Legislature(2005 - 2006)CAPITOL 106
03/22/2005 08:00 AM House STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| HB114 | |
| HB170 || HB177 || HB191 | |
| HB170 | |
| HB177 | |
| HB170 | |
| HB177 | |
| Workgroup: Pers/trs | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 170 | TELECONFERENCED | |
| *+ | HB 177 | TELECONFERENCED | |
| *+ | HB 191 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| = | HB 114 | ||
HB 170-PUB EMPLOYEES/TEACHERS RETIREMENT BOARDS HB 177-STATE EMPLOYEE RETIREMENT CONTRIBUTIONS HB 191-PUBLIC EMPLOYEE/TEACHER RETIREMENT 8:07:57 AM CHAIR SEATON announced that the committee would hear an overview of HB 170, HB 177, and HB 191, the full bill titles for which are listed in the committee calendar. 8:09:07 AM REPRESENTATIVE MIKE KELLY, Alaska State Legislature, presented an overview of HB 170, HB 177, and HB 191. As you know, Alaska has a $5 billion-plus unfunded liability in its public service pensions and teacher pensions. The future payout of that liability is estimated to be over [$15 billion]. The problem is nationwide to one degree or another. ... However, anyone who tells you we don't have a problem, or that it will just go away, or that we should raise investment target expectations above the current 8.25 percent, or that Alaskans will simply allow us to write a check out of the Permanent Fund earnings reserve may not be right. 8:10:51 AM REPRESENTATIVE KELLY noted that prior to 2000, the funds were typically nearly 100-percent funded and had remained so for decades. He remarked that, sometimes, negative factors can combine and create 100-year events. He explained: Our defined [benefit] pension funds experienced the perfect storm when: the investment markets [plummeted] ...; health care costs - particularly for the retired age group - skyrocketed; [and] pension plan actuarials were updated, reflecting the fact that the baby boomers are entering our retirement rolls and ... will live longer than expected. And as a result of cutbacks in state government over the past decade, there are fewer new and younger employees coming in the front door to replace those retiring. REPRESENTATIVE KELLY listed those who often get the blame and reasons why they should not, as follows: The public employees, who did nothing wrong and whose pension program was [provided by the legislature]; the pension boards and money managers, who may have made some bad calls, but who have worked under close scrutiny, professional reporting requirements, and audits; the legislature, who is blamed for being too generous with public employee voters, but whose benefits passed out "didn't cause a tenth of the problem"; and the employers, who are blamed for not paying enough into the fund even though they historically paid in what the PERS/TRS boards required for 100-percent funding. Representative Kelly said [the employers] increased contributions fairly dramatically in years when it was required and were permitted to reduce payments when full funding was reported. Representative Kelly stated, "So, maybe if you worked long and hard you could scare up 20 percent to blame on someone or another that might be in some way justifiable or legitimate; but we'd still be stuck with a huge and growing problem." 8:15:19 AM REPRESENTATIVE KELLY emphasized he does not want to see the legislature wait until next year - an election year - to solve the problem. He said he senses that there is little will among some legislators to act now, but he pointed out that next year there will be nearly no desire to take the steps required to fix the problem "if there's anything unpalatable or difficult about the solution." REPRESENTATIVE KELLY noted that there are three related bills to be heard by the committee, and he said the Senate is working on its own solution. He stated, "I believe the package before you would provide a workable solution." He told the committee that yesterday he heard a legislator opine to a union leader that it might be best to write a check from the permanent fund earnings to extinguish the unfunded liability. He said he doesn't believe that [Alaskans who are not in PERS or TRS] would support that action. He said others suggest that the employers pay, even if it equals as much as 25 to 40 percent or more of the wages over the next 25 years. Representative Kelly asked how employers could possibly sustain that impact on their labor costs. Local governments would have to resort to large increases in property or sales taxes, and he stated his belief that voters [not in PERS or TRS] would [rebel]. REPRESENTATIVE KELLY observed that some say the liability should be reduced to less than 100 percent, but he questions the wisdom of this approach. The Alaska pension system has maintained a 100-percent funding goal for retirement and retiree medical benefits. Recent federal rulings have confirmed that such a conservative approach is favored. He stated, "Our problem is simple ... - we can no longer afford a defined benefit plan where the government absorbs all risk associated with the retirement and the retirement health benefits for our employees and teachers." 8:17:44 AM REPRESENTATIVE KELLY opined that attracting and retaining high- quality public employees and teachers must be a goal underlying any pension fix. He added, "If we fail at that, we risk our future completely." He said he agrees with those who point out that public pay in Alaska has slipped and that generous benefits have helped "maintain our employees." REPRESENTATIVE KELLY said he has 11 grandchildren - 6 in public schools, and 4 in private schools. He noted that he is related to many teachers and public employees in the Alaska system. He stated his belief that the bills before the committee today could help to unify a larger number of Alaskans behind a solution than ignoring the problem and hoping it goes away, writing a check out of permanent fund earnings, or dramatically raising local taxes. REPRESENTATIVE KELLY noted that Chair Seaton told him he intends to introduce a committee bill that will incorporate elements of [HB 170, HB 177, and HB 191] with other ideas from the House State Affairs Standing Committee. He said he supports that approach, but encourages Chair Seaton to hurry. Representative Kelly noted that there are about 40 days left in the legislative session. He predicted that the desired solution will not be reached if the legislature allows the issue to go unresolved until election year [2006]. 