Legislature(2011 - 2012)BUTROVICH 205
04/14/2011 09:00 AM Senate STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| SB121 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 121 | TELECONFERENCED | |
| + | TELECONFERENCED |
SB 121-TEACHERS & PUB EMPLOYEE RETIREMENT PLANS
9:04:01 AM
CHAIR WIELECHOWSKI announced the consideration of SB 121, which
would let Alaska public employees choose between a defined
contribution and a defined benefit pension system. This bill was
introduced recently by Senator Dennis Egan and has a companion
bill in the House.
9:04:07 AM
SENATOR DENNIS EGAN, sponsor of SB 121, introduced his staff
member Jesse Kiehl. Senator Egan noted the key point of SB 121
is to give employees a choice between defined benefits and
defined contributions. Thus, a military retiree signing on for a
few more years of service with a city government will be able to
choose defined contributions; a state trooper who will put his
life on the line for decades will be able to choose defined
benefits.
SENATOR EGAN said the new tier would be less expensive and more
predictable, thanks to the change in medical benefits. There is
no big surprise in this legislation. It keeps all of Senate Bill
141 safeguards in place, and would be cheaper for the state,
municipalities, and school districts. In time this will free up
several million dollars per year. When the Lower 48 gets out of
the recession, Alaska will again have to compete for teachers
and engineers. Defined benefit checks are a shock absorber for
the Alaskan economy. The actuarial analysis shows lower cost for
better benefits. This is the right thing to do for Alaskans. He
said that hopefully the committee will be able to hear the bill
in more detail during the Interim.
9:08:25 AM
CHAIR WIELECHOWSKI asked Mr. Kiehl to walk through the bill.
JESSE KIEHL, staff to Senator Dennis Egan, said SB 121 would add
a new tier to the state's defined benefit retirement systems.
The Public Employees Retirement System (PERS) covers employees
of the state, of municipalities, and a few school district
employees. The Teachers Retirement System (TRS) covers
certificated teachers in the state of Alaska; a few additional
employers also participate. Article 7, Section 12, of the Alaska
Constitution protects an accrued benefit in the retirement
system of the state. When the state makes changes, it has to
protect new hires. This bill gives new hires a choice between
the current defined contribution tier, which is Tier IV in the
PERS system and Tier III in the TRS system, and a new defined
benefit tier.
9:10:02 AM
Sections 1 and 2 are meant to clarify that the TRS defined
benefit statutes apply only to employees who are participating
in the Defined Benefit (DB) and did not convert; no employee can
participate in both plans. Section 1 also puts all TRS employers
on an equal footing by requiring them to offer new employees
this choice.
CHAIR WIELECHOWSKI asked if he anticipated how many employees
would choose Defined Contribution (DC) versus Defined Benefit
(DB).
MR. KIEHL said he didn't have a solid estimate. One challenge
will be looking at the actuaries' estimates for how many people
will make that choice, and whether that changes the expectations
of the systems.
MR. KIEHL continued with the overview. He said that Sections 3
and 4 of the bill require a person who receives disability
benefits to seek work if he or she is able and to receive a
medical examination. This is a safeguard to ensure that people
receiving disability benefits under the system would be
reevaluated on a regular basis.
CHAIR WIELECHOWSKI recognized Representative Muñoz joined the
meeting.
9:12:49 AM
Sections 5 and 6 establish a new eligibility standard for TRS
retiree medical benefits. This is the primary change in the new
tier. A teacher with 25 years of service may receive medical
benefits paid for by the system. With less than 25 years but at
least 8 years, the system would pay benefits once the person is
Medicare eligible. The accrued benefit in this tier would depend
on what the federal government does with Medicare. That is a
crucial change, also reflected in the PERS changes later in the
bill. This reduces the volatility of future medical liability
and reduces costs because the retiree medical system will be a
Medicare supplement for many of its beneficiaries.
The bill does retain system-paid medical benefits for those on
disability. If a retiree does not have system-paid medical
benefits, he or she can purchase insurance through the system.
