Legislature(2005 - 2006)SENATE FINANCE 532
03/21/2005 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB141 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 141 | TELECONFERENCED | |
| + | TELECONFERENCED |
MINUTES
SENATE FINANCE COMMITTEE
March 21, 2005
9:03 a.m.
CALL TO ORDER
Co-Chair Green convened the meeting at approximately 9:03:40 AM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Con Bunde, Vice-Chair
Senator Fred Dyson
Senator Bert Stedman
Senator Lyman Hoffman
Senator Donny Olson
Also Attending: Public testifiers in Juneau are listed in the
minutes in the order in which they testified.
Attending via Teleconference: Public Testimony was presented in the
order reflected in the minutes.
SUMMARY INFORMATION
SB 141-PUBLIC EMPLOYEE/TEACHER RETIREMENT
The Committee heard Statewide public testimony on the bill. The
bill was held in Committee.
SENATE BILL NO. 141
"An Act relating to the teachers' and public employees'
retirement systems and creating defined contribution and
health reimbursement plans for members of the teachers'
retirement system and the public employees' retirement system
who are first hired after July 1, 2005; establishing the
Alaska Retirement Management Board to replace the Alaska State
Pension Investment Board, the Alaska Teachers' Retirement
Board, and the Public Employees' Retirement Board; adding
appeals of the decisions of the administrator of the teachers'
and public employees' retirement systems to the jurisdiction
of the office of administrative hearings; and providing for an
effective date."
This was the third hearing for this bill in the Senate Finance
Committee.
ROGER LIEBNER testified via teleconference from Anchorage and
voiced concern about the changes proposed in the bill; specifically
the damage they would inflict on public education. In 1977 when he
moved to the State, the education system was growing and improving;
and salaries and the retirement plan were competitive "relative to
the Lower 48". However, teachers' salaries today are no longer
competitive. Because it is currently difficult to recruit teachers,
"many back door" alternative paths to teaching have been developed
"to circumvent traditional employee standards … primarily in the
Bush area". Recently adopted legislation would assist in continuing
the practice of hiring retired teaching professionals to fill
vacant positions. While this bill seeks to establish a Defined
Contribution Plan (DCP) similar to those of private enterprises,
non-competitive salaries and the "deteriorating retirement tiers
would further compound the employment picture". The Public
Employees Retirement System (PERS) currently has a Supplemental
Benefit System (SBS) component that the Teachers Retirement System
(TRS) does not have. This bill is bad legislation.
Co-Chair Green requested testimony to be limited to three minutes.
PAT WELLINGTON, Member, Public Employees Retirement System Board
and Alaska State Pension Investment Board (ASPIB), testified via
teleconference from Anchorage and recounted that his 50-years of
service to the State included being a United States Marshall, a
State Trooper, the Commissioner of the Department of Public Safety,
and fire department service. He spoke to reports that infer that
the current governing structure of the PERS, Teachers Retirement
System (TRS), and ASPIB boards "are responsible for the current
actuarial shortfalls. These inferences are totally without merit…"
He shared the credentials of the seven PERS/TRS board members
appointed by Governor Frank Murkowski. ASPIB board members are
likewise "distinguished", as are the three advisors they hired.
"Last fiscal year, ASPIB earned 15.1-percent on its investments and
last month ASPIB was selected by Institutional Investors Money
Management Organization as one of the three outstanding large
public pension investment funds in the nation". In light of this
success, he questioned the reason the Board should be changed. The
inference that these boards have contributed "in some way" to the
actuarial shortfall is erroneous. The Legislature, rather than the
Boards, established the benefit structures. "The Boards and the
elected members, in particular, have a vested interest in the
financial soundness of the fund". The inference that the Boards
established "lower contribution rates than recommended by the
Actuarial, is preposterous and flies in the face of logic".
Mr. Wellington stated that further research would reflect that "the
adopted contribution rate brought both systems to 95 and 100-
percent funding ratios in 2000 and 2001. It wasn't until the
actuarial assumptions were changed in 2002 that the funding ratio
dropped 20-percent. The TRS and PERS Board rely on experts" and he
questioned whether the proposed Board would ignore expert advice.
Changing the Board structure would not improve decisions. The
Department of Administration, without exploring alternatives and
without a draft bill, desired that the Boards adopt a new plan.
While this bill provides details, he asked how thoroughly the
process has been investigated. This bill should advance a new DCP
"only after" the following four questions could be answered: were a
police officer, trooper, or fireman with four years of service
killed in line of duty, what benefits would be available to his or
her survivors; were a correctional officer assaulted and disabled
how would the DCP address his or her disability; were a teacher or
principal killed or disabled in the line of duty what benefits
would be available to his or her survivors; and four; "what's the
rush" as the funding status "has been worse off in the past and
recovered to 100 percent funding". He declared that the picture is
not always as depicted.
JIM DUNCAN, Business Manager, Alaska State Employees Association
(ASEA)/AFSCME Local 52 testified via teleconference from Anchorage
"in strong opposition to this legislation and the impact it would
have on current" and future employees. The real or perceived under-
funding status of the funds should be addressed by "very serious
and comprehensive review before this legislation progresses". The
causes of the situation are the stock market decline that was not
projected by the Actuary; health care cost increases "that the
actuaries failed to project accurately"; and changes in retiree
demographics as retirees are living longer. Current employees
should not be held responsible: they did not cause or control these
situations. Nonetheless, this legislation is asking that they pay.
