Legislature(2013 - 2014)BUTROVICH 205
03/27/2014 09:00 AM Senate STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| SCR20 | |
| HB19 | |
| SB30 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SCR 20 | TELECONFERENCED | |
| + | HB 19 | TELECONFERENCED | |
| *+ | SB 30 | TELECONFERENCED | |
| + | HB 284 | TELECONFERENCED | |
| + | TELECONFERENCED |
SB 30-TEACHERS & PUB EMPLOYEE RETIREMENT PLANS
9:29:42 AM
CHAIR DYSON reconvened the meeting and announced the
consideration of SB 30.
9:29:46 AM
SENATOR DENNIS EGAN, sponsor of SB 30, introduced the bill
speaking to the following sponsor statement:
SB 30 lets teachers, Troopers, firefighters and other
public employees choose one of two state retirement
systems: an individual defined contribution retirement
account, or earning a defined benefit pension.
A defined benefit pension takes time to earn, but
rewards a record of public service by paying a
guaranteed monthly benefit and, for long-term
employees, health insurance. An individual defined
contribution account is portable from one employer to
another, and flexible in how it can be used, but makes
no guarantees. SB 30 lets newly hired public servants
in Alaska choose the one that fits best.
SB 30 creates a new more stable, more predictable
defined benefit pension tier for public employees. In
2005, Alaska beefed up oversight of the pension
system. Now we have two actuaries analyzing the health
of the pension trusts, there are more frequent
experience studies and the law bars the practice of
sometimes paying less than the cost of benefits. SB 30
keeps these smart reforms, making Alaska pensions
stronger than ever.
And because the defined benefit pensions for new
employees include sharing the risk of rising health
costs, they will never cost employers more than the
defined contribution system, saving money for schools,
municipalities, and the State of Alaska.
Alaska's public servants don't earn the private
sector's defined benefit of Social Security, and many
even lose Social Security benefits they earned in past
jobs. So for most, a defined benefit pension makes
sense. Other employees will choose individual defined
contribution accounts because they prefer flexibility,
portability, and control, or because they don't plan
on long-term public sector work. SB 30 lets them
choose an individual account instead.
The teachers who educate our children, the police and
firefighters who protect our families, and the public
employees who plow the roads and serve our state and
cities will be able to choose the benefit that best
fits their service.
SENATOR EGAN reported that an analysis of a previous version of
the bill showed that it would save the state more than $70
million over five years and be cost-neutral in the long run. It
shares the risk of rising healthcare costs between employers and
employees and doesn't add to the unfunded liabilities from the
past.
CHAIR DYSON asked about portability.
9:33:19 AM
JESSE KIEHL, Staff, Senator Dennis Egan, explained that the
structure of SB 30 creates a one-time choice for a newly hired
employee between the current defined contribution system and the
new defined benefit system. The funds in an employee's
individual defined contribution account are entirely portable,
subject to a vesting schedule for the employer's contribution.
The defined benefit system provides an employee with a pension,
and those funds generally are not portable.
For the defined benefit program, the system aims to put away
enough money each year to fund the future benefits that
employees earned in that year. That's referred to by actuaries
as the normal cost rate. Both employees and employers put money
into the system and those funds are invested in trust funds.
With an open defined benefit (pension) system, trust funds are
invested for the long term and that enables them to earn returns
comparable to Alaska's Permanent Fund. Historically they have
been just more than 8 percent. Those earnings are important
because 55 percent to 60 percent of the benefits that PERS and
TRS pay in their defined benefit pension system come from
investment earnings. He noted that the average annual PERS
pension is in the low to middle $25,000 range and the average
TRS pension is about $34,000 a year. Those pensions take a long
time to earn and with longer service an employee can earn
retiree health insurance. Under the pension tier created in SB
30, the employee will always pay a portion of the monthly
insurance premium.
MR. KIEHL highlighted that SB 30 does not change the current
defined contribution system. One of the benefits of that system
is that employees are able to control their own investments.
Employees that are skilled investment managers have the
opportunity to create a retirement nest egg that will pay better
than the pension system, but there are no guarantees. He noted
that economists talk about America's looming retirement crisis
because the average American employee age 55-64 has $165,000 in
retirement savings. More than half of U.S. workers have put away
just $10,000.
