Legislature(2013 - 2014)BARNES 124
03/07/2014 03:15 PM House LABOR & COMMERCE
| Audio | Topic |
|---|---|
| Start | |
| HB247 | |
| HB316 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 247 | TELECONFERENCED | |
| *+ | HB 316 | TELECONFERENCED | |
HB 247-PEACE OFFICER/FIREFIGHTER RETIREMENT
3:20:00 PM
CHAIR OLSON announced that the first order of business would be
HOUSE BILL NO. 247, "An Act relating to the Protective
Occupation Retirement Council; relating to participation of
certain employees in the defined benefit and defined
contribution plans of the public employees' retirement system;
and providing for an effective date."
3:21:11 PM
REPRESENTATIVE REINBOLD moved to adopt the proposed committee
substitute (CS) for HB 247, labeled 28-LS0726\U, Wayne, 2/4/14,
as the working document.
CHAIR OLSON objected for the purpose of discussion.
3:21:31 PM
REPRESENTATIVE LINDSEY HOLMES, Alaska State Legislature,
testifying as a joint prime sponsor, explained that the goal of
HB 247 is to create a possible plan for a more secure retirement
future for public safety employees, specifically for police and
fire employees. The average hiring age for police officers and
firefighters in Alaska is 31 years of age with an average age at
retirement is 56 years of age. Since the public safety career
typically represents a shorter time span it can leave people
less time in the system to secure their retirement. The defined
contribution plans, the current Tier IV, Public Employees
Retirement System (PERS) definitely have great benefits. For
example, state employees have access to the supplemental
benefits system (SBS), which helps to supplement employee
retirement benefits. Unfortunately, the public safety employees
do not have SBS benefits, which increase their retirement risks.
These employees have what is basically considered a 401(k)
program. While their plan has some great advantages, it also
has some risks. This bill would define a "hybrid" plan called a
Variable Benefit Retirement System (VBRS), somewhere between the
Tier III defined benefit and Tier IV benefit contributions plan.
This hybrid plan attempts to provide reliance in future years on
social benefit programs and the difficulty in recruiting and
retaining good employees. The proposed plan has some distinct
advantages and efficiencies that go along with defined benefits
such as the ability to pool investment funds and achieve greater
returns over time. Further, this plan provides additional
security for employees during their retirement years. The
hybrid plan also has some advantages of a defined contribution
plan since it greatly reduces worry of unfunded liability (UL).
Thus the hybrid plan provides more control and security for the
state and for employees. Again, people affected by HB 247 are
the ones that put their lives on the line for us and the
legislature would like to take good care of them in return.
3:24:08 PM
GRACE ABBOTT, Staff, Representative Lindsey Holmes, Alaska State
Legislature, on behalf of one of the joint prime sponsors,
Representative Lindsey Holmes, explained the changes contained
in Version U of HB 247. On page 1, lines 5-14, language was
added to permit the Protective Occupation Retirement (PORC)
Council to adjust a monthly cost-of-living allowance (COLA) to
ensure the health of the VBRS plan from becoming underfunded.
3:24:59 PM
MS. ABBOTT referred to page 2, line 24, which added language to
allow the governor to appoint a member of the public at large to
serve on the PORC to broaden the representation of the public.
She referred to page [3], line 17, which provides that the PORC
may reduce or increase the annual medical stipend. Finally, on
page 7, lines 25-28, it establishes the monthly retirement
benefit of the protective occupation employees cannot exceed
Tier III benefit levels. The only other changes in Version U
are conforming changes, she said.
3:26:05 PM
MS. ABBOTT advised members that the bill contains two fiscal
notes from the Department of Administration (DOA), Office of the
Commissioner and the DOA, Division of Retirement and Benefits.
3:26:59 PM
MICHAEL BARNHILL, Deputy Commissioner, Department of
Administration (DOA), referring to the fiscal notes, stated that
the first fiscal note is the actuarial note on the system.
Essentially, the fiscal note [dated 2/28/14 for the Office of
the Commissioner, DOA] represents the actuarial analysis of HB
247. This provides the impact to the state in terms of the
additional assistance the state would need to pay from Senate
Bill 125 from 2008, which starts at $3.8 million and grades up
to $7.4 million in 2020. The reason for this is somewhat
complex; however, he reported that the actuary that worked with
the firefighters agreed with state's actuaries on the figures.
The reason for the impact relates to the method the state uses
to pay assistance and past service cost in the Public Employees
Retirement System (PERS).
MR. BARNHILL stated the committee may recall the state has a
very large unfunded liability in the PERS in the amount of $7
billion. The state also provides substantial state assistance
to municipalities in paying off the unfunded liability. In
2008, the state capped the employer contributions rate at 22
percent, which is the percentage of payroll that employers
contribute to the PERS to pay their share of the contributions
to fund their eventual benefit. However, the actuarial rate
fluctuates. The actuarial rate has been in the 30 percent
range, but has risen to 44 percent for FY 15. The 22 percent
employer contribution is allocated in a number of ways. First,
the defined benefit normal cost is estimated at 6 percent of
payroll. The second allocation is for defined contribution
costs that the employer contributes on behalf of the defined
contribution employees, which contains a number of components.
3:29:35 PM
MR. BARNHILL said that third, the employer contributes 5 percent
of payroll, which the employee can manage and invest; fourth, 3
percent is deposited to a health reimbursement account that can
be used to pay for premium share and deductibles. Fifth, the
employer contributes 1.5 percent to major medical contributions
to the employee's health care. The remaining amount is the
employer contribution for occupational death and disability,
which is 1 percent for police and fire. This totals 9 percent
within the 22 percent that goes to the defined contribution
normal cost. This is computed on basis of the defined
contribution payroll only. When it is computed on the basis of
the total payroll the 9 percent reduces to 4 percent overall.
