Legislature(2013 - 2014)BUTROVICH 205

04/01/2014 09:00 AM STATE AFFAIRS

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09:05:30 AM Start
09:05:57 AM SB30
10:13:16 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Public Testimony <Time Limit May Be Set> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
        SB  30-TEACHERS & PUB EMPLOYEE RETIREMENT PLANS                                                                     
9:05:57 AM                                                                                                                    
CHAIR DYSON announced the consideration of SB 30. He noted this                                                                 
was the second hearing.                                                                                                         
9:07:06 AM                                                                                                                    
LIZ   LUCAS,  Executive   Director,   Alaska  Retired   Educators                                                               
Association (AKREA),  stated strong support  for SB 30.  She said                                                               
that  AKREA members  are committed  to improving  the quality  of                                                               
life for  Alaska's educators. She  recapped the  previous hearing                                                               
and  stated   that  time  is   of  the  essence  and   she  would                                                               
respectfully suggest the committee agree to support SB 30.                                                                      
9:09:59 AM                                                                                                                    
ANDY HOLLEMAN, President,  Anchorage Education Association (AEA),                                                               
Anchorage,  Alaska, stated  support for  SB 30.  He reminded  the                                                               
committee that  the defined  benefit system started  as a  way to                                                               
bring  significant value  to employees  over a  long period  at a                                                               
reasonable  cost  to the  employer.  He  said  the AEA  wants  to                                                               
attract top quality  educators who want to make a  life in Alaska                                                               
and the  employment conditions ought to  reflect that. Retirement                                                               
isn't that important to educators  first entering the system, but                                                               
as they start  looking more long term they realize  that making a                                                               
career in  Alaska comes up short.  He noted that Mr.  Fornia, who                                                               
testified during  the previous hearing,  pointed out  that Alaska                                                               
uniquely  stands out  as  a major  employer  that neither  allows                                                               
participation  in Social  Security nor  offers a  defined benefit                                                               
retirement  plan.  When  defined contribution  employees  realize                                                               
this shortcoming,  they often opt to  move to a state  where they                                                               
don't have to  face such an uncertain retirement. This  is a huge                                                               
negative for retaining good teachers in Alaska, he said.                                                                        
SENATOR  GIESSEL asked  for clarification  of his  statement that                                                               
Alaska doesn't  allow teachers to participate  in Social Security                                                               
because  it  was  her  understanding  that  it  was  the  federal                                                               
government that made that decision in the 1930s.                                                                                
MR.  HOLLEMAN replied  he  wasn't  sure of  the  history but  his                                                               
understanding  is  that it  was  a  decision  made in  the  1960s                                                               
relative to the state providing its own retirement system.                                                                      
9:15:33 AM                                                                                                                    
SENATOR  GIESSEL  recapped  Mr.  Barnhill's  explanation  of  the                                                               
history of Social Security during the previous hearing.                                                                         
CHAIR  DYSON asked  Mr.  Holleman if  he  heard the  discouraging                                                               
statistics about employee turnover in the Tier IV system.                                                                       
MR. HOLLEMAN replied he is familiar with the statistics.                                                                        
CHAIR DYSON  asked if his  understanding is that current  Tier IV                                                               
retirement benefits  are portable,  but that portability  is gone                                                               
under the structure of SB 30.                                                                                                   
MR. HOLLEMAN  replied it's not  that there's no  portability, but                                                               
the decision  to move is more  difficult after a number  of years                                                               
in the system.                                                                                                                  
CHAIR  DYSON said  he doesn't  agree with  structuring a  benefit                                                               
system that has  a tendency to force people to  stay here against                                                               
their will.                                                                                                                     
9:22:26 AM                                                                                                                    
KATHY  LEA,   Chief  Pension  Officer,  Division   of  Retirement                                                               
Benefits,   Department  of   Administration,  addressed   Senator                                                               
Geisel's question  about Social Security. She  explained that the                                                               
Territory  of Alaska  started  providing  a teacher's  retirement                                                               
system  in  1947  and  in  1955   the  State  of  Alaska  had  an                                                               
opportunity to join  Social Security. The state could  opt in all                                                               
employees who were  not covered by a retirement  system and those                                                               
who  were  already covered  by  a  retirement system.  Since  the                                                               
teachers retirement  system was  already in place,  the Territory                                                               
of Alaska  opted to  cover only those  employees who  didn't have                                                               
