Legislature(2009 - 2010)BELTZ 211
03/17/2009 09:00 AM Senate STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| SB78 | |
| SB23 | |
| HB63 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 63 | TELECONFERENCED | |
| *+ | SB 78 | TELECONFERENCED | |
| *+ | SB 69 | TELECONFERENCED | |
| + | SB 23 | TELECONFERENCED | |
| + | TELECONFERENCED |
SB 23-REPEAL DEFINED CONTRIB RETIREMENT PLANS
9:30:32 AM
CHAIR MENARD announced the consideration of SB 23.
SENATOR PASKVAN said he took over sponsoring the bill for former
Senator Kim Elton. He and Senator Elton's staff have invested a
tremendous amount of energy into SB 23, "and I am honored to
carry this legislation forward on behalf of Senator Elton and
the bill's eight remaining cosponsors." He said the Senate Labor
and Commerce Committee took a very good bill and made it a
little better by taking the recommendations of the Chief
Financial Officer of the Fairbanks North Star Borough, who
presented testimony on his own behalf. SB 23 is sound social
policy. Teachers, police, firefighters, and other public
employees earn the right to a dignified retirement. The bill
will help recruit and retain workers. It is sound fiscal policy.
"We know that between the DB [defined benefit] and the DC
[defined contribution], it's nearly a wash." There are studies
about a better bang for the buck from the National Institute of
Retirement Security. The DB adds a stabilizing influence, and
the 2006 expenditures and retirement benefits in the state of
Alaska accounted for 6,270 jobs and paid $385 million in income
within the state. It was $1 billion in total economic output,
and it accounted for $155 million in federal, state, and local
tax revenues.
JESSE KIEHL, Staff to Senate District B, Alaska State
Legislature, said the bill may need a new short title because it
doesn't repeal the DC plan. Those statutes remain on the books.
It places virtually all new hires of the state, municipalities,
and school districts into the DB pension system. It also
provides a choice to a very limited group of professionals who
are already vested in some other pension system. They would be
people who have retirement security, like a retired military
person who would be a "great catch" for an employer. The other
new ones would go into the least expensive tier: Tier III for
the public employees retirement system (PERS) and Tier II for
the teachers retirement system (TRS). "Those are the most
restrictive of the defined benefit - the pension systems - the
most difficult to vest in a pension, the most difficult in, most
importantly, the health care benefit; however, they still
provide a very good and adequate and secure retirement for their
beneficiaries who remain in public employment long enough to
vest in the benefits." He referred to the information in the
committee packets and on the public record.
9:36:21 AM
MR. KIEHL said the greatest benefits to the state and the school
districts are the great incentives for employees to stay on. It
also helps recruit better employees. The DC plan allows
employees to take away the employer's money and the money that
came out of their paychecks when they leave, but under the DB
system an employee can cash out their own money but not the
state money that was put into the pension program. That money
stays, earns interests and dividends, and helps fund the
benefits for others. It is a strong incentive for employees to
stay. That is important because the state and school districts
spend a lot of money training employees. It is not at all
uncommon to spend $15,000 training a new employee. Public safety
employers say they spend over $150,000 to train a new employee.
Turning them over in a hurry is not good management. Defined
benefit systems help keep good employees.
9:38:04 AM
SENATOR MEYER asked about employees who have no intention to
stay, like college professors who like to go from college to
college to advance their careers. Would they have an option? Are
the only people who can choose between the two plans ones who
are already vested in a DB plan?
MR. KIEHL replied in the affirmative.
SENATOR MEYER asked about giving an option to any new employee.
MR. KIEHL replied that the University of Alaska has something
like that, but it creates more costs. The actuaries call it
"adverse selection." The most expensive people to provide a
secure pension to, like people 10 years from retirement, are
just about guaranteed to choose the DB plan, and people who cost
the least, like those entering state service at a young age, are
more likely to choose the DC plan. It changes the demographics
of the pool and ends up costing more. There is also the question
of retirement security. The recent market has shown that
professional managers invest better. The professional investment
managers in the Department of Revenue who manage the pension
trust funds were down about 22 percent at the end of 2008.
Record losses in the market hit everybody. The DC accounts were
down about 35 percent. "A staggering difference." The DOA has
told state departments that when a state employee goes to an
investing seminar offered to those in the DC plan by the state,
it's work time. So the state pays troopers, biologists, file
clerks, and others to learn about investing instead of doing
their state work. At the same time, the state is paying
professional investment managers. That may not be the most
efficient use of state resources.
