Legislature(2007 - 2008)BELTZ 211
03/26/2008 01:30 PM Senate JUDICIARY
| Audio | Topic |
|---|---|
| Start | |
| Alaska Public Offices Commission Confirmation | |
| SB235 | |
| SB183 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| += | SB 235 | TELECONFERENCED | |
| + | SB 183 | TELECONFERENCED | |
| + | TELECONFERENCED |
SB 183-REPEAL DEFINED CONTRIB RETIREMENT PLANS
CHAIR FRENCH announced the consideration of SB 183 and noted
that he is working from work draft Version \L, 25-LS0566\L,
Wayne.
SENATOR KIM ELTON, Sponsor of SB 183, said the bill has a simple
premise of taking the state back to hiring people in the Tier
III PERS system for state employees and Tier II TRS system for
teachers. It doesn't get rid of all the changes that were
adopted in the change to a defined contribution plan, but it's
the largest effect of this bill. Tier III PERS and Tier II TRS
offer much better benefits to public employees at about the same
cost. The fiscal note concludes that the cost for Tier III and
Tier II in the PERS/TRS system is roughly $5.00 a month more per
public employee or teacher. He would argue that the cost is
probably less than that for several reasons.
First, the nature of a pooled system is much easier. The kinds
of investment that are made for a defined benefit plan aren't as
conservative as those often made for defined contribution plans.
Administratively it's easier to manage a pooled account than
many individual accounts. Defined contribution accounts are
individual, not pooled. Studies by other states and actuaries
suggest that the cost for managing a defined contribution plan
(DCP) is about three times the cost of managing a defined
benefit plan (DBP). Another important issue that needs to be
accounted for when comparing the plans is forfeitures. In the
DCP an employee who leaves before they are invested in the state
can take their money and the money the state contributed. DBP
employees cannot do that. When a DBP employee leaves before
vesting, the employer dollars are forfeited. They stay in the
fund and continue working for all the other employees that stick
around. That's a significant difference between the plans and a
significant savings for the state. Anyone who suggests that
switching to the DCP has reduced the unfunded liability or that
by switching it will go down is wrong, he said. It's still a
liability and the state still has to pay for it. He believes
that the unfunded liability might become more difficult to
control because of the forfeiture issue. A completely different
system has been created; it isn't a drag on the Tier III/Tier II
system and it isn't a boost. It's different.
1:55:11 PM
SENATOR ELTON said that what this state did was unusual. Eight
other states have given employees a choice between DBP and DCP,
but Michigan is the only state that's gone entirely to defined
contribution. The difference between Michigan and Alaska is that
Michigan employees contribute to the social security program so
they have that defined benefit safety net below their defined
contribution program. That doesn't exist for public employees in
Alaska.
He relayed that employers have begun to say that without a DBP,
recruitment for state employees becomes more difficult because a
professional working in the private sector can make more money.
What's always been attractive to potential public employees is
that they would get a defined benefit program for retirement
that's better than in the private sector. That is an inducement
for public service even though pay may be lower. That inducement
has been taken away with a defined contribution plan. No
retirement benefit is gained by accepting a public service job
here in Alaska. Even worse, the state has set up a situation
where an employee can begin their professional career in Alaska
and then after five years, they can take their money and
transfer to a public service jurisdiction with a defined benefit
plan.
1:58:20 PM
SENATOR ELTON said when he was young he never though about
retirement, but after he got married he began to look ahead.
What Alaska has done is tell smart young people that once they
get their on-the-job training here, they can take the money they
contributed and their employer contributed and move on to a
defined benefit program that protects their retirement. Under
the DCP there is not a provision for a cost of living allowance
(COLA) for retirees, but Tier I, II, and III retirees that stay
in the state get that added benefit. That encourages retirees to
stay in the state and spend their money. It creates an economy
that's worth about $1.5 billion per year. That economy might not
go away, but without protection it's at risk.
