Legislature(2023 - 2024)SENATE FINANCE 532
01/23/2024 01:30 PM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB88 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 88 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE BILL NO. 88
"An Act relating to the Public Employees' Retirement
System of Alaska 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 of
Alaska and the teachers' retirement system; and
providing for an effective date."
1:34:00 PM
Co-Chair Olson relayed that it was the first hearing for SB
88. The bill was heard during the previous session, at
which time the committee heard public testimony. The
committee adopted a Committee Substitute (Version O) on May
12, 2023.
1:34:35 PM
KEN ALPER, STAFF, SENATOR DONNY OLSON, discussed a
presentation entitled "Senate Bill 88 - Defined Benefit
Pensions - Update on Process to Date, Senate Finance
Committee - January 23, 2024" (copy on file). He relayed
that at the end of his presentation there would be a motion
to adopt a new Committee Substitute (CS).
Mr. Alper looked at slide 2, "Current Defined Contribution
System in Place since 2006":
• Alaska's public employees (PERS) and teachers (TRS)
had a traditional "defined benefit" pension system
from 1961 (PERS) or 1955 (TRS) until 2006
• Beginning in 2002, Alaska started seeing growing
"past service cost," driven in part by bad actuarial
advice and under-contribution to the system
• SB141 passed in May 2005; the new "tier" for both
PERS and TRS took effect for all new employees
beginning on July 1, 2006
o New plans also changed the retirement health care
system, putting most of the costs on retirees and the
Medicare system
• Subsequent legislation from 2008 established a
process for the state to make additional contributions
to the system to help pay down the unfunded liability
Mr. Alper noted that the term "past service cost" was
defined in statute and signified the difference between the
future cost to pay pensions and the amount of funds
currently available. He expanded that a synonymous term
sometimes used was "unfunded liability."
Mr. Alper spoke to slide 3, "Various Proposals to Restore
Defined Benefit in Recent Years":
• Proposals to return to Defined Benefit have been
introduced in every legislature beginning in 2007
• There have been bills for full repeal/restoration,
hybrid systems, and plans limited to certain worker
groups such as teachers or public safety employees
• Proposals coalesced around principles of:
o Restoring Defined Benefit for all employees
o Minimizing chance of accruing new past service
costs
o Keeping the current retirement health system
Mr. Alper discussed attempts to go back to a defined
benefit (DB) system.
1:38:06 PM
Mr. Alper referenced slide 4, "Specific Concerns on
Recruitment and Retention":
• High vacancy rates/reduced customer service
• High turnover/high training & recruitment costs
Increasing number of employees taking their
training, and their portable retirement accounts, to
jobs out of state
• Growing use of bonuses and other work-arounds
It is unclear to what extent this is related to the
pension system, but many employers and employee groups
believe there is a strong correlation. There is also a
growing body of research indicating this.
Mr. Alper relayed that much of the conversation pertaining
to the bill was related to recruitment and retention, and
the state having a full workforce. He mentioned the
presentation from the Office of Management and Budget (OMB)
earlier in the day that had referenced vacancy rates in
state agencies. He discussed the effects of high vacancy
rates and increased training costs. He cited that the goal
of the pension system was to eliminate the problems listed
on the slide. He stated that it was unclear to what extent
the state's personnel problems were related to its pension
system but thought many believed there was a strong
correlation and he thought there was a strong connection.
Mr. Alper turned to slide 5, "Major Provisions of Bill":
SB88 was introduced on March 1, 2023 and has 11 co-
sponsors
• Pension accrual of 2% to 2.5% per year of service
comparable to pre-2006 tiers
• Variable employee contribution rate between 8% and
12% that can be increased by the ARM board when the
fund is stressed
• Variable employer contribution that can be reduced
when well funded
• Variable post-retirement (inflation) adjustments to
keep the plan funded at greater than 90%
• No changes to the current retirement health system
(both the "Health Reimbursement Arrangement" (HRA) and
the share of major medical premium costs). Major
savings vs. the legacy health plan
• New employees enrolled in new system
• Option for current active Defined Contribution
employees to transition to new system. Division of
Retirement and Benefits will calculate how to convert
each employee's DC account balance into years of
service
Mr. Alper discussed post-retirement inflation adjustment
and cited that it was not automatic and only kicked in if
there were adequate funds in the system. He cited that the
current health plan, which was kept in place with passage
of the bill, was a great savings to the state.
Mr. Alper noted that the Division of Retirement and
Benefits (DRB) would have a short-term surge of activity to
calculate the transition of current employees to the new
system.
1:42:39 PM
Mr. Alper considered slide 6, "Process in Senate Labor and
Commerce Committee":
• Eight hearings in March and April
Major changes of Committee Substitute:
• Increased maximum employee contribution rate and
made employer contribution rates able to flex lower
when adequately funded
• TRS "high 5" years to determine basis for pension
can be non-consecutive
• 50% reduction to post retirement inflation
adjustment (PRPA) for nonresidents
• Tighter requirement for ARM Board to separately
track the accounting for the new tier
• Provision added to allow employees transitioning
from DC to the new plan to buy back any time if their
funds are inadequate
• Former DC employees who return to service can also
opt into new plan
Mr. Alper commented that Senator Jesse Bjorkman had heard
the bill eight times in the Senate Labor & Commerce
Committee. The bill would allow for purchase of years of
service.
