Legislature(1993 - 1994)

03/05/1993 10:30 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
  SENATE BILL NO. 111:                                                         
       An Act establishing the defined contribution retirement                 
       plan for public employees; requiring the preparation of                 
       certain   actuarial   valuations   and  actuarial   and                 
       financial   experience   analyses   of  the   teachers'                 
       retirement system; requiring  the teachers'  retirement                 
       system and  the public employees' retirement  system to                 
       be fully  funded  before  granting  a  post  retirement                 
       pension  adjustment;  and  providing for  an  effective                 
  Co-chair Pearce  announced that  the SB  111(JUD) was  being                 
  brought before the committee.  Senator  Rieger said that the                 
  purpose  of  SB  111(JUD)  is  to  convert  the state's  two                 
  retirement plans, Public Employees Retirement System (PERS),                 
  and Teachers Retirement System (TRS), from a defined benefit                 
  plan to a  defined contribution plan. He  explained that the                 
  three parts to a retirement plan include  the beginning when                 
  money  is put into the  plan, the period  of time when money                 
  earns investment returns, and the end when money is paid out                 
  to the beneficiary.  The middle step in the plan is a period                 
  where  a  fiduciary is  obligated  to invest  the  money for                 
  maximum yield  consistent with  safeguarding the  principal.                 
  This  period  is   outside  the   control  of  the   pension                 
  administrator  because  rates of  return  in part  depend on                 
  rates of inflation.   The administrator must do the  best he                 
  can.   What can be defined  is the original amount  of money                 
  invested or  the money  finally  paid out.   Senator  Rieger                 
  explained that SB 111 would move PERS and TRS from  the type                 
  of  pension  plan that  defines the  output  to a  plan that                 
  defines  the  input.   One  important  aspect  of a  defined                 
  contribution pension  plan is that  it can  be designed  and                 
  adjusted  more easily to the employee.  Since employees move                 
  from job to job, they also benefit from the portability of a                 
  defined contribution pension  plan.  Several years  ago, the                 
  University initiated  and requested  that  its pension  plan                 
  become a  defined contribution  plan, and  it provided  that                 
  option to their  employees.   Another aspect is  that it  is                 
  more  amenable to self-direction  by employees.  Frequently,                 
  employees can choose how their pension money is managed.                     
  Senator Rieger also noted that in the past a large number of                 
  bills  had  been  introduced to  "tinker"  with  the state's                 
  existing pension plans to correct  perceived inequities.  SB
  111 would address this inequity without being a detriment to                 
  another  employee in  the same system.   There are  a lot of                 
  rules governing the  determination of  pension plans.   This                 
  bill does  not change  existing pension  plans that  will be                 
  maintained for existing  employees.  Existing employees,  if                 
  they choose, have the  option of opting into this  new plan,                 
  but it does not mandate the  determination of a pension plan                 
  for any prior employees.  What SB  111 does is create a two-                 
  tier  retirement  benefit  plan  at   a  date  where  future                 
  employees  would  be  hired into  a  new  retirement system.                 
  Senator Rieger also  commented that the legislature,  in the                 
  past,  has made  changes  to the  defined  benefit plan  and                 
  committed future legislatures  for 10, 15  or 20 years to  a                 
  different pension contribution than they would  have chosen.                 
  It is a grey area when  the legislature makes these kinds of                 
  long-term commitments  without a general  obligation vote of                 
  the people.                                                                  
  Co-chair  Pearce  invited  Commissioner  Nancy  Bear  Usera,                 
  Department of Administration, to speak to SB 111.  She noted                 
  that the  Department of Administration was in the process of                 
  preparing a fiscal note for the bill, and that  SB 111 would                 
  be held in committee until the fiscal note is received.                      
  NANCY BEAR USERA said that  the Department of Administration                 
  was  in  support  of  a  defined  contribution  plan.    She                 
  explained  that  at  today's  escalating  employment   rate,                 
  present employees  were really  paying for  the benefits  of                 
  those  people  who were  in  the generous  retirement system                 
  prior to the  changes of 1986.  She said that escalation has                 
  continued over the years as benefits are paid.  Last session                 
  there were 23  separate retirement bills that  "tweaked" the                 
  system to correct some inequity for certain employees.   She                 
  spoke in support of the defined contribution plan because it                 
  is clear  what the employee and employer have.  She said she                 
  felt one of  the biggest  benefits of defined  contributions                 
  was the flexibility of the employee and employer to design a                 
  program that is  easily understood.   When employees  change                 
  careers on  the average of  eight times during  their lives,                 
  portability is an  important feature.   Administratively,  a                 
  defined contribution plan is a cleaner plan to manage.                       
