Legislature(2021 - 2022)ADAMS 519
04/21/2021 09:00 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB55 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 55 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
April 21, 2021
9:04 a.m.
9:04:44 AM
CALL TO ORDER
Co-Chair Merrick called the House Finance Committee meeting
to order at 9:04 a.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Kelly Merrick, Co-Chair
Representative Dan Ortiz, Vice-Chair
Representative Bryce Edgmon
Representative DeLena Johnson
Representative Andy Josephson
Representative Bart LeBon
Representative Sara Rasmussen
Representative Steve Thompson
Representative Adam Wool
MEMBERS ABSENT
Representative Ben Carpenter
ALSO PRESENT
Representative Andy Josephson, Sponsor; Elise Sorum-Birk,
Staff, Representative Andy Josephson; Senator Jesse Kiehl.
PRESENT VIA TELECONFERENCE
William "Flick" Fornia, Pension Trustee Advisors
SUMMARY
HB 55 PEACE OFFICER/FIREFIGHTER RETIRE BENEFITS
HB 55 was HEARD and HELD in committee for further
consideration.
Co-Chair Merrick reviewed the meeting agenda.
HOUSE BILL NO. 55
"An Act relating to participation of certain peace
officers and firefighters in the defined benefit and
defined contribution plans of the Public Employees'
Retirement System of Alaska; relating to eligibility
of peace officers and firefighters for medical,
disability, and death benefits; relating to liability
of the Public Employees' Retirement System of Alaska;
and providing for an effective date."
9:05:08 AM
REPRESENTATIVE ANDY JOSEPHSON, SPONSOR, introduced the
legislation and thanked the committee for hearing the bill.
He believed it was a historic opportunity for the committee
and legislature to do something very positive for first
responder public employees. He read from a prepared
statement:
In Alaska there are about 44,000 active public
employees. These are people that make the wheels of
government function so that we can have peace, our
roads cleared, our trash removed, our children
educated, and make the economy and wheels of the
economy run. From 1961 to 2005 these workers were
eligible for a defined benefit. This is the term used
for what I call an old school pension - something you
could rely on that would be there until you die. After
2005, the eligibility for new employees to receive a
defined benefit was permanently closed and it's
remained closed for 16 years. Instead, new public
employees receive a defined contribution, commonly
called a 401k or 403a. These benefits become portable
at the time of vesting, usually in five years and that
is a critical part of the problem. It's great to be
vested, but it's the power of vesting.
Alaska went into a period of retrenchment because of
an unfunded liability and through a combination of bad
actuarial advice and our own lack of vigilance, the
unfunded liability was there but not really known
until 2004 or 2005. At its height, that unfunded
liability was $11 billion. Thankfully, it's now about
$5 billion. The retrenchment - and I think we swung
the pendulum too far - came at a cost. It was a very
heavy cost. The cost is the hollowing out of the
workforce. This must be true across the workforce. You
see older people, probably in their late 40s, 50s, 60s
and you see the young (late teens and 20s) and the
middle group are gone. Not totally gone, of course
not, but they're gone, and you'll hear testimony about
that. They've gone to other states because they have
skills and they have shopped, and they've seen that
they can do better elsewhere. They don't want to
leave, and they'll tell you that, but they're leaving.
There is a lack of ability to compete in the current
system. There's a lack of ability to hire in the
current system. We lose significant training revenue,
especially for our first responders and you will hear
testimony, it won't be argued, it won't be contested.
You'll hear numbers ranging from about $90,000 to
about $200,000 to train these individuals (paramedics,
fire, police, troopers, corrections officers).
Remember that those dollars are borne by the state and
the local governments. They fund that training and
when it leaves to Washington or Colorado or Wisconsin,
it takes the training with it, in a perfectly lawful
and competitive way. What we do is we train up these
folks, and you may wonder how it can be so expensive,
many of them return to get additional certification.
There are fire fighters who go back to get paramedic
certification, for example. There's a massive
disruption to the quality of life of the workforce we
have.
Representative Josephson shared that he had met with the
commissioner designee of the Department of Public Safety
(DPS) an hour earlier. He had been reminded that it was not
possible to hire replacement workers at the needed rate,
which had real world impacts. For example, the previous
week, the commissioner designee had told the Special
Committee on Tribal Affairs that DPS had a class of 36
troopers; however, 33 other troopers had left. He noted
that the commissioner designee had highlighted the need for
a defined benefit for first responders in the Judiciary
Committee as well.
9:10:14 AM
Representative Josephson shared that the bill applied to
about 3,000 individuals, some of whom already had a defined
benefit. He stressed that the bill was not risky, but it
reduced risk because it was a cohort of 3,000 out of 44,000
public employees. He underscored that it was a risk worth
taking. He stated that to get to the desired outcome it was
necessary to allow for a new defined benefit. He reiterated
that the risk was small. He pointed out that the fiscal
note identified Alaska as one of the only states without
defined benefits for its public safety employees.
Representative Josephson discussed the bill's cost saving
features. He noted that members would only receive a health
reimbursement account upon retirement. He relayed that it
would not generally prove adequate between the period of
retirement and Medicare eligibility. He highlighted that
the provisions were written by and for members. He
acknowledged that while he was the bill sponsor, the ideas
included had been fine tuned by members by looking at other
states and other models. Members were willing to give on
the health reimbursement issue.
