Legislature(2019 - 2020)ADAMS 519
03/17/2020 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB79 | |
| HB181 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 79 | TELECONFERENCED | |
| += | HB 268 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 181 | 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."
3:18:33 PM
Co-Chair Johnston invited the bill sponsor and his staff to
the table.
3:19:15 PM
REPRESENTATIVE CHUCK KOPP, SPONSOR, reminded the committee
that HB 79 provided for a hybrid between the Defined
Benefit (DB) system and the Tier 4 system. He believed the
bill created a good middle ground between a costly DB plan
and a system designed to maintain retention. He mentioned
the cost saving features to preserve full funding of the
plan. He realized that any retirement plan costs something,
however, he thought his bill could help resolve some of the
problems regarding public safety.
3:21:04 PM
Representative Knopp expressed reservation with HB 79
because it was offered to only a select group and not all
employees. He was also concerned with the notion of costs
increasing over time if the plan grew. He asked for
clarification. Representative Kopp indicated that there was
a risk associated if the number of employees grew, but the
plan was only available to a small group. Representative
Knopp heard from employees in other unions that with
passage of HB 79 they would want to jump on the
bandwagon. He wondered how that would be handled and who
would deny the plan to other employees. Representative Kopp
indicated the issue was difficult. He elaborated that the
bill targeted the most sensitive group of employees
relative to job turnover. He felt that there was a need for
the state to prove the model and stated that it could not
be duplicated identically to other employee groups. Other
proposed plans would need to be modeled and he could not
speak to how the analysis would turn out. He added that
with a mere 2 percent turnover in the plans employees -
comparing the state costs in lost training versus the cost
of the plan, the state would save more in saved training
costs. He noted that with the more realistic 10 percent
turnover rate the state would lose $3.5 million for the
plan versus $14.5 million in lost training costs. He
communicated that the bill would ultimately result in
considerable savings to the state. Representative Knopp
replied that the original bill applied to first responders.
He thought that the category was too broad. He asked
whether eligibility was narrowed. Representative Kopp
replied that eligible employees included: police,
firefighters, state troopers, and correctional officers.
3:25:05 PM
Vice-Chair Ortiz asked what factors would make the plan
riskier with an increased number of employees. He noted
that more members meant more contributors.
3:26:00 PM
DAVID KERSHNER, BUCK GLOBAL, FLORIDA (via teleconference),
responded that as a DB plan grew, and new peace officers
joined the DB plan the assets and liabilities became
larger. He elaborated that any adverse experience as seen
with the COVID 19 market losses, created a larger loss that
had to be covered by the state via a higher state
contribution. He added that the recent projections showing
the HB 79 plan well-funded was forecast before the market
reactions to COVID 19. He reported that using current
market data, the plan would not be as well funded as the
projections showed. The state would see higher
contributions than the fiscal note contained.
Representative Kopp interjected that no actuarial analysis
was done based on one devastating week in the markets. He
reminded the committee that actuarial analysis was
performed on an annualized basis.
3:29:16 PM
Co-Chair Johnston asked that besides adding to member
population, would it make a difference if the actuarial
base had a lengthy period of employee contributions. She
noted that the HB 79 group retired earlier than teachers
who typically worked for 30 to 35 years. Mr. Kershner
confirmed that it did make a difference. He had factored
earlier retirement into the analysis. Co-Chair Johnston
clarified that she was speaking to adding to the
population. She inquired whether the actuarial report would
be affected if there was an addition of plan members that
stayed in the workforce much longer. Mr. Kershner responded
that by adding teachers the liability would be lower if all
other elements of the plan remained equal.
3:32:03 PM
Representative LeBon asked Mr. Kershner if he was aware of
other plans that shared the participation rate
adjustments between the state, employee, and employer. Mr.
Kershner responded that typically members paid a fixed
amount and were not typically tied to the performance of
plan assets. He added that sometimes Cost of Living
Adjustments (COLA) increases were based on the performance
of the plan. Since the membership participation was
typically fixed, any losses would fall to the employer or
the state unless specified otherwise by a plan amendment or
statute.
