Legislature(2009 - 2010)BELTZ 211
03/17/2009 09:00 AM STATE AFFAIRS
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SB 23-REPEAL DEFINED CONTRIB RETIREMENT PLANS 9:30:32 AM CHAIR MENARD announced the consideration of SB 23. SENATOR PASKVAN said he took over sponsoring the bill for former Senator Kim Elton. He and Senator Elton's staff have invested a tremendous amount of energy into SB 23, "and I am honored to carry this legislation forward on behalf of Senator Elton and the bill's eight remaining cosponsors." He said the Senate Labor and Commerce Committee took a very good bill and made it a little better by taking the recommendations of the Chief Financial Officer of the Fairbanks North Star Borough, who presented testimony on his own behalf. SB 23 is sound social policy. Teachers, police, firefighters, and other public employees earn the right to a dignified retirement. The bill will help recruit and retain workers. It is sound fiscal policy. "We know that between the DB [defined benefit] and the DC [defined contribution], it's nearly a wash." There are studies about a better bang for the buck from the National Institute of Retirement Security. The DB adds a stabilizing influence, and the 2006 expenditures and retirement benefits in the state of Alaska accounted for 6,270 jobs and paid $385 million in income within the state. It was $1 billion in total economic output, and it accounted for $155 million in federal, state, and local tax revenues. JESSE KIEHL, Staff to Senate District B, Alaska State Legislature, said the bill may need a new short title because it doesn't repeal the DC plan. Those statutes remain on the books. It places virtually all new hires of the state, municipalities, and school districts into the DB pension system. It also provides a choice to a very limited group of professionals who are already vested in some other pension system. They would be people who have retirement security, like a retired military person who would be a "great catch" for an employer. The other new ones would go into the least expensive tier: Tier III for the public employees retirement system (PERS) and Tier II for the teachers retirement system (TRS). "Those are the most restrictive of the defined benefit - the pension systems - the most difficult to vest in a pension, the most difficult in, most importantly, the health care benefit; however, they still provide a very good and adequate and secure retirement for their beneficiaries who remain in public employment long enough to vest in the benefits." He referred to the information in the committee packets and on the public record. 9:36:21 AM MR. KIEHL said the greatest benefits to the state and the school districts are the great incentives for employees to stay on. It also helps recruit better employees. The DC plan allows employees to take away the employer's money and the money that came out of their paychecks when they leave, but under the DB system an employee can cash out their own money but not the state money that was put into the pension program. That money stays, earns interests and dividends, and helps fund the benefits for others. It is a strong incentive for employees to stay. That is important because the state and school districts spend a lot of money training employees. It is not at all uncommon to spend $15,000 training a new employee. Public safety employers say they spend over $150,000 to train a new employee. Turning them over in a hurry is not good management. Defined benefit systems help keep good employees. 9:38:04 AM SENATOR MEYER asked about employees who have no intention to stay, like college professors who like to go from college to college to advance their careers. Would they have an option? Are the only people who can choose between the two plans ones who are already vested in a DB plan? MR. KIEHL replied in the affirmative. SENATOR MEYER asked about giving an option to any new employee. MR. KIEHL replied that the University of Alaska has something like that, but it creates more costs. The actuaries call it "adverse selection." The most expensive people to provide a secure pension to, like people 10 years from retirement, are just about guaranteed to choose the DB plan, and people who cost the least, like those entering state service at a young age, are more likely to choose the DC plan. It changes the demographics of the pool and ends up costing more. There is also the question of retirement security. The recent market has shown that professional managers invest better. The professional investment managers in the Department of Revenue who manage the pension trust funds were down about 22 percent at the end of 2008. Record losses in the market hit everybody. The DC accounts were down about 35 percent. "A staggering difference." The DOA has told state departments that when a state employee goes to an investing seminar offered to those in the DC plan by the state, it's work time. So the state pays troopers, biologists, file clerks, and others to learn about investing instead of doing their state work. At the same time, the state is paying professional investment managers. That may not be the most efficient use of state resources. SENATOR MEYER said it seems that the state is having to go outside to recruit employees. So offering a choice of plans may get more younger people who want a DC plan. It is not that big of an issue to him, but it might be helpful for recruitment. 