Mr. Alper displayed slide 7, "Process to Date in the
Finance Committee":
• Five hearings between May 2 and the end of session,
including public testimony
• Work draft Committee Substitute \O adopted on May
12. The CS made a handful of mostly technical changes
• Two additional amendments received, incorporated in
new CS\T
• We've heard from three separate actuaries:
• The Finance Committee hired an actuary, Gene
Kalwarski (Cheiron), who presented his report and
analysis on May 12
• The stakeholders' actuary, Flick Fornia, also
presented on May 12
• The Department of Administration's actuary,
David Kershner (Buck) presented his analysis and
fiscal note on May 13
1:46:34 PM
Co-Chair Olson asked Mr. Alper to allow time for questions.
Senator Wilson asked if the Department of Administration
(DOA) had created a new note for the forthcoming CS Version
T.
Mr. Alper explained that the fiscal note the committee had
was written to Version D of the bill, which had come from
the Senate Labor & Commerce Committee. He explained that
there would be new fiscal notes generated when the
committee passed the bill. He explained that the changes
made in committee were relatively small in fiscal impact.
He thought some of the source data would be different and
would result in a different analysis.
Senator Wilson asked about accounting being separate from
the health trust and wondered about fiscal aspects of the
bill being changed.
Mr. Alper did not know to what extent the assumption was
built into the fiscal notes. He recalled that Senator
Wilson had raised the question the previous session. He
noted that the health plan in the bill and in the current
system were the same. He referenced an inadvertent
"diminishment issue," where people from one plan would pay
for the people from another plan. He mentioned that the new
CS contained an amendment that stipulated that the two
plans would remain separate from each other.
Senator Wilson commented that the current plan was
significantly overfunded and expressed concern about
financial ramifications with a new plan. He wanted to know
if the department had a way to contact the actuaries to see
if the matter had been incorporated into the actuarial
assumptions.
Mr. Alper cautioned that he was not qualified to
substantively answer Senator Wilson's question. He relayed
that invited testimony could better address the question.
He noted that DRB would be in committee the following day
and could address the topic.
1:49:57 PM
Co-Chair Stedman thought there was always confusion when
there were dueling fiscal notes and dueling actuaries. He
thought the legislation was significant. He understood that
Buck Consulting was doing an updated analysis, which he
thought would clear up some of the discussion. He thought
there needed to be more of a comparison and contrast
between the current system and the system proposed in the
legislation. He thought both systems had pros and cons. He
suggested that the committee ask the department to address
things with clarity during its presentation in committee
the following day.
Mr. Alper agreed that having dueling actuaries was
problematic and noted that his upcoming slides would
address the topic. He thought upcoming testimony would also
be addressing the topic. He noted that he had spent some
time during the interim discussing the matter and had
learned some interesting things.
Co-Chair Stedman commented on references to the causes of
high vacancy rates. He thought salaries and housing were
big issues. He wanted the committee to note that North
Dakota had switched to a defined contribution (DC) plan,
and had shut down its defined benefit (DB) plan, and were
$2 billion in deficit. He thought the vacancy issue was
nationwide, regardless of the benefit plan.
Co-Chair Olson agreed that there was a workforce shortage
nationwide.
Mr. Alper referenced the three actuaries listed on slide 7.
Mr. Alper highlighted slide 8, "Actuarial Analysis and
Fiscal Notes":
• All analyses have separately modeled three different
employee groups: PERS general, PERS public safety, and
TRS
• Cheiron "base case" was more or less fiscally
neutral
• Buck analysis showed a cumulative $1.2 billion cost
to the state over 16 years, with $700 million for
state employees and $500 million in additional state
contributions towards municipal and school district
employees
• The first six years of the Buck analysis was used
for the two major fiscal notes attached to the bill
Mr. Alper relayed that the Buck Consulting analysis had
been surprising and was part of the two fiscal notes before
the committee.
1:55:05 PM
Mr. Alper looked at slide 9, "General Concerns with Fiscal
Notes":
Cheiron's analysis was an "apples to apples"
comparison assuming the same employee base for both
the status quo and if the bill passed Buck's analysis
assumed rapid and substantial improvements to
recruitment and retention should the bill pass.
Because of this:
? The bill led to longer-tenured, higher paid
employees and lower vacancy rates, and a
significantly higher payroll than the status quo.
By the last year of the analysis (2039), there
was a $250 million difference in payrolls
? The Buck analysis also increases the state
contribution rate when needed, without
concurrently adjusting the employee contributions
The bulk of the fiscal note cost is due to the larger
payrolls and the bill's "success" in solving our
workforce problems.
If it doesn't actually work, those costs won't be
incurred
Mr. Alper discussed the assumptions behind the two
actuaries' analyses.
Co-Chair Olson asked how Buck Consulting could be so
certain about the improvement of the recruitment and
retention rate.
Mr. Alper thought Co-Chair Olson posed a great question,
and suggested that any such analysis would carry certain
assumptions. He continued that there were two decisions
before the committee: whether it wanted to pass the bill,
and if the committee was ready to fund the outcome. He
summarized that if the bill ended up not working, there
would not be an additional cost. He pondered whether the
legislature was prepared to take the chance of the new
system working and then fund the solution. He relayed that
he had been surprised at the substantial difference in
payroll was in the "after" scenario.
1:57:28 PM
Senator Bishop asked Mr. Alper to define "fixing the
problem."
Mr. Alper relayed that he had been led to understand that
the problem was in recruitment and retention, high vacancy
rates, and not being able to get qualified state employees.
He mentioned the tremendous inefficiency of training
employees at great cost, after which the employees left the
positions after only a few years.
Senator Wilson affirmed that what Mr. Alper referenced were
problems but did not think all the issues were tied to the
pension problem. He referenced toxic workplace
environments. He thought the state had not addressed the
subject of workplace culture and that there was an issue of
bad management. He commented on the fiscal notes. He
considered past budgets and thought the state had paid more
due to overtime and bonuses due to a diminished workforce.
He thought the cost of full staffing would not necessarily
be greater.