Representative Josephson reported that the bill would fix
the age of retirement at 55, meaning members could not draw
on the benefits as soon. He discussed that public safety
officers' bodies wore down and they may retire in their
early 40s, meaning they would likely have to find other
work to fill the gap before they could actually receive a
pension. He remarked that members would have to do 20 years
of service and could do much less if they waited to age 60.
Representative Josephson continued to address the bill's
cost saving features. He explained that instead of a high
three [years used to determine retirement benefits] there
would be a high five. He referenced testimony that it was
hard to go to the North Slope for five years to try to seek
a high five due to a cost of living adjustment (COLA). He
detailed that COLA was the 10 percent workers received if
they were in a previous defined benefit. He added there was
no COLA in the bill. There were also plan asset enhancement
adjustments. He detailed that employee contributions could
be increased where the actuary found the plan to be beneath
90 percent solvency. He clarified that 90 percent solvency
was considered to be very solvent. He recalled that
Representative Rasmussen had stated the previous day that
60 percent was barely passing. He remarked that 90 percent
was an A- and should be thought of that way.
Representative Josephson elaborated that the bill contained
the ability for the Alaska Retirement Management Board
(ARMB) to withhold the post-retirement pension adjustment
(an inflation adjuster). The effect was that what a person
received in their pension on a given month could be smaller
than the amount received the preceding month. He informed
the committee that the first responders were willing to
suffer that possibility to get the plan benefit they
sought. He emphasized that the issue was selfless for many
of the members. The members were looking to stop the
hollowing out of their workforce.
9:14:03 AM
Representative Josephson stated there was much desire to
return to a defined benefit for all public employees, a
desire he shared. He detailed that he is the grandson of
the man who founded AFSCME in 1932 and became its president
in 1936 for 30 years. He shared that he had been in
Detroit, Michigan in 1997 to see his grandfather
posthumously inducted into the hall of fame with people
like John L. Lewis and Franklin Roosevelt and some of the
great labor people in history. He shared the interest. He
believed the public would understand that first responders
were unique. He stated that the legislature had been burned
in 2005. He highlighted that the bill was not a
steppingstone and stood on its own. He believed the
legislature was entitled to see how the plan worked and
whether it would be solvent the way the state's retirement
officials said it would be. Additionally, the legislature
could look in the outyears at other options. He believed
the stars were aligned and the bill had bipartisan support.
He thanked the committee for hearing the bill.
9:15:29 AM
ELISE SORUM-BIRK, STAFF, REPRESENTATIVE ANDY JOSEPHSON,
introduced herself. She provided a PowerPoint presentation
titled "House Bill 55" (copy on file). She began with a
sectional analysis of the bill on slide 2:
Section 1: Amends AS 37.10.220(a) regarding the powers
and duties that the Alaska Retirement Management (ARM)
board shall carry out including:
Adding new duties to account for appropriate
employer contributions for peace officers and fire
fighters and adjustments to these employees'
contributions; and
Determining the amount of the monthly employer
contributions under new subsection AS 39.35.255(i) for
peace officers and firefighters participating in the
defined benefit plan after June 30, 2006.
Section 2: Amends AS 37.10.220(b) regarding the powers
and duties of the Alaska Retirement Management (ARM)
board, adding the ability to adjust the post-
retirement pension adjustment (PRPA) amounts and the
employee contribution rates for peace officers and
firefighters participating in the defined benefit plan
after June 30, 2006.
Section 3: Adds to the ARM board statute the
definitions for "peace officer" and "firefighter" the
existing in AS 39.35.680 (the PERS defined benefit
definitions section).
Section 4: Amends AS 39.30.090(a) by adding the AS
39.37.537 (the new health reimbursement arrangement
(HRA) medical benefit for peace officers and
firefighters participating in the defined benefit plan
after June 30, 2006 found in section 29) to the list
of retiree medical benefit programs that the
Department of Administration has the power to procure
group insurance for.
Section 5: Amends AS 39.30.097(a) regarding Alaska
retiree health care trusts. Adds the new AS 39.35.537
(the peace officer/firefighter HRA found in section
29) to the list of medical benefit programs that the
Department of Administration commissioner is
authorized to prefund.
Section 6: Amends AS 39.30.097(b) regarding Alaska
retiree health care trusts. Adds the new AS 39.35.537
(the peace officer/firefighter HRA found in section
29) to the list of medical benefit programs that the
Department of Administration commissioner is
authorized to prefund.
Section 7: Makes a Revisor's type technical change by
using the new preferred term for referring to the
state retirement system.
Section 8: Amends AS 39.30.380 regarding how the HRA
medical benefits are handled for terminated employees
who leave prior to retiring. A person who terminates
employment prior to meeting the eligibility
requirements under the new AS 39.35.537 (proposed
peace officer and firefighter HRA found in section 29)
lose rights to their contribution to the HRA trust
fund, in line with other Tier IV HRAs.
Section 9: Amends AS 39.30.390 regarding eligibility
for reimbursement under the HRA. Adds the new AS
39.35.537 (proposed peace officer and firefighter HRA
found in section 29) as eligible for reimbursements
from the HRA.
