Legislature(1995 - 1996)

05/01/1995 09:40 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
       SENATE BILL NO. 148                                                     
       "An Act relating  to a defined contribution  retirement                 
  plan for      state employees."                                              
  Senator  Rieger brought  the  committee up  to  date on  the                 
  history of the bill.  He stated that it was introduced  as a                 
  simple  defined  contribution   retirement  bill  that   has                 
  undergone changes.   The  administration  has felt  strongly                 
  that they wanted a retirement system RIP provision.  A draft                 
  was introduced to the Finance Committee which linked the RIP                 
  to   a   defined   contribution   system.     Recently   the                 
  administration   provided  a   Tier   III  defined   benefit                 
  retirement  system  which  does  achieve  savings,  in   the                 
  percentage cost, for the  benefits of a state employee.   It                 
  does  not have all  the benefits of  a defined contribution,                 
  insofar as it  does not  have the prevention  of a  possible                 
  future unfunded liability,  as we have presently  in TRS and                 
  PERS.  The Cramer draft, dated 4/30/95, version "U", selects                 
  the Tier III  system.  He  stated that a provisional  change                 
  provides, that  regardless what happens to Tier III, the sum                 
  of employer contribution to Tier III defined benefit and the                 
  SBS for Tier III employees, totals 12.5% of payroll.  To the                 
  extent  that the cost of the  Tier III goes down, the actual                 
  SBS can  go up.   This  scenario can  reverse as  well.   As                 
  originally  costed  out,  a  Tier   III  employee  will  get                 
  additional SBS compared  to Tier  II and I  employees.   The                 
  addition is in the range of 7% employer contribution instead                 
  of  6.13%.    The  other  provisional  change  is  a   clear                 
  requirement that a replacement employee will be in Tier III.                 
  The administration is  not comfortable with this  draft. One                 
  misunderstanding  was  an effective  date  of March  1 which                 
  would allow  time  in  the  interim to  work  on  corrective                 
  amendments  that they would want to provide.  Senator Rieger                 
  stated that he  could easily accommodate the change to March                 
  Alison Elgee was invited to join  the committee.  She stated                 
  that the draft incorporating  the Tier III program has  come                 
  late in the session.  She stated that the Tier  III proposal                 
  by the governor  is an excellent  starting point, but  there                 
  are  no  assurances  that  this  is  where  it  should  end.                 
  Modification to the retirement system  may be necessary. The                 
  administration would prefer  to have  the interim to  refine                 
  the proposal with the effected parties.                                      
  Senator Sharp  asked when  the governor  introduced his  RIP                 
  bill?  Ms. Elgee responded the first part of March. Co-chair                 
  Halford stated  that there  is a  strong connection  between                 
  this bill and  early retirement  in this session.   He  said                 
  there will be no support for early retirement  without these                 
  provisions.  He inquired  with Ms. Elgee if she  still wants                 
  to  wait  and  deal  with  the  bill next  year?  Ms.  Elgee                 
  responded that the governor feels strongly that the benefits                 
  of the retirement incentive program should stand  on its own                 
  merits and that there are cost savings that can be made when                 
  it is  used as a  tool and strategically  implemented. There                 
  are still savings to be had by the strategic use of  the RIP                 
  bill.  Senator  Rieger inquired if the  administration would                 
  prefer a March 31st date opposed to the March 1st date.  Ms.                 
  Elgee  indicated that is  correct.  Senator  Rieger MOVED to                 
  adopt the 4/30/95 Working Draft CS by Cramer.  No objections                 
  having been raised, the CSSB 148  version "U" was ADOPTED as                 
  a working draft.  Senator Rieger MOVED to adopt Amendment #1                 
  which included the date change of March 31st from March 1st.                 
  No objections being made, it was ADOPTED.                                    
  Mr. Stalnaker was invited to join  the committee.  He stated                 
  that  the   draft  CS   makes  participation   by  political                 
  subdivisions and  school districts  optional in  a Tier  III                 
  defined  benefit plan.  It is  a substantial  change  to the                 
  current system.   In essence  there are two  totally defined                 
  benefit plans.  Due  to the set up for those who have Tier I                 
  and II, or I,  II or III, the cost is  doubled for actuarial                 
  work, with a sizeable cost  to administration processing. He                 
  stated that preliminary  advice from  the actuarial firm  is                 
  that  the  provision regarding  the  offset on  supplemental                 
  benefits would not  be allowed under  the current plan.   He                 
  expressed his concerns with a plan  that varies from year to                 
  year.  This  would cause the  supplemental benefits plan  to                 
  come out of qualification. He stated that he has came across                 
  some very  dramatic  changes, and  more  time is  needed  to                 
  analyze  the  content.    He   conveyed  that  the  dramatic                 
  differences are  found in the Tier I  to the Tier II system.                 
  It  effected  all participating  members  of  the retirement                 
  system.  This  plan sets up a  Tier III that is  elected for                 
  school districts, and political subdivisions other  than the                 
  state.  The  result may  be  that  there  will be  political                 
  subdivisions that elect  participation, while others  choose                 
  not  to participate.    There are  two  arrays of  benefits.                 
  Employees transferring  from one  to the  other will  create                 
  questions of  portability.  The dynamics of  adding Tier III                 
  changes the original vision of a retirement system; which is                 
  to promote  or encourage skills  that were learned  from one                 
  employer, to transfer to  another employer.  He asked  if it                 
  was   the  state's   responsibility   to  run   a  political                 
  subdivision retirement  system.   He stated that  this is  a                 
  totally different structure and  requires analyzing.   Under                 
  the  current  plan  a  political  subdivision can  elect  to                 
  participate, rather than a separate  plan just for political                 
  Senator Sharp  inquired as to  the ability of  the political                 
  subdivision to opt out  of the system.  Ms.  Elgee responded                 
  that  it  is a   contractual right for  employees to  remain                 
  covered.  However, the political subdivision can opt out for                 
  all  future employees.  Senator  Zharoff responded to a memo                 
  from PSEA.  The  memo stated that the retirement  fund would                 
  be  invested in a  mutual fund system.   He asked  how it is                 
  currently  being  invested.   Mr.  Stalnaker responded  that                 
  currently,  the  systems   are  invested   by  the   Pension                 
  Investment Board with  an asset allocation that  divides the                 
  investments between  stocks, bonds  and cash  equivalencies.                 