another  retirement  system.   The  Public  Employees  Retirement                                                               
System  (PERS)  came  into  being   in  1960  and  the  Territory                                                               
employees   and  later   the  State   of  Alaska   employees  did                                                               
participate  in   Social  Security   until  February   1980.  The                                                               
employees  held   a  referendum  in   1979  when  there   was  an                                                               
opportunity to  go with a  Social Security replacement  plan. The                                                               
State   of   Alaska   employees  and   16   other   participating                                                               
municipalities have been in the  Alaska Supplemental Annuity Plan                                                               
since February 1980.                                                                                                            
CHAIR DYSON asked her to repeat what she said about teachers.                                                                   
MS.  LEA  said   that  Alaska  teachers  were   provided  with  a                                                               
retirement system starting in 1947 so  they didn't vote to opt in                                                               
or  out of  Social Security.  The Territory  of Alaska  made that                                                               
decision in their Social Security  agreement in 1955. She offered                                                               
to provide a copy of that agreement.                                                                                            
CHAIR DYSON  asked if  the state  was constrained  in any  way by                                                               
federal law.                                                                                                                    
MS. LEA  answered that  the federal government  gave the  state a                                                               
choice of including all employees  who were not otherwise covered                                                               
by a retirement  system in Social Security. The  state could also                                                               
include those who were covered  by a retirement system (teachers)                                                               
but the Territory chose not to do that.                                                                                         
9:25:18 AM                                                                                                                    
SENATOR WIELECHOWSKI asked if there  is vesting under the current                                                               
system for Tier IV PERS and Tier III TRS employees.                                                                             
MS. LEA explained  that under both PERS Tier IV  and TRS Tier III                                                               
there's a staggered vesting system.  After two years the employee                                                               
is 25 percent vested, after  three years 50 percent vested, after                                                               
four years  75 percent  vested, and after  five years  of service                                                               
the  employee is  fully invested  in the  employer contributions.                                                               
The teachers vesting schedule works the same way.                                                                               
SENATOR  WIELECHOWSKI summarized  her answer  and Ms.  Lea agreed                                                               
with the characterization.                                                                                                      
SENATOR WIELECHOWSKI asked  if employees under the  PERS Tier III                                                               
and TRS Tier II systems are  able to cash out their contributions                                                               
if they leave prior to five years of service.                                                                                   
MS.  LEA  answered yes.  Under  the  defined benefit  system  the                                                               
employee  can  cash  out their  contributions  plus  interest  at                                                               
termination   regardless    of   vesting,   but    the   employer                                                               
contributions revert to the employer  prior to vesting. She added                                                               
that  the  contributions  earn  four  percent  interest  that  is                                                               
compounded semiannually.                                                                                                        
SENATOR WIELECHOWSKI asked  if the data shows  that large numbers                                                               
of employees  under PERS  Tier IV  and TRS  Tier III  are leaving                                                               
their jobs after they vest.                                                                                                     
MS. LEA replied  the division just completed a  query for Senator                                                               
Giesel's office  on the retention schedule  comparing the defined                                                               
benefit  retention against  the  defined contribution  retention.                                                               
She offered to provide the members with the information.                                                                        
CHAIR  DYSON  expressed  irritation  with a  system  that  allows                                                               
people to  choose a rural assignment  for three years in  an area                                                               
that has a significant cost  of living differential primarily for                                                               
the  purpose of  boosting  their average  high  salary years.  He                                                               
asked her perception.                                                                                                           
9:30:04 AM                                                                                                                    
MS. LEA  replied that phenomena  is seen  in both in  the defined                                                               
benefit  and defined  contribution plan  systems. In  the defined                                                               
benefit system  for PERS  only, there is  a restriction  of using                                                               
any geographic  differential in calculating a  retirement. It has                                                               
to  be half  the  employees  service served  in  an  area with  a                                                               
differential before  it can be  used. In the  teachers retirement                                                               
there  is no  restriction  on any  type  of differential  because                                                               
that's  simply the  pay for  that  area. In  the defined  benefit                                                               
plan, if  a teacher  serves three  years in an  area with  a high                                                               
salary, their  retirement will  be calculated  on the  average of                                                               
