Legislature(2019 - 2020)ADAMS 519
03/04/2020 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB79 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| += | HB 79 | TELECONFERENCED | |
HOUSE BILL NO. 79
"An Act relating to participation of certain peace
officers and firefighters in the defined benefit and
defined contribution plans of the Public Employees'
Retirement System of Alaska; relating to eligibility
of peace officers and firefighters for medical,
disability, and death benefits; relating to liability
of the Public Employees' Retirement System of Alaska;
and providing for an effective date."
1:35:52 PM
Co-Chair Johnston indicated that the bill was last heard on
March 2, 2020 when the committee adopted a Committee
Substitute (CS) work draft version 31-LS0462\O. She
announced that amendments for the bill were due on March 6,
2020 by 5:00 pm.
1:37:07 PM
KEN TRUITT, STAFF, REPRESENTATIVE CHUCK KOPP, indicated
that the bill was the same as the prior version apart from
the identifier "O".
Co-Chair Johnston asked for a brief review of HB 79 for the
committee.
REPRESENTATIVE CHUCK KOPP, BILL SPONSOR, reported that the
bill introduced a hybrid Defined Benefit (DB) pension
system. The legislation was three-fold; it contained cost
saving features, plan asset enhancement adjustments, and
plan benefit reductions. He briefly outlined the cost
saving provisions. He indicated that the plan did not offer
retirement medical insurance and the medical benefit was
the same as the Tier 4 plan, which was a Health
Reimbursement Arrangement (HRA). He explained that the
retirement age was fixed at age 55 with 20 years of service
and prohibited retirement at any earlier age. The
retirement income average was based on the highest 5 years
and precluded a cost of living adjustment (COLA). The
plans asset enhancement allowed for increases to the
employee contribution to keep the plan funded at 90 percent
predicated on market conditions. The employer contribution
was 22 percent comprising a mandatory 12 percent for the
employee benefit and the remaining 10 percent allocated to
the current plan unfunded liability. The plans benefit
reductions included withholding the post retirement pension
adjustment if the plan was funded at less than 90 percent.
He pointed out that the plan was a hybrid due to the lack
of a guaranteed medical benefit. The plan transferred a
significant amount of risk to the employee.
1:40:17 PM
DAVID KERSHNER, BUCK GLOBAL LLC, reviewed the actuarial
analysis. He explained that the analysis involved
projections of potential contributions to the Public
Employees' Retirement System (PERS) both currently and
after the adoption of HB 79. The projections were based on
three different economic scenarios. The first scenario was
based on what the assets were expected to earn under the
ongoing funding of PERS at 7.38 percent. The second
scenario included a below expected return for five years
from FY 21 through FY 25 based on 5.75 percent, which
represented the actual return averaged over the prior 5
years. The third scenario modeled poor asset returns and
was unlikely. However, the actuaries had to include a
scenario with unfavorable asset returns to create
conditions that caused the plans cost saving measures to
kick in. He exemplified the post retirement pension
adjustment as one of the cost saving provisions. He noted
that two pie charts were included in the fiscal note and
thought the charts simplified the analysis. [The pie charts
were included in the untitled actuarial analysis narrative
document by Buck Global, LLC. (copy on file)]. Both charts
depicted the distribution of the 22 percent statutory
employer contribution rate for the members affected by HB
79 based on FY 22 projections.
1:42:52 PM
AT EASE
1:46:07 PM
RECONVENED
Mr. Kershner explained that the first chart showed how the
percentages were currently distributed. He pointed out that
the yellow slice denoting 1.8 percent represented the
amount for the DCR Trust or the death and disability
benefits and the retirement medical benefits. The average
HRA contributions were shown in green at 3 percent. The
maroon piece signifying 5 percent represented the defined
contribution accounts of the plans members. The amount
dedicated to paying down the unfunded liability in the
existing PERS defined benefit plan for members hired prior
to July 2006 was 12.2 percent depicted in orange totaling
22 percent.
