Legislature(2011 - 2012)Fairbanks
10/13/2011 12:00 PM 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 | |
SB 121-TEACHERS & PUB EMPLOYEE RETIREMENT PLANS
12:05:59 PM
CHAIR WIELECHOWSKI stated that the committee was meeting to
continue the discussion regarding the type of retirement system
the State of Alaska, its municipalities [and school districts]
should offer their long-term employees. He reminded everyone
that in 2006 the Alaska Legislature changed the retirement
system from a defined benefit (DB) system to a defined
contribution (DC) system. Under a DB system, retired employees
receive a defined monthly check based on salary and years of
service. He noted that most state, municipal, and school
district employees around the nation belong to such plans. To
his knowledge, Alaska is the only state that offers its new
employees neither a DB plan, nor the opportunity to participate
in the U.S. Social Security program.
CHAIR WIELECHOWSKI explained that under a DC system, employees
and their employers contribute to a retirement account, and the
individual employees make their own investment decisions. If
those investments perform poorly, the employee receives less
money at retirement. While this system provides less security to
workers, it has the advantage of portability; DC employees have
the ability to take their retirement accounts with them when
they change jobs. This system works well for individuals who may
wish to work for a particular employer for a relatively short
period of time.
SB 121 will give Alaska public employees a choice between the
two systems. The sponsor's objective is to design a system that
would cost the State of Alaska, municipalities and school
districts less than the current PERS Tier III DB system. He
noted that based on the most recent fiscal note, that goal might
not have been achieved. Therefore, one objective today is to
discuss ways to move closer to that goal. Mr. Slishinsky from
Buck Consultants, Inc. and Mr. Fornia with Pension Trustee
Advisors will discuss the bill and its costs, he said.
CHAIR WIELECHOWSKI recognized that Representative David
Guttenberg had joined the meeting.
12:09:27 PM
JESSE KIEHL, Staff to Senator Dennis Egan, prime sponsor of SB
121, extended apologies on behalf of Senator Egan. He was
fulfilling a commitment to the Senate President and was
therefore unable to attend the meeting today.
MR. KIEHL explained that SB 121 gives newly hired state,
municipal and school district employees the opportunity to
choose the type of retirement system that best fits their public
service to Alaskans. Each system has its strengths, and each
system has its weaknesses. The defined benefit (DB) system
guarantees a formula-based retirement check and a healthcare
benefit, but it takes a long time to earn that check, and longer
still to earn the healthcare benefit.
In a defined contribution (DC) system, the employee gets to keep
the money he or she put in, and after a certain amount of time
the money that the employer put in also belongs to the employee.
The employee controls the investments, and thus has the
opportunity to beat Wall Street, but there are no guarantees.
In addition to the choice between a DB and a DC retirement
system for a new hire, SB 121 creates a new tier for employees
who choose a defined benefit. In the new tier it is harder still
to earn the medical benefit; the employee has to either work a
full career or be Medicare eligible at the time of retirement in
order to qualify. This makes it easier to predict what to put
away now, in order to fund those benefits in the future.
SB 121 gives employees currently working in the defined
contribution system one opportunity to make an irrevocable
election to convert to the new defined benefit tier. Any new
hire that does not make a selection will be defaulted into the
DB system, largely because it provides the public a better bang
for the buck. The DB system is more economically efficient,
provides a better stabilizer for the Alaska economy, and
encourages retirees to stay in Alaska when their public service
career ends.
12:12:59 PM
MR. KIEHL said SB 121 was designed to be, at worst, cost neutral
to the state and public employers. While there hasn't been time
to thoroughly review the updated fiscal note, he looks forward
to hearing the analysis and the thinking that underlies it. He
emphasized that Senator Egan is committed to making SB 121 a
workable bill and a good deal for the state and Alaska's public
servants. He said it appears that flexibility will be necessary,
and the sponsor looks forward to working cooperatively with the
committee and the administration to accomplish this goal.
12:14:29 PM
REPRESENTATIVE DAVID GUTTENBERG asked if he's saying that he
doesn't have the underlying details to fully understand the cost
projections in the fiscal note.
MR. KIEHL replied he is casting no aspersions; it's just that
more time is needed to delve into the underlying methodologies.
It's possible that there will be questions, just as there were
with the previous fiscal note. Listening to the testimony today
and participating in the analysis should be informative for
everyone, he said.
SEAN M. GENSON, representing himself, said he teaches history at
West Valley High School in Fairbanks, but he might not be able
to make this a long-term career in Alaska, unless he has a
better retirement option. SB 121 will help in this decision-
making process. Mr. Genson explained that he is 39 years old and
has taught for four years as a TRS Tier III employee. Because he
doesn't have a retirement plan he can count on, he does what he
can to put aside extra money for retirement. Instead of saving
for a down payment on a house, he lives in a cabin without
running water. He knows that he's becoming a better teacher
every year, but he doesn't know how he'll be able to continue
for a full career. He doesn't want to leave Alaska, but he might
have to if he wants to keep teaching. He doesn't want to quit
teaching, but he might have to quit if he wants to stay in
Alaska.
MR. GENSON said it takes a new teacher a few years to figure
things out and get things working smoothly. The defined
contribution plan is a huge disincentive for teachers to stay on
after they've figured things out. In fact, it tends to push
talented and experienced teachers out of the system after just a
few years.
MR. GENSON said he won't leave teaching because he can't do it,
or because he doesn't want to do it. He is honored to work with
students as they develop into responsible and thoughtful
citizens. But he might have to leave Alaska to teach in a state
that offers a dignified retirement after a career spent working
with kids. The DC plan isn't just harmful to plans for old age,
and it isn't just harmful to the economic need to keep educated
professionals in the state. It is also harmful to children's
education. He urged the committee to think about Alaska's future
and advance SB 121.
12:22:16 PM
SENATOR GIESSEL asked how long he has lived in Alaska and in
Fairbanks and what he did before becoming a teacher.