This bill would remove public safety employees out of the
defined contribution plan to a Tier V, and the contribution
costs would increase from 9 percent to 14 percent; with 12
percent for the non-peace officer staff. Those costs will
increase and therefore the remaining amount within the 22
percent, which normally goes to past service costs decreases and
won't, means the state must pick up more past service cost.
3:31:54 PM
CHAIR OLSON asked for the effect if all the 42 or 43 percent of
the people in Tier IV that it would be significantly higher.
MR. BARNHILL answered yes; that the state will be paying more
for this portion of the population within the 22 percent cap.
Therefore, the amount that goes to past service cost decreases
and the state must pick those costs up. The actuary estimates
that the costs will start at $3.8 million and increase to $7.4
million over six years.
3:32:32 PM
CHAIR OLSON asked whether the sponsor has been contacted by
other unions that would like to participate in this bill.
REPRESENTATIVE HOLMES answered that there have been some
inquiries as to the plan.
3:32:55 PM
REPRESENTATIVE MILLETT referred to the second fiscal note. She
asked for the differences between this fiscal note and the one
for Senate Bill 141 [in 2005 Special legislative session]. She
asked why there would be differences in costs between Tier IV
and Tier V.
MR. BARNHILL said he hasn't looked at the fiscal note for Senate
Bill 141 in some time; however, this proposal puts employees
into two tiers at the same time. The employees would remain in
Tier IV for the purposes of placing credit associated with
overtime into an investment account. For all other credit,
contributions will go into a defined benefit account in Tier V.
Thus the DOA's system must be reprogrammed to accommodate
individuals being in two tiers. He anticipated this effort
would require a substantial amount of reprogramming to
accommodate two tiers at once.
3:34:12 PM
REPRESENTATIVE MILLETT said the fiscal note analysis is exactly
the same analysis. She highlighted some of the details,
including a request for cubicles. She has asked the Legislative
Finance Division to check the figures.
MR. BARNHILL responded that adding an additional tier will
require additional staff support to administer the new tier, but
the fundamental difference is that this bill adds an additional
tier while leaving the employees in the existing tier, which is
different. The state has never had a pension plan proposal in
which employees are in two separate tiers. This explains the
additional work plus it is fundamentally different than anything
the legislature has considered in the past.
3:35:48 PM
REPRESENTATIVE MILLETT found it odd that additional cubicles
would be necessary after the new space requirements.
MR. BARNHILL answered that he wished he could say it would be
easy to administer a pension plan; unfortunately, it is
incredibly complex. He said that the data comes from over 200
employers on a daily basis. Under this bill employees come in
and out of different tiers so a secretary could be a Tier V in
the Department of Public Safety (DPS), but if the secretary
transfers to the Department of Law (DOL), the position then
moves to Tier IV. Thus, people move in and out of tiers, leave
status, and employment status so the department must track
eligibility for accuracy to correctly compute the service
credit. He maintained that the system is complex.
3:37:08 PM
REPRESENTATIVE MILLETT related her own service and asked whether
it is complicated for DOA to track a Tier II vested employee to
one with a Tier IV with a 401(k) plan.
MR. BARNHILL answered that in the scenario the accumulated
service does not go into two different tiers at the same time.
A peace officer at the DPS earning overtime has earnings in Tier
IV and Tier V.
3:38:21 PM
REPRESENTATIVE HOLMES interjected that the overtime is put in
Tier V to avoid spiking.
MR. BARNHILL agreed the reasons are sound and he doesn't have
any quarrel with the objective, but the process is complicated.
3:38:39 PM
REPRESENTATIVE MILLETT questioned the $1.6 million fiscal note
to readjust the computers.
MR. BARNHILL answered that it is complicated.
3:39:14 PM
REPRESENTATIVE CHENAULT referred to the other fiscal note and
asked whether the actuarial has performed computations of the
costs of the program over time. He noted that the program costs
double in five years. He asked for costs over the life of the
employees affected.
MR. BARNHILL believed the actuary has done so. The cost for a
peace officer and firefighter would be 14 percent of defined
contribution payroll that will grow over time, which would be
compared to the existing costs of the Tier IV population - at
approximately 9 to 10 percent. Thus, the program increases the
cost for 9 to 10 percent to 14 percent for peace officers and
firefighters, although the DPS staff is at 12 percent.
Certainly the actuary can "run those numbers" very easily if
they haven't already done so. In response to Chair Olson, Mr.
Barnhill said he would request the figures. In further response
to a question, he indicated that Buck Consultants was the
actuary the state used.
3:41:22 PM
TOM WESCOTT, President, Alaska Professional Fire Fighters
Association, (AKPFFA), said the AKPFFA has listened to the
defined benefits versus the defined contributions debate. The
AKPFFA has researched the issues, and examined some successful
plans, including Wisconsin and in the State of Washington's laws
to find elements of the plan that made it successful. The goal
was to create self-sufficient retires who are able to exit a
physically strenuous career at an appropriate time. This led to
the Variable Benefit Retirement System (VBRS), he said.
3:43:30 PM
MR. WESCOTT reviewed the plan via a PowerPoint presentation.
Tier IV has some areas that are lacking in terms of the police
and firefighter careers. He noted Mr. Barnhill talked
extensively about the employer's 22 percent contribution
breakdown. He referred to the pie chart entitled "Tier IV
Employer Contribution Breakdown." Tier IV has a 401 (k), health
retirement account, occupational death and disability, and post-
Medicare health insurance; however, the big thing is that Tier
IV employee contributions help pay off the unfunded liability
associated with Tiers I-III. The Tier IV participants do not
participate in Tiers I-III at all and obtain no benefit. This
creates some problems, he said.
