Legislature(2017 - 2018)BARNES 124
03/25/2017 01:00 PM House LABOR & COMMERCE
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| Audio | Topic |
|---|---|
| Start | |
| HB83 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 83 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 83-TEACHERS & PUB EMPLOYEE RETIREMENT PLANS
1:03:28 PM
CHAIR KITO announced that the only order of business would be
HOUSE BILL NO. 83, "An Act relating to new defined benefit tiers
in the public employees' retirement system and the teachers'
retirement system; providing certain employees an opportunity to
choose between the defined benefit and defined contribution
plans of the public employees' retirement system and the
teachers' retirement system; and providing for an effective
date."
1:04:04 PM
CHAIR KITO, prime sponsor of HB 83, noted it is a companion bill
to SB 52 sponsored by Senator Egan. He explained that HB 83
would establish a Tier V program that would allow state
employees and teachers to choose either a defined benefit or a
defined contribution depending on the employee's plans for
employment. Somebody intending to be employed and retire from
the State of Alaska might choose the defined benefit program.
Somebody coming into the system and planning to be there for a
short period of time before moving on might choose the defined
contribution program. He said the fiscal notes are still being
prepared so none are available at this time. However, he
continued, past actuarial activity indicates the proposal can be
accomplished with a reasonable savings to the state and in an
affordable manner that will increase recruitment and retention
of state employees and teachers.
1:05:09 PM
BIANCA CARPENETI, Staff, Representative Sam Kito, Alaska State
Legislature, presented HB 83 on behalf of Representative Kito,
prime sponsor. She said she will discuss some of the advantages
of a defined benefit (DB) system, touch on key safeguards that
HB 83 keeps in place from the current defined contribution (DC)
system, and touch on some of the notable components of the bill
itself. She stated that the fiscal notes would be provided to
committee members once finalized.
MS. CARPENETI explained that a defined benefit (DB) system is a
defined pension paid for from a pension trust. This type of
system provides a secure and predictable retirement income, she
said. In contrast, a defined contribution (DC) system is
essentially an individual's retirement savings account. These
accounts are often described as participant directed in that the
individual decides how to save, how to invest, and how to
withdraw the funds upon retirement.
MS. CARPENETI reviewed the strengths of a DB system. She said
the first strength is that DB systems give more "bang for the
buck" in that they are more economically efficient. The biggest
economic efficiencies that drive cost advantages for DB plans
are longevity pooling, portfolio diversification, and enhanced
investment returns from reduced expenses from economies of scale
and professional management of assets. A pension trust has to
save for the average lifespan, she noted, whereas an individual
has to self-insure longevity risks and save for the maximum life
expectancy. Maintenance of portfolio diversification leads to
higher investment returns and broad diversification is a tenant
of modern-day portfolio theory, she continued. Open DB systems
are long lived with a perpetual investment horizon, whereas in
DC plans an individual's sensitivity to risk of financial market
shock increases as he or she approaches retirement. Risk is
harder to bear for DC individuals as they age. Regarding
enhanced investment returns, Ms. Carpeneti said it is hard for
an individual in a DC system to match the performance of
investments under professional management in a pension trust.
Another economic benefit of a DB system, she pointed out, is
that it acts as an economic shock absorber. For instance, last
year the DB system paid out roughly $1 billion to Alaskan
residents, which in turn benefited the state's economy. It is a
predictable income stream for recipients and for Alaska.
MS. CARPENETI said the second strength of a DB system is the
issue of choice. She related that Alaska's public employees and
teachers for the most part don't earn the private sector's
defined benefit of Social Security and many even lose Social
Security benefits they earned in past jobs. So, for many
people, a defined benefit pension makes sense. Alternatively,
though, a DC system makes sense for those people who prefer the
flexibility, portability, and control. She noted that HB 83
leaves in place a DC system for the state, thereby preserving
that choice for employees.
MS. CARPENETI stated that the third strength of a DB system is
the issue of recruitment and retention. Turnover of teachers
and public employees is an issue in Alaska, she pointed out.
When turnover happens, the state bears the cost of recruiting
and training qualified staff. Too often, she added, skilled
individuals are enticed to leave Alaska for positions that offer
defined benefit plans.
MS. CARPENETI addressed the key safeguards that HB 83 would keep
in place from the DC plan that was established by Senate Bill
141, passed in 2005. She said the first safeguard that would be
kept is the Alaska Experience Studies. The system's actuarial
adjustments would use data from Alaska rather than data from
national analyses, keeping the system better aligned with the
reality in the state of Alaska. The second safeguard that would
be kept, she continued, is to maintain the second actuarial
analysis. It is crucial to have a second review on this system,
as was demonstrated by the state's experience of receiving poor
actuarial advice from Mercer Inc. The third safeguard that
would be kept, she stated, is the Alaska Retirement Management
(ARM) Board, which has a fiduciary responsibility for the assets
of the state's retirement systems.
MS. CARPENETI reviewed the sections of HB 83. Sections 1-11,
she explained, deal with the Teachers Retirement System (TRS),
notably establishing the new defined benefit plan, Tier IV, in
Sections 1-8. Sections 12-23 deal with the Public Employees
Retirement System (PERS), likewise establishing the new defined
benefit, Tier V, in Sections 12-20.