Mr. Kershner continued to the second pie chart representing
the plan percentages after passage of the bill. He noted
that the average HRA contributions shown in green remained
the same at 3 percent. He explained that HB 79 provided a
minimum of 12 percent for employee contributions hence, the
yellow portion signifying 9 percent represented the
contribution for the HB 79 trust. The orange piece depicted
the remaining 10 percent used to pay down the unfunded
liability in the existing PERS defined benefit plan. The
decrease of 2.2 percent for the unfunded liability had to
be made up by additional statewide contributions. He
concluded that the out years would look similar to FY 22.
1:50:57 PM
Representative Wool pointed to the maroon defined
contribution slice reflected in the top pie chart and
wondered why it was not included in the second chart. Mr.
Kershner responded that under HB 79 they would receive a
defined benefit rather than a defined contribution pension.
Mr. Kershner referred to the handout, "PERS - 20-Year
Projection of Additional State Contributions" (copy on
file). The table reflected three scenarios. He pointed to
note 2 on the bottom of the page. He explained that in all
cases the analysis reflected the actual return of 6 percent
that the PERS DB plan experienced in FY 19. He reported
that 6 percent applied in all 3 cases. He varied the
assumed return in future years. In scenario one, the return
was assumed at 7.38 percent. In scenario two, it was
assumed that for 5 years (FY 21 through FY 25) the return
was only 5.75 percent based on the actuals ending on June
30, 2019 and after FY 25 he assumed a return of 7.38
percent. He emphasized that the third scenario was
unlikely. He explained that he had to present a situation
with very poor returns to create a situation that required
a sizeable increase in state contributions. The analysis
assumed a zero percent return from FY 21 through FY 25 and
a 2 percent return for two more years then returning to
7.38 percent in the remaining years. He pointed to the
Current or first scenario. The projections showed the
state contribution to be $198 million in FY 22 based on
7.38 percent returns. Under Scenario 2 at 5.75 percent
returns the state contribution was projected at $201.5
million in FY 22. In scenario 3 at zero percent returns the
contribution was projected to be $215 million. The three
scenario columns reflected the projected additional state
contributions from fiscal years 2022 to 2041. The 20 year
totals column showed the increase in state contribution
between scenario 1 and scenario 2 at $1.8 billion and
increase dramatically under scenario 3. He moved to the
columns titled HB 79G. The columns included the
provisions of HB 79 that included the redistribution of the
employer contributions under the three scenarios. He
pointed out that under Scenario One, the 20 year total
increased by roughly $100 million from $4.3 billion to $4.4
billion. Under Scenario 2, the increase over 20 years was
not a significant number, about $2 million. He explained
that the reason the large numbers popped up in 2040 and
2041 under Scenario 3 was due to the cumulative effect of
the poor asset returns. The contribution rates
significantly increased, and less money was going towards
the DB trust and therefore, the states contribution had to
make up the difference. He further explained that the
higher state contribution rate was the difference between
the actuarially determined contribution rate and the 22
percent statutory rate. The main message he wanted to
present was that because less money from the HB 79 payroll
was directed towards the DB plan, the shortfall had to be
made up by state contributions. He determined that costs
would increase under the plan. He cautioned that when a DB
plan was replaced with a defined contribution system, as
the state did in 2006, the risk was shifted from the
states investment returns to the individual. He furthered
that in a defined contribution arrangement, the employee
invested the contribution and the returns on the
investments determined how much funding was available for
retirement. Conversely, under a DB plan when assets
underperformed and created deficiencies, the deficiency
fell to the state. He concluded that a combination of
decreased DB contributions and the risk of underperforming
future returns increased the states risk for future higher
contributions.
2:00:40 PM
Co-Chair Johnston surmised that with the state's current
arrangement the state paid 12.2 percent for all employees
towards the unfunded liability. The added liability in the
HB 79 plan changed the 12.2 percent for the unfunded
liability to 10 percent. Mr. Kershner responded in the
affirmative.
2:01:42 PM
Representative Kopp asked Mr. Kershner to comment regarding
the HB 79 plans risk being pushed to the employer, which
was shared with the employee.
