Legislature(2023 - 2024)GRUENBERG 120
03/07/2023 03:00 PM House STATE AFFAIRS
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| Audio | Topic |
|---|---|
| Start | |
| HB2 | |
| HB22 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 22 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 2 | TELECONFERENCED | |
HB 22-PEACE OFFICER/FIREFIGHTER RETIRE BENEFITS
3:06:05 PM
CHAIR SHAW announced that the final order of business would be
HOUSE BILL NO. 22, "An Act relating to participation of certain
peace officers and firefighters in the defined benefit and
defined contribution plans of the Public Employees' Retirement
System of Alaska; relating to eligibility of peace officers and
firefighters for medical, disability, and death benefits;
relating to liability of the Public Employees' Retirement System
of Alaska; and providing for an effective date."
3:06:44 PM
The committee took a brief at-ease.
3:08:17 PM
REPRESENTATIVE ANDY JOSEPHSON, Alaska State Legislature,
introduced HB 22, as the prime sponsor. He paraphrased the
sponsor statement [included in the committee packet], which read
as follows [original punctuation provided]:
HB 22 creates a new hybrid retirement plan option for
state and municipal peace officers and firefighters
under the Alaska Public Employees' Retirement System
(PERS) with new protections for the state against
unforeseen future liabilities.
Alaska ended the Defined Benefit Plan in 2006 after
discovering that the accounts were too underfunded to
meet anticipated retiree obligations. Since these
plans were eliminated, one of Alaska's greatest public
safety challenges has become employee retention and
recruitment. Alaska is one of the few jurisdictions
that does not presently offer a defined benefit
retirement for new public safety employees.
Additionally, many municipal public employees do not
participate in Social Security or the Supplemental
Annuity Plan (SBS-AP). HB 22 is crafted to retain and
attract quality peace officers and firefighters while
protecting the state from unnecessary financial risks
in the future. The proposed option would allow future
peace officers and firefighters under the PERS system
and current ones under the PERS Tier IV plan to join
the defined benefit plan.
The proposal includes several safeguards modeled after
the most fiscally responsible plans in the nation.
These safeguards provide stability and would provide
the state with fiscal certainty about its ability to
maintain adequate funding for this plan into the
future. These provisions include a minimum retirement
age of 55 with 20 years of service, flexibility
setting employee contribution rates, minimum 12
percent employer contribution rates, mechanisms to
prevent costly "pension spiking," and the ability to
withhold post-pension retirement adjustments should
the plan's funding drop below 90 percent. This hybrid
tier will closely mirror Tier III of PERS for public
safety employees, with the exception of two cost
saving measures: the continued inclusion of the Tier
IV Defined Contribution Retirement health
reimbursement arrangement (HRA) and the absence of
cost-of-living adjustments.
HB 22 is a step toward making Alaska more attractive
to public safety employees. The nature of the jobs
that peace officers and firefighters hold are unique,
physically demanding, and hazardous compared to other
public employees, and all Alaskans pay the cost for
understaffed public safety agencies.
REPRESENTATIVE JOSEPHSON emphasized that the bill would not
impact the old tiers. He further reported that, per expert
analyses, the indebted liability would be amortized in 16 years
with or without the passage of HB 22. The only imposition, he
explained, albeit slight, would be an extension period of 6
months upon the repayment of the unfunded liability, as 2
percent would be redirected to pay for each individual's trust
in the new tier system ("Tier V"). He conveyed that the cost to
the state associated with that 6-month shift would be $6
million. He discussed the cost of training public safety
officers and the high rate of turnover, indicating that cities
and states could benefit from the proposed legislation because
the program would save $12 million in training costs, as fewer
officers would leave.
3:20:33 PM
REPRESENTATIVE JOSEPHSON pivoted to the Senate Finance Committee
hearing requested by Senator Stedman in which defined benefits
(DB) were compared to defined contributions (DC). He reported
the takeaway from the hearing was that DC was not on par with
DB, especially for police and fireman, the group most harmed by
the new 401(k) DC system. He reported that on average, the
difference between DC and DB plans was 3 percent after 30 years
of service; however, for public safety employees, the difference
was 8 percent, indicating that they were impacted significantly
more by a DC plan.
3:24:07 PM
REPRESENTATIVE JOSEPHSON reported that Tire V included the
following triggers if the fund were to underperform: the Alaska
Retirement Management (ARM) Board could request higher employee
contribution rates to maintain solvency and the post retirement
pension adjustment (PRPA) could be frozen. He also noted the
cost saving measures in the bill, such as the elimination of the
10% cost of living allowance (COLA) on pensions, and a high five
versus high three calculation. He concluded by discussing the
Reason Foundation - a critic of defined benefits reporting
that the organization recently recommended doubling DC for
police and fire to provide adequate benefits.
