Legislature(2009 - 2010)BELTZ 211

02/19/2009 01:30 PM LABOR & COMMERCE


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01:30:51 PM Start
01:31:42 PM SB23
03:03:37 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 23 REPEAL DEFINED CONTRIB RETIREMENT PLANS TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
         SB  23-REPEAL DEFINED CONTRIB RETIREMENT PLANS                                                                     
                                                                                                                                
1:31:42 PM                                                                                                                    
CHAIR PASKVAN announced SB 23 to be up for consideration.                                                                       
                                                                                                                                
MICHAEL LAMB,  CFO, Fairbanks North  Star Borough, said  that his                                                               
comments expressed  today are  his own and  that the  Borough had                                                               
not  yet  taken a  position  on  this  issue. He  summarized  his                                                               
previously  stated  position  that  he thinks  both  the  defined                                                               
benefit (DB)  and the defined  contribution (DC) plans  should be                                                               
continued  since  they are  both  set  up  and working;  and  the                                                               
unfunded liability issue  is not relative to  the argument either                                                               
way. He asked for questions.                                                                                                    
                                                                                                                                
1:34:55 PM                                                                                                                    
SENATOR BUNDE  asked if  adding more  people to  Tier II  TRS and                                                               
Tier III PERS would expand the liability.                                                                                       
                                                                                                                                
MR.  LAMB answered  no;  if a  new person  entered  the Tier  III                                                               
system, he  would have  no prior obligation  attached to  him and                                                               
for any  of the benefits he  would be earning in  the next fiscal                                                               
year, the  normal cost rate should  be applied to his  salary. If                                                               
the rate  is correct, that person  should not have one  impact on                                                               
the unfunded obligation.                                                                                                        
                                                                                                                                
SENATOR BUNDE asked  if he had calculated the  impacts that would                                                               
have on the employer.                                                                                                           
                                                                                                                                
MR. LAMB  answered that as a  CFO, he does care  about money, but                                                               
in  addition  to  that,  he  needs to  be  able  to  attract  the                                                               
personnel  to  fulfill  his  professional  obligations.  When  he                                                               
compares the  cost of the  DC plan to the  DB Tier III  plan, the                                                               
dollars are  about the same. In  fact, in fiscal year  (FY) 2010,                                                               
the DC plan  is slightly more than  the DB plan at  $9.46. A Buck                                                               
Consultant letter to Mr. Shier,  dated February 12, showed the DB                                                               
rate going up slightly more in 2011  than the DC rate. One of the                                                               
questions he had  about that analysis is that the  rates were not                                                               
based on total payroll and the current rates are.                                                                               
                                                                                                                                
He  continued saying that all in  all, when he sees the DB and DC                                                               
figures being  very materially close,  he then worries  about the                                                               
cost to  train and  retain people  who leave  and those  are hard                                                               
figures  to  quantify  when  you're  just  talking  about  rates.                                                               
Whether  or not  an  employee  takes a  position  or  stays in  a                                                               
position based  upon whether they are  getting a DB or  a DC plan                                                               
also has an impact. The short  answer to his question is that the                                                               
numbers do  matter, but only  presuming a  Tier III rate  for the                                                               
employee  with  no  past  service  cost  component  versus  a  DC                                                               
component.                                                                                                                      
                                                                                                                                
SENATOR  BUNDE  said  his  ongoing challenge  is  that  a  dollar                                                               
available for  benefits isn't necessarily a  dollar available for                                                               
salary.                                                                                                                         
                                                                                                                                
1:39:52 PM                                                                                                                    
CHAIR PASKVAN asked  Mr. Lamb to expand on  an employee's ability                                                               
to manage his own money.                                                                                                        
                                                                                                                                
MR. LAMB responded:                                                                                                             
                                                                                                                                
     I  simply  believe  that  the   reality  is  that  most                                                                    
     individuals are  not capable  or qualified  or diligent                                                                    
     in setting  aside the money  that they  should properly                                                                    
     diversifying  that  money,  then through  up  and  down                                                                    
     cycles not  to be an  emotional investor that  buys and                                                                    
     sells based on emotion rather than long term.                                                                              
                                                                                                                                
Put another way, he  said if an employer puts a  dollar into a DB                                                               
system managed  by professionals or  a DC system that  is managed                                                               
by the employee, in 20 or 40  years, he believed that the pile of                                                               
money that  would be  available to  cover retirement  and pension                                                               
costs would be larger  in the DB pile than it would  be in the DC                                                               
pile.  There is  no way  that  average citizens  who have  enough                                                               
struggles  and other  things taxing  their time  are going  to be                                                               
capable of getting  the same returns as a  group of professionals                                                               
who  have  a   larger  portfolio  that  can   allow  for  greater                                                               
diversification.                                                                                                                
                                                                                                                                
MR.  LAMB  said   the  DB  plan  is  better   because  it's  more                                                               
strategically managed and the money  is eventually made available                                                               
on a monthly basis for that  retiree in a methodical way - versus                                                               
a  DC plan  where  that retiree  can get  to  the money  whenever                                                               
circumstances  in his  life dictate  he  thinks he  needs it.  He                                                               
would not  be as  disciplined in limiting  the drawdown  of those                                                               
funds.                                                                                                                          
                                                                                                                                
