Legislature(2009 - 2010)BELTZ 211
03/24/2009 09:00 AM Senate STATE AFFAIRS
Audio | Topic |
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Start | |
SB23 | |
SB129 | |
HJR19 | |
SB126 | |
Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
*+ | SB 126 | TELECONFERENCED | |
+ | SB 129 | TELECONFERENCED | |
HJR 19 | |||
= | SB 23 | ||
SB 23-REPEAL DEFINED CONTRIB RETIREMENT PLANS CHAIR MENARD announced the consideration of SB 23. 9:08:04 AM BETH ALMEIDA, Executive Director, National Institute of Retirement Security (NIRS), Washington D.C., said NIRS is a nonprofit, nonpartisan organization. Its mission is to foster a deep understanding of the importance of retirement security to retirees and the economy as a whole using research, education, and outreach. She will summarize recent research found in their report entitled "Pensionomics." The intent was to measure the economic footprint of state and local pension plans. Defined benefit (DB) plans can act as an automatic stabilizer for the economy by providing predictable benefits. 9:10:35 AM MS. ALMEIDA said NIRS used data from 2006 and found that expenditures made out of state and local retirement benefits supported about 2.5 million jobs nationally and paid $92 billion in income. The total economic impact was about $358 billion nationwide and about $57 billion in state, local, and federal tax revenues. Alaska retirement benefits supported 6,270 jobs that paid $385 million in income to other Alaskans, not including the value of the pension payments themselves. The total statewide impact was about $1 billion, with about $155 million in tax revenues within Alaska. For every $1.00 paid out in benefits, $1.25 in total economic activity was supported in the state. Every dollar contributed by taxpayers supported about $6.35 in economic activity in Alaska. That really speaks to the fact that taxpayer contributions are only one source, and employee contributions and investment earnings on contributions make up the remainder. 9:12:17 AM SENATOR FRENCH asked about slide 9 and what she means by taxpayer -- the people who contribute to their own pension? MS. ALMEIDA said, no. Taxpayer contributions are the employer contributions. State employees are also taxpayers, but the study calls them employee contributions. 9:13:25 AM MS. ALMEIDA said the baseline data from the U.S. Census Bureau show that 35,000 Alaskans received pension benefits from state and local plans in 2006. The total received by retired Alaskans was about $819 million, and the average pension was a little under $2,000 per month. Over the 13 years of available data, employee contributions comprised about 12.5 percent of total system revenue. Employer contributions comprised just under 18 percent. The remainder, 70 percent, was made up of investment earnings. The economic impact refers to the multiplier affect. One person's spending is another person's income. That gives the other person more spending power. The initial event is the spending of pension payments by retirees and it has a much bigger impact by the multiplier effect. NIRS used publicly available data and software called IMPLAN -- input-output modeling software originally developed for the U.S. Forest Service. It allows the measurement of the relationship among various sectors in the economy as a matrix. MS. ALMEIDA repeated that the total economic impact of pension payments in Alaska is about $1 billion. There was about $155 million in tax revenue impact as shown on slide 15. NIRS looked at the impacts sector by sector and found a deep impact in virtually every industry in the state. The industries with the most impacts were health care, retail trade, and accommodation and food service. 9:18:01 AM MS. ALMEIDA said slide 18 provides a detailed breakdown by industry of the total economic impact of each dollar paid out in pension benefits. NIRS calculated the ultimate ripple effect of each dollar, and it translates to about $1.25 in total economic activity. NIRS calculated the return on contributions made by public employers to state and local pension plans. Because there are employee contributions and investment earnings, this multiplier is large. It is $6.25. MS. ALMEIDA concluded that pension plans have a large economic footprint in the U.S. and each state. The ripple effect is significant. Pension plans are important to those who receive them, but it may not be well recognized that other folks in the communities benefit when retirees can make regular expenditures to pharmacies, hardware stores, and doctors. Defined benefit plans are automatic stabilizers because retirees continue to spend on basic needs, providing important economic stimulus during these tough times. 