3:44:37 PM
MR. WESCOTT highlighted that the average 31-year-old firefighter
or police officer who exits at 55 or 60 years of age will obtain
a 31 percent income replacement in Tier IV, which is compounded
since these employees are not participating in social security
or the Supplemental Benefits System. Traditionally the public
safety sector does not participate in social security since they
typically do not work until the social security age for
retirement. Instead this sector participates in pension systems
in which the funds are dedicated to early retirement.
CHAIR OLSON offered his belief that approximately 90 political
subdivisions participate in the social security system, the
Public Employees Retirement System (PERS) and the Teachers
Retirement System (TRS).
MR. WESCOTT agreed. He suggested that Kenai, Anchorage, and
Fairbanks are examples.
CHAIR OLSON acknowledged that some opted out at the same time
but the Kenai Peninsula Borough (KPB) and school district stayed
in. He offered his belief that the KPB is the largest but some
small and medium sized towns still participate. He related that
the cities opted out for various reasons. He suggested that
some organizations, such as the NEA opted out since their
employees didn't want to pay twice. People were young and
didn't think about retirement so often employees requested to
opt out. He further suggested that U.S. Senator Lisa Murkowski
has worked for years to allow communities one additional chance
to participate; however, he hasn't heard anything recently. He
offered his belief that "one leg of stool" is gone for many
people.
3:46:46 PM
MR. WESCOTT answered that Chair Olson is correct. Most people
opted out when they were covered under defined benefit pension
plans. That influenced their decision. He did not recall any
reconsideration when Tier IV was adopted.
3:47:14 PM
MR. WESCOTT turned to the slide entitled "Tier IV Shortcomings."
He outlined areas of improvements to Tier IV. First, Tier IV
individuals lack professional money management services and
employees must pay a fee for these services. All the risk is at
the individual level. For example, the downturn in the economy
in 2000-2003 and again in 2008 can have a shocking effect on
retirement savings. The VBRS provides professional money
management services in its plan. When Tier IV was built the
employer contributes five percent to the employee's 401(k). The
TIAA-CREF, a financial services institution, issued
recommendations for best practices for defined contribution
plans. Their recommendation was for a 20 percent contribution
for individuals not covered by social security. He offered his
belief that it would need to be considerably more for public
safety to account for shorter careers. He stated that currently
the contribution is at 13 percent with 8 percent from employee
contributions. The health savings in the [health reimbursement
account] HRA are not projected to cover health care costs,
particularly since this population tends to retire earlier so
its retirees will need additional pre-Medicare coverage. The
market corrections are very severe on the individual level.
Finally, due to economies of scale, funds such as the Alaska
Permanent Fund and the Alaska Retirement Management (ARM) Board
pay lower fees than individuals would pay.
3:49:49 PM
REPRESENTATIVE SEATON asked whether he was analyzing this from
the perspective that the individuals control their investments
instead of the [Supplemental Benefits System - Annuity Plan]
(SBS AP) having to choose among market managers.
MR. WESCOTT answered that employers under Tier IV can make their
own investment decisions. Thus two individuals with the same
income could invest in different ways and obtain different
retirement amounts at the end of their careers. For example,
individuals averse to risk might select fixed income investments
and earn a lower rate of return.
REPRESENTATIVE SEATON asked whether he was talking about
choosing the investment strategy not selecting individual
investments.
3:50:56 PM
MR. WESCOTT said the VBRS adopts the professional money
management similar to the ARM Board, in which professionals are
hired to manage the funds.
3:51:17 PM
REPRESENTATIVE SEATON expressed interest in whether the options
are the same as the SBS management or if he was considering
individual investment or stock purchases that affect variables.
MR. WESCOTT said he wasn't completely familiar with SBS since he
doesn't participate in it; however, under Tier IV individuals
can choose a host of mutual funds, but not individual stocks to
make their investments or they can pay to have the account
managed.
3:52:07 PM
MR. WESCOTT outlined some consequences highlighted in the TIAA-
CREF's best practices for defined contributions' paper. He
offered to provide that to the committee.
3:52:31 PM
MR. WESCOTT raised the issue of the probability of an aged work
force. He predicted that individuals will need to make
decisions to stay or not based on financial reasons. Sometimes
the decisions are reasonable, but when coupled with the physical
nature of the job and the stresses it places on individuals
employers can expect workers' compensation increases or in the
worst case scenario deaths. This sector also experiences
difficulty in recruitment and retention. While defined
contribution plans are gaining in popularity, nationwide few
police and fire organizations are subject to strictly defined
contribution plans. He also predicted that if Alaska doesn't
craft its defined contribution plan correctly Tier IV retirees
can possibly become a burden to the social welfare system. He
said this country takes care of the elderly. He related a
scenario in which a Tier IV employee depleted his retirement
funds at 80 years of age, without any social security funds,
means that society would need to pick up the costs if the person
lives to be 88 years of age.
3:54:12 PM
MR. WESCOTT stated the solution crafted for the VBRS plan
provides members the distinct advantages and efficiencies of a
defined benefit plan and provides the state with fiscal
discipline and control of funding similar to a defined
contribution funding plan with a flat rate. He pointed out the
VBRS requests the "14 and 12 percent" contributions Mr. Barnhill
discussed earlier [Tier V employer contributions in the fiscal
notes.]
MR. WESCOTT stated that the VBRS plan would be managed without
additional funding by altering benefits. Thus, poor market
experiences would result in diminished benefits, which he
offered to discuss later; however, a portion is variable in
nature. The retiree's advantages under this plan include
professional money management, lower fees, and long-term
investment strategies. Individuals with one career who retire
in a disastrous year, such as 2009, can experience disastrous
results whereas participants in a large pool spread the risk.