There would be "a direct impact" on employees' status of living
were employee contributions to increase by up to five percent
annually. ASEA members' most recent pay increase was three percent
in December 2002 and an additional 1.5 percent might be forthcoming
in July 2005. This 4.5 percent increase in 2.5 years would not keep
pace with cost of living increases. This legislation would also
require employees to increase their contribution by five percent as
of July 1, 2005. Employees "would be taking a step backwards".
Mr. Duncan stated that this legislation would move future employees
from a Defined Benefit Plan (DBP) to a Defined Contribution Plan
(DCP). This would be asking "future employees to roll the dice and
place their retirement at risk without surety as to what they would
have when" upon retirement. Finally, this legislation would have
negative impacts on the State's ability to retain and recruit
employees.
Mr. Duncan urged the Committee to solicit "an independent
verification" regarding "whether the amount of under-funding that
is now asserted is correct" as well as to determine what future
contribution level would "be required to offset the problem" were
one to exist. In addition, the impact on the current PERS system
should be evaluated to determine whether it might experience "a
sudden decrease in the pool of the individuals who contribute to
it". The impact would be significant were all employees moved to a
new DCP and no longer contributing to the current DBP system.
Careful evaluation of the proposed system on the recruitment and
retention of employees should be conducted, as he believed it would
have a negative impact on employment and therefore State services.
He warned that this legislation might be unconstitutional in
regards to language that would require current employees to
increase their contribution levels. Further clarification of these
concerns should be conducted before the legislation advances.
(b) The maximum increase in the contribution rate for a member
from one year to the next may not be more than five percentage
points, as actuarially calculated.
Senator Stedman pointed out that the employee contribution language
referenced by Mr. Duncan is located in Section 8(b), page seven,
lines 22 and 23 of the bill. It is anticipated that this language
would be eliminated from the bill, as the rate would be difficult
to calculate. As is, the language is applicable to a potential
split of the Normal Cost Rate of "the benefits being accrued today
or tomorrow," and not the unfunded liability. Currently the
employer/employee contribution split of the Normal Cost Rate is
two-thirds and one-third, respectfully. The contribution split
should be further discussed with consideration given to changing it
to a 50/50 split. Were this to occur, the total maximum increase
for the employee would equate to approximately a two or three-
percent increase. This would be "a far cry from five". At this
time, it is uncertain whether a change to the Normal Cost Rate
would be included in the final version adopted by the Committee.
"Clearly, there is no intent of increasing employee contributions
to pay for the five billion [dollar] Past Service liability".
Co-Chair Green stressed that Version 24-LS0637\G of the bill is the
beginning draft document. Testifiers are encouraged "to provide
input and serious suggestions for amendments and re-writes"…in
order to assist the Committee in solving "what is seen as a fairly
impressive problem".
Senator Bunde asked that people contemplate an answer to the
question that, were the plans' beneficiaries "not responsible for
the cost of the program, who should be".
Senator Dyson asked whether ASEA would support utilizing the
Earnings Reserve Account (ERA) to fund the shortfall, were the five
billion dollar shortfall verified.
Mr. Duncan commented that, in addition to accurately determining
the amount of the shortfall, exploration as to whether the State
would have any "recourse against the actuaries who did not identify
the changing variables" affected by the decreased stock market
impact, the rising costs of health care, and other variables. There
is responsibility on the part of the actuaries to use "the proper
variables and adjust the requirements accordingly". In addition,
"there is historical precedent for the Legislature recognizing that
beneficiaries" are not the cause of the problem and "should not be
asked to pay for it". It was determined that employees should be
held harmless. He urged for that precedent to be maintained. It is
the job of the Legislature to determine a funding source for the
unfunded liability. These items should be a consideration when
considering this legislation.
Senator Dyson agreed that verifying the amount of the unfunded
liability; determining whether there is any course of recovery; and
determining how to pay for the under-funding is the course of
action to take. He asked that ASEA consider the option of utilizing
money from the Permanent Fund Earnings Reserve Account to assist in
funding the shortfall.
JAY DULANY, Retired State Employee and Former Director, Division of
Motor Vehicles, Department of Administration, testified via
teleconference from Anchorage because he has "a vested interest" in
this subject. While the total unfunded amount might be in question,
there is "no doubt that the retirement system is under-funded". The
cause of the situation is the downturn in the Financial Market and
the increases in health care costs. The downturn in the Financial
Market has affected a lot of people as well as the State's
Permanent Fund holdings. While the Legislature has chosen not to
get involved with the Permanent Fund, it has chosen to address the
retirement system. This bill would make changes to "a perfectly
good system" that anyone in either "the public or private sector
could be proud of". The changes being proposed, such as
establishing a Super Board, make no sense. He spoke favorably about
the current board members' qualifications. The bill would not
address the under-funding situation, and in fact, "exacerbates the
situation by removing all new hires from the system so there would
be no new contributions." He urged the bill to be "scraped".
LARRY SEMMENS, Finance Director, City of Kenai, testified via
teleconference from Kenai and commended Senator Stedman "on his
masterful presentation of this complex data". The issue is
complicated and other factors beyond the decreased financial market
investment value have contributed to the problem. The City of Kenai
has and would continue to struggle to budget for the current and
future employer contribution increases. Unless the proposed changes
in this bill are enacted, the City would be required to reduce its
staff. There would be no alternative. He questioned the inclusion
of the cost-of-living calculation specified on page 66 of the bill,
as surely the retirees who are currently covered would not be
supportive of that language. The City participated in the PERS/TRS
Tier Review questionnaire that was conducted and indicated its
support for a DCP. While he voiced being uncertain as to whether a
11.5 percent contribution level would be sufficient, its inclusion
in the discussion is welcome.