9:21:04 AM MS. ALMEIDA spoke next about a NIRS report called "A Better Bang for the Buck; the Economic Efficiencies of Defined Benefit Pensions." This study evaluated claims that defined contribution (DC) plans save money compared to DB plans. NIRS compared the costs of delivering a given amount of retirement income. In many states and in the private sector, employers are examining this. NIRS did a fair apples-to-apples comparison. The study modeled the population of 1,000 female teachers who worked for 30 years with a final salary of $50,000. NIRS defined a target retirement lifetime benefit of about $2,200 per month at the age of 62 adjusted for inflation. The study looked at what it would cost to fund this benefit through a DB plan and a DC plan. 9:23:58 AM MS. ALMEIDA found that the DB approach saved a lot of money compared to the DC approach. The DB plan does a much better job of pooling longevity risks. Actuaries are good at predicting life spans of a large population. The DB plan can efficiently manage those risks. Individuals have to over-save because each person doesn't know how long he or she will live, so the DC plan must save money to insure they won't outlive their savings. A DB plan only needs to set aside enough money for the average life expectancy of a large group. That saves a lot of money. Another reason why DB plans save money is that it can maintain better portfolio diversity over time. As people age, their investments need to be more conservative to insure against the downside risk of a market decline. The DB plan always has a mixture of people of different ages, so unlike individuals, the group does not age, so the portfolio can generate an enhanced return, which makes providing the benefits much cheaper. 9:26:33 AM MS. ALMEIDA said the third reason that a DB plan saves money is that the investment returns are better because it has professional asset management and lower fees. Not surprisingly, the managers do a better job. There are consistently higher returns, which makes a big difference in the cost of delivering retirement benefits. The cost of providing $2,200 per month beginning at the age of 62 in the model DB plan is $12.5 percent of payroll. That same benefit under a DC approach would cost 16 percent by taking into account that individuals would have to save as if they were to live to 100. 9:28:43 AM MS. ALMEIDA said the DC plan increases the cost to 17 percent of payroll since the DB plan has more diversified portfolios. The final effect was the largest one. NIRS was very conservative and only assumed a one percent per year difference in investment earnings -- 8 percent for DB and 7 percent for DC. It doesn't seem like much but it compounds over time and drives the cost of the DC plan to 23 percent of payroll. The DB plan in this model population was 46 percent less than the DC plan to deliver a given benefit. There is "something missing" in the assumption that a DC approach reduces retirement plan costs. Such claims are based on evaluations that aren't apples-to-apples. The assets needed on the eve of retirement is $350,000 for the DB plan, and $550,000 for the DC plan. "This is real money." 9:31:31 AM MS. ALMEIDA summed up her conclusions. A DB approach is more efficient and provides a better bang for the buck. These efficiencies drive significant cost savings for taxpayers and employers. Decision makers should continue to carefully evaluate claims that DC plans will save money. 9:32:48 AM JILL SHOWMAN, President, Mat-Su Education Association, said she represents about 1,200 educators, and the administration, teachers, and community are all quite concerned with recruiting and retaining qualified educators. In the past three years finding new teachers and retaining teachers has been a problem. This is primarily due to the DC plan and lack of social security. The district has to go outside the state to find teachers. Each time the district hires a new teacher, it must provide $100,000 of training and materials. That is a cost that the district would not be burdened with if it retained staff. 9:35:46 AM MS. SHOWMAN said she is Tier II and has taught for over 12 years. She may have to change her profession because of the retirement. She teaches an undergraduate education class at the University of Alaska, Southeast. When high school and college students ask her about becoming teachers, "I've got to be honest with them and tell them that it's not as great of a profession as it once was, and that's primarily due to the retirement." She tells them to look outside Alaska or at other professions. That saddens her. She urged passage of SB 23. 9:37:39 AM JIM LEPLEY, President, Anchorage Education Association, said he represents over 3,500 teachers in Anchorage. He encouraged the committee to promote this legislation. PAT LUBY, Advocacy Director, AARP Alaska, Anchorage, said financial security is the cornerstone of the American dream - you work hard and follow the rules and you'll be able to retire without financial worries. However, one quarter of [Alaska] retirees don't participate in social security. A person doesn't outlive social security. In the past it didn't matter so much that Alaska's public employees did not participate, because they had a DB plan that would last as long as they lived. Now, they have no DB or social security. The American dream no longer exists for Alaska's newly hired public employees. It is possible to make the DC plan work "as long as you don't live too long." But most people live into their mid 80s and many into their 90s. If the DC plan is to work, people need to predict their and their spouses' life expectancy. MR. LUBY said retirees need to know if they will be healthy up until death or if they will