Mr. Alper referenced questions in committee when Buck
Consulting was present regarding indirect costs such as
bonuses, training costs, recruitment costs, and letters of
agreement. He noted that the indirect costs were not baked
into the personnel cost directly and were not in the fiscal
note. He mentioned forthcoming invited testimony from an
economist included economic impacts the state was currently
absorbing that would go away if it solved its recruitment
and retention problem.
Senator Wilson expressed confusion about whether the state
would see savings or more costs if the bill was passed.
Mr. Alper identified that the payroll cost of salaries
would go up. Some of the other costs absorbed by the
agencies (recruitment, training, advertising) would go
down. He mentioned the impact of the economy from reduced
government service quality. He deferred further details to
invited testifiers later in the meeting.
Senator Wilson wanted to understand the overall financial
impacts of the bill.
2:01:22 PM
Co-Chair Stedman wondered why the bill was targeted as the
answer to recruitment and retention issues when other
states with DB plans had the same issues. He thought there
were other issues beyond retirement.
Mr. Alper was not certain he had an answer to the question.
Co-Chair Stedman reiterated that both DB and DC plans had
strengths and weaknesses. He thought a weakness of the DB
plan was that the benefit structure could change in the
future but not be adjusted. He mentioned the scenario
happening under the old plan, which resulted in unfunded
liability. He mentioned the constitutional protection of
the benefits system and the concept of diminishment of
benefits.
Mr. Alper relayed that he was not a part of the creation of
the bill. He thought Co-Chair Stedman had brought up an
important constitutional protection in the state, under
which it was not possible to reduce a pension benefit. He
asserted that the bill had certain flexibilities in order
to prevent the system from "going underwater." He cited
components such as the employee contribution rate, which
started at a base 8 percent of salary, but could be raised
up to 12 percent under the terms of the bill.
2:04:06 PM
Co-Chair Stedman wanted to clarify that the bill would not
stop the plan from being underfunded. He understood that in
the event that underfunding exceeded 90 percent, then the
contribution rates changed to alleviate and eliminate the
unfunded liability.
Mr. Alper believed Co-Chair Stedman's understanding was
accurate.
Co-Chair Stedman thought the bill did not prevent unfunded
liability, but did have a mechanism to have employees and
retirees contribute more to pay off the unfunded liability.
He thought the shared cost provision was a good part of the
bill. He shared a concern about teachers, who were not in
Social Security nor in the state's Supplemental Benefits
System (SBS), which was a replacement for Social Security.
He pondered that state retirees had the opportunity for 100
percent salary replacement in retirement, however teachers
did not. He was concerned that Teacher's Retirement System
(TRS) employees were not being offered a solution,
regardless of the system that was adopted.
Co-Chair Olson thought every retirement system had
different benefits.
Mr. Alper thought Co-Chair Stedman was correct regarding
the teachers opting out of SBS and Social Security. He
thought when there was a stronger pension system for
teachers 20 to 30 years previously, but now in the DC
system he thought teachers were feeling very underfunded.
He thought a fundamental long-term difference in value
between the DB and DC systems was that DB funds were
professionally managed and tended to earn a stable rate of
return and grow more where as a DC plans were left with
individuals choosing investments. He agreed that the bill
did not resolve the fact that a chunk of retirement stream
was missing from TRS, and that the bill would not solve the
matter.
2:07:57 PM
Senator Kiehl thought there had been good discussion. He
thought Co-Chair Stedman was correct in looking to peers in
other states. He mentioned West Virginia led with
eliminating its DB plan for teachers and had soon after
returned to the same system after a negative experience. He
mentioned the committee having received a great deal of
information the previous year on the returns from both DB
and DC systems. He asked Mr. Alper to remind the committee
if the DC returns were generally as good as the DB returns
in projections. He recalled an average of 75 basis points
lower.
Mr. Alper recalled that DC returns were lower to the
magnitude of 75 to 100 basis points. He stressed that
individuals would naturally not do as well as professional
investors.
Senator Wilson pondered whether Mr. Alper was saying the
purpose of the bill was to put state employees' money in
the hands of professional money managers since the
employees could not manage it wisely.
Mr. Alper appreciated Senator Wilson's framing of the
concept with support of individual rights. He commented
that it was fine to rely on those with a different level of
expertise.
Senator Wilson was waiting to hear a yes or no.
Co-Chair Olson did not think Senator Wilson had asked a yes
or no question.
Co-Chair Stedman relayed that he had asked the department
to look at performance and update the DC plan data. He
thought there were clearly some areas to improve upon. He
thought there were some funds that outperformed the DB plan
but agreed that a professional money manager had an edge
over a novice, which needed to be addressed through
education and fund selection. He thought the contribution
rate could be adjusted to compensate.
2:11:51 PM
Mr. Alper went back to slide 9. He recounted that the Buck
analysis made certain assumptions of growing state payrolls
and increased costs and that the bill would succeed.
Mr. Alper showed slide 10, "Thank You":
Feel Free to Call or Email with Any Questions
Ken Alper
[email protected]
(907) 465-8163
Mr. Alper recalled that at the end of the previous session
there was a bill and a fiscal note, and pondered that the
committee now knew the source behind the fiscal note
pointed out that there was a CS that the committee could
consider if so desired.
Co-Chair Stedman noted that there was a substantial number
of people, including teachers and other employees not in
the state system, that were not in SBS nor Social Security.
He thought the matter was a local issue and mentioned many
firefighters and police in the state. He referenced past
updates to the retirement system and thought it was an
oversight that employees were not required to be in Social
Security, SBS, or some equivalent.