SENATOR MEYER said it seems that the state is having to go
outside to recruit employees. So offering a choice of plans may
get more younger people who want a DC plan. It is not that big
of an issue to him, but it might be helpful for recruitment.
9:43:30 AM
SENATOR FRENCH asked that a letter to Pat Shier from Buck
Consultants on February 12, 2009 about the relative costs of the
two plans be put on the record. He asked for those numbers and
how Mr. Shier saw it.
9:44:08 AM
PAT SHIER, Director, Division of Retirement and Benefits,
Department of Administration (DOA), said page 1 of that letter
has a comparison of the DB and DC plans for PERS. This is normal
cost only. "You see the 2.97 percent at the top of that column -
- that's the average normal cost rate for a DB employee -- 7.98
percent for medical cost normal, and the total 10.95 compared to
the DCR rate of 5 percent for pension, 0.38 for occupational
death and disability, 0.85 percent for health, 3 percent for the
health reimbursement arrangement, for a total of 9.23."
SENATOR FRENCH asked him how the medical costs can be so wildly
different. One is 7.98 for medical normal cost rate for DB Tier
III, and DCR is 0.85 plus 3 percent, which is half of what the
state is paying for the Tier III employees.
MR. SHIER said most of that is plan design. Also, a significant
feature separating the DB plan from the DC plan for health is
that one must retire out of the system in the DC plan to get the
employer-paid health plan. It is unclear to many people that the
DC retirement plan is actually a hybrid. The health plan in that
system is paid entirely by employer contributions. That's the
0.85 percent. That describes the cost of putting money away now
to pay health claims under that plan for those that gain access
by retiring out of the system and staying long enough. There is
cost sensitivity in the new plan because even retirees will have
to pay some portion of the premium. "We are designing into that
some health improvement features and other sensitivities to cost
in- and out-network mixes. Those are not in the current health
plan right now."
SENATOR MEYER asked about making the plan optional to new
employees. What costs would be associated with that? The DB plan
is more expensive to the state, so would it be beneficial if
some new employees took the DC plan because they don't plan on
staying in Alaska for more than five or six years? Is the
administration still neutral?
MR. SHIER said the administration is concerned about any change
in the retirement systems that would add to future cost or to
the unfunded liability. The fiscal note still shows a
significant increase in costs for 2011 and on, even under the
limited-choice provision of the current bill. The administration
is taking a cautious position. He doesn't know what the bill
will do for recruitment. About 20 percent of the PERS workforce
are DC; thousands of people have been hired under the new tier
for both TRS and PERS. Individuals may be incented to stay
longer; "however, we must remember that in the defined benefit
plan, after 10 years an individual can leave the state of Alaska
public employment with the state of Alaska or a political
subdivision or a school district - it's actually a little
shorter than that - and they take with them that guarantee to
pay a pension and health care for the rest of their life after
they retire. Age 60 would be the normal retirement age." Under
the current DC plan, a worker must stay in the system for a
sufficient number of years and then retire directly out of the
system in order to have access to the health care benefit. "We
really don't have the data to show definitively that recruitment
and retention are materially affected by the current DCR plan."
9:50:50 AM
SENATOR MEYER asked if administrative costs would increase by
making the plans optional to all new employees.
MR. SHIER said the complexity of a choice would add
administration costs. The DOA would strive to reduce costs.
Costs are not insignificant in calculating the amount of DC
balance an individual may have if he or she chooses to switch to
DB. "Every time we make a change to the system, we do introduce
some complexity and we have some costs."
SENATOR PASKVAN said the fiscal note indicates that in 2012 the
cost will be about $16 million, and that is based on the
assumption of all people returning to DB.
MR. SHIER said that is accurate. The identifier reflects that
number. In conversations with the sponsor's staff, it was
retooled. It produced a fiscal note, dated 3/16/09, showing a
slightly lower number: $15 million. That reflects the idea that
there will be choice.
SENATOR PASKVAN said, "So that the public policy issue is framed
a little more closely, that $15 million is the cost in reference
to approximately a $3 billion payroll, so that $15 million is
maybe one half of one percent of a payroll cost."
MR. SHIER said it reflects the change in the normal cost rate,
and that increase for both PERS and TRS, when including the
health portion, goes over 1 percent.
9:55:00 AM
CHAIR MENARD held SB 23 over and the committee took a brief at-
ease.
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