Legislature(2019 - 2020)BELTZ 105 (TSBldg)
04/16/2019 03:30 PM Senate COMMUNITY & REGIONAL AFFAIRS
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| Audio | Topic |
|---|---|
| Start | |
| SB46 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 46 | TELECONFERENCED | |
SB 46-TEACHERS & PUB EMPLOYEE RETIREMENT PLANS
3:32:23 PM
CHAIR BISHOP announced the consideration of Senate Bill 46 (SB
46).
3:32:51 PM
SENATOR JESSE KIEHL, Alaska State Legislature, Juneau, Alaska,
sponsor of SB 46, stated that most committee members have seen
in some form of this legislation in the past. SB 46 would allow
teachers, troopers, firefighters, and other public employees
that are new hires to choose between one of two retirement
systems. These are the current defined contribution system where
an employee has an individual account that they are responsible
for investing, or a defined benefit pension system. SB 46 also
allows employees currently working in the defined contribution
systems in Alaska a one-time choice to convert to the new
defined benefit tier. The new defined pension tier created by SB
46 is designed to be more predictable, more affordable, and more
stable than the legacy pension systems the state once had. SB 46
keeps in place all the smart reforms that were put into the law
a few years back in terms of predictability and stability of the
pension system, multiple actuaries, a retirement management
board with disinterested board members, and regular Alaska
experience studies.
SENATOR KIEHL detailed that SB 46 puts in place an element of
risk sharing to protect against the possibility of future
unfunded liabilities. The risk sharing in SB 46 comes in on the
health benefit. The health benefit for retirees has been the
hardest to predict over time. SB 46 provides that the employees
will share in the risk of rising health insurance costs during
their retirement years.
He summarized that the teachers who educate Alaska's children,
the police and firefighters who protect families, the biologists
who manage natural resources, and other public employees who
serve Alaska and its cities will be able under SB 46 to choose
the benefit that best fits their service. Past actuarial
analysis of similar bills has shown that the this structure will
save the state money in the near term and will be cost neutral
or better in the long term.
3:35:28 PM
CHAIR BISHOP asked if the bill will provide an option for a
person in Tier IV to participate in a defined benefit plan.
SENATOR KIEHL answered yes. He explained that someone who is
currently working as a public employee in the Tier IV Defined
Contribution Retirement Plan will have a one-time-irrevocable
opportunity to convert to the new defined benefit tier. The
balance of the person's defined contribution account would buy
their service years in the pension system up to their actual
years worked. However, if the individual's account has a loss,
the state will not pick up the difference. The person can either
receive credit for fewer years in the system or pay the
difference out of pocket. SB 46 is written so that an unfunded
liability is not created from conversions. There is a
conversion, but the conversion is not free.
3:37:12 PM
SENATOR BIRCH remarked that he has not seen a defined benefit
program that has not put an additional burden on the state and
taxpayers. He asked what the current unfunded liability is to
the state from the PERS/TRS liability and will the bill add or
decrease the liability.
SENATOR KIEHL answered that the Alaska Retirement Management
(ARM) Board recently revisited the unfunded liability from old
defined benefit systems for PERS and TRS. The current unfunded
liability is approximately $8 billion.
He emphasized that there is no risk-free retirement system in
the world. The state's current defined contribution system
leaves the risk of an employee outliving their assets on the
individual retiree. The state does not have a trust fund for
senior benefits or other elder care programs.
He explained that SB 46 is designed to have as much stability
and predictability as possible, but with a risk-sharing element.
There have been other ideas brought forward for sharing risk
between employee and employer. The legacy systems put 100
percent of the risk on the employer side, the state, the
municipalities, and the school districts. Currently, the defined
contributions system puts 100 percent of the risk on the
individual employee. The current defined contribution system
makes sense for retirees with military retirement benefits or
individuals who don't plans to stay in Alaska long enough to
vest. However, for those people who do plan to make a career in
Alaska and whose skills will benefit the state over the long
term, the defined benefit pension system set forth in SB 46 is
designed to minimize risk of unfunded liability.