Representative LeBon asked whether it was not standard for
the investment risk to be shared between the state and the
participants. Mr. Kershner replied in the affirmative. He
added that the risk typically fell to the plan sponsors, in
the case of HB 79, the state.
3:34:41 PM
Representative Carpenter referenced the present market
conditions. He asked what would work under the present
market conditions. Mr. Kershner clarified that the plan
would not necessarily underperform. He explained that the
projections would differ from the analysis because the
plans asset values would not be as well funded as
currently projected, increasing plan costs. The cost for
the group would be higher than he calculated, which could
mean more funding might be diverted away from the DB trust.
However, he could not confirm that supposition nor comment
further without updated analysis. Representative Carpenter
asked if the additional cost would fall on the state or
members or both. Mr. Kershner responded that the members
contribution was 8 percent and could increase to 10 percent
at the discretion of the Alaska Retirement Management Board
(ARM). He elucidated that there was no automatic formula
for increasing member participation; it was a discretionary
decision. He spoke to a provision in the bill that would
automatically withhold the Post Retirement Pension
Adjustments (PRPA) if the trust fell below a 90 percent
funding level. The increase in the member contribution
would be a result of the board initiating a change.
Representative Carpenter asked whether the ARM Board would
act swiftly to increase member contributions based on poor
market performance. Mr. Kershner replied that there was no
simple answer to the question. There was no set provision
in the bill that provided a formula for how much the board
can increase the member contribution based on percentages
by how much the fund dipped under 10 percent. The board was
limited to the 10 percent limit and guidance was necessary
to determine how or if that would be raised incrementally.
3:38:47 PM
Representative Carpenter noted that the plan had levers and
mechanisms to ensure there were measures to keep the plan
solvent. He expressed hesitation in supporting the bill if
it was difficult to manipulate the levers when necessary.
3:39:30 PM
Representative Kopp clarified that the plan would start at
100 percent funded under any circumstances. He expounded
that members had to buy into the plan based on assets
already accrued and their value at the time. He concluded
that no matter what, the plan would start at 100 percent
funded. Representative Carpenter asked if, by starting at
100 percent, some employees might choose not to buy into
the plan. Representative Kopp responded in the affirmative.
Mr. Kershner added to Representative Kopps comments. He
relayed that the amount of service members would start at
when transitioning from the Defined Contribution (DC) to
the DB plan was not dependent on the assets, it had to do
with the present value or the liability associated with
their projected benefits, which was independent of whether
the plan was 100 percent funded. He expounded that the
amount of money that was used from a DC account was not
related to the asset amounts in the plan. Market
fluctuations causing asset losses would affect members DC
account balances, but it would not affect the assets of the
plan because the amount they had to transfer from the
account was dependent on the liability associated with
their service which was independent on asset values. In his
prior statements, he was attempting to point out that if he
performed a current analysis it could be different from the
analysis used for the fiscal note. He emphasized that his
point was that in a DB plan the risk of adverse asset
performance fell not to the participants but to the plan
sponsor due to the fixed contribution rates of the
employers. Any losses due to poor assets performance rests
on additional state contributions.
3:43:49 PM
Representative Carpenter asked if the losses had to be made
up by the state in the future when an employee retired.
Mr. Kershner answered that the following fiscal years
state contribution would be affected by present asset
performance. He provided an example of the assets dropping
by minus 25 percent in FY 20, consequently, the state
contribution would be affected beginning in FY 22 and for
several years after. Representative Carpenter wondered
whether he had a current projection of what the numbers
would be. Mr. Kershner replied that he did not perform any
projections based on recent market performance.
3:45:23 PM
Representative Josephson provided a hypothetical scenario
about transferring service credit. He deduced that based on
an analysis the employee would need to make the plan whole
and there would not be a year for year service credit. He
wondered if he was correct.
