Legislature(2009 - 2010)BELTZ 211
02/12/2009 01:30 PM Senate LABOR & COMMERCE
| Audio | Topic |
|---|---|
| Start | |
| SB1 | |
| SB23 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 1 | TELECONFERENCED | |
| *+ | SB 23 | TELECONFERENCED | |
SB 23-REPEAL DEFINED CONTRIB RETIREMENT PLANS
2:16:56 PM
CHAIR PASKVAN called the meeting back to order at 2:16 and
announced SB 23 to be up for consideration.
SENATOR ELTON, sponsor of SB 23, said this measure is exactly
the same as it was introduced last year. He explained that four
years ago a previous legislature passed and the previous
governor signed SB 141 that created a new defined contribution
(DC) retirement system for teachers in the TRS program and
employees in the state and municipal program (PERS) into law.
The plan shifted risk from the state to new and future teachers
and public employees. One of the major impetuses for it was the
existing unfunded liability in both plans of about 70 percent.
2:19:44 PM
He used the analogy of a family's unfunded liability being how
much they have in their savings if the bank pulls their
mortgage. Actuaries use the unfunded liability as a tool to
control liability, but it is very rare that any plan is funded
100 percent. It is also important to note, Senator Elton said,
that the unfunded liability problem is not fixed.
2:21:23 PM
SENATOR ELTON said it took a special session to get the DC plan
through and the argument used was true on its face, but not
quite so true in its application. Advocates of a DC plan said it
would save the state money when compared to the defined benefits
plans (DB) with an emphasis on the plural. He didn't disagree in
comparing the new DC plan to the defined benefit (DB) plans. But
it obscured a central fact that was very important to the
debate. The debate should have been whether or not the DC plan
saves the state and school districts money if compared to Tier
III in the PERS plan and Tier II in the TRS plan. The answer to
that question is no; it was probably a wash.
It's important to note, he said, Tier I - a "Cadillac plan" -
has been closed for 20 years. New employees don't go into Tier
I; they would go into Tier III. The employer cost for those new
employees is essentially the same whether it's DC or the old
Tier III; same for the TRS plan.
2:23:42 PM
SENATOR ELTON said it's important to note that the unfunded
liability for a Tier I PERS person is 13 times that of a Tier
III PERS person and there are almost exactly the same number of
employees or retirees in the Tier I plan as there are in the
Tier III plan. This is what created the vast majority of the
unfunded liability.
2:24:54 PM
It's also important to note, he said, that the 2005 debate was
on employer costs - how much it would cost a school district or
a municipality or the state government to contribute to a DC
plan as compared to contributing to the old Tier III or Tier II
plans. "And it's almost a wash; it was almost a wash then and
it's almost a wash now."
SENATOR ELTON said the state has just received new numbers from
Buck Consultants, actuaries, that demonstrate that the employer
contribution for the PERS DC plan is slightly lower than the
employer contribution for the old Tier III plan; for the TRS DC
plan the employer contribution is slightly higher than the
contribution that was made to the old TRS Tier II plan. He said
that graphs and charts in the coming days would illustrate that
they are talking about slight differences in cost - one slightly
up and the other slightly down. But he also hoped they would
read some of the verbiage that accompanies the charts. For
instance a quote from the actuary says, "For both PERS and TRS
the normal cost rate of the DB plan is less than the DC employer
contribution rate."
They don't have to rely on just what the actuaries say, but
there is experience elsewhere. A couple of states had gone to a
DC plan well before Alaska did. Nebraska had a DC plan for 20
years and they went back to a DB plan because it was less
expensive. West Virginia had a DC plan for teachers and they
went back to a DB plan because it was cheaper.
SENATOR ELTON said he thought it was easier to have cost
discussions today because they are now dealing with more facts,
and the facts along with experiences elsewhere demonstrate that
going back to a DB plan is not going to be expensive and they
already know it doesn't do anything to lower the unfunded
liability that the plans have.
A couple of minutes ago he said that savings to the state of the
new DC plan was essentially a wash. His analysis when he said
that was narrow because it spoke to the employer contributions
to the new and old retirement plans only. But there are
significant sometimes quantifiable losses the state incurs with
a DC plan and he wanted to speak to two of them because they are
easily understood and pertinent to the discussion: recruitment
and retention.
He said that smart, talented, new employees tend to think ahead
when they make a decision about where they are going to work,
and what they are going to do, and who they are going to do it
for. They can make a choice - they can work for the feds, for
another state, or for municipalities outside the state of
Alaska. And if they make that choice, one of the things they
will consider is if they should work in Alaska where there is no
DB plan or for a public employer that has two defined benefit
plans. The first DB plan would be the one that is provided by
the other public employers; the second DB plan would be the
social security plan. "We're not competitive any more. Alaska
has neither of those safety net defined benefit plans. So I
think that does get in the way when a new person is deciding
where they are going to go to work."
