Legislature(1995 - 1996)
04/29/1995 02:55 PM 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
April 29, 1995
2:55 p.m.
TAPES
SFC-95, #59, Side 1 (528-end)
SFC-95, #59, Side 2 (575-120)
CALL TO ORDER
Senator Rick Halford, Co-chairman, convened the meeting at
approximately 2:55 p.m.
PRESENT
In addition to Co-chairman Halford, Senators Phillips,
Sharp, and Zharoff were present. Senator Rieger arrived
soon after the meeting began. Co-chairman Frank and Senator
Donley did not attend.
ALSO ATTENDING: Robert Stalnaker, Director, Division of
Retirement and Benefits, Dept. of Administration; Susan
Taylor, fiscal analyst, Legislative Finance Division; and
aides to committee members and other members of the
legislature.
SUMMARY INFORMATION
SB 148 - STATE EMP DEFINED CONTRIB RETIREMENT PROG
Discussion was had with Bob Stalnaker of the Dept.
of Administration who advised of need to change
"July 1, 1995," to "June 30, 1995" at page 19,
line 11; page 20, line 16; page 23, line 21; and
page 25, line 24. Senator Rieger advised that he
would work with the drafter to incorporate the
following within a draft CSSB 148 (Fin):
1. The above-noted date changes.
2. Deletion of language at page 21, lines 6-8.
3. Insertion of amendment language in lieu of
that
deleted at page 21.
4. Tier III provisions in lieu of defined
contribution
language.
5. Tightened title language.
6. A municipal option for extending the RIP to
1998.
The bill was held in committee pending receipt of
the updated draft.
SENATE BILL NO. 148
An Act relating to a defined contribution retirement
plan for state employees.
Co-chairman Halford directed that SB 148 be brought on for
discussion. Senator Rieger, sponsor of the legislation,
noted earlier adoption of a draft CSSB 148 (9-LS0941\O)
which he explained spoke to a defined contribution
retirement system which would represent tier III for state
employees. It provided for a state contribution of 6% of
payroll on behalf of each employee and a 5% contribution by
the employee. The administration has been working on a tier
III approach of its own which retains the concept of a
defined benefit plan. The defined benefit, in terms of
cost, is approximately the same as that in the draft CSSB
148.
BOB STALNAKER, Director, Division of Retirement and
Benefits, Dept. of Administration, came before committee.
He stressed the administration's support for the retirement
incentive program, describing it as a valuable tool for
employers facing declining revenues. The administration
thus introduced incentive legislation which is now coupled
with CSSB 148.
The administration feels that the appropriate approach to
tier III is to work during the interim with all interested
parties and the public in an effort to achieve full
disclosure and full cooperation by all parties. Mr.
Stalnaker voiced concern over the cost to employers and need
to lower that cost while still providing meaningful benefits
that act as an incentive for employees to work for school
districts and other public employers. If tier III
legislation is to be passed in the last weeks of the
session, a delayed effective date would be of great
importance in allowing the administration to continue to
work on provisions and return to the legislature, next year,
with the results of those efforts.
Referencing defined contribution provisions of the original
bill, Mr. Stalnaker suggested that Alaska is uniquely ill
suited to putting "all of its eggs in one basket" in that
type of approach.
Mr. Stalnaker next spoke to tier III provisions proposed by
the administration. He cautioned that the proposal has not
been discussed at length with impacted parties. The
administration proposes a contribution rate split
approximately 50/50 between employee and employer. The
employee's contribution rate would be 5.5%, and the
employer's rate, as estimated by actuaries, would be
approximately 5.5%.
End: SFC-95, #59, Side 1
Begin: SFC-95, #59, Side 2
As background information, Mr. Stalnaker advised that tier
II costs at this point are 10% of pay for PERS and 8.8% for
TRS. Under tier III, the percentage for employee
contributions would be 5.5 for teachers and others in PERS
and 6% for peace officers and fire fighters. That is a 3%
decrease over tier II for teachers and 1.25% for all other
public employees.