Senator Olson asked, for clarification, whether Mr. Semmens
supported the legislation.
Mr. Semmens replied that at this point in time, it is too early to
provide a definitive response. He would appreciate the
Legislature's willingness to review all of the alternatives. While
this bill is presenting a lot of alternatives, he is concerned that
it might "be biting off more than should be chewed at one time".
Continuing, he noted that some of the ideas such as creating one
Board to manage both the liabilities and the assets are "on
target". However, he noted that, "the ASPIB Board is doing a great
job". The question is whether the proposed nine-member Board would
possess the expertise required to manage these investments.
SAM TRIVETTE, President, Retired Public Employees of Alaska (RPEA),
testified via teleconference from Anchorage on behalf of those who
have retired from public service in the State. He shared that he
and other organization members have attended PERS/TRS and ASPIB
board meetings for several years. The organization closely monitors
Legislative hearings on these subjects. There has been little
testimony from either current or recent past Board members or staff
consultants in regards to this legislation. Those involved in the
Boards over the past ten years could provide "a more complete
picture of what and why decisions were made". The organization
recommends that an invitation be extended to those individuals
"now" in order to acquire more complete information "on which to
base new legislation" rather than to continue with the bill
sponsors' "misconceptions about how the Boards work, their
processes, and why certain decisions are made". "Blame has been
heaped on the Boards for financial issues" that were beyond their
control" such as the downturn in the economy, rising medical
expenses, and the actuarial assumptions.
Mr. Trivette continued that, "the Boards are very aware of the
underfunding and the increased costs" and "have taken steps to
contain the costs they can control". One example was the Boards'
successful endeavor to get employees to utilize generic rather than
name brand drugs. "The sponsors of the legislation acknowledge that
the bill would not address any of the problems of the current
underfunding". There is no guarantee that a new Board would bring
any more experience or expertise than the current Boards and "their
very competent staff and professional consultants have". If there
was an easy solution, another "large pension fund in the Lower 48
would have discovered it by now". Medical cost increases have
lowered from double-digit numbers to less than ten percent. Part of
that is the result of the hard work of the PERS/TRS Boards, Aetna
Insurance, and cooperative efforts with retiree organizations.
Trust Fund returns have exceeded the actuarial assumptions. "Don't
fix what is not broken".
Mr. Trivette opined that in his experience of working with boards
and commissions in both the public and private sector, it would be
difficult for one Board with nine members to undertake the volume
of work that the 18 people on the three boards currently conduct.
Little attention has been paid to the demands that would be placed
on the Board members. Another important task of the PERS/TRS Board
is the appeal hearings of the Division's Administrator. The members
"have first hand knowledge of retiree, employer, and employee
issues". They issue fair decisions based on decades of experience;
"the system is working. Look at their decisions. Their record is
excellent". RPEA would be recommending to its 28,000 Alaska retiree
members as well as active public employees, that efforts be
furthered to defeat this bill. A bill should be developed that
would provide real solutions. He reiterated the suggestion that
current and former PERS/TERS and ASPIB Board Members be invited to
assist in the development of ideas. He himself has developed a list
of things that could further the effort to save money and help the
fund improve.
Co-Chair Wilken commented that, as a Legislator, it is his job "to
try to fix a system …that is broken". "The wheels may not be coming
off the wagon but the lug-nuts are loose and that's why we are
sitting here". The Legislature was unaware there was a problem with
the systems until 15 months ago. In addition to the $170 million
bill the Legislature was "handed", "we're being told that for the
next twenty years, we'll be asked to contribute" 50-percent of
teachers' salaries and approximately 30 or 35-percent for PERS
employees to a retirement system. "I think it is broken. There is
plenty of blame to go around, and part of the blame rests on the
Boards". "It is perfectly wise for us and proper for us to question
the involvement of everyone from the actuarials to the boards".
When faced with a $170 million bill "and a daunting contribution
rate", there is something broken". Numerous revisions to this
legislation would be expected. "For you" and others "to defend the
boards' lack of involvement or lack of blame in this" is "a little
bit distressing". He would prefer to hear statements such as "we
did the best we could, we have a system that today is going to
burden, if not changed, the people of Alaska for a generation".
This is the task being undertaken by the Legislature. "The Boards'
hands are not clean". We need help in fixing this. The Boards are
going "to change because the current system doesn't work".
PEGGY COWAN, Superintendent of Schools, Juneau School District
(JSD), testified in Juneau and voiced appreciation for the Senate's
leadership in the effort to address the PERS/TRS retirement
concerns. While the JSD Board of Education has not, of yet, taken a
formal position on the bill, her "initial concerns" about the bill
include its possible impact on teacher retention and recruitment.
"Quality teaching", learning, and instruction depend on quality
teachers, instructors, and staff ". At past teacher recruitment job
fairs, the JSD had long lines of people interested in working in
Juneau; however, that is no longer the case even though the
District and community have strong attributes. "It is no longer a
buyer's market". Research must be conducted to compare this
proposal to retirement benefits in other states. This would be a
key element in attracting new employees. "The linkage" of this
complex bill to the base student allocation "is concerning". As per
her previous testimony before the Committee in regards to HB 1-
INCREASE AMT OF BASE STUDENT ALLOCATION, its proposed base student
allocation (BSA) of $4,919 would be inadequate for the JSD.
Therefore, as this legislation proceeds, consideration should be
provided to increasing the BSA amount.
Senator Bunde, a former teacher, commented that when he taught,
there were more teaching jobs available than there were teachers;
thus teachers could pick and choose where they desired to teach.
"The cycle goes up and down and back and forth". He asked whether
other states are also experiencing lower applicants at the job
fairs.