MR. KIEHL said it's important to note that the state is always
the payer of last resort. There is no trust fund for the state's
share of senior Medicaid benefits, senior care, or the state's
heating program. Those all have a zero percent funded ratio,
unlike Alaska's Defined Benefit System. Another consideration is
the high cost of recruitment and retention. For example, to
recruit, hire and train a biologist in the first year is in the
neighborhood of $15,000. For peace officers the cost for the
first two years can reach $150,000. Employers are rightly
concerned because it's difficult to continue to pay for high
turnover. The option for employees to choose a defined benefit
system removes the incentive for employees to vest in the
employer contributions and then move to a state that offers a
pension.
MR. KIEHL reviewed the changes in the new pension tier that SB
30 creates. Most employees will pay in at a significantly higher
percent of their payroll; general government workers will go
from 6.75 percent of their pay to 8 percent of their pay. That's
a genuine reduction of their take home pay to fund their
benefit, he said.
9:38:32 AM
MR. KIEHL said that SB 30 takes longer for retirees to earn help
in paying for their retiree health insurance. For most employees
that threshold is Medicare eligibility. If the federal
government moves the current age of eligibility, Alaska won't be
expected to pay for the gap years. The other important
consideration is sharing the risk with employees. The new
pension tier in SB 30 adjusts the retiree's portion of the
health insurance premium so it doesn't cost the state more than
the defined contribution tier that the state currently offers
and will continue to offer under the bill. That's an important
risk-sharing element to help keep the state and municipal
employers whole in terms of paying that normal cost and
prefunding benefits.
MR. KIEHL said the bill gives current employees in the defined
contribution system one opportunity to switch. The switch would
be irrevocable and at the employee's cost. If the current value
of their individual account isn't enough to prefund the full
time they've served, they would only get credit for the time
they've served unless the employee chooses to make up the
difference to fully prefund that service time. Under no
circumstance could an employee convert and get credit for more
time than they served.
9:41:33 AM
MR. KIEHL said the analysis of the fiscal note by the system
actuary, Buck, shows that over the first years, SB 30 should
save the state just under $69 million. He recalled that after 4-
5 years in PERS and 12 years in TRS, the system will be cost-
neutral when the adjustments take effect, as compared to the
defined contribution system. He noted that the sponsor takes
exception to a line in the administration's fiscal note that
refers to creating an unfunded liability once the adjustments
take effect. In fact, the sponsor's intent and understanding of
the bill is that when the adjustments take effect, the retirees'
medical premiums will fund that additional liability. He noted
that an actuary would speak to that.
He concluded that everyone is aware that there is no such thing
as a riskless retirement system. SB 30 invests carefully and
wisely for the future, it saves the state and municipalities in
the near term, it saves money on turnover and recruitment costs,
and it shares the risk for remaining cost neutral.
9:43:43 AM
CHAIR DYSON
9:44:24 AM
WILLIAM FORNIA, President, Pension Trustee Advisors, delivered a
PowerPoint presentation in support of SB 30. He noted that this
bill is somewhat similar to Senate Bill 121 that was introduced
several years ago. He reviewed the three point agenda of the
presentation: 1) discuss the advantages of including a defined
benefit plan option; 2) discus the financial analysis of the
defined benefit plan option; and 3) discuss how actuarial
assumptions impact unfunded liabilities.
MR. FORNIA discussed the findings:
· The defined benefit plan option is more economical for the
state.
· It provides more efficient delivery of retirement
benefits.
· It helps retain jobs in Alaska.
· It provides the safety net others have from Social
Security.
· SB 30 has structured a defined benefit choice alternative
of $10 million in FY 2017 savings.
· Health cost risk is shifted to the employees
· Employee contributions are higher than the current
defined benefit system.
· It has employee health cost sharing.
MR. FORNIA reviewed why Alaska public employees should have a
defined benefit option.
· By their nature, defined benefit plans provide workers what
they need for retirement in terms of pension benefits.
· Defined benefit plans deliver benefits more efficiently
than defined contribution plans, thereby saving money for
the same retirement benefit.
· This is particularly necessary because a majority of Alaska
public employees are not covered by Social Security.
MR. FORNIA reviewed a chart of the benefit differential between
defined benefit tier employees hired just before 2006 and
defined contribution tier employees hired after 2006. It shows
that the average teacher was hired at age 34, works 25 years,
and retires at age 59. If they were hired before 2006, they
would have a defined benefit of about 58 percent of their
average annual pay. If they were hired after 2006 their
contributions would generate benefits of 33 percent of pay.
That's a 25 percent reduction of benefit and is the reason
workers are asking for the option of being in a defined benefit
program.