  Under a defined contribution plan, one approach would be, to                 
  invest in an array of mutual funds.   The SBS is participant                 
  directed  with different  investment options  that could  be                 
  mutual funds.   Under the  defined benefit plan,  that would                 
  not be an investment strategy.   He stated that in the  past                 
  there  have  been   investments  in  guaranteed   investment                 
  contracts  through  insurance  companies.    Executive  Life                 
  Insurance Company in California was restructured.  There was                 
  a question as to the viability of the investment.  He stated                 
  that the problem is being remedied.                                          
  Senator  Zharoff  inquired  as  to  the guarantee  of  funds                 
  available for those ready to retire under this program.  Mr.                 
  Stalnaker  stated that the  Tier III,  as a  defined benefit                 
  plan, would be invested  with the other assets of  the PERS,                 
  which would be  actuarily funded  and monitored every  year.                 
  The  investment   risk  on   a  defined   benefit  plan   is                 
  traditionally  with the  employer.  Therefore,  the employer                 
  plays a strong  role in how those assets are invested.  In a                 
  defined  contribution  plan,  the  investment  is  with  the                 
  employee.    Under   the  defined  benefit  Tier   III,  the                 
  investment would continue to be  professionally managed.  It                 
  is as secure as the current Tier I and II systems.                           
  Senator Rieger stated that previous testimony indicated that                 
  under the  proposed Tier  III, the  combination of  benefits                 
  expected plus the  SBS contributions for a  30-year employee                 
  (assuming  that the  investment  was just  to  keep up  with                 
  inflation)  would  be  between 80-90%  of  high  three-years                 
  compensation as a retirement annuity.                                        
  Annalee  McConnell stated that  at the  time that  the first                 
  part  of  the  proposal  was  put  together  for  RIP,   the                 
  administration was anticipating  that it would be  used only                 
  in  cases  where  the  position would  be  left  vacant  and                 
  eventually eliminate  the position.   Initially  the concern                 
  was not with what would happen with employees who were going                 
  to be replaced.  A later  expansion of the RIP occurred  for                 
  Corrections and other  24-hour institution situations  where                 
  savings would  be considerable, even  tho there would  be an                 
  employee replacement.   The administration still anticipates                 
  that under the RIP program designed, there would be very few                 
  situations where there  would be employee replacement.   The                 
  administration wants the RIP.  It is felt that it will  be a                 
  valuable tool in FY-96 but does not want to be in a position                 
  of combining prematurely another proposal which does require                 
  consideration.   The administration prefers  working through                 
  the interim on  defining the program.  One alternative would                 
  be to  have the RIP go  into place for those  positions that                 
  are intended to be left vacant.   The RIP window is designed                 
  for 3 years,  knowing that it  would be used over  different                 
  periods of  time.  She suggested incorporating it next year,                 
  after administrative  and legislative considerations  of the                 
  retirement has been  analyzed.  The administration  does not                 
  want  to  be  in  the  position  of bringing  in  a  program                 
  prematurely through this RIP vehicle.                                        
  Senator Rieger  stated that  the alternative  to that  is to                 
  have those discussions between now  and March 31st of  1996,                 
  which is when  this whole system takes effect.   If there is                 
  any  corrections that the  administration wants  to propose,                 
  there is time to work through it.                                            
  Ms.  McConnell responded  that  this idea  made sense.   She                 
  stated  her concerns with that approach, which is, that once                 
  something is in place,  even tho it is not  something tested                 
  out,  that it  is a starting  point.   She was not  sure how                 
  successful   the  administration  would   be  in  coming  to                 
  agreement  next  year on  modifications.   This  proposal is                 
  worth  looking at,  but  there  should  be  an  agreed  upon                 
  starting place that makes sense,  rather than assume that it                 
  could be corrected in the next session.                                      
  Marrit  Olson,  speaking  via  teleconference  as  a  former                 
  elected member of  the Alaskan State Pension  and Investment                 
  Board, stated that in  the past, he served  as a member  and                 
  former   chair    of   the   Teachers    Retirement   Board.                 
  Consequently, his perspective comes  from both financial and                 
  administrative aspects regarding the pension system.  In the                 
  1970's he served  as an appointee of  the state legislature,                 
  on a  committee of  five, that  advised the  Senate and  the                 
  House on all  legislative bills coming before  those bodies.                 
  In reviewing the  mass of legislation, the  committee turned                 
  in "do not  pass" recommendations on many measures that were                 
  designed to  profit a  few individuals,  or that  was deemed                 
  adverse to the financial  integrity of the fund.   He stated                 
  that retirement plans are designed to serve the many and not                 
  a few individuals. In view of those ideas, he stated that he                 
  has numerous concerns and questions about SB 148.  He stated                 
  that  this  legislation  is being  fast-tracked  for  action                 
  without adequate  notice or opportunity  for public  hearing                 
  statewide. He only  learned of  the planned hearings  today,                 
  originally scheduled for  last week.   He stated that  there                 
  are others with  similar concerns who are  unknowing of this                 
  legislation before the committee.   He stated that his  copy                 
  of SB 148,  version "O", could  have been revised since  his                 
  version was  obtained last week,  therefore he spoke  to the                 
  older version.  Ultimately, he proposed that the legislature                 
  appoint  a  committee  or commission  to  study  other state                 
  proposals and seek solutions to Alaska's problems during the                 
  interim.  He suggested that the group should include members                 
  from  the  Public  Employee's  Retirement System,  Teacher's                 
  Retirement  System, and  members  of the  legislature, which                 
  should report back to the  next session of the  legislature.                 
