Legislature(2017 - 2018)BARNES 124
02/16/2018 03:15 PM House LABOR & COMMERCE
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| Audio | Topic |
|---|---|
| Start | |
| HB303 | |
| HB110 | |
| HB83 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 303 | TELECONFERENCED | |
| += | HB 110 | TELECONFERENCED | |
| += | HB 83 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 83-TEACHERS & PUB EMPLOYEE RETIREMENT PLANS
4:42:08 PM
CHAIR KITO announced that the final 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."
4:42:48 PM
EDRIC CARRILLO, Staff, Representative Sam Kito, Alaska State
Legislature, presented the bill. He stated that HB 83 would
allow public employees to choose one of two state retirement
systems, the defined contribution (DC) or defined benefit (DB)
pension. Alaska's teachers and public employees do not earn
social security benefits, and many lose their social security
benefits earned under previous employment. This bill would also
allow newly-hired public servants in Alaska to choose the
benefit plan that best serves them, he said. For most, the DB
pension makes sense; however, other choose the DC plan that
allows flexibility, portability, and control. This bill would
keep smart reforms to retirement benefits made several years ago
and makes Alaska's pensions stronger than ever, he said. This
bill would create a more stable, predictable, and DB pension
tier. Since the DB pensions include sharing the risk of rising
health costs, the employees would never cost employers more than
the DC system, saving money for schools, cities, and the state.
He thanked members for their support.
4:44:07 PM
DIANE OAKLEY, Executive Director, National Institute on
Retirement Security the (NIRS), stated the NIRS is a not for
profit, non-partisan, research organization based in Washington
D.C. She directed attention to a Power Point presentation in
members' packets. She turned to slide 2, titled "DB Pension are
Cost Efficient: Still a Better Bang for the Buck," which read
as follows [original punctuation provided]:
Cost Comparison
NIRS looked at the cost to replace 53% of final income
under three retirement plan structures.
The DB pension cost 48% less than using Individual
Accounts in a DC Savings Plan to provide the same
amount of income.
MS. OAKLEY explained that the DB plan cost 16 percent of pay,
which is designed to provide the same amount of income from a DC
plan; alternatively, for the same cost retirees will receive
more income per the actuaries.
MS. OAKLEY directed attention to the next slide, titled "3 Key
Reasons Why Defined Benefit Pension (DB) Plans Cost Less than
Defined Contribution (DC) Plans," which read as follows
[original punctuation provided]:
1. Pool the longevity risks.
2. Maintain optimally balanced investment portfolio
compared to down-shifting to a lower risk/return asset
allocation in DC plan.
3. DB plan have higher investment returns and lower
fees compared to individual investors in DC accounts.
4:47:19 PM
The committee took a brief at-ease from 4:47 p.m. to 4:49 p.m.
4:49:23 PM
JESSE KIEHL, Staff, Senator Dennis Egan, Alaska State
Legislature, paraphrased the section-by-section analysis HB 83,
Sections 1-8, which read as follows [original punctuation
provided]:
Sections 1 and 2 Clarify that the Teachers Retirement
System (TRS) defined benefit (DB) statutes apply only
to employees who participate in the DB plan and did
not convert to defined contribution (DC). No employee
can participate in both the DB and DC plans. Sec. 1
also puts all TRS employers on an equal footing by
requiring them to offer new employees the choice
between DB and DC systems.
Sections 3 and 4 Set employee contributions for the
new DB tier at eight percent of pay, while leaving
prior tier employees' contributions unchanged.
Sections 5 and 6 Require a person receiving disability
benefits under the DB tiers to seek work and receive a
medical examination. Sets limits on the frequency of
the exams.
Section 7 Closes the Tier II DB health plan to new
hires and those DC members who choose to convert to
the new TRS DB tier.
Section 8 Establishes the eligibility standard for
retiree medical benefits in the new TRS DB tier. In
the new DB tier, a member with 25 years of service may
receive medical benefits partially paid by the system
at any age. A member without 25 years must have at
least eight years of service and be eligible for
Medicare. Disabled members also get system-paid
medical benefits.