  Ms. Usera explained the dilemma with the fiscal note is that                 
  there will be an implication on PERS because the presumption                 
  for any fixed  benefit retirement plan is  that it continues                 
  in perpetuity.   The funding rate  that the state is  paying                 
  today is really  attributable to many  of the benefits  that                 
  were established  before 1986.   She stated that  this could                 
  fix itself over time but  there can be an adverse effect  on                 
  the employer rate  as well as  how well future benefits  are                 
  funded.    The conversion  process  will cause  a short-term                 
  fiscal cost  but the  department is  still in  support of  a                 
  defined contribution plan.   The Commissioner said  it would                 
  provide  a  more  meaningful  benefit  to employees,  and  a                 
  cleaner system for the employer.                                             
  SENATOR  BERT  SHARP  asked how  the  unfunded  liability of                 
  $290.0M in TRS could cause an extra expense because benefits                 
  being paid out  now depend on  contributions of present  and                 
  future employees.                                                            
  Ms. Usera explained that the employee contributions put into                 
  PERS,  for  example,  was  held   for  that  employee  until                 
  retirement.   At  that time,  any deficit  between what  the                 
  employer and employee  paid in, and  what must be paid  out,                 
  would be paid  by the employer.   She said three  retirement                 
  programs exist in the state program: PERS, a defined benefit                 
  plan; SBS, a defined  contribution plan; and the third  is a                 
  deferred compensation plan  at the  option of the  employee.                 
  SBS became the  alternate plan when  the state opted out  of                 
  Social Security.  Although it is  thought of as a substitute                 
  for Social Security, SBS is exactly the opposite, in that it                 
  is a defined  contribution plan.    She  suggested that  one                 
  option would be to hold SBS  as the core program and enhance                 
  it to include this new option of defined contributions.                      
  SENATOR STEVE FRANK  asked if a  defined benefit fund had  a                 
  good experience and made money, would  it be possible to not                 
  have any unfunded liability.  He  also confirmed that if the                 
  plan had a  surplus, the employee  would not benefit by  the                 
  surplus.  Ms. Usera answered affirmatively.  She said one of                 
  the benefits of the defined contribution  plan is that it is                 
  market sensitive, the funding level fluctuates, and averages                 
  out over the  life of the program,  so it could  benefit the                 
  SENATOR  TIM KELLY  asked  if the  University of  Alaska was                 
  under PERS  or  TRS.   He  also asked  if  there were  other                 
  retirement systems in the state, such as the Alaska Railroad                 
  System, where the  state was liable.   Ms. Usera said  there                 
  were other retirement systems around the state, but were not                 
  tied into the state system.                                                  
  JANET PARKER, Research  and Liaison  Officer, Department  of                 
  Administration, said  that there was the Judicial Retirement                 
  System.  Senator Kelly asked why that plan was not a defined                 
  contribution  plan.   Senator  Rieger  said that  there were                 
  options in  that  plan,  but  he did  not  know  if  it  was                 
  Ms.  Usera  added that  even if  AHFC  or the  Railroad were                 
  running a separate retirement plan, the state could possibly                 
  be  found  to be  responsible  if  the plan  failed  to meet                 
  benefit payments.  Senator  Pearce asked for a list  of what                 
  retirement plans came under the Budget Act.                                  
  Co-chair Pearce invited Vernon Marshall, Executive Director,                 
  NEA-Alaska, to speak to SB 111.                                              
  (The following statement is verbatim and a copy on file.)                    
  VERNON MARSHALL said  that his organization opposes  SB 111.                 
  He said that  the bill was  viewed as a regressive  approach                 
  toward caring for those educational  employees who serve our                 
  public education institutions.  The current  defined benefit                 
  plan  ties  a  promised  benefit  to  the  earnings  of  the                 
  employee,  factors  in  length  of  service and  for  vested                 
  employees pays a  percentage of the employees  final average                 
  salary.    A  defined  contribution  plan pays  benefits  at                 
  retirement  based  on money  accumulated  in  the employee's                 
  retirement  account.     Changing  from  a  defined  benefit                 
  retirement program to a defined contribution retirement plan                 
  would create  a larger  burden on  educational employees  to                 
  manage  long-term  personal   financial  resources   because                 
  defined  benefit  plans  are not  designed  to  specifically                 
  provide stated retirement benefit levels.                                    