MR. GENSON replied he moved to Alaska in about 1995 and to
Fairbanks in 2005. Before becoming a full-time teacher, he
worked as a substitute teacher and in fine-dining restaurants.
His work experience also includes sea kayak guide and commercial
fishing.
REPRESENTATIVE BOB MILLER asked if he knows other teachers that
have similar feelings about the defined contribution retirement
system.
MR. GENSON answered yes.
REPRESENTATIVE MILLER asked if he would say a majority feel the
same way.
MR. GENSON said yes.
REPRESENTATIVE BOB MILLER asked if he believes that if SB 121
were to pass, that he would have more free cash that he could
use to help drive the economic engine in Fairbanks.
MR. GENSON said he believes that would be the case. Responding
to a further question, he said he believes the same would hold
for other teachers. He and his colleagues have had many
conversations on the topic.
12:24:07 PM
REPRESENTATIVE GUTTENBERG asked if he feels it's more secure to
make his own investment decisions, as opposed to having the
state manage the account.
MR. GENSON replied he doesn't want to bet on his investing
skills. He doesn't want to work towards what is essentially a
gamble.
SENATOR THOMAS asked if he'd noticed that the DC statement shows
that his account is automatically rebalanced on a regular basis.
MR. GENSON replied he looks at the statement, but he doesn't pay
attention to allocations.
12:26:54 PM
ERIC DANIELSON, representing himself, said he is an airport
police and fire officer and a PERS Tier IV defined contribution
employee. He also serves as vice-president of the Public Safety
Employee Association (PSEA) representing Alaska State Troopers,
state fire marshals, the airport in Anchorage, and multiple
municipal fire and police departments. In the past, the State of
Alaska recognized that these professions are inherently
dangerous and hazardous, but that is no longer the case. Under
the DC plan, police and fire officers are expected to work until
age 59 1/2; this ignores the fact that law enforcement officers
and fire fighters have a lower life expectancy than the general
population. The people that have chosen these professions
exhibit the qualities of loyalty, integrity, and courage. The DC
plan doesn't recognize this, but the DB plan would, he stated.
MR. DANIELSON said it takes very special individuals with select
training to become part of the law enforcement and fire fighter
communities. There is great demand for these skills. The state
of Alaska provides this specialized training to DC employees and
then it loses the training and skill when the employee moves on.
Mr. Danielson said he'll vest next summer and he and other DC
employees are looking at other options, because Alaska isn't
competitive. He noted that in Fairbanks, the DC employees who
want to stay in Alaska oftentimes transfer to the federal
system, because it offers a pension.
MR. DANIELSON said about half of the front-line employees in his
department are in the DC system. It's one of the main topics
around the lunch table and a huge distraction. Some employees
find it stressful to watch the market and some are already
looking at other options. Defined benefit employees within the
department question why DC employees stay around, even for the
five years it takes to vest. They point out that the 18 months
of training that costs tens of thousands of dollars is portable.
For example, law enforcement officers in Austin, TX can retire
after 23 years of service. The pay and benefits are comparable,
but that system offers a pension after 23 years that is 73
percent of pay. Alaska can't compete; he can get experience and
training here in Alaska, and after vesting in 5 years he can
move to Texas where the cost of living is lower.
MR. DANIELSON said he realizes that his account goes up and down
with the market, but right now his account is worth less than
the combined total of what he and his employer have contributed
over the past 4.5 years. This doesn't bode well for being able
to retire, particularly in Alaska where the cost of living is
higher. He cautioned that there will be a huge leadership gap in
departments if the state loses a generation of employees. He
urged the committee to pass SB 121, and return to a defined
benefit system.
12:35:43 PM
SENATOR GIESSEL observed that the discussion is about risk. In a
defined contribution plan the employee assumes the risk, and
they have the option of managing their account or having the
state do it. She asked who bears that risk in a defined benefit
plan.
MR. DANIELSON replied he would argue that both the employee and
the state manage the risk. Great-West Retirement Services
managed his account for about 3.5 years, and the returns were
much worse than the stock market. Now he manages the money
himself.
12:38:55 PM
BRIAN COOPER, representing himself, said he works for the
Fairbanks Fire Department and is a PERS Tier IV defined
contribution employee. He has lived in Fairbanks his entire
life, and received his paramedic degree and associate degree in
municipal fire control in Alaska. While going to school, he
worked at the university fire department and received on-the-job
training. He ran into burning buildings, drove and operated fire
trucks, and served as lead medic. That experience gave him a
significant advantage and the option of working anywhere in the
nation, but he wanted to stay in Alaska and work for the
Fairbanks Fire Department.
MR. COOPER said he's worked for the City of Fairbanks for about
2.5 years and he's questioning whether or not to stay. Two
coworkers who were hired at the same time have already left or
are in the process of leaving. Although it's said that
portability is a benefit of the DC system, portability isn't a
benefit in the firefighting profession. If he spends 5 years as
a fire fighter in Fairbanks, he'll again be at the entry level
if he moves to another state or even to another town in Alaska.
Being a fireman is a physically and mentally taxing career. Even
the sticker in his helmet warns that firefighting is an ultra-
hazardous occupation. One of the concerns with being a PERS Tier
IV employee is that, even after decades of service, he won't
receive the medical benefit in retirement. Moreover, he'll have
to work longer to be eligible for retirement, even though there
aren't many fire fighters on the front lines that are older than
age 60. Given the choice, he would convert to a defined benefit
plan.
12:46:15 PM
JEFF THOMAS, representing himself, said he's been a heavy
equipment operator with the Department of Transportation and
Public Facilities (DOTPF) for 4.5 years. He's a defined
contribution employee. Wintertime duties include snowplowing,
keeping ice off the roads, and thawing culverts. Activity during
the summer includes asphalt patching, brush clearing, and
painting stripes on the roads.
MR. THOMAS said recruitment and retention has become a problem
for the department with its Tier IV employees. He's heard that 7
of 10 prospective hires fail the entry-level test for an
equipment operator. Retention is a particular problem with the
DC system. The state puts a lot of time, effort, and money into
training and it's probably 3 years before an operator has a good
handle on both routes and equipment. He's seen a number of
operators leave before they are fully vested, because they can
move to the operating engineers union and get better pay and
better benefits with a predictable retirement.