  He stated  that he  hoped that  no further  action would  be                 
  taken on this  legislation until  further studies have  been                 
  Senator  Rieger  responded  to Mr.  Olson's  testimony.   He                 
  notified him of the newer version  of the bill ("U" version)                 
  which is in conjunction with  a defined benefit modification                 
  contribution plan.  The Maryland plan is similar to our Tier                 
  III  proposal.  He   notified  Mr.  Olson  that   this  plan                 
  incorporates the administration's earlier proposal.  Senator                 
  Rieger stated that they  would fax a copy to him.  He stated                 
  that  the courts  have  interpreted  retirement benefits,  a                 
  simple law passed without a vote of the people which creates                 
  a new benefit creates  an entitlement which is as  strong as                 
  G.O. debt.                                                                   
  Bruce Ludwig was  invited to testify  to the committee.   He                 
  stated that he just learned of  this new proposal, and while                 
  not dismissing  it, he stated that there  were problems with                 
  it.   He  testified that it  should not  be tied to  the RIP                 
  bill.  Both have merit in their own right and deserve  to be                 
  passed.  The  reason for a  retirement system is to  recruit                 
  and retain qualified people. The retirement system is a very                 
  big part of that package.   There was expressed concern over                 
  the fast  action of  this legislation.   Time  is needed  in                 
  order for the Alaska Public Employees Association to receive                 
  comment  from  their  membership.    He  stated  that  their                 
  organization does not work in vacuums, and asked that action                 
  not be taken  so that it  can be analyzed over  the interim.                 
  He stated  that their  organization would  be happy  to work                 
  with Senator Rieger in making changes to the plan.  Co-chair                 
  Halford inquired,  if the two  bills are not  separated, and                 
  understanding  that  the RIP  bill  stays, could  changes be                 
  worked out with  the retirement program realizing  the short                 
  time left in  this session.   Mr. Ludwig responded that  the                 
  RIP bill  is high on the  agenda for the  membership, but if                 
  the  cost is  gutting  the  PERS  system without  giving  it                 
  sufficient thought, then he didn't feel the RIP bill is that                 
  much of a priority.  The RIP bill  gives management tools to                 
  save money without regard to changing the retirement system,                 
  and  he feels  it is a  mistake to  link them together.   He                 
  described  what  gutting  the  system  meant.    The  system                 
  currently pays 2 to  2-1/2%.  The proposed system  will take                 
  it down to 1-1/2% for future employees. He emphasized that a                 
  40% cut is gutting.                                                          
  Senator Rieger stated that  according to previous testimony,                 
  this plan is in  line with other private and  public pension                 
  plans nationally.  He inquired from Mr. Ludwig if public and                 
  private employers nationally, with the  Tier III system, are                 
  having problems recruiting  and retaining  employees?    Mr.                 
  Ludwig responded that   1-1/2%  benefits is not the standard                 
  that he has  seen for other states, it is higher.  He stated                 
  that  industry creates  tremendous  competitiveness, and  an                 
  excellent retirement system  gives the edge  for recruitment                 
  and retaining employees.   Senator Rieger mentioned  that he                 
  has  experienced  people  who have  come  to  him frustrated                 
  because they  are working  for major  Alaskan employers  who                 
  have taken wage reductions. They are  angry at the state for                 
  not  applying  a wage  reduction  on  state  employees.   He                 
  emphasized  that there has been  a belt tightening in Alaska                 
  which has not  applied to  the state employee.   Mr.  Ludwig                 
  stated that wage cuts are happening. There  was an extensive                 
  lowering of administrative positions in  the last year, wage                 
  freezes, wage cuts for new employees.   These did not happen                 
  through the  legislative process,  but happened  through the                 
  civil service system.   If there is  a salary out of  range,                 
  the  Department   of  Administration   adjusts  the   salary                 
  appropriately.  The salary surveys are still not competitive                 
  with private sector employees in all the categories.  In the                 
  last 10 years, the oil  industry, has had a 30% increase  in                 
  salaries.    He  stated that mining  salaries have increased                 
  over 20%.                                                                    
  Vernon  Marshall,  Executive   Director,  NEA-Alaska,   gave                 
  testimony to the defined contribution system.  He stated for                 
  the record that NEA-Alaska opposes  utilization of RIP along                 
  with the other features of this bill.  RIP is an  issue that                 
  needs to be dealt with on its own merit.  He stated that  it                 
  should apply to school districts and  be available as a tool                 
  to administrators.    There is  concern with  regard to  the                 
  reduction of benefits to new hires.  As  it is understood, a                 
  1.5% multiplier  would be applied  to new hires  after 1996.                 
  NEA-AK is  in opposition.   Giving  districts the  option to                 
  trigger   various   multipliers   creates  confusion   among                 
  employees, and districts.  NEA-AK has asked to be considered                 
  in the discussions  regarding retirement. He stated  that he                 
  did  not  understand the  goal, but  that  once the  goal is                 
  clear, the organization  would be  a willing participant  in                 
  creating a system that works.                                                
  Senator Rieger  stated that the administration's proposal is                 
  to  bring  the  retirement system  in  line  with retirement                 
  systems elsewhere.   The intention  of the original  version                 
  was to move to a defined contribution, ridding the system of                 
  abuses. The reason the costs went up in the early years, was                 
  only because the state was forced  to acknowledge and pay on                 
  the unfunded liability. The purpose of the bill has changed.                 
  He would not characterize  it as reducing the cost  of state                 
  government. Co-chair Halford asked for  an analysis of early                 
  retirement provisions,  in this bill versus  previous bills,                 
  in terms of actual cost per employee.                                        
  Senator  Phillips brought  forward  two  amendments  to  the                 
  working draft.  Amendment  #2 is an insert on  page 18, line                 
  4,  after  the word  "employees":  "as part  of  a permanent                 
  reduction in the  personal services costs in  that section."                 
