Legislature(2009 - 2010)BELTZ 211
02/26/2009 01:30 PM Senate LABOR & COMMERCE
| Audio | Topic |
|---|---|
| Start | |
| SB84 | |
| SB23 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 23 | TELECONFERENCED | |
| + | HB 104 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| = | SB 84 | ||
SB 23-REPEAL DEFINED CONTRIB RETIREMENT PLANS
CHAIR PASKVAN announced SB 23 to be up for consideration.
1:46:18 PM
SENATOR THOMAS moved to bring CSSB 23(L&C), version 26-LS0172\P,
before the committee for discussion purposes. There were no
objections and it was so ordered.
1:48:35 PM
SENATOR ELTON, sponsor of SB 23, explained the CS adopts the
approach that was suggested by one of the committee's
professional testifiers, Mr. Michael Lamb. It allows those
potential employees who come into the system and who already are
vested in a defined benefit (DB) system exclusive of social
security to choose the existing defined contribution (DC) plan
that the state now has for everyone.
SENATOR BUNDE said it's his understanding that someone who has
worked in the private sector and qualifies for social security
and then comes to work for the state could not choose the DC
plan.
SENATOR ELTON answered no; he was trying to suggest if someone
came with a DC plan and social security, that the social
security would not be defined for this purpose as a defined
benefit.
JESSE KIEHL, aide to Senator Elton, said the biggest single
change in the CS is the repealer section that got a whole lot
shorter. The bulk of the statutes that would no longer be
deleted related to the DC retirement plan.
1:50:35 PM
He said a number of sections, 1,2,5,7, and 10 are technical and
clarify that DB statutes do not apply to anyone who is already
in one of Alaska's DC retirement plans.
1:51:22 PM
The more substantive sections, sections 3 and 4, are unchanged
from the original version; they repeal the requirement that
before a DB payment can be fully inflation-adjusted the funds
must be 105 percent funded. They also shift the responsibility
of making the decision whether to grant an inflation adjustment
from a plan administrator to the Alaska Retirement Management
Board, which has investment experts on it.
Section 6 on page 3 almost perfectly mirrors section 11 for the
TRS. It governs which new hires are permitted to choose the DC
retirement plan. These are new employees who are fully vested in
a DB system other than PERS and TRS, like a military retiree. It
might help public employers recruit new people. The choice must
be made within 60 days.
The only other change in the CS is found in the repealer
section, section 12, on page 7, 1ine 15, that repeals two
sections of session law that are scheduled to go into effect in
2010. These sections would have provided that under no
circumstance can an employee who refunded his contribution from
the DB system and who returns to work on or after July 1, 2010
participate in a DB plan.
1:56:04 PM
SENATOR BUNDE asked why they chose to exclude those who receive
social security as qualifying for a DB.
MR. KIEHL answered the two primary thoughts underlying that
decision in the CS were the government pension offset and
windfall elimination provisions that dramatically reduce what
social security will pay someone who has a DB pension. Another
thought is the availability of DB health coverage which social
security does not provide.
SENATOR BUNDE disagreed as someone who has qualified to get
social security; it's not a dramatic decrease in the amount of
social security.
1:57:57 PM
CHAIR PASKVAN asked if this CS advances sound public policy.
SENATOR ELTON responded that the changes in the CS "are not
toxic to the bill," and it goes "an awful long way" to solve the
recruitment/retention issues they are beginning to see with the
sole DC approach.
2:00:10 PM
SENATOR DAVIS asked what the department felt about the CS.
2:00:26 PM
KEVIN BROOKS, Deputy Commissioner, Department of Administration
(DOA), thanked the committee for its diligence in working
through this bill, but the administration had not yet taken a
position on it. Their focus is on what the costs will be and he
will brief the governor.
2:02:21 PM
MR. BROOKS pointed out that actuarial costs are an averaged
figure, and that giving new employees a choice creates a
different dynamic for the actuaries, because certain age groups
will pick one plan over the other, something called "adverse
selection." The normal costs (the cost that is required to
contribute to accrue enough money to pay an earned benefit) for
a 25-year old are small, but for someone who is older they are
higher. So you end up with a result "that is not one-to-one."