This plan pools the risk among the participants of the plan
instead at the individual level so members receive stable and
predictable retirement income. This doesn't absolve members of
the responsibility of saving in a 401(k) plan or a 457 plan to
supplement their income. Thus, the VBRS doesn't provide 100
percent of income, but it provides one stable plan, which he
likened as returning "one leg of that stool."
3:56:16 PM
MR. WESCOTT acknowledged the bill is complicated. He referred
to the charts entitled "Public [Employees] Retirement System
(PERS) and Variable Benefit Retirement System (VBRS) Plan
Comparison Chart." He explained that started with the chart
used by the Division of Retirement and Benefits (DRB) for Tier
III and added a column for VBRS, listed benefits and cited page
numbers in HB 247.
MR. WESCOTT explained the significant differences in the VBRS.
A portion of benefits are guaranteed and a benefit level is
targeted. The plan is designed to provide Tier III benefits,
but has the ability to make adjustments rather than ask the
employer for more money.
3:58:01 PM
MR. WESCOTT outlined safeguards of the VBRS. For example,
overtime does not count in final calculations. One problem with
some pension systems is that overtime spiking will occur during
the "high three" years and members retire on a higher pension.
Under the VBRS plan overtime contributions do not count towards
retirement. He questioned Mr. Barnhill's testimony that
indicated employees would participate in two tiers since there
is a defined contribution component and the variable component;
however, the only contributions to the defined contribution
account would be for overtime to ensure that overtime is not
calculated in the final equation. Additionally, the bill adds a
minimum of age 55 for public safety and 60 for other employees.
Under the old PERS system, the retirement was based on time and
the VBRS is based on a 7 percent rate of return as opposed to 8
percent, which is a more conservative rate.
3:59:41 PM
MR. WESCOTT reviewed the slide entitled "Tools." He related
that employee contributions are adjustable for the post-pension
adjustment (PPA) and cost of living adjustments (COLA) based on
the funding status of the plan. The VBRS also has a variable
benefit that it can award. Lastly, the plan would guarantee the
2013 health care premium. The best way to explain this is that
the plan uses the 2013 figure of $1,647 for health care costs.
He projected 30 years from that date and hoped the costs would
be within the projected amount, including inflation adjustments,
but if not, the plan would only pay out based on the funds
available. He pointed out that the PERS older tiers promised
health care regardless of cost. This plan promises a stipend,
he said.
4:01:00 PM
MR. WESCOTT turned to the slide entitled "PERS Tier III Benefit
Compared to Variable Benefit." He highlighted the main change
is that a 25 year employee retiring would receive 57 percent;
whereas a retiree under the VBRS plan would receive 50 percent
with a variable 7.5 percent. He indicated the 7.5 percent
variable can be adjusted to reduce the benefit. The COLA and
PPA adjustments are also a tool to adjust under the VBRS, as
well as the health care costs previously mentioned.
MR. WESCOTT turned to the slide entitled "Private Sector
Contributions". He compared the total contributions of Wells
Fargo, Alaska Airlines, the Alaska State Legislature, and
recently modified police and fire plans for other states to the
VBRS. He said, "You can look at the numbers there. We're right
in the ballpark."
4:02:20 PM
MR. WESCOTT turned to the slide entitled "In Closing" and
emphasized that due to the unique nature of the shorter
timeframe, lack of SBS, and social security for public safety
employees and firefighters, that Tier IV shortfalls are
predicted. He suggested that the solution in HB 247 represents
a compromise and addresses many legitimate concerns and issues
that people have raised in terms of unfunded liability. He
hoped to continue to work on the VBRS plan and address any
concerns.
4:02:55 PM
REPRESENTATIVE MILLETT asked whether the peace officers
underwent a retention study and examined the turnover rate since
passage of Senate Bill 141, and prior to the change from a
defined benefit to a defined contribution plan.
MR. WESCOTT recalled reviewing figures from the ARM Board and
from the administration, although he has not seen any current
figures. He deferred to the police department who can speak to
the issues the police department is having.
REPRESENTATIVE MILLETT recalled a study and expressed an
interest in knowing the retention rate of public safety officers
since Tier IV was adopted.
CHAIR OLSON answered that he can only speak for his district.
He said that anecdotally it appears that the younger
firefighters and police officers like the new plan since it
gives them portability, control, and vesting.
4:04:33 PM
REPRESENTATIVE MILLETT expressed concern that the portability
might mean the officers leave so Alaska would train them and
they subsequently leave the state. She pointed out that this
adds a cost to the state that has not been considered. She
highlighted that training costs are extremely expensive for any
public safety officer. She offered her belief that the training
academy at Sitka could attest to the high costs, which she
believed were over $100,000 per officer. She reiterated that
the younger officer might like the portability, but it also
means they are leaving the state.
4:05:10 PM
CHAIR OLSON stated that the exit interview asks why people are
leaving. Some people leave because one spouse doesn't like
Alaska or family members in the Lower 48 have medical issues.
He reiterated that the retirement plan has not been an issue in
his area.
REPRESENTATIVE MILLETT said that she hears just the opposite in
her district. In her experience the younger officers have
indicated they came [to Alaska] for training and experience but
that the 401(k) plan is insufficient. She hoped the training
costs will also be considered. She appreciated the anecdotal
information but would like statistical information, too.
CHAIR OLSON answered that the information has been requested
from Mr. Barnhill and Mr. Wescott.