Ms. Cowan affirmed that, "it is a nationwide issue". To that point,
Alaska should be striving to position itself as best possible. Some
states provide incentives such as a $10,000 signing bonus. While
Alaska does not have the funds to compete in that regard, its "good
retirement system has been one of the carrots that we have had".
While acknowledging that the underfunding issue is of concern,
efforts should be made to make changes that would allow the State
to remain competitive.
Senator Bunde hoped that Ms. Cowan shared the Legislature's concern
in this matter, for "if things continue the way they are, for every
two new teachers you hire, eventually, there's a third one you
won't be able to hire because of the monies" the schools would be
required to contribute to the retirement system. In 1975, there
were a total of 20,000 State employees, "including teachers,
supporting 1,700 retirees. Last year, there were 43,000 State
employees supporting 28,000 retirees". Were this trend to continue,
there would be concern that the ability to hire new people would be
challenged.
Ms. Cowan reiterated her appreciation for the efforts to address
the retirement system issue. The JSC, with both PERS and TRS
employees, must address the retirement funding issue while
continuing to provide a strong but affordable benefit and
retirement system. She applauded the fact that the Legislature has
increased funding to education; however acknowledged that it was
used to support the retirement systems rather than the classrooms.
Increasing money to the classrooms is required in order to improve
student education opportunities.
BRUCE LUDWIG, Business Manager, Alaska Public Employees
Association/American Association of Teachers testified in Juneau
and thanked "Senator Stedman for making a very complicated subject
fairly easy to understand". He "lauded the goals" identified by the
Committee in this regard; however, he opined that the most
important goal, that being the "recruitment and retention of
qualified people", was missed. The Association represents
approximately 8,000 active and 3,000 retired employees throughout
the State. Recruitment efforts have been difficult for the past
five years, specifically in regards to State Troopers, fish
biologists, engineers, or nursing positions. Scientific fields are
"particularly difficult" to recruit. The biggest and perhaps "the
only benefit" of a good retirement system, from an employer's
viewpoint, is its ability to attract and retain "quality"
employees. Few states have DCPs, as they are not as attractive to
employees as DBP. People for the most part "are not individual
investors". The decline in the stock market is the reason the
systems and everybody's "in the hole right now". In addition,
health care costs are increasing at "astronomical rates". This must
be addressed at the national level as it is affecting individuals,
worker's compensation, and a wide range of other issues.
Mr. Ludwig stated that the Association is very opposed to a DCP.
"More bang for the buck" is provided with a DBP than a DCP. A DCP
does not provide disability or death benefits, and absent these,
the burden would fall on the State through Medicare and would
further burden the Workers Compensation system. The bill does not
address the five billion dollar deficit. It "does not fix it, it's
a past debt". "Throwing the baby out with the bath water is not the
answer".
Senator Stedman stated that it would be beneficial to the
discussion were those who feel that a DCP rate structure would
negatively affect recruitment and retention efforts propose an
alternative recommendation to the contribution rate structure that
would allow employers to remain competitive. The bill currently
proposes an approximate 8.25 percent rate.
Co-Chair Wilken, responding to Mr. Lugwig's comments, clarified for
the record, that it is a common misconception that the system's
current deficit was the result of a decline in the stock market. In
reality, the stock market underperformed the State's portfolio
projections by four percent for 20-months". Other than that
timeframe, the return met or exceeded actuarial projections.
Co-Chair Wilken asked whether the Association could provide any
data to reflect to what extent the retirement plan is a factor in
the State's ability to recruit employees.
Mr. Ludwig was uncertain that such data was available.
Co-Chair Wilken stated that the argument that a DCP would not
attract employees has been voiced numerous times. However, no
supporting data has been provided to reflect that "the retirement
system is a major contributing" factor to the decision;
specifically to first time hires. He also asked whether any
Association members participate in the Supplemental Benefit System
(SBS) program.
Mr. Ludwig affirmed that there are members in the SBS program.
Co-Chair Wilken voiced that the SBS program is a defined
contribution. He asked whether there would be any comparison
between the SB 141 proposal and the SBS program; in other words, do
those members "generally support the SBS plan".
Mr. Ludwig responded that they do; however, there is a DBP plan
"backing them up". He noted that his personal retirement is similar
to the SB 141 proposal, and he "can't come close to PERS or SBS".
"SBS has had a phenomenal performance".
Senator Bunde shared that several of his constituents have
experienced similar employee recruitment difficulties as the State.
He also recalled that when he initially began teaching, his salary
range was a "far more important" consideration than the retirement
benefit, as at the time that issue was at least 25 years into the
future. To that point, he pondered "which has greater impact;
beginning salaries or retirement benefits … every dollar we put
into retirement is a dollar we can't put into beginning salaries".
While understanding that pertinent data is currently unavailable in
this regard, he asked for suggestions as to how this data could be
obtained.
Mr. Ludwig responded that the average person does not think about
retirement until they are 35 to 40 years of age, and that, prior to
that time, the salary range is of primary interest. However, he
stressed that whatever plan is developed must "be attractive to
everybody", as the State hires at all "strata of the workforce":
entry, middle, and upper level positions. He noted that a DCP is
attractive to younger people and a DBP appeals to the middle and
older worker. The SBS is an additional benefit.
Senator Hoffman characterized the DCP as "the suitcase plan" as,
were an employee to leave State employment, they could move their
benefits with them. However, the concern is that were the employee
to seek employment with another state, the portability factor would
not be considered a benefit as few other states have adopted DCPs.