3:31:08 PM
REPRESENTATIVE JOSEPHSON directed attention to a PowerPoint
presentation on HB 22 [included in the committee packet]. He
directed attention to slide 2, titled "Sections of Note in HB
22," which read as follows [original punctuation provided]:
Section 14: • Allows employee contribution rate to be
increased from 8% to 10% if needed.
Section 18: • Sets employer contribution at 22%- 12%
to employee and 10% remaining to unfunded liability
Section 21: • Establishes age of retirement at 55
years with 20 years of service or 60 years with 5
years of service.
Section 25: • Allows for the post retirement pension
adjustment to be withheld in the plan if unfunded
liability on the new tier is greater than 10%.
Section 29: • New section outlines medical benefit
eligibility for the new tier.
Section 30: • Outlines the "high five" rule for the
new tier.
Section 35 and 36: • Uncodified sections that outline
process for current employees to buy in to the new
tier.
3:31:30 PM
REPRESENTATIVE JOSEPHSON continued to slide 3, outlining the
bill history in previous legislatures, which read as follows
[original punctuation provided]:
HB 247 in 28th Legislature Rep. Holmes
HB 113 in 29th Legislature Sponsor: Rep. Millett
HB 395 in 30th Legislature Sponsor: Rep. Millett
HB 79 in 31st Legislature Sponsor: Rep. Kopp
HB 55 in 32nd Legislature Sponsor: Rep. Josephson
HB 22 in 33rd Legislature Sponsor: Rep. Josephson
3:31:41 PM
REPRESENTATIVE JOSEPHSON advanced to slide 4, titled "Details of
Tier IV," which read as follows [original punctuation provided]:
401(a) is made up of 13% of payroll: Employee=8%,
Employer=5%
HRA = 3% of average PERS salary
Medicare coverage with 25 years of service for Public
Safety
Disability similar to Tier III
Most municipal employees not covered by Social
Security or SBS
3:32:21 PM
REPRESENTATIVE JOSEPHSON summarized the table on slide 5, which
provided a comparison of existing tiers. Slide 6 featured media
articles that highlighted the retention issues with Tier IV. He
listed the following issues with Tier IV retirement on slide 7:
recruitment difficulties, retention costs, workers' compensation
costs, operational capabilities, and unforeseen costs. He
proceeded to slide 8, titled "Inadequacies of Tier IV," which
read as follows [original punctuation provided]:
William Fornia of Pension Trust Advisors says Tier 4
will replace 31% of income after 25 years.
DOA estimated 38.5% income replacement-Used a fixed
time frame of 30 years.
Bob Mitchell, the CIO of the State of Alaska put the
probability of a 25-year Public Safety employee
replacing 70% of income for 30 years at 6% and a 30-
year employee at 22%.
3:34:12 PM
REPRESENTATIVE JOSEPHSON turned to slide 9, which emphasized
that HB 22 would impact the 2,358 Tier IV peace officers and
fire fighters, amounting to only 7.7 percent of the 22,129
employees in the public sector. He continued to slide 10,
titled "Cost Containment Measures in HB 22," which read as
follows [original punctuation provided]:
Reduces benefits significantly from Tier III
Plan built on more conservative assumptions with
reasonable costs
Requires a steady level of contributions from both
employee and employer
Includes mechanisms for dealing with adverse
experience
Shares risk between employees, employers, and retirees
3:34:24 PM
REPRESENTATIVE JOSEPHSON listed the benefit reductions in Tier V
on slide 11, as follows: no pre-Medicare coverage; elimination
of the 10% COLA on pensions; final calculation based on 5 years
as opposed to 3 years; requires a minimum age of 55 with 20
years of service to collect benefits. He advanced to slide 12,
titled "Best Practices," which read as follows [original
punctuation provided]:
Built on a lower expected rate of return-7%
Require steady contribution from employees and
employers
Allow the employee contribution to go up to 10% but
not fall below 8%
Allow the PRPA (inflation proofing) to be withheld
when funding falls below 90%
Replicates Tier IV defined contribution medical
Reasonable employer costs
3:35:08 PM
REPRESENTATIVE JOSEPHSON cited an article from the Alaska Reason
Foundation on slide 13, titled "How Alaska's defined
contribution plan and supplemental annuity plan compare to the
gold standard." He highlighted the following paragraph from the
article, which affirmed that public employees were hurting under
the status quo [original punctuation provided]:
There is also a potential major shortcoming in the
Alaska DCR for public safety employee participants.
Public safety employees generally retire at an earlier
age than general classification employees because of
the requirements of their jobs. Funding an earlier
retirement date requires a higher contribution rate.
