Legislature(2009 - 2010)BELTZ 211
03/24/2009 09:00 AM Senate STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| SB23 | |
| SB129 | |
| HJR19 | |
| SB126 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 126 | TELECONFERENCED | |
| + | SB 129 | TELECONFERENCED | |
| HJR 19 | |||
| = | SB 23 | ||
SB 23-REPEAL DEFINED CONTRIB RETIREMENT PLANS
CHAIR MENARD announced the consideration of SB 23.
9:08:04 AM
BETH ALMEIDA, Executive Director, National Institute of
Retirement Security (NIRS), Washington D.C., said NIRS is a
nonprofit, nonpartisan organization. Its mission is to foster a
deep understanding of the importance of retirement security to
retirees and the economy as a whole using research, education,
and outreach. She will summarize recent research found in their
report entitled "Pensionomics." The intent was to measure the
economic footprint of state and local pension plans. Defined
benefit (DB) plans can act as an automatic stabilizer for the
economy by providing predictable benefits.
9:10:35 AM
MS. ALMEIDA said NIRS used data from 2006 and found that
expenditures made out of state and local retirement benefits
supported about 2.5 million jobs nationally and paid $92 billion
in income. The total economic impact was about $358 billion
nationwide and about $57 billion in state, local, and federal
tax revenues. Alaska retirement benefits supported 6,270 jobs
that paid $385 million in income to other Alaskans, not
including the value of the pension payments themselves. The
total statewide impact was about $1 billion, with about $155
million in tax revenues within Alaska. For every $1.00 paid out
in benefits, $1.25 in total economic activity was supported in
the state. Every dollar contributed by taxpayers supported about
$6.35 in economic activity in Alaska. That really speaks to the
fact that taxpayer contributions are only one source, and
employee contributions and investment earnings on contributions
make up the remainder.
9:12:17 AM
SENATOR FRENCH asked about slide 9 and what she means by
taxpayer -- the people who contribute to their own pension?
MS. ALMEIDA said, no. Taxpayer contributions are the employer
contributions. State employees are also taxpayers, but the study
calls them employee contributions.
9:13:25 AM
MS. ALMEIDA said the baseline data from the U.S. Census Bureau
show that 35,000 Alaskans received pension benefits from state
and local plans in 2006. The total received by retired Alaskans
was about $819 million, and the average pension was a little
under $2,000 per month. Over the 13 years of available data,
employee contributions comprised about 12.5 percent of total
system revenue. Employer contributions comprised just under 18
percent. The remainder, 70 percent, was made up of investment
earnings. The economic impact refers to the multiplier affect.
One person's spending is another person's income. That gives the
other person more spending power. The initial event is the
spending of pension payments by retirees and it has a much
bigger impact by the multiplier effect. NIRS used publicly
available data and software called IMPLAN -- input-output
modeling software originally developed for the U.S. Forest
Service. It allows the measurement of the relationship among
various sectors in the economy as a matrix.
MS. ALMEIDA repeated that the total economic impact of pension
payments in Alaska is about $1 billion. There was about $155
million in tax revenue impact as shown on slide 15. NIRS looked
at the impacts sector by sector and found a deep impact in
virtually every industry in the state. The industries with the
most impacts were health care, retail trade, and accommodation
and food service.
9:18:01 AM
MS. ALMEIDA said slide 18 provides a detailed breakdown by
industry of the total economic impact of each dollar paid out in
pension benefits. NIRS calculated the ultimate ripple effect of
each dollar, and it translates to about $1.25 in total economic
activity. NIRS calculated the return on contributions made by
public employers to state and local pension plans. Because there
are employee contributions and investment earnings, this
multiplier is large. It is $6.25.
MS. ALMEIDA concluded that pension plans have a large economic
footprint in the U.S. and each state. The ripple effect is
significant. Pension plans are important to those who receive
them, but it may not be well recognized that other folks in the
communities benefit when retirees can make regular expenditures
to pharmacies, hardware stores, and doctors. Defined benefit
plans are automatic stabilizers because retirees continue to
spend on basic needs, providing important economic stimulus
during these tough times.
9:21:04 AM
MS. ALMEIDA spoke next about a NIRS report called "A Better Bang
for the Buck; the Economic Efficiencies of Defined Benefit
Pensions." This study evaluated claims that defined contribution
(DC) plans save money compared to DB plans. NIRS compared the
costs of delivering a given amount of retirement income. In many
states and in the private sector, employers are examining this.