The proposed normal retirement age would be 60, the same age
as under tier II. For peace officers and fire fighters,
normal retirement age would be 60 or upon attaining 25 years
of service. Current provisions allow for 20 years. All
employees, including teachers, would have "a rule of 85."
That combines an employee's age with length of service. A
55-year old employee with 30 years of service could retire
with an unreduced benefit. A 52-year old person with 33
years of service could do so as well. This would be a new
provision. The current arrangement under tier II is "30 and
out." Teachers presently have a 20 and out provision. Tier
III would not include that for teachers. Early retirement
would remain at 55.
The cost of living increase (post retirement pension
adjustment, PRPA) would be 50% of the CPI for disabled
members and retirees 60 years of age and over.
Major medical service would be provided to retirees only.
They would have the ability to purchase it for dependent
spouses and children at their option and cost. Medical
would be provided at no charge for retirees 65 and older.
Retirees 60 to 65 would pay half the cost, and retirees
under 60 would pay the full system cost.
Both teachers and public employees would vest after 5 years
of service.
The benefit formula for employees in tier III would be 1.5%
per year of service. Disability benefits under the
teachers' retirement system would be brought in line with
those under the public employees' retirement system.
The net result of the foregoing changes would be that the
employer's contribution rate would be approximately 5.5% as
would the rate for employees. Since the state currently has
a mix of tier I and tier II and unfunded liabilities, the
present rate is approximately 14%. For a tier I employee,
the department estimates the current PERS cost at
approximately 13% and 14% for a tier I teacher.
Senator Rieger referenced a recent survey of private sector
retirement systems nationwide and asked how the state's
system compares. Mr. Stalnaker said that the department
reviewed averages for union plans, private sector plans,
other public sector plans, and social security. Provisions
under Tier III match favorably with private sector plans.
They also match favorably with public sector plans at the
same employee contribution rate. Generally, public sector
plans where employees pay approximately 5% would have a
benefit multiplier of about 1.5%. Survivor benefits,
disability benefits, and health insurance are not provided
under a defined contribution plan. They are essential to
the State of Alaska because the state does not participate
in social security.
Senator Rieger next asked what an employee who works for 30
years under the new system could expect upon retirement.
Mr. Stalnaker explained that in applying the 1.5% benefit
formula, the retiree would receive 45% of pay (based on the
high three years). With contributions under SBS, they could
expect another 40% if they have contributed and not
withdrawn their SBS for the entire 30-year period. That
would total to the 80-90% range.
Senator Sharp voiced his understanding that under the
present PERS system a retiree with 30 years of service
receives 67.5% of the high three-year average. Mr.
Stalnaker responded affirmatively. In response to a further
question, Mr. Stalnaker said that SBS contributions total
12.26% of pay for both the employer and employee up to the
social security match of $64.0 of salary. Over a 30-year
period that accumulates. Senator Sharp suggested that the
combination amounts to 100%. Mr. Stalnaker responded,
"There are certainly people that would probably be over
that."
Senator Rieger noted that he has been a proponent of a
defined contribution plan for many years and has sought that
change. He acknowledged the argument for retaining a
defined benefit component. He suggested that it would be
workable to combine the defined benefit proposal submitted
by the administration within CSSB 148 where the cost to the
employer is fixed, overall, between SBS and Tier III.
Employers will then know what their costs will be, and
employees will enjoy the benefits of a defined benefit plan.
That can be done by meshing SBS and Tier III into one system
whereby the costs of the benefits provided are one component
of an overall cost described as the total cost for both. As
an example, if the statute states that the total cost of the
employer contribution to SBS plus Tier III PERS is 12.5%,
under Tier III with costs of 5.5%, the contribution to the
employee's SBS would actually be 7% higher than the present
6.13%. If in subsequent years the legislature chose to
increase defined benefits and the cost of Tier III increased
to 7%, the contribution to the SBS portion would be the
remaining 5.5%. That would provide both benefits and
predictable employer costs.