Section 10: Amends AS 39.30.400(a) regarding benefits
payable from individual HRA accounts. The new AS
39.35.537 (proposed peace officer and firefighter HRA
found in section 29) is added as a plan from which the
administrator may deduct the cost of monthly premiums.
Section 11: Amends AS 39.30.495 which contains the
definitions for the HRA statutes. Adds the new AS
39.35.537 (proposed peace officer and firefighter HRA
found in section 29) to the definition of "eligible
person" found in AS 39.30.495(5).
Section 12: Amends AS 39.35.095 which lays out the
applicability of the defined benefit retirement plan
statutes found in AS 39.35.095-39.35.680 to include
peace officers and firefighters participating in the
defined benefit plan after June 30, 2006.
Section 13: Conforming amendment to AS 39.35.160(a)
which outlines the employee contribution rates for
peace officers or firefighters hired before June 30,
2006, excepting the new AS 39.35.160(e) (found in
section 14). Deletes material on page 9, lines 18-25
that is reproduced in a new AS 39.35.160(f) (found in
section 14).
Ms. Sorum-Birk continued to review the sectional analysis.
She noted that Section 14 was the first section shown on
slide 2.
Section 14: Creates new subsection AS 39.35.160 (e)
setting the employee contribution rate for peace
officers and firefighters participating in the defined
benefit plan after June 30, 2006, at 8 percent of the
employee's compensation. The ARM board may adjust the
contribution rate from 8 to 10 percent. Subsection (f)
reproduces the deleted material from page 9, lines 18-
25 in section 13 of the bill, ensuring that
contributions conform with the federal Internal
Revenue Code.
Section 15: Amends AS 39.35.255(a) by referring to a
new subsection (i) and by doing so makes clear that
the total employer contribution remains 22% for peace
officer and fire fighter employers.
Section 16: Amends AS 39.35.255(d) and is a technical
conforming change to accommodate the new subsection
(i) of this statute.
Section 17: Amends AS 39.35.255(e) and is a technical
conforming change to accommodate the new subsection
(i) of this statute.
Ms. Sorum-Birk moved to Section 18, which was where the
cost of the bill came from:
Section 18: Adds new subsections (i) and (j) to AS
39.35.255.
New subsection (i) establishes one of the new
features that aim to make this new tier financially
viable. It specifies that the employer contribution to
the employee retirement benefit will remain constant
at 12%. And, that the difference between the 12%
contribution dedicated to employee benefits and the
22% total employer contribution will be available for
the past liability of the PERS system.
New subsection (j) states that the ARM board may
increase the employer contribution to the employee
retirement benefit based on the board's decision to
increase employee contributions. This is also a new
feature, or "lever," added to help make the new tier
financially viable.
9:22:25 AM
Ms. Sorum-Birk continued to review the sectional analysis:
Section 19: Amends AS 39.35.282 regarding employer
contributions for medical benefits, conforming that
section to changes in the bill affecting peace
officers and firefighters first participating in the
defined benefit plan after June 30, 2006.
Section 20: Conforming amendment to AS 39.35.370(a)
which outlines the years of service requirements to
become eligible for retirement benefits under the
defined benefit retirement plan. The conforming
language specifies that the credit service
requirements in subparagraphs 1-3 only apply to
persons who became members of the defined benefit
retirement plan prior to July 1, 2006.
Section 21: Amends AS 39.35.370 by adding a new
subsection (l) detailing the service requirements for
peace officers and firefighters participating in the
defined benefit plan after June 30, 2006. Members are
eligible for a normal retirement benefit:
At age 60 with at least five years of credited
service as a peace officer or firefighter, or
At age 55 with at least 20 years of credited
service as a peace officer or firefighter.
Section 22: Amends AS 39.35.381 concerning the
alternative benefits for elected public officials. The
new AS 39.35.537 (proposed peace officer and
firefighter HRA found in section 29) is added to the
list of plans that elected public officials are not
entitled to under the alternative benefit for elected
public officials.
Section 23: Conforming amendment to AS 39.35.475(a)
concerning the schedule for making the annual
postretirement pension adjustments (PRPA), making
those payments subject to the exceptions in the new
subsection (g) (found in section 25).
Section 24: Conforming amendment to AS 39.35.475(b)
concerning the calculation of the annual
postretirement pension adjustments (PRPA), making
those payments subject to the new subsection (h)
(found in section 25).
Section 25: This section contains one of the new
features, or "levers," added to help keep the new tier
financially viable. The section is intended to allow
the ARM board to reduce a benefit, the automatic post-
retirement pension adjustment, to keep the new tier
financially viable. The proposed new subsections:
Subsection (g) sets up the adjustment feature of
the next subsection.
Subsection (h) allows the ARM board to reduce
PRPA payments to peace officers and firefighters
participating in the defined benefit plan after June
30, 2006, if the plan has an unfunded liability
greater than 10 percent and clarifies that the feature
can be used if the liability to PERS is attributable
to the employees of this new tier.
Section 26: Conforming amendment to AS 39.35.535(a)
concerning the medical benefits for employees under
the defined benefit retirement plan. Adds a new
subsection (g) (found in section 28) as an exception
to the defined benefit retirement plan medical
benefits for peace officers and firefighters
participating in the defined benefit plan after June
30, 2006.