4:06:42 PM
WILLIAM FORNIA, Consultant; President, Pension Trustee Advisors,
stated that he is a credential actuary with his own firm. He
has been hired by Alaska Professional Firefighters Associates
and the police union to analyze this plan. He stated that he
testified previously before the Alaska State Legislature as well
as in Colorado, Utah, Rhode Island, New Mexico, and North
Dakota, as well as before city councils. He described his
experience as broad, and he works for labor unions, pension
funds, city, and state governments.
4:08:13 PM
MR. FORNIA referred to page 2 of a presentation entitled "Alaska
Variable Retirement Plan." He said he will focus on why the
plan change is necessary, the proposed structure of the variable
retirement plan [VBRS], and he will give examples.
4:09:03 PM
MR. FORNIA turned to page 3 entitled "Why is change necessary."
He acknowledged that the previous testifiers have covered some
of the information already. He directed attention to the police
and fire column since most of the employees affected in Alaska
would fall under this column. The typical hire age is 31 and
the average retirement age has been 56 years of age with 25
years of service. Under the old Tier III provisions the retiree
would receive a benefit of 57.5 percent of pay. His
calculations, based on the 13 percent projected deposits to Tier
IV defined contribution retirement [DCR], would be 31 percent.
Basically, this means a difference in pay between Tier III and
Tier IV retirees would be just under half of the total benefits.
He turned to the portability issue discussed earlier, and from
an actuarial perspective the employee could work in Alaska for
5-6 years, then go to Washington or Colorado and join a defined
benefit plan, work an additional 20 years and retire under that
plan. He characterized that as strategically the smartest thing
to do, so it doesn't surprise him that the younger police and
firefighters like the current plan. However, he predicted that
in 5-10 years when they have less future time to earn money,
they will not like it as much.
4:11:17 PM
CHAIR OLSON referred to page 3 and asked Mr. Fornia to extend
the graph to add a column for the private sector to provide a
broader-based perspective and comparison.
MR. FORNIA offered to do so. In response to a question, he
indicated that the average private sector employee would not be
a police and firefighter employee so it would be more like the
first column. He predicted these employees would come in during
their mid-30s, would work to ages 62-65, and would not have any
pension so there wouldn't be a Tier III row. The DCR benefit
would be slightly better, and since they were older it would
likely result in approximately 40 percent of pay. He said what
has been happening is that these people are not retiring since
they haven't saved up enough. He offered to simulate retirement
at 62-65, but he reiterated the figures would likely be in the
40 percent range.
CHAIR OLSON said the committee will appreciate the figures.
4:13:09 PM
MR. FORNIA turned to slide 5, with respect to DCR health care.
He stated that part of the Tier IV contributions will go to the
DCR health contribution account. A person who is hired at 32
and is now 36 would need 8 additional years of service to retire
at age 57 with 25 years of service. That retiree will have
enough to pay for 30 percent of the health insurance cost for
the member plus spouse based on projections. This retiree will
need to find additional sources to pay for the remaining 70
percent of their health care costs.
4:13:59 PM
REPRESENTATIVE REINBOLD referred to page 4 to the final average
salary of $80,000 and asked for the number of years of service
the salary represents.
Mr. FORNIA said this would be for someone retiring after 25
years in today's dollars. He did not recall whether the figures
were based on actuals, but the two left hand bars for Tier II
defined benefit and Tier IV defined contribution were based on a
scale. He said a lower paid person would have a higher social
security benefit relative to the other two columns.
4:14:59 PM
MR. FORNIA explained that slide 5 demonstrates that pre-Medicare
costs would exceed the contributions. He outlined the pros and
cons of the defined benefit and defined contribution programs.
This bill is something truly in between and tries to take
advantages of each program and craft it into a plan.
MR. FORNIA indicated that a defined contribution plan provides a
more cost effective way to pay for retirement benefits. First,
each individual doesn't know the length of time they will live
so they hedge living longer than average. Thus, these retirees
tend to draw down their accounts more slowly. In a pooled plan
the actuary can predict how long the average person will live.
Thus, the actuary can predict how many people will die who
participate in the pooled plan. Under the defined contribution
approach, the typical person dies with some balance left for
their children; however, he offered his belief that this is not
an efficient use of the plan. Thus, instead of paying a pension
benefit, it has the effect of paying a life insurance benefit.
4:17:09 PM
MR. FORNIA said the second advantage is that as individuals get
older they can't take the investment risk, whereas the ARM Board
can due to the long horizon.
4:17:29 PM
REPRESENTATIVE SEATON asked for clarification on the reasons the
defined benefit plans will be more cost effective. He offered
his belief that the problem with the defined benefit plans is
that the unfunded liability has increased, which is typical of
what has happened across the country. He asked because the
contributions to the plan are less than the payouts.
MR. FORNIA said that it is cost effective if it is done right
and this plan will be structured appropriately. Secondly, the
unfunded liability would be the same for those employees that
have been in the defined contribution plan all along. However,
it would fall on the backs of the workers, who would not have a
guaranteed retirement and the retirees that have overspent their
savings would not have much left. Thus, the unfunded liability,
which is now the responsibility of the state and employer, would
either be deficits for workers wishing to retire, or would show
up as deficits in the accounts of those who have already
retired.
4:19:07 PM
REPRESENTATIVE SEATON maintained that he still did not view the
defined benefit plan as being more cost effective for the state.
MR. FORNIA answered that the state would not provide adequate
retirement benefits for defined contribution employees since the
state would need to make higher contributions. He pointed out
that the advantage of the defined contribution plan for
employers is that there isn't any risk of unfunded liability.
However, any shortfalls are shifted to the employees. Under the
current state structure for PERS Tier I, Tier, and Tier III
defined benefit plans is that the employees receive adequate
retirement benefits, but it is done through the unfunded
liability costs. He indicated that in order for the state to
provide an adequate retirement through a defined contribution
program, the state would spend the same amount, but it would
have needed to contribute more to employee retirement accounts
earlier.
