Legislature(2015 - 2016)BELTZ 105 (TSBldg)
03/24/2016 03:30 PM Senate COMMUNITY & REGIONAL AFFAIRS
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| Audio | Topic |
|---|---|
| Start | |
| SB88 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 88 | TELECONFERENCED | |
SB 88-TEACHERS & PUB EMPLOYEE RETIREMENT PLANS
3:32:26 PM
CHAIR BISHOP announced the consideration of SB 88.
3:33:39 PM
SENATOR DENNIS EGAN, Alaska State Legislature, Juneau, Alaska,
provided a sponsor's statement on SB 88 as follows:
SB 88 lets teachers, troopers, firefighters, and other
public employees choose one of two state retirement
systems: an individual defined contribution retirement
account, or earning a defined benefit pension.
Analysis of a previous version of this bill showed it
would save the state about $70 million in the first 5
years and any revenue in this day and age is a good
thing; it is cost neutral in the long term, it shares
the risk of rising healthcare costs between employees
and employers, and it adds nothing, not one red-cent
to the unfunded liabilities of the past. Mr. Chair, my
staff and your staff have worked hard with the
Administration to get an up-to-date fiscal analysis
and I know they are working hard on it right now and
we should have it very soon. I talked a lot about this
bill last year, so I'd like to thank the Alaska Public
Pension Coalition for bringing on an actuary to
present SB 88 to us today.
3:35:40 PM
JESSE KIEHL, Staff, Senator Egan, Alaska State Legislature,
Juneau, Alaska, stated that he would address the major changes
that were made to SB 88. He specified that SB 88 leaves
completely intact the current Defined Contribution (DC) system
and the option would continue for newly hired employees. He
detailed that SB 88 would also create a new Defined Benefit (DB)
pension tier option.
MR. KIEHL specified that the DB pension tier in SB 88 differed
in very important ways from past DB tiers as follows:
· Majority of employees would pay 8 percent of their income
rather than 6.75 percent.
· Earning retiree health insurance benefits would take longer
where an individual would have to first be Medicare
eligible.
· Individuals would have to share in the cost of retiree-
healthcare coverage.
He set forth that SB 88 was written so that the new DB plan does
not cost the State of Alaska, municipalities, and school
districts any more than the DC plan. He noted that Senator Egan
insisted that as a safeguard, no added cost be written into SB
88. He pointed out that the SB 88 would allow individuals
working in the DC system a one-shot option to switch to the DB
tier at their cost. He specified that SB 88 does not add any
unfunded liability for an employee who switches to the DB plan.
He added that the Department of Administration was working on a
full-fiscal analysis of SB 88. He summarized that SB 88 would
provide a recruitment benefit and reduce the high cost of
turnover by allowing employees to choose either a DC or DB
pension plan.
3:41:18 PM
CHAIR BISHOP asked how many states have pension options similar
to the SB 88 proposal.
MR. KIEHL replied that he did not know. He noted that a couple
of states allow an employee to revisit their pension option, but
Senator Egan insisted that a one-time irrevocable decision be
written into SB 88 in order to predict costs.
CHAIR BISHOP asked that information be provided as to how many
states went to a DC plan and reverted back to a DB plan.
MR. KIEHL replied that a case study that addressed pension
changes made by a couple of states was submitted to committee
members.
3:42:57 PM
WILLIAM B. FORNIA, Consultant, Alaska Public Pension Coalition,
Denver, Colorado, noted that Nebraska and West Virginia switched
from a DC plan back to a DB plan.
MR. FORNIA explained his actuarial history as a pension
consultant as follows:
· Actuary for the Alaska Retirement Management (ARM) Board in
2005 and 2006.
· Consultant for Alaska Public Pension Coalition (APPC) since
2011.
He detailed that his work with APPC had focused on crafting
pension legislation that brought forth savings or no added cost
to the state.
3:48:24 PM
He specified that the bill's key feature was providing employees
with a choice between a DC or DB plan. He pointed out that SB 88
would not cost the state or other public employers more money.
He added that any risk of increased healthcare cost would be
shifted to the workers where employees would share in higher
costs.
MR. FORNIA pointed out that public employees hired since
2005/2006 do not have a Social Security safety net. He opined
that employees who do not invest reasonably well or encounter
negative-financial markets might not have any safety net.
3:52:40 PM
CHAIR BISHOP remarked that more DB-plan retirees would stay in
the state. He asserted that retirees that stay in Alaska add so
much value to their communities and to the state.
MR. FORNIA set forth that DB plans were designed to actually
define a retirement benefit by providing pensions whereas DC
plans try to build wealth.
3:55:44 PM
He explained that benefit levels were compared between the
latest DB tier for teachers, Tier 2, and the current DC tier,
Tier 3. He revealed that Tier 2 would have a pension of 58
percent of pay and Tier 3 would only have 33 percent, 25 percent
less than Tier 2. He noted that numbers between tiers were
similar for police and firefighters as well. He remarked that
the disparity between the two tiers demonstrated why a DB
alternative was needed. He added that the Tier 3 pension would
not be much more than an individual receiving Social Security.