The defined contribution retirement is dependent on stock market
returns, which has been frightening. He agreed with previous
testimony that Great-West Retirement Services isn't doing a very
good job, but he's not interested in learning about investing
himself. Being an equipment operator is physically taxing and at
the end of a career it would be nice to have a predictable
retirement with healthcare benefits. He offered his belief that
retention would improve, and it would save money in the long
run, if the state were to return to a defined benefit system.
REPRESENTATIVE GUTTENBERG said Mr. Cooper affirmed a statement
he's made correlating numbers of lost mailboxes to numbers of
new equipment operators on the road.
12:50:39 PM
MICHAEL LAMB, Chief Financial Officer (CFO), Fairbanks North
Star Borough, said he has spent an inordinate amount of time
over the past six years studying and working on PERS/TRS issues.
He acknowledged that there are differing and valid views on the
defined benefit and defined contribution systems.
MR. LAMB concurred with all the points in the sponsor statement
and warned that recruitment and retention will become a larger
issue as the economy improves and boomer demographics shift.
Those employees who held off retirement during the downturn will
begin to depart the labor force in above average numbers,
leaving a profound hole in all labor forces. He said he has
testified before, and continues to believe, that both DB and DC
plans should be available. In some instances it's logical to use
the DB plan, but there are also occasions where it is beneficial
to both the employee and employer to use the DC plan. For
example, Alaska has the highest per capita percentage of
military retirees in the nation. These skilled and highly
trained individuals already have the benefit of a federal DB
retirement, so it's logical to offer them a DC plan.
MR. LAMB said he finds it troubling that the Division of
Retirement and Benefits (DBR) has taken a formal position that
any PERS employer that accesses short-term grant funds for any
salary-related position could be subject to a 30 year
termination cost. Employers were told to avoid any future
liability by keeping those grant-related dollars out of the PERS
system. He said he disagrees with that logic, and would argue
that short-term positions that are paid for with grant dollars
ought to be inside the PERS system, and under the umbrella of a
DC plan. Many short-term employees would be far better off in a
DC plan, and employers are happy to get those employees even if
it's a short-lived relationship. However, there are also groups
of employees that are career oriented and should have the DB
option.
MR. LAMB opined that SB 121 is correct policy for the state and
for employers, but it should go a step farther and amend the
statutes. An employee who retires from a DB system and is
rehired by any PERS employer should not be able to go back into
a DB plan. A DB retiree, who chooses to return to work, should
be in the DC plan. He acknowledged that there may have been
instances of bad behavior with regard to the double-dip
question, but in most instances there is absolutely nothing
improper about an employee returning to work while they continue
to draw their legitimately earned benefits. Anyone opposing that
philosophy is essentially saying that a military retiree who is
drawing a well-earned pension should not be able to return to
work and draw a salary from another employer, especially a
government employer. That doesn't make sense. He noted that he
frequently hears about this issue from employers across the
state.
MR. LAMB said that using both systems and allowing a retired DB
employee to go back to work as a DC employee will go a long way
toward helping employers recruit and retain needed workers.
MR. LAMB said it's important to understand that government
employers are perpetually in a recruiting mode, competing for an
ever shrinking labor force. He highlighted the following
examples to support this position:
1) The borough had a good engineer resigned when his spouse was
offered a good position in another state. In the end, the couple
didn't like the new lifestyle and moved back to Alaska. Although
the borough had an unfilled engineering position and tried to
rehire the engineer, it wasn't possible to compete financially
once the person left the borough. That was a major loss of skill
and institutional knowledge for the borough. That is difficult
to factor into a fiscal note as related to DB versus DC plans.
It's also difficult to factor in that DB salaries are generally
lower than DC salaries, but if it's necessary to raise salaries
to cover the difference, that adds to the fiscal note component.
2) His nephew received a Washington state teaching degree, with
an emphasis in math. His wife received a teaching degree with an
emphasis in special education. They both got teaching jobs in
Fairbanks; she had a full-time special education position and he
was a substitute teacher. They left the state last summer,
because it didn't pencil out to stay in Alaska and teach. The
state lost two smart and dedicated teachers, because it offers
neither Social Security nor a DB pension.
3) One Saturday morning he met Attorney General John Burns in
the locker room and hoped to talk to him about the troubling
legal advice that retirement and benefits was getting from the
AG's office related to termination study regulations. However,
the attorney general wanted to talk about the number of
attorneys within his office that are eligible to retire, and he
was questioning how he was going to recruit and hire attorneys
under the current PERS system. Mr. Lamb opined that if some of
those defined benefit attorneys could retire and then return as
DC employees, if there were unfilled positions, John Burns could
spend less time working out to relieve stress.
MR. LAMB said he read through the October 7, 2011 fiscal note,
and the numbers and basis for the numbers gave him very little
comfort as compared to the independent analysis provided to
Senator Egan by Pension Trustee Advisors. The latter could be
followed and actually incorporated DC plan reductions.
MR. LAMB said he's argued with a lot of CFOs who completely
dismiss or are very suspect of the accuracy of actuarial
reports. For a long time he was a holdout, but would now caution
that unless you fully understand all the variables and
assumptions being used in any actuarial projections, and unless
you know who has influence in choosing the assumptions used in
the projections, then you should take such estimates with a
grain of salt when trying to establish, with certainty, which
plan will cost more or less in the future. He opined that it's
likely that both plans will cost about the same as laid out,
since the medical component is no longer such a major variable.
The unrecognized cost of not having a DB system is likely to far
exceed any cost differential, he stated.
1:01:07 PM
SENATOR GIESSEL asked what the unfunded liability is today for
the defined benefit program.
MR. LAMB replied the number as of June 30, 2011 was $11 billion.
SENATOR THOMAS asked his professional opinion about how the
state got into the hole, how it might get out of the hole, and
if it would be beneficial to change the system.