those  three  years. In  the  defined  contribution plan,  it  is                                                               
attractive to  work in an  area with  a higher salary  because it                                                               
means  higher contributions  into the  employee's account.  Since                                                               
the  defined contribution  benefit is  based on  the contribution                                                               
balance, it  is attractive  to work in  Bush areas.  The division                                                               
sees  those  large  salaries  working  to  attract  both  defined                                                               
benefit and defined contribution employees, she said.                                                                           
CHAIR DYSON commented that Tier  IV employees have that advantage                                                               
as well as the advantage of more complete portability.                                                                          
MS. LEA agreed;  once the employee has two years  of service they                                                               
can  start accessing  the employer  contributions  and once  they                                                               
have  five years  of service  they're 100  percent vested  in the                                                               
employer contributions and they can withdraw it all.                                                                            
9:32:39 AM                                                                                                                    
CHAIR DYSON offered his understanding  that almost all retirement                                                               
systems  are designed  and  operate on  the  assumption that  the                                                               
account will earn  enough to pay the demand for  the retirees. He                                                               
observed that part  of the State of Alaska's problem  is that the                                                               
investments didn't  grow and pay  the dividends according  to the                                                               
assumptions. He  asked if SB  30 assumes an eight  percent return                                                               
on investments.                                                                                                                 
MS. LEA answered yes.                                                                                                           
CHAIR DYSON  noted that  Mr. Kiehl nodded  in agreement.  He said                                                               
that's  a  concern because  the  recent  history doesn't  reflect                                                               
those returns.  He asked  if she could  calculate the  returns at                                                               
four percent, six percent, and eight percent.                                                                                   
MS. LEA related  that the division has a  spreadsheet that's able                                                               
to run those calculations.                                                                                                      
CHAIR  DYSON   asked  how   long  it  would   take  to   run  the                                                               
MS.  LEA estimated  it would  take three  days. She  asked if  he                                                               
wanted  just  balances or  balances  and  the eight  options  for                                                               
disbursement, one of which is a lifetime annuity.                                                                               
CHAIR DYSON solicited input from the committee.                                                                                 
SENATOR WIELECHOWSKI said he'd be  curious to know the historical                                                               
average of  the S&P  500 Index  since 1926.  He said  he believes                                                               
it's 9.77  percent, but he'd be  interested to know if  she comes                                                               
back  with a  different  number. He  also  expressed interest  in                                                               
knowing what  number the administration  uses in  calculating the                                                               
returns and  what number the  Alaska Retirement  Management Board                                                               
(ARM) Board uses.                                                                                                               
MS. LEA agreed to provide the information.                                                                                      
CHAIR DYSON  asked Mr. Putman  for help checking the  veracity of                                                               
the information the committee receives.                                                                                         
9:37:16 AM                                                                                                                    
FATE  PUTMAN,   Lobbyist,  Alaska  State   Employees  Association                                                               
(ASEA), said  that William Fornia,  the consultant  who testified                                                               
at the  previous hearing, will  hopefully be able to  provide the                                                               
CHAIR DYSON asked if there is a  better way of asking Ms. Lea for                                                               
MR.  PUTMAN   responded  that  the  question   of  the  long-term                                                               
projection for growth for investments  is correct. He agreed with                                                               
Senator Wielechowski that historically  it's been 9.7 percent. SB
30  estimates an  8 percent  return in  anticipation that  growth                                                               
will exceed expectations.                                                                                                       
SENATOR COGHILL  recalled the market corrections  since the 1970s                                                               
and suggested  looking at  trend lines  on both  disbursement and                                                               
SENATOR GIESSEL  noted that Ms.  Lea's question pertained  to the                                                               
various  disbursements  and  she  believes  that  the  detail  is                                                               
valuable information.                                                                                                           
SENATOR  WIELECHOWSKI  suggested  it  would  be  helpful  if  the                                                               
returns were  broken down in  five year increments over  the last                                                               
25  years,  because his  research  indicates  that an  8  percent                                                               
return is reasonable over time.                                                                                                 
SENATOR  COGHILL added  that seeing  both trend  lines will  show                                                               
income and outgo and where the lines cross.                                                                                     
9:42:26 AM                                                                                                                    
MR.  PUTTMAN noted  that healthcare  cost is  the component  that                                                               