NIRS did a fair apples-to-apples comparison. The study modeled
the population of 1,000 female teachers who worked for 30 years
with a final salary of $50,000. NIRS defined a target retirement
lifetime benefit of about $2,200 per month at the age of 62
adjusted for inflation. The study looked at what it would cost
to fund this benefit through a DB plan and a DC plan.
9:23:58 AM
MS. ALMEIDA found that the DB approach saved a lot of money
compared to the DC approach. The DB plan does a much better job
of pooling longevity risks. Actuaries are good at predicting
life spans of a large population. The DB plan can efficiently
manage those risks. Individuals have to over-save because each
person doesn't know how long he or she will live, so the DC plan
must save money to insure they won't outlive their savings. A DB
plan only needs to set aside enough money for the average life
expectancy of a large group. That saves a lot of money. Another
reason why DB plans save money is that it can maintain better
portfolio diversity over time. As people age, their investments
need to be more conservative to insure against the downside risk
of a market decline. The DB plan always has a mixture of people
of different ages, so unlike individuals, the group does not
age, so the portfolio can generate an enhanced return, which
makes providing the benefits much cheaper.
9:26:33 AM
MS. ALMEIDA said the third reason that a DB plan saves money is
that the investment returns are better because it has
professional asset management and lower fees. Not surprisingly,
the managers do a better job. There are consistently higher
returns, which makes a big difference in the cost of delivering
retirement benefits. The cost of providing $2,200 per month
beginning at the age of 62 in the model DB plan is $12.5 percent
of payroll. That same benefit under a DC approach would cost 16
percent by taking into account that individuals would have to
save as if they were to live to 100.
9:28:43 AM
MS. ALMEIDA said the DC plan increases the cost to 17 percent of
payroll since the DB plan has more diversified portfolios. The
final effect was the largest one. NIRS was very conservative and
only assumed a one percent per year difference in investment
earnings -- 8 percent for DB and 7 percent for DC. It doesn't
seem like much but it compounds over time and drives the cost of
the DC plan to 23 percent of payroll. The DB plan in this model
population was 46 percent less than the DC plan to deliver a
given benefit. There is "something missing" in the assumption
that a DC approach reduces retirement plan costs. Such claims
are based on evaluations that aren't apples-to-apples. The
assets needed on the eve of retirement is $350,000 for the DB
plan, and $550,000 for the DC plan. "This is real money."
9:31:31 AM
MS. ALMEIDA summed up her conclusions. A DB approach is more
efficient and provides a better bang for the buck. These
efficiencies drive significant cost savings for taxpayers and
employers. Decision makers should continue to carefully evaluate
claims that DC plans will save money.
9:32:48 AM
JILL SHOWMAN, President, Mat-Su Education Association, said she
represents about 1,200 educators, and the administration,
teachers, and community are all quite concerned with recruiting
and retaining qualified educators. In the past three years
finding new teachers and retaining teachers has been a problem.
This is primarily due to the DC plan and lack of social
security. The district has to go outside the state to find
teachers. Each time the district hires a new teacher, it must
provide $100,000 of training and materials. That is a cost that
the district would not be burdened with if it retained staff.
9:35:46 AM
MS. SHOWMAN said she is Tier II and has taught for over 12
years. She may have to change her profession because of the
retirement. She teaches an undergraduate education class at the
University of Alaska, Southeast. When high school and college
students ask her about becoming teachers, "I've got to be honest
with them and tell them that it's not as great of a profession
as it once was, and that's primarily due to the retirement." She
tells them to look outside Alaska or at other professions. That
saddens her. She urged passage of SB 23.
9:37:39 AM
JIM LEPLEY, President, Anchorage Education Association, said he
represents over 3,500 teachers in Anchorage. He encouraged the
committee to promote this legislation.
PAT LUBY, Advocacy Director, AARP Alaska, Anchorage, said
financial security is the cornerstone of the American dream -
you work hard and follow the rules and you'll be able to retire
without financial worries. However, one quarter of [Alaska]
retirees don't participate in social security. A person doesn't
outlive social security. In the past it didn't matter so much
that Alaska's public employees did not participate, because they
had a DB plan that would last as long as they lived. Now, they
have no DB or social security. The American dream no longer
exists for Alaska's newly hired public employees. It is possible
to make the DC plan work "as long as you don't live too long."
But most people live into their mid 80s and many into their 90s.
If the DC plan is to work, people need to predict their and
their spouses' life expectancy.
