Legislature(2003 - 2004)
04/01/2004 03:35 PM Senate STA
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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 funded. 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 system. 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 affected. 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 responsibility. 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 motion. 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.