  overall,   a  sound   piece  of                                                                    
     legislation, furthering  sound policy, but it  does not                                                                    
     account  for all  situations. It  does not  account for                                                                    
     cities   that   have    suffered   massive   population                                                                    
     contractions. This legislation  furthers the underlying                                                                    
     policy  goals of  the  regulatory  structure: It  helps                                                                    
     ensure  that   municipalities  are  able   to  continue                                                                    
     contributing  to PERS,  while recognizing  that a  city                                                                    
     cannot, and  should not, have to  make the contribution                                                                    
     of a  city that has a  significantly larger population.                                                                    
     Recognizing that  Galena is  not the  same city  it was                                                                    
     before the base closed and  30% of its population moved                                                                    
     away is  simply good  policy, policy that  helps ensure                                                                    
     that Galena continues to contribute to PERS.                                                                               
     Recognizing   the   reality    of   sharply   declining                                                                    
     populations  is a  worthy amendment  and is  just plain                                                                    
     fair. Thank you for your  time this morning. I would be                                                                    
     happy to answer any questions you may have.                                                                                
8:36:47 AM                                                                                                                    
REPRESENTATIVE SEATON related his understanding that Galena's                                                                   
current salary base is higher than the 2012 floor.                                                                              
MAYOR KORTA explained that the City of Galena is paying current                                                                 
on its PERS contribution, but it hasn't been paying at the level                                                                
established with the 2008 floor.                                                                                                
8:37:35 AM                                                                                                                    
REPRESENTATIVE SEATON asked whether the City of Galena is                                                                       
currently, in 2015, paying more salaries than the 2012 floor.                                                                   
MAYOR KORTA responded, "I believe so, yes."                                                                                     
8:38:20 AM                                                                                                                    
SHANDA HUNTINGTON, City Manager, City of Galena, paraphrased                                                                    
from the following written remarks [original punctuation                                                                        
     Before serving  as the  city manager,  I served  as the                                                                    
     city  clerk for  6 years.  I was  also born  in Galena,                                                                    
     grew up there,  and raised my four  children in Galena.                                                                    
     I would  like to follow  up on Mayor  Korta's testimony                                                                    
     with  information   relating  to   Galena's  population                                                                    
     decline,  the base  closure, and  the  effects on  city                                                                    
     payroll and finances.                                                                                                      
     As  Mayor Korta  said,  the air  force base  officially                                                                    
     closed  in 2008,  following a  multi-year drawdown.  In                                                                    
     1990, before base  realignment, Galena's population was                                                                    
     847. Galena has  always been a small city  and the base                                                                    
     was the  driver of economic activity.  According to the                                                                    
     2000 census,  the number of  residents, which  does not                                                                    
     include all of  the Air Force personnel,  was 675. That                                                                    
     number had  dropped to  470 with  the 2010  census. 205                                                                    
     people may  not sound like  a lot, but it  represents a                                                                    
     30% decrease in the  City's resident population between                                                                    
     the two censuses. 30% of  residents moved away, but the                                                                    
     decline  in  the  city's  economic  activity  was  much                                                                    
     For FY  2008, the  current floor year,  Galena's salary                                                                    
     total  was $1,513,365.19  for 36  employees. Therefore,                                                                    
     Galena's annual minimum  PERS contribution is $332,940.                                                                    
     In FY  2012, the  amended floor year,  Galena's payroll                                                                    
     was $765,776 for  17 employees. Between FY  2008 and FY                                                                    
     2012, Galena's payroll was cut  in half, reflecting the                                                                    
     decrease  in  population   and  in  economic  activity.                                                                    
     Galena's  current annual  minimum PERS  contribution of                                                                    
     $332,940 is  nearly half  of the  City's FY  2012 total                                                                    
     payroll  costs.  Allowing  a floor  year  of  2012  for                                                                    
     cities   that  experienced   a   drastic  decrease   in                                                                    
     population    changes     Galena's    annual    minimum                                                                    
     contribution to $168,940.                                                                                                  
     For  Galena,  the   difference  in  PERS  contributions                                                                    
     between the  2008 floor and  FY 2012 actual  payroll is                                                                    
     $164,000. This  difference will continue  going forward                                                                    
     creating  an ever  increasing  obligation. By  statute,                                                                    
     any amount  unpaid accrues interest at  12%. This ever-                                                                    
     increasing  obligation  adds  to  an  already  stressed                                                                    
     situation.  The  City's   financial  situation  was  so                                                                    
     severe in FY 2009 that  it required a low interest loan                                                                    
     through the Alaska  Municipal Bond Bank to  deal with a                                                                    