It is generally accepted that without Social Security
and earlier retirement ages, the total contribution
rate for police and fire employees should be a minimum
of 30%. With public safety workers participating in
PERS and not participating in Social Security, the
combined 25.26% contribution rate is well below the
suggested 30% contribution.
3:36:58 PM
REPRESENTATIVE JOSEPHSON discussed slide 14, titled "PERS Tier
III and Tier IV Comparison," which featured two tables comparing
hypothetical salaries to actual salaries as of 2/1/23 for peace
officers and firefighters. He noted that the data was
repurposed from the meeting on retirement and benefit options in
SFIN at Senator Stedman's request. He highlighted the low rate
of revenue replacement after 15 years of service.
3:38:55 PM
REPRESENTATIVE JOSEPHSON concluded on slide 15, titled "Treasury
Accomplishments," which read as follows [original punctuation
provided]:
Professional Certifications:
- Increase in professional designations: CFAs, CPAs,
CIPMs & CTPs
Delivered outstanding investment performance results:
- In FY 22, PERS and TRS performance of -4.1% resulted
in an average of 9.0% during the 38-year history of
the retirement systems. Over the past decade, the
systems have outperformed their benchmark by 126
basis points and the median peer plan by 98 bps.
This performance places the systems well into the
top quartile, outperforming over 85% of peer plans.
- State assets have grown by 9.0% in the last 12
months, largely outperforming fund benchmarks.
ARMB Savings:
$35 million annual savings in management fees by
reducing the amount of assets invested with external
investment managers and investing those assets
utilizing Treasury Investment Officers.
3:40:26 PM
CHAIR SHAW invited questions from members of the committee.
3:40:33 PM
REPRESENTATIVE ALLARD asked whether other professions, such as
nurses, electricians, plumbers, business owners, and restaurant
workers, should be entitled to a system of defined benefits.
REPRESENTATIVE JOSEPHSON emphasized the importance of
distinguishing between routine services, such as plumbing, and
lifesaving services, like those provided by public safety
officers.
REPRESENTATIVE ALLARD asked whether the U.S. military and
members of the armed services should be entitled to defined
benefits.
REPRESENTATIVE JOSEPHSON answered, "110 percent."
REPRESENTATIVE ALLARD reported that members of the uniformed
services ceased to receive defined benefits under former
President Obama. Instead, military members received the Thrift
Savings Plan (TSP), which she defined as continuation pay with a
5 percent match. She opined that military members were on the
same level as first responders and for that reason, she
characterized HB 22 as a "hard sell."
REPRESENTATIVE JOSEPHSON stated, "Here's how you and I may
differ philosophically: If I can feed a Juneauite who is hungry
but can't get to the boy in Africa who is hungry, I'm going to
just feed the Juneauite."
REPRESENTATIVE ALLARD asked whether the bill sponsor would be
amenable to granting U.S. military members who reside in Alaska
a lifelong defined benefits plan upon retirement.
REPRESENTATIVE JOSEPHSON answered no, unless they were state
employees. He further clarified that military members would not
be covered under HB 22 unless they were public safety officers.
REPRESENTATIVE ALLARD stated that all Alaskans were important
regardless of their line of work.
3:44:01 PM
REPRESENTATIVE ARMSTRONG reported that last year, the
legislature spent $420 million on one single energy relief
payment. She calculated that at an annual cost of $6 million,
that one-time payment of $420 million would cover 70 years of
contributions for public safety workers. She asked whether her
calculations were correct.
REPRESENTATIVE JOSEPHSON answered yes. Alternatively, he
indicated that reducing the PFD by $20-$30 would yield the same
amount. He acknowledged the importance of the dividend;
however, he argued that equally important was a quick response
to emergency situations.
REPRESENTATIVE ARMSTRONG asked how the high rate of turnover
among police and firefighters impacted public safety.
REPRESENTATIVE JOSEPHSON equated more years of experience to
better community integration and better performance. He
referenced the "train and drain" in Alaska, in which officers
were trained at a high level and then poached by other states.
3:47:04 PM
REPRESENTATIVE CARPENTER opined that DB plans tended to result
in costly, unsustainable options. He took exception to the
sponsor's characterization of the Reason Foundation's assessment
of Alaska's retirement plans. He shared his understanding that
the foundation was opposed to HB 22 and all DB plans. Further,
he expressed concern that HB 22 would result in a $3 billion
increase to the unfunded liability. He asked whether the
actuarial analysis in question was recent.