Mr. Alper noted that there was a series of documents that
had been brought to committee the previous year that
provided details regarding what Co-Chair Stedman
referenced. He thought the Municipality of Anchorage and
the Municipality of Juneau were still in Social Security.
He noted that the documents included a list of which
jurisdictions were in which plan or neither plan, including
teachers. There were a substantial number of local
governments that were in neither plan, and the employees
were worse off than the employees that were in one or the
other. He thought the problem was not addressed in the bill
and needed to be addressed in the years to come.
2:15:33 PM
Senator Kiehl MOVED to ADOPT proposed committee substitute
for SB 88, Work Draft 33-LS0505\T (Klein, 1/22/24).
Co-Chair Olson OBJECTED for discussion.
Mr. Alper noted that the "T" version of the bill built upon
the "O" version that had already been discussed. He
addressed two changes to the bill. He mentioned that the
underlying bill allowed for both the employer and employee
contribution rates to increase when needed to keep the
funding solvent. The CS provided that the costs would
increase in sync with one another, thereby preventing
increased costs being borne by one entity. The new CS would
require that both the employers and employees would equally
share costs of increased costs. Likewise, if the trusts
were adequately funded and rates were going down, the
contributions would do so in sync. The second change,
referenced earlier by Senator Wilson, pertained to the
health trust. The health plan was not being changed, but
bill added language that the health trust for the new plan
would be administered separately so there was no comingling
or diminishment in value.
Senator Wilson referenced the first change pertaining to
employer and employee contribution rates, and pondered why
a governor experiencing financial constraints would want to
fund 100 percent when employees and employers could
contribute more and lower the deficit.
Mr. Alper reminded that employers were both the state and
the local governments. He mentioned that the Alaska
Retirement Management (ARM) Board was an independent
fiduciary body that authorized the changes, and if the
employer rate increased it would be shared by employers. If
the rate was not increased and if the fund were left short,
it would all fall to the state through the short-funded
mechanism. He communicated that he was going beyond his
area of expertise and should end his remarks on the topic.
He added that the intent was to not let the funding get
below 90 percent, and he thought the language of the bill
stipulated that if it fell below 90 percent, the rates were
mandated to go up to prevent it getting worse.
Senator Wilson thought what Mr. Alper described was in the
new bill in Section 69. He considered how often the ARM
Board actuaries would review the rates.
Mr. Alper assumed that the director of DRB could answer
Senator Wilson's question, and would be present in
committee the following day.
2:20:34 PM
AT EASE
2:22:41 PM
RECONVENED
Co-Chair Olson WITHDREW his OBJECTION. There being NO
further OBJECTION, it was so ordered. The CS for SB 88 was
ADOPTED.
Co-Chair Olson relayed that the committee would hear
invited testimony from an actuary that would provide an
analysis of the bill.
2:23:17 PM
GENE KALWARSKI, CEO, CHEIRON (via teleconference), relayed
that as Mr. Alper had noted, back in May his organization
performed an analysis that had come out cost neutral and
had not performed further analysis since that time. He
wanted to make some supplemental comments that were not
shared the previous May.
Mr. Kalwarski discussed a presentation entitled "Senate
Bill 88 - An Actuarial Perspective" (copy on file).
Mr. Kalwarski looked at slide 1, "Gene Kalwarski Selected
Work Experience
• Founded Cheiron, September 2002
• Opened Washington DC office of Milliman Inc,
in 1981 and served on the company's Board of
Directors
• Chief Actuary policy department of the Pension
Benefit Guaranty Corporation
• Substantial experience in testifying before Congress
and Legislative bodies
– Discussed legislative proposals to address the
multiemployer pension crisis
– Educated State and House congressional staff on
the legislative proposals
Mr. Kalwarski reviewed slide 2, "Public Sector Experience,"
which listed numerous states, cities, and counties that he
had worked with.
Mr. Kalwarski spoke to slide 3, "Specific Plan Experience,"
which showed six plans that that he considered examples of
some of the worst-funded cities in the country at one time.
He mentioned the city of San Diego, which had been a client
of Cheiron since 2005. In 2012 the city had closed the
system and created a DC system like Alaska. Two years ago,
the city was forced by the state court to reopen the plan.
He noted that it took about two years for most people to
transition back to the DB plan.
Mr. Kalwarski referenced slide 4, "May 2023 Buck Analysis
on SB 88
• Adds $1.2 billion in pension and health costs
– Primary driver is change in member retention
– In today's dollar the impact is $660 million
– Over the next five years, this impact is $147
million
• Buck Analysis does not reflect substantial economic
benefits of restoring DB pensions
• Actuarial Forecasts become less and less reliable in
the out years
Mr. Kalwarski noted that the $1.2 billion listed on the
slide was a cumulative number, and the present value with a
reasonable discount rate would be around $660 million. He
stressed the need for economic analysis.
Mr. Kalwarski turned to slide 5, "Buck Payroll and Benefit
Cost Projections," which showed a line graph depicting
payroll before and after the passage of SB 88, taken
directly from the Buck analysis. The top showed the payroll
Buck projected before SB 88, and the green line showed the
payroll after SB 88. The line showed increasingly divergent
outcomes. The bottom graph showed the pension and health
cost differential. He pointed out that not much was
occurring until 2031 or 2032, when there was change because
of the increase in payroll divergence. He did not know if
the divergence could continue forever.
Mr. Kalwarski considered slide 6, "Buck Headcount
Projections," which showed two bar graphs of new hires
versus SB 88 plan transfers compared before and after SB
88. He noted that the slide was mislabeled and should be
titled "Buck Payroll Projections." The point was to show
new hires and members in the DC plan. He noted that the
light blue on both graphs denoted new hires. He observed
that there were far more new hires before SB 88 than the
graph below, because of retention, which was shown by the
red bars versus the green bars. He pointed out the last
year (2039), showed twice as many people still there as
compared to the top chart.