He said he would be happy to work with the committee if there
are other risk sharing elements deemed essential in designing
the bill going forward.
3:40:17 PM
CHAIR BISHOP said the committee will work with Senator Kiehl
during the next session but now he'd like to hear from the
scheduled presenters.
SENATOR BIRCH reiterated his concern that the bill might
increase the existing $8 billion liability. He noted that he
brought the same question up during last year and was told that
providing actuarial information on the net present value of the
liability was expensive. He emphasized that the committee needs
to understand the impact to the state and Alaskans.
3:42:20 PM
CHAIR BISHOP announced that the committee will hear invited
testimony for SB 46.
3:42:40 PM
DAN DOONAN, Executive Director, National Institute on Retirement
Security (NIRS), Washington, D.C., provided an overview titled,
"Defined Benefit Retirement Plans and the Public Sector
Workforce." He discussed the slide DB Pensions Are Cost
Efficient: Still a Better Bang for the Buck" as follows:
• Cost Comparison:
o NIRS looked at the cost to replace 53 percent of final
income under 3 retirement plan structures.
o The defined benefit pension cost 48 percent less than
using individual accounts in a direct contribution
savings plan to provide the same amount of income.
He addressed, "3 Key Reasons Why Defined Benefit Pension (DB)
Plans Cost Less than Defined Contribution (DC) Plans" as
follows:
1. Pool the longevity risks.
2. Maintain optimally balanced investment portfolio, avoid
need to down-shift (risk/return) as nearing retirement.
3. DB plans have higher investment returns and lower fees
compared to individual investors in DC accounts.
He explained that pensions can pool longevity risks. On an
individual level there's a lot of variation in retiree longevity
and lifespan. An individual should be concerned about having
enough to last through retirement, but for large groups
longevity can be estimated. There is an efficiency in planning
and pooling longevity risk. In the past, pensions have updated
longevity assumptions periodically, but many plans now use
generational mortality tables that anticipate future mortality
improvements.
He said pensions can also maintain consistent portfolios.
Individuals should be changing their investments to be more
conservative as they approach and enter retirement. By pooling
investments pensions have a mathematical advantage over the do-
it-yourself type plans.
MR. DOONAN said pensions also benefit from the economies of
scale in professional management. Pension funds systemically
rebalance and tend to not chase the market because a fund did
badly the previous year.
3:46:52 PM
He addressed, "DB Plan's Role in the Public Sector: Workforce
Management" as follows:
• Improve public sector productivity.
• Help recruit and retain quality workers.
• Address teacher shortage.
He noted that the median tenure for public employees is nearly
twice as long as in the private sector. Reasons for the tenure
difference includes the impact of incentives and employee
benefits.
He addressed, "Pensions Help Deliver Strong Mid-career
Retention." He referenced a chart from a study that looked at
teacher pensions and retention in six different states. There is
significant turnover in the early years, some people move jobs
or realize the teaching profession is not a good fit. Once a
teacher stays several years and grows into their job, the
retention rates improve dramatically - generally until teachers
are eligible for retirement. Retirement provisions in the
different systems is the key takeaway for stronger retention for
mid-career workers.
He addressed, "Result: Career Employment Becomes Commonplace"
referencing a NIRS report on teacher pension vs. 401(k)s in six
states where the median age a teacher leaves employment is 58
with 25 years of service.
3:49:19 PM
He addressed, "Case Studies: Risk-Sharing" from a National
Association of State Retirement Administrators (NASRA) report on
"In-depth: Risk Sharing in Public Retirement Plans" as follows:
• Variable Employee Contribution Rates.
• Contingent or Limited Cost-of-Living Adjustments.
• Cash Balance Hybrid Plans.
• Direct Benefit and Direct Contribution Hybrid Plans.
MR. DOONAN explained that new public retirement plans blend the
provisions from the traditional pensions and the 401k plans.
