Legislature(2015 - 2016)BUTROVICH 205

04/09/2015 09:00 AM STATE AFFAIRS

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
*+ SB 83 PEACE OFFICER/FIREFIGHTER RETIREMENT TELECONFERENCED
Heard & Held
+ SB 89 PARENT RIGHTS: EDUCATION; SCHOOL ABSENCE TELECONFERENCED
<Pending Referral>
+= SB 1 REGULATION OF SMOKING TELECONFERENCED
Heard & Held
-- Public Testimony --
+ Bills Previously Heard/Scheduled TELECONFERENCED
           SB 83-PEACE OFFICER/FIREFIGHTER RETIREMENT                                                                       
                                                                                                                                
9:04:11 AM                                                                                                                    
CHAIR STOLTZE announced the consideration of SB 83.                                                                             
                                                                                                                                
9:04:37 AM                                                                                                                    
GENEVIEVE WOJTUSIK,  Staff, Senator  Lesil McGuire,  Alaska State                                                               
Legislature, Juneau,  Alaska, introduced SB  83 on behalf  of the                                                               
sponsor,  reading  the  following   sponsor  statement  into  the                                                               
record:                                                                                                                         
                                                                                                                                
     An   Act   relating   to  the   Protective   Occupation                                                                    
     Retirement  Council;   relating  to   participation  of                                                                    
     certain employees  in the defined benefit  plan and the                                                                    
     defined  contribution  plan  of the  public  employees'                                                                    
     retirement  system;  and  providing  for  an  effective                                                                    
     date.                                                                                                                      
                                                                                                                                
     In 2005, Alaska moved away  from a defined benefit to a                                                                    
     defined  contribution  retirement   system  for  public                                                                    
     employees hired  after July 1,  2006. Both  the defined                                                                    
     benefit  and  the  defined contribution  plans  contain                                                                    
     risks and  benefits to employees and  employers. With a                                                                    
     defined   benefit   plan   comes   the   advantage   of                                                                    
     professional  money  management,   lower  fees,  pooled                                                                    
     risk,  and long  term  investment strategies.  However,                                                                    
     employers carry significant  risk if investment returns                                                                    
     fall short  or actuarial predictions  prove inaccurate,                                                                    
     which they are shielded  from in a defined contribution                                                                    
     plan.  Taking  both  of  these   points  of  view  into                                                                    
     account, the Variable  Benefit Retirement System (VBRS)                                                                    
     was developed.                                                                                                             
                                                                                                                                
9:05:49 AM                                                                                                                    
WILLIAM FORNIA,  actuary, Pension  Trustee Advisors  (PTA), Inc.,                                                               
Centennial, Colorado, stated that he  is working on behalf of the                                                               
Alaska State  Firefighters Association (ASFA). He  said the focus                                                               
of  his  presentation  on  the   VBRS  Plan  is  to  address  the                                                               
following:                                                                                                                      
                                                                                                                                
   · Why the change is necessary.                                                                                               
   · Proposed structure of the new variable retirement plan.                                                                    
   · Examples of how the variable retirement plan would have                                                                    
     worked if ASFA had the plan all along.                                                                                     
                                                                                                                                
9:07:06 AM                                                                                                                    
MR.  FORNIA  explained  that a  hypothetical  police  officer  or                                                               
firefighter  that retires  at age  56 with  an average  salary of                                                               
$80,000 would receive one of the following benefit plans:                                                                       
                                                                                                                                
   · Tier 3 Defined Benefit (DB) Plan for people hired before                                                                   
     2005: $45,000 pension per year.                                                                                            
   · Tier 4 Defined Contribution (DC) Plan for people hired                                                                     
     after 2005: $25,000 pension per year.                                                                                      
                                                                                                                                
He  noted that  even  though  the retiree  is  not covered  under                                                               
Social  Security, the  annual Social  Security  payment would  be                                                               
$22,000. He  summarized that the  Tier 4 DC  Plan is not  a whole                                                               
lot better than Social Security  and significantly less than what                                                               
an individual  would receive from the  Tier 3 DB Plan  after a 25                                                               
year career in Alaska.                                                                                                          
                                                                                                                                