Section 27: Conforming amendment to AS 39.35.535(c)
concerning the major medical insurance coverage for
those under the defined benefit retirement plan. It
specifies that the section only applies to those
members or their surviving spouse who joined prior to
July 1, 2006.
Section 28: Amends AS 39.35.535 by adding a new
subsection (g) that states peace officers and
firefighters participating in the defined benefit plan
after June 30, 2006, are to receive benefits under the
HRA as allowed under the new AS 39.25.537 (found in
section 29).
Section 29: Adds a new section AS 39.35.537 creating
an HRA medical benefit for peace officers and
firefighters first participating in the defined
benefit plan after June 30, 2006. The section
specifies the eligibility, cost of premiums for the
major medical insurance, and procedures for
participation.
Section 30: Amends AS 39.35.680 (4) which contains the
definitions for the defined benefit retirement plan
statutes. Adds a new paragraph (F) under the
definition of "average monthly compensation" that
states the calculation for peace officers and
firefighters first participating in the defined
benefit plan after June 30, 2006, will be based on the
highest five consecutive payroll years during the
employee's career.
9:26:38 AM
Ms. Sorum-Birk continued to review the sectional analysis:
Section 31: Conforming amendment to the definition of
"employer" under AS 39.35.680(18) to include peace
officers and firefighters participating in the defined
benefit plan after June 30, 2006.
Section 32: Conforming amendment to the definition of
"normal retirement" under AS 39.35.680(26) to include
AS 39.35.370(l) detailing the service requirements for
peace officers and firefighters participating in the
defined benefit plan after June 30, 2006.
Section 33: Conforming amendment to AS 39.35.720
regarding the membership in the defined contribution
retirement system, stating that all employees who
become members on or after July 1, 2006, except as
provided in AS 39.35.095, are part of the defined
contribution plan, thus excepting peace officers and
firefighters participating in the defined benefit plan
after June 30, 2006.
Section 34: Adds a new subsection to AS 39.35.750
regarding employer contributions to the defined
contribution retirement plan, stating those
contribution requirements do not apply to peace
officers and firefighters participating in the defined
benefit plan after June 30, 2006, whose employer
contribution requirements are found in the new AS
39.35.255(i) (found in section 18).
Section 35: Adds a new section to the uncodified law
of the State of Alaska allowing peace officers and
firefighters hired after June 30, 2006 and before the
bill's effective date to elect, within 90 days of the
effective date of this section, to transfer their
contributions to their defined contribution retirement
plan to the defined benefit retirement plan. Those
transfers will be used to purchase credited service
under the defined benefit retirement plan on an
actuarially equivalent basis set by the ARM board.
Section 36: Adds a new section to the uncodified law
of the State of Alaska creating procedures set out by
the Department of Administration for employees to
transition their contributions under the defined
contribution retirement plan to the defined benefit
retirement plan. This section also states that the
election to transition from the defined contribution
to the defined benefit plan is irrevocable. If there
is a difference between the actual years of service
and the equivalent years of service calculated by an
employee's contributions to the defined benefit
retirement plan, then the Department of Administration
will allow persons to buy the difference. If the
equivalent years of service are in excess of the
actual years of service, then the excess remains under
the defined contribution retirement plan.
Section 37: Adds a new section to the uncodified law
of the State of Alaska instructing the Department of
Administration commissioner to make conforming
regulations.
Section 38: States that section 37 takes immediate
effect under AS 01.10.070(c).
Section 39: Sets effective date of July 1, 2021
9:28:29 AM
Representative Wool understood there was a significant
amount of detail in the bill. He asked if there was
detailed information about the benefit system. He stated
his general understanding of the benefit system. He
wondered when the first recipient would be eligible to
receive a benefit if the program started immediately. He
asked for more detail about the solvency and triggers in
the bill.
Ms. Sorum-Birk replied that the actuary Flick Fornia would
give a presentation next. She shared that Mr. Fornia had
helped with the plan design and would go into the details
of solvency and models. She noted that only individuals who
had been in the defined contribution plan since 2006 could
buy into the plan - they would have 14 or 15 years of
service currently and would need at least five more years
before they could retire. Additionally, they would have to
be 55 years old to retire. She relayed that the soonest the
plan would pay out would be in five or six years.
Representative LeBon stated his concern about upside risk
and how the risk was shared. He asked for verification that
the employee contribution rate was capped at 10 percent. He
referenced Section 14 of the legislation, which specified
the employee contribution rate may be increased up to 10
percent.
Representative Josephson agreed.
Representative LeBon asked if the decision would be made by
ARMB.
Representative Josephson replied affirmatively.
Representative LeBon highlighted his understanding that the
state would contribute 22 percent as its maximum
contribution. He pointed out there was currently an
unfunded liability of about $5 billion in the existing
retirement system.
Representative Josephson agreed.
Representative LeBon asked how to prevent the unfunded
liability from happening again. He understood adjustments
had been made and protections were in place to keep the
situation from happening again, but he was concerned about
an unfunded liability in 30 years. He asked how to craft a
plan so that employees shared in the upside risk more than
just a cap at 10 percent.