That change will take more actuarial review. He also needed
clarification on what part of the plan was closed on July 1,
2010.
2:05:10 PM
MR. BROOKS also commented that retirement systems, pensions and
health care plans are very complicated, and you have to be
exceedingly precise with questions to really "tease out" the
answer. He heard some mention that Nebraska and West Virginia
have gone back to a DB plan; but he found that they did that for
the pension only, not for health care. So, as they contemplate
these changes, he urged them to be precise in the questions they
are asking and the comparisons they are making. He also assured
them that they are still "looking hard" at the unfunded
liability and what impact there might be on that. Some estimates
indicate it has grown to over $9 billion now.
2:08:04 PM
He reported that the recruitment and retention issues have been
taken seriously, and the governor created a task force through
Administrative Order 237 to look at it. The administration has
negotiated responsible contracts and passed HB 417 last year
that adjusted pay for many non-covered employees. So, they are
looking at pay and alternate work weeks. Data has indicated that
the new tier has 7,200 new employees. In the TRS system out of
11,000 employees, 2,100 are active in the DC plan. So, in 32
months, 20 percent of active workers are in the new tiers. So,
data does not support that it's now harder to hire people across
the board.
The demographics of the workforce are very interesting. The
average for PERS is 45 years old with 10 years of service; the
average for TRS is 45 years old with just under 12 years of
service. The State of Alaska as an employer has an average of 45
year olds with 9 years of service.
2:11:03 PM
SENATOR MEYER joined the committee.
2:11:39 PM
SENATOR BUNDE asked if the fiscal note applies to CS.
MR. BROOKS replied no.
SENATOR BUNDE said employer rates are capped at 22 percent, and
it is likely that the unfunded liability for school districts
and municipalities will go up, and that will continue to be a
state responsibility.
2:12:43 PM
MR. BROOKS said that was accurate. Since the passage of SB 125,
the state assumed the liability for anything over 12.56 percent
for TRS and 22 percent for PERS. Last year's was a combined $400
million.
2:13:31 PM
CHAIR PASKVAN asked if the $16-million expenditure for 2012 is a
worst-case scenario when everyone elected into the DB system.
MR. BROOKS replied they made the assumption that all members
would transfer into the DB system.
CHAIR PASKVAN said he was trying to recognize that the document
references a 4 percent annual wage increase; so when one
references the $16 million in 2012, it's in relation to a $3
billion gross payroll.
2:15:17 PM
SENATOR BUNDE asked Mr. Brooks to take a message back to the
commissioner that he is receiving lots of emails on this
subject, and some of them are from state employees on state
computers. It's inappropriate to use state resources to lobby
state legislators.
MR. BROOKS said this issue came up in the last couple of weeks;
it wasn't about the use of email, but rather about employees
testifying on legislation. The administration encourages that
right of civic participation. But word has gone out that people
do it on their own time and that they identify themselves and
who they are representing accurately.
PAT SHIER, Director, Division of Retirement and Benefits,
Department of Administration (DOA), said on the recruitment and
retention issue that the division looked at a four-year period
of time with the change from DB to DC right in the middle. They
looked at all the people who were brand new public employees in
the PERS system who came to work during the prior two years as
one universe and in the other universe was a number of
individuals who came to work for public service under the DC
plan. To date, more individuals that came to work under the DB
system actually refunded out of system, took their employee
contributions and left on a percentage basis than did the DC
folks. To say categorically that that's proof positive that the
DC system is better than the DB can't be asserted without
talking to those people and getting more data.
2:18:38 PM
SENATOR BUNDE encouraged them to look at studies of the top 10
reasons for people leave teaching - retirement isn't on that
list.
2:19:06 PM
SENATOR MEYER said it appears the CS makes the retirement plan
optional. He's not sure the DC plan has been that bad for
recruitment and retention. He asked if he supported the CS.
MR. BROOKS said he had just looked at it and they need an
actuarial analysis. The administration has no position on it
now.
2:21:17 PM
SENATOR THOMAS remarked that the DB plan was been in existence
for a long time; but the DC plan got adopted within one month
after introduction.
MR. BROOKS responded that the implementation happened one year
later.