9:15:25 AM
CHAIR WIELECHOWSKI asked if under the new provision there is no
vesting until 25 years.
MR. KIEHL responded under TRS it is 8 years. That is the minimum
service requirement, but the retiree can't collect the benefit
until he or she becomes Medicare eligible.
CHAIR WIELECHOWSKI asked for confirmation that a teacher under
Tier III who retires at age 60 has no health insurance from the
system until age 65, unless he or she pays the insurance
premiums.
MR. KIEHL agreed.
CHAIR WIELECHOWSKI asked how many years of service would be
required for a public employee to vest.
MR. KIEHL answered the minimum service requirement is ten years
for both Tier III and the new tier and the individual would be
Medicare eligible before he or she could collect the benefit.
CHAIR WIELECHOWSKI asked if the basic difference is that the new
tier eliminates the five-year gap where people are without
insurance unless they pay the premiums.
MR. KIEHL suggested members review the comparison chart of the
current defined benefit tiers in the bill packet. It provides a
good description of the defined benefits for both TRS and PERS.
CHAIR WIELECHOWSKI asked Mr. Kiehl to continue with the
sectional analysis.
9:18:15 AM
MR. KIEHL said Section 7 contains clarifying language that makes
it clear that the defined contribution statutes apply only to
employees who participate in the defined contribution plan and
do not convert to the new defined benefit system. No employee
may participate in both DC and DB plans.
Section 8 puts all TRS employers on an equal footing by
requiring them to offer all new employees the same choice.
Section 9 contains the provisions that give a new hire teacher
that has no previous service in TRS, a one-time, irrevocable
choice of defined benefit or defined contribution. New employees
are put in the DB system, but within 60 days they may elect to
participate in the DC system. The Division of Retirement and
Benefits has raised concern about the workability of that
timeframe and the sponsor is willing to work to ensure that it's
workable for school districts and the division.
9:20:22 AM
Section 10 makes it clear that the defined benefit statutes only
apply to DB employees. It also puts all PERS employers on equal
footing, by requiring them to provide the choice to new
employees.
Section 11 sets the same minimum earning threshold for elected
officials in the new defined benefits tier as the 2004 reform
bill implemented. There was significant concern when Senate Bill
141 passed, about some elected officials, usually at the
municipal level, who are paid an honorarium rather than a
salary, and were in previous years gaining credit for their
work, and their employers' contributions were out of proportion
to the benefits they earned. This maintains that safeguard
explicitly in the new tier.
Sections 12 and 13 extend disability medical checkups to PERS
employees. Section 14 contains the new medical requirements for
PERS members. This is more complicated in PERS because there are
two categories: police and fire, and all others.
9:22:06 AM
In the new DB tier, a police officer or fire fighter full career
is 25 years, with benefits paid no matter the age at retirement.
For others a full career is 30 years. For those who work less
than the full career amount, 10 years is the minimum to vest but
medical benefits are not collectible until the retiree becomes
Medicare eligible.
Sections 15 and 16 have language requiring all PERS employers to
offer a choice between DB and DC. Section 17 clarifies that the
defined contribution statutes apply only to DC employees.
Section 18 puts all employers on equal footing and requires all
PERS employers to offer the choice between DB and DC.
Section 19 contains the mechanics of giving the choice to newly
hired public employees; at the date of hire the default the
defined benefit system, but the employee has the option of
converting 60 days to convert to the defined contribution system
if desired.
Section 20 contains repealers to existing statutes that let non-
vested defined benefit employees convert to the defined
contribution system. That would go away under this plan because
new hires have the choice. It also repeals the sections related
to political subdivisions, such as cities, that don't offer the
choice.
9:24:43 AM
It also requires returning employees who took their money out
and then return to work to be given the same choice as a new
hire, since they would have no money in the system.