Mr. Kalwarski displayed slide 7, "Summary of Buck's
Analysis
• It is arithmetically accurate
• Reflects the benefit cost associated with increased
retention of employees which is the goal of SB 88
• Does not reflect the substantial economic benefits
resulting from increased employee retention
2:28:12 PM
Co-Chair Stedman referenced increased employee retention
and thought there was previous testimony regarding
employees that did not stay for 20 to 30 years. He wondered
about the actual projected number of employees that would
be retained. He did not think the data pertaining to
retention of DC employees versus DB employees showed much
difference.
Mr. Kalwarski thought the question should be asked of Buck
Consulting the following day, since the retention
assumption was made by Buck. He mentioned the difficulty in
retaining teachers and public safety employees, who could
leave the state for a better DB pension elsewhere. He
thought the number was significant. He thought all states
faced a retention problem but suspected that Alaska's
problem was more severe because public safety and teachers
wanted a DB pension.
Co-Chair Stedman thought the question was straightforward.
He thought a comparison of retention amongst states should
not be difficult to obtain. He mentioned that Alaska's
hiring data was public and imagined that other states' data
was also public.
Mr. Kalwarski was certain that the ability to retain
particularly public safety employees and teachers in Alaska
was more difficult than in any other state that had a DB
system. He suggested asking Buck Consulting for data on the
turnover rate differential between having a DB system and
not having a DB system, which was what produced higher
payrolls.
2:32:07 PM
Senator Wilson mentioned Mr. Kalwarski's inclusion of
slides from Buck Consulting. He asked if Mr. Kalwarski had
done work for Cal PERS.
Mr. Kalwarski relayed that his agency had done work for Cal
PERS but was not the system's actuary.
Senator Wilson relayed that he was in Los Angeles County
and had visited a job fair and spent time in discussion
with recruiters at a California Highway Patrol booth. He
mentioned that he had discussed recruitment issues and
retirement and benefits, and the recruiters had indicated
that they had the same set of issues. The recruiter had
mentioned issues with salaries. He discussed work with the
National Conference of State Legislatures (NCSL) and
learning about the changing workforce and the "gig
economy." He asked if there was a generational difference
that would cause higher turnover. He suggested that the new
generation of workers coming into the workforce had a
higher rate of turnover.
Mr. Kalwarski agreed that there was a much higher rate of
turnover in younger workers, which was already in the
assumptions. He reiterated that he had been discussing
public safety employees and teachers that had reached mid-
career where there was higher turnover without a DB plan.
He noted that Buck had assumptions about the subject, and
should be able to answer the question directly the
following day.
Senator Wilson asked Mr. Kalwarski about the number of
years before someone became a longer-tiered employee.
Mr. Kalwarski noted that his sister was a teacher and had
recently retired. He thought that when she had reached
about age 40 she had realized that retirement and a DB
system was important to her. He qualified that the
information was anecdotal.
Senator Wilson asked if Mr. Kalwarski was saying that
employees from age 24 to age 40 were entering the workforce
before thinking about retirement.
Mr. Kalwarski clarified that he was not saying that the DB
system helped hiring new employees, but rather he was
discussing retention.
2:36:19 PM
Mr. Kalwarski returned to slide 7, and pointed out that the
benefit cost was limited to pension and health and did not
reflect economic benefits. He noted that actuaries were not
skilled to quantify the economic benefits of increased
employee retention.
Co-Chair Stedman discussed the concept of the DB and DC
systems, and asked if there was an age group or time span
that the DC plan would be of more interest to employees, or
if the DB plan would always prevail.
Mr. Kalwarski relayed that he had seen from experience that
people in their 20s and early 30s did not care that much
about DB plans because they did not view their employment
as a career, although public safety and teacher employees
tended to be more career minded.
Co-Chair Stedman clarified that he was inquiring about the
analysis. He asked about those working in a DC plan for
five, ten, or twenty years; compared to working the same
amount of time in a DB plan. He pondered whether there was
a difference in the plans where one plan was better for a
certain age group or length.
Mr. Kalwarski considered a person that worked five years in
the DB plan. He estimated that at age 65 the DC program
would be greater, but as time went on the DB plan would
take over.
Co-Chair Stedman mentioned testimony that referenced work
going past five years into the teens.
Mr. Kalwarski thought once an employee reached ten years,
the DB plan would have taken over [to be better].
Co-Chair Stedman pointed out that the earnings potential
from the DC plan was almost always less than that of the DB
plan. He referenced comments made by Mr. Alper. H ewHe
referencved
Co-Chair Stedman noted that once an employee separated from
the DB plan, the benefits were frozen and did not increase.
If one was in the DC plan, the money stayed with the
employee and compounded for the next 30 years.
Mr. Kalwarski hypothesized about a DB plan frozen at $1,000
per month, and the value of the $1,000 increased with
interest as the employee approached age 65. He summarized
that the present value of $1,000 per month payable at age
65 was much greater than the present value of $1,000 per
month at age 30, payable 30 years in the future.
Co-Chair Stedman thought the vast majority of employees did
not stay for 30 years.
Mr. Kalwarski respectfully disagreed. He believed that for
a person who left at 15 years, a DB pension at retirement
was greater than accumulated contributions from a DC plan.
2:41:44 PM
Senator Kiehl thought it sounded as though, considering
plan design and employee incentives, an employee working
five to eight years in a DC plan and then left money in the
plan and moved elsewhere for a DB plan would get a maximum
individual retirement.
Mr. Kalwarski agreed because in the first five years the DC
plan benefit could be greater. He qualified that it was not
common for employees that worked only five or six years in
a DC plan environment to leave money for 30 years. Many
individuals took the money out to use for expenses.