In addition, the portability aspect of a DCP should be of concern
as the State could exacerbate its current recruitment difficulties
by losing long term, experienced employees who might acquire
employment with another state. Continuing the current DBP would
assist in stopping the "brain drain".
Mr. Ludwig agreed that the DBP "is an anchor that keeps people
here". A recent public safety employees' salary study [copy not
provided] conducted by David Reaume, indicated that these salaries
"have fallen behind all other jurisdictions". The high salaries
that Alaska offered in previous years have declined and the State
now offers "middle of the road salaries". Because people could earn
more money working elsewhere, a good retirement benefit package is
crucial in attracting employees. The private sector benefit package
is predominately a 401(k) program; public sector employment is
primarily a defined benefit program. This is "one of the things
that attracts people to public service".
Senator Hoffman expressed support for addressing the State's
retirement system's unfunded liability and noted that his comments
should not be misconstrued as opposing changes to the State's
retirement benefits. He noted however, that the State is "far
better off than three-fourths if not more of the states' retirement
programs as they presently exist". Such things as changing and
unifying the Board structures should be the first step rather than
making "massive changes when everyone agrees we need to look at
recruitment and retention as a major factor in anything we do. This
legislation might be too big of a step all at once". Perhaps this
sort of legislation should be developed incrementally. While noting
that this legislation does not address the plans' unfunded
liability, "something must be done".
Senator Bunde voiced that there are two sides to every coin. While
there is concern that the portability of the DCP could result in a
brain drain, another factor that should be considered is that those
who might leave are "sour on Alaska"; they are "burnt out" and are
simply "handing around" until they reach retirement. Allowing those
individuals to leave might be a good thing.
Co-Chair Green considered the portability of the plan a benefit, as
demographic studies indicate that rather than people working for
one employer for decades, the trend is to change employers
approximately every seven to ten years. She voiced appreciation for
the multitude of good ideas and suggestions have been presented
today, and asked that those who testified provide specifics in
writing. She reiterated that this legislation is in its infancy and
the bill's sponsor and the Committee "are very open to the
conversation". Finance Committee members are "very worried and
troubled that every time the increase for the current year is
talked about, we are the deep pocket; regardless of which public
agency is involved. There is the expectation that the State of
Alaska is going to continue to fund shortfalls and increases each
year. She warned that this would not be the case. Alternatives must
be developed. The systems must be prioritized, reorganized, and
improved to include mechanisms such things as health reimbursement
programs, efficiencies, and cost savings. Individual employees must
be involved in addressing their health care and savings issues, for
the State of Alaska would not continue to be the lone source of
funds for the plans. Therefore, everyone should contemplate what
should occur in this legislation to improve the systems. She
garnered that similar concerns about retention and other issues
occurred when the implementation of Tier 2 and Tier 3 were being
discussed.
Senator Olson asked Mr. Ludwig his view about creating a single
nine-member board to manage the plans: specifically his thoughts on
its proposed membership.
Mr. Ludwig recommended that the PERS/TRS participants and retirees
elect the PERS/TRS employee representatives on the Board.
In response to a question from Senator Olson, Mr. Ludwig clarified
that the current proposal would have those members appointed by the
Governor.
Co-Chair Green understood therefore, that Mr. Ludwig's concern
regards the Board members appointment process.
Mr. Ludwig concurred and stated that the complaints he has heard
are contrary to the complaints the Legislature is hearing. There is
concern that the PERS/TRS Board would not approve such things as
occupational disability.
Co-Chair Green asked Mr. Ludwig whether he thought "it strange
that" neither a Board nor a Board member had notified the
Legislature about the underfunding issue until it had reached
gigantean proportions. Last year, the Committee asked the PERS/TRS
Boards "to go forth and create a list of things that we need to
change, what can we do in Legislation to help make it better, and
consider a Tier 4 plan". A PERS/TRS Board subcommittee worked
diligently to address the issues and develop a plan; however,
neither Board supported it. Consequently, the Committee did not
receive any suggestions or recommendations. "The status quo is not
satisfactory".
Co-Chair Green reiterated her appeal to testifiers that specific
suggestions or changes in the legislation be provided. Senator
Stedman, the bill's sponsor, "is ready to work".
JOHN BROWN, President, Fairbanks Central Labor Council, testified
via teleconference from Fairbanks to address the long-term
consequences a DCP would have on the State. Were the Members to
research a 401(k) per capital distribution plan, they would learn
that a DCP "is not a pension and it never would be for 90-percent
of the people out there". This is worrisome in its regard to both
employee retention and "the economic wellbeing of our State" and
its citizens. Statistics indicate that instead if saving the money
in their Defined Contribution Plan for retirement, people utilize
it to purchase such things as a house, a vacation, or a new car.
Changing to a DCP "would do nothing to solve the unfunded
liability" of the current plans, and, in the future, a DCP would
result in fewer people being able to financially take care of
themselves in retirement. Society and governments would be required
to assist them. "This is a big mistake: there are hundreds of ways
to address the unfunded liability". While being unprepared to
provide specifics at this moment, he avowed that a DCP would be a
huge mistake" for the State "economically and socially". Currently,
more than $50 million a month is received in the State through a
DBP. "That is a huge impact". Were the State "to switch to a DCP,
over time, it would result in the loss of "a huge economic engine"
to the State.
Co-Chair Green requested further explanation about how changing
from a DBP to a DCP could negatively impact the economy of the
State.