SENATOR THOMAS said he was talking about the one-month time
frame on changing the DB to the DC plan was all the time the
issue was considered by the legislature.
MR. BROOKS responded that the actual deliberation on that
legislation was far longer than that.
SENATOR THOMAS recalled that he asked people who should have
been in the know at the time for statistics on the tiers of the
plan, specifically on Tier III PERS and Tier II TRS, and the
information was not available. A fair amount of supposition was
used and there was a bad financial situation at the time as
well.
2:24:40 PM
SENATOR ELTON remarked that Mr. Kiehl was at a noon meeting
today that got straight to a couple of the department's
assumptions about unfunded liability that could lower the fiscal
note by $15 million. In another the assumptions made on the TRS
costs, could be a $13 million/year. So he was surprised to hear
they had a fiscal note, because his understanding is that they
were going to rework it.
He also wanted "to vent just a little bit" that he shared this
bill as a prefile with the department, and now this committee
has gone through three hearings and has heard an extensive
amount of public testimony. He assumed the department would have
a fiscal note they were comfortable with by now; and now they
are saying they have to review their assumptions. "I can tell
you as a person who was here in 2005, it didn't take them that
long to do a fiscal note for defined contribution and that was
without an awful lot of the data. And that was back when - and
I'm going to repeat some words that I heard in the previous
testimony - before we even knew what kind of precise questions
to ask."
CHAIR PASKVAN said they might be able to move the bill with a
forthcoming fiscal note.
2:27:52 PM
SENATOR ELTON said the forthcoming fiscal note might not address
some costs. The training costs are important, and he agreed with
previous testimony that they don't have data on recruitment and
retention. They didn't have data on recruitment and retention in
2005 either, but certain assumptions were made that led to the
very narrow passage of the DC bill. The advantage he thought
they would have now, four years later, is having that data But
with the lack of it he suggested they go with anecdotal
testimony they have heard from public employees and their
employers.
2:29:19 PM
Finally, he asserted that the unfunded liability issue was
raised again and that's the same kind of testimony they heard
four years ago. He appreciated the comment about asking precise
questions, because at no place did he hear an answer to whether
or not Tier IV PERS contributes to or lessens the unfunded
liability, nowhere did he hear that Tier III PERS does one or
the other or that Tier II or III TRS has any effect on the
unfunded liability. They just heard that it exists and that it's
growing.
The committee has received testimony from people like Mr. Lamb
from Fairbanks and other expert testimony has suggested the
unfunded liability wouldn't grow or decrease because of a switch
back to the DB system.
2:30:46 PM
SENATOR MEYER said he understood that the basic change in the CS
makes the DB and DC plans optional if you're already vested in a
retirement program.
SENATOR ELTON replied it's much more discreet than that. If a
new employee already has a DB plan and he is being hired by a
public employer, he has the option of selecting a DC. The choice
is to a discrete number of potential employees.
SENATOR MEYER asked why the options are limited to certain
groups.
2:32:57 PM
SENATOR ELTON replied that two things were compelling to him
when he wrote the bill. Studies have shown that the DC plan
investments have been hammered much more heavily in this market
than the DB investments. He said some bright young person might
be able to handle a DC plan over a long period of time, but
there probably isn't a perfect recipe on how to do it to protect
all future retirees. The Finance Committee recently heard
testimony from Michael O'Leary of Callan and Associates, who
said one of the problems with DC plans is that they are
especially vulnerable when the market tanks. If Mr. O'Leary has
a defined contribution plan, he is probably wondering now about
how many more years he will have to work to get to the
retirement he thought he would have. Finally, he felt that a
bright young person who is capable of making good investment
decisions would be doing it outside his retirement system also
in a way that would make the DB retirement even better.
2:35:46 PM
SENATOR MEYER said he liked the CS; it had come a long way in
meeting his concerns. But they have heard consistently that the
state needs more tools to recruit bright young people, and why
not be able to offer both programs to those people.
2:36:20 PM
SENATOR ELTON agreed that he might be right, but the bigger
concern is their retention. And they just heard that employees
in the DB plan are now leaving and taking the money they put in.
