Legislature(2009 - 2010)BELTZ 211

03/17/2009 09:00 AM Senate STATE AFFAIRS

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Heard & Held
Heard & Held
Bill Postponed To 3/19/09
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
         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-                                                               

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