MR. LAMB said the system became unfunded because the normal cost
rate was set too low. When he reviewed a retirement and benefits
presentation, he noticed that it included a chart that used
financial statements from when the system was positive and
whole. The problem is that those financial statements didn't use
the correct actuarial numbers, because they did not show a
decline in value until about 2000. In 1995 the state paid for a
report that warned the state to look at the actuarial numbers
that were being used, but that didn't happen. "Essentially, the
biggest deal really had to do with incorrect actuarial numbers
and incorrect medical component," he stated. Although there was
a lot of argument that the market went bad, the truth is that it
was the market starting in 2008/2009 that clearly had an impact.
MR. LAMB highlighted that when Callan Associates looked at the
numbers going back nearly 15 years, they noted that the rates of
return for both the PERS and TRS systems were right at 9
percent. Thus, the notion that the original problem was caused
by bad market conditions simply isn't true. The reality is that
the state does a very good job of investing. If it hadn't
basically gotten 75 basis points above 8.25 percent, the numbers
would have been even farther off.
MR. LAMB summarized that the normal cost rates were set way too
low, and nobody did anything when the state was actually under
water, because the financial statements didn't reflect that
reality. The effect was cascading and cumulative.
He said now there's comfort is what the current normal cost rate
really is because there are two reviewing actuaries. However,
he'd now like to know if a study was ever done comparing just
Tier III DB costs to the DC system, because originally the study
compared the total Tier I, Tier II and Tier III costs to the DC
system. He looked at the two actuary reports last night and one
says it will cost less, and the other says it will cost more.
1:05:21 PM
SENATOR PASKVAN asked Mr. Lamb to give his thoughts on designing
a system and why he might pick DB over DC for most employees.
MR. LAMB said he believes that SB 121 is a good proposal. If the
numbers were crunched independently and all the assumptions were
understood, the calculations would probably be pretty close.
What can't be factored in is the cost of not having qualified
employees doing the job in a timely and efficient manner. His
perspective is that DB Tier III and the proposed DB Tier V are
much the same. He said when a person retires the two big
concerns are having money to live on and healthcare. Even under
PERS Tier III, unless you fit a certain set of criteria, there
won't be much healthcare benefit from the system so there isn't
much backslide for the proposed Tier V. What is a big deal is
that individuals that want to focus on their jobs rather than
investing will know that they will have a pension check that is
a large as it could be, because a qualified professional managed
their money.
1:09:42 PM
SENATOR GIESSEL asked how regular people in the private sector
manage without a defined benefit possibility.
MR. LAMB responded there are two things. First, people in the
private sector generally are paid more over their lifetime,
because salaries for private enterprise are generally higher
than in government. Second, there are more or less options
depending on the entity for which a person works. A large
corporation clearly has the assets and incentive to help
employees with long-term financial planning, whereas those
resources generally aren't available to mom and pop type
entities. However, the solution to that shouldn't be to take the
opportunity away from those that do have the advantage. He added
that he would argue that anyone in the Social Security System
actually is in a DB system and they should augment their
"retirement stool" with more legs.
1:12:36 PM
CHAIR WIELECHOWSKI asked the administration or Mr. Slishinsky to
discuss the revised fiscal note.
MICHAEL BARNHILL, Deputy Commissioner, Department of
Administration (DOA), stated that it's true that the Parnell
Administration opposes SB 121, but it's disturbing that someone
would cast aspersions on DOA's numbers without having any basis.
MR. BARNHILL explained that he essentially opened the door to
the state's actuary so that Mr. Fornia, an actuary for a
proponent of the bill, could ask questions about the
assumptions. If he disagreed with any of the assumptions, he was
free to bring them to the committee for discussion. He
emphasized that at no time did the administration attempt to
limit access to its actuary. That door will remain open so that
this committee and the people of the state of Alaska can trust
the numbers, he stated.
1:16:40 PM
MR. BARNHILL reminded the committee that at the last hearing he
surmised that the fiscal note would go down, because of Mr.
Fornia's persuasive argument that the bill would reduce the
normal cost of medical in the proposed DB tier. However, Buck
Consultants, Inc. again came back with a positive fiscal note.
The fiscal note shows a total of [$124.412] million for FY2013.
That represents the cost for existing DCR members to transfer
into the proposed DB tier. It's a positive number because it
allows a one-for one service credit for members potentially back
to July 1, 2006. If the combined employer/employee contributions
are insufficient to purchase the employee's service, the
remainder will be made up from the general fund. This FY2013
expenditure is essentially an unfunded liability of $124
million. The actuarial assumption is that 60 percent of current
DCR members will convert to the proposed DB tier, and 40 percent
will remain in the current DCR system. Going forward, the
assumption is that 80 percent of future employees will select
the DB plans, and 20 percent will select the DCR plan.
Beginning in FY2015, the fiscal note reflects the increased
normal cost presented by the bill. He deferred the explanation
to Mr. Slishinsky.
1:19:09 PM
DAVID H. SLISHINSKY, Principal and Consulting Actuary, Buck
Consultants, Inc., ("Buck"), stated that Buck is the actuary for
the State of Alaska and as such it performs the actuarial
services on the state's retirement plans. The assumptions for SB
121 are that 60 percent of current DCR members will select the
proposed DB plan, and 80 percent of new hires will select the
proposed DB benefit. The fiscal note reflects the difference
between the costs of the proposed DB benefits for the above 60
percent of members and the costs of the DCR benefits.
Importantly, the normal cost is a combination of the difference
in costs for pension and for healthcare. The DB normal cost paid
by the employers for pension is less than the employers are
paying for the DCR plan, so there is a savings for pension.
However, the healthcare benefit per member is higher for the DB
plan than the current DCR plan. These calculations include
expected future new hires into both PERS and TRS and reflect the
impact of the difference in costs for those people. As this
group grows over time, the increase in the normal cost goes up
as well.
1:22:25 PM
SENATOR PASKVAN offered his understanding that the cost to the
employer of the DB component is cheaper than the cost to the
employer of the DC component.