Representative Josephson answered that the state's actuary,
Mr. [David] Kershner testified 13 months earlier that he
perceived the bill was 99.3 percent funded. He elaborated
that Mr. Kershner had testified that the plan did not add
to the existing liability. There was some cost associated
with the state needing to contribute a bit more to the
unfunded liability (between $3 million to $4 million in the
early years). He clarified it was not a cost directly
associated with a new cohort the bill would create. He
explained that the employee was the proxy for the amount
that went to the unfunded liability and the state would be
contributing marginally more. He noted that the $3 million
to $4 million was far less than the training and
recruitment cost associated with lost employees.
Representative Josephson recognized that the government
took the risk in a defined benefit system, but he believed
the plan proposed in the bill was very low risk. He
referenced Representative LeBon's mention of the employees'
participation in the risk. He explained that the employees'
risk was identified in several things. First, the plan did
not include a COLA. Second, an adjustment may be made to
employees' paychecks if ARMB decided the performance was
below 90 percent. Similarly, there was a loss of the
inflation adjuster, the PRPA, when the performance was less
than 90 percent. He highlighted that the plan was far less
generous than Tiers I, II, and III. He explained that a
person could not retire after 20 years at any age (he did
not believe 20 years was required for Tier I) and employees
did not have the health guarantee that active employees
enjoyed. Employees would have a health reimbursable
arrangement they would have to leverage and make do with.
He conceded it would be difficult to do, especially for
people who retire at a young age because they would have to
cover the gap between retirement and age 65.
9:35:24 AM
Representative LeBon referenced the 99.3 percent certainty
of success, which he observed was high.
Representative Josephson confirmed the 99.3 percent figure.
Representative LeBon asked why there was a fear of
structuring the bill in a way where the employee shared a
bit of the risk with the state if success was certain.
Ms. Sorum-Birk answered that the employee was already
sharing in the risk. She highlighted that the normal
employee contribution was 8 percent under the plan. She
explained that the percentage would increase to 10 percent
if the plan dropped below 90 percent funded.
Representative LeBon believed the risk needed to be shared
in a way that made it easier for legislators to
collectively support the bill. He remarked that in the past
the state noted they had an $11 billion shortfall in the
defined benefit plans (Tiers I, II and III). He discussed
that about 10 years back the gap had been closed by the
governor and legislature; the existing gap was currently
about $5 billion. He wanted to ensure the program was set
up in the correct way to avoid a multi-billion funding gap
in the future.
9:37:20 AM
Vice-Chair Ortiz looked at Section 25 of the bill that
allowed ARMB to reduce PRPA payments to peace officers and
firefighters participating in the defined benefit plan
after June 30, 2006, if the plan had an unfunded liability
greater than 10 percent. He referenced the 99.3 percent
solvency referenced by the presenters. He asked for
verification that the likelihood of an unfunded liability
was less than 1 percent.
Representative Josephson agreed; however, he noted that
stocks and bonds were doing better at present than they
typically did. He elaborated that when the testimony had
been offered that the plan was 99.3 percent solvent at a
March 2020 hearing, COVID had struck, and stock had been
performing miserably. He believed the actuary may be the
best person to respond to the question. He did not want to
claim that there was a 1 percent chance the PRPA would be
withdrawn; however, he noted the possibility was unlikely.
Vice-Chair Ortiz appreciated the concerns expressed by
Representative LeBon and he agreed he did not want the
state to be responsible for a further unfunded liability.
He asked for verification that under the plan included in
the legislation, once a person retired, the benefit was the
same every year.
Representative Josephson replied in the negative. He
clarified that the PRPA was an inflation adjuster.
Vice-Chair Ortiz asked for verification there was an
inflation adjustment aspect to the bill.
Representative Josephson agreed. He noted that the PRPA
could be suspended.
Representative Rasmussen thanked Representative Josephson
for bringing the bill forward and remarked on its
importance. She asked for the number of current public
safety employees in Alaska.
Representative Josephson recalled the number was 3,000,
based on a previous bill hearing and numerous documents
associated with the bill. He noted the number may be closer
to 4,000, but it did not exceed that amount.
Representative Rasmussen asked how many state employees
were covered in Tiers I, II, and III.
Representative Josephson responded that there were
approximately 12,000 active employees in the defined
benefit Tiers I through III. He noted that including the
Teachers' Retirement System (TRS) Tiers I and II (TRS did
not yet have a Tier IV) increased the number to about
16,000 active employees.
Representative Rasmussen referenced the previous $11
billion unfunded liability. She asked what the state's
collective obligation had been for active and retired
employees under Tiers I, II, and III.
Representative Josephson answered that retired Tiers I, II,
and III was in the range of 47,000 people. He noted the
number was almost two years old, but he did not believe the
current number was substantially different. He asked
Representative Rasmussen to repeat her second question.
Representative Rasmussen combined the PERS, TRS, and
retired employees and estimated there were roughly 75,000
people who contributed to the $11 billion unfunded
liability. She asked for verification that the bill
included about 3,400 people at present.
Representative Josephson replied affirmatively. He stated
it was the reason he believed it was where the state should
pivot and turn the corner to a new defined benefit. He
pointed to the cost of recruiting and training the
employees, the difficulty of retaining employees because
they left for other opportunities, the small cohort size,
and the affordability of the plan. He added that the plan
was low risk.