MS. CARPENETI pointed out that source statute requires some
technical differences in the drafting, but that overall both DB
systems include five elements. The first is that an employee
cannot participate in both plans at once. The second is that
the employee contribution is set at 8 percent while leaving
prior tier employees contributions unchanged. The third is
that a person receiving disability benefits under the DB tier is
required to seek work and to receive an occasional medical
examination; this also matches the DC plan. The fourth element
is that the eligibility standards for retiree medical benefits
are established in the DB tier in Section 8 for TRS and in
Section 18 for PERS. Notably, Ms. Carpeneti said, these two
sections set out the premium share schedule for retirees to pay
a portion of their health insurance premium and require
actuarial adjustment to keep the pre-funding rate of the new DB
tier no higher than the cost of the DC plan. Unlike the old
system, this premium share schedule ensures that employees have
skin in the game. Additionally, this premium share schedule is
a key part of the bill's cost savings. For most folks the state
wouldn't be paying the pre-Medicare coverage, which is the most
expensive and most unpredictable element of retirement
healthcare. In effect, Medicare Supplement is cheaper than
major medical coverage. The fifth element, she said, is said is
that the bill defines the choice of DB versus DC for newly hired
employees as a one-time, irrevocable choice. So, employees
cannot be switching back and forth between the two systems.
MS. CARPENETI continued her overview of the bill's provisions.
She said Sections 25 and 26 outline the conversion option and
the process. The bill itself, she noted, offers a one-time
conversion option for employees who are currently in the DC
system who want to change to the DB plan. Section 26, she
continued, outlines the actuarial process for that conversion.
It is notable that this process is set up so that it does not
create new unfunded liability. She said the remaining sections
of the bill detail the regulation and effective dates.
1:13:04 PM
REPRESENTATIVE BIRCH requested a recap of the percentage that
would be set aside for medical, retirement, and the social
security alternative for a new employee making $100,000 a year.
MS. CARPENETI replied she doesn't have the breakdown in front of
her for each of those. However, she said, the pre-tax employee
contribution for Tier IV in PERS and Tier III in TRS is 8
percent for all employees.
REPRESENTATIVE BIRCH calculated that an employee making $100,000
a year would have $8,000 come out of that and would go to PERS
Tier I.
MS. CARPENETI clarified that this is for Tier IV for PERS and
Tier III for TRS.
REPRESENTATIVE BIRCH asked whether there would be a Social
Security equivalent [such as the] Supplemental Benefit System.
MS. CARPENETI responded that for the most part public employees
and teachers do not pay into Social Security, but there is the
state's Supplemental Benefit System (SBS) component. She noted,
though, that she doesn't have that information in front of her.
CHAIR KITO suggested this question be asked of someone from the
Department of Administration.
1:15:33 PM
REPRESENTATIVE BIRCH restated his question regarding the benefit
contributions, including medical, retirement, SBS, individual
retirement accounts (IRAs), and deferred compensation.
KATHY LEA, Chief Pension Officer, Division of Retirement and
Benefits, Department of Administration, answered the question
for each of the state's three groups of employees - State of
Alaska employees, political subdivision employees, and teachers.
She explained that for State of Alaska employees the State of
Alaska does not participate in Social Security and instead uses
the Supplemental Benefit System (SBS) as a replacement, to which
employees contribute 6.13 percent of their base salary and the
State of Alaska as the employer matches that contribution. For
the PERS Defined Contribution Retirement (DCR) Plan, employees
make an 8 percent contribution and as the employer the state
makes a 5 percent contribution. As well, the state has a 457
Plan to which an employee can contribute a minimum of $50 a
month in a pre-tax option or a post-tax Roth option, but for
which there is no employer match. Ms. Lea said the state has 20
political subdivisions that participate in the SBS Annuity Plan,
with employees contributing 6.13 percent and the employer
providing a 6.13 percent match. These employees also pay 8
percent and the employer 5 percent [to the PERS DCR Plan]. Each
employee would be a member of whatever 457, 403(b), or 401(k)
plan that is offered by their employer. She noted that about 70
small employers in the state do not participate in Social
Security and use PERS as their Social Security replacement. Ms.
Lea said teachers pay an 8 percent contribution to the DCR Plan
and their employers pay 7 percent. Teachers can participate in
the 403(b) plans offered by their school districts, as well.
REPRESENTATIVE BIRCH inquired as to the matches for police,
fire, and other people in public safety today and how they might
differ from Tier I.
MS. LEA replied that there is no difference in the contribution
for police and fire versus all other employees. However, she
said, they can retire and meet eligibility for medical benefits
with 25 years of peace officer or fire fighter service.
REPRESENTATIVE BIRCH asked whether the 6.13/6.13 percent SBS
contributions are put into an accumulating annuity account.
MS. LEA responded that 100 percent of the contributions of both
the employee and the employer go into the employee's investment
account. The employee can choose which investment among 25
investment options to put their money in, and if they make no
choice they're defaulted in an age-based target date fund.
1:20:50 PM
REPRESENTATIVE KNOPP requested a description of the components
of the Defined Contribution Retirement (DCR) Plan. He further
asked whether it is substantially different than what is being
proposed in HB 83.
MS. LEA answered that the DCR Plan is a hybrid plan that has DC
annuity benefits, along with defined benefit components in the
occupational death and disability benefits and in the medical
benefits. In the DC component, she said, the employee can
invest his or her contribution and the employer's contribution
in any option the employee chooses. The plan offers investing
advice and financial assistance for employees who need more
information or who want help to manage their accounts, or for a
fee of 0.45 percent employees can choose professional management
of their accounts. On the occupational death and disability
side, she stated, a member suffering an occupational disability
is provided a monthly benefit that is the same calculation as
the Tier III PERS DB Plan. This benefit would be received until
the member reaches Medicare age. While receiving the benefit
the member's employer must pay its contributions and the
employee's contributions to the employee's annuity account and
the employee cannot withdraw his or her annuity account until
reaching Medicare age. Ms. Lea said the same is true for the
survivor benefit for an occupational death. The survivor
receives a monthly benefit just like the Tier III would have
been, and in that case in the disability and survivor benefits
there is a difference for police and fire. All other members
receive 40 percent of their salary while the police and fire
receive 50 percent. The survivor receives that until eligible
for Medicare and during that time the employer is making
contributions to the annuity account based on the employee and
employer contributions. Then, at the time that the disability
or the survivor benefit stops, the member has access to that
account.