MR. SLISHINSKY said he agrees if the discussion is specifically
about the pension portion.
SENATOR PASKVAN said he assumes that the DB costs are still
cheaper than the DC costs for FY2015 - FY2018.
MR. SLISHINSKY replied that's correct only when talking about
the pension.
SENATOR PASKVAN asked if the totals on the fiscal note represent
only the medical component.
MR. SLISHINSKY answered no; it reflects the increase in the
total normal costs for both pension and healthcare benefits.
SENATOR PASKVAN offered his understanding that the number would
be less than zero if it was just the pension, but it depicts 100
percent the cost of the medical component, which is greater than
the credit for the defined benefit.
MR. SLISHINSKY said that's correct.
SENATOR PASKVAN offered his understanding that the expectation
for new hires is that 80 percent would want a DB retirement.
MR. SLISHINSKY said that's correct.
SENATOR PASKVAN asked if the date for determination of the
amount of assets in the account is different than June 30, 2010,
which is when the unfunded liability was calculated.
MR. SLISHINSKY replied the data that was used in this analysis
is the same data that was used in the latest actuarial
valuations as of June 30, 2010, which contained an overall
measure of the unfunded liability of $11 billion.
1:25:54 PM
CHAIR WIELECHOWSKI asked him to elaborate on how he came up with
60 percent and 80 percent.
MR. SLISHINSKY explained that the 60 percent assumption reflects
the fact that some people just don't want to make a decision
about whether or not to change from one plan to another. A
recent study of DB and DC systems showed that new hires selected
DB between 75 percent and 97 percent of the time. Buck elected
to use 80 percent, which is in the mid-range.
CHAIR WIELECHOWSKI asked if he had a breakdown for pension and
healthcare that shows how much lower the DB pension benefit
would be compared to the DC pension benefit.
MR. SLISHINSKY responded the employer normal cost rate for PERS
was 2.86 percent of salary for the pension portion, and the
employer contribution into DCR was 5.22 percent of salary.
CHAIR WIELECHOWSKI asked what the cost savings would be for
pension and the cost increase for healthcare for FY2015. The
fiscal note depicts the total as $19.853 million.
MR. SLISHINSKY replied the savings on pension is about $9.7
million and the cost on healthcare is about $27.3 million.
1:29:23 PM
CHAIR WIELECHOWSKI asked how the healthcare costs can increase
so much in FY2015.
MR. SLISHINSKY replied two things are happening. First, the
healthcare benefit isn't a function of salary like it is for a
pension benefit. Healthcare costs the same for an employee with
an $80,000 salary as it does for an employee with a $40,000
salary. Second, when the current DCR group is compared with one
of the previous tiers, there is a difference in the level of
healthcare cost over the entire term of employment. The DCR
group covers anybody hired on or after July 1, 2006, and the
average age of that group is 34 with two years of service. The
healthcare benefit for that relatively young group is projected
to increase according to healthcare cost trend rates, which are
roughly double the rates that are used as part of the pension
valuation. Not only are the costs for healthcare expected to go
up more relative to the pension benefit, these people are
younger so their healthcare benefit will be provided over a
period when healthcare costs are higher than for somebody in an
earlier tier. That too adds to the cost of healthcare.
1:32:10 PM
MR. BARNHILL added that the healthcare experience of the PERS
and TRS systems since 1978 has been an average annual increase
of 9 percent. DOA is undertaking a number of efforts to bring
that cost curve down because that's unsustainable, he said.
Until there is some measure of success in doing that, the
actuary has to continue to prudently project what the healthcare
costs will be 30 or 40 years from now.
SENATOR PASKVAN asked if he agrees that the state should provide
medical care to all its employees, regardless of whether they
are in a DB or DC system.
MR. BARNHILL responded that is an appropriate policy question
for the Governor and the Legislature to ultimately take up; it
isn't an issue in this bill.
SENATOR PASKVAN asked if he would agree that the DB plan would
cost the state less for the pension portion than the DC plan.
MR. BARNHILL replied that does appear to be the case.
SENATOR PASKVAN asked what percentage of the total PERS/TRS
payroll the $19.853 million represents.
MR. BARNHILL replied he didn't know, but it's a small
percentage.
SENATOR PASKVAN asked if the total payroll is something just
under $3 billion
MR. BARNHILL replied the total is $2 billion plus, but he didn't
know if it was closer to $2 billion or $3 billion. He reiterated
that it's a small percentage.
SENATOR PASKVAN asked if small means less than one-half of one
percent.
MR. BARNHILL replied he'd accept that if that's what Senator
Paskvan is representing.
1:35:07 PM
SENATOR THOMAS asked if the 9 percent increase in health cost is
a general increase, or if it's specific to this group. His
understanding is that it was a general increase in health costs
over the last 10-15 years.
MR. BARNHILL replied it's the general increase that the
retirement system has experienced. It's not a 9 percent increase
every year, it's on an average basis.
SENATOR THOMAS asked if the thinking is based on the idea that
the DC plan will, in general, only be insuring younger people.
MR. BARNHILL responded the rate of healthcare cost growth right
now is 9 percent, and the basic point the actuary is trying to
make is that healthcare is projected to be much more expensive
in the future. It will be more expensive for people that are 30
years old now and retire in 40 years, than for people that are
50 years old now and retire in 10 years.
SENATOR THOMAS said he was having difficulty relating that to
the two different plans.
CHAIR WIELECHOWSKI added that he was having the same difficulty.
SENATOR PASKVAN asked if, in part, he is saying that the
administration's opposition to this bill is that it would just
as soon not have new young employees come to the state because
medical costs for that young population will be higher in the
future.
MR. BARNHILL responded that is absolutely not correct; the basis
for the administration's opposition to the bill is on the record
and it isn't based on this recent information. Mr. Slishinsky is
simply highlighting the fact that healthcare is increasing and
projecting that it will be more expensive for this younger
population in 30 years than it is for people that will retire in
the next 10 years. There is considerable basis for this
projection because of the experience the retirement system has
had over the last 30 years.
