Legislature(2007 - 2008)BELTZ 211
01/29/2008 01:30 PM Senate LABOR & COMMERCE
| Audio | Topic |
|---|---|
| Start | |
| SB183 | |
| SB196 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 183 | TELECONFERENCED | |
| *+ | SB 196 | TELECONFERENCED | |
SB 183-REPEAL DEFINED CONTRIB RETIREMENT PLANS
CHAIR JOHNNY ELLIS announced SB 183 to be up for consideration.
SENATOR KIM ELTON, sponsor of SB 183, explained that the bill
before them provides statutory authority to hire new state
employees into existing retirement tiers - Tier III for PERS
folks and Tier II for the TRS folks. The rationale is three-
fold. He stated that Tier III and Tier II give employees much
more benefits for essentially the same cost as the new defined
contribution (DC) tier.
He said the numbers provided by consultants show a very tiny
increase in PERS costs and a decrease in TRS by going to the
Tier III and Tier II plans. They already know that 401K type
plans earn on an average of 1 percent less than managed pension
plans and this change will make it easier to hire and keep good
public servants. He explained that the better benefit for the
same cost accrues largely because the previous PERS and TRS
tiers incorporate forfeiture. However, under the new defined
contribution plan over a short period of time, if an employee
leaves, they take not only their contribution to the retirement
system, but a portion and up to 100 percent of the employer
contributions as well. So, the employer dollars disappear from
the system and don't keep working for the benefit of those
employees who stay with the state and retire from it.
1:42:16 PM
SENATOR ELTON said another not much discussed advantage to Tier
III for PERS and Tier II TRS is that both have a cost of living
adjustment (COLA) for retirees who stay in the state. He pointed
out that the retirement economy in the State of Alaska is about
$1.5 billion annually. A lot of the retirees remain in the state
because of the COLA. The defined contribution tier doesn't have
a COLA, he suspected a lot of those retirement dollars would
start going out of the state as retirees leave because there is
no financial hit to their retirement checks if they do leave.
1:43:45 PM
SENATOR ELTON said they have heard repeated testimony that the
health retirement account in the defined contribution plan is
going to expire before many of the retirees expire. He also
explained that new state employees don't have the safety net of
social security that defined contribution folks have in other
private jurisdictions. So there is nothing between them and the
ground.
1:44:49 PM
SENATOR ELTON stated that a good safe pension is important for
recruitment and retention of good state employees and the state
is having that challenge right now. If the state keeps public
servants for only three or four years, they get good on the job
and then realize they can go to another jurisdiction and get a
safe retirement package - and in many cases they can get better
pay too. On top of that they might also have the unintended
incentive of getting a lump sum payment that is pretty generous
when they leave, because they are not only getting the money
they put into the retirement system back, they are getting the
money the employer put in as well. So a teacher, for example,
might decide after five years that he or she could make more
money teaching some place else where their retirement benefit
would be better and he could leave the state of Alaska with
enough money to make a down payment on a nice home. "That
really, really does make retention difficult. And it is a
problem that we're seeing even now even though we're only a
short way into the defined contribution plan."
He said this bill does not change some important good changes
that were made recently to the retirement system; it doesn't
change the new mandate for a second actuary that checks the work
of the first actuary. It does not change the requirement for
mandatory experience studies. It does not change the recent move
that takes some elected officials who make less than $24,000 out
of the retirement systems. It doesn't change the new ARM board
structure or the 2010 deadline to buy back a defined benefit
time.
1:48:47 PM
SENATOR STEVENS commented under the current defined contribution
plan, if the employee leaves the state's employment and goes to
another state they can take their employer contribution along
with their contribution, but asked if they can still do that
under his proposal.
SENATOR ELTON replied no; the defined contribution plan
introduced a new concept to the state's retirement system that
stair-stepped to allow an employee to keep 100 percent of the
state's contribution if he stays for five years; for less than
five years it's a percentage of that. This bill takes them back
to an already existing Tier III for PERS and Tier II for TRS.
One of the reasons the cost is a wash is because under those
tiers unvested employees are not entitled to any of the money
the employer has put into their retirement system. Therefore,
those dollars sit in the accounts and continue to accrue
benefits, but those benefits are distributed to those who stay.
1:49:54 PM
SENATOR BUNDE asked how much the current deficit is for Tier III
PERS and Tier II TRS.