Mr. Kershner affirmed that there was some risk sharing that
was passed onto the employee. The members contribution rate
started at 8 percent and the plan contained two features
that were initiated when and if the fund fell below 90
percent. The post retirement pension adjustments were
reduced, and the Retirement Board could adopt a higher
employee contribution rate; higher than 8 percent and
limited to 10 percent.
Co-Chair Johnston recounted that inherent in the hybrid
program in HB 79 was the risk of increasing the states
liability towards the unfunded liability. She wondered
whether she was correct. Mr. Kershner asked for
clarification. Co-Chair Johnston restated the question. Mr.
Kershner concurred that she was correct. He delineated that
a smaller portion of the HB 79 contribution would be
deposited to the DB plan trust for the unfunded liability.
He voiced that the shortfall had to be made up in some way.
He concluded that if the peace officers and firefighter
members were contributing less to the liability, the state
had to cover the shortfall via the state contribution.
Co-Chair Johnston clarified the difference between the
employers and the state. She instructed that employers were
entities like municipalities, the university, and schools.
After the state closed the DB program, employers had to pay
their full amount for the unfunded liability for
approximately one year until the state increased its
contribution and capped the employer contribution at 22
percent.
2:07:23 PM
Representative Wool wondered how the current defined
contribution plan paid for the unfunded liability. Co-Chair
Johnston referred to the top pie chart as a depiction of
how the unfunded liability was currently handled. She
exemplified that the university paid a certain percentage
for each of the DB and DC plans.
Representative Kopp interjected that the plan by itself was
structurally very sound and did not add to the structural
liability. However, it was the existing liability that was
a problem and burdened the plan. He relayed that according
to Mr. Kershner, the HB 79 plan itself was projected to be
funded at 99.3 percent and was expected to improve and
increase to above 100 percent over the years because of the
HB 79 trusts contribution rate. He surmised that the plan
was structurally very sound but the unfunded liability
was problematic.
Co-Chair Johnston maintained that one of the reasons the
plan was structurally sound was because the HB 79 plan
decreased its contribution to the unfunded liability from
12 percent to 10 percent.
2:10:45 PM
Representative Wool referred to Scenario 3. He noted that
at the end of 20 years the first 2 scenarios had similar
returns. He asked if HB 79 was not enacted, but the severe
financial conditions modeled in the third scenario happened
how it would affect repayment of the unfunded liability and
if it fell on the state. Mr. Kershner responded in the
affirmative and noted that it fell to the state. He
reiterated that the employer contribution was set at 22
percent and the excess difference between the actuarially
required rate and the 22 percent fell to the states
contribution. He pointed to the three scenario columns
under the current plan on the state contribution projection
table. The Scenario 3 column portrayed significantly
increased state contributions of up to $10 billion over 20
years above the 22 percent employer contribution because
the draconian asset returns created large increases in the
unfunded liability that had to be made up over 25 years.
2:13:40 PM
KEVIN WORLEY, CHIEF FINANCIAL OFFICER, DIVISION OF
RETIREMENT AND BENEFITS, DEPARTMENT OF ADMINISTRATION,
addressed the new Department of Administration (DOA) fiscal
note appropriated to PERS State Assistance. He indicated
that the fiscal note would not be effective until July 1,
2021 in FY 22. The state contribution increase in FY 22 was
$3.5 million increasing to $4.1 million by FY 26.
Representative Wool asked Mr. Worley to restate his
comment. Mr. Worley complied. He referred to the pie charts
in the actuarial analysis and noted that because of the
shift in plan contributions to the unfunded liability from
12.2 percent to 10 percent, the additional state
contributions increased to about $99.8 million through FY
39.
Representative Josephson asked how a firefighter who was
employed in 2007 would transition into the HB 79 plan.