2:00:31 PM
SENATOR ELTON said one thing that happened when the legislature
talked about moving to a DCP was that it was couched in terms of
the DBP being one very expensive bucket. He admits that it was
an expensive bucket, but not because of PERS Tier III or TRS
Tier II. It was expensive because of PERS Tier I and Tier II and
TRS Tier I. Over time the state reduced the benefits for
incoming employees because of the great expenses associated with
those early tiers. It was to the benefit of those who advocated
for the DCP to talk about DBP being more expensive, but that
obscured an essential truth. That essential truth is that the
new DCP creates no more savings to the state than would have
accrued to the state if it had stayed with PERS Tier III and TRS
Tier II. We can quibble about minor amounts, but it's
essentially a wash.
2:02:33 PM
SENATOR ELTON said this bill doesn't change the good things that
were done. It doesn't change: the requirement for a second
actuary, the required mandatory experience studies, the ARM
Board structure, the provision for elected officials making
$25,000 or less, or the 2010 deadline for earlier tier employees
coming back into service to buy back their time.
He noted that the proposed CS makes one substantive change in
Sections 4, 5, and 28. It shifts responsibility for making the
determination for when the funds are healthy enough to make an
inflation-adjustment payout to retirees from the commissioner of
administration back to the ARM Board. It also contains a few
other technical changes. It updates the conversion election at
the end of the bill and makes minor adjustments to accommodate
SB 123, which was the big fix-it bill for DCP. Also it uses some
different kinds of language; the original bill refers to the
former AS 14 and this refers to provisions of AS 14 for the
citation. That flexibility is important to retain and protect a
few provisions, such as forfeiting defined contribution benefits
when convicted of corruption.
2:05:59 PM
CHAIR FRENCH asked how this bill treats Tier IV employees.
SENATOR ELTON explained that defined contribution employees will
have the option of changing to the defined benefit plan as
either a PERS Tier III or TRS Tier II.
CHAIR FRENCH asked if their defined benefit amount begins to
accrue when they make the transition, or would they receive a
benefit for the service accrued.
SENATOR ELTON replied those employees will be held harmless, but
the commissioner of administration will need to make some
adjustment to make sure that the transition doesn't hurt either
the state or the employee.
2:07:03 PM
CHAIR FRENCH asked if the transition will be open ended.
SENATOR ELTON replied the deadline is 90 days, and it's
irrevocable.
SENATOR THERRIAULT asked why the language that talks about when
the fund is healthy enough to give an additional benefit was
struck from Sections 4 and 5.
2:07:44 PM
JESSE KIEL, Staff to Senator Elton, said the change in Sections
4, 5, and 28 dropping the 105 percent standard isn't new in the
CS; it was in the bill as originally introduced. They're known
technically as the ad hoc retirement pension adjustments. When
the balance of the trust fund is healthy enough, these allow the
retirees' pension benefit to fully keep up with inflation. SB
141 inserted a 105 percent standard, which is generally
considered to be an unattainable and undesirable result. A great
many actuaries and pension consultants consider maintaining a
funded ratio of 90 percent to be best practices; not 100 percent
and certainly not 105 percent. This change, combined with
returning administration to the ARM Board, would allow those
with fiduciary duty to the fund to make the decision about when
the trust funds are healthy enough.
2:09:40 PM
SENATOR THERRIAULT said he can understand that 105 percent might
be unattainable, but he isn't sure he would agree to drop any
standard and turn the decision over to the ARM Board.
SENATOR ELTON said the difficulty might instead be who sets the
standard. He's knows he's uncomfortable with 105, but he can't
say with certainty that 90 is too low. Given the experience in
this state he anticipates that the ARM Board and its advisors
will have a better idea. Experts who have a better understanding
of the dynamics of investments and how to protect pension plans
are better prepared to do this than the legislature by setting a
firm number in statute.
2:10:54 PM
SENATOR WIELECHOWSKI asked if public employees in any other
state have neither social security nor a defined benefit plan
through the state.
SENATOR ELTON relayed that eight states either have a choice
between DBP or DCP, or have a hybrid. The only other state that
has a straight DCP for newly hired employees is Michigan, but it
does have social security as a safety net.