SENATOR ELTON answered north of $8 billion; he added that the
defined contribution bill that was adopted is doing nothing to
reduce that debt. And frankly, he said, going back to Tier II
and Tier III probably won't either. He explained the system has
charge-backs to try and reduce the unfunded liability, but
moving from defined contribution back to the defined benefit has
no effect on how quickly it may disappear.
1:50:44 PM
VINCE BALTRAMI, President, AFL-CIO, supported SB 183. He said
the AFL-CIO represents about 60,000 members statewide and is
growing in number. US Department of Labor (DOL) statistics
confirmed a net gain in membership in 2007 of 6,000 new union
members in the state. He said that roughly half of the AFL-CIO's
membership is public employees in the PERS/TRS system. He said
he was not here to rehash whether it was right or wrong to have
passed SB 141, but to determine the best course of action moving
forward for the both in terms of cost to the state and benefits
to its employees.
Some think it is too early to say if switching to the defined
contribution system is working, but it's true that those DC
employees "must spend a lot of time to become expert investors
and make all the right decisions for any chances at having
enough money to live on in their retirement." Self-directed
investment choices have historically not worked out as well as
long-term sophisticated investment strategies of professional
actuaries and consultants who work every day to manage risk and
limit exposure. States that have chosen a defined contribution
system are having trouble with them and have switched back.
The State of West Virginia, for instance, found that after 15
years of having a defined contribution system that it cost
significantly more than a defined benefit would have and has
since returned to the defined benefit system. In this model 22
percent of the employees had under $73,000 in their account at
retirement; 76 percent had about $21,000 and on average those
accounts had under $34,000 - and this is for them to live off of
for the rest of their lives. He said if you take the higher
amount of $73,000 and figure 10 years that is $7,300 a year or
about $10,000 less than the federal poverty level.
MR. BALTRAMI said coupled with the obstacles associated with
qualifying for health care in the new system, there is no
question these issues must be redressed and he urged them to
pass SB 183.
SENATOR BUNDE asked if his new members were all state employees.
MR. BALTRAMI answered no; he didn't know what the break out was.
1:55:39 PM
ROB COX, President, Public Safety Employees Association,
supported SB 183. He said people are not interested in serving
as police officers these days. They have voluminous procedure
manuals, possible criminal charges, job security threats on
unfounded accusations and a court system that doesn't take their
word without audio and video backup.
It takes a great toll when society doesn't support them and the
Department of Public Safety (DPS) struggles to hire enough
troopers. Restoring benefits will make these jobs more
competitive and the public will be safer when public safety is
at full strength. He agreed that the defined contribution plans
might actually encourage officers to shorten their service.
2:00:08 PM
MR. COX said that portability also takes away the officers who
were trained here - taking additional dollars out of the state.
This means that Alaska will have to invest more in training
dollars than necessary to offset the loss.
2:01:02 PM
JEFF BRIGGS, International Association of Firefighters,
supported SB 183. He said he is a senior captain with the
Anchorage Fire Department with 15 years of experience. His
family came here in the 30s and he has two children. He is proud
of what he does for a living and his 13-year old son is proud of
him, too; but he has to steer him to a different profession, one
that has a more secure retirement.
Every time he responds to an emergency, he has to weigh the
risks versus the benefits and determine if he is willing to risk
his life or that of the young firefighter behind him. He said he
can't imagine raising a family and retiring on 40 percent of his
wage and he knows for a fact the Anchorage fire department has
trouble recruiting, training and retaining paramedic
firefighters and it's expected to get worse. It is projected
that people will begin job hunting in their fourth year and take
their small nest egg with them after they get their five-year
vesting. The department will become a training ground for other
departments across the nation.
Currently Alaska is the only state in the nation that mandates
its firefighters be on a defined contribution system. The
Anchorage Fire Academy currently has 32 new recruits; they are
not happy with the current system.
MR. BRIGGS said he believes the DC system is great for employees
who are not making a career out of their current jobs; but he
did not think it was an appropriate plan for career employees.
It has been proved over and over how employees are not able to
save enough to survive if saving is left to them; most aren't
even able to afford health insurance more than a couple of years
after they retire.
2:06:04 PM
LYDIA GARCIA, Executive Director, National Education Association
Alaska (NEA), supported SB 183. She said, "We believe the damage
of a defined contribution plan on Alaska's public employees will
be staggering the longer the DC plan remains in effect." She
said that NEA represents employees in both the PERS and the TRS
system.
