Legislature(2017 - 2018)SENATE FINANCE 532
04/25/2018 09:00 AM Senate FINANCE
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HOUSE BILL NO. 47 "An Act requiring certain municipalities with a population that decreased by more than 25 percent between 2000 and 2010 that participate 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; authorizing the administrator of the defined benefit retirement plan of the Public Employees' Retirement System of Alaska to reduce the rate of interest payable by certain municipalities that are delinquent in transmitting employee and employer contributions to the retirement plan; and providing for an effective date." 9:49:16 AM Co-Chair MacKinnon offered a brief history of the bill in committee. REPRESENTATIVE NEAL FOSTER, SPONSOR, stated that the bill would provide relief for communities that paid into the PERS system and had lost more than 25 percent of its population since the last census. He said that the relief would be provided by resetting the minimum payments for the 2008 salary levels to the 2012 salary levels. He used the example of Galena, which had lost 30 percent of its population, reflected in the last census, due to the closure of the Air Force base. He shared that municipalities had to pay into the PERS system based on one of two alternatives: an amount based on their current salary level or an amount based on what their salary level was in 2008, referred to as the 2008 salary floor. The floor was established when the legislature polled municipal PERS systems in 2008 and existed under the rationale that local governments usually grew rather than shrinking. He explained that the problem in Galena had been that the salary level had shrunk from $1.5 million in 2008 to $770,000 in 2012. According to the PERS system, Galena still had to make contributions into the PES system as if it had a $1.5 million workforce. He lamented that Galena did not have the resources to pay into the retirement system for workers that they did not have and could continue to let their PERS bill grow or close their city office. He hoped that the bill could foster a compromise that would provide Galena with some relief. 9:53:00 AM PAUL LABOLLE, STAFF, REPRESENTATIVE NEAL FOSTER, stated that the reason for Galena's shrinking workforce was the removal of the Air Force Base. He informed that state law did not allow for bankruptcy for municipalities, nor could cities dissolve unless debts were paid, which would leave the state responsible for the unfunded liability the city had amassed. Senator Stevens asked whether any other communities in the state faced similar problems and whether there was any assistance from the military when communities faced the closure of a base. Mr. LaBolle stated that there were five communities that fit the definition of population loss as defined by the bill. He listed Pelican, St. George, and Galena as three that were affected. He said that when the Air Force base moved out of Galena assets had been left with the city. 9:55:19 AM Senator von Imhof found the legislation compelling. 9:56:35 AM Co-Chair MacKinnon pondered the economic impact on a community losing a military installation. She wondered whether there could be any help on the federal level. She asked whether termination studies had been done for Galena to determine the total liability. Representative Foster addressed how the federal government had been involved in Galena. He noted that the Air Force had left over 1 million gallons of heating fuel, which was now largely gone. He said that no other financial resources had been bestowed on the community. Co-Chair MacKinnon wondered about the fairness issue of the state picking up the cost for this small community verses others. Mr. LaBolle stated that Galena had not done termination studies. He said that SB 25 had two components: the termination studies and the 2008 floor. Galena was currently only affected by the floor. He shared that the total debt, to date, was $1.5 million; changing the floor would bring their minimum payment to $775 thousand. He added that the payroll had grown to just over $1 million, with the 2008 floor of $1.5 million. Co-Chair MacKinnon observed that the state would pick up the difference of approximately $133 thousand in perpetuity. Mr. LaBolle deferred to the Legislative Finance Division. 10:00:31 AM Senator Olson wondered whether there was an alternative way to keep the city functioning if the bill did not pass. Representative Foster replied that he knew of no alternative. He noted that the Galena Interior Learning Academy was an asset and a hub in the community and coordinated work on renewable energy and water and sewer issues. He reiterated that there were no immediate alternatives to the city office. Senator Olson thought the importance of the city office in Galena was sizable. 