Legislature(1993 - 1994)
03/05/1993 10:30 AM Senate FIN
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
MINUTES
SENATE FINANCE COMMITTEE
March 5, 1993
10:30 a.m.
TAPES
SFC-93, #34, Side 1
CALL TO ORDER
Senator Drue Pearce, Co-chair, convened the meeting at
approximately 10:30 a.m.
PRESENT
In addition to Co-chairs Frank and Pearce, Senators Kelly,
Rieger, and Sharp were present. Senator Jacko arrived while
the meeting was in progress. Senator Kerttula was not
present.
ALSO ATTENDING: Nancy Bear Usera, Commissioner, Department
of Administration; Janet Parker, Research and Liaison
Officer, Department of Administration; Vernon Marshall, NEA,
Alaska; Dave Tonkovich, Fiscal Analyst, and other analysts,
Legislative Finance Division; and aides to committee
members.
SUMMARY INFORMATION
CSSB 19(JUD) - An Act relating to the crime of conspiracy.
Amendment 1 by Senator Rieger dated March 2,
1993 was ADOPTED, and CSSB 199(FIN) was
REPORTED OUT of committee with unanimous
consent.
CSSB 43(RES) - An Act establishing a grant program relating
to transplantation of elk; and providing for
an effective date.
CSSB 43(RES) was not heard and rescheduled
for Monday, March 8, 1993.
SB 111 - An Act establishing the defined contribution
retirement plan for public employees;
requiring the preparation of certain
actuarial valuations and actuarial and
financial experience analyses of the
teachers' retirement system; requiring the
teachers' retirement system and the public
employees' retirement system to be fully
funded before granting a post retirement
pension adjustment; and providing for an
effective date.
Discussion was had by Senators Rieger and
Kelly. Commissioner Nancy Bear Usera,
Department of Administration, and Janet
Parker, Research and Liaison Officer,
Department of Administration testified in
support of SB 111. Vernon Marshall, NEA,
Alaska, testified in opposition to SB 111.
The bill was held in committee.
CS FOR SENATE BILL NO. 19(JUD):
An Act relating to the crime of conspiracy.
CO-CHAIR DRUE PEARCE announced that CSSB 19(JUD) was being
brought before the committee. SENATOR STEVE RIEGER directed
the committee's attention to amendment #2, dated March 3,
1993, and informed the committee that he was withdrawing it.
Senator Rieger MOVED for adoption of amendment 1 dated March
3, 1993. SENATOR TIM KELLY objected. Senator Rieger said
he felt the amendment would correct a glitch in the law that
said there could be a point where a defendant could be
guilty of conspiring to commit a crime but could not be
found guilty of committing it even if he or she had
committed it.
Senator Kelly asked if there were any other objections to
the amendment. Co-chair Pearce said that Senator Rick
Halford, sponsor of CSSB 19(JUD), had concurred with Senator
Rieger's amendment. Senator Kelly withdrew his objection.
Hearing no further objections, amendment 1 dated March 3,
1993, was ADOPTED for incorporation within a finance
committee substitute for CSSB 19(JUD).
Senator Kelly MOVED for passage of CSSB 19 (FIN) from
committee with accompanying fiscal notes. No objections
having been raised, CSSB 19(FIN) was REPORTED OUT of
committee with a $54.8 SFC fiscal note for the Department of
Corrections; zero SFC fiscal note for Court System, zero
fiscal notes for the Department of Law, and the Department
of Public Safety, and a zero SFC fiscal note for the
Department of Administration (Public Defender Agency); and a
$45.0 SFC fiscal note for the Department of Administration
(Office of Public Advocacy). Co-chairs Pearce and Frank,
Senators Rieger, Jacko, Kelly and Sharp signed the committee
report with a "do pass" recommendation. Senator Kerttula
was absent and did not sign.
CS FOR SENATE BILL NO. 43(RES):
An Act establishing a grant program relating to
transplantation of elk; and providing for an effective
date.
Co-chair Pearce announced that SB 43 - Grants to Transplant
Elk would be held in committee.
SENATE BILL NO. 111:
An Act establishing the defined contribution retirement
plan for public employees; requiring the preparation of
certain actuarial valuations and actuarial and
financial experience analyses of the teachers'
retirement system; requiring the teachers' retirement
system and the public employees' retirement system to
be fully funded before granting a post retirement
pension adjustment; and providing for an effective
date.
Co-chair Pearce announced that the SB 111(JUD) was being
brought before the committee. Senator Rieger said that the
purpose of SB 111(JUD) is to convert the state's two
retirement plans, Public Employees Retirement System (PERS),
and Teachers Retirement System (TRS), from a defined benefit
plan to a defined contribution plan. He explained that the
three parts to a retirement plan include the beginning when
money is put into the plan, the period of time when money
earns investment returns, and the end when money is paid out
to the beneficiary. The middle step in the plan is a period
where a fiduciary is obligated to invest the money for
maximum yield consistent with safeguarding the principal.