2:30:39 PM
He stated that the nub of this is retention - how to keep a new
state or school employee on the farm once they are hired - and
the new DC plan has created an incentive for them to leave.
Because they can stay for five years; maybe they get to age 28;
they're married; they want a family and they are starting to
wonder how they can afford a house - in Juneau, for instance -
but after five years he said:
We have made that decision for them to leave easier,
because they can take the money they put into the
defined contribution plan; they can take the money the
employer put into the defined contribution plan; they
can go someplace else outside the boundaries of the
State of Alaska; they have a nice nest egg of money
they can use as a down payment on a home and they can
find an employer that will give them a defined
benefit, give them two defined benefits - social
security and what every other public employer around
the nation does.
2:32:36 PM
SENATOR ELTON said he would anticipate a question based on
arguments they no longer need to anticipate - it goes like this.
PERS/TRS changes are complex and they deserve all the time we
need to study and review, talk to professionals - it takes a lot
of time. "Let's not rush." Sometimes this argument is made
because it's easier to kill a bill than to pass a bill; it's
even easier to kill a bill in 90 days than in 121 days.
Sometimes the argument is used honestly and sometimes it's used
by opponents, but it is flawed here on several levels. The first
is this bill doesn't create anything new; there is nothing in
this bill that isn't already in law. This bill doesn't change
Tier III; it just says new employees are going to Tier III if
they are a PERS employee or Tier II if they have a TRS employer.
"Nothing new," he said, "I mean the state is managing a Tier III
and a Tier II plan for PERS employees and TRS employees." So
that is one of the things that would mitigate against the
argument of waiting.
2:34:34 PM
The second argument he said is this year they can talk about
facts and figures. When the DC plan was passed in 2005, they
were debating concepts. Now managers can actually say it's hard
to hire because Alaska is not competitive - because we're not
competitive on a benefits package - and we're unfortunately not
competitive on wages in many cases, as well. So, they don't need
to wait because they have facts and figures that can lead them
to a good conclusion and support this bill.
Another argument that mitigates against the waiting approach is
that it's not like they are starting the debate on this bill
right now. This debate has happened outside the walls of this
building for three years. It's happened in constituent meetings;
it's happened during campaigns. It also occurred inside the
building - this bill moved through two committees in the
previous legislature.
2:36:31 PM
Finally, Senator Elton said, the fourth reason against the
waiting argument "gets my goat." The take our time approach to
getting back to a plan the state already has is that in 2005 the
legislature adopted a DC contribution plan, and the Senate
discussion and debate on that brand new plan, which wasn't
prepared by an actuary or professionals - it was prepared by
politicians - took 28 days!
I just leave you with this final thought. If we can
adopt a radical brand spanking new pension plan that
nobody else had - no other public jurisdiction had -
if we can do that in 28 days, and I don't want to
sound sarcastic here, but it may come across that way,
it would seem to me that they can make a decision to
utilize a pension plan that is already on the books,
that we've had 20 years of experience with. We ought
to be able to make that decision in two weeks. Let's
not fall into the trap that this is complicated stuff
- we're creating something new. We're not creating
anything new. We're just going back to a plan that we
had for 20 years, a plan that doesn't cost employers
more, a plan that doesn't inflate the unfunded
liability, but also a plan that provides a secure and
safe retirement. It provides a benefit package for
retirees that won't die before they do. And I would
suggest that that's very, very important because the
retirement economy in the State of Alaska is a $1.5
billion economy. Those are dollars that are spent in
restaurants and drug stores, hospitals, car lots, to
landlords, and we don't want to stick with a plan in
which a brand new retiree says, 'Okay, this is a lot
more iffy than a defined benefit package. Maybe I
should live someplace where the cost of living isn't
higher by a factor of 1.36 than it is in Anchorage,
Juneau, Fairbanks, Kenai, MatSu and considerably
higher than that in bush communities.'
SENATOR ELTON said that he and his staff, Jesse Kiehl, would
answer questions.
2:40:35 PM
MICHAEL LAMB, representing himself, said he is CFO of the
Fairbanks North Star Borough. He stated that he spent a great
deal of time researching the two systems and the issues that got
us into the unfunded state we are in now. He stated that neither
the mayor nor the assembly have had discussions on the DB versus
the DC plan; these are his own comments. He also stated that he
has not talked with Senator Elton, but he concurred with a lot
of what he said. He fully acknowledged that there are differing
valid views on this issue.
He concurred with the recruitment and retaining employees
comments in the sponsor statement for SB 23 and believed that it
will become a bigger issue in the future as the boomer
demographics changes continue to occur.