1:38:49 PM
CHAIR WIELECHOWSKI asked if the administration's fundamental
opposition to this bill is that it will cost more.
MR. BARNHILL responded the administration's fundamental
opposition relates to the ability of the state to keep long-term
promises, given the current revenue stream and that throughput
in the Trans Alaska Pipeline System has been declining 5 percent
each year for the last 10 years. That promise needs to be
guaranteed because the nature of defined benefit systems is that
unfunded liabilities can creep in at any time for any number of
reasons. In the past 2 decades, the state has experienced
unfunded liabilities due to investment loss; a change in
assumptions such as people living longer or retiring at
different ages than expected; and negligence in how the system
is managed and advised. Right now, the general fund is
backstopping the DB system; last year it took $478 million and
this next year it will potentially take $610 million to keep the
system healthy. The administration's concern is whether or not
revenue of the same magnitude will be available 40-60 years from
now. Nobody knows the answer to that question, he stated.
1:41:22 PM
CHAIR WIELECHOWSKI observed that both actuaries seem to agree
that the pension portion of the bill would save the state money.
He asked if the administration would support a bill that only
returns to a pension system.
MR. BARNHILL answered no, because that savings only looks at
normal costs. It doesn't consider the risk of additional past
service costs, which is how to pay off the unfunded liability.
Because the very nature of the DB system exposes the state and
future taxpayers to the risk of having to pay off those past
service costs, the Parnell Administration opposes SB 121.
CHAIR WIELECHOWSKI asked if the administration believes that the
actuaries could be wrong with respect to the pension portion of
the bill saving the state money.
MR. BARNHILL suggested he ask the actuaries, but he predicts
that every actuary will say that, by nature, a defined benefit
system can develop an unfunded liability at any time for the
reasons previously identified.
CHAIR WIELECHOWSKI asked if that means that the committee should
basically take the actuarial statements with a grain of salt as
Mr. Lamb suggested.
MR. BARNHILL responded that's a different issue.
1:43:10 PM
SENATOR GIESSEL asked him to explain the October 7, 2011 letter
to Mr. Puckett from Mr. Slishinsky regarding the revised fiscal
note for SB 121.
MR. BARNHILL explained that the numbers the actuary sent to the
Division of Retirement and Benefits were used to prepare the
fiscal note. The only difference in the numbers is that the
fiscal note advanced the $124.412 million transfer cost to
FY2013, because those costs would come due within 60 days after
the effective date of the bill. Assuming the bill passes, that
would be FY2013.
SENATOR PASKVAN asked how the fiscal note differentiates between
the costs for the medical component that would be incurred for
new young employees in the DC system (like Mr. Danielson who
testified today) as opposed to the DB system.
MR. BARNHILL pointed to the document "State of Alaska summary of
normal costs for new tier members under SB 121" and explained
that it is subdivided into four categories: PERS others, PERS
peace officer/firefighter, PERS total, and teachers.
CHAIR WIELECHOWSKI deferred discussion of the document until
copies had been distributed.
1:46:06 PM
SENATOR THOMAS asked if it would be possible to devise a formula
through payroll that would keep the state from incurring large
debt over a period of years while ensuring that health and
welfare costs that increase in the future are taken care of,
even by the employees if they are desirous of having the DB plan
with healthcare in place.
MR. BARNHILL responded he's a bit unclear as to the point of the
proposal, but he can say that with enough money, anything is
possible.
SENATOR THOMAS clarified that what he is suggesting is that if
people are desirous of having a DB plan in place, it would be
reasonable to explore the option that employees pay for more and
the state incurs a lesser percentage of the debt. He
acknowledged this would be subject to negotiations by the
bargaining units.
MR. BARNHILL said anything is possible if the suggestion is to
gross up the paychecks.
SENATOR THOMAS responded the suggestion isn't to gross up the
paychecks. It's that there is a solution if people were to take
on more responsibility over a period of years.
MR. BARNHILL replied that's a valid point, and in the past
decade employers across the country have expected employees to
contribute more to pay for their healthcare benefits.
1:49:42 PM
CHAIR WIELECHOWSKI called a brief recess.
2:02:04 PM
CHAIR WIELECHOWSKI reconvened the meeting and asked Senator
Paskvan to restate his earlier question.
SENATOR PASKVAN said the fiscal note shows $19.853 million for
FY2015, and he was trying to locate the $27.3 million in
healthcare costs and the $9.7 million in pension costs.
MR. SLISHINSKY explained that the spreadsheet shows the detail
and backup information for the amounts that were included in the
fiscal note. PERS police officers and firefighters and all other
PERS were separated and then the total is shown on the
spreadsheet. The same analysis was done for TRS. He said his
explanation will focus on the total for PERS and for TRS.
CHAIR WIELECHOWSKI asked him to explain how he arrived at
$19.853 million for FY2015.
MR. SLISHINSKY said that's the total amount for PERS and TRS.
The breakdown is $17.568 million for PERS and $2.285 million for
TRS. Focusing on just the PERS amounts for FY2015, he explained
that the total employer normal cost, which is the pension
amount, is $53.256 million and the employer DCR contribution
total amount is $35.698 million. The difference is $17.568
million.
CHAIR WIELECHOWSKI observed that for FY2015, the employer
pension normal cost is $11.735 million versus $21.419 million
for the employer DCR contribution pension amount. That
difference is $9.684 million.
MR. SLISHINSKY agreed.
CHAIR WIELECHOWSKI further observed that for FY2015, the
healthcare normal costs are $41.531 million versus $14.279
million for the employer DCR contribution healthcare amount.
MR. SLISHINSKY agreed.
CHAIR WIELECHOWSKI asked if the PERS medical benefits will be
different for the proposed Tier V than they are for current DCR
Tier IV.
MR. SLISHINSKY said yes. There is an increase in the benefit
under Tier V, whereby anyone can get the full cost of their
medical benefit at Medicare age.