3:58:03 PM
He disclosed that he had co-authored a paper with the National
Institute on Retirement Security (NIRS) in 2008 that was updated
in 2014. He detailed that the paper demonstrated that a DB plan
would provide a higher level of benefits than a DC plan. He set
forth that Longevity Risk Pooling (LRP) was one factor for the
DB plan's higher benefits level. He detailed that LRP annually
has people of the same age retiring, whereas an individual does
not know how long they are going to live and consequently has to
save more.
CHAIR BISHOP asked if there was a risk difference between DB and
DC plans.
MR. FORNIA replied that the risk for DB and DC plans was
identical.
4:02:43 PM
MR. FORNIA explained that additional reasons for a higher return
from a DB plan was due to portfolio diversification and
professional management.
4:11:29 PM
He reported that research on economic efficiency had shown DB
plan costs were 46 percent less than a DC plan for the same
benefit level. He remarked that a misperception exists where DC
plans inherently save money. He said the only reason DC plans
save money was due to employers putting less money in, but
employees receive a severe reduction in benefit levels.
He remarked that DC plans have gotten a lot better in the last
10 years with lower fees, new asset allocations, and the
introduction of Target Date Funds where workers receive help in
asset allocation that is based on an individual's retirement
date.
He revealed that NIRS did a study on three states that changed
from DB plans to DC plans: West Virginia, Michigan, and Alaska.
He said the conclusions indicated that going from DB to DC did
not help with the unfunded liability at all and the plan costs
actually went up.
4:14:26 PM
CHAIR BISHOP asked if the overfunding of 24 percent by
individuals in a DC plan would provide savings.
MR. FORNIA replied not quite. He explained that an individual
has to overfund their DC plan in order to receive the same level
of benefits through a DB plan because a person does not know how
long they are going to live. He specified that overfunding by an
individual in a DC plan does not have much to do with the
state's unfunded liability for the legacy-DB plan. He summarized
that the best way to address the underfunding problem was just
to fund it, to have a responsible funding policy, make the full
contribution each year, and to adjust the state's assumptions as
necessary over time.
CHAIR BISHOP opined that DB plans work, but the state has to be
honest with the multiplier and contribution rate.
MR. FORNIA replied that Chair Bishop's point was proven by
California in 1999. He recalled that the markets were booming in
the 90s and there was a view that the markets would go up
forever. He detailed that California set a high multiplier
called "3 at 50" where an individual would get 3 percent of pay
for each year of service at age 50. He said California thought
they were over-funded, but their pension strategy came back to
bite them. He agreed that a state has to be honest with its
multiplier and assumptions.
4:18:39 PM
MR. FORNIA referenced a study from California that refuted the
claim that DC plans were better for teachers than DB plans. He
admitted that DC plans might be better for a few teachers that
did not teach for a full career, but 89 percent of California
teachers taught for 10 years or more and were better off with a
DB pension plan rather than a DC plan:
· 0-4 years (6 percent)
· 5-9 years (5 percent)
· 10-19 years (14 percent)
· 20-29 years (26 percent)
· 30+ years (49 percent)
4:22:02 PM
He referenced an actuarial study from 2014 that addressed
whether Alaska's DC plan encouraged workers to quit and move
back to the Lower 48. He said the report revealed that the
turnover rate for teachers in their first 8 years was 12 percent
higher than expected, police and firefighters was 4 percent
higher than expected, and the turnover rate for "other" Public
Employees' Retirement System (PERS) workers in the first 5 years
was 15 percent less than expected. He summarized that the report
might provide evidence that the state was indeed losing
teachers, police, and firefighters more than expected.
4:25:00 PM
CHAIR BISHOP asked if monetary numbers had been assigned that
take into account the time and money invested in professional
development for workers that quit.
MR. FORNIA answered no. He concurred that training costs were
substantial, especially for public safety, but the actuarial
study was done for a totally different purpose.
CHAIR BISHOP suggested that the sponsor and the committee take
turnover cost into account in order to move the DB legislation
forward.
MR. FORNIA replied that he agreed. He noted that the actuarial
report was done during a recession when individuals tend to hang
on to their jobs. He opined that the report was more evidence
that the turnover rate could be a significant ongoing issue,
especially when data was gleaned during a recession.
4:28:29 PM
MR. FORNIA revealed that Alaska's unfunded liability had grown
by more than $3 billion since the DC program's implementation.
He pointed out that the bill for the DC program was not designed
to solve the unfunded liability. He reiterated that SB 88 had
safeguards to try and manage any additional unfunded
liabilities, primarily on the healthcare side. He detailed that
if healthcare costs go up more than expected, there would be a
greater cost-sharing by employees and retirees. He specified
that the bill's advance-funding plan should result in no new-
unfunded liability if the actuarial assumptions were accurate.