1:43:53 PM                                                                                                                    
SENATOR BUNDE  said Mr.  Lamb just insulted  about 75  percent of                                                               
the people in Alaska and less  than 30 percent of the people work                                                               
for the state. People in  private enterprise make these decisions                                                               
every  day. If  they follow  his  logic, the  state should  cover                                                               
everyone's retirement  in the state  because they  aren't capable                                                               
of making good decisions.                                                                                                       
                                                                                                                                
MR. LAMB  responded that he did  not intend to insult  anyone. He                                                               
clarified that  he was trying  to say "the Department  of Revenue                                                               
wins  hands  down in  terms  of  being  the better  investor"  in                                                               
comparing a  system where individuals  make their  selections for                                                               
their  investments  versus  having them  professionally  managed.                                                               
Several years  ago the social  security system, a DB  system, was                                                               
also  discussed nationally  and  the question  was asked  whether                                                               
some of the  money should be set aside for  individuals to manage                                                               
themselves,  and the  conclusion was  the same.  He wasn't  being                                                               
disrespectful,  but the  reality is  that the  general population                                                               
does not  have, nor should they  be expected to have,  all of the                                                               
training  necessary  to  understand investment  markets  and  the                                                               
discipline.                                                                                                                     
                                                                                                                                
Also, he  pointed out that  others who  don't work for  the state                                                               
will have the  benefits of a social security benefit  plan as one                                                               
of their legs on their  retirement stool. His concern, long term,                                                               
is  that another  large  segment of  our  population becomes  not                                                               
quite as  prepared at  retirement because  they are  not in  a DB                                                               
system; and at some point,  governments generally end up stepping                                                               
in to help.                                                                                                                     
                                                                                                                                
CHAIR PASKVAN  said he didn't  perceive disrespect in  Mr. Lamb's                                                               
comments. He asked  why he thought it appropriate  to retain both                                                               
systems and who would be best suited to a DC system.                                                                            
                                                                                                                                
1:47:20 PM                                                                                                                    
MR.  LAMB  answered  that  great  regard needs  to  be  given  to                                                               
creation of  the DC plan  and the work that  was done on  SB 141.                                                               
Time has  shown they are two  great plans. There remains  a place                                                               
for both plans as demographics  continue to shift, boomers retire                                                               
and  the population  gets smaller.  The difficult  task would  be                                                               
having  the  legislature carve  out  under  what circumstances  a                                                               
potential employee would invest in the DB versus the DC plan.                                                                   
                                                                                                                                
He said some  people have retired out of the  DB system and there                                                               
could be a very  legitimate need to get them back  for one or two                                                               
years; a  DC plan would  be perfect  for them. They  shouldn't be                                                               
allowed  to   go  back   into  the  DB   plan  because   all  the                                                               
circumstances  regarding the  benefits have  to be  addressed. He                                                               
said the state  has 70,000 retired military, about  10 percent of                                                               
the population; and  the military basically has a  DB program. He                                                               
remarked that it would be great  to have the option to have those                                                               
people who  have been trained,  who have  a good work  ethic, and                                                               
all the things that go with  retired military enter into a system                                                               
for a short-term  period and offer them a DC  plan where they are                                                               
going to be slightly better off than in a DB plan.                                                                              
                                                                                                                                
1:50:52 PM                                                                                                                    
CHAIR PASKVAN asked  him if the DB plan has  met its expectations                                                               
in terms of rate of return.                                                                                                     
                                                                                                                                
MR. LAMB replied  that he has great accolades  for the Department                                                               
of Revenue (DOR) that according  to Callan & Associates, over the                                                               
last  14.75 years,  has  achieved at  total  annualized rates  of                                                               
return  of  8.89  percent  and  8.96 percent  for  PERS  and  TRS                                                               
respectively. The rate  of return the systems have  to achieve to                                                               
serve the  normal and past service  costs is 8.25 percent.  So in                                                               
the  long haul,  the  average rate  of return  is  over the  8.25                                                               
percent point  and any return over  that goes to help  reduce the                                                               
unfunded obligation.                                                                                                            
                                                                                                                                
He recalled that  60 or 70 percent of the  money that is actually                                                               
used to pay pension benefits  comes from investment earnings over                                                               
the life  of those  monies and not  from the  actual withholdings                                                               
from  employees'  pay.  Historically, and  before  Callan's  2006                                                               
report, the rate of return was slightly over 9 percent.                                                                         
                                                                                                                                
1:54:15 PM                                                                                                                    
CHAIR  PASKVAN asked  him to  comment on  the unfunded  liability                                                               
related to the Mercer litigation.                                                                                               
                                                                                                                                
MR. LAMB said  that the legislature had heard a  lot of testimony                                                               
on  this since  2005 and  in the  end, state  documents indicated                                                               
there were  errors in the  actuarial calculation,  especially for                                                               
the  medical  calculation. The  normal  cost  rate was  seriously                                                               
understated;  but what's  worse is  that Mercer  actually advised                                                               
the  legislature in  early  2000 to  expand  health care  medical                                                               
benefits five more years as a way  to get the funding down to 102                                                               
percent.  However, Senator  Elton said  in his  sponsor statement                                                               
that a lot had been done to correct that problem.                                                                               
                                                                                                                                
