Legislature(2005 - 2006)CAPITOL 106
04/02/2005 10:00 AM House STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| HB133 | |
| HB238 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 133 | TELECONFERENCED | |
| += | HB 170 | TELECONFERENCED | |
| += | HB 177 | TELECONFERENCED | |
| += | HB 191 | TELECONFERENCED | |
| += | HB 238 | TELECONFERENCED | |
HB 238-PUBLIC EMPLOYEE/TEACHER RETIREMENT 11:00:05 AM CHAIR SEATON announced that the next order of business was HOUSE BILL NO. 238, "An Act relating to contribution rates for employers and members in the defined benefit plans of the teachers' retirement system and the public employees' retirement system and to the ad-hoc post-retirement pension adjustment in the teachers' retirement system; requiring insurance plans provided to members of the teachers' retirement system, the judicial retirement system, the public employees' retirement system, and the former elected public officials retirement system to provide a list of preferred drugs; relating to defined contribution plans for members of the teachers' retirement system and the public employees' retirement system; and providing for an effective date." CHAIR SEATON noted that there is a sectional analysis in the committee packet. He opened public testimony. 11:00:45 AM BILL BJORK, President, NEA-Alaska, said he represents 12,500 employees in Alaska. He highlighted key points from his written testimony [included in the committee packet]. He said the purpose of the retirement system is stated in AS 14.25.012, which read as follows: (a) The purpose of this chapter is to encourage qualified teachers to enter and remain in service with participating employers by establishing a system for the payment of retirement, disability, and death benefits to or on behalf of the members. MR. BJORK read from his written testimony as follows: Although there is some anecdotal evidence that the retirement benefits can be used for recruitment, its main attraction is a tool for retaining educators. Job satisfaction, competitive compensation and retirement benefits are the three major reasons for a person to remain in education. 11:02:34 AM MR. BJORK said currently the average number of years a teacher serves before retiring is 27. He addressed some of the key assumptions made going into deliberations over changes in the retirement system. He stated assumption 1: "An educator with 27 years of service ought to be able to receive an annual annuity of at least 55 percent of their salary at retirement to be able to retire with dignity." He noted that he provided information regarding the average [teacher] salary and "what that represents as a percentage." He said HB 238 would require teachers to work at least 30 years [before retiring], which is three more years than the current average. MR. BJORK said assumption 2 is in regard to the level of investment return. He stated, "We agree with the assumption currently in the retirement systems of 8.25 percent; ... it's consistent with permanent fund assumptions, as well." He stated assumption 3: "The combined contribution of the employee and the employer to the pension must be at least 20 percent of salary ...." He said assumption 4 is in regard to inflation. The present actuarial assumption is 3.5 percent annually. He said that is not consistent with permanent fund assumptions. He asked, "Given that inflation has been 2.6 percent over any 10- year period in Alaska, why would we adopt a 3.5 percent inflation rate?" That half a percent over 25 years would add a huge amount of money to the past service cost. He stated that assumptions are critical in determining the necessity of a new and improved retirement system and making the wrong ones today will only lead to retirees having no dignity and becoming dependent on the State of Alaska for Welfare. He said, "We must take time to reach agreement on the actuarial assumptions to be used." 11:05:10 AM MR. BJORK stated his belief that there is agreement that "the actuarial assumptions made in the past have brought us to this point, particularly in the area of health care." He noted that the delayed used of [updated] mortality rates and the addition of benefits in the retirement system, without a corresponding increase in contributions, are major factors. Two of the factors can be corrected without the adoption of a new tier for TRS and PERS. He stated that the legislature could mandate the use of the most recent mortality tables, and it could also require an actuarial evaluation of any proposed benefit changes and require an increased contribution "to cover past service cost at the time of passage." He offered an example. 