10:02:25 AM Vice-Chair Bishop commented it was still unknown where the employees from Galena had gone and whether they were working in another PERS system. He noted that the school in Galena had a 100 percent graduation rate. 10:03:11 AM Senator Stevens asked about what happened if the population returned to prior levels. Mr. LaBolle stated that if the population grew and there was a corresponding growth in municipal government, the actuals would be paid versus the floor. Senator von Imhof asked about the total population for the three towns. 10:03:55 AM AT EASE 10:05:30 AM RECONVENED Mr. LaBolle relayed the populations for the following areas: Anderson: 246 Atka: 61 Galena: 470 Pelican: 88 St. George 102 Senator von Imhof pointed out that Pelican had an employer number of 200. Mr. LaBolle stated that the number was a code for identifying the positions. Senator von Imhof referenced communities with percentages under 25. She asked whether the sponsor had considered a rubric with which to evaluate communities that would benefit from the state's relief. She considered how to afford the implementation over the long-term, and whether there were multiple funding sources. She urged the sponsor to develop a rubric. 10:08:09 AM Co-Chair MacKinnon asked about the population size of Anderson. Senator Stevens replied that that population of Anderson was 246. Co-Chair MacKinnon corrected her precious statement about the fiscal note and what the state would owe in perpetuity. She corrected that the fiscal note reflected a timespan of 20 years to pay down the interest and the current obligation. She noted that there was a defined end to the contributions. She added that the contributions that the cities had to make were effected by the size of the payroll and not necessarily the number of employees. She felt that it was important to understand the employee change in each community versus the population drop. She reiterated previous testimony that the population in Galena had dropped 30 percent and that there was a $1.5 million payroll in 2008. Mr. LaBolle affirmed the numbers were correct. Co-Chair MacKinnon continued that the $1.5 million payroll of Galena had been reduced by half to $750,000 in 2012. Mr. LaBolle answered in the affirmative. Co-Chair MacKinnon thought that in considering the bill it was important to recognize the payroll numbers and whether the state government grew or declined. She reiterated the need for a termination liability study of the system at the current payroll. She referenced the fiscal note which reflected expected small increases to the payroll in Galena. She spoke to the effective date written into the bill, which would alleviate the cities contributions for 2017, and make that a state responsibility with the new floor. This required a supplemental request of $148,000 in addition to the $141,000 of reoccurring operating costs. 10:13:01 AM Senator Micciche wondered what the effect would be if the $148,000 was amortized in future years rather than placed in the supplemental budget. Co-Chair MacKinnon said that if the supplemental was not provided there could be a shortfall in the calculation that could hit the state differently on the retirement system and the state's obligation. She thought that if the supplemental was not going to pass then the effective date would need to be changed, which would affect the fiscal not on the reoccurring operating cost line, or the liability would go up and local communities would experience a higher interest rate over the amortization period. Ms. Lea agreed with that assessment. Co-Chair MacKinnon concluded that the bill would positively impact affected cities because they would not owe the additional contribution or the interest payments to the state - even though the fiscal year was nearly at an end. 10:14:29 AM Mr. LaBolle added that the existing liability of $1.5 million would remain on the books after passage of the legislation. Co-Chair MacKinnon countered that the fiscal note showed an outstanding liability of $1,099,633.35 from Galena. She believed that the issue merited further discussion. 10:15:14 AM Mr. LaBolle said that Section 1 of the bill contained enabling language that corresponded to Section 4. He addressed the Section 2, where the 2008 floor was adjusted to establish a new floor for the effected communities of FY12. He spoke to Section 2, subsection (B): (B) June 30, 2012, if that total is less than the total under (A) of this paragraph, and the employer is a municipality in which the population decreased by more than 25 percent between 2000 and 2010, according to the decennial census conducted by the United States Bureau of the Census. Mr. LaBolle relayed that Section 3 contained conforming language. He said that Section 4 would allow for the PERS administrator to negotiate the delinquent interest rate. He furthered that bill would allow the administration to negotiate an interest rate for delinquent payments. He concluded that Section 5 was the effective date. 10:17:10 AM Co-Chair MacKinnon OPENED public testimony. JOHN KORTA, MAYOR, CITY OF GALENA, GALENA (via teleconference), testified in support of the bill. He discussed the closure of the Air Force base, which had been a significant source of employment for Galena residents. He said that in 2000, Galena had 675 residents, 470 in 2010, resulting in the 30 percent decline. He