2:16:17 PM
KATHY LEA, CHIEF PENSION OFFICER, DIVISION OF RETIREMENT
AND BENEFITS, DEPARTMENT OF ADMINISTRATION, explained that
the bill provided for a transition process. She elaborated
that the division would look at a member's age, the
members account in the DC plan, and the amount of service
the member needed to purchase. The actuary would calculate
the amount necessary to purchase the same amount of service
in the DB plan, if there were insufficient funds to buy all
of the service, the division would calculate how much was
paid for and the member would pay off the remainder in the
future. Any excess would remain in their defined
contribution plan account.
Representative Knopp presented a hypothetical scenario. He
wondered what it would take for a person to buy into the
plan. He posed the case of an employee that began in 2007
and had 14 years of service. He wondered what the maximum
contribution was. Ms. Lee indicated the figure was
difficult to calculate offhand. However, except for "a few
outliers that were closer to retirement, she had learned
from Buck Global' s information that the majority of the
defined contribution participants would be able to purchase
their service.
2:19:42 PM
Representative LeBon reported that the state still had
employees under Tiers 1 to 3. He deduced that most of the
Tier 1 population had already reached retirement age. He
wondered about the size of the unfunded liability for the
remaining DB members. Kevin Worley responded that the
amount was about $5 billion. Representative LeBon asked
whether the HB 79 plan was neutral to the liability or
helped to repay it in an indirect way.
Mr. Kershner replied that the plan did nothing to the
existing liability, but it affected the amount of employer
contribution used to pay back the liability. He referred to
the pie charts. He reminded the committee that currently
12.2 percent was contributed to repayment of the liability
and under the HB 79 plan only about 10 percent was
attributed to repayment. The extra unfunded burden of
roughly $3.5 million to $4 million per year for the next
five years fell to the state, which was the reason for the
increase in state contributions noted on the projection
table.
2:22:19 PM
Representative LeBon thought the elephant in the room was
the $5 billion of unfunded liability and how HB 79 affected
the states ability to meet its obligation. Mr. Kershner
responded that the Alaska Retirement Management Board (ARM)
had taken on the funding policy and the plan had the
unfunded liability paid off by 2039.
Representative LeBon asked whether the HB 79 model offered
enough financial stability to ensure the state and
municipalities that in the future there would not be an
unfunded liability.
Co-Chair Johnston interjected that the committee had seen
the actuarial projection that showed the plan was over 90
percent funded in the future. She noted that over 80
percent funded was considered stable with most plans.
2:24:39 PM
Representative Sullivan-Leonard asked what the employees
currently had regarding healthcare compared to the most
recent version of the bill. Ms. Lea responded that the CS
adopted the same health plan as the current defined
contribution system currently had at an 80 percent 20
percent cost share. The premiums were based on the number
of years of service the employee had.
2:26:00 PM
Vice-Chair Ortiz asked if passage of HB 79 would not impact
the unfunded liability. Mr. Worley responded in the
negative. He offered that it did impact the ARM board
funding plan by increasing the state contribution. He
reiterated that the lower contribution by the HB 79 plan
members towards the unfunded liability shifted an increase
to the states contribution.
Vice-Chair Ortiz asked about the figures going out to FY 26
in the fiscal note. He asked how accurate they were. Mr.
Kershner responded that all the projections were based on
assumptions of what would likely happen in the future. He
pointed to Scenario One and explained the assumptions were
based on no unexpected surprises with the assets or
liabilities of the plan. He defined that unexpected
surprises were underperforming assets and differences in
retirement and mortality assumptions. He noted that the
circumstances would result in higher state contributions.
Vice-Chair Ortiz asked the likelihood of Scenario 3
happening. Mr. Kershner replied that Scenario 3 was a
random scenario created to cause the plans funding to drop
below 90 percent to kick in the plans cost saving
measures. He referenced the 20 percent to 30 percent
decline in the asset market in 2008. He reasoned that there
was no way of quantifying another similar event like the
market decline of 2008 in the projections and deduced that
there was a low probability of generating a zero and two
percent return over a number of years.
2:31:59 PM
Representative Wool thought that the chart reflected that
the unfunded liability would be paid off by 2040. Mr.