A TRS DB retiree who does not meet those
qualifications can buy health care coverage from the
system, but must pay the full cost of premiums.
Establishes a premium share schedule for retirees to
pay a portion of their health insurance and requires
actuarial adjustments to keep the pre-funding rate of
the new DB tier no higher than the cost of the DC
plan.
Sets vesting rules for the premium share percentages
so that the schedule can change during an employee's
working life, but is fixed at the date of retirement.
4:51:24 PM
MR. KIEHL elaborated that Section 8 is one of the significant
cost savings provisions in this bill compared to previous tiers
since all retirees will pay a portion of their monthly health
premium based on their years of service. This provision sets up
that schedule. One safety mechanism in this bill to ensure that
the new pension tier does not cost the school districts or the
state more than the DC tier is a periodic five-year review by
the actuaries. During an employee's working life those shares
of the premium at retirement can vary. Thus, it sets vesting
rules for the premium share percentages so that the schedule can
change during an employee's working life, but it is fixed at the
date of retirement. He reiterated that this refers to the
percentage of the health premium, not the dollar amount since
health premiums may rise and this is a risk shared by all.
4:52:44 PM
MR. KIEHL continued the section-by-section analysis of HB 83,
Sections 9-11, which read as follows [original punctuation
provided]:
Section 9 Clarifies that the TRS DC statutes apply
only to employees who participate in the DC plan and
did not convert to DB. No employees can participate in
both the DB and DC plans.
Section 10 Puts all TRS employers on an equal footing
by requiring them to offer new employees the choice
between DB and DC.
Section 11 Gives a newly hired teacher the choice
between DB and DC systems. This is a one-time
irrevocable choice. Sets timeframes and rules for the
process.
MR. KIEHL emphasized that it is noteworthy to emphasize that
this provides a one-time irrevocable choice. He said that this
decision requires an employee must receive some education prior
to making the choice so that no one makes the irrevocable choice
blind.
4:53:36 PM
MR. KIEHL continued the section-by-section analysis of HB 83,
Sections 12-13, which read as follows [original punctuation
provided]:
Section 12 Clarifies that the Public Employee
Retirement System (PERS) DB statutes apply only to
employees who participate in the DB plan and did not
convert to DC. No employee can participate in both the
DB and DC plans. This section also puts all PERS
employers on an equal footing by requiring them to
offer new employees the choice between DB and DC
systems.
Section 13 Sets the same minimum wage threshold for
elected officials in the new DB tier as the 2004
reforms implemented for prior tiers.
4:54:02 PM
MR. KIEHL said that Section 13 is unique to PERS and it matches
the DC system by setting a minimum wage threshold for elected
officials in the new DB tier. This is one of the safety net
features that Mr. Carrillo mentioned earlier, noting that
elected officials who only make an honorarium now would have a
minimum salary if they were to be employed as full PERS members,
he said. There would need to be an adequate contribution to the
system to fund that. He turned to Section 14-18 of the
Sectional Analysis of HB 83, which read as follows [original
punctuation provided]:
Sections 14 and 15 Set employee contributions for the
new PERS DB tier at eight percent of pay, while
leaving prior tier employees' contributions unchanged.
Sections 16 and 17 Require a person receiving
disability benefits under the PERS DB tiers to seek
work and receive a medical examination. Sets limits on
the frequency of the exams.
Section 18 Establishes an eligibility standard for
retiree medical benefits in the new PERS DB tier. In
the new DB tier, a peace officer or firefighter with
25 years of service may receive medical benefits
partially paid by the system at any age. A peace
officer or firefighter who does not have 25 years of
service must be eligible for Medicare and have at
least 10 years. Other PERS employees require 30 years
of service to get medical benefits partially paid by
the system unless they are Medicare eligible, in which
case they require a minimum of 10 years. Disabled
members also get system-paid medical benefits.
A PERS DB retiree who does not meet those
qualifications can buy health care coverage from the
system, but must pay the full cost of premiums.