Senator Kiehl considered plan design and estimated the
average age of a new employee in Alaska was 44 or 45. He
mentioned the state's desire to recruit young Alaskans into
public service, and thought it sounded like for the average
individuals coming in mid-career would be better off with
the DB plan. He thought that without a DB plan there was an
incentive for the employees to go.
2:44:13 PM
Co-Chair Stedman wanted to hear from Mr. Kalwarski
regarding when a DC plan might be preferential to a DB
plan.
Mr. Kalwarski thought there was no one answer, and that Co-
Chair Stedman's question was dependent upon the plan
provisions. He asked for an example of a DC plan formula
versus a DB plan formula.
Co-Chair Stedman thought Mr. Kalwarski's testimony made it
sound as though the DB plan was always preferential. He
recalled other testimony in committee that suggested there
were pros and cons to each plan, depending upon the
structure and retention issues. emHe mentioned the
structure of the economy, and generations and how they
viewed employment.
Mr. Kalwarski noted that his early comments were not meant
to indicate that a DB plan was always better, and he had
expressed that in the short term a DC plan could provide a
better benefit.
Mr. Kalwarski turned to slide 8, "What The Forest
Includes
• Extra $2.7 billion in payroll
– Where will the money be spent?
– Where will the higher pensions be spent?
– How much more taxes will the state receive?
– Higher income => Improved Morbidity
– What will be the impact of improved services?
• Significant cost savings in employee recruitment and
training
• Etc.??..
Mr. Kalwarski noted that actuaries were not trained in
economics, and he had urged all parties to seek out an
economist that could speak to the issues listed on the
slide.
Senator Bishop commented that the third biggest cost driver
in the budget was health care. He mentioned living with
dignity in one's retirement years. He commented on the cost
of staying in a retirement home. He mentioned his father,
whose DB plan was paying his way in a retirement home.
Co-Chair Olson relayed that the next presenter was an
economist on contract with the Pension Coalition. He noted
that she had provided the committee a report on the fiscal
and economic impact of SB 88 (copy on file).
2:48:27 PM
TERESA GHILARDUCCI, ECONOMIST, PENSION COALITION (via
teleconference), introduced herself and explained that many
of the questions that Co-Chair Stedman had asked had been
asked and answered by economists over the previous 20
years, especially from data from the University of
Michigan. The university had utilized a survey on health
and retirement that had looked at how people fared in old
age and stayed connected to their jobs throughout their
lives. She mentioned references in her report to factors
such as the generational turnover rate, and experience and
productivity profiles of police and teachers. She discussed
pension design that was appropriate to high peak careers
versus shorter careers. She thought she had anticipated an
answered many of Co-Chair Stedman's questions. She noted
that her testimony would hone in on about 50 years of
research by labor economists that want to help employers
align compensation to the needs to the employee.
2:50:48 PM
Ms. Ghilarducci referenced her biography (copy on file) and
noted that she had been teaching for about 40 years, with
25 years at the University of Notre Dame as a full
professor. She was an economist and had advised former
California Governor Arnold Schwarzenegger on pension
design, and had worked for eight years as a trustee of the
Indiana Public Employees System to oversee employees move
from a DC plan to a DB plan. She mentioned similarities
with Alaska including high turnover and fear of poverty in
old age. She thought DC plans could work on paper, but in
real life people tended to draw from the plans before
retirement and studies showed that those with only DC plans
had a high risk of poverty in old age. Those with a DB
plan, even in the plan for 10 to 15 years, had almost zero
risk of poverty in old age.
Ms. Ghilarducci shared that she had been appointed by the
President of the United States for 12 years a pension
advisory board for design. She had recently consulted for
the government of Puerto Rico and had testified in Congress
over 15 times as well as before the state legislatures in
multiple states. She noted that Nebraska was another state
that had gone to a DC plan, and because of problems with
turnover in occupations where experience mattered had moved
over to a DB plan.
Ms. Ghilarducci emphasized that employee recruitment and
retention would cost more money. She pondered that the
state could raise pay quite a bit to overcome incentive
that DC plans gave before moving on. She considered that a
less costly way of keeping people was to change the design
and adopt a DB plan, which she thought was the best design
for employers who employees had productivity that increased
over time and were essential for training and onboarding
new employees. She noted that a state that cared about the
efficiency of the pension dollar would choose a DB plan,
which earned on average .7 percent more than a DC plan. If
one added risk and fees, a DB plan earned even more;
primarily because of scale. A DB plan had scale and could
have much more of a diverse portfolio, which could offer a
much higher return for lower risk than a DC plan. She added
that DC plans had almost all liquid assets. She thought
that matching employees' contributions through liquid
assets (when they were supposed to save long term) was a
mismatch of the appropriate assets to the goals of the
savings.
Ms. Ghilarducci relayed that her much longer report showed
that there were four sources of economic savings from
switching from a DC plan to a DB plan. She would speak to
two of the sources, which were the most direct and added up
to about $76 million in savings per year to the Alaska
treasury. She cited that the biggest direct cost savings
from reducing the hiring, training, and separation costs of
employees. She noted that there were many studies that
showed a DB plan design was very much causal of a lower
turnover rate, especially for those in their seventh year.
2:55:18 PM
Ms. Ghilarducci continued that employee's tenure and age
made people highly sensitive to what their future was. She
added that Buck consultants had access to the same
literature and research and agreed. The second source of
direct cost savings was a higher rate of return that would
yeild about about $14 million per year in savings. She
noted that the indirect costs that Senator Bishop referred
to was that a DB plan kept people in the job and if people
stayed in jobs they were more likely to retire in the
state. She cited that a city or state employee that stayed
in the state was quite valuable for the stability of
neighborhoods and for the small businesses. A DB plan had a
larger economic multiplier because the spendings stayed in
the state, rather than a DC plan retiree that might leave
the state.