Kershner explained that the unfunded liability would not be
paid off but would not require any further state
contribution and would be covered under the employer
contribution at less than 22 percent; any unfunded
liability balance would be met by the employer.
Representative Wool asked if he meant 12.2 percent. Co-
Chair Johnston reminded Representative Wool that the state
would not be participating in repayment if employer
contributions were under 22 percent.
Representative Wool asked if there was a scenario in which
the state would not pay a contribution based on an
exceptionally good year for returns. Mr. Kershner replied
that employer contributions were projected at 29 percent in
FY 22 and was projected to remain in the 30 percent range
over the next several years. He voiced that it would take
significant asset returns in the teens for a number of
years to generate the scenario that eliminated the
additional state contribution.
2:35:13 PM
Representative LeBon inquired whether Mr. Kershner held an
opinion regarding the effectiveness of the adjustment
mechanism of the employee/employer contribution rates
should the plan have an unfunded liability. He wondered if
the plan had an ability to correct itself during the life
of the plan. Mr. Kershner responded that the HB 79 trust
was starting out at 100 percent funding. He relayed that
even considering the 5 bad years simulated under Scenario
2, the funding status was still projected to be over 90
percent. The lowest funded percentage was roughly 99
percent funded. He thought it would take a lot to generate
a funding percentage below 90 percent. He determined that
the HB 79 plan was fairly secure with the built-in
safeguards that would keep percentages from sky rocketing.
He indicated that even with the safeguards in the bill, the
state contribution was increasing under the HB 79 plan, but
the safeguards made it unlikely the plan would ever be
poorly funded.
Representative LeBon asked about a deposit made to the
unfunded liability of $3 billion by the state approximately
7 years ago. He wondered if that deposit made things better
and ultimately answered his own question by discerning that
it did. He asked if the state had a legal obligation to be
the safety net for HB 79 if something went wrong. Ms. Lea
responded in the affirmative.
Representative Josephson noted that the $3 billion
contribution reduced the state's amortized amount to $8
billion. He asked how the unfunded amount decreased from $8
billion to $5 billion. Mr. Worley answered that several
things contributed to the decrease. He reported that
changes made to the healthcare plans through the Employee
Group Waiver Plan (EGWP) in the prior year lead to
significant savings. In addition, savings were achieved
through a third party administrator for medications.
Regarding pensions, the state did not have the ability to
alter the current plan set out by the ARM board.
Representative Josephson asked about the $100 million
increase in Scenarios 1 and 2 for the state contribution.
He deduced that the amount constituted roughly a 2 percent
increase to the unfunded liability. Mr. Worley answered
that the number was the amount necessary to pay down the
unfunded liability. Representative Josephson shared that he
was feeling some confidence in the legislation in terms
of the benefit of the bill and Mr. Kershner's assurances
regarding the plan's viability and sustainability. In
relation to the remainder of the unfunded liability, it did
not appear that the plan added a large burden considering
the states increased contribution was spread out over 20
years. He asked Mr. Worley whether he had any comment. Mr.
Worley responded in the negative. He related that he was
acting in his capacity as an accountant to analyze the
numbers in the plan.
Co-Chair Johnston commented that the program could be
considered a pilot plan for other employees in the
retirement system. She deemed that if the plan were
expanded the cost of the program to the state would
increase due to the employer's involvement in the state's
unfunded liability. She asked whether her statement was
accurate. Mr. Worley responded affirmatively.
Representative Wool thought that at some point the plan was
cost neutral. He wondered, unfunded liability aside, if the
plan was cost neutral in any scenario. Ms. Lea responded
that HB 79 itself was cost neutral because it had leavers
to address any unfunded liability and was starting out
very well-funded as there was no one presently ready to
retire. She relayed the actuarial analysis that it would
take some very extraordinary circumstance for the HB 79
plan to accrue unfunded liability. She emphasized that the
plan itself was cost neutral but the effects on the
unfunded liability and who paid for it was established by
the analysis. She elucidated that the state ended up paying
the additional costs. She exemplified that instead of the
employer paying $55.00 and the state paying $100.00 the
state would pay $125.00. Representative Wool wondered
whether there was an economy of scale to offset any
potential downturn in the economy if the plan was expanded.