  Amendment #3 is an insert on page 24, line 8, after the word                 
  "research": "and does not entitle  the individual to receive                 
  retirement, health, or leave benefits."                                      
  Co-chair Halford and the  committee agreed to hold  the bill                 
  on the table and come back to it.                                            
       SB 148 STATE EMP DEFINED CONTRIB RETIREMENT PROG                        
  Senator  Phillips  offered amendment  #1.  Page 18,  line 4,                 
  after  the  word,  "employees",  insert,  "as  part  of  the                 
  permanent reduction in the total number of employees in that                 
  agency".  There  were objections, Co-chair Halford  asked to                 
  define "the  agency".   There  was  considerable  discussion                 
  regarding a more appropriate category.                                       
  Senator Sharp stated that in  evaluating past performance on                 
  previous RIP bills  in this state,  he is reluctant to  pass                 
  another RIP bill  without assurances built-in that  there is                 
  going to be employee reduction.   Employee reduction has not                 
  happened in the past,  and in incurring future  past service                 
  debt or obligations by a RIP  bill, there must be reductions                 
  of  employees  in the  long  term.  He suggested  that  if a                 
  Division cannot make a permanent  reduction then they cannot                 
  receive the benefit of a RIP bill.                                           
  Ms. Elgee was asked to respond  to the language in question,                 
  should it be a  division, department, section, agency?   She                 
  responded that it does preclude  some of the uses envisioned                 
  for the program.   She gave  an example in the  Pioneer Home                 
  Program.  The department is in the process of converting the                 
  Pioneer  Homes   from  the   previous  medical   model  home                 
  environment  to a  social model  home environment.    In the                 
  change over, there is  less need for registered nurses.   As                 
  the  nurses turn over,  we are  replacing them  with Pioneer                 
  Home Maid's.   The difference in pay is 1-1/2 Home Maid's to                 
  one registered nurse.   This  is at the  section level.   In                 
  this example, there  would be more employees  but they would                 
  be more effectively  utilized in  the home care  environment                 
  created and less expensive  individually than the  employees                 
  currently on staff.  Ms. McConnell   stated that Ms. Elgee's                 
  example was just what OM&B wants to avoid, where we are tied                 
  from doing something that  makes common sense.  In  terms of                 
  the overall  plan,  OM&B is  not  going to  leave  positions                 
  vacant,  but  rather  eliminate  the  position so  there  is                 
  greater control  by what is  being done by  the departments.                 
  The  environment  for   this  RIP  is  different   than  the                 
  environment for previous RIPs.   In order to  accomplish the                 
  reduction  of  the budget,  there  must  be a  close  out of                 
  positions.   Co-chair Halford  suggested that  in making  it                 
  work  with  a minimum  of  problems,  he would  apply  it to                 
  personnel costs and would come back to the section.  It is a                 
  restriction that has both security and costs.  It was agreed                 
  that this was the least damaging way to adopt this amendment                 
  to their flexibility.   He stated that his support in  a RIP                 
  program and whatever  provisions represented provide savings                 
  commensurate with the cost of the RIP.                                       
  Senator  Phillips  WITHDREW  the  original  amendment.    No                 
  objection being  made it  was WITHDRAWN.   Senator  Phillips                 
  offered an amendment  to amendment #1.   OBJECTION was heard                 
  by  Senators   Zharoff  and  Rieger.   Further  considerable                 
  discussion  was  had  over  the  language of  amendment  #1.                 
  Senator  Phillips  MOVED  to  adopt  a  technical  amendment                 
  changing  the amendment  to read,  "as part  of a  permanent                 
  reduction  in  the  total personal  services  costs  in that                 
  Senator Zharoff asked  the department  if they have  changed                 
  their position  on the bill?   Ms. McConnell  responded that                 
  the other  alternative would  be "department".   She  stated                 
  that it is  the departments that  need to show the  savings.                 
  Co-chair  Frank  stated  that  he  could  support  the  word                 
  "section".  If this  does not work, then next  year it could                 
  be redefined in  an amendment.  Senators Zharoff and  Donley                 
  OBJECTED.  The question is the adoption of the amendment, by                 
  a show of  hands the amendment was  ADOPTED.  In favor  were                 
  Co-chairs Halford and  Frank, along with Senators  Sharp and                 
  Phillips.  Opposed were Senators Zharoff and Donley.                         
  Senator Phillips offered  amendment #2 on  page 24, line  7.                 
  He  asked Wendy  Redman  to  give  testimony.    Ms.  Redman                 
  responded against  the combination  of these  two bills  and                 
  against this amendment  in particular.   This amendment  has                 
  been in the last  two RIP bills for a  specific purpose, for                 
  faculty positions only.   Out of the 400 people  involved in                 
  RIP in  faculty position,  only 42  people were hired  back.                 
  She  stated that  the  reason this  was  needed for  faculty                 
  positions is that in many of the  disciplines, especially in                 
  engineering and business, it  often takes a year or  more to                 
  actually recruit replacements.  During  that period of time,                 
  it has been extremely  helpful to hire back faculty.   There                 
  is still a  savings of money.   They are  able to cover  the                 
  courses.  Without this provision the University would  be in                 
  a  difficult position  with faculty.    It is  restricted to                 
  faculty.  Co-chair  Halford  asked if  this  was  University                 
  faculty  RIPPED  out, who  have  come  back to  teach  under                 
  contract directly? Ms. Redman responded that it was still at                 
  a cost saving.  Senator Rieger stated that he did not have a                 
  problem with the  language staying in the bill.   He said it                 
  was  as  if  the  individual   left  the  retirement  system                 
  entirely.  If they enter into  a personal services contract,                 
  the  assumption   is  that  means  exclusive   of  continued                 
  participation in TRS.  It is the same  concept that Tier III                 
  has. There will be savings which will be more than  the RIP.                 
  Senator  Sharp stated  that  it would  allow  for abuses  by                 
  meeting the personnel reduction, but still covering it under                 
  contractual. Ms. Redman  reiterated that they are  not hired                 
  back  as permanent employees  either part-time or full-time,                 
  they  are hired back as a  per course basis.  Co-chair Frank                 
  said that in analyzing RIP for the state budget, there is  a                 
  realization that  the budgets come  back with a  request for                 
  more  personnel.   At the  committee  level there  is debate                 
  whether  the  request  should  be  approved.    There  is  a                 
  frustration because it does  not turn out to be  a reduction                 
  in overall personnel.   With  the University, the  committee                 
  does not get  into looking at  requests for more  personnel.                 