furthered that in 2013, ice dammed the Yukon River, which led to a federal disaster declaration. He relayed that the 2008 floor had been established to prevent a municipality from gaming the PERS system by contracting out work previously done by municipal employees, in order to avoid making ongoing contributions to PERS. He related that the current minimum PERS contribution was based on 2008 salaries, the law had not accounted for Galena's unexpected situation and had not contemplated municipalities with sharply declining populations. He stated that HB 47 only affected communities that faced a minimum 25 percent decline in population between 2000 and 2010. He asserted that the bill would simply replace the 2008 floor with the 2012 floor. He stated that Galena was currently paying contributions based on the 2008 floor, which represented a population substantially larger than the actual population. He lamented that the cities required PERS contribution approached half od the cities entire current payroll. He shared that the FY08 salary total had been $1,513.365.19 for 36 employees, making their annual PERS contribution $332,940. In FY 12, Galena's payroll was $765,776 for 17 employees. He reiterated that under the current 2008 floor, Galena's annual minimum contribution was over half of their entire payroll costs. He warned that if action was not taken, the differential would continue to create an ever- increasing obligation. He stressed that the cities financially situation was so severe that in FY 11, a low interest loan from the Alaska Bond Bank had to be secured for heat and electricity in the city. 10:21:19 AM Mr. Korta continued that HB 47 did not undermine the underlying policy goals of the existing PERS structure but helped ensure that municipalities remained able to contribute to PERS, while recognizing that the city could not make a contribution based on a larger population. He noted that Galena had continued to pay 100 percent of its annual obligation of 22 percent to PERS for its actual payroll. 10:24:06 AM Co-Chair MacKinnon asked the testifier to submit any written testimony. Co-Chair Hoffman asked about the status of the municipal bond bank loan taken out in 2011 to pay for fuel. Mr. Korta estimated that the loan balance was over $1 million. He said that all payments had been made on time. Co-Chair Hoffman asked how long the borrowed $1 million from the bond bank had been expected to last to pay for heating fuel and electricity. Mr. Korta stated that the city had to do some restructuring after the closure of the base, which he believed was closer to $2 million. He said that the city had paid down that obligation and had stabilized since the restructure. Co-Chair Hoffman asked whether the community of Galena had an annual audit. Mr. Korta answered in the affirmative. Co-Chair Hoffman asked that the last 3 years' audits be made available to the committee. 10:26:03 AM Senator von Imhof looked at the city manager's testimony (copy on file). She indicated that the salary in 2008 was approximately $1.5 million, and the salary in 2012 was about $765,000; yet both years the city had paid the same PERS contribution of $332,000 for both years despite the salaries going down by half. Mr. Korta agreed. Co-Chair MacKinnon asked whether the contributions had been paid or owed. Mr. Korta replied that the city had been paying actual contributions but not paying on the accruing interest. Senator von Imhof asked whether the $332,000 included the accruing interest. Mr. Korta deferred to the city manager. Senator von Imhof understood that under a hypothetical in the letter, the actual payroll should have been $164,000, with a difference of $150,000. Co-Chair MacKinnon thought that without a termination study to reduce and pay to the plan the amount owed to a person who retired, Senator von Imhof was correct. She thought it was accurate when Vice-Chair Bishop stated that if the employees moved to another state system, the employees would continue to contribute to costs in the state system. 10:29:14 AM KATHIE WASSERMAN, EXECUTIVE DIRECTOR, ALASKA MUNICIPAL LEAGUE, testified in support of the legislation. She informed that that league had been working on retirement termination studies and below the floor costs since SB 25 went into effect in 2008. She asserted that many smaller committees in the legislature did not have a full understating of PERS issues, which made passing legislation difficult. She said that when she was mayor of Pelican, and the population had dropped, the community had lost many people from all areas of the workforce. She lamented that the state could only expect so much from communities with no money and no tax base. 10:32:53 AM Co-Chair MacKinnon CLOSED public testimony. Senator Micciche requested the audit information and information on the city's tax base. Mr. Korta replied that he would need a physical address to send the information to. Co-Chair MacKinnon provided the address. Co-Chair MacKinnon stated that proposed amendments due the following day at noon. HB 47 was HEARD and HELD in committee for further consideration.