Section 21 gives those in the defined contribution system who
did not have a choice an opportunity to convert to the new
defined benefits tier. Funds in their accounts would be
transferred into the PERS or TRS trust fund. Employees who make
that choice would receive full service credit for the time
worked. An actuary would calculate how much time that buys; to
ensure there is no unfunded liability, this bill requires the
deficiency to be paid up front.
It is important to note that defined benefit systems work to
prefund liabilities. Contributions pay the future cost of the
benefit. Section 23 gives the commissioner of the Department of
Administration authority to promulgate regulations; Section 24
is the effective date.
9:28:44 AM
MR. KIEHL noted that Senator Egan asked him to leave the
committee with the information that the defined benefit system
pays a more valuable benefit down the road than the defined
contribution system. It does this for comparable or even less
cost.
The committee packet contains this analysis by an actuary very
familiar with the PERS and TRS systems. His analysis shows that
the new tiers would cost less than prior tiers and less than
defined contributions. It would provide public employees with a
dependable benefit. Most PERS and TRS retirements are not rich;
average retirements are in the $20-$30 thousand per year. But
they don't go down when the stock market tanks. Employees who
rely only on individual investment accounts have to decrease
their spending when the market goes down, and the impacts of
that ripple through the economy.
It is also important to note that most PERS retirees do not
receive social security. A defined benefit payment is a
tremendous stabilizer to the state economy. It gives greater
benefit for less cost. It makes good economic sense and is good
public policy from a hiring and retention standpoint.
CHAIR WIELECHOWSKI opened public testimony.
9:32:10 AM
BRETT GILLAN, representing NEA Alaska, testified in support of
SB 121. He is a math teacher at West Anchorage High School, and
his wife teaches science at Golden View Middle School in
Anchorage. Roughly two years ago he was invited by NEA Alaska to
fly to Juneau and speak about the need to return to a defined
benefit plan. His message then was simple; by offering only a
defined contribution plan, the state was creating a class of
mercenary teachers with little incentive to stay in Alaska for
the entirety of their careers. The state's benefit plan made it
so easy to work for a short while and then relocate to another
state with a more secure retirement package, even while
retaining the money sunk into retirement from Alaska. The DC
plan actively encouraged this class of mercenary teachers. These
teachers were here to reap the benefits of impressive starting
salaries, only to leave for states with secure retirement
options after a few years.
At the time he was told that his message would be more powerful
if he could provide examples. He said he has returned here in
his third and final year as an Alaska teacher to reiterate his
message and offer himself as an example. He loves teaching at
West Anchorage High; the outstanding and diverse student body
combined with a professional and motivated staff has created a
unique atmosphere of academic excellence that he has not
experienced anywhere before, and does not expect to find again.
His wife, also a teacher, feels the same about her own school,
Golden View Middle School. It is physically painful for him to
consider moving to another state, and yet he and his wife were
forced to evaluate where they would be best situated for the
long haul.
9:35:17 AM
There were many factors to weigh when considering their options;
however, a decision made by the state of Alaska six years ago
clarified their thinking. Neither is willing to risk their
family's well being by depending on an insecure retirement.
Knowing they do not have the stability of Social Security to
rely on, and knowing they do not have the stability of a defined
benefit retirement, he and his wife are not willing to gamble on
the prospect of a defined contribution plan.
The stock market drop in 2008, which devastated his parents'
retirement, made it clear how risky that proposition would be.
The question for him and his wife became not whether they would
leave, but when. They have resigned from their jobs and are
returning to New Mexico and a defined benefit retirement.
Last week he visited the capital with a colleague from Mat-Su
whose son, a special education teacher, and daughter-in-law, a
physics teacher, were packing their bags for states with a more
secure retirement. When he returned home, his wife told him to
make sure the committee knew that three of the four seventh
grade science teachers in her school were leaving, for the same
reason. They cannot afford the risk of retirement in Alaska
under a defined contribution plan. The state is losing three out
of four science teachers at Goldenview Middle School, a flagship
school in Anchorage; this is a serious problem.
