Legislature(2003 - 2004)

04/01/2004 03:35 PM Senate STA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
     CSHB  91(TRA)-RETIRED PEACE OFFICER'S MEDICAL BENEFITS                                                                 
CHAIR  GARY  STEVENS   announced  CSHB  91(TRA)  to   be  up  for                                                               
consideration. He noted that it was heard previously.                                                                           
SENATOR  BERT  STEDMAN  said  he would  move  the  State  Affairs                                                               
committee substitute  when a quorum  was reestablished  and asked                                                               
whether discussion could take place in the meantime.                                                                            
CHAIR GARY  STEVENS agreed and  asked Senator Stedman  whether it                                                               
was  correct that  the  CS  calls for  the  initial  costs to  be                                                               
absorbed by the State rather than the local municipalities.                                                                     
SENATOR STEDMAN said that is true.                                                                                              
MELANIE  MILLHORN, Director  of  the Division  of Retirement  and                                                               
Benefits, introduced herself  and Mr. Staack who  was involved in                                                               
the preparation of the draft fiscal  note. It calls for the State                                                               
to pay  for the cost  to PERS  employers and also  addresses some                                                               
concerns  raised by  municipalities  regarding  the first  fiscal                                                               
note. The  projections look  at a  percentage of  individuals who                                                               
would benefit from the legislation  and indicates that 25 percent                                                               
of  those  employees  who  positively  benefit  would  make  that                                                               
election.  Therefore the  municipalities  were concerned  because                                                               
they  believe  that  more  of their  employees  would  make  that                                                               
selection.  Because of  this,  MERCER  Human Resource  Consulting                                                               
provided the revised calculations. The  following, from page 2 of                                                               
the  draft  fiscal  note  shows  how  a  higher  retirement  rate                                                               
assumption   would  affect   the  unfunded   liability  and   the                                                               
corresponding employer rates.                                                                                                   
Alternate Assumptions:                                                                                                        
                     %         % of      % of P/F Increase in                                                                   
                     Members   Total     Payroll    Unfunded                                                                    
                     Affected Payroll               Liability                                                                   
                                                    (in Dollars)                                                              
Current Assumption 21%         0.11%     0.97%      $8,000,000                                                                
50% Retirement       40 %      0.19%     1.68%      $11,400,000                                                               
75% Retirement       60%       0.27%     2.39%      $14,800,000                                                               
100% Retirement      79%       0.35%     3.11%      $18,200,000                                                               
CHAIR GARY  STEVENS asked whether  the figures included  state as                                                               
well as municipal employees.                                                                                                    
MS.  MILLHORN told  him  it  includes state  and  all other  PERS                                                               
employers who would benefit from HB 91.                                                                                         
SENATOR STEDMAN asked  her to explain the  difference between the                                                               
$856,000 on the original fiscal note and the accrued liability.                                                                 
ANSELM  STAACK,  Chief  Financial  Officer for  the  Division  of                                                               
Retirement and Benefits,  explained that when the  bill passes it                                                               
places  new benefits  in place.  The current  assumption includes                                                               
everyone expected  to take advantage  of the change  and projects                                                               
an  immediate  $8  million  unfunded  liability.  Those  are  the                                                               
employees  that would  be  the most  expensive  because they  are                                                               
under 50  years of  age, have  close to  20 years  employment and                                                               
would probably terminate within the year.                                                                                       
The previous  fiscal note used  only the State of  Alaska figures                                                               
and the draft  fiscal note shows the total cost  for the State of                                                               
Alaska and all subdivisions. The  $8 million is amortized over 25                                                               
years and for FY 2005 the total would be $1.7 million.                                                                          
SENATOR STEDMAN noted  that the draft fiscal note  shows that the                                                               
unfunded liability would  range from $8 million  to $18.2 million                                                               
depending  on  how  many people  exercise  the  early  retirement                                                               
benefit to capture the cost of health insurance.                                                                                
MR.  STAACK agreed  and added  that you'd  never see  100 percent                                                               
participation  in the  police and  fire  population because  some                                                               
won't have enough years of  employment before they reach 60 years                                                               
of age.                                                                                                                         
SENATOR  STEDMAN  suggested  ignoring  the fiscal  impact  for  a                                                               
moment and asked for a comment on the fairness issue.                                                                           
MS.  MILLHORN   replied  the  tier   system  is  the   result  of                                                               
legislative action and each tier provides different benefits.                                                                   
MR. STAACK  added that establishing  new tiers was  purposeful to                                                               
reduce costs and maintain funding  of the system. He acknowledged                                                               
that the fairness and fiscal issues do collide.                                                                                 
CHAIR GARY  STEVENS noted that  a quorum  was present and  he was                                                               
ready for a motion.                                                                                                             
SENATOR  STEDMAN  motioned  to adopt  committee  substitute  (CS)                                                               
version \S as the working  document. There being no objection, it                                                               
was so ordered.                                                                                                                 
SENATOR JOHN COWDERY  questioned whether PERS and  TRS were under                                                               
MS. MILLHORN advised  that the June 30,  2003 actuarial valuation                                                               