Establishes a premium share schedule for retirees to
pay a portion of their health insurance and requires
actuarial adjustments to keep the pre-funding rate of
the new DB tier no higher than the cost of the DC
plan.
Sets vesting rules for the premium share percentages
so that the schedule can change during an employee's
working life, but is fixed at the date of retirement.
MR. KIEHL emphasized that Section 18 sets up the eligibility
standards for retiree medical benefits, which is comparable to
the TRS and will provide a significant cost savings in the new
pension system as compared to the old system. Every retiree
pays a share of his/her monthly premium which provides for risk
sharing for those retiree health insurance costs.
4:55:29 PM
MR KIEHL continued the section-by-section analysis of HB 83,
Sections 19-24, which read as follows [original punctuation
provided]:
Sections 19 and 20 Put all PERS employers on an equal
footing by allowing employers that return to PERS
after terminating participation to hire employees the
same way other PERS employers do, and allows employees
to earn service credits in the appropriate tier when
working for those employers.
Section 21 Clarifies that the PERS DC statutes apply
only to employees who participate in the DC plan and
did not convert to DB. No employees can participate in
both the DB and DC plans.
Section 22 Puts all PERS employers on an equal footing
by requiring them to offer new employees the choice
between DB and DC systems.
Section 23 Gives a newly hired public employee the
choice between DB and DC systems. This is a one-time
irrevocable choice. Sets timeframes and rules for the
process.
Section 24 Repeals sections that let non-vested
employees convert from DB to DC and required employers
to match the funds transferred dollar for dollar.
Repeals sections related to political subdivisions
that participate only in the DC plan. Repeals a
requirement that DB employees who refunded
contributions from the system and return to work after
July 1, 2010 participate only in the DC plan. (Such
employees will thus be treated as new hires.)
MR. KIEHL added that Section 24 would allow non-vested employees
convert from DB to DC and take employer funds along, which is no
longer necessary because the window is closed and under the bill
new hires have a choice.
4:56:42 PM
MR KIEHL continued the section-by-section analysis of HB 83,
Sections 25, which read as follows [original punctuation
provided]:
Section 25 Gives employees hired into the TRS and PERS
DC plans who have not refunded out of those plans a
90-day period from the effective date of the bill to
irrevocably convert into the new DB tier.
Contributions move from the DC plan to the DB plan
trust if they make the switch.
MR. KIEHL clarified that Section 25 is the first of the
conversion options. This would allow employees who are working
in the DC system a one-time option to make irrevocable
conversion into the new DB tier. He directed attention to
Section 26, which read as follows [original punctuation
provided]:
Section 26 Sets the procedure for the conversion
election in Sec. 25 and allows the administrator to
adopt regulations related to the conversion. The
choice to convert is irrevocable, and certain
information must be provided to the employee. An
employee who transfers receives credited service in
the defined benefit plan equal to the value of the
employee's DC account. If that amount is insufficient
to 'buy' the employee's actual service time, the
employee may create an indebtedness to purchase the
difference. If the employee's individual account has
an excess, the difference is transferred into the
Supplemental Benefits System or a comparable account,
in keeping with federal tax law.
4:57:05 PM
MR. KIEHL explained that Section 26 lays out the rules of the
conversion. He highlighted that if an employee wants to earn a
pension instead, the value of the employee's account, including
employer contributions, is actuarily calculated and buys up to
the employee's actual years of service time. If insufficient
funds exist to purchase the employee's actual years of service,
the employee may create an indebtedness to purchase the
difference, but the employee is not entitled to it as a matter
of right. The state or municipality would not "kick in" extra
funds to buy the time. He offered his belief that in rare
instances in which an employee had more money in his/her
account, the federal government would require it to be rolled
over into a supplemental benefits account or an individual
retirement account. It would not be taken from the employee, he
said.
MR KIEHL continued the section-by-section analysis of HB 83,
Sections 27-29, which read as follows [original punctuation
provided]:
Section 27 Allows the Commissioner of Administration
to adopt regulations to implement and make specific
the bill's provisions.
Section 28 Is an immediate effective date for sections
26 and 27 of the bill.