8:20:39 AM REPRESENTATIVE KELLY asked the committee to imagine a cut in federal funding in the future. He spoke of state funds and taking care of future problems now. He said the bills before the committee would leave the current benefits in place for the existing and retired employees, but would make a bold attempt to protect those benefits "on out into the future." He reiterated that he cares about and is related to some of the folks who are "counting on those dollars to be there." 8:22:15 AM REPRESENTATIVE KELLY explained what each of the bills would do. He said [HB 170] would be a simple fix to PERS/TRS boards. He said that while he respects the fact that the Senate has studied all three boards with a view to conducting an overhaul, he looked at the positions on the boards and decided that perhaps a less dramatic approach may be best. He indicated that his intent is to combined employee- and management-type thinking. REPRESENTATIVE KELLY said HB 170 specifies that the majority on the boards would [not be members of either system] and at least two of the public members on the boards would have certain professional skills. He said, "So, the board fix is a relatively simple non-invasive surgery attempt to bring in some perspective from ... the bill-paying side of the table." 8:24:40 AM REPRESENTATIVE KELLY indicated that [HB 177] would bring active employees to the payment table to show a recognition that employers "just can't shoulder this entire burden." He predicted that that will be received favorably by Alaskans [not in either system]. He estimated that the active Alaskan work force is approximately 45,000, and by sharing the burden with the employer and the taxpayer, they send a signal that they are willing to work on it as well. 8:27:08 AM REPRESENTATIVE KELLY indicated that [Legislative Legal and Research Services] informed him that accrued benefits [cannot be touched], but one solution to the retirement system problem could be to ask employees to come to the table and help with the payment. He stated he believes that the competitiveness of public employees' and teachers' pay has slipped in Alaska. He said, "It may well be [that] the generosity of our benefits are holding this together competitively; so I think [it's] a very honest aspect of this that we have to be mindful of." He said the "second bill" would require active employees to help out with the pension programs. 8:29:34 AM REPRESENTATIVE KELLY commented that the Senate's version of the bill [SB 141] would make a change for existing employees regarding the normal cost rate - the rate in any given year - and it would not help to fund the unfunded liability. 8:30:05 AM CHAIR SEATON clarified that when Representative Kelly referred to the "first bill" he meant HB 170, by "second bill" he meant HB 177, and by "third bill" he meant HB 191. He said the committee is not yet hearing those bills; it is just listening to a general review right now. 8:30:59 AM REPRESENTATIVE KELLY pointed out that HB 191 would put new employees in a defined contribution plan. He noted that a defined contribution plan is similar to a defined benefit plan in that the employer and the employee both put money into the plan. In the defined benefit plan, the money buys a future benefit, "the cost of which - if it changes - is entirely on the employer, under the current situation." He indicated that the employees have "a percentage share" and the employers' shares are predicted - "in order to take out this unfunded liability" - to grow at a certain percent "up to that amount of pay." In a defined contribution plan, a dollar amount goes into the pot; it's not a benefit with an undefined amount. He explained, "If somehow the value of that purchase changes in any manner by changes in the investment market or any other impact, then that is on the employee ...." He mentioned similarities between the Senate's bill and his own plan in regard to the medical aspect, and he said he would send that information to the committee. 8:33:00 AM REPRESENTATIVE KELLY said probably close to a dozen states have moved from a defined benefit plan to a defined contribution plan, or a hybrid of the two. He offered his understanding that there has been an increase up to 42 percent of employers having moved to defined contribution plans. He also stated his belief that the state will be able to attract and maintain qualified people with a defined contribution plan. He added, "It is simply about the numbers of the contributions." He stated his belief that the employees should be allowed to contribute money to their retirement above and beyond the amount put in through the employer/employee match. 8:34:22 AM CHAIR SEATON stated for the benefit of those listening to the meeting that the [Alaska] Supreme Court has interpreted the Alaska State Constitution to say that the State of Alaska has a contract with retirees, and "those benefits must be paid." No matter the liability, unless the state declares bankruptcy, the state will be "making those payments as they were scheduled ...." Nothing in the proposed ideas for PERS/TRS bills would change that, he clarified. CHAIR SEATON announced that the committee would address each bill, starting with HB 170. He outlined that the three elements to discuss would be regarding the [PERS/TRS] board, current employees, and new employees. 