Some in this room believe this problem can be put off. They say
jobs are tight outside, so no one will risk a move. However, the
teachers he listed: math science, and special education, are in
high demand and will find work quickly. They can afford to move
regardless of the economic climate. He said, "Unless you believe
that the state does not need high quality, committed, science,
math, and special education instructors do not believe that a
tight economic climate means this can wait."
Starting pay for teachers in Alaska is still very appealing, and
the state has no problem attracting new teachers. But the
current system actively encourages them to walk out the door
within three to five years, just when they are hitting their
peak effectiveness. He said, unless it is your intent that
Alaska become a training ground for teachers in other states,
the State cannot afford to put this off any longer. Those with
defined benefit retirements are staying as educators in Alaska.
His brother and wife, both middle school teachers, moved here
eight years before him, but with confidence in the security of
their defined benefit retirement. With retirement as it is now,
he does not have a choice. With no option of guaranteed
retirement stability, staying is too great a risk. The decision
was made for him.
9:40:45 AM
MR. GILLAN said that he is on his way out the door. It is too
late to keep him here; he urged the committee to pass SB 121 and
give future educators in Alaska the option to plan from the
moment they start here to stay here, and become excellent
teachers throughout their careers in Alaska.
9:41:23 AM
JOSH FOSTER, Anchorage Fire Fighter and Tier IV participant
testified in support of SB 121. He was born and raised in
Alaska, attended Diamond High school, attended UAA and UAF and
received a bachelor's degree in Fire Service Administration. He
was part of the first group hired under the DC system; the lack
of a defined benefit retirement option is a big concern for the
group of 30 firefighters who were hired in that group. There is
talk of taking lateral transfers to the Lower 48, where most
firefighters participate in a defined benefit system. A few
members of the group have already tested for departments in
other states but pulled out at the last minute, hoping for a
retirement fix in Alaska. He intends to remain in Alaska, but it
is difficult to remain in a job without a defined benefit for
retirement. He urged the committee to pass SB 121.
9:43:24 AM
STEVEN CHAYKOWSKI, Anchorage Police Department (APD), said he is
a patrol officer with the APD and is speaking on behalf of his
fellow police officers. He graduated from Bartlett High and left
for college, then returned to UAA where he graduated from the
ROTC program and served four years in the Air Force. After
living in many places with the Air Force, he decided to return
to Alaska. He left a military pension to return here.
At that time defined contribution was in the works; when he
arrived he learned that defined contribution was real. His job
is the most rewarding thing he could do. Most people wouldn't
want to do what he does, but it is rewarding for him. Forty
percent of those trained as police officers for the APD don't
make it to the street.
9:46:58 AM
OFFICER CHAYKOWSKI said he was testifying in place of Officer
Garcia, who testified previously and has now moved away from
Alaska, for a job with secure retirement. Another officer he
knows has gone to the U.S. Marshalls. He knows many who are
looking at other options; he himself has an offer from the Air
Force to go back. He could easily leave the state and have a
defined benefit retirement system. He took a pay cut to return
to Alaska.
He doesn't know what he will be able to provide for his family,
or even if he will go home. He works the night shift in Mountain
View, where he has been involved in homicides and officer
involved shootings. He has actually had to tell a mother that
her child did not survive. His wife has said--you don't even
have a retirement--what if something happens to you while you
are at work? With all of that, he still loves his job.
He personally loaded an officer into the ambulance after she was
shot on duty. The worst part was his wife didn't know who was
shot; she learned on the news that morning an East Anchorage
officer was shot in the line of duty, and spent the entire day
wondering if it was him.
OFFICER CHAYKOWSKI said his job is very hard on his family; a
lack of secure retirement makes it even worse. He would like to
keep his family here in Alaska, but doesn't know if he can do
that under the current system. The defined contribution system
makes him think of leaving. He needs the security of a defined
benefit plan. It is hard for him to do his job while in the back
of his mind he is worrying about how much he has in his 401(K)
or how much retirement money he has; at the same time he is on
his way to help someone.