Section 29 Makes the bill effective July 1, 2017,
except as provided in Sec. 28.
4:58:26 PM
MR. KIEHL stated that this provision makes the effective date
July 1, 2017, which needs to be adjusted going forward.
CHAIR KITO agreed that the date would be fixed.
4:58:51 PM
MS. OAKLEY reiterated the three "Key Reasons" as the longevity
pool, maintaining an investment portfolio, and since typically a
DB plan will have more assets than an individual account, the
fees are lower. Historically, in reviewing DB and DC plans,
what economists call behavioral drag exists, in that individual
investors invest on their own, she said. She clarified that
sometimes employees do not make the right investment decisions,
for example, buying or selling at the wrong time.
MS. OAKLEY referred to slide 4, titled "Colorado State Auditor:
DB Pension Higher Income Replacement over DC." She referred to
the graph on the slide that summarizes data from a report that
is produced by the Colorado State Auditor. She explained that
Colorado does give its employees a choice between a DB pension
and a DC plan. The auditor's analysis shows the percent of
income being replaced by PERA, [Public Employee Retirement
Association], the side-by-side DB/DC plan, and a specific DB
"Cash Balance" plan. She further clarified the DB "Cash Balance
plan is one that works like a DB plan with contributions, but
unlike a regular DB plan in which the individual has control
over the investment, this gives them a fixed investment return.
She referred to the bottom line of the chart, which shows the
amount of income that would be replaced in a self-directed DC.
Each column represents an employee at a given age, for example,
an employee age 40 with 3 years of service is compared to
someone who retires at 65 with 30 years of service. Over time,
the DB plan will ultimately provide a career employee with a
higher income than for a short-term employee. It would provide
a higher amount of income than a self-directed DC plan would,
she said.
5:02:26 PM
MS. OAKLEY refereed to slide 5, titled "Different Workforces:
Public Sector Has Job Tenure Twice that of Private Sector." She
explained that this slide gives an indication of the tenure of
employees derived from data by the United States Department of
Labor. Referring to a graph on slide 5, she indicated the gold
line reflects the public sector and the green line reflects
private employees. She explained that the public employees
typically have a longer tenure than the private sector
employees, about twice that of the private sector. This
provides one reason why the DB plan is attractive to many
employees in the public sector. In addition, the DB plan
encourages them to stay longer and maintain their employment
relationship with the state or local agency.
5:03:44 PM
MS. OAKLEY referred to slide 6, titled "DB Plan's Role in the
Public Sector: Workforce Management," which read as follows
[original punctuation provided]:
• DBs improve public sector productivity:
Employees are more likely to value their work and
tend to invest more in their skills.
• Pensions help recruit and retain quality workers.
Moving to a DC design could affect recruitment,
retention, and productivity.
• Teacher effectiveness increases with experience.
Greater teacher retention means higher overall
teacher productivity. When a mid-career teacher
is replaced by an inexperienced teacher, the
school as a whole sees a drop in productivity.
MS. OAKLEY said this slide represents a summary of some of the
research that has been done to examine how the DB plans help the
public sector manage its workforce. She paraphrased the bullet
points, commenting that firemen, police officers, and teachers
are all valued members of the community. Further, greater
teacher retention means higher overall educational productivity.
When a mid-career teacher is replaced by an inexperienced
teacher, the overall productivity in the school tend to drop,
she stated.
5:05:41 PM
MS. OAKLEY directed attention to slide 7, titled "Palm Beach
Case Study: Costs Due to Employee Turnover Wasn't Considered,"
which read, in part, as follows [original punctuation provided]:
In 2012, Palm Beach closed its DB pension and opened a
Combined DB/DC plan, greatly reducing benefits. During
the next four years (2012-2015), a total of 109 police
officers and firefighters left the forces before
retirement, including 53 vested officers.