4:20:43 PM
REPRESENTATIVE SEATON pointed out that the state is still
employing people and can at least schedule it in and make
decisions on the number of employees and the amount of wages.
He stated that it will be very difficult if the state doesn't
know the future cost.
MR. FORNIA acknowledged that his concern is a legitimate
concern, which is why the VBRS is structured in this way. The
state has a big unfunded liability. The variable plan
capitalizes on three advantages of a defined benefit plan while
it maintains many of the advantages of a defined contribution
plan, particularly the "no risk of unfunded liabilities to
employer."
MR. FORNIA related that the defined contribution is more
portable, it is under their full control, and the defined
contribution plans are transparent and clear to employees, the
state, and municipalities.
4:22:26 PM
MR. FORNIA discussed the compromise contained in HB 247 [slide
7]. The key feature of the defined contribution plan is that
the employer knows the exact cost. The VBRS starts with that
fixed contribution and agrees to manage the plan within the
budget. The VBRS designs target benefit levels, comparable to
Tier III, but adjustment mechanisms are built in. Thus, the
plan has lower guaranteed levels. From the actuarial side, a
lower discount rate is used to provide a cushion against future
adverse experience.
4:23:28 PM
MR. FORNIA discussed the contributions for police and fire
members [slide 8]. He acknowledged that Mr. Barnhill is right
that this is complicated. He directed attention to the two
right hand columns to see how the fiscal note was derived.
Under the VBRP 14 percent of the 22 percent would go toward
pensions and 8 percent will go towards the legacy unfunded
liability. He explained the DCR under the 22 percent Tier IV
defined contribution, with 5 percent for the DCR pension
account, 3 percent for the health retirement account, 2.72
percent for other liabilities, such as death and disability
(D&D) and post-65 health care. The total is 11.28 percent. The
DOA's actuary figures are slightly different, although similar.
Since only 11.28 percent of the contributions are designation to
cover the Tier I, II, and III unfunded liability, while under
Tier IV only 8 percent goes to unfunded liability under the VBRS
proposal, the state would need to cover the extra 3.98 percent
for the unfunded liability, which explains the FN cost. He said
the fiscal note covers the difference between the 8 percent
under the VBRS and the 11.28 percent under Tier IV today.
4:25:29 PM
MR. FORNIA referred to the $4 million to 7.8 million in fiscal
costs and explained that the reason this is going up so rapidly
is because it accounts for the new people coming into the
system. At some point, virtually everyone will be included in
Tier V and it will stabilize and at that point will only
increase 3 to 4 percent per year. He said that the initial
increased cost is significant. He anticipated that the costs
will increase for up to ten years and then stabilize. He said
that slide 9 covers non police and fire members, but is similar.
4:26:49 PM
REPRESENTATIVE SEATON asked why the contributions for non-police
and firefighter members differ than for the entire PERS field
and asked whether it encompasses everyone in the PERS system.
MR. FORNIA answered that two left columns represent everyone
throughout PERS. The right hand column covers individuals
working in protective occupations, basically the non-police and
non-fire employee, for example secretaries and dispatchers.
4:27:53 PM
REPRESENTATIVE SEATON expressed an interest in the rationale for
this system having a higher percentage for pension for
secretaries and dispatchers within police and fire whose job
descriptions are the same as for other PERS employees throughout
the state.
MR. FORNIA suggested that Mr. Abbott or Mr. Wescott could
respond. He offered his belief that it was a fairly small group
and perhaps it would be for the convenience of the department,
but he did not know the precise logic.
4:28:49 PM
REPRESENTATIVE MILLETT offered her belief that these employees
belong to the same union. She regrettably reported that the
Anchorage Fire Department's senior Captain Jeff Bayless died on
duty today. She recalled police officers that had been shot.
She reminded members that this group is laying down their lives
for us so this type of employee is different than other
employees. She indicated that the state has a distinction
between public safety peace officers and other state workers.
She stated that all of the employees are in the same union,
including the administrative officers. She said, "For me, this
bill is about covering people that will put their lives on the
line like Captain Bayless, who lost his life about 30 minutes
ago. This is the first time in a long time that we've lost a
fireman on duty." She went on to report that in the last three
years the state has lost three police officers from her police
department who had been shot. She hoped that members would be
thinking about people who put their lives on the line and not
compare them to other administration staff, such as the Division
of Motor Vehicles. She emphasized the duties the peace officers
perform are important for Alaskans.
4:30:53 PM
REPRESENTATIVE SEATON clarified that he is talking about non-
officer category. He wondered how that equates with the
differential that would be employer's contribution of 12 percent
and not the 14 percent in the other category for active police
and fire employees.
CHAIR OLSON reminded members that committee time is short and
asked Mr. Fornia to continue.
4:31:25 PM
MR. FORNIA discussed actuarial and governance safeguards to
ensure an adequately funded program [slide 10]. He stated that
the plan is built around the employer's contribution being
safeguards; 12 or 14 percent without any additional bargaining.
This differs from the current plan in which an unfunded
liability happens. This plan is designed to make the pension
council make tough decisions to keep the plan adequately funded
and manage benefits so we can do that. This happens in several
ways. First, the VBRS plan uses a lower actuarial discount
rate. Second, overtime worked is not part of the plan. Third,
the employee contributions can be increased, if necessary.
Fourth, any transition benefits for Tier IV are at the full
actuarial costs. Fifth, during good times reserves will be
built up so the reserves can be used during bad economic times.
Lastly, the VBRS will increase to ages 55 and 60 rather than
using years of service rules.