This period is outside the control of the pension
administrator because rates of return in part depend on
rates of inflation. The administrator must do the best he
can. What can be defined is the original amount of money
invested or the money finally paid out. Senator Rieger
explained that SB 111 would move PERS and TRS from the type
of pension plan that defines the output to a plan that
defines the input. One important aspect of a defined
contribution pension plan is that it can be designed and
adjusted more easily to the employee. Since employees move
from job to job, they also benefit from the portability of a
defined contribution pension plan. Several years ago, the
University initiated and requested that its pension plan
become a defined contribution plan, and it provided that
option to their employees. Another aspect is that it is
more amenable to self-direction by employees. Frequently,
employees can choose how their pension money is managed.
Senator Rieger also noted that in the past a large number of
bills had been introduced to "tinker" with the state's
existing pension plans to correct perceived inequities. SB
111 would address this inequity without being a detriment to
another employee in the same system. There are a lot of
rules governing the determination of pension plans. This
bill does not change existing pension plans that will be
maintained for existing employees. Existing employees, if
they choose, have the option of opting into this new plan,
but it does not mandate the determination of a pension plan
for any prior employees. What SB 111 does is create a two-
tier retirement benefit plan at a date where future
employees would be hired into a new retirement system.
Senator Rieger also commented that the legislature, in the
past, has made changes to the defined benefit plan and
committed future legislatures for 10, 15 or 20 years to a
different pension contribution than they would have chosen.
It is a grey area when the legislature makes these kinds of
long-term commitments without a general obligation vote of
the people.
Co-chair Pearce invited Commissioner Nancy Bear Usera,
Department of Administration, to speak to SB 111. She noted
that the Department of Administration was in the process of
preparing a fiscal note for the bill, and that SB 111 would
be held in committee until the fiscal note is received.
NANCY BEAR USERA said that the Department of Administration
was in support of a defined contribution plan. She
explained that at today's escalating employment rate,
present employees were really paying for the benefits of
those people who were in the generous retirement system
prior to the changes of 1986. She said that escalation has
continued over the years as benefits are paid. Last session
there were 23 separate retirement bills that "tweaked" the
system to correct some inequity for certain employees. She
spoke in support of the defined contribution plan because it
is clear what the employee and employer have. She said she
felt one of the biggest benefits of defined contributions
was the flexibility of the employee and employer to design a
program that is easily understood. When employees change
careers on the average of eight times during their lives,
portability is an important feature. Administratively, a
defined contribution plan is a cleaner plan to manage.
Ms. Usera explained the dilemma with the fiscal note is that
there will be an implication on PERS because the presumption
for any fixed benefit retirement plan is that it continues
in perpetuity. The funding rate that the state is paying
today is really attributable to many of the benefits that
were established before 1986. She stated that this could
fix itself over time but there can be an adverse effect on
the employer rate as well as how well future benefits are
funded. The conversion process will cause a short-term
fiscal cost but the department is still in support of a
defined contribution plan. The Commissioner said it would
provide a more meaningful benefit to employees, and a
cleaner system for the employer.
SENATOR BERT SHARP asked how the unfunded liability of
$290.0M in TRS could cause an extra expense because benefits
being paid out now depend on contributions of present and
future employees.
Ms. Usera explained that the employee contributions put into
PERS, for example, was held for that employee until
retirement. At that time, any deficit between what the
employer and employee paid in, and what must be paid out,
would be paid by the employer. She said three retirement
programs exist in the state program: PERS, a defined benefit
plan; SBS, a defined contribution plan; and the third is a
deferred compensation plan at the option of the employee.
SBS became the alternate plan when the state opted out of
Social Security. Although it is thought of as a substitute
for Social Security, SBS is exactly the opposite, in that it
is a defined contribution plan. She suggested that one
option would be to hold SBS as the core program and enhance
it to include this new option of defined contributions.
SENATOR STEVE FRANK asked if a defined benefit fund had a
good experience and made money, would it be possible to not
have any unfunded liability. He also confirmed that if the
plan had a surplus, the employee would not benefit by the
surplus. Ms. Usera answered affirmatively. She said one of
the benefits of the defined contribution plan is that it is
market sensitive, the funding level fluctuates, and averages
out over the life of the program, so it could benefit the
employee.
SENATOR TIM KELLY asked if the University of Alaska was
under PERS or TRS. He also asked if there were other
retirement systems in the state, such as the Alaska Railroad
System, where the state was liable. Ms. Usera said there
were other retirement systems around the state, but were not
tied into the state system.
JANET PARKER, Research and Liaison Officer, Department of
Administration, said that there was the Judicial Retirement
System. Senator Kelly asked why that plan was not a defined
contribution plan. Senator Rieger said that there were
options in that plan, but he did not know if it was
mandatory.