11:06:28 AM MR. BJORK stated that NEA-Alaska believes that health care costs can be managed to provide a more predictable rate increase. He stated, "It seems that the health cost trend actuarial assumptions provided to the administration June 30, 2002, absolutely defied common sense or logic." He said the projections provided, as printed in the retirement booklet, showed increases in health care of: 7.5 percent for [Fiscal Year 2001 (FY 01)], 6.5 percent for FY 02, 5.5 percent for FY 03, 5 percent for FY 04-08, and declining after that. He stated, "Anyone using health care services could tell you that those rate projections were not based in reality." He said the next year the assumptions were changed to show: 12 percent for FY 04, 12 percent for FY 05, 11.5 percent for FY 06, and declining until the increases would only be 5 percent in FY 17. He questioned how such a drastic change could occur in one year. He queried, "These numbers, when graphed, would make a pretty downhill slope, but are they based in reality?" He stated that this kind of dramatic change does not inspire credibility in the actuary. He asked, "Is this the kind of assumption that the $5 billion unfunded liability is based upon?" 11:07:48 AM MR. BJORK said NEA-Alaska appreciates the efforts made through HB 238 to provide important access to health care and payment of premiums for retirees. He said once everyone agrees on which health care inflation assumption to use, it will be possible to "evaluate the proposal and its impact on retirees' standard of living." Mr. Bjork stated for the record that a teacher that begins a career at age 22 and works nonstop for 30 years, as outlined in HB 238, will be eligible to retire at age 52. Since the teacher must retire directly out of the system, he/she would have to teach for 38 years to reach age 60, or pay for his/her health care for 8 years, which would erode the pensions annuities significantly. MR. BJORK said NEA-Alaska believes that several things can be done to provide a new and improved retirement system for both teachers and public employees and "stands ready to work with the [House State Affairs Standing] Committee to determine the appropriate actuarial assumptions upon which a new retirement system could be built that meets the purpose of recruiting and retaining qualified educators and public employees." 11:09:29 AM CHAIR SEATON expressed appreciation for the focus of Mr. Bjork's testimony, which he said parallels the committee's own focus. 11:09:33 AM REPRESENTATIVE LYNN asked how the legislature would use more up- to-date mortality tables when they only are produced every 10 years. 11:10:15 AM MR. BJORK said Representative Lynn raises an excellent point. He continued as follows: We just believe that we ought to implement the most recent actuarial table ... available. The mortality table, as you correctly point out, is a key driver of cost. If we change from one mortality table to a new mortality table and it shows increased longevity, then the actuarial assumptions trigger a huge past service increase. So, you're absolutely right. When these are published, though, we ought to be using them. But the actuarial assumption that is a particular problem ... is the increase in medical coverage costs. Those projections ... were just simply not real world based. To say that, at some point in the magic future, medical cost increases would only be 4 percent just simply isn't ... reflecting the kind of reality that all of us experience when we need medical coverage. 11:11:36 AM REPRESENTATIVE LYNN asked if the health cost is "a bigger driver of the problem" than the actuarial tables. 11:11:51 AM CHAIR SEATON explained that the two systems are different. The "health cost" is the largest driver in TRS, accounting for approximately 40 percent of the unfunded past service cost, but it's much less in PERS. He said the two systems contribute at different rates and the age at which a person qualifies is different. 11:12:58 AM CHAIR SEATON asked: Do you have an analysis at all on how much those [RIPs] lowered the retirement age, and how much of that 3-year gap between the 30 that [HB] 238 calls for and the 27 which is your average coming out of the system - how much of that do you think would be accounted for by the different [RIPs] that went forward? 11:14:01 AM MR. BJORK noted that both state and local RIPs were offered. He said it's difficult to answer Chair Seaton's question, because only a small number of the total retirees actually got access to those RIPs; therefore, it's hard to "spread that number across the retired population to give you a straight up answer on that." He noted that about 27 years of active service is that average for "those retirees," not factoring in the RIP, whatsoever. 11:15:08 AM CHAIR SEATON returned to assumption 3, which Mr. Bjork noted would require that the contribution must be 20 percent. He noted that the current version of HB 238 would require that the contribution be 22 percent. He asked, "Does that fit within your range of expectation for a plan that would provide those equality of benefits?" 11:15:47 AM MR. BJORK stated, "It's our experience that 20 percent of salary needs to go towards the pension." Regarding the 22 percent in HB 238, he noted that "a chunk of that goes toward major medical coverage and also the health reimbursement rate"; therefore, "those percentages are not going directly into the pension." He stated his experience with [NEA-Alaska's] own employees is that is takes about 20 percent of salary into the pension to accomplish retirement with dignity. 11:16:24 AM CHAIR SEATON offered some statistics and explained, "I'm trying to figure out where the 20 percent into the retirement plus medical comes from if that hasn't been the history in any of the last 20 years in the current program." 