REPRESENTATIVE KNOPP asked whether the benefits would stop at
the Medicare eligibility age of 65 and the employer would
continue making contributions until the person reached age 65.
MS. LEA replied yes, the employer would continue to make those
contributions until the member or survivor reaches Medicare age.
She noted there are also contributions that go into the health
reimbursement arrangement that employees have. This helps them
pay for either their premiums when they reach Medicare age or
for any other qualified medical expenses they may have.
1:24:35 PM
CHAIR KITO inquired whether survivor benefits and disability are
provided with or without having to opt-in for them on payroll.
MS. LEA responded that they are provided automatically. The
employer contributes to those accounts every pay period on
behalf of the employee, she explained. The employee does not
have to opt-in to that coverage.
1:25:23 PM
REPRESENTATIVE BIRCH asked whether the committee would be having
a discussion regarding the current liability of PERS/TRS.
CHAIR KITO replied that such a discussion could be had. In
further response to Representative Birch, he confirmed that a
fiscal note for the bill has not yet been received.
CHAIR KITO opened invited testimony.
1:26:12 PM
BAILEY CHILDERS, Executive Director, National Public Pension
Coalition, testified in support of HB 83. She stated that
America is in the midst of a retirement security crisis. A
recent Pew Charitable Trust study, she related, found that only
60 percent of workers in the state of Alaska have access to a
retirement savings vehicle through work and many more workers
are financially unprepared for retirement. For public employees
like teachers, fire fighters, and nurses, a secure retirement in
Alaska has unique challenge because a majority of those workers
are not eligible to participate in Social Security. She said HB
83 is an important bill and would re-open Alaska's pension to
public employees while offering flexibility for workers. She
urged the committee to advance the bill.
MS. CHILDERS discussed two reasons why it is important to offer
a pension option to fire fighters, nurses, and teachers. First,
she said, in a state where public employees are not eligible for
Social Security a pension provides a more secure retirement.
Pensions are pooled, professionally managed accounts where risk
is shared between the employer and employees so no one
individual employee will be left to the whims of the market,
like many were during the 2008 recession. A pension provides a
guaranteed monthly benefit upon retirement, much like Social
Security, and this regular payment that a worker can count on is
critical to security in retirement. Ms. Childers said the
second reason a pension option is important is that pensions are
more cost effective for the state, an important consideration at
a time when Alaska is experiencing multi-billion-dollar
deficits. She related that in 1991 West Virginia closed its
defined benefit pension plan for teachers and put new hires into
a defined contribution 401(k) style system. With no new member
contributions, the unfunded liability in the teachers'
retirement system grew and by 2005 the plan fell to a funded
status of 25 percent. When West Virginia began studying the
option of re-opening the defined benefit plan, she continued, it
found that the normal cost of the teachers' retirement system
was half the required employer contribution to the defined
contribution plan. So, West Virginia re-opened the teachers'
retirement system in 2008 and 78 percent of teachers switched
back to the defined benefit plan. By July 2013 the plan
achieved a funding status of 58 percent and is expected to be
fully funded by 2034.
MS. CHILDERS recalled that Alaska had unique problems with its
pension system in the early 2000s when errors made and covered
up by an actuary resulted in a large unfunded liability. The
state should have been paying more each year for its annually
required contribution, she explained, but the actuary had
miscalculated that figure for years. Alaska won a judgment
against the firm but still had a large unfunded liability to
address. However, she continued, closing attention exacerbates
rather than solves underfunding. West Virginia experienced this
as well and went back to offering a defined benefit to its
teachers. Correcting these errors of the past, she said, will
be beneficial for the state budget and the fire fighters,
teachers, and other public employees who serve the state.
1:30:00 PM
REPRESENTATIVE KNOPP shared that he has received many e-mails
that reference the lack of employees being able to make Social
Security contributions. He asked how Alaska's Supplemental
Benefit System (SBS) is advantageous to the federal system.
MS. CHILDERS replied that she would get back to the committee
with an answer that provides various comparisons. She noted
that about 25 percent of public employees across the U.S. do not
receive Social Security.
1:31:37 PM
REPRESENTATIVE BIRCH inquired whether Ms. Childers has a sense
of the movement away from or toward a defined benefit program
within the private sector such as Fortune 500 companies.
MS. CHILDERS responded she doesn't have those numbers but said
there has been some movement away from defined benefit plans in
the private sector. She opined that that is part of what is
contributing to the overall retirement security crisis in the
U.S. The 401(k) by itself has proven not to be a great vehicle
for average workers to accumulate the savings they need in
retirement, and the average balance of those accounts is
inadequate for retirement. The accounts in most states took a
big hit with the recession, she continued. Pensions suffered
just as individual accounts did, so states have looked at their
defined benefits plans, and many have made adjustments, but most
states have decided to stick with their defined benefit for
several reasons. Some are more applicable to the public sector,
she said, but the recruitment and retention of employees is a
big driver for the public sector, as well as the cost
efficiencies of providing a defined benefit. When looking to
provide a certain level of retirement security for public
employees, a pension is the more cost-effective way to do that.
She offered to provide more information if requested.
REPRESENTATIVE BIRCH said it would be helpful to have the
information given the state relies on taxpayers to support its
state and local governments, and certainly at a national level.
For people who don't work in the public sector, he said, it
would be helpful to find out how that is trending and how it is
working. He suggested that looking at Fortune 500 companies
would be a good place to start.
MS. CHILDERS agreed to do so. She stated that a great thing
about the pension is that it is a cost-effective way for the
taxpayer to be able to provide employment to public employees.
CHAIR KITO pointed out that employees in the private sector that
have a 401(k) are also eligible for Social Security, and
therefore they do have a defined benefit in a sense. So, he
continued, they have Social Security regardless of whether that
401(k) program is working.
