Resolution 11-039 Support Bill to End Public Employees' Retirement System Pay Termination Costs

CITY OF HOMER
HOMER, ALASKA

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RESOLUTION 11-039

A RESOLUTION OF THE CITY COUNCIL OF HOMER, ALASKA, SUPPORTING A BILL TO END REQUIREMENTS THAT EMPLOYERS WHO TERMINATE SOME OR ALL PARTICIPATION IN THE PUBLIC EMPLOYEES' RETIREMENT SYSTEM OF ALASKA PAY TERMINATION COSTS, AND MAKING THE CHANGES RETROACTIVE.

WHEREAS, The Alaska State Legislature, in SB 125, helped Alaska’s PERS employers tremendously by adopting the flat statutory 22% rate of salary to help fund current costs and the unfunded liability of the PERS system; and

WHEREAS, Our legislators, in crafting SB 125 struggled hard to come up with a fair and equitable solution to a problem that most of them did not create. Further, in crafting SB 125, legislators never envisioned, intended, nor did they want to create any inequitable financial damage to any PERS member employer, nor negatively interfere with the current or future delivery of any member’s services or programs because of SB 125, which the termination studies law does do; and

WHEREAS, 2 AAC 35.235. Calculation of termination costs states: (a) An employer that proposes to terminate coverage of a department, group, or other classification of employees under AS 39.35.615 or 39.35.957, or terminate participation of the employer under AS 39.35.620 or 39.35.958, must have a termination study completed by the plan actuary to determine the actuarial cost to the employer for future benefits due employees whose coverage is terminated. And (b): In addition to the costs calculated in (a) …the employer under AS 39.35.620 or 39.35.958, is required to pay to the plan until the past service liability of the plan is extinguished an amount calculated by applying the current past service rate adopted by the board to salaries of the terminated employees as required by AS 39.35.625 (a). This payment shall be made each payroll period or the employer may enter into a payment plan acceptable to the administrator for each fiscal year;and

WHEREAS, If a PERS employer reduces its employee count because it made a decision to alter or suspend one of its programs or services, per 2 AAC 35.235 PERS might send it three bills. The first bill will be for the cost of doing a termination study. The second bill will be what the study says you owe the System, due to the employee change(s) you made. The third bill, the big bill, is the one that will require the employer to pay the past service cost (PSC) on each position’s salary PERS said needed to be opted out of PERS. The employer will be required to pay the PSC (currently 18.63%) on the salary(s) of the position(s) PERS said the employer needed to opt out, until the unfunded obligation is paid off, maybe 30 years from now. These three bills cumulatively can run from hundreds of thousands of dollars to several millions of dollars; and

WHEREAS, The underlying fear that certain employers would purposely act in a manner that jeopardized payment of the unfunded obligation, and thus shrink the salary base that pays off the unfunded obligations, has simply not happened. The total PERS salary base must be sustained and have reasonable growth, which it has to the tune of about 19% since the 6/30/2008 last pay period floor was set; and
WHEREAS, The future financial stability of PERS employers, and their ability to efficiently and effectively manage the delivery of their programs and services, is being directly impacted and undermined by 2 AAC 35.235; and
WHEREAS, Equitable and consistent application of the State’s termination law does not seem to be occurring, nor likely can it ever occur given the uniqueness of all PERS employers’ positions. A law like this that has such a material financial impact on PERS employers should at a minimum be able to be fairly, equitably, and consistently applied to all PERS employers, yet the Division of Retirement and Benefits has taken the position that the State, with half of the PERS salary base is exempt from termination studies and their financial impacts; and

WHEREAS, There is an inescapably inequitable impact to small PERS employers. This State law, or its application by PERS creates a clear and unconscionable inequitable impact on small PERS employers, versus larger PERS employers. Many smaller communities only have “one” employee for a program or service. If they lose a grant, or simply are faced with budget constraints and they have to cut a person, say a nurse in a school, they’d be required to have a termination study done, then pay all of the related costs because they actually cut a “function or a group;” and

WHEREAS, Termination studies negatively impact our decision, and our ability to accept grants because of the potential future liability. Grant funded positions may become subject to the termination studies, once the positions are terminated due to grant funding ending. Employers will find themselves paying the past service cost rate on former grant funded position salaries with other revenues. Essentially, if an employer accepts a grant it is possible, depending upon the circumstances, that once those grant funded positions are ended that employer will need to use other dollars to pay the PSC on those former grant funded salaries that the employer is no longer paying; and

WHEREAS, There are no offsets taken into account for salary increases in one area, for decreases in other areas. In other words, the ability for entities to adjust their programs and services to meet their constituent’s needs is negatively impacted. If an employer needs to cut in Area A, and add in Area B, that employer could find itself paying the PSC rate times the salary(s) it is no longer paying in Area A because it shifted its employees to Area B where there is more need, whether driven by local need or a mandate; and

WHEREAS, Over time, more and more resources will go toward paying for positions that no longer exist than go to the delivery of services such as fire protection, law enforcement, teaching, recreational services, landfill services, library services, flood control services, emergency response services, and the list goes on from here. Once you start shifting employee resources from one area of responsibility to another, you start a negative downward spiraling in your programs and services;and

WHEREAS, An employer will pay more toward the unfunded obligation every pay period on positions that no longer exist than they will for existing paid positions. This is true because the rate set by statute is capped at 22%. The 22% first covers the current normal cost rate then the difference is applied to the unfunded obligation. The current (FY ’11) normal cost rate is 9.33%; therefore, an employer pays 11.67% times the working employee’s salary toward the unfunded obligation. This same employer is required to pay 18.63% times the salary of an employee they are no longer paying toward the unfunded obligation. That employer is paying almost 7% more for positions that no longer exist because of the unfunded obligation than it pays on salary dollars for existing positions; and

WHEREAS, Termination studies nullify the intent of SB 125 that employers pay the exact same rate. It is clear that one result of these termination studies is that different employers will in fact be paying different net rates, and therefore, there will not be a single uniform contribution rate for PERS employers. The adoption of SB 125 was based on the acknowledgement that we do not have a single-agent, multiple employer PERS system, but rather we have had a consolidated un-equitable cost share system. The intent of SB 125 was that all employers would pay the same exact rate. That cannot happen when each employer pays a different termination cost amount, or pays none at all; and

WHEREAS, The Borough supports a sustainable salary base to pay off the PERS unfunded obligations; and

WHEREAS, The termination language in SB 125 was a solution to a problem that never materialized, and it’s not needed. The negative consequences, the additional charges and the payments that result from the termination language, were never contemplated or intended by the legislature, and they are destructive; and

WHEREAS, A.S. 39.35.625, that requires termination studies, and any other similar statutes or regulations, should be repealed.

NOW, THEREFORE, BE IT RESOLVED that the City Council of Homer, Alaska, while supporting a sustainable salary base to pay off the PERS unfunded obligation, believe that AS 39.35.625 and any other similar statutes or regulations that require termination studies, should be repealed and supports adoption and passage of a bill removing termination study requirements from the law.

PASSED AND ADOPTED by the Homer City Council this 11th day of April, 2011.

CITY OF HOMER

______________________________
JAMES C. HORNADAY, MAYOR

ATTEST:

_______________________________
JO JOHNSON, CMC, CITY CLERK

Fiscal Note: N/A