MR. LAMB  summarized again  that investments  are an  animal onto                                                               
themselves, and  they are critical  for peoples'  retirements. He                                                               
concluded that  most of  the general public  is not  qualified to                                                               
invest  like professionals  and  he  didn't mean  that  to be  an                                                               
insult.                                                                                                                         
                                                                                                                                
SENATOR BUNDE waved a letter  from Buck Consultants [February 12,                                                               
2009] to Mr. Shier saying he wanted Mr. Shier's version of it.                                                                  
                                                                                                                                
1:59:09 PM                                                                                                                    
SENATOR JOE THOMAS joined the committee.                                                                                        
                                                                                                                                
PAT  SHIER, Director,  Division  of  Retirement and  Investments,                                                               
Department  of Administration  (DOA), said  the letter  shows the                                                               
differences in  ongoing plan  costs for all  the tiers.  A normal                                                               
cost rate  of 10.95 percent  for PERS Tier  III DB plan  and 9.23                                                               
percent for Tier  IV; under TRS tier  II the DB plan  was at 8.96                                                               
percent compared to  11.4 percent for the DC plan.  Those are the                                                               
normal  costs based  on the  draft actuarial  evaluation reports,                                                               
which haven't been presented to the ARM board yet.                                                                              
                                                                                                                                
CHAIR PASKVAN asked what that means  for a true Tier III analysis                                                               
as opposed  to a  blended cost  analysis of Tier  I plus  Tier II                                                               
plus Tier III.                                                                                                                  
                                                                                                                                
MR.  SHIER replied  these  are simply  normal  costs; they  don't                                                               
contemplate the past  service cost. SB 123 and SB  125 spread the                                                               
DB past  service cost assessment  across the entire  payroll. The                                                               
DC contributions area calculated only  on the DC payroll. Because                                                               
the DC  payroll is used to  help collect money from  employers to                                                               
pay  off  the  unfunded  liability,  they  wanted  to  make  that                                                               
distinction.  Once the  liability is  paid  off, the  DC plan  is                                                               
fully  funded; there  is no  further obligation  to the  state or                                                               
other  TRS or  PERS employers  in the  future. But,  the DB  plan                                                               
might accrue  additional liabilities  in the future  depending on                                                               
fluctuations  in   health  care   costs,  mortality   tables  and                                                               
investments.                                                                                                                    
                                                                                                                                
CHAIR  PASKVAN   asked  if  he  would   anticipate  any  unfunded                                                               
liability going forward,  assuming a normal cost rate  were to be                                                               
adequately set over the long term.                                                                                              
                                                                                                                                
MR. SHIER replied no.                                                                                                           
                                                                                                                                
2:03:40 PM                                                                                                                    
SENATOR BUNDE said  they had that assumption  before getting into                                                               
trouble  before. He  asked why  there  was a  difference in  past                                                               
service adjustment  (PSA) and the  numbers that  Buck Consultants                                                               
came up  with and if  those figures included the  ongoing medical                                                               
costs and potential medical costs for retirees.                                                                                 
                                                                                                                                
MR. SHIER replied  the employer contribution to the  DC PERS plan                                                               
is   5   percent  plus   disability   and   the  medical   health                                                               
reimbursement  arrangement  (HRA);  it's  7 percent  in  the  TRS                                                               
system.  Those  rates don't  include  any  contemplation of  past                                                               
service costs  for medical, but they  do include a levy  of about                                                               
.85  percent  for  future  medical  costs.  He  said  it's  often                                                               
misunderstood that  the health  plan going  forward into  the new                                                               
tiers is  actually a DB  health plan with a  health reimbursement                                                               
arrangement  attached. In  other words,  the .85  percent is  the                                                               
normal cost  rate going forward  that the actuary says  is enough                                                               
to fund  the employer-provided health  plan, which has  a feature                                                               
of cost  sharing in it that  even retirees have to  pay a portion                                                               
of the premium going forward.                                                                                                   
                                                                                                                                
2:05:47 PM                                                                                                                    
CHAIR  PASKVAN  said  he  understands  litigation  has  commenced                                                               
against  Mercer relating  to some  actuarial computations  and he                                                               
asked if the unfunded liability  is a cause of miscalculations by                                                               
Mercer as compared to a fault in the concept of the plan.                                                                       
                                                                                                                                
MR.  SHIER replied  that he  hadn't read  the allegations  in the                                                               
case so he couldn't comment.                                                                                                    
                                                                                                                                
SENATOR  BUNDE  asked  why  there  is  a  significant  difference                                                               
between the medical  normal cost rates under  both plans, because                                                               
it appears to be the most expensive part of the package.                                                                        
                                                                                                                                
MR.  SHIER answered  that is  an accurate  observation. The  most                                                               
recent DB  plan requires  a relatively short  term of  service in                                                               
the system  in exchange for coverage  of health care from  age 60                                                               
on;  five of  those years  are prior  to the  advent of  Medicare                                                               
becoming primary  - a very  significant issue. An  individual can                                                               
work in the state for 10 years  and leave, but under the new tier                                                               
the state is not on the hook  for their health plan. They have to                                                               
stay  longer and  retire  out of  that system  in  order to  gain                                                               
access to  that health care  plan. Part  of that is  reflected in                                                               
the much lower normal cost rate for health care going forward.                                                                  
                                                                                                                                