2:11:50 PM
CHAIR FRENCH asked the source of the data that indicates that
returning to DBP is would cost about $5.00 more per employee per
month.
SENATOR ELTON said that came from the Department of
Administration (DOA). Although that's not a large cost, he
assumes the cost will be closer to parity or less because
defined contribution plans, by nature, are more expensive to
administer. However, he's willing to give DOA the benefit of the
doubt since the difference is miniscule.
CHAIR FRENCH clarified that this doesn't provide more or less
benefits than the old PERS Tier III and TRS Tier II.
2:13:51 PM
SENATOR ELTON said there is nothing new being created. The
administrators are already managing a Tier III and Tier II
system. We need to have a discussion about the health care
benefit because there is almost universal acceptance that health
benefits will end before the retiree dies. That creates a
problem for the retiree and it shifts the costs to other parts
of government. This restores a health plan that will last as
long as the person lasts.
SENATOR WIELECHOWSKI pointed out that for Tier II and Tier III
the state only pays for the few years until Medicare starts at
age 65.
2:15:51 PM
SENATOR ELTON said that is his understanding.
JERRY PATTERSON, Past President, NEA-Alaska, said he will
address two aspects of the DCP. First is portability. The DCP
has been touted as being very good for portability, but there
was portability under the DBP. Under the DBP any teacher could
take their retirement to move between school districts. They
could also move to PERS and combine service for a benefit. Up to
10 years of teaching service could be brought in from other
states as long as it was paid for. They could pay for it with
cash, a payroll deduction plan, or by rolling their 401b, 403b
or IRAs into the retirement plan. So there was portability.
These measures were provided to encourage teachers to stay in
Alaska and teach until retirement. In comparison the DCP makes
it easy for a person to take the money and run, but the Windfall
Elimination Provision (WEP) of the social security act levies a
heavy penalty for doing that. Any social security that a person
earns is subject to a reduction of up to 60 percent. The test
was when a state employee vested. State employees vested in five
years and teacher vested in eight years and so for that period
of time they weren't subject to the WEP. Under SB 141 a teacher
or public employee became subject to WEP when they came into
service because the law says that they are vested upon
employment. So if a person is looking at going to work for the
state his view is that DCP doesn't enhance portability
whatsoever.
2:19:57 PM
MR. PATTERSON said the second aspect of the DCP is the potential
additional wage cost to school districts. He knows that PERS
Tier III is slightly advantageous and TRS Tier II is slightly
more costly than the DCP, but when he was on the TRS Board there
were about 300 retirements each year and the average age of the
retiree was 53.5. Under the DCP a person must be age 60 to
collect the medical benefit so a teacher would have to put in an
additional seven years of service to gain that medical benefit.
When you calculate the difference between the high-end salary of
an experienced teacher opposed to a beginning teacher's salary,
there is a considerable cost to the state to keep those teachers
in the additional years. Over several years the aggregate cost
rises to between $50 million and $70 million each year, he said.
2:22:14 PM
MR. PATTERSON said you can't just compare costs of TRS Tier II
to the DCP, you have to compare the costs of how the DCP will
impact retirement decisions of the people involved. It appears
that the DCP will increase the labor costs of school districts
considerably. That will far outweigh any savings accrued from
the DCP.
JIM DUNCAN, Business Manager, Alaska State Employees Association
(ASEA), Juneau, said he represents about 8,500 state and
municipal employees. He is also here on behalf of the Alaska
Public Pension Coalition (APPC), a group of 16 unions and
associations statewide that have come together to support SB
183. He noted that he provided the presentation he gave to the
last committee. He highlighted four reasons why APPC supports
returning to a defined benefit plan. First, the DCP does not
provide a secure pension upon retirement. Public servants should
have a good standard of living in their retirement and have a
secure pension. The DCP will not give a secure pension and those
employees won't even have a social security benefit. Second is
the lack of medical coverage to retirees under the DCP. That is
important to all, but the DCP doesn't provide that. To access
retiree medical, individuals have to retire directly from the
system and they have to pay 100 percent of their premiums until
eligible for Medicare. Although they can pay the premiums out of
the health care reimbursement account, that account will likely
expire within two to three years. But the most onerous provision
is that the state may terminate or change the medical plan at
any time.
