Legislature(2015 - 2016)BARNES 124

04/06/2015 03:15 PM House LABOR & COMMERCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Moved HB 46 Out of Committee
Moved CSHB 47(CRA) Out of Committee
<Bill Hearing Canceled>
           HB 47-PERS CONTRIBUTIONS BY MUNICIPALITIES                                                                       
3:29:15 PM                                                                                                                    
CHAIR OLSON announced  that the final 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."  [Before the committee was CSHB 47(CRA)]                                                                       
3:29:35 PM                                                                                                                    
REPRESENTATIVE NEAL FOSTER,  Alaska State Legislature, introduced                                                               
himself and his staff, Paul LaBolle.                                                                                            
3:29:46 PM                                                                                                                    
PAUL  LABOLLE, Staff,  Representative Neal  Foster, Alaska  State                                                               
Legislature, stated  that HB 47,  Section 1 would reset  the 2008                                                               
Public  Employees  Retirement System  (PERS)  floor  to 2012  for                                                               
communities  that  have  lost  more  than  25  percent  of  their                                                               
population and  are paying  less than they  would have  in fiscal                                                               
year (FY)  2008.   It specifically excluded  Atka, which  was the                                                               
only community whose population dropped  by more than 25 percent,                                                               
but  whose salaries  are  above the  2008 floor.    He said  that                                                               
Section  2  of  the  bill  would  change  the  interest  rate  on                                                               
delinquent payments from 1.5 times  the actuarial assumed rate of                                                               
return or 8  percent to simply the actuarial rate  of return or 8                                                               
percent for  communities that  make payments  to the  PERS system                                                               
under  the "2008  floor"  and  not under  current  salaries.   He                                                               
indicated  that   if  they  pay   under  current   salaries,  the                                                               
obligation will  be unchanged  on delinquent  payments.   He said                                                               
Section 3  would provide a  retroactive clause that goes  back to                                                               
3:31:27 PM                                                                                                                    
REPRESENTATIVE LEDOUX  asked whether the  fiscal note was  a zero                                                               
fiscal note.                                                                                                                    
MR.  LABOLLE  explained  that the  fiscal  note  [Retirement  and                                                               
Benefits  dated 4/3/15]  was indeterminate  due to  the actuarial                                                               
loss  versus a  real  loss and  an estimate  of  annual loss  and                                                               
assumed rate  of returns.   He referred to  page 2 of  the fiscal                                                               
note that provides an estimate of  the yearly loss.  The estimate                                                               
starts in fiscal  year (FY) 16 at $131,000 and  fall each year FY                                                               
21, $85,000.   He pointed  out that  the estimate leaves  out the                                                               
biggest  part of  the  fiscal note,  which  is the  retroactivity                                                               
clause.   He referred members  to page 2  of the letter  from the                                                               
actuarial, [David  H. Slishinshy, ASA], which  indicates $999,000                                                               
for FY 16, for  a total of $1.13 million in FY 16.   He said that                                                               
the remainder of the years  are unchanged since the retroactivity                                                               
clause  would   be  closed   out  by  then.     In   response  to                                                               
Representative LeDoux  he clarified that  the FY 21  ongoing cost                                                               
is $85,000.                                                                                                                     
3:33:25 PM                                                                                                                    
REPRESENTATIVE   COLVER  requested   a   review/summary  of   the                                                               
actuarial letter.                                                                                                               
3:33:53 PM                                                                                                                    
MIKE BARNHILL, Policy Analyst, Office  of the Director, Office of                                                               
Management &  Budget (OMB), Office  of the Governor,  deferred to                                                               
the  Chief Financial  Officer for  the Division  of Retirement  &                                                               
Benefits to explain the fiscal note.                                                                                            
3:34:13 PM                                                                                                                    
KEVIN WORLEY,  Chief Financial Officer, Central  Office, Division                                                               
of  Retirement &  Benefits, Department  of Administration  (DOA),                                                               
referred to page 2 of the  fiscal note, stating that one line was                                                               
for ongoing and the other for retroactive figures.                                                                              
3:34:29 PM                                                                                                                    