2:08:13 PM                                                                                                                    
Part of it  also is that the  old tier plan has  a low deductible                                                               
and that  won't be adjusted going  forward. The new tier,  on the                                                               
other hand,  has the  flexibility to  introduce some  elements of                                                               
cost sharing; those are very powerful drivers in terms of cost.                                                                 
                                                                                                                                
SENATOR BUNDE wanted  him to clarify why the cost  of health care                                                               
couldn't be changed.                                                                                                            
                                                                                                                                
KEVIN BROOKS, Deputy  Commissioner, Department of Administration,                                                               
explained  that  the  reason  the state  has  multiple  tiers  is                                                               
because the  Alaska Constitution  doesn't allow  a "diminishment"                                                               
of  that  retirement benefit.  That  is  why  the new  tiers  are                                                               
prospective for new employees going forward.                                                                                    
                                                                                                                                
2:10:25 PM                                                                                                                    
CHAIR PASKVAN asked  him if the unfunded aspect is  related to an                                                               
actuarial miscalculation.                                                                                                       
                                                                                                                                
MR. BROOKS  said actuarial evaluations  are based on  25 separate                                                               
variables ranging  from earnings  and health care  assumptions to                                                               
mortality tables.  Since this is  active litigation,  he couldn't                                                               
address  it  publicly. The  Department  of  Law (DOL)  has  hired                                                               
contract attorneys to address the Mercer case.                                                                                  
                                                                                                                                
SENATOR BUNDE asked if this bill  passes, would we simply go back                                                               
to the existing tier.                                                                                                           
                                                                                                                                
MR. BROOKS said that is his understanding.                                                                                      
                                                                                                                                
2:13:01 PM                                                                                                                    
JOHN   CYR,   Executive   Director,   Public   Safety   Employees                                                               
Association,  supported SB  23  and returning  to  a DB  program.                                                               
Anecdotally, he  said they have been  collecting information from                                                               
members  who  are  in  Tier IV  who  are  absolutely  considering                                                               
leaving  public service  when they  get their  five years  in and                                                               
taking what  they have  and going outside  where they  can insure                                                               
their families.                                                                                                                 
                                                                                                                                
MR. CYR asked  if they had considered the sheer  cost of training                                                               
and  the  expertise they  lose  when  someone leaves,  especially                                                               
police officers. It takes somewhere  around $150,000 to put a new                                                               
recruit  through the  academy, doing  field training  and keeping                                                               
him on  the force for just  a year -  so he is off  probation and                                                               
minimally competent.                                                                                                            
                                                                                                                                
SENATOR  THOMAS asked  if he  had collected  statistics on  these                                                               
folks that have moved out.                                                                                                      
                                                                                                                                
MR. CYR answered that he didn't have the exact numbers.                                                                         
                                                                                                                                
SENATOR  BUNDE asked  if he  would agree  with Mr.  Lamb's theory                                                               
that   state  employees   need   government   to  monitor   their                                                               
investments.                                                                                                                    
                                                                                                                                
MR. CYR remarked  that it's clear in looking at  his 401K that he                                                               
can't monitor his own investments.                                                                                              
                                                                                                                                
2:16:53 PM                                                                                                                    
LYDIA GARCIA, Executive  Director, National Education Association                                                               
Alaska (NEA), said  less than one month ago,  the annual assembly                                                               
for  NEA convened  and over  450 educators  and school  employees                                                               
from  across  the  country  came   together  to  establish  their                                                               
priorities  and returning  the  state  to a  DB  system is  their                                                               
number one priority  for many of the reasons  they heard earlier.                                                               
The  Association  held  a  number  of  forums  across  the  state                                                               
attended by over a thousand  Alaskans and over a dozen lawmakers.                                                               
During  those opportunities,  many  state  and municipal  workers                                                               
related what  it will take  for them  to consider staying  in the                                                               
state, and it will take having a future they can rely on.                                                                       
                                                                                                                                
2:19:34 PM                                                                                                                    
She said that  Alaskan school districts still hire  70 percent of                                                               
their teachers  from the  Lower 48 and  that number  has remained                                                               
constant over a  decade. It costs roughly about  $12,000 to train                                                               
a  new educator,  she said,  and Alaskan  districts are  spending                                                               
over $8 million a year to  train teachers from outside the state.                                                               
So, they should be looking at  every way possible to retain these                                                               
educators  here  and have  them  here  for  longer than  just  an                                                               
"Alaskan experience."                                                                                                           
                                                                                                                                
She said turnover  has definitely accelerated even  though it has                                                               
always been  high. Yesterday she  heard the University  of Alaska                                                               
speak powerfully  about teacher  retention and  recruitment. They                                                               
talked about  the fact that  they graduate only about  30 percent                                                               
of the  teachers here and  that they  want to do  everything they                                                               
can to keep Alaska's teachers in the state.                                                                                     
                                                                                                                                