9:09:19 AM                                                                                                                    
He revealed that the current  retiree healthcare provision is not                                                               
likely  to provide  adequate pre-Medicare  benefits. He  detailed                                                               
that due  to healthcare costs  escalating faster than  wages, the                                                               
current average monthly premium will  increase from 39 percent of                                                               
an average Alaska Public Employees'  Retirement System (PERS) pay                                                               
to over 58 percent by 2034.                                                                                                     
                                                                                                                                
He explained  the pros and  cons of  the DB Plan  approach versus                                                               
the DC Plan approach.                                                                                                           
                                                                                                                                
He said DB plans are  more cost efficient at providing retirement                                                               
benefits and specified as follows:                                                                                              
                                                                                                                                
   · Pool longevity-risks.                                                                                                      
   · Maintains a better diversified portfolio because, unlike                                                                   
     individuals, the plan does not age.                                                                                        
   · Achieve better investment returns because of professional                                                                  
     asset management and lower fees.                                                                                           
                                                                                                                                
MR.  FORNIA explained  that  DC plans  are  more consistent  with                                                               
individual responsibility and specified as follows:                                                                             
                                                                                                                                
   · Benefit is a clearly defined contribution from the employer                                                                
     and employee to a trust.                                                                                                   
   · Benefit is more under the control and full ownership of the                                                                
     individual.                                                                                                                
   · Benefit is much more portable.                                                                                             
   · No risk of unfunded liabilities.                                                                                           
                                                                                                                                
9:11:55 AM                                                                                                                    
He stated  that VBRS tries  to strike a compromise.  He explained                                                               
that SB  83 fixes  the employer contribution  so that  there's no                                                               
risk of  the contribution  going up. He  specified that  the bill                                                               
creates  a board  to  figure out  how to  live  within the  fixed                                                               
contribution.  He specified  that the  plan has  targeted benefit                                                               
levels and the  board will have some authority to  figure out how                                                               
to  adjust benefits  or employee  contributions  as necessary  to                                                               
provide the  benefits out  of the  fixed contribution  amount. He                                                               
added  that VBRS  is designed  with a  lower anticipated  rate of                                                               
return to provide  a cushion against a long  term experience that                                                               
might be worse than expected.                                                                                                   
                                                                                                                                
9:13:06 AM                                                                                                                    
He explained that current members in  the DB Plan pay 7.5 percent                                                               
of pay  with employers paying  22 percent  of pay for  members in                                                               
the old  plan; however,  more than half  is going  towards paying                                                               
off old  unfunded liabilities. He  said individuals under  the DC                                                               
Plan are  putting in 8 percent  of pay and the  employer's amount                                                               
also adds up to 22 percent.                                                                                                     
                                                                                                                                
He set  forth that  the proposed VBRS  Plan increases  the member                                                               
contribution to 9  percent, keeps the employer pay  at 22 percent                                                               
with  8 percent  going towards  "legacy" pre-funded  liabilities,                                                               
and 14  percent going towards  the VBRS Plan. He  summarized that                                                               
the board  will have  to figure  out how  to make  the 9  plus 14                                                               
percent  work  and how  to  provide  the  level of  benefits.  He                                                               
revealed  that PTA's  projections are  that the  VRBS Plan  could                                                               
provide benefits  similar to the  Tier 3  DB Plan. He  added that                                                               
there  is a  chance that  the benefit  projections will  not work                                                               
out.                                                                                                                            
                                                                                                                                
MR. FORNIA  said there are safeguards  that the board can  use to                                                               
make adjustments and prevent the  state from having to contribute                                                               
more than 22 percent:                                                                                                           
                                                                                                                                
   · Increase employee contributions or decrease when things are                                                                
     good.                                                                                                                      
   · Provide cost of living increases.                                                                                          
   · Adjust the benefit.                                                                                                        
   · Adjust how much goes towards healthcare.                                                                                   
                                                                                                                                
9:15:34 AM                                                                                                                    
He  explained  that another  safeguard  is  a built-in  actuarial                                                               
assumptions margin where lower assumed  rates of return provide a                                                               
higher  threshold  before action  is  required  when returns  are                                                               
lower. He  added that better  than expected returns will  be used                                                               
to build reserves.  He noted that the ongoing DB  Plan assumes an                                                               
8 percent return, the VRBS Plan assumes a 7 percent return.                                                                     
                                                                                                                                