MR. LAMB said that most new public employees are put at greater
risk as relates to their retirement capabilities using
individual savings plans because these accounts earn much less
than professionally managed pension funds.
Third, he agreed that oversight of the state's pension funds has
been beefed up substantially with two actuaries and all the
other systemic improvements.
2:44:24 PM
MR. LAMB said he wanted to make four points. The first point is
that he would continue both plans. The development of both plans
has been paid for, and they are both being maintained. In most
instances the DB plan should be used, but sometimes it is
beneficial to both the employee and the employer for a
particular employer to enter into a DC plan. For example, many
short term employees intend to be short term and those are
better in a DC plan. When Melanie Milhorn was the director and
Charlie Morrison was the CFO for the Division of Retirement and
Benefits, they did analysis that showed within 15-17 years an
individual was better off in a DC plan if they got out of a
plan. Employees who actually retire from the DB plan and who
could go back and provide service to employers once they retire
should only be allowed to come back and be part of a DC plan.
His second point is that the cost to the employer for both plans
is about the same - the DB might be cheaper depending on what
year you are talking about. The FY10 normal cost rate is to be
9.46 percent for PERS as compared a DC rate of slightly over 10
percent. Further, in the DB plan, if an employee leaves before
they are vested, the employer's contribution into the plan on
behalf of that employee over their employment period remains
with the plan.
Thirdly, he said, PERS created a short term problem, a mid-term
and then a long-term issue. The short term problem, which they
are all dealing with right now, really impacts budgets across
the state because of increased costs that resulted from the very
large past service cost rate - that part of the component that
paid for and is paying for the unfunded obligation. The mid-term
issue is focused around the entities' ability to actually be
competitive in the market place and their ability to hire and
retain employees to provide the programs and services that they
are charged with delivering. Mr. Lamb said he believed we have
been, and are now feeling the effects of, the hiring and
retaining issue. "I believe that without reinstating a DB
option, I am quite fearful that our abilities to hire and retain
will only get progressively worse."
In the long term, decades, he really feared that not going back
to a DB will surely create a situation where another huge
component of our population will not be prepared for retirement
and will, in the end, actually cost the government more to
provide assistance to them than if the government had managed a
DB plan on their behalf in the first place.
He said the underpinnings of his thoughts about this are
analogous to the discussions that occurred several years when
some wanted a portion of employees' pay to not go into the
social security system, which is, in fact, a DB plan, but to be
individually managed. He stated:
But recent times should have made abundantly clear
that there are very few individuals that are
knowledgeable enough, that are informed enough, that
are disciplined enough that are long-term horizoned
enough to set up and manage a multi-decade retirement
plan with proper allocation of their assets. Should
they have been disciplined enough to set aside a
proper amount on a continuous basis throughout their
lifetime, I'm fearful that even with a well-set-up DC
plan, most individuals are, in fact, emotional
investors, the result being that they'll be ill-
prepared financially for retirement. A DB plan is a
great equalizer for hard working persons who don't
have the time, the knowledge or the inclination to
diligently manage their retirement funds over decades.
2:50:26 PM
The fourth point he thought weighed on legislators' with regards
to their decision about the DB versus the DC and that is that
the existing unfunded liability issue is really not relevant in
this decision. He reasoned:
For this position and statement to not be true - for
what I said to not be true - one would have to be
willing to argue that future normal cost rates are
going to be set lower than they should be by the
actuary.
The rate an individual employer pays as we know is
comprised of two components, the normal cost rate and
the past service cost rate. When the normal cost rate
is set properly, there is no need for a supplemental
past service cost rate. If normal cost rates had been
set properly in prior years, there would be no past
service cost component or it would an immaterial
amount and there would be no discussion with regards
to PERS and TRS.
Essentially, the normal cost rate is set, and it's set
properly, and we pay that amount throughout the year;
it doesn't matter whether we end/stop service as an
entity and all those employees are gone, whether
somebody retires or not. But if that amount is set
properly, then the amount of funding that should be
available in those future decades to provide the
payments should be there.
The unfunded liability that drives this discussion so
often - that in fact drove to a DC plan - which I
think was - the analysis of what caused it I do not
believe is correct - because the research I did came
to the same conclusion as Senator Elton stated also -
that if you go back and you look at the amount of
unfunded obligations, they reside - the vast majority
of them come from Tier 1 retirements, which also ended
20 years ago.