11:17:37 AM MR. BJORK responded that he agrees with the numbers that Chair Seaton put forward. Notwithstanding that, he said, "That is our experience that it takes 20 percent of salary to accomplish a defined ... contribution program that would allow an annuity of sufficient size to last a person throughout their retirement years." 11:18:03 AM CHAIR SEATON said he appreciates knowing that Mr. Bjork is talking about "the amount that would be necessary under a defined contribution [plan]." He asked if Mr. Bjork is factoring in an 8.25 percent rate or a lower percentage investment rate based on the history of defined contribution programs, such as 401K, versus a defined benefit program. 11:18:30 AM MR. BJORK said he is factoring in an 8.25 percent [rate]. 11:18:39 AM WILLY DUNNE, President, Kachemak Bay Chapter, Alaska State Employees' Association (ASEA), which includes approximately 60 state employee members, noted that he sent in written testimony [included in the committee packet]. He stated that the members of the chapter are concerned about any increase to their current contribution. They have not seen a pay increase in a couple of years and are due for a small one this year, which would be lost if there was any increase in the contribution rate. MR. DUNNE said most of the employees are doing their jobs because they like doing them; they could make more money in the private sector or working with the federal government, and many employees are lost to both. He stated that retirement benefits are one of the factors that keeps state employees going. He asked the committee to carefully evaluate any changes to current employees' benefits, and he cautioned the committee to think carefully before structuring a new tier. He said the latter could negatively impact recruitment. He stated his understanding that "there's a big, $5 billion problem out there that has to be dealt with." MR. DUNNE said he read a study that shows that state employees have lost approximately 30 percent buying power in their wages over the past 25 years. He predicted that any further reduction would cause employees to "think about jumping ship and not sticking it out." He expressed appreciation for the work that Chair Seaton and his staff have put into [HB 238], but reiterated that he would like the committee to think carefully about [what may] harm employees "any more than we already have been." 11:23:13 AM CHAIR SEATON said one segment of the retirement program being considered would be switching to a defined contribution program. No element of that program would change [the benefits of] existing employees, unless they were not vested and opted to change from the current Tier III defined benefit to a new Tier IV defined contribution plan. 11:24:10 AM REPRESENTATIVE GARDNER asked for verification that going to a defined contribution plan with a new tier level would not in any way affect the shortfall; it would only deal with the future. 11:24:27 AM CHAIR SEATON answered that's correct. As a point of general information, he reviewed that the past service cost is generated by looking at the projected payments of state, municipal, and school employers and figuring out what the projected expenditures are going to be, amortized over the next 25 years. He explained that the benefits expected to be accrued by employees are looked at to determine their cost. Based on the amount of money in the bank, the percentage of the future benefits that will be covered can be predicted at an 8.25 percent growth rate. The payments that would have to be made over the next 25 years add up to $15.6 billion. CHAIR SEATON noted that there are charts [included in the committee packet] that show that. He indicated that it's only the present dollar value that is $15.6 billion. He explained that "if you take those costs and back ... calculate, subtracting 8.25 percent interest per year," the result is an unfunded liability of $5 billion in 2003 present dollar value. He said the assumption is that if the $5 billion in 2003 was put in the bank and earned 8.25 [percent], that amount would grow to [meet the future payments of expected benefits]. That deposit was not made in 2003; therefore, the 2004 numbers basically escalated by 8.25 percent and, because there was one less year to grow that amount, the unfunded liability is now $5.6 billion. CHAIR SEATON stated that $5.6 billion is "the present dollar cost that we would need to have invested at 8.25 [percent] to cover the projected liabilities of $15.6 billion." Chair Seaton indicated that if nothing is done this year, the $5.6 billion will grow by 8.25 percent, resulting in an even larger present dollar value unfunded liability next year. The $15.6 billion of projected payments are still the same, but there won't be as many years to invest an initial sum of money now that can grow to cover the shortfall. 