She explained that the Teacher Retirement System (TRS) was
created in 1955. It was a needed tool then to recruit and retain
teachers in Alaska. Over 50 years later the need to recruit a
quality teacher to every classroom in Alaska has not diminished.
MS. GARCIA said the Alaska university system produces about 200
teachers per year, but it must hire about 900 teachers per year.
They constantly recruit from Lower 48. With passage of SB 141,
Alaska is viewed as having the worst retirement plan in the
nation; it used to be third. "While the salary slide is
damaging, the effects of becoming the only state in the nation
with no social security for teachers and a defined contribution
plan is unimaginable." There is absolutely no safety net for
teachers who spend a career in Alaska's classroom. This is
further exacerbated by the federal pension offset windfall
elimination provision, another issue.
She added that retirees spent $1.5 billion in Alaska last year
and about two-thirds of public retirees remain in Alaska and
contribute those dollars to the Alaska economy. One need only
look to West Virginia to see the ill effects of a defined
contribution plan from 1991 - 2005. When they finally made it
back to a defined benefit plan they found out two frightening
truths. The DC plan did not save money and retirees had an
average of only $33,000 in their accounts after as much as 14
years.
She said the NEA met recently for its 52nd annual delegate
assembly in Anchorage and they were unanimous in making the
return to a defined benefit pension system a top priority.
2:10:48 PM
KEVIN BROOKS, Deputy Commissioner, Department of Administration,
said the DC plan has been in effect for only 19 months and
during that time the state has continued to bring in about 4700
new employees in 2007 and another 3100 in 2008. He said they
need to continue watching this issue.
MR. BROOKS mentioned the biggest thing they can't lose sight of
is the unfunded liability of $8.6 billion for the pension
system. He reported that the administration is taking
significant steps to pay it off in 25 years.
2:13:58 PM
He explained the good thing about the DC plan is that it was
fully funded from day one; and the unfunded liability is totally
attributable to the DB side of the equation. When the bill
passed establishing the DC tier, the administration surveyed
public employers and one of the dominant things they heard was
that they needed budget certainty. PERS contribution rates were
projected to go to 40 percent for employers and the TRS rates to
60 percent and attempting to pay those rates devastated budgets.
Those payments have now been capped at 22 percent with the state
picking up the additional amount. Stability was the primary
motivator behind the DC plan and it has accomplished that.
He summarized that the retirement system needs to be sustainable
and not all DC plans are the same. Attempts were made to make
the plan as attractive as it could be. He also pointed out that
the state has an SBS plan that offsets the lack of social
security.
2:16:42 PM
SENATOR BUNDE asked if the state had picked up 7800 new
employees since defined contribution went into effect.
MR. BROOKS replied those numbers are new employees enrolled in
the DC plan; they are still bringing back old DB members as well
for a total of 12,200.
SENATOR BUNDE asked how many left and took their money with
them.
MR. BROOKS answered that he would get that figure for the
committee.
CHAIR ELLIS said the portability was used to convince
legislators it was a good thing and that young people would be
attracted to it; and it drove him crazy. He wanted to attract
quality folks and have them make a career here. The DC plan
might serve the individual interest, but it doesn't serve the
state to train people and have them move away. He asked if the
administration feels the same way about the newly trained people
leaving.
MR. BROOKS replied that it has been trying to determine the
number. He said that portability is a two-way street. It
provides someone coming in from another jurisdiction to put an
existing 401K into our system and use the state's investment
services.
CHAIR ELLIS asked again if he would provide those numbers.
2:21:12 PM
SENATOR HOFFMAN asked if he had seen problems with recruitment
in some departments as a result of the [DC] plan. The
administration has said the primary reason is salaries -
especially in the oil and gas industry.
MR. BROOKS replied that the administration has looked at
recruitment and retention and it can't say the
pension/retirement system is the sole problem. Recruitment
practices need to be looked at as well and they are trying to be
strategic in recruiting folks. It probably does have some
impact, but not across the board. Engineers and oil industry
people are fiercely competitive.
SENATOR HOFFMAN said when the state is recruiting people, those
people look at the whole package and if they are compensated
enough in salary they can give up some in benefits. So it's hard
to evaluate. He asked if the administration was monitoring the
7,000 new employees with interviews so it could get a handle on
why others are leaving the state. We don't want to end up like
West Virginia, he said.
