Legislature(1993 - 1994)
03/05/1993 10:30 AM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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 date. 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 employee. 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 mandatory. 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 committee. 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 COMMITTEE. ADJOURNMENT The meeting was adjourned at approximately 11:15 a.m.