need long-term care. Medicare doesn't pay for nursing homes or home care. A person will need to know if there will be inflation in health care and utility costs. Defined benefits and social security provide annual COLAs [cost of living allowances], but the DC doesn't. The price of fuel oil and gasoline may go up. "You better have a crystal ball to make a defined contribution plan work." Many companies have switched to DCs, but all who work in the private sector have social security that will last as long as they live. No matter how much is saved in a 401k or I.R.A., they will always have the defined benefits of social security. Alaska's public employees used to have the same financial security before SB 141 [of 2005], and no matter how long they lived or what bad luck was dealt them, they would not starve or end up on public assistance. AARP members rely on Alaska's public servants for police assistance, to teach their grandchildren, and to put out fires, and they don't want these honorable public servants to end up worrying about their health coverage and outliving their savings. They deserve better than that. He asked for support for SB 23. Give people the security they deserve. 9:41:52 AM LAWRENCE WEISS, Executive Director, Alaska Center for Public Policy, Anchorage, said he is a Tier I TRS retiree. He has heard different large figures on Alaska's unfunded liability, and this way of looking at the pension plan obscures the facts and creates a panic about the actual status. A person buying a house with a 30-year mortgage would develop heart palpitations by looking at the total owed. The other way to look at it is that there will be reasonable monthly payments over 30 years. The unfunded liability on pensions is very similar. The liability is defined at a given date. It is not useful harping on it at any one point in time, especially now. 9:44:26 AM DONALD CALLAHAN, Retiree, Fairbanks, said he is in Tier I of PERS. He is 68 and worked as a city engineer. He went to the University of Alaska and graduated as a civil engineer. At the age of 41 he became a paramedic and retired after 30 years in the city system with what he thought was a great retirement. He has lost about 30 percent of his retirement due to inflation. If he had to live on his mutual funds as if he were in a DC plan, he would run out in about 3 years and would have to sell his house and move south. Every union retiree gets a better retirement than he does. He son has become a teacher in Alaska and worked for a year for free as a student teacher. His pay is over $40,000. He got his Masters Degree last summer. He had a difficult time finding a house he could qualify for. Retired teachers in Fairbanks do a lot of community work. 9:46:43 AM LADAWN DRUCE, President, Kenai Peninsula Education Association, Soldotna, said she represents over 600 certified teachers and specialists in the Kenai Peninsula Borough school district. She noted NEA's fight on the national level to right the injustice of the windfall elimination provision. She wants to tell new teachers that the legislature will return to the DB program. "We need a cost analysis for all parties involved, including the retirees." But she said to not get lost in the numbers -- there are some things that are priceless. Public employees provide priceless services to Alaska communities. Young people coming out of college are educated about their retirement and are being cautioned to plan for a secure future. "Let's not wait until it's too late." She asked the committee to move SB 23. 9:48:28 AM MELODY DOUGLAS, Chief Financial Officer, Kenai School District, Soldotna, said the district has expressed concern about PERS and TRS since 2003. "This is an ability-to-pay issue." She thanked the legislature for the funding in fiscal year 2008, and $17.2 million was for TRS retirement. The funding is 41.4 percent for TRS. There were 596 full-time equivalent teaching staff in 2008. Salaries and benefits are 80 percent of the budget. Class sizes would have doubled in the district. None of the new hires or exiting teachers has expressed concern over the DC plan. The district hired 76 teachers in 2008, 107 in 2009, and she expects 75 in 2010. The next time the numbers are released, the unfunded liability will be about $10 billion. The public sector can no longer fund a DB plan. The DC plan has only been in place for three years and should be evaluated later. 9:50:38 AM CHAIR MENARD said there is a second fiscal note. It went from $17 million to $782 million. SENATOR PASKVAN said the fiscal note of March 16 is $14 million for fiscal year 20ll, and the revised note was $752,000 for 2010. He believes that for 2011 "it is an extra $84,000, and I believe that those are just additional transition costs." Those are thousands not millions. SENATOR MEYER said this is an important subject and it seems like the committee is moving rapidly, but many have heard this in a previous committee, and numerous changes were made to meet his concerns. He moved to report CSSB 23(L&C) from committee with individual recommendations and attached fiscal note(s). There being no objection, CSSB 23(L&C) moved out of committee.
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