drives the  retirement system  and that the  bill is  designed to                                                               
shift to  the employee the  healthcare costs that  aren't covered                                                               
by investment growth.                                                                                                           
SENATOR COGHILL  said it would  be interesting to know  the legal                                                               
ramifications of shifting those costs to the retired employee.                                                                  
CHAIR DYSON asked  his staff to send the  question to Legislative                                                               
Research. His  understanding is that all  retirement benefits are                                                               
contract law  and there  is no  basis on  which the  employer can                                                               
avoid that.                                                                                                                     
SENATOR GIESSEL  suggested it would  be interesting to  hear from                                                               
Legislative Finance Director David Teal on the subject.                                                                         
CHAIR  DYSON asked,  assuming the  bill passes,  if contributions                                                               
from the employer would go into a separate account.                                                                             
MS.  LEA answered  yes  they  would go  into  a  new account  and                                                               
employee and employer contributions would not be mixed.                                                                         
CHAIR DYSON  asked if contributions  for the new  defined benefit                                                               
plan would go  into a different account than  the current defined                                                               
benefit account.                                                                                                                
9:45:45 AM                                                                                                                    
MS.  LEA  answered no;  those  contributions  would go  into  the                                                               
Defined Benefit Trust.                                                                                                          
CHAIR DYSON  reiterated that he  wanted to see a  spreadsheet and                                                               
graph  that shows  the employer  and  employee contributions  for                                                               
this  new group  of defined  benefit  employees and  the cost  of                                                               
those  people retiring  and getting  benefits, discrete  from the                                                               
existing account of all the defined benefit employees.                                                                          
MS. LEA  agreed and noted  that the  funds within the  PERS Trust                                                               
are accounted for by Tier.                                                                                                      
CHAIR  DYSON asked  for  a graph  that shows  the  growth of  the                                                               
account,  the   anticipated  growth  of  the   account,  and  the                                                               
anticipated growth of demand on the account.                                                                                    
9:47:00 AM                                                                                                                    
SENATOR WIELECHOWSKI  asked the amount of  the unfunded liability                                                               
that is  caused by  the defined  benefit and  the amount  that is                                                               
caused by healthcare costs.                                                                                                     
MS. LEA offered to follow up with updated figures.                                                                              
SENATOR WIELECHOWSKI asked for her general sense.                                                                               
MS. LEA replied she believes  it's generally the healthcare costs                                                               
that account for the rise in the unfunded liability.                                                                            
SENATOR  WIELECHOWSKI  asked  if  her  sense  is  that  the  vast                                                               
majority is healthcare.                                                                                                         
MS. LEA answered no.                                                                                                            
SENATOR WIELECHOWSKI asked her to follow up with the numbers.                                                                   
MS. LEA agreed.                                                                                                                 
CHAIR DYSON asked Mr. Kiehl if he  had any comments to add to the                                                               
9:48:34 AM                                                                                                                    
JESSE   KIEHL,  Staff,   Senator   Dennis   Egan,  Alaska   State                                                               
Legislature,  Juneau, Alaska,  addressed  several questions  that                                                               
arose  during the  foregoing discussion.  He  explained that  the                                                               
stability of  the pension benefit  can be addressed  and enhanced                                                               
through plan design. For example,  the average five high years of                                                               
salary for public employees Tier  III was designed as a provision                                                               
to reduce  or eliminate  late career moves  to spike  the pension                                                               
amount. Some plans go further and use lifetime average earnings.                                                                
CHAIR  DYSON asked  if pension  benefits are  bargained in  union                                                               
MR.   KIEHL   explained   that   things   like   the   geographic                                                               
differentials are  bargained by  unions, but the  pension benefit                                                               
is not. He  understands that the Alaska  Public Employee Relation                                                               
Act is explicit about that.                                                                                                     
MR. KIEHL  supplemented the discussion  of the history  of Alaska                                                               
teachers and Social  Security. He relayed that Alaska is  1 of 14                                                               
states  that  does  not  include  teachers  in  Social  Security,                                                               
whereas  36 other  states elected  to include  teachers in  their                                                               
Social Security agreements with the federal government.                                                                         