CHAIR WIELECHOWSKI asked if there wouldn't be a cost savings
since SB 121 delays the medical benefit until age 65 at Medicare
eligibility rather than age 60.
MR. SLISHINSKY responded there is a cost savings between PERS
Tier III and the proposed Tier V, but the current DCR members
have a separate healthcare benefit. The Tier V healthcare
benefit proposed under SB 121 is less expensive than Tier III,
but more expensive than Tier IV.
CHAIR WIELECHOWSKI asked what accounts for the $27.252 million
difference in healthcare cost.
2:08:52 PM
MR. SLISHINSKY explained that there is a reduction in the cost
for healthcare from Tier III to Tier V because the medical
benefit is delayed from age 60 until Medicare eligibility at age
65. Buck's calculations indicated that change would save
approximately 19 percent. However, in Tier IV the current DCR
members pick up a portion of the cost depending on their years
of service. They will pay 10 percent after 30 years of service
at Medicare eligibility. That cost grades up to 30 percent if
the member has less than 15 years of service. The Healthcare
Reimbursement Account is also used to help pay premiums.
CHAIR WIELECHOWSKI asked Mr. Fornia to provide his opinion on
the fiscal note.
2:11:21 PM
WILLIAM B. FORNIA, President, Pension Trustee Advisors, said he
is working on behalf of the Alaska Public Pension Coalition. He
summarized his credentials and work experience and noted that
for the last 20 years he has focused on the public sector. Often
he is a second-opinion actuary and feels strongly that it is an
actuary's job to bring facts so that proper decisions can be
made.
MR. FORNIA said he received the spreadsheet showing the detail
and backup information for the fiscal note just last night, and
looks forward to reviewing it more thoroughly. He expressed
optimism that he and Mr. Slishinsky could work together and come
to an understanding so that the committee can make the best
decisions possible.
He summarized the controversy surrounding Senate Bill 141 that
changed the state's retirement plan from defined benefit to
defined contribution, and noted that it was particularly
controversial since the State of Alaska does not participate in
the Social Security System. It is the largest employer in the
country that offers neither a defined benefit retirement nor
Social Security to new hire employees.
MR. FORNIA confirmed that just as the testimony today indicated,
DC plans tend to be better at attracting young people, and DB
plans tend to be better at keeping people in mid-career until
retirement age. He opined that Alaska certainly seems to be a
state that would want a DB plan, because it isn't in the state's
best interest to train people and then have them leave for a job
in the Lower 48.
MR. FORNIA said that as the ongoing review actuary for the
Alaska Retirement Management Board (ARM Board) he saw that the
cost between PERS Tier III and Tier IV was about the same. Over
the years he was asked about switching back to a DB system, and
in January the Alaska Public Pension Coalition hired him to
figure out how to make a cost neutral bill. It seemed that a
good way to do it would be to cut the healthcare feature of the
bill. Under SB 121, the only healthcare benefit most people will
receive is a supplement to Medicare. The state's actuary
indicated that would result in approximately 19 percent savings.
2:18:52 PM
MR. FORNIA reiterated that he did not have ample time to review
the fiscal note and supporting numbers, but they appear high.
The spreadsheet shows that the FY2015 healthcare normal cost
rate per member is $4,940, which means that every young person
should set that amount aside every year from now until
retirement, just to pay for what Medicare doesn't cover.
CHAIR WIELECHOWSKI asked Mr. Fornia to talk about what would be
covered for most people at age 65 as a Medicare supplement.
MR. FORNIA said that isn't his area of expertise, and he
couldn't say for sure what things would be supplementary.
However, $4,940 seems like a lot of money to have to save year
after year or a lot of money for the state to give to its
workers year after year.
CHAIR WIELECHOWSKI asked if the big discrepancy centers on the
column showing the healthcare normal cost rate per member.
MR. FORNIA said yes, and it is also reflected in the column that
calculates the healthcare normal cost rate as a percentage of
pay. For FY2015 that is 10.12 percent of pay, whereas the FY2015
employer DCR contribution healthcare rate is 3.48 percent. The
difference is roughly 7 percent. According to these numbers, the
bill is asking the equivalent of a 7 percent pay raise, and that
makes the bill seem cost prohibitive. Even though there might be
a percent or two savings on the pension, giving away 7 percent
on medical creates a big gap.
MR. FORNIA said he wasn't in a position to make recommendations
at this point, but ideally there will be a way to look at the
differences, and get that 7 percent figure down to zero in order
to start at a point that's a little more cost neutral. Mr.
Fornia said he thought that substantial cuts to the healthcare
plan would achieve Senator Egan's goal to have a cost neutral
bill, but it now looks like that might not be the case.
CHAIR WIELECHOWSKI asked why there is such an increase between
the FY2015 PERS employee headcount of 8,408 and the FY2019
headcount that is projected to be 17,012.
MR. FORNIA explained that each year after FY2015 includes some
DCR employees. The number will continue to increase until
eventually the entire population is in that group.
SENATOR PASKVAN observed that the TRS healthcare normal cost
rate per member is $5,930, and asked why it's higher than the
rate for PERS.
MR. FORNIA replied the benefit structure is slightly different,
but for any additional explanation he would defer to Mr.
Slishinsky.
2:25:18 PM
SENATOR PASKVAN asked how Alaska compares to other states with
regard to the medical benefits it provides to PERS/TRS
employees.
MR. FORNIA replied he didn't have that data, but it's important
to know that Alaska is one of a very few states that has made a
substantial effort to fund its retiree healthcare plans. The
vast majority of pension funds around the country do not cover
healthcare; coverage is provided by a different department
through a different vehicle with virtually no advance funding.
SENATOR PASKVAN asked if he's saying that other states are only
booking the cost of their retiree healthcare for the year, not
the present value.
MR. FORNIA clarified that all the states are booking about the
same amount, but the only cash that most states are putting in
is the cash of paying the retiree healthcare benefits for those
retirees as they get sick. Alaska, by comparison, is putting in
[on average 2.86 percent of pay for PERS DB employees and on
average 3.48 percent for DCR employees]. Other states are
waiting until the employees retire and then paying in cash.