He asked if a greater safety net was created with a larger
employee base or was it all the same. Ms. Lea deferred the
question to Mr. Kershner. She inferred that the impact on
the state would be greater.
Mr. Kershner commented that when he heard cost-neutral he
interpreted it as no additional cost to the state. He
declared that HB 79 was not cost neutral. He furthered that
the funding of the HB 79 trust was self-contained. However,
the employer was contributing less to pay down the unfunded
liability and the plan was not cost neutral in terms of
total spend to the state for the benefits. He expounded
that the risk to the state was higher as the DB plan grew
larger because the liabilities and assets were larger so
with any asset losses the state had to make up a larger
shortfall over 25 years according to the ARM board policy.
Representative Wool commented that since the Tiers 1, 2,
and 3 recipients were a defined quantity and were
diminishing overtime, he wondered if an expanded employee
base would help with the unfunded liability having more
employees paying towards the liability. Mr. Kershner
responded that if the plan population expanded, payroll
would expand, and the liability would increase. However,
the increased payroll did help generate additional
contributions. He surmised that extended payroll helped;
however, as the plans assets and liabilities became larger
and larger the percentage decline in contributions grew and
had to be made up. The risk to the state increased as the
DB plan increased.
Representative Wool determined that under the medical plan
the medical benefits were not continuing. He assumed that
medical costs were a factor that largely contributed to the
unfunded liability. The pension alone was self-sustaining,
the unfunded liability component added the extra cost. He
pondered that since the new plan did not offer medical
benefits at retirement and employees would be retained
longer under the plan, he wondered how that affected
outcomes. He remarked that he was confusing himself.
Ms. Lea reminded committee members that the plan had
medical benefits for active and retired members and it
offered an HRA to help retirees pay for the premiums. The
retiree health plan was entirely funded at 100 percent. The
pension plan was not.
Co-Chair Johnston reminded members that DOA would speak to
health savings later.
Vice-Chair Ortiz referenced Co-Chair Johnstons comments
considering the plan as a pilot project. He remarked that
Rep. Wool pointed out the cost saving elements of the plan.
He asked if there was anything in place that would track
the savings from year-to-year and use the information as
part of the cost benefit analysis.
Co-Chair Johnston answered that the committee could ask DOA
to perform the analysis. She indicated the state would also
need to include the municipalities in the analysis.
2:55:57 PM
Representative Josephson was surprised to learn that the
HRA was fully funded and that the liability was the cash
pension portion. He thought the idea behind HB 79 was not
to offer retirees health benefits because it made the
outcomes more unpredictable. Ms. Lea pointed to Sections 26
through 29 of the bill that contained the provisions about
the eligibility for the medical benefits and the premium
payments. She indicated that the benefits were the same for
the defined contribution members. She deferred to Mr.
Worley regarding the funding of the health plan.
Representative Josephson wondered why the author of the
bill was going with the defined contribution plan rather
than a defined benefit plan.
Co-Chair Johnston interjected that one difference with the
employee pool for the HB 79 plan was that employees
typically began their employment in their twenties retired
in 20 years. The time gap between retirement and benefit
age could be an additional cost.
Mr. Worley was unclear what Representative Josephson was
referring to. He explained that the HRA was a health
reimbursement arrangement that equated to a defined
contribution dollar amount and was different than the
defined benefit plan healthcare trust that was over 100
percent funded.
Co-Chair Johnston asked if Representative Josephson wanted
to hear from Representative Kopp.
2:59:34 PM
Representative Kopp responded that under HB 79 a person
would not be eligible for the health savings account
benefit until the employee had 25 years of service. He
explained that even though the plan required 20 years of
service an employee had to wait until they were 55 years of
age to retire. In order to access healthcare sooner, a
person would have to work a minimum of 25 years prior to
being able to access the medical savings plan. The HRA was
a bridge to Medicare that enabled the employee to purchase
a plan until eligibility. He spoke to the value of
retention. He reported that a fire fighter trained in their
first 3 years received training equal to about $1 million.