The problem with the DC plan is they can leave with the money
they put in as well as the money the employer put in.
2:37:10 PM
BETH ALMEIDA, Executive Director, National Institute on
Retirement Security, a non-profit, non-partisan research
organization that does research on retirement issues, Washington
D.C., said she would speak to them about the findings of an
important analysis released today. The title of the report is
"Pensionomics: Measuring the Economic Impacts of State and Local
Pension Plans."
Economists believe that DB plans act as an automatic stabilizer
in economies like the one we are in now. Even in tough times
retirees with a reliable pension can maintain spending on basic
needs. That has stabilizing effects on national, state and
local economies.
2:39:44 PM
MS. ALMEIDA said they focused on state and local pensions for
this study because the census bureau publishes data on state and
local pension plans that is fairly detailed at the state level.
2:40:14 PM
They found that in 2006, expenditures made out of state and
local retirement benefits supported 2.5 million jobs that paid
$92 billion in income, $358 billion in economic output
nationwide and $57 billion in federal, state, and local tax
revenue.
In Alaska (2006) they found retirement benefit expenditures
supported 6,270 jobs that paid $385 million in income, had $1
billion in economic output statewide and $155 million in
federal, state, and local tax revenue.
2:42:24 PM
For each dollar paid out in benefits to Alaskan retirees, $1.25
worth of economic activity was seen in the state. Every $1.00
contributed by taxpayers to state and local retirement systems
resulted in $6.35 in economic activity in the state.
2:43:35 PM
According to the U.S. Census Bureau data, close to 35,000
Alaskans received pension benefits from state and local pensions
in 2006, the most recent year available for the state, for a
total of $819 million. The average pension was $1,953/mo. or
$23,440/yr.
2:45:08 PM
Where does the money come from to finance these systems? Their
data goes back to 1993 and they found over that period
investment earnings and employee contributions were doing the
lion's share of the work of financing retirement benefits.
Investment earnings accounted for about 70 percent of system
revenues, employee contributions about 12.5 percent and employer
or taxpayer contributions were responsible for the remaining
portion of about 18 percent.
2:45:53 PM
How do pension plans have economic impacts? Pension plans can
have economic impacts through several different channels. For
instance, a benefit channel would be when retirees receive
benefits and they go out and spend them in the local economy. By
virtue of that expenditure, other folks in the local economy
receive income.
Pension plans also have economic impacts through their
investment channel. This means assets which are in a pension
trust are invested and through those investments, businesses are
provided capital to develop new products and technologies and
create jobs. This study focuses on the benefit channel rather
than on the investment channel.
2:48:12 PM
Slide 11 showed an economic multiplier effect or the direct
impacts of, for example, a retired school teacher who uses her
pension check to buy a new car. The people who work for the
sales company see an immediate economic benefit from that and
this is called a direct impact. When the owner of the car
dealership or the salesman receives that income, they can go out
and spend it. This is called an indirect impact of that initial
expenditure that the retiree made. When those people expend
their income, there is a third impact, an induced impact, that
happens when the companies that were involved with the
production of the car hire additional employees to replenish
their inventory as a result of that increased business and those
employees go out and spend their paychecks in the local economy.
This is referred to as the multiplier effect and it explains how
the initial spending of a pension benefit ripples through an
economy. To measure the size of that ripple effect, again they
used the U.S. Census Bureau's State and Local Government
Employee Retirement System Survey data.
2:49:47 PM
CHAIR PASKVAN asked her to focus on the conclusions, because
they were running short on time.
2:52:10 PM
MS. ALMEIDA said using software called "Implan" they were able
to estimate the economic impacts of the benefit payments both
nationally and within the State of Alaska. The expenditures made
out of these benefit payments support about 6,270 jobs statewide
that paid about $385 million in income. These benefits supported
$1 billion in economic output statewide and about $155 million
in federal, state and local tax revenue.
2:53:20 PM
Slide 15 showed the total economic impact of $1 billion broken
down into the direct, indirect and induced impacts. The tax
revenue impacts were broken down into their federal, state,
local and other corporate tax categories. The $155 million tax
impact was fairly evenly divided between federal taxes paid out
of pension benefits and federal taxes that resulted from those
expenditures of $87.5 million, state and local tax revenues of
$67.8 million and other corporate taxes of about $200,000. The
estimated impacts are on an annual basis.