He referenced  a chart that modeled  the VRBS Plan if  enacted in                                                               
1985 to  present. He pointed  out that funding levels  would have                                                               
ranged from  80 percent to  158 percent.  He noted that  the VRBS                                                               
Plan  would currently  be 95  percent  funded on  a target  level                                                               
basis  and 110  percent funded  on a  guaranteed level  basis. He                                                               
summarized that the chart demonstrates  that the VRBS Plan should                                                               
work as  long as the  board is  prudent in not  guaranteeing more                                                               
than can be afforded.                                                                                                           
                                                                                                                                
9:17:21 AM                                                                                                                    
SENATOR MCGUIRE joined the committee meeting.                                                                                   
                                                                                                                                
MR. FORNIA reviewed case studies  of similar plans in four states                                                               
that have worked well:                                                                                                          
                                                                                                                                
   · Wisconsin: a very well-funded plan with a board that has                                                                   
     the flexibility to generate cost of living adjustments                                                                     
     based on returns.                                                                                                          
   · South Dakota: same situation as Wisconsin.                                                                                 
   · Ohio: most similar to Alaska where the contributions are                                                                   
     fixed so there is no increased contributions that have to                                                                  
     go through the Legislature; however, Ohio's board annually                                                                 
     decides how much to use for healthcare and pensions.                                                                       
   · Colorado: firefighters and police officers environment with                                                                
     a fixed contribution rate where their board makes decisions                                                                
     on how much to shift year after year.                                                                                      
                                                                                                                                
9:19:36 AM                                                                                                                    
MR.  FORNIA  set forth  that  the  VRBS  Plan purposes  that  the                                                               
employers  put in  14 percent  of  pay for  police officers'  and                                                               
firefighters' plans. He  noted that a small group  of people that                                                               
work in police and fire  departments that are not police officers                                                               
or firefighters would  receive a 12 percent  of pay contribution.                                                               
He pointed out  that the proposal is consistent  with other plans                                                               
across the country  as well as being consistent  some of Alaska's                                                               
significant employers such as Wells Fargo or Alaska Airlines.                                                                   
                                                                                                                                
He  remarked  that  the  state  is  very  concerned  with  future                                                               
unfunded liabilities  and that  is the reason  why Alaska  made a                                                               
change in 2005;  however, the change is projected  to not provide                                                               
adequate benefits for the next  generation of police officers and                                                               
firefighters. He stated that SB  83 provides a potential solution                                                               
with  benefits that  are  similar  to Tier  3  DB Plan  benefits;                                                               
however,  lower  returns  will   result  in  lower  benefits.  He                                                               
explained  that the  government takes  the risk  under Tier  3 DB                                                               
Plan and individuals each take the  risk under Tier 4 DC Plan. He                                                               
summarized that the VRBS Plan  is more efficient where the police                                                               
and firefighters take on risk as a "pooled" group.                                                                              
                                                                                                                                
9:22:04 AM                                                                                                                    
TOM  WESCOTT,   President,  Alaska  Professional   Fire  Fighters                                                               
Association,  Anchorage,  Alaska, specified  that  he  is also  a                                                               
captain in the  Anchorage Fire Department working  out of Station                                                               
5 in Spenard.  He stated that fixing  the Tier 4 DC  Plan and its                                                               
shortcomings is very important.                                                                                                 
                                                                                                                                
MR. WESCOTT said  the first goal of any  retirement system should                                                               
be  to ensure  that  participants  are ready  to  retire and  can                                                               
remain  self-sufficient once  they  do retire.  He asserted  that                                                               
remaining self-sufficient  for retirees is going  to be difficult                                                               
under the  Tier 4 DC  Plan and noted  that many are  not eligible                                                               
for Social Security or for  the Alaska Supplemental Annuity Plan;                                                               
for   example,  firefighters   or  police   officers  in   Kenai,                                                               
Anchorage, and Fairbanks do not participate in either plan.                                                                     
                                                                                                                                