REPRESENTATIVE JOSEPHSON agreed that the Reason Foundation
disliked HB 22; however, he maintained his belief that the
paragraphs featured on slide 13 from a September 2022 article
[by Richard Hiller and Rod Crane] "had a strange way of saying
it." He paraphrased the article in question, emphasizing that
there was no way HB 22 could impose anything close to $3 billion
on the unfunded liability. He reported that, per the actuaries,
Tier V would cost $60 million over 10 years. He further
reported the state's actuary was Buck [formerly Buck
Consultants], adding that consultants from Buck were hired to
analyze the status of the unfunded liability each year, followed
by a secondary analysis every four years to avoid repeating
mistakes of the past. Additionally, the firefighters hired
their own actuary, William "Flick" Fornia. He emphasized that
the unfunded liability was analyzed under a microscope and that
the plan had been well vetted.
REPRESENTATIVE CARPENTER suggested that an actuarial analysis
should be conducted by a nonbiased third party. He agreed with
the sponsor that Alaska's DC plan was not competitive in
comparison to other plans throughout the nation. He contended
that instituting defined benefits was not the only solution to
help retain public safety workers. He suggested "sweetening"
the DC plan. He expressed concern that Tier V, as proposed in
HB 22, would reduce employee pay if the fund was
underperforming. He expressed further concern that the bill,
which addressed a complex issue with major implications to the
state's long-term fiscal plan, was being rushed through the
committee process with little scrutiny. He recommended sending
the bill to a subcommittee to be further studied.
REPRESENTATIVE JOSEPHSON stressed the credentials of Buck
consultants, opining that the firm would be quick to report a
problem. He acknowledged that the previous committee of
referral could have vetted the bill further. Nonetheless, he
said the contention that the bill wasn't "ready for prime time"
or that it lacked clear explanation was unfair, as the
legislation almost made it through the Senate in recent years.
He concluded by reminding the committee that the Reason
Foundation, a critic of the bill, had recommended that the state
solve the problem by paying 4 percent more into retirement,
which would double existing costs. He argued that HB 22 was a
cheaper solution.
3:56:25 PM
The committee took a brief at-ease.
3:56:59 PM
CHAIR SHAW invited additional comments from members of the
committee.
3:57:05 PM
REPRESENTATIVE ALLARD contended that Ryan Frost, a senior policy
analyst at the Reason Foundation, contradicted the statements
made by the bill sponsor, adding that Mr. Frost characterized
the plan as "[lacking] sufficient controls to justify the
proponents' assertion." She agreed that HB 22 should be
referred to a subcommittee, arguing that the legislature needed
to avoid pulling from the PFD to fund a specific cohort's
retirement without a full audit.
3:58:10 PM
REPRESENTATIVE C. JOHNSON recalled the errors in Mercer's
actuarial analysis of the state's unfunded liability. He opined
that some actuaries were paid to come up with a specific answer,
adding that the bill should be referred to a subcommittee for
further consideration.
3:58:58 PM
CHAIR SHAW made the following prepared remarks [original
punctuation provided]:
The subject matter of this bill is both important and
of a complex nature. I'll note that while this bill is
narrowly focused to public safety employees, the
companion legislation in the other body, Senate Bill
88 is significantly different and has a much broader
scope.
We are reliably informed by the leader of the minority
caucus that this bill, among others, requires "a
higher level of attention". I fully agree with the
Minority Leader on this.
That having been said, the House State Affairs
Committee has quite a large roster of bill referrals.
While this bill and the matter of recruitment and
retention in general require "a higher level of
attention", the work of the committee must nonetheless
continue apace.
In that spirit, and pursuant to Uniform Rule 20 (b), I
am establishing a subcommittee which shall be called
the "House State Affairs Subcommittee on House Bill 22
and Senate Bill 88".
This shall be a three-member subcommittee and shall be
chaired by Representative Craig Johnson. The other two
members shall consist of Representative Ben Carpenter
and Representative Andi Story.
It is my intent that Senate Bill 88 when it comes
over from the other body will also be referred to
this subcommittee. At that point, the Subcommittee on
House Bill 22 and Senate Bill 88 will evaluate the
relative advantages and disadvantages of the two
proposals and shall report back to the House State
Affairs with their findings and recommendations for a
unified proposal.
To that end and pursuant to Mason's Manual Section
651, the Subcommittee on House Bill 22 and Senate Bill
88 is authorized to make whatever efforts and
undertakings are needed to carry out this task.
I thank the new chair of the Subcommittee on House
Bill 22 and Senate Bill 88 for his willingness to take
on this responsibility, and I trust that our two
offices will work closely together on this matter.
Thus, the Subcommittee on House Bill 22 and Senate
Bill 88 is established.
And at this time, I am referring House Bill 22 to the
House State Affairs Subcommittee on House Bill 22 and
Senate Bill 88.
CHAIR SHAW moved to establish the House State Affairs
Subcommittee on HB 22 and SB 88 to which HB 22 was referred.