9:42:59 AM
Representative Rasmussen believed that with the low number
of personnel and Representative LeBon's concerns, she
thought it seemed possible to find a slight compromise to
assuage concerns about the risk the state may incur, while
recognizing the number of employees was substantially lower
than the previous membership in the defined benefit
program. She believed the issue was incredibly important.
She hoped they could find a solution to get all members on
board due to the importance of the issue.
9:44:00 AM
WILLIAM "FLICK" FORNIA, PENSION TRUSTEE ADVISORS (via
teleconference), introduced himself and shared that he was
working on behalf of the firefighters. He provided a
PowerPoint presentation titled "Shared Risk Hybrid
Retirement Program for Public Safety: HB 55 - Actuarial
Implications," dated April 21, 2021 (copy on file). He
characterized the plan in the bill as a hybrid because it
was not a pure defined benefit plan and was not a defined
contribution plan like the current tier.
Mr. Fornia began on slide 2 and provided his credentials.
He detailed that he was a fully credentialed actuary and
had been in the business for over 40 years. He was
currently the board-elected secretary/treasurer of the
Society of Actuaries. He shared that he had authored a few
well known pieces on defined benefit and defined
contribution plans. He had frequently testified to
legislatures and city councils and had traveled to Juneau
to testify to the legislature in-person on multiple
occasions in the past. He listed other states he had
testified in as well.
Mr. Fornia turned to slide 3 and gave a sample of his work
history on slide 3. He shared that he did not work for
labor all of the time. He historically worked for a
coalition of public employees in Alaska and was currently
working for the firefighters. His largest client was the
State of Ohio where he advised the state oversight board.
Additionally, he was currently helping the City of Austin,
Texas in its negotiations with police, firefighters, and
other employees regarding pension issues. He added that he
had worked for the banks in the Detroit, Michigan
bankruptcy. He had been a corporate actuary for Boeing for
a couple of years about 40 years back and had started his
own firm just over 10 years back. He shared that just
before he started his firm, he had been hired by ARMB as
its first ongoing review actuary for a couple of years. He
relayed that he had testified in Juneau in February 2009 to
present his results of an audit of the Alaska PERS and TRS
systems. Additionally, he had been the head of Buck
Consultants Denver retirement practice. He had advised many
groups since founding his firm.
9:47:54 AM
Mr. Fornia advanced to slide 4 titled "Shared-Risk Hybrid
Retirement Program for Public Safety." He would try to
answer questions asked by Representative Wool and
Representative LeBon. He addressed the question "why is
change necessary?" He explained that the current benefit
tier was not providing adequate benefits and workers were
leaving.
Mr. Fornia turned to a bar chart on slide 5 titled
"Illustration of hypothetical police/fire benefits: $80,000
final average salary." He explained that under the state's
Tier III (defined benefit), the tier for police and
firefighters hired just before 2005, a typical firefighter
with average pay of $80,000 and a full career would get a
benefit of a little over $45,000. He reported that the
benefit would be substantially less for employees in Tier
IV (defined contribution) because their investment return
was not likely to be as good as the return under a defined
benefit program and they did not know how long they would
live so they did not know how quickly to draw down the
benefit. The third bar on the slide showed that even if
employees were just in social security (which they are
not), the benefit would be almost as good as Tier IV.
9:49:38 AM
Mr. Fornia turned to slide 6 titled "Why is change
necessary?" He provided some of the numbers behind the
data. He detailed that a typical person used in the data
had 25 years of service, retired at 56, and had been hired
at 31. He detailed that an employee whose benefit was 57
percent of their pay under the defined benefit plan fell to
31 percent under the defined contribution plan. He detailed
it was a 26 percent pay reduction. He explained it meant
that individuals were running out of money in retirement.
He understood the committee had heard information a year
earlier from Bob Mitchell [CIO, Treasury Division,
Department of Revenue] who had done some work showing very
similar results. He pointed out that the data did not cover
medical. He clarified that the program in the bill did not
change the retiree healthcare program for people hired
since 2005. He noted that one of the reasons the state's
[defined benefit] plan had the higher unfunded liability
was because it included the healthcare program. He informed
committee members that most states did not offer retiree
healthcare in their pension program. He detailed that when
comparing an unfunded liability member in Alaska with an
unfunded liability member in another state, the other state
was likely not counting healthcare. He reported that Alaska
and Ohio were the only two major states that funded retiree
healthcare through their pension program.
9:51:01 AM
Mr. Fornia moved to slide 7 and reviewed defined benefit
and defined contribution plans. He stated that a defined
benefit plan was what Representative Josephson referred to
as an old-school pension and a defined contribution plan
could be thought of typically like a 401k. He noted a 401k
was the most prominent plan in the private sector; it was a
plan for people like himself who saved for their own
retirement.
Mr. Fornia explained that a defined benefit plan paid over
the life expectancy of the average employee. He noted that
actuaries were mostly accurate when predicting the number
of people who would be alive the following year, which was
a pretty easy thing to predict on a group basis. However,
on an individual basis it was very difficult to predict.