1:34:24 PM
CHAIR KITO inquired whether there are studies or information
available about how well the 401(k) programs for retirement have
been preparing workers for retirement.
MS. CHILDERS answered that there is a lot of information and it
is not a good picture for most people. She said she believes
that the average 401(k) balance is only about $18,000. The
National Institute for Retirement Security, she added, has
looked at preparedness for retirement, plus she has information
as well. It has been found that for most American workers a
401(k) is not getting them where they need to be in retirement.
The State of Michigan, she related, put its state employees in a
401(k) system in 1997 and the median account balance for the
folks who have been in this system for 20 years is around
$36,000 and the average is around $76,000; for people nearing
retirement it is a bit higher. When looking at a length of 10-
20 years of retirement, those balances are not getting where
they need to be. Even if a person buys an annuity with his or
her 401(k), the amount of money that would be received each
month would not be enough to cover basic expenses. She said she
would provide the committee with the Michigan study.
CHAIR KITO responded that he would like to receive the study for
distribution to committee members.
CHAIR KITO opened public testimony on HB 83.
1:36:50 PM
JUSTIN HERNANDEZ, Officer, Anchorage Police Department Employees
Association, testified that HB 83 is a fantastic bill. He noted
he is a college-educated person, lifelong Alaskan, and employee
in law enforcement, and will soon become vested. Lower 48
departments, he advised, are actively recruiting Alaskan
officers because they understand that law enforcement training
in Alaska is very good. Recruits to Lower 48 departments can
buy back their time in a defined benefit package, he noted. The
Lower 48 departments are basically getting an officer that has
been trained at the financial burden of the State of Alaska, so
Alaska is becoming a training ground. He said he has seen this
firsthand with colleagues who know that once they get vested at
their five-year mark, they can take all that money with them to
another department that has a defined benefit program, which
does not help recruitment and retention in Alaska. He said HB
83 would give Alaska the ability to compete with these Lower 48
departments. As a lifelong Alaskan, he added, he doesn't want
to leave but eventually he must do what is good for his family
and if other departments are recruiting that can be an issue.
1:39:30 PM
AARON PETTUS, Officer, Anchorage Police Department, testified
that a defined benefits program is extremely important to him.
He said he came from a larger law enforcement agency in Los
Angeles where he had a pension, which was enormous if an officer
stayed 30 years because the pension was light at the end of the
tunnel. Pensions allow for sense of security, he explained. An
officer can leave his or her career knowing there will be a
stable and predictable source of income in retirement after
sacrificing countless hours away from his or her own family,
missing important events, and everything else that comes along
with being a public servant. Pensions benefit the employee as
well as the employer and they act as a recruitment and retention
tool, he advised. Not only do they grow the applicant pool,
they allow for employers to compete with other agencies that
offer more than just defined contributions. Even in his short
year and a half at the Anchorage Police Department (APD) he has
seen the department invest immense amounts of man hours on
recruiting applicants and training recruits just to see them
take their quality training elsewhere that offers them better
benefits. As crime, violence, and terrorism increases, officers
are being asked to do more. The Anchorage Police Department
wants to be able to compete and even increase its competitive
edge, Mr. Pettus said, and a defined benefits plan would be a
great start in helping retain quality employees.
1:41:11 PM
DAVID BRIGHTON, President, Kenai Peninsula Education
Association, testified in support of HB 83. He said committee
members probably would not hear from many friends of his that
are teachers because many of them have left the state. With a
defined contribution, teachers work in Alaska for a few years,
become vested in a short time, and then leave the state. Alaska
is losing many of its best and brightest teachers because after
a few years they realize that they may never be able to retire.
He shared that he has been working as a teacher for about 10
years and has a little over $80,000 in his retirement account.
He calculated that if he worked another 20 years, he could
retire with about five or six years before he dies. Of course,
he continued, he doesn't know when he is going to die so he
doesn't know when he will ever be able to retire. If he had the
option of being a member of Social Security, it would be much
easier because he would have two sources of income, one of which
would be a defined benefit that he doesn't now have. It is
difficult being a teacher in Alaska, he stated. While he loves
Alaska and his students, and loves working with students and
teachers, he has begun looking for other jobs even though he
doesn't want to leave. He said he recently applied to a
different job because he knows he cannot stay in the course he
is in and ever plan on a retirement system. This makes him sad
and he knows there are many others in the same position, he
continued. Alaska is losing teachers and other public service
employees because they cannot rely on a stable retirement income
source. He strongly urged that HB 83 be passed.
1:43:54 PM
JACOB BERA, Teacher, testified in support of HB 83. He offered
his belief that HB 83 would help attract qualified educators
that are needed in Alaska, as well as address the problems of
teacher turnover and the high cost of education. He noted that
he has testified on previous retirement bills and talked about
the data of the large number of teachers who have left the
profession in Alaska. The numbers that he has seen are that 65-
70 percent of teachers working in Alaska come from out of state.
The state is hoping that those teachers are the most qualified
and are willing to stay. The state is also hoping that they
want to work and live in communities that need them most. But
that is the problem, he opined. Alaska's retirement plan for
public employees is having a direct impact.
MR. BERA related that when he and his wife decided to move to
Alaska in 2003, he had just finished his teaching degree program
along with his service in the U.S. Marine Corps Reserve. He and
his wife were excited to start their new adventure and were
attracted to the beauty of Alaska and to start a family. They
did their research and factors that were important to them were
job security, pay benefits, and the retirement plan. In 2003 he
and his wife had the option to participate in the defined
benefit plan, which is important to them. In weighing that,
they also noted that health care costs in Alaska were much more
expensive, but they were still willing to take the risk of
moving to Alaska to try it out. So far, he continued, he and
his wife are blessed to still call Alaska home and have three
kids.