He addressed, "What Resources are Needed to Maintain your
Standard of Living?" and referenced research from Aon that took
a deeper look at retirement needs. He said the private need is a
large bucket that includes employer plans that suggest 11 times
pay at retirement, which is a multiple that seems high to many
people given American's savings levels. Financial advisors often
begin conversations about drawing down assets by using the four
percent rule, which is an amount that could be too aggressive
given the current low interest rates. The report from Aon looks
at different factors that would lead to more customized savings
targets based on age and income levels. For example, Millennials
should have higher savings targets than Baby Boomers because
health care costs are likely to grown faster than wages and
longevity improvements are likely to continue.
3:51:37 PM
He addressed, "Retire Readiness Checkpoints" as follows:
• The average employee needs to accumulate 11.1 times pay by
age 67 to maintain their preretirement standard of living
throughout retirement, after Social Security.
• Employee savings milestones throughout their career,
targets include Social Security participation:
o Age 35: 2.0 multiple of pay saved;
o Age 45: 4.0 multiple of pay saved;
o Age 55: 7.0 multiple of pay saved;
o Age 60: 8.5 multiple of pay saved;
o Age 65: 10.5 multiple of pay saved;
o Age 67: 11.1 multiple of pay saved.
He said for many Alaska public sector employees, knowing how
much to save is hard because they are not covered by Social
Security. The "Retirement Readiness Checkpoints" is a good idea
for private savings in addressing the retirement problems from
volatile returns, low interest rates, runaway health costs, life
expectancies, and the broad challenges for retirement in
general.
SENATOR BIRCH asked him to confirm that the retirement readiness
checkpoint for age 35 is a multiple of 2, which means a 35-year-
old should have saved double their income towards their
retirement to maintain their pre-retirement standard of living.
MR. DOONAN answered yes.
3:54:35 PM
He addressed, "Economic Impact of Alaska's Public Retirees
Spending" as follows:
• Expenditures by public sector retirees' DB pensions provide
steady economic stream to Alaska. In 2016, these
expenditures supported the following in Alaska:
o Over 11,791 jobs that paid $580 million in wages.
o $1.89 billion in total economic output.
o Each dollar in DB benefits supported $1.25 in total
economic activity.
o $319 million in federal, state and local tax revenues.
o Each taxpayer dollar "invested" in plans supported
$4.77 in total economic activity in the state.
He opined that the economic impact of pensions generally gets
less attention. The contributions into the retirement plan does
not disappear, the money gets paid out to real people that live
in communities who spend their money in grocery stores and
restaurants.
He addressed, "83 percent of Americans: Public Pensions a Good
Way to Recruit and Retain Employees" as follows:
• Strongly agree: 45 percent.
• Somewhat agree: 38 percent.
• Somewhat agree: 7 percent.
• Strongly disagree: 2 percent.
• Don't know: 8 percent.
He said NIRS recently did public opinion research on retirement
security. Americans are generally concerned about retirement
security, health care costs in retirement, long-term-care costs,
saving enough, and longevity. Americans have a good view of
their retirement challenges and their concern is not polarized.
NIRS asked if pensions are a good way to recruit and retain
public employees and 83 percent of respondents strongly agreed
or somewhat agreed with the question.
3:56:48 PM
CHAIR BISHOP stated that his intent is to have Mr. Doonan back
in person when the bill is heard again in 2020.
CHAIR BISHOP announced that the committee will hear invited
testimony on SB 46.
3:57:35 PM
JUSTIN BRANDT, Probation Officer, Bethel Probation Office,
Alaska Department of Corrections, Bethel, Alaska, testified in
support of SB 46. He said the Bethel field office is seeing high
job turnover. Trainees have been known to complete their state-
paid academy training and then leave for positions in the Lower
48, mainly due to retirement benefits and a lower cost of
living. Because Bethel is in a remote area, there is no
personnel back up. Probation officers based in Bethel cover an
area the size of Oregon that includes 56 villages outside of
Bethel.