information  indicates  a percentage  point  loss.  For PERS  the                                                               
funding ratio was  at 75 percent and now it's  at 72 percent. The                                                               
TRS funding ratio  was at 68 percent and now  it's at 64 percent.                                                               
The recent valuation sets the  employer contribution rates for FY                                                               
2006. Based on  the current funding status for PERS  and TRS, the                                                               
division  has  requested that  legislation  be  held in  abeyance                                                               
because  this  proposal  is an  enhancement  to  an  under-funded                                                               
SENATOR COWDERY asked whether the system still has tiers.                                                                       
MS. MILLHORN  informed him that  PERS has  Tiers I, II,  and III.                                                               
Tier I was for a 25 year period.  Tier II was created in 1986 and                                                               
Tier III was created in 1996. TRS has two Tiers.                                                                                
SENATOR  COWDERY  asked if  state  and  municipal employees  were                                                               
MS. MILLHORN  said that the  fiscal note  for the version  \S CS,                                                               
represents  the  cost   to  the  State  of  Alaska   and  to  the                                                               
approximately 156 other PERS employers.                                                                                         
SENATOR  COWDERY   asked  whether   they  were  looking   to  the                                                               
communities or the State to pay.                                                                                                
CHAIR GARY  STEVENS explained that  House version called  for the                                                               
State  to pay  its  portion and  the  communities their  portion.                                                               
Version   \S  CS   would   make  the   entire   amount  a   State                                                               
LARRY  SIMMONS   from  Kenai  testified  via   teleconference  in                                                               
opposition to  CSHB 91 for  fiscal reasons. It's clear  that more                                                               
than 21 percent of eligible members  would retire if they were to                                                               
receive health benefits, he said.                                                                                               
CHAIR GARY  STEVENS noted that  the committee had copies  of both                                                               
his and MERCER's letters before them.                                                                                           
MR. SIMMONS  continued to say  that the 79 percent  assumption is                                                               
the most realistic  among the options presented. For  the City of                                                               
Kenai,  the percent  and cost  would be  higher yet  because they                                                               
don't have  any members who will  be over 60 years  old when they                                                               
have 20 years  service. If 79 percent were to  retire, that would                                                               
more than  triple the percent  of police/fire payroll. If  the 79                                                               
percent assumption  is the realistic  option, the  State's fiscal                                                               
impact  will be  $2.75 million  for FY  2005 rather  than $856.9.                                                               
That number will grow to $3.2 million per year by FY 2010.                                                                      
He calculated that if 79 percent  choose to retire in FY 2005 the                                                               
total  would  be $5.5  million  rather  than the  projected  $1.7                                                               
million. That would grow to $6.4  million in FY 2010. The cost to                                                               
the City of  Kenai would be $85,000 per year.  There is already a                                                               
5 percent  increase in PERS rates  for FY 2005 and  when combined                                                               
with the  $85,000, you're at  more than  three fourths of  a mill                                                               
property tax.  It's unlikely  that property  taxes can  be raised                                                               
for that purpose, he said.                                                                                                      
Remember, he  said, the Tier II  and III PERS members  that could                                                               
benefit  from  this  legislation  were aware  of  the  retirement                                                               
package when  they were  hired. "It's  simply not  appropriate or                                                               
prudent to  increase retirement benefits  at this time  of fiscal                                                               
difficulty at nearly every level of government," he concluded.                                                                  
CHAIR GARY STEVENS  summarized his testimony then  asked what his                                                               
thoughts are regarding the State assuming the cost.                                                                             
MR. SIMMONS admitted it would reduce  costs to the City of Kenai.                                                               
However, the bill  isn't needed and the State of  Alaska is in no                                                               
position  to pay  $5.5  million per  year  for additional  health                                                               
benefits for a select group of PERS members, he opined.                                                                         
CHAIR GARY STEVENS asked Ms. Millhorn and Mr. Staack to comment.                                                                
MR. STAACK  pointed out  that if the  79 percent  assumption were                                                               
taken then  the current assumption  percentages would  triple. He                                                               
calculated that using the 79  percent assumption the total to the                                                               
State of Alaska would be $2.6 million in FY 2005.                                                                               
He  added that  in  2001  the Legislature  enhanced  part of  the                                                               
benefit so that it became system paid.                                                                                          
JULIE  BENSON  testified  via teleconference  from  Ketchikan  in                                                               
support of HB 91.                                                                                                               
KEVIN  RICHIE, Alaska  Municipal League,  distributed a  two page                                                               
hand out  to show what  a 5 percent  increase in the  PERS system                                                               
would cost municipalities in terms  of both dollars and mill rate                                                               
increases.  He  advised  that  his figures  were  based  on  2003                                                               
figures so they  might be off slightly, but  the financial impact                                                               
to the various municipalities would be huge.                                                                                    
4:35 p.m.                                                                                                                     
TAPE 04-25, SIDE B                                                                                                            
CHAIR  GARY STEVENS  summarized  the testimony  and  asked for  a                                                               
SENATOR STEDMAN  made a  motion to report  SCS CSHB  91(STA) from                                                               
committee  with   the  attached   fiscal  notes   and  individual                                                               
recommendations. There being no objection, it was so ordered.                                                                   

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