The unfunded liability which a lot of people thought
about and I'm sure are going to be concerned about
right now was not driven by investment problems. And
many people believe that. The Callan & Associates
conveyed on 10/20/06 to the ARM Board that PERS and
TRS have achieve annualized full returns of 8.89 and
8.96 percent respectively. The expected rate of return
on investments to pay those future benefits is 8.25
percent. And in the two years after Callan &
Associates had done their analysis, the rates of
return were, as I recalled, something like 17 or 19
percent. The Department of Revenue does an outstanding
job, professionally managing the state's funds
including the retirement funds. There is and I have it
here and I could go through it if you wanted to, but
there is substantial testimony that has been made to
the legislature on the fact that the unfunded costs
were really driven by actuarial - let me use the work
'miscalculations.' There is a report that was done by
the Alaska Division of Legislative Audit in January 06
that stated the same thing. If you look at the lawsuit
that was filed by the ARM Board against Mercer, it
states clearly that they made - Mercer - here's what
it - never left, made fundamental errors in
methodology and even in basic calculations and failed
to find competent experienced personnel.
The whole history of the unfunded obligation, which
I'm fearful will become the lynch pin of where
decisions get made of moving on and not moving on,
really would never have occurred and really has no
impact on the future as long as the normal cost rates
are correct. And as we talked about - I said in the
very beginning - and as is noted in the sponsor
statement - that Alaska has beefed up its oversight of
the pension system. I have a lot of difficulty
imagining in the near term, the next decade or
whatever, that we are going take our eyes off of what
the actuary produces. And if that's the case, then
we're right back to - does the DB plan cost more than
a DC plan, which gets to the basic question of - is
the normal cost rate higher than the DC cost. And the
projection for next year for PERS, 9.46 percent, is
lower.
So, in short, let me just restate that unless you
believe the future normal cost rates are going to be
set as irresponsibly as those brought forth by Mercer
in the late 90s, the existing unfunded liability is
not relevant to a DB versus a DC discussion.
2:55:34 PM
Again, I still believe that quite frankly - I've been
a CFO for almost 20 years - that we have two tools
that have been set up. They're established, they're
maintained and in my world, we would have both
available with a majority of employees going into the
DB plan.
2:56:36 PM
CHAIR PASKVAN asked if he would be available on Thursday next
week to discuss this bill.
2:56:58 PM
DANIEL GARCIA, Police Officer, Anchorage Police Department
(APD), supported SB 23. He supported Senator Elton's comments
and said his concerns are all the same as his. He related his
personal story that he came to Alaska in 2005 as a law clerk for
a superior court judge in Anchorage. He was a temporary full-
time employee so he wasn't in PERS at that point - although he
was paying into SBS. When he concluded his clerkship in August
2006, he went to the District Attorney's Office where he was an
assistant district attorney. So he was Tier IV by 1.5 months. He
went to the APD in November 2007 which is where he is now. He
said the Anchorage Policy Employees Association has
approximately 100 Tier IV members. His academy class graduated
25; 23 of those were Tier IV. He'll vest in 2.5 years and at
that point he will have 3.5 years of police experience. He could
take that experience with the law degree, licensed in Colorado
and Alaska, as Senator Elton said, to the feds - to anywhere. He
loves Alaska; he is starting a family here; he doesn't want to
leave, but he may be forced to.
SENATOR BUNDE said he understands that police officers are
actually coming to Alaska because of the economic downturn in
the Lower 48 and that the APD has plenty of applicants of
experienced police officers.
MR. GARCIA said he had a meeting in Anchorage a little while
back where a sergeant who is the director of recruiting
testified that recruiting for APD has "gotten more and more
difficult as Tier IV has come into effect." There are a lot of
applicants, but qualified applicants is a different story.
SENATOR BUNDE asked if the news account was inaccurate that the
APD is hiring experienced police officers from the Lower 48
because they are looking for jobs.
MR. GARCIA answered yes.
3:00:48 PM
BRETT GILLAN, West High School teacher, Anchorage, said that
teacher recruitment especially in the fields of math and science
is incredibly difficult. He guaranteed that within 10 years if
he doesn't have defined benefits, even though he loves Alaska,
he will take the money he has invested and go somewhere that
will give him a safe retirement. He sees more and more of what
he thinks of as mercenary teachers who come up for five years;
then leave to spend their money somewhere else where they can
have the surety of a defined benefit retirement. "And then they
can use your money to see if they can make some on top." It is
bad for the state's finances and it is an awful trend for the
state's schools where, "You lose your leadership."
3:03:01 PM
CHAIR PASKVAN thanked all the people who testified today and
held SB 23 for further hearings and adjourned the meeting at
3:03.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB01 - Alaska Minimum Wage - Bill Packet.pdf |
SL&C 2/5/2009 1:30:00 PM SL&C 2/12/2009 1:30:00 PM SL&C 2/17/2009 1:30:00 PM SL&C 2/24/2009 1:30:00 PM |
SB 1 |
| SB23 - Restore Defined Benefit - Bill Packet.pdf |
SL&C 2/12/2009 1:30:00 PM SL&C 2/19/2009 1:30:00 PM SL&C 2/26/2009 1:30:00 PM |
SB 23 |