2:21:16 PM                                                                                                                    
JERRY PATERSON,  representing himself, said  he and his  wife are                                                               
retired  teachers, and  how his  wife worked  post-election as  a                                                               
substitute for another  person. When she got her check,  it had a                                                               
mandatory deduction of  $24 for the retirement  system. They were                                                               
told  it was  mandatory  because the  state  doesn't use  federal                                                               
social  security. To  get her  money out,  she eventually  had to                                                               
fill out eight pages of  paperwork and have both their signatures                                                               
notarized. She ended up having  $35 in expenses deducted from her                                                               
final check and  paying a $7.77 separation from  service fee. Had                                                               
she  been under  the  old DB  plan, she  could  have applied  and                                                               
gotten  her $24  contribution  back. He  observed  that the  only                                                               
happy people are those who are  collecting the fees and urged the                                                               
committee to pass SB 23.                                                                                                        
                                                                                                                                
2:25:04 PM                                                                                                                    
DOUG  MOLLINEAU, representing  himself,  said he  is a  fisheries                                                               
biologist in the  Alaska Department of Fish and  Game (ADF&G). He                                                               
is also  a member of  the supervisory  unit of the  Alaska Public                                                               
Employees Association.  Since 1989  his work  has focused  on the                                                               
Kuskokwim area salmon  fisheries, an area that  accounts for half                                                               
the statewide annual subsistence harvest  of King salmon. It also                                                               
supports commercial salmon fisheries,  which are poised to expand                                                               
with the development  of a new fish processing  plant. Salmon are                                                               
also by-catch  in the lucrative  Bering Sea pollock  fishery, and                                                               
concern over  that by-catch threatens costly  restrictions on the                                                               
pollock  fishery. A  quality salmon  monitoring program  has been                                                               
developed  that   allows  them   to  emerge  from   a  cautionary                                                               
management  style to  better optimize  commercial harvest  and to                                                               
avoid unnecessary  restrictions. Their  ability to  implement and                                                               
maintain that  program is  at risk now,  because they  are having                                                               
difficulty in  recruiting, training and retaining  staff to build                                                               
and  maintain the  institutional knowledge  needed for  long-term                                                               
effectiveness.  There are  multiple reasons  for the  recruitment                                                               
and retention  problem, but one  of the big  ones is the  Tier IV                                                               
PERS,  which  fails  to  provide  a  guaranteed  pension  to  new                                                               
employees. The recent plummeting  of investment values under Tier                                                               
IV makes the shortfall all the more poignant.                                                                                   
                                                                                                                                
A common  scenario for  them is to  hire someone,  increasingly a                                                               
non-resident, provide him or her  with training, and then after a                                                               
few years, lose  him to a more lucrative position  in the federal                                                               
or private  sector. Recruitment  is also a  problem; in  the past                                                               
few months key  positions such as the  regional supervisor, Yukon                                                               
area  research  biologist,  multiple  bio-nutrition  and  fishery                                                               
scientist  positions all  have had  recruitment periods  spanning                                                               
months with  multiple extensions and nation-wide  advertisement -                                                               
and still they  get an insufficient hiring pool.  He has observed                                                               
the problem  getting worse since  the inception of Tier  IV. "New                                                               
and perspective  employees are just  not satisfied with  what the                                                               
state of  Alaska is offering.  Tier IV  is not the  only problem,                                                               
but it's a big part of the problem."                                                                                            
                                                                                                                                
SENATOR BUNDE asked if state salaries are competitive.                                                                          
                                                                                                                                
MR. MOLLINEAU said combined with  the poor retirement plan, it is                                                               
one of the big three issues.                                                                                                    
                                                                                                                                
2:28:31 PM                                                                                                                    
SENATOR  THOMAS asked  who hires  in his  department. Is  it done                                                               
internally?                                                                                                                     
                                                                                                                                
MR. MOLLINEAU replied  yes; the department uses  its own process.                                                               
They   advertise  a   variety   of   ways  through   professional                                                               
organizations,   the  American   Fisheries  Society,   biometrics                                                               
publications  and organizations,  but they  have found  they need                                                               
more of those.  In-house hiring through Workplace  Alaska has not                                                               
been adequate.                                                                                                                  
                                                                                                                                
SENATOR  THOMAS  asked if  the  department  is alarmed  at  those                                                               
statistics along with the much longer timeframes for hiring.                                                                    
                                                                                                                                
MR.   MOLLINEAU  answered   that  he   personally  doesn't   keep                                                               
statistics,  but  he  assumed the  Department  of  Administration                                                               
would. His experience,  and it's a common  discussion point among                                                               
his colleagues in the supervisory unit,  is that this has been an                                                               
ongoing problem and seems to be getting worse.                                                                                  
                                                                                                                                
2:30:47 PM                                                                                                                    
PENNY VAVLA, representing  herself, Soldotna, said she  is on the                                                               
school board  there and  supported SB  23. It's  really important                                                               
that the state be able to  attract and retain quality teachers to                                                               
continue  promoting  a  quality  education for  all  students  in                                                               
Alaska.  The cost  of training  and retraining  teachers is  very                                                               
expensive and she  firmly believed that the state  is losing some                                                               
of these quality teachers because of the DC system in Tier IV.                                                                  
                                                                                                                                
2:33:03 PM                                                                                                                    
JOHN  BROWN, representing  himself, Fairbanks,  supported SB  23.                                                               
The  cost/benefit ratio  of retention  is  just undisputable,  he                                                               
said. Just  the fees for  the DC plan  are 6-7 percent  more than                                                               
the DB plan. He urged them to  try to find anyone who has retired                                                               
on a  DC plan that they  earned from their employer,  because "it                                                               
doesn't happen." Providing  a DB plan is also the  right thing to                                                               
do  for  people who  have  dedicated  their  whole lives  to  the                                                               
service of the state.                                                                                                           
                                                                                                                                
