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