  In other departments and other areas, the committee does get                 
  into item by item cases and if more money should be provided                 
  which we previously  thought was  RIPPED.   He supports  the                 
  University  utilizing  this   tool  and   living  with   the                 
  consequences. He said  that the legislature is not  going to                 
  be  giving  them  more money  if  they  did  not utilize  it                 
  properly.    Co-chair  Halford   questioned  the  return  of                 
  employees without  benefits. He stated  that the terminology                 
  of  double-dipping  is  working   for  one  agency  building                 
  retirement, and  going on  to work  for  another agency  and                 
  building another retirement.   If the employee  cannot get a                 
  retirement and benefit  package from the contract,  then the                 
  abuse is  avoided.  In the  section that says they  can work                 
  for  the legislature,  it adds,  "and  does not  entitle the                 
  individual to receive retirement, health or leave benefits".                 
  He  asked if  it is  intended  to be,  by inference,  in the                 
  section to deal with  the University employees?  It  is very                 
  clear that if they  come back on a  contract, they were  not                 
  getting those benefits which they  previously RIPPED out of.                 
  Ms. Redman  stated that she had no idea  why that was in the                 
  University section. Co-chair Halford asked Ms. Redman if she                 
  would  object if this amendment were  not adopted to adding,                 
  "and does not entitle the  individual to receive retirement,                 
  health,  or  leave  benefits" in  this  section?  Ms. Redman                 
  stated that she would not object.                                            
  Mr.  Stalnaker  clarified  the  difference  between  the two                 
  references. As Ms. Redman stated, the University enters into                 
  employment  contracts,  they have  varying  contracts.   For                 
  their nonpermanent instructors it  is $2500/yr.  There  is a                 
  small annuity that every employee receives.  The reason that                 
  subsection 2 for legislative employees, has  that additional                 
  language,  is  because legislative  employees  generally are                 
  hourly employees.  It was meant to differentiate that in the                 
  case that the legislature felt the need  to hire a person to                 
  do  a  short research  project,  etc., that  it  was clearly                 
  defined that  it was an hourly employee ineligible for other                 
  benefits.  That is the  only reason that additional language                 
  is  written  in.   Ms.  Redman  stated  that under  personal                 
  services contracts, the University  does not pay retirement,                 
  health or leave benefits on any  contracts.  The wording the                 
  way it is works  the way it is.  She  stated that University                 
  faculty has a defined contribution  program, which works for                 
  faculty not necessarily wanting to retire in Alaska.                         
  Senator Zharoff stated that an employee in the University is                 
  in  the  TRS  system.   In  accepting  employment  with  the                 
  legislature, the PERS system is again activated. If there is                 
  a RIP  out of one and  involvement with another,  there is a                 
  penalty.   Everything  must be  paid  back because  there is                 
  still an accruing  of benefits? Ms.  Redman stated that  the                 
  intent  is  for people  not  returning under  any retirement                 
  system.  Mr. Stalnaker responded that if an employee were to                 
  retire under the TRS,  they could not go back  to work under                 
  the PERS without having the penalty  and paying it all back.                 
  They could not go  back to work under the  option retirement                 
  plan  for  the  University without  having  the  penalty and                 
  having to pay  it all back.  The provision on subsection  2,                 
  beginning on  line  9, puts  these  employees into  what  is                 
  considered  a  nonpermanent  position  that  is   for  short                 
  duration and is  not a full  time employee. If the  employee                 
  does  go  into  a position  that  is  covered  by the  other                 
  retirement plan, there is a  penalty and it does have to  be                 
  paid back.                                                                   
  Co-chair Halford  stated that  before the  committee is  the                 
  adoption  of Phillips amendment #2.   No further debate, and                 
  by a show of hands, the amendment FAILED.  Those in favor of                 
  the amendment Senators  Sharp, Phillips  and Donley.   Those                 
  opposed were Co-chairs Halford and Frank along with Senators                 
  Rieger and Zharoff.                                                          
  Senator Donley  offered amendment #3, page 24, line 8, after                 
  the  word  "research"  insert:  "and  does not  entitle  the                 
  individual   to   receive  retirement,   health,   or  leave                 
  benefits." Ms. Redman stated that  her understanding is that                 
  personal  service  contracts   do  not  include  retirement,                 
  health,  or leave benefits, and  that this is an unnecessary                 
  amendment.    Co-chair Halford  asked  if there  was further                 
  debate on the amendment? No further debate, amendment #3 was                 
  ADOPTED.  Senator  Donley offered amendment #4,  proposing a                 
  limit  on  how much  the  returning employee  contract could                 
  total based on the percentage of their former annual salary.                 
  He offered language,  "personal service contracts shall  not                 
  exceed 10% of their former annual salary".  Ms. Redman urged                 
  the  committee to vote  against the amendment.   The statute                 
  provides that the maximum that anyone can be brought back on                 
  a personal services  contract, without becoming a  full time                 
  employee, is 49%.  Co-chair Halford stated that the question                 
  before the  committee is  the adoption  of Senator  Donley's                 
  amendment #4.  By a show of hands the amendment FAILED.                      
  Senator Duncan referred to  the comparison table of  Tier II                 
  and  III.    He  asked  Mr.  Stalnaker  to  go  through  the                 
  comparison table giving  savings figures to the state.   Mr.                 
  Stalnaker explained that he would go through the table using                 
  an example of what a $40,000/yr employee comparison would be                 
  between Tier II and III.  The cost savings is obvious as the                 
  difference  in cost  is compared. Tier  II teachers  will be                 
  contributing over  3% more than  the Tier III  teachers. The                 
  Tier II public employees will  be contributing 1.25% more of                 
  their dollars than the Tier III public employees.  He stated                 
  that the Tier II  people will be contributing less  than the                 
  Tier  III.  The  employer and employee  contribution in Tier                 
  III is lower.   He referred to the categories  on the chart.                 