     severe  cash flow  crisis that  was preventing  us from                                                                    
     being  able to  secure fuel  for heat  and electricity.                                                                    
     Simply put, if  Galena can't pay its  bills, the lights                                                                    
     go out in Galena.                                                                                                          
     Reasonably  adjusting  the   floor  year  for  severely                                                                    
     impacted cities does not mean  that the cities will pay                                                                    
     the  minimum  amount  only. Modifying  the  floor  year                                                                    
     changes  Galena's  minimum   annual  contribution  from                                                                  
     $332,940 to  $168,940; the  actual contribution  may be                                                                    
     higher.  For FY  2013, Galena  would in  fact pay  more                                                                    
     than that  amended minimum. For  FY 2013,  Galena added                                                                    
     one employee,  for a total payroll  of $895,784.53. For                                                                    
     FY 2013,  Galena's contribution  would have  been above                                                                    
     the 2012 floor by approximately $30,000.                                                                                   
     This  amendment  simply   recognizes  that  reality  of                                                                    
     drastic  population   decreases  experienced   by  some                                                                    
     Alaska cities,  using a clearly  defined metric:  a 25%                                                                    
     decrease  in population  according  the  2000 and  2010                                                                    
     The base  closure has been  very difficult  for Galena.                                                                    
     As  previously noted,  Galena required  a low  interest                                                                    
     loan through  the Alaska Municipal Bond  Bank to secure                                                                    
     fuel for heat  and electricity in FY 2009.  In the last                                                                    
     several  years, Galena's  finances have  stabilized and                                                                    
     there  are  even  indicators   of  recovery  after  the                                                                    
     catastrophic decline.  We cannot  say what  will happen                                                                    
     to Galena's  population long-term, but we  believe that                                                                    
     we've  turned  a  corner in  terms  of  population  and                                                                    
     The  City  of Galena  is  adjusting  to a  new  reality                                                                    
     following  the base  closure  and loss  of  30% of  the                                                                    
     population.  This   amendment  is  one  part   of  that                                                                    
     adjustment. I  became city  manager during  a difficult                                                                    
     period  for  the  City. Our  finances  have  stabilized                                                                    
     somewhat  over the  last several  years. Requiring  the                                                                    
     City of Galena to pay to  PERS a contribution owed by a                                                                    
     much  larger city  weakens  Galena,  and threatens  its                                                                    
     ability  to provide  any contribution  to PERS.  We are                                                                    
     cautiously  optimistic   that  the  City   will  become                                                                    
     stronger and  even grow over  time. If and  when Galena                                                                    
     becomes  the city  it was  in  2008, the  city will  be                                                                    
     required to  make a  PERS contribution  comparable with                                                                    
     that size and payroll, and  will do so gladly, but it's                                                                    
     not  that  city  right  now   and  the  oversized  PERS                                                                    
     contribution inhibits it from becoming so.                                                                                 
     Recognizing  the   reality  of   drastically  declining                                                                    
     populations  is  a  matter   of  simple  fairness.  The                                                                    
     amendment recognizes  this and ultimately  promotes the                                                                    
     goals  of  PERS:  ensuring that  Alaska  municipalities                                                                    
     continue to contribute their fair share to the system.                                                                     
     I'd like to  thank the committee for  taking time today                                                                    
     so that I may explain  the importance of this amendment                                                                    
     for communities like Galena  that have seen significant                                                                    
     population decreases in the last decade.                                                                                   
8:44:58 AM                                                                                                                    
MAYOR KORTA, in summary, informed  the committee that Galena is a                                                               
functional community,  but this salary  floor issue has  hurt it.                                                               
Therefore, he requested the committee truly consider HB 47.                                                                     
8:47:54 AM                                                                                                                    
REPRESENTATIVE SEATON  surmised that  HB 47  seems to  attempt to                                                               
balance the  objective of  cities not going  out of  business and                                                               
the salary  floor.  He then  inquired as to the  relative cost to                                                               
the system of  small cities going out of  business without assets                                                               
to make  the payments  versus making adjustments  to stay  in the                                                               
system by changing the date when the floor is imposed.                                                                          
8:49:06 AM                                                                                                                    
KEVIN  WORLEY, Chief  Financial Officer,  Division of  Retirement                                                               
and Benefits,  Department of Administration  (DOA), said  that he                                                               
had no statement on HB 47  itself.  Regarding resetting the floor                                                               
to 2012,  Galena hasn't paid its  salary floor.  He  informed the                                                               
committee that Galena's 2012 gross  salaries were about $765,000,                                                               
the  2008 salaries  were $1.5  million, and  in fiscal  year 2010                                                               
Galena was billed  $115,000.  Therefore, [if the  floor was reset                                                               
to a  salary base  of 2012  and was made  retroactive to  July 1,                                                               
2009],  the  state  would  forgo the  receipt  of  $115,000  from                                                               