11:27:09 AM CHAIR SEATON said one option would be to spend $5.6 billion from the general fund this year and let it grow at 8.25 percent, which would cover every bit of the past service cost, without having to have an increase in employer contribution rates. He described another option as increasing the employer contribution rates. A third way, he proffered, would be a combination of paying off some of the unfunded liability and increasing the employer rate or having a matching employer/employee rate. CHAIR SEATON said the calculations [presented by Mercer Human Resource Consulting - "Mercer"] are all based on the employer rates [escalating to as much as] 44 percent of the total salary of all the school districts. Because the calculations are made on the total [population] base growing at 1 percent a year, even if a defined contribution plan is instituted and there is no actual past service cost associated with [those individual employees] under that plan, the employer is still going to have to pay the same amount of money into the system because the calculations of [the past service cost] rates [from Mercer] are based on the total salary of the employer. Chair Seaton stated that it gets confusing. He indicated that there is a past service cost liability to the employer even though a defined contribution program would mean that each individual employee does not have a past service cost associated with him/her, and the employer would be responsible for that liability. 11:29:29 AM CHAIR SEATON explained that if the wage base of the new employees under the defined contribution plan is not included, then as soon as there are an equal number of new employees [under the defined contribution plan] and old employees [under the defined benefit plan], the contribution rate - instead of being at 44 percent - would be at 88 percent and would result in [the same dollar rate distributed among] fewer employees. The actuaries, he explained, have tried to calculate a [past service cost] rate that is reasonably fixed over time - amortized over time - to give a stable percentage, and they have to use the entire wage base [to make those calculations]. If a declining wage base is used, pretty soon there would be 200-300 employees left that hadn't retired yet, and "you'd be paying 10,000 percent of their salary," because [the employer] still has to contribute the same dollar amount and would not be spreading it over the [entire] wage base. 11:30:21 AM REPRESENTATIVE GRUENBERG asked Mr. Dunne about a study he previously mentioned that shows that, over last 25 years, the earning power of governmental employees has declined 30 percent. 11:30:51 AM MR. DUNNE recollected that that study was part of the public safety employees' negotiation, and he offered to track down a copy. 11:31:14 AM CHAIR SEATON echoed that he would like a copy of the study. 11:31:51 AM CHAIR SEATON noted that Mr. Dunne had mentioned the existing tiers during his testimony. He noted that HB 238 would change three things: First, a preferred provider drug list would be required for existing employees. Second, the bill would change the definition of the Ad Hoc Post Retirement Pension Adjustments (PRPAs), so that "when the system can support it" means when the system is 100 percent funded. Third, the bill would equalize contributions between employers and employees. He noted that Mr. Dunne had testified to that and indicated that the committee would give that careful consideration. 11:33:15 AM REPRESENTATIVE GRUENBERG said Representative Elkins had asked a question regarding the meaning of "qualified domestications relations order" (QDRO). He said QDROs are required under both federal and state law to meet the requirements "of these statutes" and the Employment Retirement Income Security Act (ERISA). He offered further details. 11:34:45 AM CHAIR SEATON explained that in the bill, "member" means someone who was in a retirement program and "participant" could include a child or spouse, for example. 11:35:19 AM REPRESENTATIVE GRUENBERG added that those two words are terms of art that are known throughout the industry. The committee took an at-ease from 11:35:42 AM to 11:36:49 AM. 11:36:50 AM CHAIR SEATON mentioned the article in the March 6, 2005, Anchorage Daily News, written by David Reume entitled "State's salaries are falling behind". [The article is included in the committee packet.] 11:37:46 AM KATIE SHOWS, Staff to Representative Paul Seaton, Alaska State Legislature, on behalf of Representative Seaton, Chair of the House State Affairs Standing Committee, sponsor, directed attention to a [single-page, double-sided] handout in the committee packet. She said the handout is a model showing a defined contribution pension account amount, based on a model by Richard Solie, Ph.D. She stated, "All offices have this model and have been working with it." She directed attention to the front page, entitled, "Projected Benefits-Rate of Return 6.73 percent." She said that is based on the Anchorage "CPI" of 3.73 percent and a [real rate of interest] of 3 percent. She noted that the real rate of interest mistakenly shows on the page as 4.52 percent, and should read 3 percent. It's a conservative rate of return based on the assumption that individually managed accounts will collect less interest than a group-managed account, because the employee will choose more conservative investment options. 