MR. FORNIA displayed a graph showing hypothetical teacher
benefits from a $50,000 final average salary. The Tier 2 defined
benefit amount is about $30,000, the Tier 3 defined contribution
amount is about $17,000, and Social Security is about $13,000.
MR. FORNIA reviewed the three reasons that it is more
economically efficient and effective to provide a defined
benefit.
· Longevity risk pooling. Because defined benefit plans cover
large numbers of retirees, they can pay out over the
average life expectancy, not maximum life expectancy. An
individual under a defined contribution plan will want to
avoid the risk of running out of money if they live a long
life. Because individuals must plan for a maximum life
expectancy, much more money must be accumulated in a
defined contribution plan compared to a defined benefit
plan. A graph showing pension payments and "over-savings"
for a pool of 1,000 teachers who retired at age 62 under a
defined contribution plan shows that 24 percent of the
assets passed to the estate rather than being used during
retirement.
· Maintenance of portfolio diversification. Defined benefit
plans can maintain a well-diversified portfolio over time.
By contrast, individuals in defined contribution plans are
advised to shift to more conservative investments as they
age, sacrificing some expected return. Lower returns mean
that more money must be contributed to deliver the same
level of benefits.
· Superior returns. Assets in defined benefit plans are
professionally managed. Pooled investments in defined
benefit plans can lower expenses. Studies generally have
shown that defined benefit plan returns outperform defined
contribution plans by at least one percent annually.
9:54:44 AM
MR. FORNIA said the concerns about unfunded liabilities are
legitimate. A new defined benefit program puts the state at some
risk of increasing liabilities, but if the pool of assets grows
at more than eight percent it would decrease the unfunded
liabilities for the state.
MR. FORNIA displayed a chart showing the anticipated $70 million
savings over fifteen years. The point is that the bill is
designed to be cost-neutral. In conclusion he said the defined
benefit plan is more economical for the state because it's more
efficient, helps keep jobs in the state, and provides the safety
net others have from Social Security. The plan is structured to
provide about $10 million in savings in the first year and $70
million over 15 years. This is done by shifting some of the risk
to the employees as opposed to the tiers from the pre 2006
years.
9:57:42 AM
SENATOR WIELECHOWSKI asked if he'd discussed the $70 million
savings with the administration and if their actuaries agree or
disagree with the number.
MR. FORNIA replied the numbers are from the administration's
report.
SENATOR WIELECHOWSKI asked if the current unfunded liability is
due primarily to defined benefit pensions or healthcare.
MR. FORNIA said he didn't know the exact split, but healthcare
is clearly a huge portion of the unfunded liability.
SENATOR WIELECHOWSKI asked if he was aware of any other states
whose public employees do not receive Social Security or some
sort of defined benefit plan.
MR. FORNIA answered that he wasn't aware of any other states or
major employers whose public employees receive neither.
10:00:33 AM
CHAIR DYSON asked if the defined benefit pension envisioned in
SB 30 is based on high years of earnings, the circumstances
under which the employer contribution changes, the history of
the state opting out of the Social Security system, and if the
state will make up the difference if an employee outlives the
assets in their account.
MR. KIEHL replied the pension calculations work the same way as
the most recent pension tiers. For PERS Tier III it's based on
the highest five consecutive years of compensation. He offered
to follow up with how employer costs change and history of how
public employees opted out of Social Security.
CHAIR DYSON asked Mr. Barnhill to respond to the information
presented.
10:03:24 AM
MIKE BARNHILL, Deputy Commissioner, Department of
Administration, said the administration has concerns with any
proposal for a defined benefit plan for state employees and
school districts. As a result of promises made in the past, the
state is struggling with how to deal with the $11.9 billion
unfunded liability. Looking forward 10-40 years there is a fair
amount of uncertainty on how to meet the fiscal needs of state
government and its citizens. He pointed out that a defined
benefit promise for a 20-year-old new state employee would have
to be kept for up to 70 years. The state has the resources to
meet the promises it made decades ago, but there is uncertainty
looking forward 30-40 years if a new unfunded liability should
arise. From an employee's viewpoint a defined benefit makes
sense, but the state has to look at its balance sheet and
revenues to see where the resources will come from if there is a
financial downturn in the investment markets in the 2030s,
2040s, or 2050s. He suggested addressing the promises the state
has made to date and the fiscal uncertainty the state faces
today before making new promises to a new generation of defined
benefit employees.
SENATOR COGHILL asked if the Supplemental Benefit System
partially offsets the loss of a Social Security benefit.