CHAIR BISHOP asked how long he had been with the Bethel
Probation Office.
MR. BRANDT answered five years.
CHAIR BISHOP asked if he came from another state.
MR. BRANDT replied that he graduated from college in West
Virginia and came to Alaska on his first assignment. Some states
require candidates to pay their own way through the academy
training process, but Alaska hires personnel and pays for their
training.
4:01:48 PM
TIM PARKER, President, National Education Association-Alaska
(NEA-Alaska), Anchorage, Alaska, testified in support of SB 46.
He said the issue that SB 46 addresses is the serious problem
with teacher turnover, particularly in rural areas of Alaska,
that is attributed to the current retirement system. The
retirement issue pertains to people in the Teachers' Retirement
System (TRS) Tier III and Public Employees' Retirement System
(PERS) Tier IV. TRS-III is considered the worst in the country
and the system affects the ability to attract and retain quality
educators to Alaska. TRS-III and PERS-IV are nicknamed the death
tiers because an employee does not feel like they can ever
retire because of the incredible amount of risk that they have
to carry.
He noted that TRS-III and PERS-IV changed in 2006, but the
change still needs more work. So much risk has been placed on
employees and the change has been especially hard on the TRS-III
group because they have no Social Security. Under the defined
contribution system, 69 percent of educators will probably
outlive their savings and face the prospect of being destitute.
4:05:14 PM
MR. PARKER addressed the TRS group history in not having Social
Security, explaining that the Territory of Alaska decided in
1951 that teachers would not participate in Social Security and
the PERS group did the same in 1978. A change was made in 2006
on the PERS side where a Supplemental Benefits System (SBS) was
added, but nothing was done on the TRS side, there is just a
defined contribution into a savings account.
He said another issue that TRS-III faces is the federal
government Windfall Elimination Provision that targets states
that are not in the Social Security program and a penalty is
placed on earnings in an individual's life. All the noted
factors increase the retirement risk factor that makes employee
attraction and retention challenging.
He noted that more than 50 percent of the state's teachers and
support professionals are in the defined contribution system. No
one is attending the state job fairs to fill the nearly 1,000
openings that occur on an annual basis. Positions are going
unfilled through the entire year and that is standard for most
Alaska school districts.
He pointed out that salaries in Alaska, especially in the
teaching field, are not keeping up. The state continues to drag
behind inflation and the rest of the country has noticed that
there is a teaching shortage and they are increasing salaries.
More than 20 governors proposed increases in teacher salaries as
part of their budgets in 2019 while Alaska has not. Washington
state had increases of 15 to 20 percent across the board and a
fair number of Alaskan teachers have applied for jobs and moved
there.
4:08:46 PM
He summarized that relying on a savings account is just too
risky. One hundred percent of the risk has been placed on the
shoulders of teachers, plus they do not have an SBS; there is no
other employee group that has that. Teachers are not looking for
something that they do not pay for, but the state needs to make
sure that teachers have a decent system and SB 46 is a solution
that NEA-Alaska favors.
SENATOR BIRCH asked if SBS is a system that school districts can
opt into.
MR. PARKER answered no.
SENATOR BIRCH pointed out that the state has an $8 billion
unfunded liability with respect to the current PERS and TRS
legacy accounts. He said he struggles with the idea of
increasing the current unfunded liability that burdens future
generations. He opined that defined benefit programs are fading
away. He asked at what point should an individual employee be
responsible for setting aside what they need to take care of
themselves when they cease to work.
4:12:34 PM
MR. PARKER answered that the idea that the employee should save
some percentage of money is what the private sector does, but
the employees in the private sector have a Social Security
option. Teachers in Alaska embrace setting aside money with a
return to the Social Security system. Alaska is the only state
that has direct-contribution-only option for teachers. The
savings account is all a retired TRS-III teacher has and 69
percent are projected to run out of their savings during their
retirement.