MS. OAKLEY explained that slide 7 summarizes the result of a
case study. She said that the City of Palm Beach closed its DB
pension and opened a combined DB/DC plan, which greatly reduced
benefits in the DB plan. She noted that the matching
contribution was 100 percent for the employees' contribution of
four percent, which went into the DC plan. In 2011, a year
prior to the plan change, the city had about 60 police and
firefighter employees. In the next four years, the department
lost 109 employees, who left before they were eligible to
retire. In addition, 20 percent of the workforce retired as
soon as the new DB/DC plan was adopted. Thus, police and
firefighter employees left in droves, she said. In fact, in the
four years prior to the change only two vested employees left.
In the four years after the combined plan was adopted, 53
experienced police and firefighters left. She compared that to
the trend for new police and firefighter employees. In the four
years prior to the change, only four new employees left, yet in
2015, 31 firefighters left. She explained that the young
officers came to Palm Beach, went through the academy and rookie
training, but left as soon as an opportunity arose to join a
force with a DB plan. Ultimately, the lost training funds
exceeded $20 million, she said. She implied that the city was
short-sighted, thinking it was saving money in pension funds,
but losing not only training costs, but overtime costs, as well,
due to short staffing.
5:09:20 PM
MS. OAKLEY turned to slide 8, titled "92% of Americans: Public
Pensions a Good Way to Recruit and Retain Employees," and to the
illustration on the slide that captured the public sentiment in
a survey. She reiterated that plans are valuable for recruiting
and retaining employees. In a survey, when the public was asked
whether the person agreed or disagreed that pensions are a good
way to recruit and retain qualified teachers, police officers,
and firefighters, 92 percent agreed, of which 6 out of 10
strongly agreed. She concluded that demonstrates the level of
support that many public pensions have in the broader public
arena.
5:10:05 PM
MS. OAKLEY turned to slide 9, titled "Economic Impact of Alaska
Public Retirees Spending," which read, in part, as follows
[original punctuation provided]:
Expenditures by state retirees provide steady economic
stream to Alaska. In 2016, these expenditures
supported in Alaska:
• Over 7,600 jobs that paid $400 million in wages.
• $1.2 billion in total economic output. Each
dollar in DB benefits supported $1.12 in total
economic activity.
• $168 million in federal, state, and local tax
revenues.
• Each taxpayer dollar "invested" in plans
supported $4.39 in total economic activity in the
state.
MS. OAKLEY paraphrased statistics on expenditures by retirees in
Alaska. She recapped that the pension enables the retirees to
spend, knowing they have an income stream. If retirees in a DC
plan were worried about running out of money, they would be less
likely to take more money out of their pensions and spend it.
5:12:40 PM
REPRESENTATIVE CHENAULT, referring to slide 7, asked about the
Palm Beach employee turnover. He suggested that the chart
seemed a bit deceiving. He asked for clarification on the
actual numbers of employees between 2011 and 2015.
MS. OAKLEY answered that in each case the [year listed] is
capturing the prior four years, from 2012 to 2015. She further
explained that 2011 is capturing from 2008 to 2011. She offered
to provide information that details the difference in the
composition of the staff at that time. She recalled that by
2015 half of the firefighters and police officers had less than
five years of service.
5:14:50 PM
REPRESENTATIVE SULLIVAN-LEONARD asked whether she had discussed
with the Department of Administration (DOA) what it would take
to change to the proposed system and any actuarial valuation
that would need to be done prior to a change in retirement
systems.
MS. OAKLEY answered no; that she has not had the opportunity to
have that discussion with the department. Currently, the state
operates a DB plan for employees hired prior to 2006. The skill
sets to invest those dollars exists within the departments that
administer the retirement system. She offered her belief that
the state has been operating the two systems, so it would not be
difficult to take it back to one system. She offered that these
choices are ones occurring throughout the country, that state
employees in approximately 12 states currently have a choice
between a DB and DC plan.
5:16:28 PM
REPRESENTATIVE SULLIVAN-LEONARD recalled prior committee
discussions that indicated an actuarial study and analysis would
need to be performed so the legislature could decide whether the
state could afford to move forward with this type of system.