2:34:47 PM                                                                                                                    
PAUL  ORTNER,  representing  himself,  said  he  is  the  Quality                                                               
Improvement  Coordinator  for  the Alaska  Psychiatric  Institute                                                               
(API).  He said  he  had worked  there for  12  years because  he                                                               
believes  in  its mission  and  commitment  to provide  the  most                                                               
progressive acute  psychiatric care available. Recently,  US News                                                               
and World Report  ranked API 26th nationally on its  list of best                                                               
psychiatric  hospitals -  an  astounding  accomplishment for  any                                                               
state hospital. However,  he said, "The ability  to maintain that                                                               
level  of  care  is  being severely  challenged  by  the  defined                                                               
contribution  retirement  plan  that  the state  now  offers  new                                                               
employees."                                                                                                                     
                                                                                                                                
He said  resources that could  otherwise be used to  provide high                                                               
quality psychiatric  care are  being shifting  toward recruitment                                                               
and  retention costs.  Instead of  finding qualified  applicants,                                                               
the  hospital is  being forced  to find  lower quality  employees                                                               
with little  or no experience who  need training to do  their job                                                               
adequately, an additional  burden to the hospital.  But, he said,                                                               
"Unfortunately that  just provides  them the experience  to leave                                                               
state  employment  when  they realize  they  have  no  retirement                                                               
future."                                                                                                                        
                                                                                                                                
Another  point   he  made  is   that  the   hospital's  education                                                               
department has  a limited ability  to maintain or  increase staff                                                               
competency as  their resources  become overwhelmed  with constant                                                               
new-hire  orientation. Nursing  positions are  constantly turning                                                               
over.  Some real  examples of  how unattractive  state employment                                                               
has become can  be seen in several areas:  nursing vacancies were                                                               
at 16  percent in the last  quarter, four newly hired  nurses are                                                               
straight out  of college  and it isn't  likely the  hospital will                                                               
retain  them once  they  become experienced.  After  months of  a                                                               
vacancy,  the  hospital  was  finally   able  to  hire  a  health                                                               
information  manager by  lowering the  position's qualifications.                                                               
That person is now trained  and certified, but she probably won't                                                               
stay  beyond   three  years  because  opportunities   are  better                                                               
elsewhere.                                                                                                                      
                                                                                                                                
MR. ORNTER stated that the  safety officer's role in the hospital                                                               
is  critical and  that position  remains  vacant; it  used to  be                                                               
filled internally  as people  moved up  in the  organization. "No                                                               
one is  moving up, because no  one is sticking around."  Only two                                                               
of   the  hospital's   six   licensed  independent   practitioner                                                               
positions are filled;  this forces the hospital  to contract with                                                               
temporary  licensed independent  practitioners at  a much  higher                                                               
cost, and  orienting this rotating  group eats up  valuable staff                                                               
time. API  will soon be  on its  third human resource  manager, a                                                               
job  that is  becoming  increasing difficult  to  fill without  a                                                               
secure  retirement  program.  All  these  challenges  impact  the                                                               
hospital's ability to provide quality patient care.                                                                             
                                                                                                                                
2:39:37 PM                                                                                                                    
SENATOR BUNDE said API has been  struggling to keep staff as long                                                               
as he has been here.                                                                                                            
                                                                                                                                
MR. ORTNER responded  that he had been with API  for 12 years and                                                               
he  has seen  considerable change  in the  hospital's ability  to                                                               
retain staff in that time. Just  today he talked to someone about                                                               
two new, young, social workers who  are doing great work, but who                                                               
won't  stick  around  without a  defined  retirement  system.  He                                                               
agreed  that  while nursing  has  had  a consistent  rollover  of                                                               
staff, it hasn't  been as high as  it is now and  this leaves the                                                               
hospital open to liability, especially without a safety officer.                                                                
                                                                                                                                
2:41:22 PM                                                                                                                    
CARL  ROSE,  Executive  Director, Association  of  Alaska  School                                                               
Boards, supported SB 23. The  members think being able to attract                                                               
and  recruit  quality  teachers  is  important,  and  a  previous                                                               
teacher-tenure conversation with  the legislature identified four                                                               
important   areas  to   consider   in   this  respect:   quality,                                                               
performance, accountability  and fairness. The issue  of fairness                                                               
is the  one that is paramount  here. They already have  some good                                                               
employees, but the  districts need to attract more.  "So, I would                                                               
ask you  to consider as  you look  at this piece  of legislation.                                                               
It's the  value that it brings;  it's the incentive that  it will                                                               
cause. It's the quality they  we're trying to attract." Who would                                                               
see  the  value  in  a  DB  plan  if  it  included  the  unfunded                                                               
liability? People look at the whole package.                                                                                    
                                                                                                                                
2:43:53 PM                                                                                                                    
SENATOR  BUNDE said  he understands  that teacher  recruitment is                                                               
difficult throughout the entire United States.                                                                                  
                                                                                                                                
MR. ROSE replied yes, it is.                                                                                                    
                                                                                                                                