MR. LUBY said retirees need to know if they will be healthy up
until death or if they will need long-term care. Medicare
doesn't pay for nursing homes or home care. A person will need
to know if there will be inflation in health care and utility
costs. Defined benefits and social security provide annual COLAs
[cost of living allowances], but the DC doesn't. The price of
fuel oil and gasoline may go up. "You better have a crystal ball
to make a defined contribution plan work." Many companies have
switched to DCs, but all who work in the private sector have
social security that will last as long as they live. No matter
how much is saved in a 401k or I.R.A., they will always have the
defined benefits of social security. Alaska's public employees
used to have the same financial security before SB 141 [of
2005], and no matter how long they lived or what bad luck was
dealt them, they would not starve or end up on public
assistance. AARP members rely on Alaska's public servants for
police assistance, to teach their grandchildren, and to put out
fires, and they don't want these honorable public servants to
end up worrying about their health coverage and outliving their
savings. They deserve better than that. He asked for support for
SB 23. Give people the security they deserve.
9:41:52 AM
LAWRENCE WEISS, Executive Director, Alaska Center for Public
Policy, Anchorage, said he is a Tier I TRS retiree. He has heard
different large figures on Alaska's unfunded liability, and this
way of looking at the pension plan obscures the facts and
creates a panic about the actual status. A person buying a house
with a 30-year mortgage would develop heart palpitations by
looking at the total owed. The other way to look at it is that
there will be reasonable monthly payments over 30 years. The
unfunded liability on pensions is very similar. The liability is
defined at a given date. It is not useful harping on it at any
one point in time, especially now.
9:44:26 AM
DONALD CALLAHAN, Retiree, Fairbanks, said he is in Tier I of
PERS. He is 68 and worked as a city engineer. He went to the
University of Alaska and graduated as a civil engineer. At the
age of 41 he became a paramedic and retired after 30 years in
the city system with what he thought was a great retirement. He
has lost about 30 percent of his retirement due to inflation. If
he had to live on his mutual funds as if he were in a DC plan,
he would run out in about 3 years and would have to sell his
house and move south. Every union retiree gets a better
retirement than he does. He son has become a teacher in Alaska
and worked for a year for free as a student teacher. His pay is
over $40,000. He got his Masters Degree last summer. He had a
difficult time finding a house he could qualify for. Retired
teachers in Fairbanks do a lot of community work.
9:46:43 AM
LADAWN DRUCE, President, Kenai Peninsula Education Association,
Soldotna, said she represents over 600 certified teachers and
specialists in the Kenai Peninsula Borough school district. She
noted NEA's fight on the national level to right the injustice
of the windfall elimination provision. She wants to tell new
teachers that the legislature will return to the DB program. "We
need a cost analysis for all parties involved, including the
retirees." But she said to not get lost in the numbers -- there
are some things that are priceless. Public employees provide
priceless services to Alaska communities. Young people coming
out of college are educated about their retirement and are being
cautioned to plan for a secure future. "Let's not wait until
it's too late." She asked the committee to move SB 23.
9:48:28 AM
MELODY DOUGLAS, Chief Financial Officer, Kenai School District,
Soldotna, said the district has expressed concern about PERS and
TRS since 2003. "This is an ability-to-pay issue." She thanked
the legislature for the funding in fiscal year 2008, and $17.2
million was for TRS retirement. The funding is 41.4 percent for
TRS. There were 596 full-time equivalent teaching staff in 2008.
Salaries and benefits are 80 percent of the budget. Class sizes
would have doubled in the district. None of the new hires or
exiting teachers has expressed concern over the DC plan. The
district hired 76 teachers in 2008, 107 in 2009, and she expects
75 in 2010. The next time the numbers are released, the unfunded
liability will be about $10 billion. The public sector can no
longer fund a DB plan. The DC plan has only been in place for
three years and should be evaluated later.
9:50:38 AM
CHAIR MENARD said there is a second fiscal note. It went from
$17 million to $782 million.
SENATOR PASKVAN said the fiscal note of March 16 is $14 million
for fiscal year 20ll, and the revised note was $752,000 for
2010. He believes that for 2011 "it is an extra $84,000, and I
believe that those are just additional transition costs." Those
are thousands not millions.
SENATOR MEYER said this is an important subject and it seems
like the committee is moving rapidly, but many have heard this
in a previous committee, and numerous changes were made to meet
his concerns. He moved to report CSSB 23(L&C) from committee
with individual recommendations and attached fiscal note(s).
There being no objection, CSSB 23(L&C) moved out of committee.
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