  Normal  retirement age is  60.  A peace  officer in the PERS                 
  for an early unreduced retirement can, under Tier II, retire                 
  after 20  years. Under Tier  III it would  take them 5  more                 
  years to retire with an  unreduced retirement benefit before                 
  age 60.  A teacher can retire with 20 years of service under                 
  Tier II; under Tier III, a teacher  would have to work until                 
  age 60, or until a combination of age and service that would                 
  equal  85.  He  offered the example  of a teacher  at age 55                 
  with 30 years  of service.  That  would be the same  for any                 
  other public employee  covered under  Tier III.   Currently,                 
  under  Tier  II, a  public employee  can  work 30  years and                 
  retire  with  an unreduced  benefit.   Under  Tier  III, the                 
  public employee would have to equal 85 in age and service to                 
  retire with an unreduced benefit.                                            
  Senator Duncan confirmed with Mr. Stalnaker that the savings                 
  comes because actuarial  pay off comes later.  Mr. Stalnaker                 
  stated that  the reduction  in retirement  benefit would  be                 
  with a teacher who is 45 years  old and retires now after 20                 
  years  of  service,  and receives  an  unreduced  retirement                 
  benefit based on  20 years of  service.  That teacher  would                 
  have to meet one  of the other requirements under  Tier III.                 
  There  is  a  dollar reduction  in  comparison  to  Tier II.                 
  Senator Zharoff inquired  how and  when would someone  under                 
  Tier III be  able to benefit  or utilize a RIP  program. Mr.                 
  Stalnaker responded that under Tier III program, at age 52 a                 
  person  would be eligible because the three years would take                 
  them to age 55, which is an early retirement date. He stated                 
  that the rule of 85 is just one of the ways to reach a point                 
  of a normal retirement benefit.  It is designed to recognize                 
  a person who starts very early on with an employer and works                 
  30 years.  It is  to recognize  long term  service with  age                 
  approaching retirement.   Early retirement does  not change,                 
  it starts at age 55.  The  calculation is defined to be 1/2%                 
  per month of  early retirement.   Tier II under Hoffbeck  vs                 
  Hammond  allows   an   employee,  under   their  period   of                 
  employment, to  take the  most profitable  actuarial factor.                 
  The most advantageous actuarial factor available is the 1/2%                 
  per month.   This is more beneficial  over the PERS and  TRS                 
  and puts it in statute so that there is no uncertainty.                      
  Mr. Stalnaker advanced to the  next section dealing with the                 
  post  retirement pension adjustment.   The department refers                 
  to the cost-of-living as PRPA's. Currently, under Tier II, a                 
  retiree at age  60 receives a 50%  cost-of-living adjustment                 
  from the prior year.  At age 65, the retiree gets 75% of the                 
  actual  cost-of-living  for  the  prior  calendar  year.  An                 
  alternative is 1/2 of the cost-of-living with retirement for                 
  8 years, under the age of 60  in the TRS; or, retirement for                 
  five years under  the age of 60 in the PRS. Tier III retiree                 
  would receive 50% of the CPI from age 60 forward.  That is a                 
  reduction in benefit.  Co-chair Halford asked  if that is  a                 
  cumulative  CPI?    Mr. Stalnaker  responded  that  once the                 
  employee  retires, if they  meet the eligibility  of age 60,                 
  they then  are eligible for  the PRPA  for that year.   Each                 
  year it adds on.                                                             
  Senator  Salo  asked for  an  understanding of  the  Tier II                 
  system for the benefits to employees  who are retiring.  Mr.                 
  Stalnaker  responded  that  in 1986,  the  public  employees                 
  worked  with  the  administration  to  enact  an  automatic,                 
  prefunded, cost-of-living increase.   Prior  to that  point,                 
  there was  the ad  hoc, it was  not prefunded,  it became  a                 
  burden  on  the  system  each  time  it was  granted  as  an                 
  additional cost that  would then extend through  time.  Tier                 
  II  was   then  implemented,  which   increased  the  normal                 
  retirement  age  to  60.    It  also  increased  the benefit                 
  multiplier  from  2%   to  2-1/2%  and  had   other  changes                 
  incorporated into the  package for the automatic  PRPA.  The                 
  same approach was  passed for  the teachers in  1990.   They                 
  elected nonparticipation in  1986, and  in 1990 they  worked                 
  together  with the  administration to  receive a  guaranteed                 
  post retirement pension adjustment in legislation.   Senator                 
  Salo injected that  it also increased contributions  for the                 
  new teachers entering the system.   She pointed out that for                 
  the older  retirees, when they were having  a problem making                 
  it on  their retirement salary with the automatic PRPA, they                 
  were rescued by the new people coming in  (Tier II) who then                 
  paid significantly more in their retirement contributions to                 
  pay for it.   She mentioned that there was a change that was                 
  detrimental relative to Medicaid or Medicare.  Mr. Stalnaker                 
  responded that there was no change to  that.  He stated that                 
  a retiree, when they  reach age 65, has to  participate with                 
  Medicare B, and  they pay the premiums.   That was a subject                 
  of litigation.                                                               
  Mr. Stalnaker continued with the comparison table.  The next                 
  section  addresses major  medical insurance. Under  Tier II,                 
  currently anyone age 60 must pay one-half the cost of health                 
  insurance.  Until, and upon, age 65 the full cost  of health                 
  insurance is paid by  the system.  He noted  that under Tier                 
  II, the health  insurance policy covers the  retiree, spouse                 
  and  dependent children.   Under  Tier III,  it would  cover                 
  retiree  only; age 60-65,  the retiree would  be required to                 
  pay one-half the  cost; age 65  and older, the system  would                 
  pay the full cost of health insurance.  The critical savings                 
  is that the retiree  would have the health insurance.   They                 
  could purchase health  insurance through the plan  for their                 
  dependents and spouse,  but it would  not be covered by  the                 
  Senator Duncan asked  for a  dollar figure for  Tier III  at                 
  present day costs. Mr. Stalnaker responded that the cost for                 
  health coverage for the retiree at  age 60-65 would pay less                 
  than the Tier  II retirees.  A  retiree would be paying  for                 
  themselves at a cost  of $400/mo.  If covering  a dependent,                 
  the cost would  be an  additional $200/mo  for the  retiree.                 
  There is a  $200 savings to  the state, plus the  actuarial,                 
  which is what  Senator Duncan mentioned in  the anticipation                 
  that health costs  will increase faster than  inflation into                 
  the future.  Mr. Stalnaker said that the health component of                 
  the retirement plan  is the most expensive  single component                 
  of the plan.  It is the  only component that is estimated to                 
  increase faster than  inflation.   Alaska prepays the  fund.                 