  Mr. Marshall  went on  to say  that a  defined benefit  plan                 
  provides the ability for  the employer to design plans  that                 
  attempt to  satisfy stated retirement income  objectives for                 
  vested employees.  The defined contribution plan outlined in                 
  SB 111 will take employer and employee contributions and for                 
  all  practical  purposes,  allocate these  contributions  to                 
  individual  accounts.  Under this  approach, there is no way                 
  of knowing  in advance  the exact  amount of  assets in  the                 
  employee's account at retirement.   The size of the  account                 
  will be  affected by the amounts contributed,  the impact of                 
  investment  gains  or losses  and  the value  of reallocated                 
  benefit forfeitures.                                                         
  Mr.  Marshall  said  NEA-Alaska  would   support  a  defined                 
  contribution  plan as a supplement to an existing plan, such                 
  as that of the University of Alaska.   NEA felt SB 111 would                 
  set up another  bureaucracy to  manage another benefit  plan                 
  which would likely offer no  better means for providing  and                 
  managing for retirement needs  of educational employees than                 
  the current system.   If the intent of SB 111  is to trim or                 
  redirect the state's future retirement obligation, it should                 
  not be accomplished  on the  backs of those  who will  begin                 
  work next  year.   NEA felt  that there  are better  ways to                 
  utilize retirement options to affect savings.                                
  Mr. Marshall proposed the reason  for turning from a defined                 
  benefit  package   to  a  defined   contribution  retirement                 
  benefits could be the fear of large unfunded liabilities  as                 
  discussed  earlier.    By  limiting  the  employers  maximum                 
  contribution,  such organizations  believe they  can control                 
  and  contain  costs.   A defined  benefit plan  can minimize                 
  unknown  cost  commitments  by  projecting  future  interest                 
  earnings,  mortality rates,  personnel turnover,  and salary                 
  increases,  thus,  they  attempt to  establish  a reasonable                 
  level  funding  pattern.   Moreover,  he  believed  that the                 
  retirement system  boards and  manager should  be evaluating                 
  the defined benefit  plan's assets and liabilities  at least                 
  annually for contribution  adjustments if  needed.  He  also                 
  added,  according  to  court  decisions,  retiree's  defined                 
  benefits  under  some circumstances  were defined  as vested                 
  benefits that cannot be taken away.  He said he did not feel                 
  SB  111 took defined  benefits away, but  employees had been                 
  paying  into the system with  the expectation that they will                 
  have  a  guaranteed  level  of  benefits  upon   retirement.                 
  Creation  of  a  two-tier could  be  confusing  and divisive                 
  because   employees   would  continually   compare  benefits                 
  associated with the two plans.                                               
  Mr. Marshall said NEA-Alaska was  concerned about the affect                 
  this change will have on the overall stability and soundness                 
  of the  current defined  retirement plan.   SB 111  provides                 
  that beginning 93-94  school year new  hires will enter  the                 
  defined  contribution  plan.    Risk   to  the  employer  is                 
  minimized and in the current plan, risk is shared.  He urged                 
  the committee  to vote against SB  111.  If this  bill would                 
  pass,  Alaska could  become the  first state to  require its                 
  employees to  join a  defined contribution  retirement plan.                 
  Mr.  Marshall  offered  his  statement  in  writing  to  the                 
  Senator Rieger  asked if  Mr. Marshall  remembered when  the                 
  administrator of TRS, a year ago, recommended an increase of                 
  about  5-6  percent  in  the  contribution rate  because  of                 
  unfunded liability.  Mr.  Marshall felt it was at  3 percent                 
  that the  decision was  made for  the system  to absorb  the                 
  required increase in  the employer contribution.   He agreed                 
  that it did extend the unfunded liability, but TRS' unfunded                 
  liability,  compared  to  other  retirement systems  in  the                 
  country, is  not excessive.   Senator Rieger  felt that  the                 
  increased employer contribution had just  been pushed out to                 
  later  years rather  than  paid at  the  time the  liability                 
  occurred.  Now there was not as much room to push things out                 
  and the  next  time it  occurs, it  will be  hard on  school                 
  districts and school employees.   Senator Rieger thought the                 
  teaching community would  support a bill that  would restore                 
  stability to the plan.  Mr. Marshall admitted that there was                 
  an extension  in the unfunded  liability but  did not  agree                 
  that  there  was  a  financial  crisis confronting  the  TRS                 
  retirement system.                                                           
  Senator  Kelly  asked at  what point  it  would be  called a                 
  crisis.  Senator Kelly  pointed out that TRS had gone from a                 
  101 percent  unfunded liability in  1987 to 85.6  percent in                 
  1993.    Mr.  Marshall said  the  systems  employ investment                 
  advisors who carefully assess information.   It is difficult                 
  to say it should be a certain percentage.  He agreed that at                 
  some point  employees  would  have  to  pay.    Any  benefit                 
  increase would be analyzed as to the cost to the system over                 
  a long period of time.                                                       
  Senator  Pearce  asked  Senator  Rieger  and  Ms.  Usera  to                 
  continue work on SB 111.  She said the bill would be HELD IN                 
  The meeting was adjourned at approximately 11:15 a.m.                        

Document Name Date/Time Subjects