Employees who walk out the door early took the monies
spent in training employees. He considered the situation
devastating to municipalities. He cited the increased
state contribution in one year at $3 million and equated
that to the many millions more lost to municipalities
dealing with lost retention. He reported that the Alaska
State Troopers had 40 trooper positions vacant and still
had 40 positions vacant after hiring 40 new troopers due to
lack of retention. He stated that even with salary
increases to attract new applicants, retention remained an
issue. He believed that a retirement plan was critical to
solving the retention problem. The financial loss to the
state was minute compared to the collective losses suffered
by the municipalities from lack of retention.
3:02:21 PM
Vice-Chair Ortiz asked if there was a way to track the
amount of savings from the plan over a period of time.
Representative Kopp indicated that most agencies tracked
their employee attrition. He thought that the state could
easily monitor the information to determine whether the
plan affected retention.
Co-Chair Johnston invited Mr. Truitt to provide a sectional
analysis.
3:03:44 PM
Mr. Truitt informed the committee that there were 11
substantive sections which he would exclusively review. He
began with Section 1, page 3, lines 6 through 9 authorizing
the ARM board to activate the cost saving mechanisms or
plan asset enhancement adjustments to the employer
contributions and employee contributions if necessary. He
offered that Section 2, page 4, lines 23 through 26 worked
in conjunction with Section 1 and contained further
adjustment authority for the ARM board as follows:
(5) adjust the amount of the increase in benefits
payable to a peace officer or firefighter who first
becomes a member after June 30, 2006, as provided
under AS 39.35.475; (6) adjust employee contribution
rates under AS 39.35.160(e).
Mr. Truitt disclosed that page 4 through page 8 contained
technical and conforming language that inserted the
statutory language in the current draft CS. He reported
that the next major change was in Section 12, beginning on
page 9 that created the new version of the retirement plan.
He noted that the term Tier 5 was not used in the bill.
He pointed to the language on page 9, line 9, first hired
after July 1, 2006 as the designation for the employee
group in HB 79. He highlighted that Section 13, beginning
on line 12 defined how the employees contributed to the
plan. He cited line 28 [Section 14] that mandated the
employee contribution of 8 percent.
Mr. Truitt turned to Section 15, page 10, beginning on line
10 that made clear that the total employer contribution
remains 22 percent for peace officer and fire fighter
employers. He moved to Section 18 on page 11, which
contained asset enhancement adjustment language and the
contribution formula of the plan. He elucidated that
Section 19, page 11, beginning on line 19 defined the
medical benefit that was the same as Tier 4. He delineated
that the CS assumed the new plans medical benefit
contributions would be deposited into the current Tier 4
HCR trust. However, in conversations with the division
about how the contributions to the plan would be handled a
second trust might be created. He indicated there might be
a statutory change needed to establish a separate trust.
Mr. Truitt continued with Section 21, page 12, line 7 that
detailed the service requirements for the plan as follows:
(1) at age 60 with at least five years of credited
service as a peace officer or firefighter; or (2) at
age 55 with at least 20 years of credited service as a
peace officer or firefighter.
Mr. Truitt pointed to Section 25 beginning on page 13, line
3 that allowed the ARM board to reduce Post-Retirement
Pension Adjustments (PRPA) payments (inflation proofing) to
peace officers and firefighters if the plan had an unfunded
liability greater than 10 percent until the plan recovered.
He characterized the provision as one the benefit
reduction tools. He underlined that Section 28, pages 14
through 15 contained the statute that referred to Tiers 1,
2, and 3 medical plan and created a carve-out from the
Tiers 1, 2, and 3 associated statutes for the HB 79 members
to participate in the Tier 4 medical plan. He expounded
that the section corresponded to Section 29 that added a
new statute creating the HRA medical benefit and specified
the qualifications and procedures. He added that the
Section 29 new medical plan was identical to the Tier 4
medical plan with a few technical changes necessary in
subsections (f), (g), and (h) to initiate the plan. He
reported that the last major change was found in Section
30, pages 17 through 18. The provision contained the cost
savings feature reflecting the calculation for an average
retirement income based on 5 years of service rather than
the 3 highest years for Tiers 1, 2, and 3 employees. He
concluded that the remainder of changes were either
technical or conforming changes. He reminded the committee
that Section 5 through Section 11 contained the language
and formulas for employee transition into the new plan.
