02/16/2012 09:00 AM Senate STATE AFFAIRS

        SB 121-TEACHERS & PUB EMPLOYEE RETIREMENT PLANS                                                                     
                                                                                                                                
9:05:11 AM                                                                                                                    
CHAIR WIELECHOWSKI announced that the  first order of business to                                                               
come before the committee was SB  121. It is the sixth hearing on                                                               
the  bill.  At  the  last   meeting  the  committee  adopted  two                                                               
amendments, the most significant of  which would help ensure that                                                               
the  health care  costs of  the new  defined benefits  tier never                                                               
exceed  those of  the existing  contributions program.  He opined                                                               
that the  committee has  finally achieved  the sponsor's  goal of                                                               
crafting  a  retirement  system  that will  save  the  state  and                                                               
municipalities money, while  providing teachers, police officers,                                                               
fire  fighters,  and  other   public  employees  with  retirement                                                               
benefits they can count on.                                                                                                     
                                                                                                                                
SENATOR  DENNIS EGAN  thanked the  committee for  its work  on SB
. There  have been six hearings  of the bill in  three cities.                                                               
He commented that  public servants around the state  would like a                                                               
choice  to earn  a pension.  Experts talk  about the  benefits of                                                               
both defined contribution (DC) and  defined benefit (DB) systems.                                                               
He stressed  that the bill  had changed a  lot and now  saves the                                                               
state, at  the onset,  $49 million  in the  first five  years, is                                                               
cost  neutral long-term,  shares  the risk  between employer  and                                                               
employees, and adds nothing to  the unfunded liabilities from the                                                               
past.                                                                                                                           
                                                                                                                                
SENATOR EGAN related that SB 121  lets new hires who serve Alaska                                                               
and  Alaska's cities,  who teach  kids  and respond  in times  of                                                               
need, choose  between a portable  account to save  for retirement                                                               
or  a monthly  pension  check. Personal  accounts  are great  for                                                               
recruiting researchers,  military spouses, or  corporate retirees                                                               
to  state  and  local  government, and  pensions  are  great  for                                                               
keeping   those  who   spend  their   lives  teaching   children,                                                               
patrolling prisons, and managing fisheries.                                                                                     
                                                                                                                                
To make  the new  system cost neutral,  employees will  share the                                                               
risk  of health  cost rising  in the  future. It's  a risk  worth                                                               
taking and is fair to Alaskans.                                                                                                 
                                                                                                                                
CHAIR  WIELECHOWSKI noted  that he  had asked  the Department  of                                                               
Administration  to prepare  a  fiscal note,  which  had not  been                                                               
done.  He  estimated that  the  bill  would  save the  state  $49                                                               
million over the next five  year. Long-term savings would be even                                                               
greater. He  inquired if that  was Senator  Egan's understanding,                                                               
also.                                                                                                                           
                                                                                                                                
SENATOR EGAN said it was.                                                                                                       
                                                                                                                                
CHAIR WIELECHOWSKI  stated that  the goal of  the new  version of                                                               
the bill  is to be revenue  neutral or to save  money. He thanked                                                               
Senator Egan  for his  hard work.  He noted  that the  bill would                                                               
receive a rigorous review in Senate Finance.                                                                                    
                                                                                                                                
CHAIR WIELECHOWSKI asked for a motion  to move SB 121, version R,                                                               
as amended,  from committee  with individual  recommendations and                                                               
two attached fiscal notes: one for  $769,000 in FY 13 to help the                                                               
Department of Administration  get the new system  up and running,                                                               
and one  from the Department of  Revenue for $593,000 in  FY13 to                                                               
cover additional  retirement board  management fees. He  noted an                                                               
additional  fiscal note  from  the  Department of  Administration                                                               
would be forthcoming. The bill  has an additional referral to the                                                               
Senate Finance Committee.                                                                                                       
                                                                                                                                
9:09:14 AM                                                                                                                    
SENATOR  MEYER said  he would  make the  motion, but  first would                                                               
like to  ask a question  of the  Department of Revenue  (DOR). He                                                               
inquired about  the revenue neutrality  of the bill and  asked if                                                               
DOR agreed with the sponsor's statement.                                                                                        
                                                                                                                                
MIKE BARNHILL, Deputy  Commissioner, Department of Administration                                                               
(DOA),  testified in  opposition to  SB 121.  He stated  that the                                                               
department's goal is  to make the bill cost  neutral to employers                                                               
in terms  of normal cost.  He maintained that no  defined benefit                                                               
bill can  guarantee cost  neutrality for  past service  cost. For                                                               
that  reason, DOA  continues to  oppose SB  121. He  recalled the                                                               
history of the legislation, beginning  with how the first version                                                               
of the bill  contained $124 million in  unfunded liability. Next,                                                               
an incorrect  fiscal note  was drafted.  Then, health  care costs                                                               
increased. He  said in a defined  benefit plan the state  ends up                                                               
owning  the expense  because costs  increase more  than what  was                                                               
projected.  He  reiterated  the  many  problems  with  a  defined                                                               
benefit plan and argued against extending the bill for decades.                                                                 
                                                                                                                                
SENATOR MEYER thanked Mr. Barnhill for taking a position.                                                                       
                                                                                                                                