Senator Rieger said he would undertake preparation of a
draft combining the two elements in an attempt to
accommodate the administration. The only things the
proposal would not accomplish is immediate vesting and total
defined contribution self-direction. That is a trade off,
and there are policy arguments for both sides. Mr.
Stalnaker acknowledged that the approach is new. He said
that while he did not disagree that it would shift the
investment risk to the employee by virtue of rate
fluctuations under SBS, he noted need to check the
qualification under 401, the defined contribution plan, to
determine if "you can have an employer rate that might
change from year to year." There could be federal
requirements that are beyond department control.
Senator Zharoff asked if both PERS and TRS members would
vest in 5 years under Tier III. Mr. Stalnaker responded
affirmatively.
The Senator than noted municipal interest in changing
participation time frames for the retirement incentive
program. Mr. Stalnaker acknowledged that political
subdivisions have expressed interest in flexibility over the
3-year period for individual budget purposes. That has been
added to the retirement incentive bill in the House. While
the provision makes the program more difficult to
administer, the department is willing to take it on if it is
in municipal best interest and makes the program more
valuable.
Mr. Stalnaker noted need for other date changes in
retirement incentive provisions of CSSB 148. Directing
attention to page 19, line 11, Mr. Stalnaker suggested that
the date be changed from July 1 to June 30. He explained
that in order to retire, individuals must apply in the month
preceding the date they retire. That is consistent with
prior incentive programs. An identical change in date
should then be made at page 20, line 16, page 23, line 21,
and page 25, line 24. Amendments made in House legislation
regarding time frames for municipal use of the retirement
incentive would be applied at page 21, beginning at line 6
and continuing through line 8. Mr. Stalnaker advised that
he would provide copies of the provision changed in the
House. Instead of defining participation from December 31
through June 30, 1996, new provisions would open the window
period for the entire time. A municipal employer could then
utilize the program when most convenient or in the budget
cycle in which it is needed. That application would
continue to be at the discretion of the Commissioner of
Administration.
Senator Rieger asked if changes effected in House
legislation would extend the window past June 30, 1996. Mr.
Stalnaker answered affirmatively, advising of extension to
1998.
Mr. Stalnaker referenced a copy of House amendment language
and explained that it would delete language at page 21,
lines 6 through 8, and insert:
The political subdivision, upon requesting from
the Commissioner of Administration, could
establish one or more periods during which the
employees of the political subdivision would be
eligible to participate. The periods could be no
longer than 60 days and no less than 30 days.
The department would be given 60 days advance notice to make
necessary administrative arrangements to accommodate the
municipality. Window periods would extend from October 31,
1995, through October 31, 1998.
Senator Sharp asked why the administration proposes a 3-year
window and possible multiple periods of applications. Mr.
Stalnaker explained that the administration intends to use
the program as a strategic tool. It will approach
departments impacted by budget cuts and utilize turnover to
take advantage of the incentive program. It further seeks
to consider normal attrition and strategically utilize the
program by section and division to achieve maximum savings.
It is unreasonable to expect that proper analysis and
targeting can be done in a short period of time. Hence need
for the 3-year time frame.
Senator Rieger voiced his belief that with Tier III in place
the retirement incentive program would work since Tier I and
II employees would be replaced with Tier III employees, if
replacement occurs.
In response to a question from Senator Sharp regarding
employer and employee contributions under Tier II, Mr.
Stalnaker advised of a blended rate of 14% for the employer.