11:40:32 AM MS. SHOWS said the chart shows what the amount of the defined benefit account lump sum would be at termination at 10, 20, 30, and 40 years. She said the lump sum amounts would be the same for both males and females, assuming a base salary of $37,538 and a salary increase, including inflation, of 5.73 percent. She highlighted further details regarding the lump sums. In response to a question from Chair Seaton, she stated her understanding that the column which shows the lump sum at termination is "in the real dollar value at retirement," whereas the column that shows the beginning annuity in 2004 dollars shows the annual pension benefit for the retiree, calculated in 2004 dollars. She noted that the reason the number is higher for men than women, under the beginning annuity in 2004 dollars column, is because women tend to live longer than men. She directed attention to the last column, which shows the percent funded compared to the current defined benefit plan. She offered an example. She added, "And that also assumes the defined contribution pension account percentage of 15.5 percent, which is what HB 238 has for PERS employees. It's slightly higher - 15.75 percent - for TRS employees. So, after medical benefits are taken out of the equation, this is what is attributed to a defined contribution account." 11:43:48 AM REPRESENTATIVE GRUENBERG directed attention to a portion of the fourth paragraph of previous testifier Mr. Dunne's written testimony, which read: Most state employees have not had a pay raise in several years. We are scheduled to receive a small (1.5%) raise this year .... REPRESENTATIVE GRUENBERG said it looks like the charts being reviewed assume a salary increase of 5.73 percent the first five years, then 4.23 percent, based on the assumptions of Mercer. He said that seems to be contrary to what Mr. Dunne has said. 11:44:37 AM MS. SHOWS responded as follows: The assumptions included here [are] a real salary increase of 1.5 percent for the first five years, and then .5 percent for the following years. So, the additional percentage is indexed for inflation. And we are going off of - as is Dr. Solie's table - Mercer's assumptions. REPRESENTATIVE GRUENBERG said he is just trying to compare the chart in front of the committee with the conflicting previous testimony. 11:45:17 AM CHAIR SEATON answered that's correct. 11:45:42 AM MS. SHOWS turned to the back of the page, which shows the same headings, but for a rate of return of 8.25 percent. She said it's a far more generous percentage compared to the current plan. She noted that she could make available the computer program which she used to project these assumptions. In response to a question from Chair Seaton, she confirmed that the chart is calculated for PERS. 11:47:11 AM CHAIR SEATON made the following observation: Basically, the analysis is showing that, if the defined contribution rate of return is equal to Mercer's rate of return ..., then ... the defined contribution plan actually - other than the 10 years - ... for 20, 30, or 40 years of service is generating a much more lucrative plan for the employee than the current plan. However, if we're looking at a 2 percent or ... less return rate ..., [and] if we assume that employees managing their own money are going to earn less than the PERS investment, then we see that it doesn't compare nearly as well, unless you're a male and you've been in the system for 40 years. CHAIR SEATON said he thinks those are issues the committee needs to wrestle with. 11:48:31 AM REPRESENTATIVE GRUENBERG noted that during a divorce, one question often involves what a pension is worth. Many of the arguments revolve around the assumptions that are made. 11:49:31 AM CHAIR SEATON reminded the committee that Mercer [Human Resource Consulting] is the company that projects the actuarials. He also mentioned Milman, another actuarial firm used in 2001 specifically to audit the results provided by Mercer. Chair Seaton said that information is available through his office. 11:51:36 AM CHAIR SEATON indicated that HB 238 would set "a 20 percent rate." Subtracting out the medical portion, which is 3.5 percent medical and 1 percent health care reimbursement rate, what is left is "a very good plan that's better than the defined benefit plan that we have, if we are using the 8.25 percent return rate on the account." He added, "Or we have a plan that doesn't match up if we say that we're going to earn 1.5 percent less than retirement and benefits currently earns on the assumptions." He explained that all the assumptions are "the same on both, except for the rate of return." 11:52:42 AM REPRESENTATIVE GRUENBERG asked if there could be a plan made available to give people the option of investing their retirements themselves or having someone else do it. 11:53:09 AM CHAIR SEATON answered, "Sure." He clarified that HB 238 would not allow people to individually manage their funds; it would provide for a selection of money managers, similar to that in [the state's Supplemental Benefits System (SBS)], to manage the fund. There have been a number of studies that have shown that the employee managing his/her own money is more conservative and thus receives less reward from his/her pension fund. He suggested one option may be to have one board manage the money, but in individual accounts. 