For example, he shared that his mom was 88 and she was
saving for retirement - he did not know whether she would
live one more year or 12 more years. He stated it was very
difficult for someone to plan on how long they have to pay
themselves. Additionally, defined benefit plans had a
diversified portfolio and could maintain a very well
diversified portfolio of stocks and bonds throughout the
entire period. He shared that he was 62 years old and was
retiring in several years; therefore, he was starting to
have to be more conservative in his investment. He stated
that defined benefit plans were also better managed. He
detailed that the investors ARMB worked with to invest the
money were much better than the average 401k owner
investing on their own.
Mr. Fornia reported that defined contribution plans were
very consistent with the individual responsibility theme.
He detailed that the employer paid a given amount and it
was up to the employee to figure it out. He elaborated that
the plan was portable and under the employee's full
control. He explained that the situation was currently
shooting the state in the foot. He highlighted that a
firefighter or police officer could work five years in
Alaska at the beginning of their career, have a pretty
decent balance and go to another state to buy into a new
plan. He explained that the individual got the best of both
worlds - they received a portable benefit early in their
career and a guaranteed benefit later in their career. The
advantage of a defined contribution plan for the employer
was there was no risk of an unfunded liability. Under a
defined benefit plan there was a real risk of an unfunded
liability, which Alaska had seen with its $11 billion
unfunded liability.
Mr. Fornia discussed that the bill used a shared-risk
hybrid plan, which had features of defined benefit and
defined contribution plans. The plan had the cost-
effectiveness of the defined benefit plan, while the risk
(of things not turning out as well as the actuary
predicted) was borne by the employer and employee. Under
the proposed plan, an employee would receive a lower
benefit than Tier III, and their contribution would
increase from 8 to 10 percent (a 25 percent cost
increase)[if the plan funded rate dropped below 90
percent], and if the plan fell below 90 percent funded the
post-retirement inflation adjustment could be suspended by
ARMB until solvency improved. He stated that many plans
around the country were currently going through changes and
were using COLAs. He explained that if investments were
terrible, it was fairly easy to suspend a cost of living
adjustment compared to making other changes.
9:55:10 AM
Co-Chair Merrick informed the presenter there were about 15
minutes remaining in the hearing.
Mr. Fornia replied that he would wrap up in five minutes.
He looked at slides 8 and 9. The plan included a fixed
contribution, and the goal was to manage the plan that
covered the target as well as possible. He looked at a
table showing a plan comparison on slide 9. He relayed
contributions would be about the same for employees to
start with, but the number may increase if needed. The
employer contributions and vesting were the same. The
retirement age was a substantial change from any age to age
55. The benefit multiplier was essentially the same and the
final pay was about the same.
9:56:34 AM
Mr. Fornia continued with a plan comparison on slide 10 and
noted that the disability and death benefits were the same.
He addressed an earlier question about how soon there would
be money going out of the program. He explained that in
theory, if an employee bought into the plan and later
became disabled or died, there could be some monies going
out; therefore, the plan would have a small outflow in the
first few years. He turned to slide 11 and noted that when
the plan had been designed, they wanted to make sure it
would be okay; therefore, they had opted to use a more
conservative rate of return than the return used by ARMB.
9:57:18 AM
Mr. Fornia looked at slide 12 and shared that current Tier
IV members could take their money from Tier IV and use it
to purchase equivalent benefits on a cost neutral basis and
the plan would start out at 100 percent funded. He added
that ARMB and its actuaries would calculate formulas to
make certain it was the case. He skipped slides 13 and 14
and explained that the bill included a lower pension than
Tier III. He briefly highlighted slide 15 and reported
there were three safeguards in place that resulted in a low
risk of being poorly funded. Slide 15 showed the first
safeguard, which was the benefit reduction. Slide 17 showed
the second safeguard related to actuarial methods. He
explained that the plan was designed to be over funded. He
detailed that if things turned out to meet the predictions,
the plan would be more than 100 percent funded.
9:58:43 AM
Mr. Fornia advanced to slide 19 titled "Benefit Plan
Simulations - Historical." He referenced Representative
LeBon's earlier question about the likelihood of the plan
becoming poorly funded. He had modelled how the plan would
have looked for each 20-year period from 1980 to 2000 and
2000 to 2020. He highlighted the worst case scenario where
the plan started just before the burst of the dot-com
bubble, the first two or three years followed the burst of
the bubble, and eight years in the financial crisis
occurred. Under the scenario the average return had been
8.6 percent. He pointed to a line graph on slide 20 showing
examples of what might have happened to the plan's funding
ratio in the past. He directed attention to the gray line
representing the worst case scenario. He detailed that if
the plan had started in 2000, the funding ratio would have
dipped close to 90 percent in three years due to the
bursting of the dot-com bubble. The funding ratio would
have returned to 100 percent and in 2009 it would have
dropped below 90 percent. In 2009 it would have been
necessary to raise the employee contributions by 0.25
percent and suspend the PRPA. He noted the action would not
have done much because there would not be a significant
number of people collecting benefits at that time. He
estimated that the [employee] contributions would likely
have been close to 10 percent by 2013. He explained that
the contribution increase would have been unwound by the
present time because the plan would be over 100 percent
funded.