Galena.   In fiscal  year 2011,  [the bill]  to Galena  was about                                                               
$139,000.   Therefore, by using  the 2012 salary base,  the state                                                               
would  forgo  $164,000.   In  fiscal  year 2013,  Galena's  gross                                                               
salaries  would be  above the  2012  salary floor  and the  state                                                               
would  forgo  $136,000.   In  fiscal  year 2014,  Galena's  gross                                                               
salaries  would again  be above  the  2012 salary  floor and  the                                                               
state would  forgo $138,000.   Therefore,  [were the  2012 salary                                                               
floor used]  the state would  lose a  total of about  $693,000 in                                                               
addition to  the 12  percent interest  charge of  $154,000, which                                                               
would amount  to a  grand total  loss to  the state  of $850,000.                                                               
This is  just the loss from  Galena, one of the  five communities                                                               
impacted.    In response  to  Representative  Seaton, Mr.  Worley                                                               
agreed  to provide  the committee  with  the aforementioned  loss                                                               
data for each of the five communities that HB 47 would address.                                                                 
8:52:05 AM                                                                                                                    
REPRESENTATIVE   SEATON   asked   if   other   communities   have                                                               
closed/gone  out  of business.    He  then  inquired as  to  what                                                               
happens  to the  PERS  liability  if a  community  can't pay  and                                                               
doesn't have physical assets to meet its obligations.                                                                           
8:52:48 AM                                                                                                                    
KATHLEEN LEA,  Chief Pension Officer, Division  of Retirement and                                                               
Benefits, Department  of Administration, explained that  the only                                                               
recourse PERS has is to intercept  funds coming from the state to                                                               
the  community  that  is  delinquent  or  has  defaulted  in  its                                                               
contributions.      The  state  intercepting the  funds from  the                                                               
state  to  these  small  communities  would  impact  these  small                                                               
communities' ability to pay for  very basic necessary services in                                                               
the communities.   Therefore, the amount  these communities don't                                                               
pay  becomes part  of the  unfunded liability  and "the  state on                                                               
behalf" that needs to be  paid unless those payments are received                                                               
from  the community  at  some point,  which  would reduce  future                                                               
obligation  for the  state  on  the "on  behalf."   However,  the                                                               
reality is the state hasn't received any funds.                                                                                 
8:54:19 AM                                                                                                                    
The committee took a brief at ease.                                                                                             
8:55:03 AM                                                                                                                    
MS.  LEA, correcting  earlier testimony,  clarified  that if  the                                                               
state, as an  employer in PERS, fell below its  salary floor, the                                                               
state  would  be  charged  the  interest  and  the  contributions                                                               
through the plan.                                                                                                               
8:55:32 AM                                                                                                                    
REPRESENTATIVE SEATON  directed attention to the  provision in HB
47 that would  change the interest rate  on delinquent [payments]                                                               
and asked  whether the  PERS Board or  its managers  believe that                                                               
change in interest rate is reasonable.                                                                                          
MR. WORLEY  explained that  by statute the  state is  required to                                                               
charge  the  actuarial  rate  of return,  which  is  currently  8                                                               
percent for PERS  and TRS plus one half that  amount.  Therefore,                                                               
it's one  and a  half times  the actuarial rate  of return  of 12                                                               
percent.   He  opined that  the [12  percent] is  charged because                                                               
it's  assumed  that  the  8  percent  rate  of  return  on  those                                                               
investments  will  be  made.    Furthermore,  by  the  state  not                                                               
receiving the contributions  in a timely manner  and getting them                                                               
into  systems  for investment  purposes,  the  state is  forgoing                                                               
interest/investment earnings from each of  those funds.  A charge                                                               
below that [12  percent] is in effect helping an  employer by not                                                               
obtaining the 8 percent charge.                                                                                                 
8:57:13 AM                                                                                                                    
REPRESENTATIVE SEATON  surmised that if the  actuarial investment                                                               
return  is 8  percent and  [the community]  is charged  that, the                                                               
division  is making  the actuarial  investment rate.   Therefore,                                                               
the  division isn't  foregoing the  investment  rate because  the                                                               
average investment  rate is achieved  in the 8  percent interest.                                                               
Therefore,  he  questioned  why the  half  [percent]  penalty  is                                                               
MR. WORLEY reminded the committee  that the statute specifies one                                                               
half times the  actuarial rate of return.   Statute withstanding,                                                               
when  the  division isn't  receiving  contributions  on a  timely                                                               
basis, the  division is foregoing  interest being earned  on each                                                               
of  those payrolls.    Currently, there  are  some employers  who                                                               
haven't paid their  salary floors for a number of  years and thus                                                               
the  state  is  forgoing  a   $150,000  contribution  from  2009.                                                               
Receiving only  8 percent  on that this  year means  the division                                                               