  It is an  expensive benefit, prepaying accounts  for a large                 
  Mr. Stalnaker  advanced to  the section  on vesting.   Under                 
  Tier II, an employee  works for five years before  they vest                 
  in the  PERS, and  eight years  before vesting  in the  TRS.                 
  Under Tier III,  all members, teachers and  public employees                 
  would vest after five years.   Senator Duncan asked what the                 
  small  percentage  of  savings is  in  a  TRS  due to  early                 
  vesting?  Mr. Stalnaker said, that  when a person terminates                 
  without vesting, it  is not  uncommon for them  to pull  out                 
  their  contribution.    Those   contributions  do  not  gain                 
  earnings  to  help pay  for  benefits  in the  future.   The                 
  difference  in  5  and  8  years  in the  teachers  plan  is                 
  considered by the actuaries, in that  there would be a small                 
  savings in  the vesting  provision.   This  is because  more                 
  teachers would leave  their contributions which would   earn                 
  money to outlay for benefits in the future.                                  
  Mr.  Stalnaker went  on  to the  next  section covering  the                 
  benefit  multiplier.  Under  Tier II for  PERS employees who                 
  are  not  peace  officers  or  fire fighters,  the  employee                 
  receives a benefit multiplier  of 2% for the first  10 years                 
  of service, 2.25% for  the next 10  years and 2.5% per  year                 
  thereafter.  For the PERS peace officers and fire  fighters,                 
  the  formula  is  2%  for  the   first  10  years  and  2.5%                 
  thereafter.   For the TRS benefit  formula it is 2%  for the                 
  first 20 years, and 2.5% thereafter.   Tier I is the same as                 
  Tier II in the benefit multiplier.  In Tier III, the benefit                 
  would be 1.5% for all years of service.  He stated that 1.5%                 
  is an average  rate in the private sector, and a common rate                 
  in the public sector.   This would be a  substantial savings                 
  to the system.  A retiree of $40,000, with 30 years service,                 
  under Tier III would receive in the defined benefit program,                 
  45%  of $40,000 a  year.  Under  Tier II, the  retiree would                 
  receive 67-1/2% of $40,000  a year.  The difference  is 22%.                 
  He said that  at 3%,  assuming all employees  for the  state                 
  were Tier III, and state salaries totaled $600  million, the                 
  savings would be $18 million a year.                                         
  Senator Duncan asked if retirees  can afford to retire under                 
  Tier III? He  noted that for a  TRS employee, with  30 years                 
  service, retirement with all the  same conditions under Tier                 
  III that they have  under Tier II, will yield  approximately                 
  $11,000  less in retirement income a  year.  On top of that,                 
  it will cost  $200/mo or $2400/yr  more for health  benefits                 
  for their spouse, and they are going to have a lower cost of                 
  living adjustment than at present.   Essentially, the income                 
  is  an  estimated $15,000  less in  the  first year  for the                 
  retiree.    That is  substantial.   The  state is  trying to                 
  encourage people to stay in this state.  The state is trying                 
  to attract people  to work  in the public  sector.   Senator                 
  Duncan stated that this  is what is being overlooked  in all                 
  this discussion, is the impact on the individuals.  There is                 
  great emphasis on the government  side, forgetting about the                 
  impact it  will have on   individuals. Mr.  Stalnaker stated                 
  that  he  could not  agree more  with  Senator Duncan.   The                 
  department proposes working through this during  the interim                 
  with  the unions,  and effected  individuals.   Some of  the                 
  effected individuals are  the employers who are  bearing the                 
  costs.  The  people that Mr.  Stalnaker has spoken with  are                 
  willing to sit down and talk  about it.  How do you  achieve                 
  savings in a defined benefit plan?  It means lower benefits,                 
  or  more  costs  to the  employee,  one  way  or the  other.                 
  Whether this is  reasonable or  not, this was  not our  idea                 
  without  sitting down and working through it in the interim.                 
  He reiterated that he agreed with Senator Duncan, that these                 
  will be traumatic effects for employees not yet hired.                       
  Senator Phillips inquired about the 1.5% benefit formula for                 
  the  Tier  III  employees,  and  how  that  compares.    Mr.                 
  Stalnaker said it is close to that in the private sector.                    
  Senator  Rieger noted  that  in addition  to Tier  III being                 
  comparable to  other plans,  prior testimony  indicated that                 
  the state employees  have two retirement systems:  a defined                 
  contribution plan, and a defined  benefit plan.  The defined                 
  contribution is SBS.  That combination under Tier III allows                 
  the employee to retire at  80-90% of the high 3-years.   The                 
  possibility is 45% out of Tier III and 45% out of SBS.  Is a                 
  $15,000 annual reduction unreasonable considering that there                 
  is an income equal to 80-90% of what they were making before                 
  they retired. Is it traumatic to bring an employee into line                 
  with other retirement systems, especially when what is being                 
  talked about is  prospective, and not  effecting any of  the                 
  $600 million current payroll?                                                
  Mr. Stalnaker took up  the last section and stated  that for                 
  purposes of analysis,  the department has  taken in the  two                 
  systems to come into about 5-1/2% of employer costs.  If the                 
  old percentages were  multiplied by  payroll versus the  new                 
  percentages  and multiplied them  by payroll, the difference                 
  would be the savings assuming 100% conversion.                               
  Tape #60 End                                                                 
  Tape #62 Begin                                                               
  Mr.  Stalnaker  stated  that  his  previous  explanation  in                 
  response  to Senator Phillips  was comparing defined benefit                 
  plans.    He believes  that  there  are differences  in  the                 
  private sector in  terms of  bonuses, and other  incentives,                 
  that  do  not  necessarily  align  themselves.    The  other                 
  variable  in  the  private  sector  is  that  all  employees                 
  participate  in social security.   The argument of a defined                 
  contribution is  widely used  in the  private sector,  it is                 
  based on  the  fact that  they  are contributing  7-1/2%  to                 
  social security and not getting near the benefit that you do                 
  under a  defined benefit  plan such as  this.  The  issue of                 
  defined  benefit  versus  defined  contribution  is  a  very                 
  difficult issue and is not an "apples to apples" comparison.                 