REPRESENTATIVE GRUENBERG asked if when he mentioned switching
back, if he was referring to switching from the DC plan to a DB
plan.
MR. FORNIA answered yes, and Mr. Slishinsky is an expert on that
issue. He described two states that put in DC plans and
subsequently switched back to variations of DB plans, once it
became clear that people weren't accumulating enough money to
retire.
REPRESENTATIVE GRUENBERG asked for an example of how different
assumptions for the same problem can create wide differences in
a calculation.
MR. FORNIA responded the classic example is the discount rate.
Some funds are using an 8.25 percent assumption while other
funds are using 7.25 percent, and some economists are saying
that the assumption should be 4 - 5 percent. Changing those
numbers can quickly move billions of dollars from one side to
the other. It's easy to see that if the assumption is for a
higher rate of return, not as much has to be put in, and vice
versa. Pension systems that use numbers that are on one extreme
or the other can have a large impact, all other things being
equal. This is particularly true when there is a liability.
Pushing that number up or down by 5 - 10 percent on a fixed
number of assets can make an amazing difference. He reiterated
that is why it is so important that decision-makers get numbers
they trust.
2:32:06 PM
CHAIR WIELECHOWSKI asked Mr. Slishinsky to discuss how Buck
arrived at the $4,940 healthcare normal cost rate per member.
MR. SLISHINSKY said he wanted to first clarify that the
calculation is such that the number for healthcare is a level
dollar amount. Over the course of someone's career, it's the
payment each year to accumulate an amount to pay for the
healthcare benefit in retirement. It's different than the
pension benefit, which is calculated as a percentage of pay, and
increases over time as pay increases. The healthcare cost for
this group initially is a little higher because of the level
dollar methodology.
CHAIR WIELECHOWSKI asked what it costs to purchase an equivalent
supplement to Medicare.
MR. SLISHINSKY responded he didn't know.
CHAIR WIELECHOWSKI asked if the numbers essentially indicate
that a person would have to contribute $4,940 [every year] over
an average lifespan to accumulate enough to buy supplemental
Medicare insurance.
MR. SLISHINSKY replied that would be the cost from age 65 to the
end of the person's life.
2:35:20 PM
MR. FORNIA said the average age of the DCR group is 34 and on
average they won't retire for 31 years, so the number that's
used today will be some multiple of that.
MR. SLISHINSKY reiterated that the effect of compounding
healthcare costs is significant, and the current cost
projections are for people that won't be receiving the benefit
for another 30 years. In that time period the cost of healthcare
is expected to escalate, and it continues in retirement.
CHAIR WIELECHOWSKI asked if the expected rate of increase is 9
percent per year.
MR. SLISHINSKY responded Buck's assumptions are about 7 percent
for medical and little more for prescription drugs. The
healthcare cost trend model indicates a gradual decrease over
time, but the healthcare cost trend rates are still more than
double normal inflation.
CHAIR WIELECHOWSKI asked what the expected rate of return is for
the medical asset.
MR. SLISHINSKY replied the expectation is 8 percent per year,
the same as the pension asset.
CHAIR WIELECHOWSKI asked for additional explanation, because it
seems that an 8 percent return would cover medical costs that
are projected to go up 7 percent per year.
MR. SLISHINSKY responded the return is only 1 percent, so a
person would have to accumulate a lot more for there to be
enough money to pay the healthcare benefit during retirement.
2:38:37 PM
MR. FORNIA again suggested the actuaries figure this out
together.
MR. SLISHINSKY pointed out that if the healthcare cost trend
rate is 6 percent per year, then it will be 5.7 times more in 30
years because of compounding. And the cost will continue to
escalate during retirement.
CHAIR WIELECHOWSKI asked if it's realistic to think that
healthcare insurance that costs $15,000 per employee today might
cost $75,000 per employee in 30 years.
MR. FORNIA suggested the committee would probably be better
served if the actuaries first signed off on the numbers, perhaps
with input from the third actuary.
SENATOR PASKVAN expressed a desire to walk away today with
everyone in agreement, on an actuarial basis, that if the state
were to convert to a DB retirement system, that it could save
money as compared to the current DCR system.
MR. FORNIA responded his position is that there is just as much
chance of having a surplus by converting to a DB system as
having a new unfunded liability..
MR. SLISHINSKY declined to give an answer without further
analysis.
CHAIR WIELECHOWSKI asked Mr. Slishinsky how much confidence he
had in his numbers.
MR. SLISHINSKY expressed great confident in the numbers he
provided.
CHAIR WIELECHOWSKI asked if his numbers indicate that it will
save the state money to switch to a new DB system, as proposed
in SB 121, compared to the current [DCR] system.
MR. SLISHINSKY replied it will save the state money for pension
only, not healthcare.
2:43:07 PM
MR. BARNHILL opined that the committee's goal is to get the
actuaries to agree on a design where normal costs are equal to
or less than the existing DC tiers. He cautioned that it
wouldn't change the administration's position on the bill, but
he would encourage the actuaries to work together on a set of
assumptions and a design to attain that goal.
REPRESENTATIVE GUTTENBERG asked what would change the
administration's position.
MR. BARNHILL replied the only thing at this point is a crystal
ball that would give the administration confidence in the
actuarial projections going forward. Those don't exist. The
nature of the DB system is that there will always be a risk of
unfunded liabilities creeping into the system.
MR. BARNHILL assured the committee that the administration had
no objection to Mr. Fornia working with the state's actuary. He
is free to call and trade thoughts with Mr. Slishinsky and try
to identify any differences between actuarial views. They can
bring that to the committee and provide an explanation.
MR. SLISHINSKY said he and Mr. Fornia are willing to work
together and develop a bill that meets Senator Egan's objective
of being cost neutral.
CHAIR WIELECHOWSKI thanked the participants and opined that it
will be a big step forward if the actuaries can agree on the
numbers to a high degree of certainty. [SB 121 was held in
committee.]
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