CHAIR  STOLTZE  asked  if   the  non-participations  are  federal                                                               
prohibitions.                                                                                                                   
                                                                                                                                
MR. WESCOTT answered  that the state has a  Section 218 Agreement                                                               
with  the  federal  government  that  outlines  participants.  He                                                               
detailed  that  firefighters  and police  officers  traditionally                                                               
have participated in  defined benefit plans based on  the need to                                                               
retire at a  younger age because of the physical  nature of their                                                               
jobs.                                                                                                                           
                                                                                                                                
MR. WESCOTT said the VBRS Plan  from SB 83 is a better retirement                                                               
system  that was  borne  out of  listening  to the  Legislature's                                                               
concerns  about  risk and  unfunded  liabilities.  The VBRS  Plan                                                               
takes from other states' plans  where tools were built-in to deal                                                               
with  adverse   experiences.  He  noted  that   Wisconsin's  plan                                                               
remained nearly 100 percent funded after a financial collapse.                                                                  
                                                                                                                                
He  asserted that  large pooled  retirement accounts  earn higher                                                               
rates over  the long haul versus  individual retirement accounts.                                                               
He detailed  that large pooled  retirement accounts  benefit from                                                               
lower fees  through economies of  scale and earn  maximum returns                                                               
from professional  management oversight.  He added that  the VBRS                                                               
Plan pools risk and maintains  investment portfolio diversity for                                                               
all participants.                                                                                                               
                                                                                                                                
9:26:11 AM                                                                                                                    
He said  SB 83 addresses  three issues  that the state  should be                                                               
concerned about:                                                                                                                
                                                                                                                                
   · Costs associated with recruitment, retention, and training                                                                 
     for new hires when police officers and firefighters leave                                                                  
     for competing jurisdictions.                                                                                               
   · Higher workers' compensation where an older work force is                                                                  
     required to work "on the line."                                                                                            
   · Increase in social welfare costs where retirees run out of                                                                 
     money.                                                                                                                     
                                                                                                                                
He  said  a study  has  shown  that individuals  without  defined                                                               
benefit pensions  were nine  times more likely  to be  in poverty                                                               
when   they  retired;   the   Alaska  Professional   Firefighters                                                               
Association worries  that its members  would be in the  same boat                                                               
where individuals are not ready or ill prepared to retire.                                                                      
                                                                                                                                
He  detailed   that  SB  83  allows   employee  contributions  to                                                               
fluctuate  in order  to deal  with adversities.  Medical benefits                                                               
are paid  with stipends as opposed  to a level of  coverage where                                                               
the costs  are not known.  The board determines optional  cost of                                                               
living increases  based on  the plan's health.  He added  that as                                                               
opposed  to guaranteed  benefits,  a portion  of  the benefit  is                                                               
variable where  payments are based  on what the  plan's financial                                                               
capabilities are.                                                                                                               
                                                                                                                                
He remarked that SB 83 is  not perfect. He pointed out that legal                                                               
and fiscal concerns  need to be addressed. He  summarized that SB                                                               
83 addresses a  problem and provides a better  benefit for Alaska                                                               
Professional Firefighters Association members.                                                                                  
                                                                                                                                
9:29:49 AM                                                                                                                    
JEREMY CONKLING,  Officer, Anchorage Police  Department Employees                                                               
Association,  Anchorage,   Alaska,  explained  that   not  having                                                               
defined benefits impacts the  Anchorage Police Department's (APD)                                                               
recruitment and retention of officers.                                                                                          
                                                                                                                                
MR.  CONKLING detailed  that APD  is receiving  75 percent  fewer                                                               
applications than were received in  the late 90s and early 2000s.                                                               
He asserted that  due to a lack of retirement,  people don't have                                                               
an incentive to join APD and work  for 20 years in Alaska with no                                                               
security on the back end.                                                                                                       
                                                                                                                                