MR.  WORLEY explained  that retroactive  represents revenue  from                                                               
2008-2015  that  the  PERS  retirement   system  would  not  have                                                               
collected as a result in the  change in salary.  For example, the                                                               
department  will waive  difference between  the salaries  and the                                                               
actual payroll for the City of Galena.                                                                                          
MR.  BARNHILL explained  that  the  way that  works  is that  the                                                               
actuarial has already treated them  as actuarial losses for those                                                               
years  and has  built  in the  losses for  those  years into  the                                                               
actuarial rate setting for FY 08, FY  09, FY 10, FY 11, FY 12, FY                                                               
13, and FY  14.  He characterized it as  "water under the bridge"                                                               
since  it  was  figured  into the  unfunded  liability  so  going                                                               
forward it's already built into  the rate setting the actuary has                                                               
done.   The  state has  been paying  for that  through additional                                                               
state assistance contributions  to the extent that  the state had                                                               
a net  actuarial loss  with the  sum total  of all  the actuarial                                                               
losses in a particular year.                                                                                                    
3:36:02 PM                                                                                                                    
REPRESENTATIVE HUGHES  asked whether the $999,000  was the "water                                                               
under the bridge."                                                                                                              
MR. BARNHILL answered yes.                                                                                                      
REPRESENTATIVE HUGHES  recalled that it  seemed like the  City of                                                               
Galena's rate  of $131,000  had been $150,000  or $160,000.   She                                                               
asked for further  clarification on why the  ongoing figures were                                                               
only $131,000.                                                                                                                  
MR. BARNHILL  referred to Appendix "A"  on page 3 of  fiscal note                                                               
analysis from the actuarial, which  shows that the City of Galena                                                               
had gross salaries  in FY 08 of $1.5 million  and $765,000 for FY                                                               
12.   He said  that the  figures represented  22 percent  of $1.5                                                               
million, which  was the  bill the  division sent  to the  City of                                                               
Galena since  FY 08.  However,  what the City of  Galena actually                                                               
paid was 22  percent of their current payroll,  or something less                                                               
than 22 percent  of $1.5 million.  What has  happened since FY 08                                                               
was that  the city's salary  base reset to  a lower level  and it                                                               
has  been going  up each  year.   Thus in  FY 12  the amount  was                                                               
$765,000  and in  FY 14  it was  over $866,000.   The  actuary is                                                               
predicting that  in FY  16-18, the City  of Galena's  salary base                                                               
will continue to  creep up and as  creeps up to the  FY 08 salary                                                               
level,  it gets  smaller each  year,  which is  reflected in  the                                                               
fiscal note.                                                                                                                    
3:38:24 PM                                                                                                                    
REPRESENTATIVE HUGHES  asked whether the diminishment  of revenue                                                               
sharing was taken into account in this analysis.                                                                                
MR. BARNHILL was not sure he followed the question.                                                                             
3:38:39 PM                                                                                                                    
REPRESENTATIVE HUGHES  referred to the revenue  sharing the state                                                               
gives  back to  local  communities, which  will  be reduced  each                                                               
MR.  BARNHILL  related  his understanding  that  she  was  asking                                                               
whether the  actuarial took into account  the resources available                                                               
to the City  of Galena for its  salary base to continue  to go up                                                               
might be less.  He surmised  that the actuarial did not take that                                                               
into  account, but  just  looked at  the trend.    He offered  to                                                               
contact the actuarial and report to the committee.                                                                              
3:39:20 PM                                                                                                                    
REPRESENTATIVE COLVER asked whether the  bill resets the floor to                                                               
June 30, 2012  for municipalities who decreased by  25 percent in                                                               
the last two census reports.                                                                                                    