CHAIR KITO answered that his office had held discussions with
DOA. He reported that the department has advised that it is not
prepared to perform such an intensive actuarial analysis until
the bill is before the House Finance Committee. The DOA would
like the committee to provide any recommended policy changes and
the actuarial would only perform the analysis once.
5:17:43 PM
REPRESENTATIVE JOSEPHSON asked for clarification on subsequent
hearings. He offered his support for the bill.
CHAIR KITO was unsure of the time commitment. He expressed an
interest in having the actuarial review done at the time the
bill is before the House Finance Committee.
5:18:44 PM
REPRESENTATIVE WOOL asked whether the existing Palm Beach
employees were forced into the new plan.
MS. OAKLEY answered that the city council voted to move the
employees into the new plan, thus, employees were forced into
the new plan. She indicated that many of the employees did not
feel there were any benefits to stay in Palm Beach. Their
benefits were frozen based on their salaries and would not
increase, she explained. She pointed out that nearby
communities were offering retirement plans like their old plans.
The "churning part" by the new employees in the Palm Beach study
is something that the state would likely want to consider.
5:20:32 PM
JACOB BERA, Public School Teacher, shared his personal
background, offering his support for HB 83, based on his
experience as a public-school teacher for the past 15 years in
Eagle River. His goal is to help the committee understand how
the current retirement plan affects student learning and the
effective use of the limited budget and core education. After
he finished his time in the United States Marine Corps Reserve,
he and his wife, who is also a teacher, moved from Wisconsin to
Alaska to start their careers in education. The beauty of the
state attracted them since they both like to run and spend time
in the mountains; however, they also want to start a family and
put down roots. He emphasized that the retirement plan has made
a big difference for his decision to stay in Alaska. Since
their teacher service started in 2003, they fall under the Tier
II DB plan, which allows them to contribute to a pension plan
after they retire. When the plan changed in 2006, public
employees could no longer contribute to the DB plan. If they
had been considering moving to Alaska after 2006, they simply
would not have done so as it would not have made economic sense.
He said they learned that all new public employees cannot
participate in the Social Security [Old-Age, Survivors, and
Disability Insurance (OASDI) program administered by the Social
Security Administration (SSA)]. In fact, employees lose Social
Security benefits in Alaska by becoming public employees in
Alaska. They could contribute to both plans in Wisconsin, but
they opted to stay to supplement their losses by opening a Roth
IRA [individual retirement account].
5:22:11 PM
MR. BERA said that when he explains the public employee's
choices to other Alaskans, especially those not in the public
sector, they better understand the risks that public employees
take. He acknowledged that he and his wife feel lucky to be
under the Tier II plan, even absent the ability to contribute to
the OASDI [Social Security], that they are still trying to make
their retirement system work for them. Other colleagues moved
to Alaska for a few years for the adventure, but have taken
their savings and left, in part due to budget cuts and increased
demands. For those reasons, Alaska is becoming less attractive
for teachers to stay, he said. The state has continued to lose
the money it invested in attracting and training teachers.
Teacher turnover is rising in Alaska and schools and educators
suffer.
MR. BERA said he hopes the committee will understand the quality
of the educators who remain, noting he is one of four nationally
board-certified teachers in his school, and one of 200 in the
state. His college friend who teaches in his school just won
the Milken Educator Award. He described a recent experience
that illustrated teacher dedication. Despite his son's
teacher's facing family medical issues that day, the teacher
immediately focused on the school conference and his son's
progress in school. He emphasized the importance of retaining
teachers, noting he often hears students express an interest in
teaching. He said the state is not competitive with other
states in terms of salary and benefits. Teacher positions are
being cut and relatively new teachers must make choices to stay
in Alaska or to leave, invest and build up their retirement
plans, including building their social security benefits. Even
he and his wife must consider their options due to job security
issues.
MR. BERA offered his belief that HB 83 could provide an
incentive for public employees to stay in Alaska by providing
the ability for them to earn a better retirement security for
their future. Attracting and keeping the best educators makes
the most economic sense for Alaska, especially for the children
who attend public schools.
5:25:24 PM
[HB 83 was held over.]