MR. BERA pointed out that the case has been very different for
too many of his colleagues. One teacher who worked with
challenged students at Service High School recently left because
of the lack a secure retirement. Another couple, both teachers
with kids, moved back to the Midwest because it was more
competitive, secure, and closer to home. Young colleagues at
his school are watching this issue, he related, hoping that
something will change, and weighing their options. Yesterday he
said in a meeting with a special education teacher of two years
who is already one of the most inspiring and effective teachers
he has ever come across. He stressed that Alaska needs to keep
folks like this young teacher.
MR. BERA said he and his wife are still weighing their options,
given that the Midwest is a very attractive place to teach and
their kids would grow up closer to family. He and his wife are
trading a lot to build financial security for their family and
serve Alaska's students. But, he emphasized, if the defined
contribution plan was the only option, he and his wife would
already be gone. Too many of his colleagues have already made
that choice, he said, and he believes retirement plays a big
role and HB 83 would go a long way to help address that.
1:46:55 PM
LADAWN DRUCE, Teacher, testified in support of HB 83. She noted
that she is currently in Barrow serving as a long-term
substitute school counselor at an elementary school. She said
she is in favor of HB 83 even though it doesn't affect her
personally because she is a retired Tier II teacher and her
husband is a retired Tier I teacher. However, she continued,
having been in Alaska since 1993, she knows people in education
who have left the state because of not having a defined benefit.
As with the police, Alaska is a training ground for teachers.
Teachers come to Alaska, have a wonderful experience, and get
wonderful training, and then - when they reach that fifth or
sixth year and become fully vested in the DC system - they
leave.
MS. DRUCE noted that prior to Mr. Brighton, she was president of
the teachers' association in the Kenai Peninsula Borough School
District, and five years ago over 50 percent of the Kenai
Peninsula's teachers were in the Tier III level. She offered
her understanding that 50 percent in Tier III is the current
level statewide. She pointed out that the State of Alaska
changed the regulation that disallowed a retired teacher with a
lifetime certificate from being able to substitute for 20
consecutive days up to 120 days and said she surmises this was
to address the shortage of teachers. Teachers are leaving
Alaska because they literally cannot afford to stay in a state
that doesn't offer some type of defined benefit, she said. She
urged the passage of HB 83.
1:49:29 PM
TOM WESCOTT, President, Alaska Professional Fire Fighters
Association, testified in support of HB 83 and a return to
defined benefits. He said his association represents fire
fighters around the state. Most fire fighters in Tier IV are
neither covered by Social Security nor SBS, nor are they allowed
to join. "Those decisions," he pointed out, "were made prior
when we were in the DB system and cannot be revisited." He
noted that a fire fighter in Fairbanks places 8 percent into a
401(a) and the employer matches with 5 percent, which is less
than Social Security. He further pointed out that there is no
distinction between public safety and any other career field, so
the shorter duration with the physical demands of public safety
are not considered.
MR. WESCOTT said that with the advent of Tier IV the state
created a more expensive vehicle to save for retirement with
higher fees. It put in less money and put amateurs, the
employees, in charge of investment decisions and gave fire
fighters one short career window in which to make what they need
to be self-sufficient in retirement. Pensions aren't magic, he
continued. Today after the great recession, the dotcom bubble,
and other market hiccups, a look around the country will find
fully funded, well managed plans in Wisconsin and the Washington
state employees fire plan. It is about doing the right thing -
reasonable benefits. Benefits of a defined benefit system
include pool risk, professional management, and lower fees due
to economies of scale. Additionally, he noted, over 60 percent
of the benefits paid out come from market returns, not
contributions. He encouraged returning to a defined benefit
system because the 10 years of experience with the current
systems is not tracking to put people on a path to being self-
sufficient in retirement.
1:52:15 PM
JIMAEL JOHNSON testified in support of HB 83. She noted she
works for the State of Alaska Department of Health and Social
Services [but is speaking on behalf of herself]. Like other
witnesses, she said, she is experiencing the effects of the
defined contribution system versus a defined benefit system.
Many of her colleagues have chosen to leave state employment
after five years of service, she related, and some left the
state with all the money that they had earned. The turnover
rate of caseworkers for the most vulnerable population is
extremely high, causing a great deal of problems within the
department as well as the community. She stated that HB 83 is a
good alternative to what the state has right now.
1:53:52 PM
NADINE LEFEBVRE, Southeast Representative, Alaska State
Employees Association (ASEA), testified in support of HB 83.
She noted that she is speaking as a Tier III employee. Almost
half of ASEA's 8,000 members are in Tier IV, she pointed out,
and there is a high turnover of almost 30 percent per year in
the workforce. With that kind of turnover comes the expense of
recruitment and retention - it costs nearly one-third of an
employee's annual salary to train them and bring them up to
speed, so they can become productive and adhere to program
integrity.
MS. LEFEBVRE advised that most Tier IV folks are young people
who are looking to establish themselves in the future. After
five years they can take that money and invest in another state.
This is not an opportunity for them to invest in Alaska. She
further advised that with these Tier IV contributions the money
is not being put back into the people who are drawing from Tier
I, Tier II, and Tier III. This undermines the state's own pre-
existing systems, which is true folly. She noted that employees
who are in a defined benefit system and retire in the state are
contributing and reinvesting in Alaska's economy. They pay
property tax, sales tax, contribute to the school systems, and
do volunteer work in every community. Retirement pensions gave
$1.7 billion to the Alaska economy in 2010, she reported, and
these retirees still contribute to the workforce in the state.
She stated ASEA's support for HB 83.
1:56:06 PM
REPRESENTATIVE BIRCH asked whether Ms. Lefebvre has a sense of
how many of her neighbors were not in the public sector and
receive a defined benefit plan from the private sector.
MS. LEFEBVRE replied that while there are retired people in her
neighborhood, they don't talk about their personal retirement.