has  lost investment  and interest  earnings from  2009-2013 have                                                               
been lost.                                                                                                                      
8:59:00 AM                                                                                                                    
REPRESENTATIVE SEATON surmised then  the division is not charging                                                               
8 percent  on the total  debt.   Rather, it's charging  8 percent                                                               
for one  year and then  the debt is set  aside as a  fixed amount                                                               
and  the 8  percent interest  rate is  not being  charged on  the                                                               
entire debt the next year.                                                                                                      
MR.  WORLEY explained  that 12  percent is  the interest  charged                                                               
each month.   If the division  doesn't receive the amount  due in                                                               
2009, 12  percent interest will  be charged.   As any  other bill                                                               
becomes  due with  interest charges  to it,  the 12  percent will                                                               
continue to accrue.  In 2009,  if that hasn't been paid, interest                                                               
will be  accrued through 2010,  2011, 2012,  2013, and 2014.   If                                                               
the  payment  due  in  2010  isn't received,  there  will  be  an                                                               
interest rate charge for 2011,  2012, 2013, and 2014.  Therefore,                                                               
it's compounding  interest over  time.   Receiving a  payment one                                                               
year at  a rate  well below  8 percent  would result  in forgoing                                                               
investment earnings  and there would  be interest expense  to the                                                               
communities that are still due to  the plan.  He noted that those                                                               
would be significantly less than 8 percent.                                                                                     
9:00:57 AM                                                                                                                    
REPRESENTATIVE  SEATON related  his  analysis that  if 8  percent                                                               
interest is  achieved, when  a payment comes  in the  actuarial 8                                                               
percent would be  achieved and the [payment] would be  whole.  He                                                               
clarified that  he wasn't  saying that the  interest rate  in the                                                               
bill  is  giving  the  division 8  percent,  rather  it's  merely                                                               
earning  8 percent  in another  place  and then  coming into  the                                                               
division's account.                                                                                                             
9:02:37 AM                                                                                                                    
REPRESENTATIVE  SEATON  said  he appreciated  the  necessity  for                                                               
making  an  adjustment;  however,   he  expressed  concern  about                                                               
setting the floor and contributions  at less than the actuarial 8                                                               
percent  that PERS  is  to return  on its  investment.   He  then                                                               
requested  an analysis  of whether  the 8  percent interest  rate                                                               
would  eliminate another  potential gaming  situation as  well as                                                               
avoid losing [money] on delayed contributions.                                                                                  
REPRESENTATIVE FOSTER agreed to run those calculations.                                                                         
MR.  LABOLLE, referring  to Section  2,  asked if  Representative                                                               
Seaton is referring to resetting  that interest rate based on the                                                               
population loss criteria or the entire system.                                                                                  
REPRESENTATIVE  SEATON said  he would  have to  review that.   He                                                               
related his  understanding that  HB 47  resets the  entire system                                                               
and  ongoing  calculation rates  if  communities  don't make  the                                                               
floor contribution.   He expressed the need to  avoid a situation                                                               
in  which the  contribution rates  are calculated  one way  on an                                                               
ongoing basis  for one community  that doesn't make  its payments                                                               
and calculate  the nonpayment of  the floor of  another community                                                               
at  another rate.   Therefore,  he opined  that it  would be  the                                                               
system related to  not meeting the floor, not the  entire rest of                                                               
the system.                                                                                                                     
MR.  LABOLLE explained  that under  HB 47  the new  interest rate                                                               
applies only to  those communities that meet  the population loss                                                               
REPRESENTATIVE  SEATON  remarked  that  the  committee  needs  to                                                               
review  whether that's  a  fair  and equitable  way  in which  to                                                               
address  the  matter.   He  opined  that meeting  the  population                                                               
criteria  shouldn't take  one community  to one  percentage while                                                               
another community  that doesn't meet  the floor is  calculated at                                                               
another  percentage.     The  calculation  should   be  fair  and                                                               
equitable  across  the  communities.    He  offered  his  initial                                                               
thought  that  if  a  community  isn't  meeting  the  floor,  the                                                               
legislation would  cover that interest  rate but nothing  else in                                                               
the entire system.                                                                                                              
REPRESENTATIVE FOSTER offered to review that as well.                                                                           
9:08:26 AM                                                                                                                    
MR.  LABOLLE pointed  out  that  theoretically the  retroactivity                                                               
clause  would   eliminate  the   interest  on   those  delinquent                                                               
payments, and therefore the  committee could consider eliminating                                                               
Section  2  of  HB  47.   With  the  elimination  of  Section  2,                                                               
theoretically the  communities would still  be made whole  due to                                                               
the retroactivity clause.                                                                                                       
9:09:09 AM                                                                                                                    
CHAIR TILTON announced that HB 47 would be held over.