He explained  that retention  is an issue  where APD  has shifted                                                               
from  being a  destination to  a training  ground where  officers                                                               
leave  after receiving  training and  certification. He  detailed                                                               
that  APD invests  several hundred  thousand dollars  on training                                                               
and  certification for  each officer.  He revealed  that officers                                                               
from  APD have  left for  places with  defined benefit  plans. He                                                               
noted that the Denver Police  Department is offering officers the                                                               
ability to buy  back up to ten years of  service; for example, an                                                               
officer with 12 to 14 years can  buy 10 years back and only do 10                                                               
more years and  get a full retirement. He  revealed that officers                                                               
in exit  interviews are saying  that not having  defined benefits                                                               
is the reason why they are leaving.                                                                                             
                                                                                                                                
He  summarized that  APD is  unable  to recruit  and keep  highly                                                               
trained, professional officers.  He said passing SB  83 will give                                                               
APD a huge advantage for recruiting and retention.                                                                              
                                                                                                                                
9:33:05 AM                                                                                                                    
CHAIR STOLTZE asked the sponsor to comment on SB 83.                                                                            
                                                                                                                                
SENATOR  MCGUIRE  remarked  that  she   is  known  for  being  an                                                               
innovator and visionary in reconsidering  the way the Legislature                                                               
does things. She said she does  not believe that things are black                                                               
and white. She  explained that in 2005 Senate  Bill 141 addressed                                                               
fiscal concerns  to move away  from a  defined benefit plan  to a                                                               
defined   contribution  plan   for   the  state's   firefighters,                                                               
teachers, and  police officers. She  said during her time  in the                                                               
Legislature,  men and  women  serving at  the  ground level  have                                                               
testified about their  concerns regarding recruitment, retention,                                                               
and retirement.  She asserted that  she wants to bring  the noted                                                               
concerns  forward  for the  Legislature  to  think about  whether                                                               
there  is  a different  way  and  asserted  that SB  83's  hybrid                                                               
approach is  a possibility.  She declared that  the fine  men and                                                               
women  that   serve  and  save  Alaska's   families  deserve  the                                                               
Legislature's attention on their retirement system.                                                                             
                                                                                                                                
CHAIR  STOLTZE stated  that SB  83  will get  further review.  He                                                               
asserted  that  the  committee  puts   a  lot  of  trust  in  the                                                               
administration to review  the actuarial data and  give their best                                                               
analysis. He asked that the  committee receive a candid point-by-                                                               
point on  SB 83.  He summarized  that SB 83  deals with  a fiscal                                                               
issue which is  one of the three legs of  the state's deficit and                                                               
the committee will  have no blindfolds on during  the bill's next                                                               
hearing.                                                                                                                        
                                                                                                                                
9:36:54 AM                                                                                                                    
CHAIR STOLTZE announced that SB 83 will be held in committee.                                                                   
                                                                                                                                
SENATOR HUGGINS  asked that analysis  be provided  with different                                                               
parameters for alternative courses.                                                                                             
                                                                                                                                
CHAIR  STOLTZE agreed  that the  committee wants  to receive  the                                                               
best information.                                                                                                               

Document Name Date/Time Subjects
SB1 DOT-IASO 3-27-15.pdf SSTA 4/9/2015 9:00:00 AM
SB 1
SB1 Letters of Support for SSTA (3-31-15 to 4-8-15).pdf SSTA 4/9/2015 9:00:00 AM
SB 1
SB1 Letters of Opposition for SSTA (3-31-15 to 4-8-15).pdf SSTA 4/9/2015 9:00:00 AM
SB 1
SB83 Sponsor Statement.pdf SSTA 4/9/2015 9:00:00 AM
SB 83
SB83 Presentation to SSTA - Variable Retirement Plan 4-9-15.pdf SSTA 4/9/2015 9:00:00 AM
SB 83
28th Legislature - HB247 Fiscal Note-DOA-DRB-02-28-2014.pdf SSTA 4/9/2015 9:00:00 AM
SB 83
28th Legislature - HB247 Actuarial Fiscal Note-DOA-DRB-02-28-2014.pdf SSTA 4/9/2015 9:00:00 AM
SB 83
SB83 Support Document - Email Angie & Matt Fraize 4-10-15.pdf SSTA 4/9/2015 9:00:00 AM
SB 83
SB83 Support Document - Letter (HB90) Patrick O'Connor 4-9-15.pdf SSTA 4/9/2015 9:00:00 AM
HB 90
SB 83