2:26:20 PM
MR. BROOKS replied that is exactly what the administration is
trying to do. West Virginia had very low employer contributions
and very little education was provided to the employees on what
they should do with their funds. He also didn't know what the
medical provisions of that plan were.
CHAIR ELLIS observed that what Governor Palin says about good
retirement and health benefits and retirement with dignity seem
to be at significant odds with the position of the department on
defined contribution. While he has been gratified by some of the
things she has said, it doesn't comport fully with the reality
of defined contribution and he worries about that in the future.
2:28:52 PM
SENATOR STEVENS said they are all shocked by the $8 billion
liability and by going to the DC system they were assured that
will not happen in the future. If they go back with this plan,
he asked, could there be a liability.
MR. BROOKS replied that the department wanted to investigate
that issue with its actuaries and see what would happen if this
bill was adopted.
2:30:34 PM
GARY MILLER, Retired Public Employees of Alaska, said all of his
points had been covered.
2:30:48 PM
JIM DUNCAN, Business Manager, Alaska State Employees Association
(ASEA), supported all the previous testimony saying it had hit
all his major points of concern. He represents 8500 state
employees plus some municipal employees. They have a 20 percent
turnover/year; so he estimated that about 2,000 - 2,500 members
are now in the DC plan (since July 1, 2006).
In moving to the DC plan, he testified on three major concerns;
that it would not provide a fair and secure retirement system;
it wouldn't give retirees access to a sufficient retiree medical
budget; and it wouldn't help recruitment and retention. He
believed all three of those were happening.
2:32:15 PM
He wanted to address a couple of points the deputy commissioner
made; one is that the DC plan is fully funded. He explained that
in 1996 when the legislature passed a Tier III retirement
system, he didn't necessarily agree with all the changes; but
the reason for doing it was to be sure the plan could be fully
funded "and Tier III did that." The real unfunded liability came
out of the Tier I and II portions of the plan - not Tier III. He
agreed with Senator Elton who said figures show that the defined
contribution plan may be just slightly less expensive or cost
the same as Tier III and that returning to a Tier III plan would
provide a fully funded secure plan.
He also wanted to clarify that SBS is not part of a defined
benefit plan. He said the public employees in this state who
don't have social security if they do not have a defined benefit
plan. They are taking all the risk on all of their retirement
and that's not right.
He said he had been an employer in the past and the deputy
commissioner talked about how one of the goals was to bring
stability to the employer, and he could understand that desire.
But he believed that Tier III, being a fully funded plan, would
provide that over time. "But to bring stability to the employer
and shift the entire risk to the employee I don't believe is the
correct way to go - and that's exactly what the defined
contribution plan has done." He said you only need to look at
what happened to the stock market over the last couple of weeks
to understand what can happen to folks' retirement. It may take
years to recover.
2:35:54 PM
He concluded that the administration seems to say the jury is
out and that they haven't really had a chance to evaluate the DC
plan, but it should have started doing exit interviews and
interviews with folks who have just been hired immediately, not
just now. He had been the commissioner of the Department of
Administration for two and half years and knew that it had the
staff to act on priorities. He hope they would urge the DOA to
make it a priority to evaluated the DC plan and its impact on
recruitment and retention and evaluate it on its lack of a good
secure retirement and health plan for retirees.
He said Administrative Order 37 was issued recently to evaluate
recruitment and retention issues for state employees; he would
have thought a part of that effort would have been to look at
this. However, he was concerned that he received an August 2007
newsletter from the Division of Retirement and Benefits that had
a list of retirement issues and bills it was evaluating and
following. One bill was missing - SB 183, which told him the
division had not identified it as an issue at that time.
2:38:24 PM
SENATOR HOFFMAN said the state had the largest savings on health
care under SB 141 [that established the DC plan]. He was
inferring that Mr. Duncan's employees aren't happy with their
health plan.
MR. DUNCAN replied that the employees he represents, once they
have realized and fully understood the kind of plan they will
have at retirement, will not be happy. His job is to be sure
that those folks when they retire will have a secure retirement
and have access to health care. He agreed that the rising cost
of health care is the major concern. However, he repeated, Tier
III was not causing it; it was the solution.
CHAIR ELLIS said they would hold SB 183 for further
consideration.
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