  To look at it in totality of the private  sector plans, 1.5%                 
  is  reasonable when even comparing it to other public sector                 
  Senator Duncan stated that the 1.5% national  average is not                 
  accurate. He  cited other state percentages:  Alabama, 2.1%;                 
  California 2.5%, etc.  He asked about the SBS system and the                 
  changes effected by  this bill. Mr. Stalnaker  said that the                 
  department does not support the change to SBS.  He said that                 
  under  the   current  qualifications  of   the  supplemental                 
  benefits,  the  rate  must  be   fixed,  which,  by  federal                 
  regulations means there cannot be a rate change for SBS.  He                 
  said it  was not  fair to put  all investment  risks on  the                 
  backs of the employees.  There is a role for the employer to                 
  play in defining the  investment strategy.  He said  that if                 
  they  do  well  with  the  investment, they  could  consider                 
  lowering the employer contribution.                                          
  Senator Salo asked Mr.  Stalnaker, if the goal is  to reduce                 
  the  number  of  state  employees,  then would  the  savings                 
  realized in creating a new Tier in the retirement system, be                 
  minimized by  this action?   Mr. Stalnaker responded  that a                 
  calculation of savings,  when there  is downsizing, will  be                 
  automatic.   However,  he  stated,  that  if a  less  costly                 
  benefit  provision  or  statute   is  incorporated  for  new                 
  employees leaving, the actual dollars  may change because of                 
  the  downsizing  as  well  as   eliminating  positions.  The                 
  difference  in  cost remains  fairly  stable.   Senator Salo                 
  stated that for  both retirement  systems, the beginning  of                 
  the statute starts out  with the purpose, which is  having a                 
  retirement system  to attract and  retain quality  employees                 
  for the State of Alaska.  The drastic reduction in  benefits                 
  and increase in cost makes that a less important philosophy.                 
  She stated that there is enough time to figure out what  the                 
  actual savings to  the State of Alaska  is, to see if  it is                 
  worth the cost.  She feels it will make a drastic difference                 
  to the types of people the state will be able to attract and                 
  retain.  Senator Rieger asked  if the RIP program was a  way                 
  to retain  state employees?   Senator  Salo stated that  the                 
  drastic change in  this plan deserves input  from the people                 
  it  effects.  She  expressed  her   concerns  regarding  the                 
  increased   length   of  service   before   eligibility  for                 
  retirement goes into effect.                                                 
  Senator  Duncan  asked if  this  proposal has  been formally                 
  submitted by the department to the Administration Retirement                 
  Board?  Mr.  Stalnaker  responded  that  there  was  nothing                 
  specific  presented to  the Retirement  Board.   He  said he                 
  presented it to the  Retirement Board as a form  of updating                 
  them on where legislation was, and  what was stirring in the                 
  legislative ranks.  It has been an on-going issue along with                 
  defined contribution that  has been discussed in  years past                 
  with the Retirement Board.  The  fact that it was brought to                 
  the Board's attention is true.   Senator Duncan asked if the                 
  Retirement Board had  a position?   Mr. Stalnaker  responded                 
  that the general feeling of the  Retirement Board is that it                 
  should be a process that is exposed to those it effects, and                 
  that  they  themselves   were  not  in  favor   of  reducing                 
  retirement benefits.                                                         
  Senator Duncan  defined that those effected, that need to go                 
  through  the   process  are:  the   administration,  unions,                 
  teachers,  and  employees.   Mr.  Stalnaker stated  that the                 
  proper  process  would  be to  bring  everyone  together and                 
  discuss it in the interim.                                                   
  Annalee McConnell  stated that  the administration  does not                 
  support  combining the RIP  proposal with the  change in the                 
  RIP  retirement  program.    There  was agreement  that  the                 
  department would  make a  good faith  effort to  look at  an                 
  alternative defined contribution plan.  The  department does                 
  not  feel  comfortable  without   internally  or  externally                 
  checking  on the impact of the  program. She reiterated that                 
  the department does not support  the committee substitute on                 
  the table.                                                                   
  Senator Duncan reiterated that it was his understanding that                 
  the administration did not support the committee substitute.                 
  He stated that this should not  be rushed through, it should                 
  go through the State Affairs  Committee, the Health & Social                 
  Services Committee.                                                          
  Co-chair Frank called for a short recess at 2:15 p.m.                        
  The meeting RECONVENED at 2:17 p.m.                                          
  Senator  Rieger  stated  that  the  representative  for  the                 
  University responded to  the Donley amendment and  requested                 
  that page  24, line 8  continue to read.....,  except social                 
  security replacement."                                                       
  Senator Sharp OBJECTED he felt  that they were self-employed                 
  and should pay for it out of their own pocket,  not employer                 
  contribution   if   self-employed.   There  was   discussion                 
  regarding  this  issue.     Co-chair  Frank  spoke   to  the                 
  definition of an independent contractor.                                     
  Senator  Rieger  offered an  amendment  to the  amendment to                 
  read, "except social security replacement if required by IRS                 
  No objection being heard, it was added to the amendment. Co-                 
  chair Halford asked if there was objection to the amendment.                 
  Without objection the amendment was ADOPTED.                                 
  Co-chair  Frank  MOVED  to  pass  out  CSSB  148  (FIN) with                 
  individual  recommendations  and accompanying  fiscal notes.                 
  OBJECTIONS from  Senator Zharoff  and Senator  Donley.   The                 
  question  is,  shall  CSSB 148  (FIN)  pass  from committee?                 
  Members voted by  a show of  hands. In favor were  Co-chairs                 
  Halford,  Frank and Senators Rieger and Sharp.  Opposed were                 
  Senators Donley and Zharoff. CSSB 148 (FIN) was REPORTED OUT                 
  of committee  with individual  recommendations and  a fiscal                 
  note from the Department of Administration for $1,158.8.                     
  The meeting RECESSED at 2:25 p.m.                                            

Document Name Date/Time Subjects