She said there are so many instruments of investment opportunity
in the marketplace today that people must look at what their own
personal situation is to see if an individual retirement account
(IRA), Roth IRA, or a supplemental 401(k) might work for their
family depending on their income now and proximity to the
retirement of the primary wage earner. So, she added, while she
cannot speak to that as a program issue, it is good to know that
people in her neighborhood are keeping their homes.
1:57:26 PM
ALICIA HUGHES-SKANDJIS testified in support of HB 83. She said
she is a State of Alaska Department of Health and Social
Services employee but is speaking on behalf of herself. She
said she feels like she is the poster child of somebody who
might benefit from this legislation. She has been employed by
the state for almost four years, is well trained, and has a good
skill set thanks to the state's training and expense. But she
is at a crossroads of deciding, she continued. She loves Alaska
and has been in the state for 13 years. It is not about whether
she stays in Alaska, but whether she stays in state service. In
some ways, she said, she thinks it might seem like a volatile
time, it almost seems like an ask from a public employee, but in
her opinion this is actually the perfect time to switch to
something like HB 83 because there are lots of dedicated state
employees and public employees of all kinds who want to keep the
jobs they have and want to think of them as a career.
MS. HUGHES-SKANDJIS said she knows several people in the private
sector who lost a lot of money as they were nearing retirement
age due to recent economic events. A sharing between the state
and the individual of that volatility and risk, she continued,
would be enough of a guarantee for her to be able to contribute
to the economy by buying a house or a better house. The bill
would benefit her personally as well as benefit the state. She
is a union steward, she noted, and her moment of trying to
decide is quite common. She related that she works with some
Tier I employees in her office, but that the rest are Tier IV
and many of them are staying until about three years when they
have a better-looking resume.
REPRESENTATIVE KNOPP stated Ms. Hughes-Skandjis is the perfect
candidate for this discussion because she is in that age group.
He said he remembers when in the private corporate world, the
switch was made from pensions to defined contributions. One of
the arguments was that the new generations didn't stay in the
same position long and at that time there was a lot of advocacy
for defined contributions because employees could just pick up
and go whenever they were ready, which happens a lot today
unlike in his early years. But, he continued, if employees
didn't have the option to just pick up the money and leave, they
might be more inclined to stay and see it through to the end if
they had a long-term pension that they couldn't touch until
retirement age. While he doesn't doubt that people close to
retirement age lost a lot of money recently in the markets, he
said that that is somewhat the same issue that got the state in
trouble with its current PERS/TRS situation.
REPRESENTATIVE KNOPP stated that there are pros and cons with
both types of systems and that many people say the SBS is much
superior to Social Security. He posed a scenario of an employee
making $60,000 a year with a contribution rate of 6.13/6.13 for
a total of 12.26 percent over 30 years. He calculated that with
no compounded interest and no investment returns, the actual
contributions would total about $225,000 in 30 years, which
could end up at $500,000 with interest and returns after 30
years. He further calculated that if at age 65 the employee
began withdrawing $4,000 a month, [the money] would last 10
years. He said he is looking forward to the fiscal analysis to
see whether it is really a better system and added that he is
not convinced that Social Security is a better system than what
the state has. He inquired as to what state employees think
about the SBS versus [Social Security].
MS. HUGHES-SKANDJIS answered she doesn't have any numbers in
front of her, but that she thinks Alaska's current package is a
cut above what exists in the Lower 48 and she further thinks
that people who have the SBS are aware of that. She said she
would think that Alaska would want to hold to that standard of
being a cut above.
2:04:16 PM
REPRESENTATIVE BIRCH opined that at times the mobility aspect is
good. He related that 20 years ago friends of his in the oil
industry called their defined benefits the "golden handcuffs"
because they didn't give the latitude. The benefits would be
substantially reduced if a person retired even one day prior to
reaching retirement age or timeline. He said people he knew
were happy when it went to a linear line where if they left at
any point along their career, they could take the money that had
accumulated. He allowed that this does put more onus and
responsibility on the individual. He inquired whether the state
provides counseling and guidance to employees regarding
retirement and benefits.
MS. HUGHES-SKANDJIS replied that in her experience the [Division
of Retirement and Benefits] does a great job of informing
employees. She said it is almost a "you can lead a horse to
water" situation in that she doesn't think a large segment of
the average Tier IV state worker is taking advantage of that.
She noted that she has attended training sessions and made
appointments to talk to the division. Regarding golden
handcuffs, she said she doesn't think she would be speaking in
support of this if it were not a choice because it isn't right
for everybody. She knows people who are happy with how it is
and have their life charted out, she continued, and providing a
choice is valuing the employee.
2:08:03 PM
PATRICK ROACH, Teacher, testified in support of HB 83. He said
he is currently an English teacher at Thunder Mountain High
School in Juneau. He has been teaching for ten years, eight of
them within Alaska, and he has received three Teacher of the
Year awards during that time, he noted. He has lived in Alaska
for 20 years and received his undergraduate at the University of
Alaska Fairbanks (UAF) and his masters at the University of
Alaska Southeast (UAS). He loves Alaska and he loves teaching,
he continued, but is seeing many alarming trends in education in
Alaska. The pupil to teacher ratio is rising as teachers are
cut, electives are dying, and more and more students are
receiving instruction from digital sources and taking classes
where they never interact with a certified teacher, he related.
Local teacher unions all over the state are accepting contracts
that don't even keep up with inflation, much less the rising
cost of health insurance premiums. None of this bodes well for
teachers.