3:13:22 PM
Representative Merrick had notes from last year. She showed
the average cost of training for firefighters and
paramedics as over $130 thousand for the first year and
the average cost of training a public safety employee at
over $200 thousand. She asked whether the analysis assumed
better retention under the HB 79 plan than under the
current Tier 4 plan. Mr. Kershner responded in the
affirmative. He furthered that the employees transferring
into the new plan were subject to the same termination of
employment that applied to DB plan participants. He offered
that a DB plan provided more incentive for employees to
remain in the job than a defined contribution plan. The
analysis projected lower termination rates for the HB 79
plan than the current defined contribution plan.
Representative Josephson remarked that Alaska was training
employees who were then being poached by other states. He
characterized it as an endless cycle.
3:15:59 PM
Representative Kopp responded affirmatively. He mentioned
that he included letters in the members packets (copy on
file) from police and fire chiefs relaying the exact
situation. He maintained that the employees were lost to
out of state departments offering significant cash
incentives for lateral hire. Based on the candidates
training resume other departments did not have to pay for
training. There was a significant cost to Alaska when
others recruited Alaska's troopers.
3:16:47 PM
Vice-Chair Ortiz asked about statistics since the change
from Tier 3 to Tier 4. He asked whether the loss of public
safety workers was tracked. Representative Kopp responded
that every [police and fire] department had tracked the
loss. He reported that one common consequence was a huge
age gap between the younger employees cycling out between
two and four years of service and the remainder with 15
years or more. The departments were losing its mentors,
trainers, and supervisors to retirement and the young ones
were leaving before promotion into those roles. He
characterized it as an age and experience gap that created
an artificial divide between the young and senior
employees.
Representative Wool believed the effect on retention should
be emphasized over the increased state contribution. He
asked about the medical aspect of Tiers 1, 2, and 3. He
thought that the reason the DB plans were discontinued was
due to accelerated medical costs, reasoning that the
pension costs were more predictable. He wondered how that
had changed as he had assumed medical costs were the
problem. He referenced testimony that medical costs were
contained, and the pension costs were not. He asked for
clarification. Representative Kopp responded that the state
had had very poor actuarial advice, which precipitated the
liability problem. He acknowledged that healthcare costs
were a significant cost driver of pensions and it was no
different in the states situation.
Co-Chair Johnston recounted that healthcare attributed to
one-third of the $3 billion payment to the Public
Employees' Retirement System (PERS) and the Techers
Retirement System (TRS). She noted that there had been
significant cost saving measures taken by DOA since then
that made a huge difference.
Co-Chair Johnston reviewed the agenda for the following
morning.
HB 79 was HEARD and HELD in committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 79 State Actuary Report Narrative FY22-FY26 3.04.2020.pdf |
HFIN 3/4/2020 1:30:00 PM |
HB 79 |
| HB 79 Fiscal Note 3.04.2020.pdf |
HFIN 3/4/2020 1:30:00 PM |
HB 79 |
| HB 79 State Actuary Rerport - Distribution of contributions for FY22-FY23_current vs HB 79G (baseline scenario)022920.pdf |
HFIN 3/4/2020 1:30:00 PM |
HB 79 |
| HB 79 State Actuary Report - Summary of 20-year projection of Additional State Contributions - current vs HB 79G (two adverse asset scenarios)022920.pdf |
HFIN 3/4/2020 1:30:00 PM |
HB 79 |
| HB 79 Public Testimony rec'd by 030320.pdf |
HFIN 3/4/2020 1:30:00 PM |
HB 79 |