9:14:14 AM                                                                                                                    
CHAIR WIELECHOWSKI pointed out that  fiscal notes are done to try                                                               
to predict the cost of legislation.  He continued to say that DOR                                                               
fired an actuary who  had had a year to work  on the fiscal note.                                                               
The latest  fiscal note is  a best estimate based  on information                                                               
learned from  past actuarial mistakes, which  assumed that health                                                               
care costs  would increase by only  3 percent per year  when they                                                               
actually  increased  by  10  percent. He  pointed  out  that  the                                                               
current assumption is that health  care costs will increase by 10                                                               
percent for the  next 30 years. He disagreed  with that predicted                                                               
10 percent  increase because it would  mean that in 30  years the                                                               
state  would be  paying  $150,000 per  employee  for health  care                                                               
benefits.  He  called it  a  worst-case  scenario. Even  so,  the                                                               
assumptions  that DOR  experts arrived  at are  being used  in SB
. The  sponsor has put  in a provision  that says the  cost of                                                               
the defined benefit program cannot  exceed 95 percent of the cost                                                               
of the current program. He  maintained that the system would save                                                               
the  state hundreds  of millions  of  dollars. He  noted that  he                                                               
requested a  new fiscal note  that has not been  forthcoming from                                                               
the administration.  He expressed  frustration at not  having the                                                               
new fiscal note.                                                                                                                
                                                                                                                                
9:17:06 AM                                                                                                                    
MR. BARNHILL disagreed with Chair Wielechowski's assumptions.                                                                   
                                                                                                                                
CHAIR   WIELECHOWSKI  maintained   that  they   were  not   "his"                                                               
assumptions, but rather DOR's assumptions.                                                                                      
                                                                                                                                
MR.   BARNHILL  debated   Chair   Wielechowski's  arguments.   He                                                               
maintained that  the actuaries  had only  a week  to work  on the                                                               
current version of  the bill. He described a  cascading series of                                                               
"passing  along the  buck"  if  the assumptions  turn  out to  be                                                               
incorrect. He  addressed the 10  percent cost  growth assumption,                                                               
saying it  is instead  9 percent. He  said the  Alaska Retirement                                                               
Management  (ARM) Board's  health  care  cost growth  assumptions                                                               
trend down over time. He  spoke of the actuarial mistakes related                                                               
to the DB plan and the  resulting solution to have more actuarial                                                               
oversight. He  maintained that a  week is  not enough time  for a                                                               
full actuarial review.                                                                                                          
                                                                                                                                
9:20:32 AM                                                                                                                    
CHAIR WIELECHOWSKI  countered that  DOR had over  a year  to have                                                               
the legislation fully vetted by actuaries.                                                                                      
                                                                                                                                
JESSE  KIEHL, staff,  Senator Dennis  Egan, provided  information                                                               
regarding SB 121 on behalf of  the sponsor. He clarified that the                                                               
new version  of the bill guarantees  that the new tier  would not                                                               
exceed the  normal cost of the  current DC system. He  noted that                                                               
when a  retiree under the  new DB  tier retires, the  amount they                                                               
pay for  their health insurance  is not fixed. The  percentage of                                                               
the  premium  is  fixed  once a  person  retires.  The  statutory                                                               
requirement  that   there  is  an   actuarial  analysis   of  the                                                               
retirement system,  long precedes  the 2005  enactment of  the DC                                                               
system. All of SB 141 safeguards  for a DB system remain in place                                                               
in SB  121. There  will be  a second actuary  to check  the first                                                               
actuary, an  ARM Board review,  and a requirement  that employers                                                               
not pay less than the normal  cost. It is the prefunding costs of                                                               
the DB system that won't exceed the cost of the DC system.                                                                      
                                                                                                                                
MR. KIEHL  took issue with  the statement that costs  are shifted                                                               
to future generations of retirees.  He emphasized that the health                                                               
care cost adjustment in the bill  is a pooling of risk and moving                                                               
that risk to  employees. He concluded that the  risk could become                                                               
burdensome for employees,  but it is a risk  that Alaska's public                                                               
servants are willing to take for a chance to choose a DB system.                                                                
                                                                                                                                
CHAIR WIELECHOWSKI asked  how the fiscal note  process has worked                                                               
and what assumptions were used.                                                                                                 
                                                                                                                                
MR. KIEHL reported that the  timeframes on the actuarial analyses                                                               
have  varied with  different versions  of the  bill. He  believed                                                               
that the administration would have a  fiscal note in time for the                                                               
bill to be heard in  the Senate Finance Committee. He appreciated                                                               
the administration's cooperation in  making the actuary available                                                               
to the sponsor.                                                                                                                 
                                                                                                                                
9:27:48 AM                                                                                                                    
SENATOR MEYER concluded  that allowing state employees  to have a                                                               
choice of  retirement systems is  the best policy for  the state.                                                               
However, he did  not know if the state could  afford it. He spoke                                                               
of military personnel who want  a defined contribution and others                                                               
who would  prefer a  defined benefit program.  He said  that most                                                               
states have a hybrid system.                                                                                                    
                                                                                                                                
SENATOR MEYER moved  to report SB 121, version  R, from committee                                                               
with  individual  recommendations  and  the  accompanying  fiscal                                                               
notes.                                                                                                                          
                                                                                                                                
CHAIR WIELECHOWSKI  added, SB  121, version  R, as  amended, with                                                               
two attached fiscal  notes and a forthcoming DOA  fiscal note. He                                                               
announced that  without objection,  CSSB 121(STA) moved  from the                                                               
Senate State Affairs Standing Committee.