9:49:58 AM
OFFICER CHAYKOWSKI said his fellow officers are currently being
actively recruited by other departments down south. They view
this as a chance to get the best trained officers, and are
actively seeking Alaskans because they can offer a defined
benefit. He is hoping he can stay here and sustain his job, and
hopes that SB 121 will allow him that chance. It is hard for him
to turn down the Air Force when they call. He would rather serve
Alaskans; SB 121 would help him do that.
9:51:29 AM
CHAIR WIELECHOWSKI thanked him and the others for their
testimony and their service. He noted the administration was
present to testify.
9:51:54 AM
MIKE BARNHILL, Deputy Commissioner, Department of Administration
(DOA), said he is testifying on behalf of the DOA and the Office
of the Governor in opposition to SB 121. He said they recognize
and understand the good intentions of the sponsor; they
recognize and understand the concerns of the employees who
testified, and are also very gratified for the excellent service
state employees provide. The administration's primary concern
centers on the belief that the state does not have the financial
capability to extend defined benefit promises to a new
generation of state employees. The state needs to fix its long-
term fiscal situation. To potentially have a situation where
people relied on pensions and then discovered they were not
there would be unacceptable.
9:54:52 AM
CHAIR WIELECHOWSKI noted that Alaska is the only state in the
country that does not offer either Social Security or a defined
benefit for public employees.
MR. BARNHILL responded that Alaska is not the only state that
has opted out of Social Security.
CHAIR WIELECHOWSKI reiterated that Alaska is the only state that
has opted out of Social Security and also does not offer a
defined benefit plan.
MR. BARNHILL said he would have to check on that. He is aware
that many states are considering ending defined benefit programs
and moving to defined contribution. If Alaska is the only state
today, that is not likely to last.
CHAIR WIELECHOWSKI asked if he knew what the state's total
accumulated savings is.
MR. BARNHILL answered $14 billion, and the permanent fund
balance is $40 billion.
CHAIR WIELECHOWSKI asked if it's fair to say that Alaska has the
largest savings account in the United States, and is probably in
the best financial condition of any state.
MR. BARNHILL said in the short term yes, but these promises are
made for 70 to 80 years. The oldest PERS retiree died recently
at the age of 106. So if the state makes a new promise today to
a defined benefit employee who is 20 years old, that promise is
for 70, 80, or even 90 years.
CHAIR WIELECHOWSKI said actuaries figure out how much to pay out
in benefits and how much to take in, and it should equal out.
MR. BARNHILL said theoretically it should, but in practice it
has not worked in this state for the last 10 years.
9:57:42 AM
There are many reasons why it hasn't worked. Sometimes it is
actuarial negligence, but that's not always the case because
assumptions change over time and people live longer. Now the
state has an unfunded liability. Even with the best actuary it
cannot predict medical advances that change mortality. An
actuarial study done under Senate Bill 141 found out people on
average are living longer and now the state's unfunded liability
has increased $1 billion in the space of one year.
CHAIR WIELECHOWSKI asked if that isn't why actuaries are hired.
MR. BARNHILL replied they base mortality assumptions on
experience.
CHAIR WIELECHOWSKI asked what the initial cost of malpractice
estimate was in the Mercer case.
MR. BARNHILL answered $1.3 billion, which was attributable to a
number of factors including negligence. The figure was
subsequently increased to $2.3 billion, based on the discovery
of fraud.
CHAIR WIELECHOWSKI asked how much the state settled for.
MR. BARNHILL replied $500 million.
CHAIR WIELECHOWSKI asked if the state fully funded the defined
benefit system during that time.
MR. BARNHILL answered the state did not fully fund the system
during that time, for reasons attributable to actuarial
negligence and other reasons. In 2003 the actuarial audit from
FY02 was released, and the state first learned it had a $4.4
billion unfunded liability. That increased for a variety of
reasons, including investment losses.