2:26:49 PM
MR. DUNCAN said the third reason to return to a DBP is the
increasing problem of recruitment and retention of career public
employees. The state is touting the mobility of the DCP by
encouraging people to come and get their DCP and telling them
that when they leave they can take their money. That doesn't
encourage career state employees and that's a step backward.
The fourth reason is that there is no overall cost saving. The
underfunding was really being generated by PERS Tier I and TRS
Tier II and the legislature addressed the issue years ago by
moving to PERS Tier III and TRS Tier II. The most recent
information from Buck Consultants dated February 11, 2008 shows
that the DBP for TRS Tier II costs about three percent less than
the DCP and PERS Tier III costs about three fourths of a percent
more so there wasn't an overall cost savings. That information
is based on an estimate as of June 30, 2005. There will be
estimates as of June 30, 2007 in the next few weeks.
2:29:44 PM
MR. DUNCAN said there have been no cost savings and it will not
be more costly to return to a DBP. The DCP doesn't have a secure
pension, it has inadequate medical coverage, it doesn't
encourage recruitment and retention of career employees, and it
doesn't save money. He said he hasn't reviewed the CS, but he
believes that his group would support it. Changing the decision
making about the health of the fund from the DOA to the ARM
Board is appropriate.
2:31:08 PM
SENATOR THERRIAULT noted that years ago he attended a Local 71
meeting and afterwards a gentleman relayed that after working
for the state for 20-25 years, he was sitting on $500,000 in
SBS. He asked how that figures into the discussion here.
MR. DUNCAN explained that the defined contribution system of SBS
was put in place when the state opted out of the defined benefit
system of social security. Teachers don't pay into SBS. So when
someone retires and is able to take their SBS at age 59.5, they
have an amount based on investment returned. Some folks probably
did better than others with their SBS, but they had to make
individual decisions and pay attention to their investments. Not
everyone pays that much attention or has the expertise to do
that. What the SBS system did is shift all the risk to the
employee. That was compounded when the state went to a defined
contribution system for all employees hired after July 1, 2008.
2:33:21 PM
SENATOR THERRIAULT asked if he has any evidence that it's more
difficult for the state to attract employees than private sector
firms.
MR. DUNCAN said there isn't any firm data and the state is not
doing exit interviews, but over the past year the actual state
employment turnover rate has increase from 23 percent to 30
percent. People come and they leave and he attributes much of
the 7 percent increase to the change that became effective July
1, 2008. He isn't saying that wages don't have something to do
with it, but he believes the data shows that the defined
contribution plan doesn't encourage employees to stay. In the
private sector most folks have the defined benefit of social
security plus a 401k type retirement offered by their employer.
2:35:06 PM
PAT SHIER, Director, Division of Retirement and Benefits,
Department of Administration (DOA) said the administration
opposes the passage of SB 183. It shifts 100 percent of the risk
back to the employer along with future cost increases. The
retirement plan isn't yet mature because more people are being
added to the state's health plan than are leaving. There was a
5.4 percent increase in the retiree population of the health
plan and a slight decrease in the active population. That is
just for the select benefits plan, it doesn't include the union
trusts. In spite of assurances to the contrary, one of the prime
drivers is currently off limits to the administrators of the
retirement plan. That is the health care plan for Tiers I, II,
and III. Currently for retirees it's a $150 deductible plan with
certain co pays that are fairly rare in the market place, he
said.
2:36:47 PM
CHAIR FRENCH commented that that deductible isn't part of his
plan.
MR. SHIER said part of the issue is that that is stuck in time.
There have been attempts to modify and modernize the plan to a
net no loss, but some individuals decided that that was a
diminishment and the court agreed. He believes that any more
time spent to re-describe the retiree plan in that environment
is a waste of time. While the department is looking at other
options going forward, such as an optional retiree health plan
that may include preventative care, it can't really do anything
to modernize the retiree health plan. Any addition to a defined
benefit plan may increase the actuarially assumed unfunded
liability because the employer has all the risk.