4:33:00 PM
MR. FORNIA referred to the Protective Occupational Retirement
Council (PORC), which will be able to adjust employee
contributions, cost-of-living adjustment (COLA), benefit
formula, and health care cost sharing [slide 11].
MR. FORNIA highlighted that more specifically the PORC, which is
similar to a bard, can make different decisions each year [slide
12]. Annually, the PORC will make adjustments. The actuarial
will provide the target benefit basis and guaranteed benefit
basis; however, there will not be any changes to the employer
contributions rate, which will be fixed. He identified this as
the compromise.
4:34:04 PM
MR. FORNIA compared the flexible benefit design safeguard to
ensure an adequately funded program [slide 13]. He suggested
that Mr. Wescott previously discussed most of these. He
referred to the two bottom times: the post retirement
purchasing adjustments and health reimbursement, which he
characterized as being huge changes. For example, the health
reimbursement starts out with premium reimbursement being based
on 2013 rates; however, as the experience improves, it can be
bumped up to 2014-2015. He said that the good news is that not
many people will retire under this plan for many years so by the
time a meaningful number of employees retire, the plan will have
obtained sufficient experience to know what it can afford.
4:34:48 PM
MR. FORNIA discussed the second safeguard, the actuarial methods
[slide 14]. The actuarial has built in a margin for the actual
assumptions, will use an asset valuation to minimize and smooth
impacts, and will build up reserves during good times. He
touched on reduced discount rate as a safeguard [slide 15] and
reported that the actuarials performed variable benefit plan
simulations [slide 16]. First, the plan considered how it would
have looked if it had started at various times over the last
fifty years, after first receiving all the data from the Alaska
Public Employees' Retirement System returns since 1981. The
actuarial also used statistics from prior to 1981 and national
return statistics prior to 1981 to examine the model.
4:35:57 PM
MR. FORNIA compared how the program would have worked if it
began in 1985 [slide 17]. He discussed the graph, noting that
1985 represented an average case. He pointed out the bottom
green line on the chart shows the funded ratio of the plan on
the level of the target benefits. The guaranteed level, for
lower level benefits, would have started out at 120 percent
funded and would have skyrocketed to 158 percent by 2000, and by
2009 would be 80 percent funded. Thus, the state would have
paid out the guaranteed benefit level in 2009. During this time
the PORC would have been making tough decisions and during the
90s would likely have ratcheted the benefits up to the
guaranteed level, but as the economy had a downturn, would
perhaps have suspended COLA for a few years in the early 2000s,
and not granted the 2.5 percent. He predicted that the VBRS
will fall between these two lines on the graph and have
recovered by now and the state will be paying benefits closer to
the target benefit level.
4:37:34 PM
MR. FORNIA explained that the pro forma findings show "a ton of
numbers" that show the typical case in 1985 compared to the 1963
and 1996 best case and worst case scenarios. The 1985 typical
case today would be 93 percent funded at the target funded ratio
as of 2013 and 15 years in it would be 134 percent funded, but
the worst it ever would have been would be 96 percent funded,
but today the guaranteed funded ratio would be at 110 percent
funded [slide 18]. He asked members to keep in mind that he
shows an extreme case of the market value of assets; however,
actuaries use a smooth value of assets to smooth out the
fluctuations. If that was performed, the good years would be
lower and the bad years would have been higher.
4:38:36 PM
MR. FORNIA discussed the best case scenario if the program would
have begun in 1963 [slide 19]. This plan would have been funded
at 216 percent funded by the time the "dot-com bubble" would
have burst on a guaranteed level. Although probably the
benefits would be given out at the target level the state would
have been 180 percent funded, that today the state would still
be over 100 percent.
4:39:17 PM
MR. FORNIA reviewed the worst case scenario, if the program
would have begun in 1996, the fund would have just started so
the funding ratios would have crept up to 126 percent, but would
have plummeted twice. In this instance the benefits would be
paid at the target level; however, the plan would not have had
any retirees to speak of since 1996 was still less than 20 years
ago so the plan would have paid out the benefits only at the
guaranteed level.
4:40:09 PM
MR. FORNIA related the next five pages reviewed case studies for
four other states with similar plans [slides 21-25]: Wisconsin,
South Dakota, Colorado, and Ohio. The main thing with Wisconsin
is that its COLA is dependent upon the fund returns so each year
they announce the amount of the variable benefit based on a
built in formula and following the most recent crash the
variable benefit decreased. He pointed out that retirees
'benefits could actually go down to their retirement level, but
not lower. In Alaska's case the benefit is fixed and the PORC
will make a decision as to whether a cost-of-living adjustment
or pension protection benefit can be granted.
4:41:39 PM
MR. FORNIA stated that Colorado's fire and police pension plan
contributions are fixed at 8 percent for employees and for
employers. He said that he was Colorado's actuary starting in
1997. If the plan was overfunded Colorado put the extra funds
into a defined contribution account. Those funds were depleted
when the returns were bad. Colorado also has discretion over
COLA. He said that they must keep their costs below 16 percent
just like Alaska would need to keep its cost below 14 percent
plus 9 percent [for a total of 23 percent]. He cautioned that
this plan does not include health care; in fact, very few plans
include health care as part of the pension and instead, health
care has usually been considered a separate entity.
MR. FORNIA stated that South Dakota's plan is similar to
Wisconsin since it has a variable COLA. He said that Ohio's
contributions are now fixed. He explained that Ohio underwent
major pension reforms in 2012 and their systems are required to
keep their plans fully funded in 30 years. In most instances
the states are imposing plan reductions, particularly the police
and fire plans with some reductions to their benefits. He
stated that Ohio does include retiree health care.