MR. BARNHILL explained that in 1981 federal law opened to allow
public entities, state governments, and local municipalities to
opt out of the Social Security System by opting in to a
qualified Social Security replacement. The State of Alaska
designed the Supplemental Annuity System (SBS) as the qualified
Social Security replacement system. The basic structure is a
defined contribution structure where the employer contributes
6.13 percent of the employee's salary and the employee matches
that for a total of 12.26 percent. Those percentages are the
same as what Social Security was charging employers and
employees in 1981. Some municipalities in the state opted out of
Social Security but rather than opting into SBS, they adopted
PERS as the qualified Social Security replacement. The mechanism
for opting out was a referenda conducted by each employer that
opted out. The State of Alaska employees held a referendum and
voted to opt out of Social Security into SBS.
SENATOR COGHILL asked about the Teacher Retirement System (TRS).
MR. BARHILL said he believes that goes back to when Social
Security was enacted in the 1930s, although teachers generally
did not participate in Social Security.
SENATOR COGHILL summarized his understanding of the risk of
rising healthcare costs under the bill.
10:10:01 AM
MR. BARNHILL agreed that under the structure of SB 30 the risk
of increasing healthcare costs does fall on the retiree. That
can be seen in the Buck chart that shows that starting in FY
2022 the retiree premiums start going up. He continued to say
that Buck is concerned that those premiums could rise so sharply
that retirees will stop electing retiree health and the plan
won't have sufficient participation to work. The risks in any
defined benefit plan are driven by what the actuary projects
with respect to investment return, inflation, mortality, and
date of retirement. If the actuary makes any wrong projection
those risks can create a new unfunded liability.
MR. BARNHILL opined that the bill doesn't address the primary
risk of not earning eight percent in year one, which is why the
administration's fiscal note is indeterminate. The
administration's actuary did come up with the numbers that
produce the $70 million saving over 15 years but an investment
loss in the first year could offset any savings.
SENATOR WIELECHOWSKI said this subject has been debated the
entire time he's been in the legislature, but the point remains
that Alaska is the only state in the nation whose public
employees don't have a defined benefit or Social Security. He
questioned whether the bill moving through the House could be a
compromise because it removes the state's liability and gives
the employees a defined benefit.
MR. BARNHILL replied that particular vehicle is complex and he'd
defer as to whether the administration would support it, but
there is room for compromise.
CHAIR DYSON opened public testimony.
10:15:39 AM
JACOB BERA, Teacher, Chugiak, Alaska, stated support for SB 30.
He said it would allow public employees a choice between a
defined contribution and a defined benefit plan. He and his wife
did some research after they completed their schooling and in
2003 decided that Alaska offered a positive job outlook. The
good pay and secure retirement along with the natural beauty of
the state were deciding factors, but based on the current job
outlook and retirement plan they'd make a different decision
today. A recent report to the Alaska Retirement Management (ARM)
Board shows that of the 3,037 teachers hired since July 1, 2006,
only 632 have stayed more than five years. Of the 12,297 PERS
employees hired in that same period, only 989 stayed. He said he
believes that restoring the ability to earn a secure retirement
can create the incentive to stay in Alaska and help turn the
trend around.
MR. BERA said he's been working with legislators for years to
find a better retirement option for his colleagues. Most agree
that the lack of a secure retirement and the inability for
public employees to contribute to Social Security puts the state
at risk as the payer of last resort. Legislators on both sides
of the aisle have expressed support for a blended system that
offers the choice of a defined contribution or a defined benefit
as long as it doesn't put the state at risk due to rising
healthcare costs. SB 30 addresses these issues.
10:18:51 AM
BRANDEN WINEBARGER, Teacher, Fairbanks, Alaska, stated support
for SB 30. He said he moved to Alaska and began his career in
education in August 2006, just after the introduction of the
defined contribution plan. Since then he's seen many good
teachers come and go. They arrive with excitement that slowly
erodes due in part to an increasing awareness of the poor
teacher retirement system. He said it's almost as though Alaska
is renting teachers for 2-4 years at a time. This high turnover
rate erodes a school's staff the ability to function effectively
or develop cohesiveness and limits the overall ability to serve
the needs of the students.
MR. WINEBARGER said the uncertainty of the defined contribution
plan makes it difficult to plan for the future and for
retirement, and the fact that Alaska's public school teachers do
not receive any Social Security benefits adds further
uncertainty when making retirement plans.