Ms. Usera added that even if AHFC or the Railroad were
running a separate retirement plan, the state could possibly
be found to be responsible if the plan failed to meet
benefit payments. Senator Pearce asked for a list of what
retirement plans came under the Budget Act.
Co-chair Pearce invited Vernon Marshall, Executive Director,
NEA-Alaska, to speak to SB 111.
(The following statement is verbatim and a copy on file.)
VERNON MARSHALL said that his organization opposes SB 111.
He said that the bill was viewed as a regressive approach
toward caring for those educational employees who serve our
public education institutions. The current defined benefit
plan ties a promised benefit to the earnings of the
employee, factors in length of service and for vested
employees pays a percentage of the employees final average
salary. A defined contribution plan pays benefits at
retirement based on money accumulated in the employee's
retirement account. Changing from a defined benefit
retirement program to a defined contribution retirement plan
would create a larger burden on educational employees to
manage long-term personal financial resources because
defined benefit plans are not designed to specifically
provide stated retirement benefit levels.
Mr. Marshall went on to say that a defined benefit plan
provides the ability for the employer to design plans that
attempt to satisfy stated retirement income objectives for
vested employees. The defined contribution plan outlined in
SB 111 will take employer and employee contributions and for
all practical purposes, allocate these contributions to
individual accounts. Under this approach, there is no way
of knowing in advance the exact amount of assets in the
employee's account at retirement. The size of the account
will be affected by the amounts contributed, the impact of
investment gains or losses and the value of reallocated
benefit forfeitures.
Mr. Marshall said NEA-Alaska would support a defined
contribution plan as a supplement to an existing plan, such
as that of the University of Alaska. NEA felt SB 111 would
set up another bureaucracy to manage another benefit plan
which would likely offer no better means for providing and
managing for retirement needs of educational employees than
the current system. If the intent of SB 111 is to trim or
redirect the state's future retirement obligation, it should
not be accomplished on the backs of those who will begin
work next year. NEA felt that there are better ways to
utilize retirement options to affect savings.
Mr. Marshall proposed the reason for turning from a defined
benefit package to a defined contribution retirement
benefits could be the fear of large unfunded liabilities as
discussed earlier. By limiting the employers maximum
contribution, such organizations believe they can control
and contain costs. A defined benefit plan can minimize
unknown cost commitments by projecting future interest
earnings, mortality rates, personnel turnover, and salary
increases, thus, they attempt to establish a reasonable
level funding pattern. Moreover, he believed that the
retirement system boards and manager should be evaluating
the defined benefit plan's assets and liabilities at least
annually for contribution adjustments if needed. He also
added, according to court decisions, retiree's defined
benefits under some circumstances were defined as vested
benefits that cannot be taken away. He said he did not feel
SB 111 took defined benefits away, but employees had been
paying into the system with the expectation that they will
have a guaranteed level of benefits upon retirement.
Creation of a two-tier could be confusing and divisive
because employees would continually compare benefits
associated with the two plans.
Mr. Marshall said NEA-Alaska was concerned about the affect
this change will have on the overall stability and soundness
of the current defined retirement plan. SB 111 provides
that beginning 93-94 school year new hires will enter the
defined contribution plan. Risk to the employer is
minimized and in the current plan, risk is shared. He urged
the committee to vote against SB 111. If this bill would
pass, Alaska could become the first state to require its
employees to join a defined contribution retirement plan.
Mr. Marshall offered his statement in writing to the
committee.
Senator Rieger asked if Mr. Marshall remembered when the
administrator of TRS, a year ago, recommended an increase of
about 5-6 percent in the contribution rate because of
unfunded liability. Mr. Marshall felt it was at 3 percent
that the decision was made for the system to absorb the
required increase in the employer contribution. He agreed
that it did extend the unfunded liability, but TRS' unfunded
liability, compared to other retirement systems in the
country, is not excessive. Senator Rieger felt that the
increased employer contribution had just been pushed out to
later years rather than paid at the time the liability
occurred. Now there was not as much room to push things out
and the next time it occurs, it will be hard on school
districts and school employees. Senator Rieger thought the
teaching community would support a bill that would restore
stability to the plan. Mr. Marshall admitted that there was
an extension in the unfunded liability but did not agree
that there was a financial crisis confronting the TRS
retirement system.
Senator Kelly asked at what point it would be called a
crisis. Senator Kelly pointed out that TRS had gone from a
101 percent unfunded liability in 1987 to 85.6 percent in
1993. Mr. Marshall said the systems employ investment
advisors who carefully assess information. It is difficult
to say it should be a certain percentage. He agreed that at
some point employees would have to pay. Any benefit
increase would be analyzed as to the cost to the system over
a long period of time.
Senator Pearce asked Senator Rieger and Ms. Usera to
continue work on SB 111. She said the bill would be HELD IN
COMMITTEE.
ADJOURNMENT
The meeting was adjourned at approximately 11:15 a.m.
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