10:01:24 AM
MR. BARNHILL said the theme of his presentation is the
distinction between making promises and the hard work it takes
to keep them. He would explain why the state can't extend new
promises to a new generation of state employees. To date, a
pension after 30 years amounts to 67.5 percent of annual salary;
the state provides annual cost of living increases and system-
paid medical premiums. That promise has been made to 100,000
people and their families. There is a high, long-term cost. The
state has a constitutional and a moral obligation to keep those
promises. Actuaries currently project those benefits will be
paid until 2080.
10:03:07 AM
Starting from today and for the next 50 years, those hard
liabilities will be in excess of $1 billion per year. They will
crest for a twenty year period; from 2026 to 2047 the benefit
payments made by the system will exceed $3 billion per year.
SENATOR PASKVAN asked if those were nominal dollars.
MR. BARNHILL answered they are nominal dollars, not discounted
dollars. He said that people are living longer than expected,
retiring earlier than expected, and health costs have
substantially exceeded the rate of inflation. He described how
the state plans to keep its promises to those employees; the
State of Alaska will make all benefits payments when due.
In order to meet these promises they are turning to the general
fund. The Senate Bill 125 general fund draw is projected to
exceed $1 billion a year by the end of this decade; it will
exceed $1.4 billion by the middle of the next decade. Total
employer contribution rates for PERS are now over 30 percent;
they will increase in FY13 to close to 33 percent. For TRS, it
will approach 50 percent. So in order to meet the promises, they
are currently turning to the general fund.
SENATOR PASKVAN asked what the base wage percentage is.
MR. BARNHILL answered the normal cost for PERS is just over 9
percent; it fluctuates between 8 and 10 percent. The normal cost
plus the employers' contribution is about 11 percent. So about
11 percent goes to normal costs and the defined contribution
costs, leaving a balance of 11 percent being paid on past
service costs.
10:07:17 AM
SENATOR PASKVAN asked what the gross payroll is for PERS
employers.
MR. BARNHILL said he did not have the figure available but would
get it for the members.
SENATOR PASKVAN asked if the past service cost at 11 percent is
being channeled toward the unfunded liability.
MR. BARNHILL answered yes.
SENATOR PASKVAN asked how much in total is going to the unfunded
liability at this time.
MR. BARNHILL answered for FY12 under Senate Bill 125 the state
is contributing $474 million to the unfunded liability; TRS
employers don't contribute, but PERS municipal employers pay a
meaningful amount, probably several million dollars.
SENATOR PASKVAN asked if in FY11 the payment was in excess of
$800 million when the Mercer settlement monies were added.
10:09:13 AM
MR. BARNHILL said the Mercer settlement netted about $400
million. The Senate Bill 125 payment for FY11 was $300 million,
so added together the total was $700 - 800 million.
MR. BARNHILL said the final point is the state plans to make all
benefit payments when due. The cost of promised benefits keeps
increasing; the unfunded liability is now projected to exceed
$11 billion, PERS and TRS rates are increasing. Some things
cannot be predicted by actuaries, such as changes in mortality
and investment losses, and those will continue to create
unfunded liabilities from now until the last defined benefit
retiree expires. That is a fact of life with defined benefit
plans.
CHAIR WIELECHOWSKI asked if the administration has any plans to
increase current employees' retirement age or reduce current
employees' benefits.
MR. BARNHILL said there is no plan to reduce current retirement
benefits. That is prohibited under the state constitution. The
Alaska Supreme Court has held that benefit promises the state
extends cannot be reduced. The Court noted it would consider
diminishments in case of a fiscal crisis.
10:12:12 AM
SENATOR PASKVAN asked how he would define fiscal crisis.
MR. BARNHILL answered he would not try to define it, and they
did not want to hear it.
CHAIR WIELECHOWSKI answered they do. He asked is the
administration having any discussions about what it would be.