CHAIR  PASKVAN asked  if  he believed  that  recruitment is  more                                                               
difficult with the DC plan.                                                                                                     
                                                                                                                                
MR.  ROSE  replied  that  after  November  2008  it  became  more                                                               
difficult.  Sometimes   young  folks   didn't  care   much  about                                                               
retirement  plans, but  that is  not a  good reason  to offer  an                                                               
insufficient  one. In  one way,  we  take advantage  of youth  in                                                               
offering them  employment here,  he said, because  5 or  10 years                                                               
hence they  figure it out  and the  incentive really is  there to                                                               
take their money  and move. He didn't think  anyone thought about                                                               
it when the DC plan was created, but that is the case now.                                                                      
                                                                                                                                
SENATOR THOMAS  asked if the  Association of School  Boards keeps                                                               
statistics.                                                                                                                     
                                                                                                                                
MR. ROSE  replied that the  Association doesn't have  those kinds                                                               
of statistics, because  this is a fairly new event  for them. The                                                               
real impact has come as a  result of the downturn in the economy.                                                               
They  have  always had  some  difficulty  recruiting into  Alaska                                                               
based  on the  salaries, but  the  total package  is becoming  an                                                               
increasing disincentive.                                                                                                        
                                                                                                                                
2:47:06 PM                                                                                                                    
SENATOR  BUNDE asked  if  he  heard what  Mr.  Lamb  said that  a                                                               
majority  of the  funding really  comes  from investment  returns                                                               
rather  than contributions;  so the  down market  would certainly                                                               
affect the money that is  available for defined benefits. And the                                                               
state is  required constitutionally  to make that  up and  with a                                                               
finite amount of dollars, he asked  if it is reasonable to assume                                                               
that  those dollars  would come  from  some other  area of  state                                                               
service.                                                                                                                        
                                                                                                                                
MR. ROSE  answered by  saying one  of the  issues here  is market                                                               
performance, but a DC program  also has a larger contribution, as                                                               
well.  "So,  I  don't  think they  are  mutually  exclusive.  But                                                               
absolutely  the performance  of  the market  is  going to  affect                                                               
almost everything  we do and  it will affect the  defined benefit                                                               
program, but  it also has  that depressing effect on  the defined                                                               
contribution program, as well."                                                                                                 
                                                                                                                                
2:48:29 PM                                                                                                                    
PAT  LUBY, Advocacy  Director,  AARP, supported  SB  23. He  said                                                               
lifetime  financial security  is  a cornerstone  of the  American                                                               
dream. AARP's major  concern is that most of  it public employees                                                               
and retirees don't participate in  the social security system. In                                                               
the past it  didn't matter so much that our  public employees did                                                               
not  participate  in  the  social security  system;  they  had  a                                                               
defined benefit plan that would last  as long as they lived. "But                                                               
now  they  have  no  defined  benefit and  they  have  no  social                                                               
security. The American dream of  a secure financial retirement no                                                               
longer exists for Alaska's newly hired public employees."                                                                       
                                                                                                                                
MR. LUBY said,  "It is possible for defined  contribution to work                                                               
for you  as long as  you don't live  too long." Most  people will                                                               
live into their mid-80s  or 90s. With a DC plan  you have to know                                                               
your life  expectancy and if  married, how long your  spouse will                                                               
live, if  you will be healthy  right up until you  stop breathing                                                               
or if you will need long-term  care, home care or a nursing home.                                                               
Medicare  doesn't  pay  for  that;  you  have  to  pay  for  that                                                               
yourself.                                                                                                                       
                                                                                                                                
He asked if  anyone knew what inflation would be  for the next 20                                                               
years. Defined  benefits and social security  provide annual cost                                                               
of living increases;  the new DC plan doesn't.  Health care costs                                                               
will also have inflation over the next 20 years.                                                                                
                                                                                                                                
2:50:26 PM                                                                                                                    
He said it's true that  many private companies have switched from                                                               
DB to  DC plans  over the past  few years, but  all of  those who                                                               
work in the  private sector also participate  in social security.                                                               
They  are guaranteed  a  check  as long  as  they live.  Alaska's                                                               
public employees used to have  the same financial security before                                                               
SB 141.  AARP members  rely on public  servants; they  teach, put                                                               
out fires  and police respond.  They deserve more  than outliving                                                               
their retirement.                                                                                                               
                                                                                                                                
In response to  Senator Bunde, Mr. Luby said, it  isn't about Big                                                               
Brother. It's  about using expertise. Every  private pension plan                                                               
has professional  managers and the professionals  managing the DB                                                               
plan are  making about  10 percent  more than  members in  the DC                                                               
plan  even   over  the   economic  downturn.   "So,  professional                                                               
management  is really  critical if  we're going  to maximize  our                                                               
investments."                                                                                                                   
                                                                                                                                
SENATOR  BUNDE said  he didn't  disagree,  and that  professional                                                               
management is  available to anyone  who wants to purchase  it. He                                                               
asked  Mr.  Luby if  he  really  thought  social security  was  a                                                               
defined benefit; it  might be around for our  lifetime, but maybe                                                               
not for out great grandchildren.                                                                                                
                                                                                                                                