MR. BARNHILL answered yes.                                                                                                      
REPRESENTATIVE  COLVER asked  how this  affects communities  that                                                               
are close to  that asked whether it would that  take care of them                                                               
or just the City of Galena.                                                                                                     
MR.  BARNHILL  answered these  are  communities  impacted by  the                                                               
bill.   For  instance, if  a  community loses  population in  the                                                               
future, this bill would not impact the community.                                                                               
3:40:29 PM                                                                                                                    
REPRESENTATIVE COLVER  related his  understanding that  this bill                                                               
would  reset and  write  off bad  debt that  has  accrued on  the                                                               
higher payrolls at  22 percent of the imputed payrolls  at the FY                                                               
2008  level.    He  further understood  that  ongoing  costs  are                                                               
reflected on  page 2 of  the fiscal  analysis.  He  asked whether                                                               
the  department's  fiscal  note  was  indeterminate.  The  fiscal                                                               
analysis shows $131,000 in FY 16 and $122,000 in FY 17.                                                                         
MR. BARNHILL answered that some  actuarial complexity exists.  He                                                               
stated  that  the  table  on  page  2  represents  lost  employer                                                               
contributions to  the PERS [Public Employees  Retirement System].                                                               
When  the state  doesn't collect  the revenue  from employers  it                                                               
would  normally collect,  it  is treated  as  an actuarial  loss,                                                               
which is added  to the existing unfunded  liability and amortized                                                               
over a 25-year period.  For  example, the $131,000 in FY 16 would                                                               
be capitalized  as additional unfunded liability,  which would be                                                               
offset against all  the other actuarial gains and  losses for the                                                               
year.  The  remaining number, if positive goes  against the prior                                                               
unfunded  liability,  and  if  negative, it  is  added  to  prior                                                               
unfunded liability  and amortized.   All  things being  equal, if                                                               
the actuarial  loss to FY 16  was $131,000,  the  amount added to                                                               
state  assistance  -  that  the  state  pays  on  behalf  of  all                                                               
participating  employers  would  be   a  fraction  of  $131,0000,                                                               
probably in  the range of  $25,000 to  $30,000 per year  in extra                                                               
state assistance.                                                                                                               
3:42:43 PM                                                                                                                    
REPRESENTATIVE  COLVER asked  whether a  large percentage  of the                                                               
unfunded liability  was due to generous  retirement commitments a                                                               
few years ago that now are showing up as the true cost.                                                                         
MR.  BARNHILL  answered that  he  could  discuss this  matter  at                                                               
length;  however,  he  summarized   that  the  causation  of  the                                                               
unfunded liability was  a product of investment  losses that were                                                               
not contemplated and actual projections that were badly wrong.                                                                  
CHAIR OLSON  asked whether those  were the mortality  tables that                                                               
were used.                                                                                                                      
MR.  BARNHILL  answered  it  had  more to  do  with  health  cost                                                               
projections in 1990s calculated 4.5 percent  for FY  1999 but the                                                               
actual costs  for FY 1999 was  20 percent.  He  acknowledged that                                                               
the  mortality  tables will  be  a  big challenge  since  medical                                                               
science is  doing amazing  things to cure  disease.   He expected                                                               
that people will  live longer.  He said that  in the most current                                                               
set of  actuarial valuations, the actuarial  has recommended some                                                               
additional conservative numbers in  terms of mortality, which was                                                               
adopted  by the  Alaska  Retirement Management  Board last  year.                                                               
Again, as the state moves  forward in time, the state anticipates                                                               
the   actuaries    will   bring   an    additional   conservative                                                               
recommendations with respect to mortality projections.                                                                          
3:44:54 PM                                                                                                                    
REPRESENTATIVE HUGHES  related her understanding that  the fiscal                                                               
note was  indeterminate, but the  actuarial has  provided figures                                                               