MR. ROACH stated that because he loves teaching, he could deal
with the aforementioned if he knew his future was secure and
that after putting in 20 or 30 years, he was guaranteed some
sort of retirement. However, he continued, he is Tier III and
therefore that is not the case. With such an uncertain future,
he related, it is hard to hear from a friend who is a principal
in New York City that with his resume she could find him a job
making $81,000 per year with a guaranteed pension. That is an
instant pay raise and a defined benefit, he said, and he'd never
have to fear losing 40 percent of his retirement overnight as so
many did in 2008. When he got into teaching 10 years ago, he
was told that to teach in Anchorage, Fairbanks, or Juneau,
Alaska, a teacher would first have to do their time in a rural
area, but this is no longer the case. And just as Alaska's
rural areas were once the proving ground for its urban centers,
Alaska will become the proving ground for Lower 48 teachers, he
advised, and he has already seen it happen. Just last year one
of Juneau's best young teachers left to work in [Washington,
D.C.] because he couldn't count on his job in Alaska and because
D.C. offered a pension. To attract and retain quality teachers
for the children of Alaska, he said, they need to be offered a
future.
2:10:07 PM
REPRESENTATIVE BIRCH asked whether there is a number per hour
per year or rate that could be used to offset an employer-
provided pension; for example, if earnings were twice as much a
year. He asked whether it is too much for the employer to
expect that employees would have the initiative to set aside for
themselves for their future; in other words, that the onus be on
the employer.
MR. ROACH replied that fear of a market crash happening again is
always present. Regarding the earlier mention of compound
interest, he pointed out that a financial advisor at the rate of
0.5 percent adds up to a lot. The state has economy of scale,
he said, and because as a teacher he does not have SBS, the
uncertainty of his 403(b) is what scares him. He intends to
stay in Alaska, he continued, but he has already informed his
principal that next year is his last year of teaching in Alaska.
A lack of pension was definitely a part of his reasoning.
REPRESENTATIVE KNOPP allowed Mr. Roach made some good points.
He related that when he was employed in the private sector, he
made 401(k) contributions. But the financial world has changed,
he noted. It used to be that good stock and mutual funds could
be purchased a good rate of return and could be counted on.
Regarding the talk about uncertainty for Mr. Roach as well as
for anybody planning for retirement, he allowed there is
uncertainty in the overall financial markets today, unlike years
ago. He said that years ago he quit using financial investors
and fund managers and started doing it himself because they were
making more money every year than he was. He said he doesn't
think the state's contribution rates under the SBS and defined
contributions are bad. But, he continued, not everybody is a
financial genius and it takes a lot of work to understand how to
invest money and he has always thought that was one of the
downfalls of the current 401(k) system. He inquired whether Mr.
Roach thinks the financial world as it is today is a big
contributing factor to people's unrest versus what the state
actually contributes to the plans.
MR. ROACH replied that he would say so. He said the union and
the state do a good job of offering choices and services as best
they can, but still there is that overall uncertainty with the
market. Regarding being asked for his working life to put in 30
or 40 years, he countered with the question: "Is it too much of
me to ask the state to assume the liability of my retirement, to
take that burden if I'm going to take on the burden of educating
its children?"
CHAIR KITO stated that risk sharing is one issue, but pooling is
a big issue. As a person putting money away in a 401(k), he
said, he doesn't know how long he is going to live, so he is
trying to plan for an outcome of living to 90. Right now,
however, he is planning on living to 80 because that is as far
as his money gets him and family-wise that's the age many of his
relatives have lived to be. When saving individually in a
401(k), he opined, everyone is being asked to estimate how long
he or she is going to live, and the tendency is to put money
into it at an accelerated rate to ensure getting the retirement
that is being asked for. A benefit of a pooled plan, he noted,
is that actuarial age difference is spread across many people,
providing the ability to invest differently to bring a return to
cover that inevitability.
2:16:04 PM
AMBER BARNEY testified in support of HB 83. She noted she is a
Tier IV employee with the State of Alaska Department of Revenue
[and is speaking on behalf of herself]. She further noted that
her brother is a law enforcement officer with the Anchorage
Police Department. She said she has been with the state for
about three years and her brother with the Anchorage Police
Department for just over two years. She loves Alaska and her
job, she continued, but in less than two years she will be
vested with the state and at that time she has intention of
going elsewhere because there is no incentive for her as an
employee to stay with the State of Alaska.
MS. BARNEY recognized that some people like to pick up and move
and that others like being able to have a defined benefit plan.
However, she said, the issue is that right now there is only one
option, which is a defined contribution plan and there is no
incentive. Currently [the state] is in a fiscal crisis and is
spending approximately one-third of an employee's annual salary
for recruitment and training costs. For public safety employees
the state spends about $150,000 to train each employee.
However, she continued, her brother has no intention of staying
long term as a police officer. The state spent six months
giving him a set of skills that he can take to the Lower 48 and
know that after he has dedicated his life and put his life on
the line that he will be guaranteed a set amount every month and
not have to figure out if he retires at a certain age he will
have $3,000 a month for 20 years to live on; and if he goes past
that age, he has nothing. There is just no incentive for state
employees or public employees to continue to be here, she
reiterated. Plus, those people taking their training to the
Lower 48 are also more likely to retire in the Lower 48. So,
Alaska is losing revenue as well by forcing people out of the
state by not giving them a reason to stay and work in the state.
Therefore, she said, she fully supports HB 83.
2:19:20 PM
BOB MURPHEY testified in support of HB 83. He said he is a
long-term state employee, is TIER II under PERS, and is a member
of the Alaska Public Employees Association. He has seen many
changes during his long time with the state, he related, the
most significant being the change from the defined benefit
retirement plan to a defined contribution retirement account.
He said he can say with certainty that having state employees
and teachers work in the same position or field for a long time
is a direct benefit to the people of the state versus the
alternative of turnover every several years because the
incentive to keep working for the state is just not there. He
stated that HB 83 would help in recruiting and retaining
employees and, as well, would attract the best for long term.
He urged the committee to support HB 83.