8:35:48 AM REPRESENTATIVE LYNN asked how an upswing in Alaska's economy would affect the PERS/TRS situation. 8:36:16 AM REPRESENTATIVE KELLY responded that it might change the perceived ability of the state to fund an unfunded liability; it might not be as difficult to make a payment. He clarified, "It wouldn't change the plans on the face of it, but it would give us more money to address unfunded liability." 8:37:19 AM CHAIR SEATON said: There has been one comment that has been made about municipal assistance and that our contribution on PERS/TRS has been municipal assistance over time, and I would draw to the members' attention that we have made contributions to PERS and TRS for school districts, which are not municipalities. Although sometimes they are related to the size of a borough, or some other entity, some of them aren't at all. ... I don't want to get the concept of municipal assistance and PERS and TRS contributions to the ... school districts confused, because they're not municipalities. 8:38:14 AM REPRESENTATIVE GARDNER said she is having a difficult time understanding the scope of the whole issue. She surmised that the focus is to solve an existing problem, while simultaneously trying to avoid "a future manifestation of the same problem." She compared the situation to taking out a mortgage. She asked how having a defined contribution plan at the outset might have changed the financial situation for current retirees. 8:39:25 AM REPRESENTATIVE KELLY said the current situation would not exist if a defined contribution plan had been used from the beginning. 8:39:55 AM CHAIR SEATON offered his belief that about 40 percent of the unfunded liability in TRS is due to medical costs. He indicated that protecting against "the downside in the defined benefit [plan], as far as retirement, ... depends on what system's adopted for medical." He asked if that is correct. 8:40:34 AM REPRESENTATIVE KELLY responded that the model used is the Mercer [Human Resource Consulting] Alternative 2 system. He said the medical component would be addressed in any defined contribution plan that is adopted. He reiterated that he would get his medical plan idea to the committee, but he said it would attempt to limit the exposure to risk in the cost of health care by involving the employee in sharing that risk. 8:42:10 AM CHAIR SEATON stated that he wants to clarify that adoption of a defined contribution plan with a medical component would not eliminate all potential for unfunded liability. He said that subject would be discussed in depth. 8:42:36 AM REPRESENTATIVE GARDNER mentioned big companies "going under," such as Enron, which leaves employees in a bad position. Ms. Gardner asked, "Leaving aside the medical cost question, if the employees from the State of Alaska or from our school districts had had a [defined contribution] plan to begin with, does anybody know what their financial security would look like today?" 8:43:16 AM REPRESENTATIVE KELLY replied that it is not known what that plan would have been. However, based on a comparison of the plans, for example, "when the market went down, ... the employee would not have been protected from that drop in return on the asset." 8:43:44 AM CHAIR SEATON said, "I don't think any of the plans that I've seen would allow what has been done ..., [for example], with Enron in investing in their own stock. ... All of the options that are on the table would allow a spread like SBS for managed accounts." He reminded the committee that all the benefits of current participants are secured through the constitution, as well as all the future benefits that have to be paid. 8:44:19 AM REPRESENTATIVE GARDNER responded that the proposal is to change that, and she said she's just curious to know how things would stand if the state had [used a defined contribution plan] to begin with. She pointed out that if people's retirement plans go under, the state is still responsible and "ends up supporting them in another way." 8:44:33 AM REPRESENTATIVE RAMRAS stated his concern is how the state's solution to the PERS/TRS problem would be connected to the 155 municipalities that are "in for a dime/in for a dollar with the state." Specifically, he said he wants to know how Representative Kelly's proposed plans would affect the City of Fairbanks and the Fairbanks North Star Borough. 8:45:35 AM REPRESENTATIVE KELLY answered that [his plan would] bring another plan and new money to the table to help fund the unfunded liability. The plan would bring active employees to the table. He predicted that the municipalities would see that as positive. 8:46:17 AM REPRESENTATIVE RAMRAS asked if the same provisions would be adopted by the municipalities as by the state. 8:46:25 AM REPRESENTATIVE KELLY answered that whatever is done for PERS and TRS employees would impact those municipal employees, because they are either PERS or TRS employees. He indicated that a concern which would be focused on is the ability of schools and municipalities to attract and maintain employees. 8:47:20 AM REPRESENTATIVE RAMRAS stated that Fairbanks is arguably in the worst shape of all the municipalities in the state; there are 89 workers supporting 453 retirees. He asked if Representative Kelly's solution, if adopted, would solve the all municipalities' problems at the same rate. 8:48:27 AM REPRESENTATIVE KELLY replied that he believes it would be an equitable solution for all players. Notwithstanding that, he said splitting an insurmountable cost to an employer with the employees still results in a challenge. He mentioned a pension obligation bond "to knock this thing down for everyone." 8:50:16 AM REPRESENTATIVE KELLY, in response to a question from Representative Gatto, reviewed the differences between the defined contribution and defined benefit definitions. He said, "It's a definition of the dollar, versus the benefit."
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