11:55:52 AM REPRESENTATIVE GRUENBERG responded that he thinks that's a great idea; however, he suggested that it should be left to the employee to choose one way or the other. 11:56:17 AM CHAIR SEATON said that's what is being considered "with these diversities." 11:56:50 AM REPRESENTATIVE GARDNER referred to a white paper from NEA-Alaska showing Nebraska's experience of changing to a defined contribution plan and then changing back to a defined benefit plan. MR. BJORK explained that that happened because the individually directed accounts had a lower rate of return and could not sustain retirement. He noted that West Virginia made a similar decision a week ago to return from a defined contribution plan to a defined benefit plan for the same reason. 11:58:09 AM REPRESENTATIVE GARDNER asked what those states' rate of return was. 11:58:17 AM MR. BJORK answered that the rate of return in Nebraska was approximately 6 percent, and it is recognized that it takes 8.25 percent to generate the kind of return needed to have a viable retirement. He said the numbers were about the same for West Virginia. 11:59:15 AM REPRESENTATIVE GRUENBERG said he would like to hear from witnesses from one of those two states. 11:59:35 AM CHAIR SEATON said paper work will be made available regarding West Virginia. He asked if some of Mr. Bjork's concerns would be alleviated if [the Alaska State Pension Investment Board (ASPIB)] was investing the money at the same rate that the defined benefit plan would generate. 12:00:46 PM MR. BJORK answered yes. He stated, "This rate of return is a critical money-management assumption within any retirement system, and we believe ASPIB has done a very good job ... - it models the Alaska Permanent Fund." 12:01:18 PM CHAIR SEATON noted that a report last year showed that the retirement funds were actually producing, over time, a higher rate of return than the Alaska Permanent Fund did. He offered further details. 12:01:52 PM MR. BJORK said employees are naturally "risk averse" and ASPIB has the capacity to "dot that professional management." 12:02:10 PM REPRESENTATIVE GRUENBERG suggested that a common theme is security and rate of investment. He applauded the work of the chair and the work that the committee is doing. He said "the other bill" that would change the makeup of the boards concerns him, and he opined that it is imperative to have "the best, most honest people" on the boards to "maximize the return and the security." 12:03:33 PM CHAIR SEATON reviewed that ASPIB is an investing board, while the TRS and PERS Boards deal mainly with appeals and setting rates. He noted that one section of HB 238 would set an 11 percent floor on employer contributions. He mentioned the unfunded liability and said, "If ... the state and local governments have to write checks for $15 billion over the next 25 years and have not collected that money, that is a big problem within the system." He stated his understanding that 86 percent of the TRS retirement section is funded, which means it's in much better shape; "it put a floor on and did not go down below 11 percent." He offered further details and said, "It's a question of the bottom line and how we get there." He said the committee members could come in individually to his office to view a Power Point presentation. 12:06:45 PM REPRESENTATIVE ELKINS suggested that it might be advantageous to do the Power Point presentation before the entire committee. 12:07:05 PM TOM HARVEY, Executive Director, NEA-Alaska, testifying on behalf of NEA-Alaska, commended Ms. Shows for "generating a mechanism of looking at lots of scenarios." He said NEA-Alaska has also developed several charts showing actual cases across the state, and he offered to make those charts available to the committee upon request. He said Mr. Bjork pointed out that the question to ask is, "What are the assumptions you're going to use?" MR. HARVEY noted that, regarding salary increases, over the past 16 years, the teacher average salary has increased 1.36 percent. He said, "If you're making an assumption that somebody's salary's going to increase by ... 5.73 percent, then sure, their annuity's going to look good at the other end. But when in reality what they're getting are increases of 1.36 [percent], inflation alone is going to eat more of that up, because the inflation, which is another assumption that I'd like to check on ..., should be the assumption for everything that the state does." He recalled being continually told by actuaries during work on the Percent of Market Value (POMV) last year that 2.6 percent was the inflation rate over any 10-year period of time that "you would pick in the State of Alaska." He continued: So, we generated charts at 2.6 [percent] and discovered some alarming things that occur at that rate of inflation, versus a salary increase of only 1.3 [percent]. MR. HARVEY stated his willingness to work with the committee on any number of scenarios. He said teachers do better in the first nine years because of the step increases. However, when they get to the top and there are either no raises or raises of only 1.36 percent, that's when the trouble begins, "particularly when you're suggesting that a male has to work 40 years in order to get to a defined contribution plan that will look the same as the defined benefit plan." 12:11:08 PM CHAIR SEATON clarified, "That is if you calculate defined benefit at 8.25 [percent] and ... you calculate defined contribution at 6.73 [percent]." He offered further details. 