Representative Kopp responded that Representative Josephson
was correct.
Representative Knopp asked whether the plan would currently
have serious pension liabilities because of the market
downturn if the bill was enacted two months ago. He
wondered whether the state was better off for not acting on
the legislation sooner. Mr. Kershner replied that if he
currently perfumed the analysis the DC accounts balances
would be significantly lower for purchasing service. The DC
benefits at the time the fiscal note analysis was done (as
of 6/30/2018) were higher and presently would be
significantly lower, reducing the amount of service members
could purchase. He was uncertain of what the impacts might
be on the state contributions. He emphasized that the risk
to the state was increased in a DB plan versus a DC plan.
The asset decline over the prior week could produce
different results if an analysis were performed based on
current data.
3:49:45 PM
Representative Josephson thought Mr. Kershner's analysis
applied to all the tier plans. Mr. Kershner answered in the
affirmative. He added that the current additional state
contribution would be higher than what was previously
projected because the assets were lower.
3:50:21 PM
AT EASE
3:52:04 PM
RECONVENED
Representative Carpenter noted that Mr. Kershner had
commented several times about the current market conditions
versus at other times and how that affected the analysis.
He recounted that the HB 79 plan had levers and mechanisms
to keep the plan solvent and weather future downturns. He
wondered where the state would be currently.
3:53:26 PM
KEN TRUITT, STAFF, REPRESENTATIVE CHUCK KOPP, responded
that as directed by statute, the ARM Board would perform an
annual actuarial valuation at the close of the fiscal year
to determine how the plan was performing. The plan
administrators would currently be waiting for the
valuation. He reminded the committee that the annual
actuarial analysis was implemented with the creation of
Tier 4 because the state had gone a number of years without
an actuarial evaluation of asset performance. The annual
actuarial analysis was built into the Public Employees
Retirement System (PERS).
Representative Carpenter attempted to clarify his point of
view. He pointed out that the plan carried a high risk to
the state and thought the liability to the state would
increase. He emphasized that the present market downturn
would cost the state in the future. He voiced that the
levers and mechanisms did not provide him confidence they
would reduce the states risk in the future.
3:55:56 PM
Representative Kopp responded that the modeling showed a 5
percent growth in the fund over 10 years. He cautioned that
the discussion was gauging the plan with a micro focus on
current market conditions instead of looking at the
horizon. He speculated that the COVID 19 pandemic would
pass and the market would stabilize. The current situation
did not make Tier 4 any better or lessen the need for
change. He suggested that other similar plans were stable,
like the state of Washingtons Law Enforcement and
Firefighters Fund, which would weather the current storm.
The plan was funded at 110 percent. He thought the state
needed to look beyond the current storm and out to the
horizon to address the problem of retention. He maintained
that the plan was conservative. He characterized the
retention issue as high risk turnover and relayed that
Alaskas public safety agencies were operating in a crisis
mode because of it. He reiterated that the savings in
training dollars kept in the state was significantly
greater than the cost of the plan. He stressed that
conditions would stabilize. He advised against getting
caught up in the moment when deciding on the legislation.
3:59:02 PM
Representative Carpenter felt that it was not reasonable to
speculate that the current conditions would stabilize in
under 10 years. He emphasized that current events should
prove that increasing risk to the state with future
obligations was unwise. The state was still struggling to
figure out its long-term fiscal future. He stressed that
adopting the plan was a bad policy decision. He related a
story from personal experience having a conversation with a
policeman who preferred the Tier 4 plan. He suggested that
there were other ways to solve the recruitment problem
without the HB 79 plan.