Ms. Ghilarducci continued that a DB plan kept people in
jobs longer, particularly teachers, and those in public
service, public health, and public safety. She discussed
the quality of schools and public safety being an important
aspect of private investment. An economic benefit of the DB
plan was to attract private investment, but it was not
quantifiable and not in her report. She continued that were
three ways employee turnover became important to decrease.
The high turnover lowered productivity, which meant the
cost of the employee was higher than it should be. She
discussed productivity levels. She provided examples.
Higher turnover led to lower morale of longer-term
employees, and having to train people frequently led to
lower morale.
2:59:05 PM
Ms. Ghilarducci stated that the third reason it was
important to lower turnover was that it distracted highly
productive employees that were called on to do on-the-job
training. She referenced an earlier question by Co-Chair
Stedman or Senator Wilson regarding a generational change
in attitudes towards retirement security, and whether
younger people were less concerned about employment
security and pensions. She noted that studies showed the
opposite, and that the current generation was one of the
most financially literate. She commented that Generation X
and Generation Y were more financially literate, perhaps
because because they have had to take on substantial
student debt. She shared she had talked to a 15-year-old
the previous day who was interested to know how to manage
debt later on. She shared that there was a lot of
literature that showed that attitudes towards economic
security led to more attraction towards better benefits,
including a DB plan. She added that the DC plan, which
included the ability to withdraw funds after five years,
signaled to an applicant that perhaps the employment
structure was not as hospitable to someone who wanted a
long-term career. Conversely, a DB plan signaled that the
employer had a high commitment to have an experienced
workforce.
Ms. Ghilarducci began to conclude her remarks and noted
that economic research found that a DB plan was best in the
situation that an employer needed trusted and experienced
workers. It was especially true when the employee's work
depended upon trust because it was not easily monitored and
quality was not measured hour by hour or day by day.
Aligning compensation and benefits with productivity was
consistent with the principles of strategic human resource
management. She emphasized that if one's organizational
goal was to have an experienced and productive workforce,
then it would need a compensation that indicated as much.
She emphasized that a DB plan dollar was much more
efficiently invested than a DC dollar.
3:02:29 PM
Senator Wilson clarified his earlier question. He asked if
the younger generation was more astute, if it was not as
easily tricked by golden handcuffs.
Ms. Ghilarducci thought that the younger generation knew
that DB plans were more secure, and many of them had said
they do not want to repeat the mistakes of their parents.
The information came from studies of the Pew Commission and
was especially true of those that wanted to go into public
safety, public health, and teaching. She qualified that the
information was empirical and not ideological.
Senator Wilson looked at page 5 of the study provided by
Ms. Ghilarducci. He discussed recruitment of teachers and
considered university slots for job openings. He thought
the same could be said for attorneys and doctors. He
considered how teachers in New Jersey and New York had the
highest paid teachers in the nation and also had social
security. He wondered if Alaska was able to pay more and
secure Social Security for teachers if it would be able to
retain them as employees.
Ms. Ghilarducci considered which part of the pay package
would connect a worker to the position, and thought it was
very difficult to decompose and quantify. She was convinced
that the DB plan design and pay were particularly
interesting for workers who were trying to decide whether
to move from a profession or employer. She referenced
Senator Wilson's mention of golden handcuffs, but thought
it was often welcome for people that wanted to stay in
their career. She thought all of the elements helped to
retain employees, but considered that the DB plan design
was of particular strength in keeping people in their jobs.
3:05:58 PM
Co-Chair Olson asked if Ms. Ghilarducci had any additional
remarks.
Ms. Ghilarducci explained that after 40 years of 401k DC-
like plans, there was a lot of data about what such designs
did. She noted that a lot of people tended to withdraw from
the plans, almost entirely before retirement, and thought
it was one of the biggest failures of the American DC
system. She thought the plans looked good on paper but
people tended to access the cash. She made note of a trend
in the U.S. for DC providers to try to make them more like
DB plans. Unfortunately, the providers were going towards
more of a commercial annuity, which were high-priced and
did not provide the services that a DB plan could. She
mentioned the struggle in advising Congress to determine a
way to figure out a way of lifetime benefits to people to
supplement Social Security. Advisors had found that the DB
plan prevented poverty in a way that the DC plan did not.
Co-Chair Stedman asked about the private workplace and what
corporations were doing with retirements.
Ms. Ghilarducci answered that several months earlier IBM
had declared its 30-year experiment with a DC plan did not
work in terms of keeping its engineers and it was switching
over to a DB plan. She shared that the DC plan at the
university she worked at was being changed. She thought
there seemed to be real concern that too many people were
coming into retirement without enough income to last. She
continued that even if coming to retirement with $500,000
the ability to handle the money caused a considerable
amount of anxiety and mental depression when compared to
people with a DB plan. The head of benefits for Delta
Airlines had told her that they had a 10 percent
contribution to the DC plan. The airline knew employees
stayed about 10 years and spent the money after leaving the
airline. He wished they had not left their DB plan behind.
Co-Chair Stedman observed that Ms. Ghilarducci felt that
the employer was responsible for the employees' well-being
until the employees' death.
Ms. Ghilarducci clarified it was not her who felt that way.
She elaborated that employers wanted to align compensation
to the needs of the employer but were concerned that when
they spent so much money it did not help their employees.
She mentioned the concern about whether or not the money
was being used well, and constant concern about health care
spending.