CHAIR BISHOP asked how many states currently have direct benefit
plans for teachers.
MR. PARKER answered that approximately 50 percent of the states
offer direct benefit plans for teachers with many opting for
hybrid plans. He reiterated that Alaska is the only state with a
direct-contribution-only retirement plan.
CHAIR BIRCH asked if he has exit survey data on teachers leaving
employment in Alaska that are TRS-III.
MR. PARKER answered that school districts do the exit surveys,
but NEA-Alaska does not have a good look at the entire state. He
detailed that every year, Alaska has approximately 9,000
teachers and 1,000 teaching positions come available.
4:16:28 PM
CHAIR BISHOP asked how long teachers stay employed at TRS-III.
MR. PARKER answered that a lot of teachers leave on a regular
basis and close to 50 percent of teachers leave in the first 5
years.
CHAIR BISHOP suggested that NEA-Alaska focus on exit surveys to
get to the root of the problem and let the data help drive the
discussion. He agreed that wages and retirement motivate
employment. He noted Mr. Parker's recollection that in the 1990s
there were over a thousand surplus teachers applying for
positions and today there are basically zero. He said the
legislature knows there is a problem and referenced a bill that
passed the previous year for rehiring retired teachers.
MR. PARKER concurred that the need to rehire retired teachers
has grown because the state is having a hard time attracting and
retaining teachers.
He said he is telling TRS-III teachers to save an additional 25
percent for retirement due to the inefficient retirement system
for teachers.
CHAIR BISHOP noted that improving student outcomes is important
and the importance of investing in teachers for the long run to
improve outcomes. He noted that in the Finland model, one
teacher is with the same kids for seven years.
4:21:26 PM
ROBERT MURPHY, representing self, Kodiak, Alaska, testified in
support of SB 46. He disclosed that he is a PERS-II person who
has seen many changes since he started working for the Alaska
Department of Fish and Game in the 1980s. He said the department
has gone from the premier agency to work for in the state to an
agency that has a difficult time competing with positions in the
federal government or private sector. He opined that the
difficulty in hiring and retention is attributed to the decline
in benefits that are offered.
4:25:11 PM
CHAIR BISHOP said considering that the legislature is near the
end of the session, SB 46 will be held in committee and
addressed early in the next session. He noted that he is a co-
sponsor of the bill and emphasized that he believes a direct-
benefit plan does work, but the legislation must be honest with
the multiplier.
SENATOR KIEHL responded that he looks forward to working with
Chair Bishop during the interim. He said his staff will get back
to the committee with the requested information.
4:27:41 PM
CHAIR BISHOP held SB 46 in committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB0046 Version A.PDF |
SCRA 4/16/2019 3:30:00 PM |
SB 46 |
| SB046 - Sponsor Statement 4.2.19.pdf |
SCRA 4/16/2019 3:30:00 PM |
SB 46 |
| SB046 - Updated Sectional Analysis 4.16.19.pdf |
SCRA 4/16/2019 3:30:00 PM |
SB 46 |
| Supporting Documents- Teacher Turnover Study.pdf |
SCRA 4/16/2019 3:30:00 PM |
SB 46 |
| Supporting Document- DPS Recruitment Retention Plan Overview.pdf |
SCRA 4/16/2019 3:30:00 PM |
SB 46 |
| Presentation_Doonan_April 2019.pdf |
SCRA 4/16/2019 3:30:00 PM |
SB 46 |
| SB046 - Fiscal Note 1-DOA-RNB.pdf |
SCRA 4/16/2019 3:30:00 PM |
SB 46 |
| SB046 - Fiscal Note 2-DOA-Commissioner.pdf |
SCRA 4/16/2019 3:30:00 PM |
SB 46 |
| Letter_AFL-CIO.pdf |
SCRA 4/16/2019 3:30:00 PM |
SB 46 |
| SB 46 Letters- Master file.pdf |
SCRA 4/16/2019 3:30:00 PM |
SB 46 |