4:01:42 PM
Representative Wool indicated that the current market
crash closely resembled scenario 3. [He referred to the
document titled PERS - 20-Year Projection of Additional
State Contributions (copy on file) discussed in a prior
hearing.] He noted that scenario 3 modeled a 5-year period
of zero growth followed by 5-years of 2 percent growth. He
relayed from the prior meeting that the scenario was dire
and unlikely. He assumed the markets would rebound over
time. He pointed to the scenario 3 projections for the Tier
4 plan and noted that the state had a $14.2 billion
[million] liability and under HB 79 that liability was
$15.8 [million]. He calculated that it was a difference of
1.6 percent. He offered that scenario 3 was dire and hoped
the current conditions were short-term. He wondered whether
under the current scenarios column on the document, the
levers were accounted for.
Mr. Kershner replied that scenario 3 was the only scenario
where the plan performed under 90 percent, which activated
withholding the PRPA benefits. However, the member
contributions were not increased due to the discretionary
feature of the mechanism under any scenario. Representative
Wool asked if the member contribution increased to the
maximum of 10 percent, would the states contributions be
lower under scenario 3. Mr. Kershner answered in the
affirmative and added that increasing member contributions
lowered the costs to the state.
4:05:37 PM
Representative Wool asked if the employee contribution were
increased under the current column of scenario 3 to the
maximum of 10 percent, would it alleviate the state's
lability. He wondered what the figure would be and if it
was modeled. Mr. Kershner clarified that under the
current column there were no adjustment to employee
contributions. The adjustments were only possible under the
HB 79 plan. He reiterated that under HB 79, the costs to
the state would be lower with increased employee
contributions. He indicated that it had not been modeled.
4:08:01 PM
AT EASE
4:09:13 PM
RECONVENED
Co-Chair Foster MOVED to report CSHB 79(FIN) out of
Committee with individual recommendations and the
accompanying fiscal note
Representative Carpenter OBJECTED.
Representative Josephson commented that he was confident
that HB 79 presented the best path forward for public
safety and the citizens of the state.
Representative Wool agreed with Representative Josephsons
comments. He pointed out that the levers and mechanisms
were not modeled under the current scenario. He ascertained
that they were a significant piece of the plan and wished
they had been modeled to better reflect the effects of the
plan.
Representative Knopp thanked the sponsor for his hard work
on the bill. He would not be supporting the bill because it
only addressed one group of employees. However, with the
comments made about the current fiscal situation, he was
not comfortable with voting in favor of the bill. He
believed that the markets were artificially inflated and
thought market growth would slow down.
4:12:23 PM
Representative LeBon appreciated the sponsor's efforts for
attempting to find a middle ground for a defined benefit
plan. He wished there were a mechanism that changed the
contribution rate to minimize the risk to the state. He
desired more future skin in the game on the part of the
plans members to increase their contribution rate and
share more of the risk with the state.
Co-Chair Johnston thought several good points had been made
by the committee. She hoped new actuarial reports would be
a part of the presentation on the floor and in the other
body.
Representative Carpenter believed a better solution existed
that did not impose risk on the state. He was opposed to
the bill.
Representative Carpenter MAINTAINED his OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Wool, Josephson, LeBon, Merrick, Ortiz, Johnston,
Foster
OPPOSED: Tilton, Carpenter, Knopp, Sullivan-Leonard
The MOTION PASSED (7/4). There being NO further OBJECTION,
it was so ordered.
CSHB 79(FIN) was REPORTED out of committee with four "do
pass" recommendations, three "do not pass" recommendations,
three "no recommendation" recommendations, one "amend"
recommendation and with one previously published fiscal
impact note: FN2 (ADM/Retirement Payments).
4:15:30 PM
AT EASE
4:16:00 PM
RECONVENED
Co-Chair Johnston indicated the committee would be hearing
HB 181 next.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 268 Southcentral Foundation Support 200313 .pdf |
HFIN 3/17/2020 1:30:00 PM |
HB 268 |
| HB 79 Public Testimony Rec'd by 031620 (2).pdf |
HFIN 3/17/2020 1:30:00 PM |
HB 79 |
| HB 79 Public Testimony Rec'd by 031820 (2).pdf |
HFIN 3/17/2020 1:30:00 PM |
HB 79 |