SENATOR WIELECHOWSKI referred to statistics in the bill packet
showing high and increasing turnover in the executive branch, in
particular 40 percent in public safety, and asked if he
disagrees with the figures and what the administration will do
to resolve the issue.
2:39:08 PM
MR. SHIER said he hasn't looked at the underpinnings of the
figures, but he has no reason to doubt them. The administration
is aware that it is facing issues with recruitment and retention
just as other employers are. The state is not unique in having
this challenge.
SENATOR WIELECHOWSKI asked if the loss of the DBP is having an
impact on the administration's ability to retain and recruit.
2:40:24 PM
MR. SHIER replied the record shows that people come and go under
both plans. Exit interviews aren't conducted so he can't say why
in any case.
SENATOR WIELECHOWSKI asked if the administration would support
public employees contributing to social security.
MR. SHIER said he could find out. That same inquiry came in
earlier in the year and was passed on to the governor's office.
He didn't see the response.
2:41:31 PM
SENATOR THERRIAULT said that the Tier I and Tier II system
wasn't set up to hand the state a $9 billion hole to fill, but
that's what happened. Isn't there that potential with a defined
benefit system?
MR. SHIER said with the DBP, the entire liability is with the
state. Also, under SB 125 anything over 22 percent, which is a
component of the normal cost rate and past service cost, is
entirely the state's responsibility.
SENATOR WIELECHOWSKI asked if he has seen the letter from Buck
Consultants.
MR. SHIER said he has a copy.
2:42:48 PM
SENATOR WIELECHOWSKI asked if the administration disputes the
figures about the cost for maintaining status quo or going back
to defined benefit.
MR. SHIER said the administration doesn't dispute that that's
the normal cost estimate going forward. He said he called Buck
Consultants for an explanation of those figures when they came
through because the defined contribution plan appeared to be
more expensive. He was told that this year there was good
performance in the stock market and the state experienced an
extraordinarily low 2 percent increase in the retiree and active
health plan. We're happy about that, he said, but that creates
great volatility in the short run because those good experiences
are part of the basis for the foundation from which the actuary
looks forward to determine normal cost. We know that it will be
different next year, possibly by as much as 10 percent.
SENATOR WIELECHOWSKI asked if any change in statute would gain
the administration's support for returning to a defined benefit
plan.
MR. SHIER said he'd prefer to have that discussion in a broader
audience including the commissioner of administration and the
governor's office. In conclusion he said he'd like to mention
that other options like deferred compensation are available,
which can be turned into annuities. All employees are encouraged
to attend informational classes and doing so is considered time
at work. "We're hopeful for the future," he said.
2:46:59 PM
SEAN RICE, representing himself, said he works with the
Fairbanks public works department. He is not on the PERS program
anymore, but he works closely with the Fairbanks police and fire
department. When the defined contribution issue came up there
was a lot of gripe and if he had to make that choice he probably
wouldn't work with the city any more. Speaking as a worker he
wants to work until he retires and then stay retired. He hears
the police and fire departments are having a hard time getting
positions filled because of the defined contribution plan.
2:49:31 PM
FRANCIS McLAUGHLIN, Regional Planner, Municipality of Anchorage,
said he was born and raised in North Pole and went outside for
college. He worked as an urban and regional planner down south
and returned to Alaska to fulfill his career goal. He was hired
by the Anchorage planning department and he works with seven
planners, four of which qualify for retirement right now. If
they retire, there will be a crisis in terms of loss of
knowledge and experience. His boss wants him to make his career
in Fairbanks, but he won't unless PERS Tier IV is repealed. He
will work for four more years to get 100 percent vested, and
will return to work in the private sector where he'll receive
more pay and essentially the same retirement benefits. Or he'll
move to a state that offers a defined benefit plan and
guaranteed retiree health insurance. He has no incentive to
continue working for the Anchorage planning department because
he has a 401k rather than a pension plan and the medical benefit
is no good. If he works 35 years, he'd still need to buy health
insurance for the rest of his life and pray his health
reimbursement didn't run out. That isn't a risk he's willing to
take. Tier III employees don't have to make that choice since
they receive health insurance in retirement after working for 10
years. SB 183 is about being fair to all civil service employees
over the long term. It's good policy and it's the right thing to
do.