MR. LUBY  responded that  social security  is fully  funded until                                                               
2042. Changes are  needed, but people have to make  sure that the                                                               
promise  of  social security  is  there.  "Social security  is  a                                                               
family protection plan,  not just a retirement plan,"  he said. A                                                               
third of  those checks in  Alaska go to children,  disabled folks                                                               
and  spouses   of  folks  who   have  died  or   become  disabled                                                               
themselves.                                                                                                                     
                                                                                                                                
2:53:31 PM                                                                                                                    
JIM DUNCAN, Business Manager,  Alaska State Employees Association                                                               
Local 52  (ASEA), supported SB  23. He stated that  Senator Bunde                                                               
wasn't in  this Body  when the retirement  system was  moved from                                                               
Tier I,  to Tier  II to Tier  III, but he  was. Contrary  to what                                                               
some folks  may think,  it is  okay to  continue to  evaluate the                                                               
programs that are in  place to see if changes need  to be made to                                                               
allow  them to  work more  efficiently and  more effectively  for                                                               
those who they serve.                                                                                                           
                                                                                                                                
MR. DUNCAN  said he was the  sponsor of the Tier  II legislation.                                                               
They held  to four important  principles in changing  the defined                                                               
benefits plan  and he asked them  to consider whether or  not the                                                               
DC plan  meets those four  principles. One  is does it  provide a                                                               
secure pension upon retirement; the  answer is no. Secondly, does                                                               
it provide adequate medical coverage  for retires; and the answer                                                               
is no. In fact, the answer  to Senator Bunde's question about why                                                               
the cost of the  DB plan for PERS and TRS is  so much higher than                                                               
for Tier  IV that the DB  plans do contain medical  coverage. The                                                               
DC plan has minimal medical coverage.  In fact, when the bill was                                                               
passed two years  ago, it was estimated that those  folks who did                                                               
access their medical  care at 60 years of age  would deplete that                                                               
within two  years, and the  next three years before  they reached                                                               
Medicare age they would not have medical coverage.                                                                              
                                                                                                                                
He  said the  third principle  they always  considered is  answer                                                               
what  it  does to  the  state's  ability  to recruit  and  retain                                                               
employees,  and  it's  clear  in  his mind  that  they  tried  to                                                               
maintain this  principle in Tier I,  Tier II and Tier  III. It is                                                               
clear that the DC system does not do that.                                                                                      
                                                                                                                                
People have  asked for figures showing  that to be the  case, but                                                               
he has listened to the  problems teachers and troopers are having                                                               
with recruitment; he  knows that two years ago  the turnover rate                                                               
in his  unit of  8,500 people  was 20  percent/yr., and  now it's                                                               
over 30 percent/yr.  He also knows that  recruitment of positions                                                               
in  his  general  government  unit  is  becoming  more  and  more                                                               
difficult. One of his retiree  members talked to him recently and                                                               
indicated  that the  job he  retired  from is  still not  filled.                                                               
Before he  retired, they used  to have more applicants  than they                                                               
could ever get through for  those types of positions. Less people                                                               
are applying,  they are harder  to recruit and the  turnover rate                                                               
has increased.                                                                                                                  
                                                                                                                                
The fourth  principle they always looked  at is what the  cost of                                                               
providing the  first three  principles would be.  If the  DC plan                                                               
would cost a  whole less, then maybe they could  say they gave up                                                               
some  of  those principles  to  save  some  money, but  the  Buck                                                               
Consultants' report  in 2008 and  the letter they  were presented                                                               
today indicates the  cost between Tier III PERS, Tier  II TRS and                                                               
the  DC  plan is  about  a  wash. He  urged  them  to keep  these                                                               
principles in mind as they move forward.                                                                                        
                                                                                                                                
2:59:20 PM                                                                                                                    
SENATOR BUNDE asked  why the state moved from  the Elected Public                                                               
Officers Retirement System (EPORS) in the tier directions.                                                                      
                                                                                                                                
MR. DUNCAN answered that Tier  I was the first retirement system;                                                               
EPORS  was a  short-time  retirement system  that certain  people                                                               
participated in,  but it no  longer exists for new  members. When                                                               
they first  evaluated Tier I,  he represented Juneau and  a major                                                               
part of  his constituents  were state  employees. He  became very                                                               
knowledgeable about  it and  was very  protective, but  it became                                                               
clear that as  they moved through the years, Tier  I was becoming                                                               
more expensive; and  changes were made to  maintain that adequate                                                               
retirement  system and  medical coverage.  Legislators made  sure                                                               
they  maintained those  four  principals, but  at  the same  time                                                               
tried  to address  the  increasing cost.  For  instance, Tier  II                                                               
increased the  amount of time  to be in service  before accessing                                                               
medical coverage.                                                                                                               
                                                                                                                                
3:01:23 PM                                                                                                                    
CHAIR  PASKVAN said  as  a  matter of  both  social and  economic                                                               
policy  he favors  returning  to a  DB system  and  he ended  the                                                               
public testimony.                                                                                                               
                                                                                                                                
SENATOR  DAVIS  said  she  supported the  bill,  and  asked  what                                                               
direction it  was going  to take  since she  hadn't heard  of any                                                               
suggestions.                                                                                                                    
                                                                                                                                
CHAIR PASKVAN answered  that he thought the bill  would move next                                                               
week if the committee chose. [SB 23 was held in committee.]                                                                     

Document Name Date/Time Subjects
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