MS. ALMEIDA said the industries where the most severe economic
impacts were felt were 1,300 jobs in health care and social
assistance for $119 million in economic impact, about 1,300 jobs
in retail trade with about $97 million in economic impact, 839
jobs in the accommodation and food services, and then real
estate rental and leasing with $51 billion in impacts. She
provided a detailed slide of economic impacts by the top 10
industries.
The pension benefit multiplier indicated that every $1.00 paid
to retirees in Alaska resulted in $1.25-worth of total economic
activity. For every $1.00 of taxpayer contribution to state and
local pensions a total of $6.35 of economic activity was
created.
2:53:47 PM
Slide 20 showed that the taxpayer contribution factor is quite a
significant on each $100 they are investing in the pension
plans.
2:54:44 PM
The conclusions were that state and local pension plans have a
large economic footprint both nationally and within Alaska. They
have significant ripple effects and sizable multipliers. The
upfront investment of taxpayer dollar goes a long way.
2:55:46 PM
MS. ALMEIDA summarized that state and local pensions do more
than provide a critical source of reliable income for 7.3
million retired Americans and 35,000 retired Alaskans. They
support 2.5 million American jobs and $358 billion in national
economic activity. They support 6,270 Alaskan jobs and $1
billion in economic activity. It keeps the retirees continuing
to chug along, and this steadiness helps others in the community
as well.
2:59:26 PM
SENATOR BUNDE asked why they chose to study Alaska.
3:00:05 PM
MS. ALMEIDA replied that this is part of a national study that
was released earlier today.
SENATOR BUNDE asked who paid for it.
MS. ALMEIDA replied that they are a non-profit, non-partisan
research institute funded by a broad membership that includes
trade associations, financial service providers, and pension
plans across the country.
SENATOR BUNDE said any dollar that flows through the economy
follows through her economic multiplier and investment returns
are the largest portion that supports a DB plan, much larger
than worker contributions. With a prolonged down market, he
asked if it wasn't true that the state will end up providing the
majority of the defined benefits because investment returns no
longer do it. So, the notion that this is a stabilizer is only
valid as long as there is money in the account.
MS. ALMEIDA referred him back to slide 9 that indicated the
period of time over which they did their calculation covered the
years 1993-2006, which encompassed both bear and bull markets.
She said one of the benefits of a DB system is the long-term
nature of the system. A state sponsored pension system spans
decades or even more than a century. This is quite different
than the timing and planning horizon of an individual in a DC
plan. It allows for a better kind of diversification of
investment risk, which makes a dollar contributed to a DB go a
lot further. DC investors must invest much more conservatively.
3:06:49 PM
SENATOR THOMAS moved to report CSSB 23(L&C) from committee with
individual recommendations and forthcoming fiscal note.
SENATOR BUNDE objected to comment that people have not looked at
other states. State workers deserve this, he said, but at what
cost? He said he has lost confidence in the sponsor of SB 141.
He then removed his objection and CSSB 23(L&C) moved from
committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| CS for SB 23.pdf |
SL&C 2/26/2009 1:30:00 PM |
SB 23 |
| CS for SB 23 Explanation of Changes.pdf |
SL&C 2/26/2009 1:30:00 PM |
SB 23 |
| SB23 - Restore Defined Benefit - Bill Packet.pdf |
SL&C 2/12/2009 1:30:00 PM SL&C 2/19/2009 1:30:00 PM SL&C 2/26/2009 1:30:00 PM |
SB 23 |
| SB84 - AIDEA Bonding Limits.pdf |
SL&C 2/17/2009 1:30:00 PM SL&C 2/24/2009 1:30:00 PM SL&C 2/26/2009 1:30:00 PM |
SB 84 |
| SB 84 Amendment.pdf |
SL&C 2/26/2009 1:30:00 PM |
SB 84 |
| SB 23_Pensionomics - Senate Labor and Commerce.pdf |
SL&C 2/26/2009 1:30:00 PM |
SB 23 |