Mr. Brown expressed that, in a DCP, people tend not to save and
retain their money toward retirement. Therefore, a DCP would not
create the "kind of wealth that a DBP does". He noted that the
Operating Engineers Association Plan has accumulated a total of two
billion dollars. Ten-percent on that amount is a "huge amount of
money". In contrast, individual investors would not "leave that
money there to build up; it doesn't make that kind of rollup on
interest rates when you have a good year". While acknowledging that
PERS must address its unfunded liability, he declared that there is
time available in which it could address its unfunded liability;
however, were the plan changed and monetary contributions to the
plan to cease, its ability to "fix itself down the road when there
are good investment years" would diminish. Ceasing monetary
contributions to the Plan would just make the current situation
"worse". This is what would occur were a DCP implemented.
Senator Bunde voiced the understanding that, as a member of SBS,
which is a DCP, he could not remove money from the plan. This would
be similar to the DCP being proposed in this legislation. A person
could not remove their money unless they were to retire or
terminate their employment with the State.
Mr. Brown understood otherwise: a person could access their SBS
money. He suggested that this be further researched.
Co-Chair Green asked that any suggestion or solutions about how to
address the plans' $500 billion unfunded liability be provided to
the Committee.
[NOTE: The remaining testifiers presented in Juneau.]
KEVIN RITCHIE, Executive Director, Alaska Municipal League (AML),
expressed that AML has been working with representatives of school
districts, the University of Alaska, and municipal officials as
well as the PERS/TRS Boards regarding the retirement and benefit
issue. The funding of the PERS/TRS systems over the next two years
at the local level is a "critical issue". Also of importance is the
examination of the entire system in regards to what could "be
changed and what makes sense". The information that has been
developed is impressive and reflects the Legislature's and the
Department of Administration's understanding "of the depth of the
issue". "It would be wrong to think that anybody would be for or
against this bill; the question is what needs to be changed". He
voiced appreciation for the fact that "this is a platform" through
which to present changes and discuss the issues. Rather than solely
being a State challenge, this issue is a tremendous problem for
everyone: municipalities, school districts, and the University. AML
is looking forward to working with the Legislature to further
develop the bill.
Senator Bunde noted that AML has had frequent discussions with the
Legislature regarding past municipal revenue sharing and the fact
that municipal revenue sharing would not be forthcoming to address
the debt that PERS/TRS has caused. Therefore, it is incumbent upon
AML to work with the Legislature to address the issue in order to
avert further sharing of the debt at the local level.
10:14:22 AM
Co-Chair Green remarked that this bill is on an accelerated
schedule, and therefore any person wishing to testify should do so
at this time.
MARY FRANCIS, Executive Director, Alaska Association of School
Administrators, shared that many of the Association's school
superintendents are meeting in Juneau this week. One of topics of
discussion is this legislation. There is a consensus of strong
support among the attendees about the Legislature's efforts "to
overhaul and improve the State's retirement system". Additional
work would be required to address the concern about how this bill
would align with the Base Student Allocation (BSA) for FY 06. The
Association is willing to work with the Legislature to address its
concerns.
TOM HARVEY, Executive Director, NEA-Alaska, informed that 90-
percent of the people in the TRS system and 30-percent of the
people in the PERS system are NEA-Alaska members. While he had
planned to provide written comments, he has chosen to testify due
to the accelerated schedule of the bill. He complimented the bill's
sponsor, Senator Stedman, on the efforts he has exerted on the
legislation; particularly that Senator Stedman had contacted the
Association in regards "to a number of issues". He specifically
appreciated Senator Stedman's earlier remarks clarifying that the
employee contribution language located in Section 8(b), page seven,
lines 22 and 23 of the bill was not attributed to him and would
likely be removed from the bill.
Mr. Harvey further appreciated and voiced approval of Co-Chair
Wilken comments that the stock market is not the root of the
underfunding problem, as the ASPIB Board and its investments "have
far exceeded what has been necessary to sustain the system as it
was defined by the actuaries". The actuarial assumption changes
that were made in 2002 should be the primary focus, as that change
caused the scenario to change from "appearing to be fully funded to
being five billion dollars under-funded. While there have been a
few "plausible" answers to how this situation occurred, there have
not been many answers. Hopefully, "the real answer" as to why those
2002 assumptions "are the right assumptions" will surface over the
next few months and thereby could further affirm the actual under-
funded level.
Mr. Harvey stated that the question would then become "how to build
a system to avoid the five billion dollar problem". Since the
answer to why the assumptions were changed has not been accurately
identified, the answer as to how to change the system could not be
developed. He communicated that he is not opposed to a DCP. The
union he represents has a DCP. It is managed by 25 "very highly
compensated people who have the ability" and the time to make
decisions about their investments. The concern is that the average
public employee does not have the time to make educated investment
decisions on a regular basis. He referenced the experience of the
State of Nebraska, which adopted a DCP 22 years ago for State
employees. This year Nebraska changed its plan from being solely a
DCP pension system to a mixed system, as "they discovered that the
average individual makes investments on a more conservative basis
than" necessary and as a result "ended up losing two to three
percent a year". Over a 30 to 40 year period of time for
retirement, this would equate to a loss of "close to 100-percent of
what they could have gained had the investments been done by a
group of people who have a better understanding of the investment
environment, such as the ASBIP Board".
Mr. Harvey continued that the issue of compensation must also be
addressed; "Do they have enough money to contribute what is
necessary". According to his calculations, the percentage specified
in this bill would be insufficient for retirement and the employee
"would be coming back to the State for assistance:" particularly
after they make their medical payments. As specified in the bill, a
limited amount of money would be available after paying such things
as property taxes, and food and clothing in respect to the standard
of living they presently experience. The "promise of a pension
plan" to a servant to the State is that one's standard of living at
retirement would remain at the level it was prior to retirement. A
person in private practice does not have this promise. "That is a
distinct difference" between the private sector and the public
sector.