12:11:44 PM MR. HARVEY said Chair Seaton hit on a potential solution of ensuring that it is an entity like the ASPIB Board doing the management so that the 8.25 percent return can be guaranteed. He stated that the other issue will be the assumption on health care. 12:13:00 PM MR. HARVEY, in response to a comment from Representative Gruenberg, reiterated that he has a simple chart that shows the teacher average salaries. He offered more details and, in response to Chair Seaton, said he would send it to the committee. 12:14:04 PM REPRESENTATIVE GRUENBERG suggested that his staff would benefit from some informal individual instruction regarding these issues. 12:15:10 PM CHAIR SEATON said his staff is already doing that with other groups and would be happy to involve Representative Gruenberg's staff and anyone else's staff. 12:17:07 PM CHAIR SEATON directed attention to a handout, "State of Alaska PERS & TRS Proposed Medical Program House State Affairs." He asked the committee to concentrate on the "pre-65" benefits. He said he doesn't want to go through this without the department representatives who have not yet arrived at the meeting. Notwithstanding that, he proffered that there should be a fair amount of difference in what the contribution rate must be, depending on how the medical program is designed. He discussed some differences between PERS and TRS that must be considered. 12:20:28 PM BRADLEY FLUETSCH told the committee that he is a financial consultant with Wells Fargo Investment, but is testifying on behalf of himself. He referred to the "projected benefits - rate of return 6.73 percent" page and said if the defined contribution pension account percentage assumption of 15.5 is "ramped up" to 28.5 and the columns are "rerun," the [numbers] would be almost doubled. He indicated that when deferred [compensation] is added, the retirement plan becomes "fairly attractive." MR. FLUETSCH, regarding West Virginia and Nebraska, said there is good evidence of how Alaskans invest their retirement through SBS. He suggested, "Let's take a look at the target retirement funds - target 2015, target 2020. These are retirement funds designed for employees retiring on or about a specific year. How are they doing relative to the 8.25 and the 6.73 [percent]?" Mr. Fluetsch also recommended looking at the Alaska Balanced Fund to see how it's doing. The last thing he recommended asking is: "What is the break-even rate of return, where the assumptions zero out ... where the defined contribution equals the defined benefit, so that in this percentage column they're all zeros?" 12:23:26 PM CHAIR SEATON informed Mr. Fluetsch that he has requested that information regarding SBS, the different funds, and how they've been faring. Another consideration will be whether or not SBS should be a factor in a rewrite of the program. He offered further details. 12:24:48 PM MR. FLUETSCH, in response to a comment by Chair Seaton, stated that everybody participates in SBS at the same rate; therefore, he clarified that Chair Seaton is talking about deferred compensation. 12:25:58 PM HEATH HILYARD, Staff to Representative Mike Kelly, Alaska State Legislature, on behalf of Representative Kelly, noted that the State of Michigan changed to a defined contribution plan about 10 years ago, and he recommended that Michigan's plan could be used as a comparison model. 12:26:43 PM REPRESENTATIVE GRUENBERG asked whether any of the regional divisions of [the Council of State Governments (CSG)] or the National Conference of State Legislatures (NCSL) have any task forces or committees working on this issue on an ongoing basis. 12:27:14 PM MR. HILYARD offered his belief that NCSL is, but perhaps CSG is not involved as much. He said he has also looked into the American Legislative Exchange Council. In response to a question from Chair Seaton and Representative Gruenberg, he said he doesn't know if there are any House Representatives from Alaska serving on [the NCSL] committee. 12:28:20 PM REPRESENTATIVE GRUENBERG opined that as the Legislative session winds down and the Interim begins, it is important to have "somebody sitting on ... that committee, whatever it is." He offered to look into the matter. 12:29:09 PM MR. HILYARD stated his belief that Representative Anderson serves on the Labor & Commerce labor committee for NCSL, but he doesn't know if that committee has purview over retirement and benefit issues. 12:30:03 PM CHAIR SEATON noted that the information regarding the State of Michigan's plan was being distributed. He asked the committee members to go through the sectional and bill on their own time and be prepared to go through it on Tuesday, April 5. He indicated that it may be necessary to hold an informal work session and told people to let him know if they are interested in participating. [HB 238 was heard and held.]
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