4:43:30 PM
MR. FORNIA indicated the proposed 14 percent and 12 percent
employer contribution is fairly consistent with what other
employers around the country provide. He stated that Wells
Fargo with a 12.2 percent and Alaska Airlines at 14.7 percent
total employer contributions [slide 26].
MR. FORNIA recapped the proposed VBRS [slide 27]. He explained
the catalyst for the VBRS structure is that the state is
concerned with potential future unfunded liabilities, including
that Tier IV defined contribution plan does not provide a
solution. This plan could provide a potential solution under HB
247. If the 7 percent average return is achieved, then benefits
will be pretty close to the state's Tier III benefits. However,
if the experience is not so good, the benefits will not be
increased to the Tier II level. He explained that under a pure
defined contribution plan each individual takes the risk whereas
under a typical defined benefit plan the employer takes the
risk. He stated that in this case [under the VBRS] the risk is
a shared risk among all of the individuals so each individual
doesn't have to predict how long they will live, invest their
own money, or which asset class is appropriate, since the plan
as a whole does it. That removes significant risk, which is the
reason this type of structure works, he said.
[HB 247 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB247 ver A.PDF |
HL&C 3/7/2014 3:15:00 PM |
HB 247 |
| HB247 Sponsor Statement.pdf |
HL&C 3/7/2014 3:15:00 PM |
HB 247 |
| HB247 Sectional Analysis.pdf |
HL&C 3/7/2014 3:15:00 PM |
HB 247 |
| HB247 Fiscal Note-DOA-DRB-02-28-2014.pdf |
HL&C 3/7/2014 3:15:00 PM |
HB 247 |
| HB247 Fiscal Note-DOA-DRB-02-28-2014-actuarial.pdf |
HL&C 3/7/2014 3:15:00 PM |
HB 247 |
| HB247 Draft Proposed Blank CS ver U.pdf |
HL&C 3/7/2014 3:15:00 PM |
HB 247 |
| HB247 Supporting Documents- FAQs.pdf |
HL&C 3/7/2014 3:15:00 PM |
HB 247 |
| HB247 Supporting Documents-APDEA 02-24-2014.pdf |
HL&C 3/7/2014 3:15:00 PM |
HB 247 |
| HB247 Supporting Documents-Tools and Safeguards.pdf |
HL&C 3/7/2014 3:15:00 PM |
HB 247 |
| HB247 Supporting Documents-Assorted Letters.pdf |
HL&C 3/7/2014 3:15:00 PM |
HB 247 |
| HB247 Supporting Documents-VBRS-PP Presentation.pdf |
HL&C 3/7/2014 3:15:00 PM |
HB 247 |
| HB316 ver N.pdf |
HL&C 3/7/2014 3:15:00 PM HL&C 3/10/2014 3:15:00 PM |
HB 316 |
| HB316 Sponsor Statement.pdf |
HL&C 3/7/2014 3:15:00 PM HL&C 3/10/2014 3:15:00 PM |
HB 316 |
| HB316 Sectional Analysis.pdf |
HL&C 3/7/2014 3:15:00 PM HL&C 3/10/2014 3:15:00 PM |
HB 316 |
| HB316 Fiscal Note-DOLWD-WC-03-03-14.pdf |
HL&C 3/7/2014 3:15:00 PM HL&C 3/10/2014 3:15:00 PM |
HB 316 |
| HB316 Fiscal Note-DOA-RM-02-28-14.pdf |
HL&C 3/7/2014 3:15:00 PM HL&C 3/10/2014 3:15:00 PM |
HB 316 |
| HB316 Supporting Documents-Letter NFIB 3-5-2014.PDF |
HL&C 3/7/2014 3:15:00 PM HL&C 3/10/2014 3:15:00 PM |
HB 316 |
| HB316 Supporting Documents-Resolution ASHBA.PDF |
HL&C 3/7/2014 3:15:00 PM HL&C 3/10/2014 3:15:00 PM |
HB 316 |
| HB316 Supporting Documents-WC Board Resolution 13-01.pdf |
HL&C 3/7/2014 3:15:00 PM HL&C 3/10/2014 3:15:00 PM |
HB 316 |
| HB316 Supporting Documents-WC Fee Comparison.pdf |
HL&C 3/7/2014 3:15:00 PM HL&C 3/10/2014 3:15:00 PM |
HB 316 |
| HB316 Supporting Documents-AHLA 3-5-2014.pdf |
HL&C 3/7/2014 3:15:00 PM HL&C 3/10/2014 3:15:00 PM |
HB 316 |
| HB316 Supporting Documents-Legislative Research Brief.pdf |
HL&C 3/7/2014 3:15:00 PM HL&C 3/10/2014 3:15:00 PM |
HB 316 |
| HB316 Supporting Documents-Letter AK Chamber 03-05-2014.pdf |
HL&C 3/7/2014 3:15:00 PM HL&C 3/10/2014 3:15:00 PM |
HB 316 |
| HB316 Supporting Documents-Letter ASHNA 3-4-2014.pdf |
HL&C 3/7/2014 3:15:00 PM HL&C 3/10/2014 3:15:00 PM |
HB 316 |
| HB316 Supporting Documents-Letter FNSB 2-28-14.pdf |
HL&C 3/7/2014 3:15:00 PM HL&C 3/10/2014 3:15:00 PM |
HB 316 SB 2 |
| HB247 Supporting Documents-VRP Presentation-Fornia 3-07-2014.pdf |
HL&C 3/7/2014 3:15:00 PM |
HB 247 |
| HB316 Supporting Documents-Letter-ASRC-ANC 0306-2014.pdf |
HL&C 3/7/2014 3:15:00 PM |
HB 316 |