Senators Joe Paskvan, Dennis Egan, and Gary Stevens during the closeout hearing of the Senate Finance DEED Subcommittee, March 20, 2012
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Friday, April 1, 2011

SB 100 - PERS Termination Costs

On Tuesday, March 29 the Senate Labor & Commerce Committee heard SB 100 - PERS Termination Costs (http://www.legis.state.ak.us/basis/get_bill.asp?bill=SB%20100&session=27).  Michael Lamb of the Fairbanks North Star Borough testified that if a PERS employer reduces their employee count by altering or suspending a program or service, then PERS can send that employer three bills:
  1. The cost of a termination study,
  2. A bill for the amount the termination study determines that the employer owes the system due to the position change(s), and
  3. A bill for the past service costs on each of the position’s salaries until the unfunded liability is paid off.
Mr. Lamb wondered if past service liability would ever be extinguished, making the termination payments perpetual.  The bills to an employer could run from several hundred thousand dollars to millions of dollars for each termination study.  The law should be fairly and equally applied to all PERS employers, but the Div. of Retirement & Benefits says the state is exempt from termination studies and their financial impacts.  The state is the biggest PERS employer, but is not subject to termination studies.  Mr. Lamb said this disturbs other PERS employers.

Kathy Lea, acting director, Div. of Retirement & Benefits, said the State of Alaska does not have to do termination studies because state participation in PERS is mandatory, while all other participation is voluntary.  All the participation statutes refer to “changes to a participation agreement.”  That refers to the voluntary participation of municipalities and school districts; the State of Alaska has no participation agreement.  Ms. Lea said when the State of Alaska makes changes or reduces employees, while it may not have a termination study and may not have to amend an agreement, it still has to pay the liability.  No liability shifts to other employers as a result of state personnel actions.

Mr. Lamb said current requirements for termination studies
have a much greater impact on small PERS employers than on larger employers.  Many smaller communities only have one employee for a program or service.  If a school district loses a grant, or has to cut a program that only has one employee, then they are required to have a termination study done and to pay all the costs.  A larger school district that has ten employees in a program could cut nine of the ten employees in that program and would not have to do a termination study because they kept one employee.  Only small municipalities and school districts are impacted by the current law.  Grant-funded positions may be subject to PERS termination studies and costs, even if the positions are new enough that the employees are defined contribution employees.

Mike Barnhill, deputy commissioner, Dept. of Administration, said he has a different perspective than Mr. Lamb, but does not mean to downplay his concerns.  The state retirement systems have a big unfunded liability.  Prior to passage of SB 125 (http://www.legis.state.ak.us/basis/get_bill.asp?bill=SB%20125&session=25), the responsibility for that liability was allocated roughly 50-50 between the state and other employers.  SB 125 shifted responsibility from municipalities to the state.  He said it’s important to understand that whenever one party doesn’t pay into the system, someone else has to.  The effect of SB 100 will be to shift some costs to the state. 

Mr. Barnhill said in 2010, there were five termination studies.  Each study cost $2,500.  The one-time termination costs ranged from $10,364 to $21,373.  In the context of what the state general fund is going to pay to PERS for municipalities and school districts this year, those are relatively small costs.  He said he understands the concerns about employers being able to have flexibility, and those are legitimate concerns.  The Dept. of Administration is willing to continue to discuss the issue and try to arrive at a solution that does not shift undue costs to the state, but still solves some of the flexibility issues.  There are situations where there can be unfair double counting of salaries.  They’ve discussed the issue with the Dept. of Law, and the Dept. of Law has told them they can address that issue through regulations.  They have begun working on that already. He noted that won’t solve all of Mr. Lamb’s concerns, but it goes partway, while still maintaining fairness to the system as a whole.

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