3:11:58 PM
Senator Wilson asked whether it was an employer's
responsibility how former employees used their money in
retirement. He asked if it was the employer's role and
responsibility.
Ms. Ghilarducci did not think private companies took on the
responsibility, unless there was a union or collective
bargaining engagement. She thought a public employer was
really concerned about whether its retirees stayed in the
state. She continued that public employers were also
concerned because they did not want to pay for emergency
housing or an increase in Medicaid funding. She explained
that if public middle class employees could stay middle
class retirees, there would be fiscal savings.
Senator Wilson relayed that the committee had been hearing
from many people about the life events that arose such as
divorce, major medical events, and bankruptcy. He wondered
how individuals could address problems in they could not
use DC funds. He asked if it would switch one problem for
another later on.
Ms. Ghilarducci replied that she had spent two years on a
bipartisan policy center commission that looked at
emergency savings and retirement. The commission had
concluded after two years that employees needed to have an
untouchable retirement fund (to earn compound interest) and
a credit union emergency savings fund. She expressed that
combining the two items would always short the long-term
needs. She pondered that [in a DC plan] the employer spent
substantial money on retirement that would only be used to
fund emergency needs. She mentioned research on workers in
Chicago and Los Angeles, which showed that women especially
viewed emergencies according to the needs of their children
and drew from their liquid source of retirement for their
families. She noted that 401k accounts were particularly
susceptible for leakage for woman, which was especially
true for divorce and family medical needs.
3:15:38 PM
Senator Wilson thought it appeared the state should
consider a credit union emergency fund for employees.
Co-Chair Stedman remarked that the State of Alaska had a
supplemental employee benefits system (SBS) as a
replacement of social security, which was in effect a DC
plan with 16.13 percent of every paycheck from the employer
and employee to compound until retirement. He had not heard
any complaints about the SBS system. He noted that the
funds travelled with the employee after leaving service and
stayed with the family upon the employee's demise. He
thought the fact ran contrary to the current discussion. He
had spoken with numerous employees over the years and they
were happy with the SBS system. He added they were
virtually the same thing.
Ms. Ghilarducci recalled being asked the question by a
congressman about 20 years earlier. She knew people loved
their 401k plans, in which they could see accumulation of
wealth. She continued that people that were most satisfied
were those with a DB plan and a supplementary plan to use
for emergencies. She thought SBS was not a supplement but
rather they were complimentary.
Co-Chair Olson noted that SBS was taxed when one started to
withdraw money.
3:18:07 PM
Senator Kiehl agreed that it was not necessarily the
employers' job to get a retired employee to the grave. He
thought the notion of getting the most benefits for the
dollar and for employee retention was an important part of
plan design. He mentioned the 401a plan, a Social Security
replacement and supplemental benefit, was designed when the
state had a DB pension system. He referenced the term
"leakage" and how to get the dollars into the state. He
pondered how plan design could do better. He asked about
the different retiree inflation adjustments for those who
were long-term residents of the state versus individuals
who were snow birds." He discussed the notion of going
back to Social Security and the guaranteed leakage of the
windfall elimination and government pension offset that
radically eroded the benefits for people with PERS or TRS.
Ms. Ghilarducci responded that the DB plan helped prevent
leakage in a number of ways. She emphasized one could not
withdraw DB benefits before retirement, and most people
took money out of 401k plans. She mentioned a contribution
holiday, which could really put a dent in the long-term
balance. There was leakage in terms of short-term employees
taking the Alaska contribution and leaving the state
permanently. Other leakage could be employees leaving and
taking the pension elsewhere. She thought the principle of
the Permanent Fund Dividend (to be a resident and keep the
dollars in the state) had been violated and did not seem to
be consistent.
3:21:48 PM
Senator Kiehl asked about the guaranteed erosion of the
Social Security benefit.
Ms. Ghilarducci noted that she tracked bills that altered
the Social Security System and answered that every year for
the past 15 years there had been bills in Congress but had
been little accomplished. She thought the system really had
to change and was hurting teachers across the country.
Co-Chair Olson thanked the presenters.
Mr. Alper provided closing comments on the bill. He thought
the committee was considering huge issues and cited the
role of the state in regulating the relationship between
employers and employees, and the well being of workers. He
pondered the issue how to build a high-functioning
workforce in the state. He thought there were strong and
well-informed opinions around the table. He thought the
bulk of workers appeared to want to go to a DB system. He
thought the legitimate fear was the cost. He thought the
bill was built to minimize the risk of future costs that
were the downfall of the prior system. He pondered whether
the state could find a mechanism to meet the wishes of its
public employees.
SB 88 was HEARD and HELD in committee for further
consideration.
Co-Chair Olson reviewed the schedule for the following day.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 88 Teresa Ghilarducci biography.pdf |
SFIN 1/23/2024 1:30:00 PM |
SB 88 |
| SB 88 Pensions committee update presentation 1-23-24 final.pdf |
SFIN 1/23/2024 1:30:00 PM |
SB 88 |
| SB 88 Summary of Changes O to T 1-24-24 .pdf |
SFIN 1/23/2024 1:30:00 PM |
SB 88 |
| SB 88 work draft version T.pdf |
SFIN 1/23/2024 1:30:00 PM |
SB 88 |
| SB 88 DOA DRB 011924.pdf |
SFIN 1/23/2024 1:30:00 PM |
SB 88 |
| SB 88 Ghilarducci Report on SB88 final.pdf |
SFIN 1/23/2024 1:30:00 PM |
SB 88 |
| SB 88 012324 Kalwarski presentation.pdf |
SFIN 1/23/2024 1:30:00 PM |
SB 88 |
| SB 88article.pdf |
SFIN 1/23/2024 1:30:00 PM |
SB 88 |