2:53:29 PM
SARAH GROSSHUESCH, Public Employee said she moved to Alaska
about five years ago. She taught in the Anchorage school system
for four years and was a member of the TRS system. She went back
to school and in October 2006 began a career in public health
with the Municipality of Anchorage. She's now a Tier IV PERS
member and her four years of service is trapped in the TRS
system. Previously the systems were compatible and she would
have vested last year with five years service, but they are no
longer compatible. When she moved to Alaska in 2002, she bought
a house and started a family and now she is deciding whether to
stay or move to another state. She can make more money in the
private sector with the same benefits that Alaska offers, but
that doesn't have the same draw for her as public service. She
was trained in Alaska by the Anchorage school district and the
University of Alaska graduate program, but she has to look out
for her family's well being so she may have to take her
knowledge to the Lower 48. Her research indicates that 90
percent of state and local government employees are covered by
defined benefit plans so there's lots of opportunity there. She
would rather stay in Alaska, but it's likely she'll have to go
elsewhere. She asked the committee to support SB 183.
2:56:49 PM
LARRY WEISS, Retired Research Professor, Executive Director for
the Alaska Center for Public Policy, and Editor of the Alaska
Health Policy Review, said he when he looked at what SB 141 did
to retiree health plans he was taken aback. He supports SB 183
because a number of obstacles were put up to make employees get
off the health plan early or force them off altogether.
Employees must work longer and retire later, they have to retire
directly from the state, and regardless of length of service
they have to pay the full premium until they're eligible for
Medicare. He noted that he submitted a paper that discusses his
points in more detail. The new health plan is insufficient in a
number of areas, but in particular it says the retiree health
plan can be changed or terminated at any time. Sec. 14.25.490 -
Amendment and termination of plan - says, "The state has the
right to amend the plan at any time and from time to time, in
whole or in part, including the right to make retroactive
amendments… ." It further says that at its discretion it may
terminate the plan in whole or in part without liability. This
does not serve the retirees of Alaska or the state. He supports
SB 183 to reinstate a far more effective and efficient health
care system.
3:00:21 PM
CHAIR FRENCH noted that the committee had received a letter from
Marie Darlin with AARP.
PAT LUBY, Advocacy Director, AARP-Alaska, said AARP strongly
supports SB 183. Some and perhaps many public employees outlive
their defined contributions; 29 percent of women who live to age
65 reach age 90 and 18 percent of men who live to age 65 will
live to age 90. AARP doesn't believe people can save enough to
last 25 years, particularly considering inflation. The DCP has
no annual COLA, and without the social security defined benefit
there will be police officers, firefighters, and teachers who
will outlive their contributions and end up on public
assistance. They deserve better than that.
JEFF BRIGGS, Firefighter from Anchorage, said he supports SB
183. Firefighters deserve a secure defined benefit retirement
plan in return for the years of risking their lives and health
serving their community. Alaska is the only state that requires
its firefighters to be in a defined contribution system. A few
other states offer a DCP, but employees have the option of
selecting a DBP. It's expensive to recruit and train new hires
and the cost for that is paid by municipal tax payers. If this
system isn't fixed, Anchorage tax payers will continually pay to
train new hires rather than using those same tax dollars to
expand coverage and purchase new equipment. Every new hire he's
asked would prefer a defined benefit plan. He doesn't foresee an
event such as 911 taking place in this state, but it shouldn't
take that to show the state the need to take care of its first
responders. He urged the committee to pass SB 183.
3:03:26 PM
CHAIR FRENCH closed public testimony and announced he would hold
SB 183 in committee for further work.
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