9:43:30 AM SENATOR FRENCH asked that a letter to Pat Shier from Buck Consultants on February 12, 2009 about the relative costs of the two plans be put on the record. He asked for those numbers and how Mr. Shier saw it. 9:44:08 AM PAT SHIER, Director, Division of Retirement and Benefits, Department of Administration (DOA), said page 1 of that letter has a comparison of the DB and DC plans for PERS. This is normal cost only. "You see the 2.97 percent at the top of that column - - that's the average normal cost rate for a DB employee -- 7.98 percent for medical cost normal, and the total 10.95 compared to the DCR rate of 5 percent for pension, 0.38 for occupational death and disability, 0.85 percent for health, 3 percent for the health reimbursement arrangement, for a total of 9.23." SENATOR FRENCH asked him how the medical costs can be so wildly different. One is 7.98 for medical normal cost rate for DB Tier III, and DCR is 0.85 plus 3 percent, which is half of what the state is paying for the Tier III employees. MR. SHIER said most of that is plan design. Also, a significant feature separating the DB plan from the DC plan for health is that one must retire out of the system in the DC plan to get the employer-paid health plan. It is unclear to many people that the DC retirement plan is actually a hybrid. The health plan in that system is paid entirely by employer contributions. That's the 0.85 percent. That describes the cost of putting money away now to pay health claims under that plan for those that gain access by retiring out of the system and staying long enough. There is cost sensitivity in the new plan because even retirees will have to pay some portion of the premium. "We are designing into that some health improvement features and other sensitivities to cost in- and out-network mixes. Those are not in the current health plan right now." SENATOR MEYER asked about making the plan optional to new employees. What costs would be associated with that? The DB plan is more expensive to the state, so would it be beneficial if some new employees took the DC plan because they don't plan on staying in Alaska for more than five or six years? Is the administration still neutral? MR. SHIER said the administration is concerned about any change in the retirement systems that would add to future cost or to the unfunded liability. The fiscal note still shows a significant increase in costs for 2011 and on, even under the limited-choice provision of the current bill. The administration is taking a cautious position. He doesn't know what the bill will do for recruitment. About 20 percent of the PERS workforce are DC; thousands of people have been hired under the new tier for both TRS and PERS. Individuals may be incented to stay longer; "however, we must remember that in the defined benefit plan, after 10 years an individual can leave the state of Alaska public employment with the state of Alaska or a political subdivision or a school district - it's actually a little shorter than that - and they take with them that guarantee to pay a pension and health care for the rest of their life after they retire. Age 60 would be the normal retirement age." Under the current DC plan, a worker must stay in the system for a sufficient number of years and then retire directly out of the system in order to have access to the health care benefit. "We really don't have the data to show definitively that recruitment and retention are materially affected by the current DCR plan." 9:50:50 AM SENATOR MEYER asked if administrative costs would increase by making the plans optional to all new employees. MR. SHIER said the complexity of a choice would add administration costs. The DOA would strive to reduce costs. Costs are not insignificant in calculating the amount of DC balance an individual may have if he or she chooses to switch to DB. "Every time we make a change to the system, we do introduce some complexity and we have some costs." SENATOR PASKVAN said the fiscal note indicates that in 2012 the cost will be about $16 million, and that is based on the assumption of all people returning to DB. MR. SHIER said that is accurate. The identifier reflects that number. In conversations with the sponsor's staff, it was retooled. It produced a fiscal note, dated 3/16/09, showing a slightly lower number: $15 million. That reflects the idea that there will be choice. SENATOR PASKVAN said, "So that the public policy issue is framed a little more closely, that $15 million is the cost in reference to approximately a $3 billion payroll, so that $15 million is maybe one half of one percent of a payroll cost." MR. SHIER said it reflects the change in the normal cost rate, and that increase for both PERS and TRS, when including the health portion, goes over 1 percent. 9:55:00 AM CHAIR MENARD held SB 23 over and the committee took a brief at- ease.