The Senator voiced his understanding that with an employee
rate of 6.5%, the total is approximately 21% of payroll. He
then asked if the percentage applies to base pay or all
wages. Mr. Stalnaker said that it applies to "all
compensation for services rendered." It does not include
bonuses, cashed out leave, etc., but it does include
overtime. It is thus more than simply base pay. Senator
Rieger advised of his understanding that the present 21%
includes an additional piece relating to the "past service
rate"--an additional percentage to make up the $200 million
unfunded liability in the PERS system. The true cost is
approximately 18%. Mr. Stalnaker concurred and added that
components of the contribution rate are the normal cost (for
future service) and past service costs (which makes up for
funding shortfalls or overfunding from prior years). Since
each employer has its own rate calculation, some employers
are overfunded. Their cost may be 6% of pay at the present
time. The overfunding is helping subsidize the normal cost
into the future. In the state's case there is a $200
million unfunded liability that is being amortized over 25
years. That is approximately 2% of pay. Each year it is
recalculated and reconfigured as a total contribution rate.
Co-chairman Halford raised a question concerning the
unfunded liability. Mr. Stalnaker explained that in 1986 a
law was passed that provided for a pre-funded automatic
post-retirement pension adjustment and reduced benefits
under Tier II. It was immediately recognized that the
guaranteed PRPA was a much better funding mechanism than the
ad hoc provision currently in statute. It increased the
unfunded liability dramatically at that point. The state
has been paying off the liability over time. The dynamic
was recognized when the change was made. The same is true
for TRS. The Co-chairman voiced his understanding that once
a PRPA is adopted, it becomes a contractual obligation. Mr.
Stalnaker concurred.
Senator Sharp asked if area differentials are included in
base pay calculations. Mr. Stalnaker explained that the
area differential is included in salary. An employee who
worked his entire service time in Nome would have higher pay
because the cost of living there was higher. Both the
employee and employer thus paid higher contributions based
on the higher pay. Retirement benefits for an individual
are based on the working years and what the employee accrued
as a benefit. The law was changed in 1986 because of
concern that an employee could work in Anchorage for the
bulk of his or her service, transfer to the bush at 40%
higher pay for the final 3 years, and receive the additional
benefit for the entire 20 years of service. The 1986 change
requires that before a person receives a benefit based on a
differential the individual must have worked in a
differential area for over half of the period of employment.
Senator Sharp next asked what would happen when no new
employees are entering Tier II to help pay off the 2%
unfunded liability. Mr. Stalnaker explained that the
actuarial method being utilized allocates the rate among all
employees. While a new tier employee would have a lower
cost, allocation remains a means of paying off past service
liability. All employees are thus charged the same rate by
the employer. Employees would only pay the contribution
rate based upon the provisions by which they are covered.
Tier II employees would pay at 6.75%, and Tier III employees
would pay at 5.5%. The employer still has an obligation for
past service liability to a different group of employees.
Senator Zharoff noted the broad title of the bill and its
reference to compensation. He then asked if the legislation
addresses that issue. Co-chairman Halford remarked that
benefits are a part of compensation. Mr. Stalnaker advised
of provisions in the Governor's retirement incentive bill
that allow for a separation bonus. Senator Rieger directed
attention to page 25 of the draft. Mr. Stalnaker explained
that the provision would allow a separation incentive of up
to $25.0 to encourage those who are not eligible for the
retirement incentive to leave state service. Co-chairman
Halford concurred that the title should be narrowed.
Senator Rieger suggested that he arrange for a new draft of
CSSB 148 which would tighten the title and incorporate the
administration's Tier III proposal in lieu of defined
contributions. Senator Zharoff requested that the new draft
include the flexibility requested by municipalities.
Senator Rieger said he had no objection to extension of the
time frame to 1998 and would include the provision in the
updated draft. Co-chairman Halford directed that CSSB 148
be held in committee pending receipt of the new draft.
CS FOR HOUSE BILL NO. 268(FIN)
An Act making and amending appropriations; and
providing for an effective date.
Co-chairman Halford announced that a draft capital budget
would be distributed as soon as it is available. The draft
will contain the "minimum capital starting point matches."
It will be significantly reduced from the original proposal
and include less than $17.5 million in AHFC. The total,
including, AHFC is approximately $100 million.
RECESS
The meeting was recessed at 3:40 p.m. for attendance at the
afternoon Senate Floor Session.
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