SENATOR COGHILL said he's open to the discussion but it appears
that the structure of SB 30 will increase risk to individual
teachers. He asked Mr. Weinberger if he'd "seen any credible
proposals on the Social Security question outside of this."
MR. WEINBERGER answered no.
VICE-CHAIR GIESSEL stated that Chair Dyson stepped out and she
would preside over the rest of the meeting.
10:24:01 AM
DEREK HSIEH, President, Anchorage Police Department Employees
Association (APDE), Anchorage, Alaska, stated support for SB 30.
He said APD is suffering staffing problems and the May police
academy is unlikely to fill the 28 positions. To his knowledge,
APD is the only metropolitan police department in the U.S. where
the police employees have no access to a defined benefit plan or
Social Security. He said APD's primary source of police
applicants is the military. These people earn Social Security
while serving, but once they're hired at APD they essentially
lose their Social Security credit because of the Windfall
Elimination Provision (WEP). This is a major impediment and APD
is seeing younger police employees leaving the department for
positions in the Lower 48.
10:27:26 AM
BEVERLY BRILL, Alaska State Employee Association, Sitka, Alaska,
stated support for SB 30. She said she's participated in PERS
and SBS for 24 years as a Tier II employee with a defined
benefit plan, which she appreciates. She said the change in the
retirement system from defined benefit to defined contribution
does not attract or retain long-term employees. It also causes
inequity in the workforce when people working side-by-side have
different retirement plans. She further said that all public
employees need a reliable retirement system that will allow them
to provide for themselves and their family after leaving the
workforce. Hopefully they will also be able to afford to
continue to live in the state of Alaska. To ensure that future
generations are provided services by the best teachers, state
and municipal employees, it's important to offer a reasonable
benefit package that allows them the choice of either a defined
benefit or defined contribution in their retirement plan.
VICE-CHAIR GIESSEL stated that SB 30 would be held in committee
and public testimony on would remain open.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SCR 20 Sponsor Statement.pdf |
SSTA 3/27/2014 9:00:00 AM |
SCR 20 |
| SCR 20.pdf |
SSTA 3/27/2014 9:00:00 AM |
SCR 20 |
| HB 19 - Sponsor Statement.pdf |
SSTA 3/27/2014 9:00:00 AM |
HB 19 |
| HB 19 - Legislation Ver. A.pdf |
SSTA 3/27/2014 9:00:00 AM |
HB 19 |
| HB 19 - Legislation Ver. C.pdf |
SSTA 3/27/2014 9:00:00 AM |
HB 19 |
| HB 19 - Legislation Ver. N.pdf |
SSTA 3/27/2014 9:00:00 AM |
HB 19 |
| HB 19 - Legislation Ver. U.pdf |
SSTA 3/27/2014 9:00:00 AM |
HB 19 |
| HB0019D.pdf |
SSTA 3/27/2014 9:00:00 AM |
HB 19 |
| HB 19 - Explanation of Changes.pdf |
SSTA 3/27/2014 9:00:00 AM |
HB 19 |
| HB0019-3-2-022814-ADM-Y.pdf |
SSTA 3/27/2014 9:00:00 AM |
HB 19 |
| HB 19 Support Letters.pdf |
SSTA 3/27/2014 9:00:00 AM |
HB 19 |
| HB 19 - Opposition Letters.pdf |
SSTA 3/27/2014 9:00:00 AM |
HB 19 |
| HB 19 Support DMV Eligible Registration Classes.pdf |
SSTA 3/27/2014 9:00:00 AM |
HB 19 |
| SB30-Sponsor Statement Letterhead.pdf |
SSTA 3/27/2014 9:00:00 AM |
SB 30 |
| SB 30 A.pdf |
SSTA 3/27/2014 9:00:00 AM |
SB 30 |
| SB 30 - Letter of Support - Weishahn.docx |
SSTA 3/27/2014 9:00:00 AM |
SB 30 |
| SB 30 - Letter of Support - Sparks.docx |
SSTA 3/27/2014 9:00:00 AM |
SB 30 |
| SB 30 - Letter of Support - Ricker.docx |
SSTA 3/27/2014 9:00:00 AM |
SB 30 |
| SB 30 - Letter of Support - Doerry.docx |
SSTA 3/27/2014 9:00:00 AM |
SB 30 |
| SB 30 - Letter of Support - Kunkler.docx |
SSTA 3/27/2014 9:00:00 AM |
SB 30 |
| SB 30 - Letter of Support - Clark.docx |
SSTA 3/27/2014 9:00:00 AM |
SB 30 |