MR. BARNHILL said the state is not in a fiscal crisis at this
time. Funding of plans is poor, but the state has assets and
revenue streams. He is not suggesting there is cause for alarm
with respect to current retirees. But extending these kinds of
benefits would be unwise. Especially when the state relies on
oil production and that trend is steadily down. TAPS could
extend to 2047, maybe 2065. That will secure current promises.
If the state has to extend defined benefits to 2080 or 2090,
there is no way to make that guarantee, to guarantee that the
general fund will be there at the end of this century to make
good on the promises made today.
10:14:54 AM
CHAIR WIELECHOWSKI said the spring forecast revenue projections
indicate throughput decline itself is declining. The Department
of Revenue (DOR) is projecting a decline down to 2.1 percent;
the price of oil is up. He asked if it would that create a
fiscal crisis if the state removed $2 billion per year from the
general fund.
MR. BARNHILL said he would not go there. He said if the state
pays off the unfunded liability over a five year time period,
that would not solve the problem. The state would still be
exposed to the future risk of mortality changes, increasing
health costs, and investment losses, and unfunded liabilities
could crop up at any time.
10:16:36 AM
CHAIR WIELECHOWSKI asked what the state's credit rating is.
MR. BARNHILL answered triple A; the best there is.
CHAIR WIELECHOWSKI asked is it triple A even with the unfunded
liabilities.
MR. BARNILL answered the state issues 30 year bonds, and the
state has no problems for 30 years. But the talk today is about
70 year promises.
SENATOR PASKVAN said he is not so pessimistic about Alaska's
future. He asked if we don't have a definition of economic
crisis, how we know when we are operating with an objective
standard. In the context of throughput, the technological
advances of heavy oil and shale oil, and potential for other
areas opening up, we should not be pessimistic.
MR. BARNHILL said he is not pessimistic. He said it will be
clear that the state is on the right path when the crude oil
production chart shows an uptick. He cautioned against counting
the chickens before they hatch. He noted the legislature has
heard some exciting news this session; hydro fracking on the
North Slope, the gas line, off-shore drilling. He is optimistic
those things will come to pass. When there is a meaningful,
sustained uptick in oil production, then is the time to have
this conversation. Don't make promises that can't be guaranteed.
10:19:35 AM
SENATOR PASKVAN asked if the administration had factored in the
risk to Alaska losing highly competent police officers,
teachers, and other employees. He asked have they factored in
that loss for 80 years.
MR. BARNHILL said those concerns are real, and he does not
diminish them. He has to balance which is worse; telling
employees the truth about the state's long-term finances, and
giving them the choice while they are young to go somewhere else
if they want a defined benefit plan, or making a promise the
state doesn't know it can keep when it is needed most. He
believes the defined contribution plan is the most honorable and
moral way for the state to proceed at this time.
SENATOR PASKVAN noted there is an obligation the state owes to
its current public employees. It is not acceptable to tell them
to look elsewhere.
MR. BRANHILL responded he respected his opinion.
CHAIR WIELECHOWSKI said it is a basic math equation. He asked
why we can't figure out a system that works.
MR. BARNHILL replied this discussion is playing out in state
legislatures all across the country.
CHAIR WIELECHOWSKI noted we don't care how they do it outside.
MR. BARNHILL said the bottom line is, in a defined benefit plan,
the risks are all on the employer. The risks will continue to be
present until the day it closes.
CHAIR WIELECHOWSKI said when asking each person to manage their
own retirement, that person doesn't know if they will live to 65
or to 100. The state can smooth that out actuarially; it is
extremely difficult for one single person to figure out. He
noted the state can ask for more contributions from its
employees.
MR. BARNHILL agreed that investing in the aggregate has
efficiencies. He said the status quo for PERS Tier IV and TRS
Tier III does provide meaningful benefits to these employees. A
range 16 employee who works for the state for 30 years in PERS,
invested at four percent annual return, will end up with a DC
account at the end of that time of approximately $400,000. They
will end up with an SBS account of approximately $400,000. That
totals $800,000, which is a meaningful amount.