2:20:30 PM
JAN CONITZ testified in support of HB 83. She said she has been
in public service during most of her career and has lived in
Alaska for most of her adult life. She has worked as a teacher
and as an employee of the University of Alaska in fisheries and
marine science research and is currently an employee of the
Alaska Department of Fish and Game. She said she is benefitting
from the defined benefits program and has seen from her older
friends, neighbors, and family that it promotes the development
of a stable, long-term workforce. It encourages people to stay
and complete a career with the State of Alaska or another public
employer, she continued, and it gives them the sense that they
are getting something from the state and they will stay and give
back. Retirees staying in the state contribute financially as
well as volunteer or go to work for non-profits or other areas
where they can still contribute.
MS. CONITZ related that she was opposed to implementing the
switch to Tier IV and thinks it extremely unfair to see people
working next to her and not getting any of the security that she
and her other colleagues have. She said it encourages high
turnover, lowers morale, and gives people the feeling that the
employer has no commitment to the employee, which undermines the
success of public programs. Most public programs are long-term
efforts and many of the positions are knowledge-based positions.
This knowledge is developed over a long career and a price
cannot be put on that long-term knowledge, she advised. The
importance of people that commit to the state and to staying in
the state cannot be overstated. She urged the passage of HB 83.
2:24:26 PM
JESSE KIEHL, Staff, Senator Dennis Egan, Alaska State
Legislature, testified on behalf of Senator Egan, prime sponsor
of SB 52, the companion bill to HB 83. Regarding the issue of
volatility in investment returns, he noted that the substantial
body of research over many years shows that pension systems
bring a number of benefits that help reduce volatility and help
improve returns because of the economic efficiency of these
pension systems. Depending on the research being read, he
advised, professional investors tend to average on the very long
term anywhere from 80 to 120 basis points better returns, thus
0.8 to 1.2 percent year over year. That allows defined benefit
pension systems to provide a great deal more of their benefits
from investment earnings than from individual or employer
contributions, which is important for the legislature to keep in
mind when looking at the broad strokes of Alaska's economy and
public employers.
2:26:09 PM
REPRESENTATIVE JOSEPHSON remarked that the idea that a public
employee would need to be anchored to Alaska doesn't seem to be
accurate. Someone who is vested, he said, would at the
appropriate retirement age suffer a 10 percent penalty but would
enjoy a reduced albeit regular and dependable monthly pension.
So, he concluded, it is portable in that sense.
MR. KIEHL replied that different pension plans have different
designs. This one provides significant incentives to stay but
tends not to function as golden handcuffs where a person must
stay for 30 years and be of a certain age or else suffer a much-
reduced benefit. The structure of the chairman's bill would be
that a public employee vests in the pension check when they have
10 years of service, he advised. They must be the minimum age
before they begin to collect those pension checks, but the value
is not lost when that eligible age is reached. He further
advised that the healthcare benefit grows in value to the
employee over the course of his or her time working for a
public-sector entity in Alaska, but there isn't that instant
cliff designed into this plan. Built into this plan is an
incentive to retire in Alaska the pension check is 10 percent
higher if the retiree is an Alaska resident when drawing the
check. That, among other things, has been very effective in
benefitting Alaska's economy with retirees staying in the state.
He offered his belief that 80-90 percent of PERS and TRS pension
checks are paid to Alaskans. It has been an effective tool, he
added, and this proposal maintains that.
2:29:15 PM
REPRESENTATIVE BIRCH returned to the earlier hypothetical
scenario of a state employee earning $100,000 a year with a
total set aside of 25 percent (6.13/6.13 percent SBS, 8.00/5.00
percent PERS). He calculated that with interest the set aside
would grow to a couple million dollars, which when put in an
annuity at the end would produce generous checks. He related
that legislators have recently been discussing using the
permanent fund, earnings from the permanent fund, and what is an
appropriate percent of market value (POMV) draw from the
earnings of the permanent fund. He asked what the potential is
for an employee to, if not invest in the permanent fund, at
least invest in a state managed account that tracks the
permanent fund. He allowed he doesn't know if that is a
possibility, but said the state is spending a lot of money to
hire good people to manage the permanent fund and perhaps this
expertise could be taken advantage of. He asked who manages the
retirement savings for the individual public employee given
there has been testimony that some employees may not pay close
attention to that.
MR. KIEHL responded that the Division of Investments, Department
of Revenue, manages the PERS and TRS trusts under the direction
of the Alaska Retirement Management (ARM) Board. He said this
has been great management over the management that occurred
before Senate Bill 141. The Division of Investments implements
that policy with some state employee investment officers and
some outside managers. The permanent fund, he continued, is
always in the process of trying to improve what it is doing and
finding the most economically efficient way to do that with a
mix of in-house and outside help. He deferred further response
to the Permanent Fund Corporation, noting that prior
legislatures have discussed an Alaska permanent fund mutual
fund. He offered his belief that the corporation has been
somewhat cool to the notion in terms of the costs that would be
incurred given it would involve having to keep track of tens of
thousands of clients as opposed to just the State of Alaska and
the Alaska Mental Health Trust. The choice element in HB 83, he
added, would help maintain the state's robust defined
contribution system, which has been well managed and has low
management fees - it is a best of both worlds approach.
2:34:09 PM
CHAIR KITO, regarding the current defined contribution plan,
noted that someone departing state service prior to vesting
takes the money that they have put in. He asked what happens to
the funds that the state has set aside for that account.
MR. KIEHL answered that after two years of service employees in
the defined contribution plan can take with them 25 percent of
the employer's contributions net of investment earnings. After
three years the employee can take 50 percent, after four years
75 percent, and after five years the employee is fully vested in
the employer's contributions as well as their own.
2:35:35 PM
CHAIR KITO announced public testimony would be held open. He
held over HB 83.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB083 Sponsor Statement 2.28.17.pdf |
HL&C 3/25/2017 1:00:00 PM |
HB 83 |
| HB83 Sectional Analysis 2.28.17.pdf |
HL&C 3/25/2017 1:00:00 PM |
HB 83 |