Mr. Fornia explained that ARMB would be the entity
responsible for making decisions related to employee
contributions and responding to changes in the solvency of
the plan. He noted his modelling showed increasing half of
a percent [0.005] each time the plan dipped below [90
percent funded]. He looked at other scenarios shown on
slide 20. The orange reflected the average scenario where
the plan started in 1995. The plan would have looked great
in the first years and would have dipped down close to 90
percent in 2009 as the Great Recession hit and would be
back to 100 percent funded at present. He highlighted one
of the better cases (reflecting the fifth best out of 20
modelled cases) shown in yellow. He characterized the
scenario as fantastic where the plan would get up to 140
percent funded and then begin to dip down.
Mr. Fornia highlighted that in the real world, the solvency
percentage would be somewhat volatile. He detailed there
was a strong chance solvency would reach 90 percent
occasionally; however, there was not much chance the plan
would dip below 90 percent funded. He stressed that under
the bad scenarios, the scenarios were bad for everything.
He elaborated that under the scenarios where the plan would
be under 90 percent funded for an extended period of time,
it would mean a Great Depression type of situation.
Mr. Fornia turned to slide 21 titled "How have other states
operated?" He highlighted a somewhat similar plan in
Wisconsin that had been around for decades and had worked
well immediately following the Great Recession. He
elaborated that Wisconsin had suspended some if its COLAs
for several years, but everything was back in place at
present. He noted that South Dakota had a similar plan, and
the two plans were very well funded. He noted that Colorado
and Ohio were not so well-funded, and they had similar
mechanisms in place. He moved to slide 22 showing a case
study of Wisconsin as a good example of what other states
had done.
10:03:24 AM
Representative Wool addressed the concern about unfunded
liability. He remarked that the bill applied only to the
public safety component of public employees at around 3,000
or $4,000. He estimated the number as one-tenth or less of
the total number of state employees. He noted that many
people would like to include all public employees. He
stated that in the event of a loss, using a smaller
population would reduce the size of the loss. He asked if
the inverse worked. He referred Mr. Fornia's reference to
years where the plan was funded at 133 percent. He asked if
the economy of scale would add benefit. He understood they
did not want to lose with 3,400 or 30,000. He asked if a
larger pool was better. He understood it was not the goal
for the bill and he was not pushing for it at the time.
Mr. Fornia answered in the affirmative. However, he
underscored that he did not want temporary euphoria to
cause a reduction in contributions or an increase in
benefits, because markets went down as well as up. He
stressed that there was nothing wrong with a plan that was
120 percent funded. He characterized the situation as a
desirable position. He agreed that the inverse was true, if
the plan worked well for a small group, it would work even
better for a larger group.
Representative LeBon stated that the program was identified
as a shared risk hybrid retirement program for public
safety. He was still trying to wrap his head around the
shared risk component. He stated his understanding that the
shared risk was limited to the employee, but it was 100
percent the responsibility of the state if the future did
not pan out in the desired way and an unfunded liability
occurred. He referenced the employee contribution rate that
capped at 10 percent. He asked about increasing the cap to
12 percent to share some of the risk.
10:06:59 AM
Mr. Fornia answered that it would be a reasonable approach.
He clarified that based on the modelling, the chances of
the employee contribution going above 12 percent were very
remote. He encouraged the state's actuary, Buck, to do
similar projections. He guessed the scenario was possible.
Under the scenario, the state's $5 billion unfunded
liability would likely have increased to $15 billion to $20
billion because it would take really terrible returns to
get to the point of raising the members' contribution rate.
He considered that if in 15 years there had been disastrous
returns, he believed it would be very reasonable to change
the law to a 12 percent cap. He emphasized that the plan
had been designed so the scenario was a very unlikely
event. He added that the legislature had the authority to
change the law to increase the employee contribution, but
it was not possible to go back and cut benefits in most
states.
Representative LeBon communicated that he got nervous about
being told not to worry about the future and that
everything would be fine. He preferred to not count on
future legislatures fixing something 15 years in the future
when it could be fixed at present.
Representative Josephson surmised there was not time to
hear from the other invited testifier.
Co-Chair Merrick replied they would hear the presentation
from Mr. Miranda with the Alaska Professional Firefighters
at the next hearing on the bill.
Representative Josephson shared Representative LeBon's
concern with unfunded liabilities because they were an
imposition on future generations; however, if the plan was
overfunded, it was an imposition on the current generation.
He stated that theoretically, if a plan was 120 percent
funded, the employee was not getting the benefit they
mathematically would be entitled to. He stood by the
state's actuary who had testified the previous year that
the plan was 99.3 percent funded. He noted that the
employees would receive less pay if ARMB believed their
contribution rate needed to increase. He pointed out that
the employees would receive less pay than a typical
pensioner if the performance was poor. He explained that
the employees would suffer inflation and not have an
inflation adjustment. He stressed that employees did have
skin in the game. He underscored employees had to hang in
there until they were 55 for retirement benefits and 65 for
health benefits with inadequate healthcare. He pointed out
that employees would need a second job if they retired in
their 40s.
Co-Chair Merrick thanked the presenters.
HB 55 was HEARD and HELD in committee for further
consideration.
Co-Chair Merrick reviewed the schedule for the afternoon.
ADJOURNMENT
10:11:07 AM
The meeting was adjourned at 10:11 a.m.