10:25:25 AM
CHAIR WIELECHOWSKI said for a range 16 who retires after 30
years with $800,000, no social security, and no other pension,
they can only pull out -- at four percent -- $32,000 a year. He
asked how a person 30 years from now can live on $32,000 a year.
MR. BARNHILL said people make do with what they have. He said
$800,000 is a meaningful amount of money that people can plan
for and live on during retirement. He agreed it was probably not
as good as a defined benefit plan.
SENATOR PASKVAN asked isn't the purpose of defined benefit that
the long-lived employee takes advantage of the short-lived
employee. If retirement benefits are not paid out, that money
funds the person who lives longer. What if you live to 90 or 95
or 100?
MR. BARNHILL agreed that is a benefit to the defined benefit
plan.
10:27:50 AM
CHAIR WIELECHOWSKI asked Mr. Barnhill to wrap up, and said he
hopes to have another hearing on this bill over the Interim.
MR. BARNHILL said the administration looks forward to having
further discussions over the Interim and into the next session.
Even though they oppose this bill, they recognize the concerns
that drive it. He said the Division of Retirement and Benefits
will supply all information as timely and effectively as
possible.
The administration has not yet submitted a fiscal note; the
actuary has to evaluate on a case-by-case basis the transfer of
service credit into the defined benefit plan. Those employees
have been contributing 13 percent to the defined contribution
accounts. Those defined contribution accounts got hit by the
Great Recession. In the meantime the state has been contributing
close to 30 percent for defined benefit employees. The chance of
doing a one-for-one transfer of service credit is nonexistent.
There will be a general fund impact.
He asked if SB 121 actually saves money. He believes, with all
due respect to Senator Egan, a defined benefit is more valuable.
Therefore it has to cost more. The state contributes five
percent to the defined contribution system. Right now normal
cost for the defined benefit is nine percent; that will go up.
The overall contribution rate is much higher in the defined
benefit plan.
The risks to the state are much higher with a defined benefit
plan. It will cost more money in the long term. Transferring
account balances into the defined benefit trusts would not make
a meaningful dent in the unfunded liability. It would not change
contribution rates, since they are calculated on the combined
payroll DB and DC base. The administration would love to see a
defined benefit system that actually saved costs, but it does
not exist. That is why states across the country are seeking to
follow Alaska's example.
10:31:49 AM
He thanked the Chair for the opportunity to present the
administration's position in opposition to the bill. The state
wants to keep its retirement promises. It does not want to make
new retirement promises that it cannot keep. Until Alaska's
long-term fiscal situation is resolved, this discussion is
premature.
CHAIR WIELECHOWSKI said the committee would continue to work
with the stakeholders and the administration, and look for
common ground. He thanked the committee, the recording
secretary, LIO staff, and his committee staff Michelle Sydeman.
[SB 121 was held in committee.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 121.pdf |
SSTA 4/14/2011 9:00:00 AM |
|
| SB 121 Pensionomics_factsheet_AK_2009.pdf |
SSTA 4/14/2011 9:00:00 AM SSTA 2/16/2012 9:00:00 AM |
SB 121 |
| SB 121 Sponsor Statement.pdf |
SSTA 4/14/2011 9:00:00 AM SSTA 2/16/2012 9:00:00 AM |
SB 121 |
| SB 121 NCPERS_ResearchSeries_TopTen.pdf |
SSTA 4/14/2011 9:00:00 AM SSTA 2/16/2012 9:00:00 AM |
SB 121 |
| SB 121 PERStierI-IVchart.pdf |
SSTA 4/14/2011 9:00:00 AM SSTA 2/16/2012 9:00:00 AM |
SB 121 |
| SB 121 TRStierI-IIIchart.pdf |
SSTA 4/14/2011 9:00:00 AM SSTA 2/16/2012 9:00:00 AM |
SB 121 |
| SB 121 Actuarial Analysis - Fornia March 8 2011.pdf |
SSTA 4/14/2011 9:00:00 AM SSTA 2/16/2012 9:00:00 AM |
SB 121 |