Mr. Harvey agreed that the DCP's affect on employee retention is a
concern. He voiced disagreement with the argument that people,
specifically educators, moved to the State, primarily due to its
retirement system that allowed people to retire after 20 years with
a good medical component. Research however, does support the fact
that these elements are in the top three reasons that people remain
in the State. Job satisfaction is number one; salary is number two;
and retirement benefits are number three. "The retirement keeps
them here for at least 20-years, or beginning in 2011, 25-years".
The DCP defined in the bill would vest an employee after five
years; public school data indicates that "the fifth year is the
year of the itch" in that many educators, in their third, fourth or
fifth teaching year begin to make decisions about their career. 48-
percent of educators change professions within the first five
years, and "the 52-percent that remain are making decisions about
their future". This State does not provide sufficient teacher
supply to meet the demand; it is a highly competitive situation.
Therefore, developing a system that would allow teachers after
their fifth year to return home to a state where they could make a
similar salary as offered in Alaska is questionable, particularly
since the State has lost the competitive salary edge experienced in
the 1980s and 1990s. We would be "at risk of not retaining them".
While agreeing that the portability factor is beneficial in that it
could bring in new ideas and concepts, it "is less of a good thing"
when it pertains to the education field. Stability in a school is
beneficial to student achievement and is instrumental in providing
a quality education.
Senator Dyson voiced appreciation for Mr. Harvey's remarks. In
regards to the comments pertaining to retaining one's standard of
living after retirement, he asked whether Mr. Harvey was inferring
that the State has the responsibility to ensure that everyone has a
retirement income that might equate to $50,000, $60,000, or $70,000
a year.
Mr. Harvey apologized if his remarks inferred that a public service
employee should receive the exact same compensation into his or her
retirement. The intent of his remarks was to express that public
service people have an expectation that they would maintain a
similar standard of living after they retire. The compensation
could be less at retirement, as many expenses such as house
payments would not be experienced, as the house would likely be
paid for by that time. Therefore, a retiree's expenses would be
less than when they were active employees. All public servants
expect to have "a similar dignity" in their retirement as they had
when actively employed.
Senator Dyson commented about the issue of those individuals who
might not be prudent with their money; in that "there is still a
social contract that the taxpayers of the State have to make up
whatever delta there might be".
Mr. Harvey communicated that it would be possible that some folks
would end up at poverty level and require State services. This has
occurred in some states. It would be unfortunate were this to occur
in Alaska.
Senator Dyson voiced being impressed with the clear and logical
comments about what attracts people to the State. However, not
included in the list of attractions was "a love for our State, its
beauty, resources, opportunities, and people". Particularly missing
in the list of what attracts teachers to the State was "a
commitment and a calling to serve our kids". One of "the tragedies"
of this State's history is that people come here, use State
resources, make their money, and then go back home. It is his hope
that people would be attracted to and live in the State "because of
a love and commitment to this extraordinary State and its people".
He would choose "to disincentivise … the transient pirates" and
would prefer to attract people for other reasons besides monetary
reasons.
Mr. Harvey expressed that teachers who come to the State do have a
calling to teach children. That calling is the number one
incentive. "The issue is, is it an incentive" to remain in the
State once they retire. The number of education retirees who stay
in the State is increasing. They would stay "if they can maintain
their dignity in retirement".
STEVE BRADSHAW, Superintendent, Sitka School District, praised the
Legislature's, and particularly Senator Stedman's, courage in
furthering this bill. He noted that his job and that of the
Committee are similar in respect to the fact that, in developing a
budget, "there's never going to be enough money…". This legislation
is an attempt to "solve a problem" that must be addressed. However,
the question of how and by whom that problem would "be paid for"
must be answered. The State is fortunate that the price of North
Slope crude oil is high and would result in a $600 million dollar
surplus. It is certain that the health insurance expenses of the
retirement plans would not decrease. These costs must be financed.
He applauded the previous year's efforts to develop alternate State
revenues to replace declining oil revenues. Solving the State's
revenue problem is "the number one issue that we are faced with".
This is a difficult task. "The State is nothing more than the
people in the State … we need to solve our problems financially and
find a way to fund the State that isn't based on whether the price
of oil is going to be $55 per barrel or going to be $20 per
barrel". Solving problems such as this is the responsibility of the
Legislature. The task is not easy, for when such things as taxes
are proposed, "people want to vote you out of the place". Until the
State's revenue problems are solved, the State's dependency on oil
would continue to be an obstacle no matter "what bump in the road
we get".
10:34:23 AM
Senator Bunde, while sharing the concern about the State's
dependency on oil revenue, stressed that the increased oil revenues
being experienced this year should not be characterized as a
surplus; the State "is not rolling in dough". He urged the
testifier to review SB 88, which is sponsored by Senator Wilken.
That bill would provide a 15 to 20 year fiscal plan that could
serve as "a bridge to the future".
RICHARD CARLSON, Superintendent, City of Klawock School District,
thanked the Committee for undertaking "this difficult task". A
five-and-a-half billion dollar shortfall is indicative "of a major
problem" that must be fixed. Rather than focusing on a specific
element of the problem, the discussion must consider the entire
system. To that point, his "concern is simply a matter of
logistics, I guess, in wedding" this legislation to HB 1-INCREASE
AMT OF BASE STUDENT ALLOCATION. He encouraged the Committee to view
these as two separate issues, "each with merit on their own".