on the fiscal note.  She  said the $131,000 would be amortized so                                                               
it would  really be $20,000-25,000  cost to the state  this year.                                                               
Further  the $1  million  that has  was  considered "water  under                                                               
bridge."  She asked whether it was a $150,000 cost to the state.                                                                
MR. BARNHILL  said that was very  nearly the amount.   All things                                                               
being  equal that's  what it  would be;  however the  state never                                                               
gets an 8  percent investment return.  For example  in FY 14, the                                                               
investment return  was over 18  percent, which resulted in  a net                                                               
actuarial gain.   He was unsure what will happen  in FY 16, since                                                               
the investment markets could return  more than 8 percent and that                                                               
could offset  the actuarial loss.   He suggested that  in viewing                                                               
the scale  of investment returns,  it will  be very easy  to wipe                                                               
out $131,000 in actuarial losses.   He predicted that 8.2 percent                                                               
could completely wipe it out or  8.0105 percent.  He cautioned to                                                               
take these figure with "a grain of salt."                                                                                       
3:47:10 PM                                                                                                                    
CHAIR OLSON,  after first determining  no one wished  to testify,                                                               
closed public testimony on HB 47.                                                                                               
3:47:37 PM                                                                                                                    
REPRESENTATIVE COLVER said that if  the state was going to expect                                                               
communities to be viable, given  declining state assistance, that                                                               
it was  very troubling they  would be  charged so much  when they                                                               
had  to reduce  the budget.   He  said that  something has  to be                                                               
done, that cities need to be  viable and continue to operate.  He                                                               
agreed it  was a difficult problem.   He offered his  belief that                                                               
this bill seems to be a  reasonable solution, noting that the 8.2                                                               
percent return would result in no cost to the state.                                                                            
3:49:09 PM                                                                                                                    
REPRESENTATIVE HUGHES  commented that  she cringed at  thought of                                                               
increasing the  unfunded liability, but in  considering the small                                                               
amount per  year or that  if the state has  a good year  that the                                                               
$131,000 would be wiped out.   She said she felt more comfortable                                                               
now that she better understands the fiscal note.                                                                                
3:49:45 PM                                                                                                                    
REPRESENTATIVE LEDOUX  suggested that if the  legislature doesn't                                                               
do  this some  places  may "turn  off lights  and  give the  keys                                                               
back."  She suggested that just  as bankers consider the terms of                                                               
the  loan, and  if  collecting means  driving  the borrower  into                                                               
bankruptcy  and the  bank gets  nothing,  this approach  probably                                                               
makes sense fiscally to the state and the smaller communities.                                                                  
3:50:24 PM                                                                                                                    
CHAIR OLSON thanked the sponsor  for providing what appears to be                                                               
more  accurate information  than  the committee  has  had in  the                                                               
3:50:36 PM                                                                                                                    
REPRESENTATIVE  HUGHES reiterated  that understanding  the fiscal                                                               
note was  valuable.   Further, she offered  her belief  that this                                                               
was the fair and right thing for the communities.                                                                               
3:51:08 PM                                                                                                                    
REPRESENTATIVE  HUGHES moved  to  report  the proposed  committee                                                               
substitute,  CSHB  47(CRA),  out  of  committee  with  individual                                                               
recommendations and  the accompanying fiscal notes.   There being                                                               
no objection, CSHB 47(CRA) was  reported from the House Labor and                                                               
Commerce Standing Committee.                                                                                                    

Document Name Date/Time Subjects
HB46 ver A.pdf HL&C 4/6/2015 3:15:00 PM
HB 46
HB46 Sponsor Statement.pdf HL&C 4/6/2015 3:15:00 PM
HB 46
HB46 Fiscal Note-DOLWD-WIB-04-02-15.pdf HL&C 4/6/2015 3:15:00 PM
HB 46
HB46 Fiscal Note-MVA-OOC-04-02-15.pdf HL&C 4/6/2015 3:15:00 PM
HB 46
HB46 Support Documents-Email-Russ Black-SFAC Director-3-25-15.pdf HL&C 4/6/2015 3:15:00 PM
HB 46
HB47(CRA) Fiscal Note-DOA-DRB-04-03-15 with Actuary Letter-3-31-15.pdf HL&C 4/6/2015 3:15:00 PM
HB 47