He disclosed that the actuarial assumptions in the DC plan were
conservative and could result in a small surplus.
He set forth that the DB plan in SB 88 was designed to:
· Be economical.
· Keep jobs in Alaska.
· Keep retirees in Alaska.
· Provide a safety net that everyone else has from Social
Security.
· Be cost neutral.
He stated that the bill's pension benefits would basically be
the same as the tiers that were switched in the 90s. He revealed
that retiree health benefits would be stronger than the DC plan,
but not as strong as the benefits in the 90s. He added that
employees in either the DC or DB plans would both contribute 8
percent of their income.
4:32:02 PM
He summarized that the DB plan in SB 88 would do the following:
· Provide better benefits for workers.
· Provide better healthcare benefits for workers.
· Workers would no longer have the health-retirement account
contributions, but they would have a retiree health program
instead.
· Designed so the employer costs would not increase.
· Depending on the pending fiscal note, would actually save
money for the state.
CHAIR BISHOP stated that he was a DB plan recipient and glad to
have spent 40 years working to get it. He recalled that he read
an article where Congress had passed a provision that allowed
pension plans to write-down their unfunded debt and the result
would be decreased monthly benefit payments.
4:34:23 PM
MR. FORNIA replied that Chair Bishop was referring to multi-
employer plans that would affect Teamsters trucking companies
and some of the airlines. He explained that the provision would
not affect state or local governments, and no single-employer
pensions. He specified that the federal government has no
jurisdiction and the issue related to states' rights. He noted
that Social Security was an example of Alaska refusing to
participate and that was the reason why the state has its own
pension.
4:36:56 PM
CHRISTOPHER BENSHOOF, teacher, Lathrop High School, Fairbanks,
Alaska, testified in support of SB 88. He disclosed that he
taught math, statistics, computer science, engineering, and
robotics at Lathrop High School in Fairbanks. He noted that he
was recognized as the 2013 Alaska Teacher of the Year, 2015
National Teacher of Excellence, and a finalist for the 2015
Presidential Award for Excellence in Math and Science Teaching.
He asserted that Alaska's DC plan had harmed the state's
recruitment and retention efforts for teachers.
4:40:30 PM
JEROME KRISTJANSON, representing himself, Juneau, Alaska,
testified in support of SB 88. He commented that the better the
benefit package, the higher the quality and number of job
applicants. He asserted that individuals want the option to
either control their own retirement funds through a DC plan or
rely on the leadership of trained financial experts for a set
return through a DB plan.
CHAIR BISHOP stated that he concurred with Mr. Kristjanson's
comments.
4:43:45 PM
JUSTIN HERNANDEZ, Police Officer, Anchorage Police Department-
Municipality of Anchorage, Anchorage, Alaska, testified in
support of SB 88. He remarked that he had longevity concerns
under the PERS-Tier 4 plan in regards to financial and medical
stability as he pursued his law-enforcement career. He asserted
that a retention and recruitment problem existed in the field of
law enforcement in Anchorage due to the current retirement
program.
4:46:17 PM
GREGORY COLLEN, representing himself, Juneau, Alaska, testified
in support of SB 88. He disclosed that he has been on the PERS-
Tier 4 plan for seven years at the Juneau School District. He
stated that wanted the option to switch to a DB plan.
CHAIR BISHOP advised that Mr. Collen continue to save at an
early age for his retirement. He commented that perhaps someday
Mr. Collen will have a DB plan option.
He asked that Mr. Fornia comment on a statistic that he recalled
where 70 percent of retirees in the U.S. retired at or below the
poverty level.
4:50:39 PM
MR. FORNIA replied that 70 percent sounded too high and maybe
did not take Social Security into consideration. He admitted
that the country has a serious retirement crisis, primarily in
the private sector. He remarked that people have not saved
adequately.
SENATOR EGAN asserted that SB 88 had a lot of support. He stated
that he hoped DB plan legislation would someday pass. He thanked
Chair Bishop for co-sponsoring the bill.
4:52:13 PM
CHAIR BISHOP closed public testimony and announced he would hold
SB 88 in committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 88 Fiscal Note DOLWD.pdf |
SCRA 3/24/2016 3:30:00 PM |
SB 88 |
| SB 88 Flick Fornia Presentation.pptx |
SCRA 3/24/2016 3:30:00 PM |
SB 88 |
| SB 88 Public Pension Resource Guide Case Studies of State Pension Plans.pdf |
SCRA 3/24/2016 3:30:00 PM |
SB 88 |
| SB 88 Public Comment.pdf |
SCRA 3/24/2016 3:30:00 PM |
SB 88 |
| Analysis for Tier Plans from 2013.pdf |
SCRA 3/24/2016 3:30:00 PM |
SB 88 |
| SB 88 Additional Public Testimony.pdf |
SCRA 3/24/2016 3:30:00 PM |
SB 88 |