Co-Chair Green agreed that "they are two separate issues and we
want them to be that way. Were it not for the PERS/TRS dilemma, $38
million would not be" included in the BSA this year. Many
Legislators do not support tying the $38 million to the BSA. In an
effort "to generate more conversation and more cooperation and to
really move forward on SB 141, we will have it as a proviso". With
the passage of SB 141, it would be attached, and would become a
part of the final. "They are inextricability tied, and yet they're
very, very, very separate". Saying that the BSA has been increased
by millions of dollars could be considered "duplicitous", were it
known that more than 50-percent of that amount would be to support
the PERS/TRS problem. Other State entities' PERS/TRS obligations
must be provided for today and in the future. "It's a big deal".
She encouraged the public to assist in developing avenues through
which to address the issue.
AT EASE 10:39:23 AM / 10:40:03 AM
Senator Stedman stated that as the discussion on this complex and
sensitive issue has advanced, "rhetoric to make one point verses
another point" has occurred. It should be restated that the benefit
structure currently provided to PERS/TRS retirees "is not in
jeopardy". Current employees would be "moderately" affected by
certain aspects of the legislation; however, there is no intent to
make "any radical changes" to the current tiers, but rather "to
bring forward" issues such as "cost containment and the fairness of
the fee structure" for discussion. Other than "the concept" being
included in the bill, there is little that addresses the five
billion dollar funding shortfall. "There are two distinct
problems". It is "more important" to address the Board and Tier
issues first and then address the underfunding issue. Were the
underfunding problem restructured first, the scenario could repeat
itself going forward and become insurmountable. He assured that
even though this legislation does not directly address the
underfunding issue, once some form of this legislation is
finalized, that issue would be addressed.
Senator Stedman declared that the "competitive nature" of the new
tier structure could easily "be over-dramatized" as he did not
believe that people would be living in poverty after working 20 or
30 years. "Most people in the country save approximately ten
percent" per year for retirement. That is approximately the amount
specified for retirement in this bill. The contribution amounts are
"not set in stone"; they are a point upon which to begin
discussion. Some of the labor organizations have presented
differing contribution amounts, and "that's fine".
Senator Stedman conveyed that the work conducted by the PERS/TRS
Boards Tier Review Subcommittee at the request of the Senate
Finance Committee was the basis for this legislation. Efforts were
conducted over many months. It should be emphasized that the
previous year school funding was dramatically increased partly to
account for the increase in PERS/TRS obligations. Another increase
was provided in the budget this year and the demand would continue
in the future. He warned however, that any increase in money to
address the past service liability is diverting money from the
classroom and is eliminating funds for various state departments.
On the local level, the obligation is removing funds that could
have been used for such things as paving streets and improving
sewer systems. "We're diverting cash flow from this generation to
pay for liabilities incurred from a previous generation", as far
back as the 1970's. He stressed that there should be concern that
we not "unduly burden future generations of Alaskans to pay for the
benefit structures of today and yesterday". It would be extremely
difficult for the State of Alaska to forecast the health care costs
for a fifty year old man who might live to reach his nineties.
Therefore, going forward, "we need to be able to have a benefit
structure in place that is fair for the employees and fair for the
citizens of the State"…a balance must be reached. It is "debatably
out of balance" today, as the State is "definitely diverting" its
cash flow for today to address issues that are 30 years old.
Senator Stedman encouraged testifiers to offer suggestions for
amendments. Legislative staff could "fine-tune" the suggestions
into the "proper kind of language". "Get it on the table so we can
talk about it". When the issues at hand are in focus and the bill
is revised to reflect that, it could be acted upon. He welcomed
more "on-point" suggestions, particularly from involved
professionals such as labor unions or management.
10:47:53 AM
Senator Bunde, addressing the argument that the bill would not
address the approximate five billion dollar underfunding gap,
voiced that this bill might prevent the gap from widening further.
He asked Senator Stedman to further discuss how the underfunding
issue would be addressed.
Senator Stedman hoped that the Committee would adopt the
legislation "with revisions" and "task the new Board" to develop
"specific recommendations" about how to address the underfunding
issue. The goal would be to have those recommendations considered
during the next Legislative Session. Although he would be surprised
were it to prevail, one option that has been mentioned would be to
receive "an equity infusion" from the corpus of the Permanent Fund.
Other options could include changing targeted funding levels,
developing cost containments, or undertaking pension bond
restructuring.
Senator Stedman stated that efforts to tie in a debt funding
mechanism with the restructuring of the Retirement System would be
"complex" and therefore "too easy to get off-point in the
discussion". The preferred method would be to address "the
structural problems with the boards" and then address the debt. He
agreed with Senator Bunde, that otherwise, the debt could continue
to occur. In addition, over time, the number of retired employees
would continue to increase, "relative to employed citizens", and
thus would place further liability on the system under the current
structure.
Co-Chair Wilken asked regarding the aforementioned "accelerated"
bill schedule.
Co-Chair Green communicated that Legislative staffers have been
working diligently toward the development of a committee
substitute. The goal is to have a committee substitute developed
prior to the end of March. To that point, significant Committee
time would be dedicated to the bill. She encouraged people to
provide their suggestions, ideas, and comments to the Committee
"post haste".
Senator Bunde "hoped … that the suggestion that we just hide our
heads under the blanket and hope that this would goes away would
not be a viable option".
Co-Chair Green stated that a solution to the issue must be
obtained.
Co-Chair Green communicated that an additional opportunity for
public testimony would be available during the March 22, 2005
Committee meeting.
The bill was HELD in Committee.
ADJOURNMENT
Co-Chair Green adjourned the meeting at 10:54 AM.
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