With  regard to  the  discussion about  portability,  he said  he                                                               
appreciates Ms. Lea's context that  employees who decide to leave                                                               
the defined  benefit system, whether  before or after  they vest,                                                               
are entitled to take all  their contributions plus a four percent                                                               
guaranteed rate of return. He  added that another element of plan                                                               
design  is that  the  defined  benefit pensions  in  SB 30,  like                                                               
Alaska's  legacy  systems,  have  a 10  percent  cost  of  living                                                               
adjustment  for  those  retirees  who   live  in  Alaska.  It  is                                                               
deliberately designed  to keep retirees  living in the  state and                                                               
it's worked.  In FY2011, 90 percent  of the $921 million  in PERS                                                               
and  TRS pension  checks went  to Alaska  residents and  into the                                                               
Alaska  economy.   According  to   the  National   Institute  for                                                               
Retirement Research, the total economic  impact to Alaska is more                                                               
than $1.4 billion.                                                                                                              
CHAIR  DYSON asked  Mr. Fornia  to  respond to  the questions  he                                                               
heard during the foregoing discussion.                                                                                          
9:53:05 AM                                                                                                                    
WILLIAM FORNIA, Consultant, Pension  Trustee Advisors, said he is                                                               
working for  the Alaska Public Pension  Coalition. Addressing the                                                               
question about the  consequence of long term returns  of only 4-6                                                               
percent, he  warned that it  would be problematic for  all tiers,                                                               
not just the defined benefit tier structured under SB 30.                                                                       
With  regard  to the  question  about  contract law  and  whether                                                               
benefits can be  reduced, he said it depends on  how the contract                                                               
is written.  If the benefit is  described up front as  able to be                                                               
reduced, there  is no  contract problem.  The State  of Wisconsin                                                               
does that  with its  cost of living  adjustment and  other states                                                               
have similar benefit provisions.                                                                                                
CHAIR  DYSON asked  about  the membership  of  the Alaska  Public                                                               
Pension Coalition.                                                                                                              
MR. FORNIA replied  it is a collection of unions.  He deferred to                                                               
Mr. Kiehl and Mr. Putman for the actual list.                                                                                   
CHAIR DYSON asked if he is an independent contractor.                                                                           
MR. FORNIA answered yes, and he  tries hard to work both sides of                                                               
the issue.                                                                                                                      
9:57:21 AM                                                                                                                    
CHAIR DYSON  asked if  he heard  correctly that  the risk  to the                                                               
state would  be less under SB  30 than under the  current Tier IV                                                               
MR.FORNIA  clarified that  under  the current  proposal the  risk                                                               
would  be  more  secondary  if  returns  were  poor.  Individuals                                                               
wouldn't be able to retire and  those that had retired would have                                                               
lower  benefits, which  might cause  public assistance  problems.                                                               
The fact is that the  traditional defined benefit plans generally                                                               
place  more  risk  on  employers than  employees,  he  said.  The                                                               
largest risk  under a  low investment return  scenario is  to the                                                               
existing  defined benefit  Tiers I,  II, and  III because  of the                                                               
large unfunded liability.                                                                                                       
SENATOR WIELECHOWSKI  asked if  he could talk  about how  much of                                                               
the  unfunded liability  is comprised  of healthcare  and if  the                                                               
greatest risk lies with healthcare or defined benefit pensions.                                                                 
MR.  FORNIA posited  that a  substantial amount  of the  unfunded                                                               
liability is due to increased  healthcare costs as opposed to low                                                               
investment  return. SB  30 is  designed  to fix  that problem  by                                                               
shifting the costs to employees.                                                                                                
CHAIR  DYSON asked  if he  sees a  trend, because  he understands                                                               
that  many  sovereigns  and   municipalities  are  considering  a                                                               
defined contribution system going forward.                                                                                      
MR.  FORNIA  replied there  are  concerns  and considerations  of                                                               
hybrid  systems,   but  there  haven't   been  any   new  defined                                                               
contribution plans.  Even Detroit's  proposed plan  of adjustment                                                               
under their  bankruptcy is  going to be  a defined  benefit plan,                                                               
albeit lesser. He cited other examples.                                                                                         
SENATOR GIESSEL  stated that she  intended to ask  the Department                                                               
of Administration  to break out  the healthcare component  of the                                                               
unfunded liability.  The FY2011 data the  committee received last                                                               
year is outdated.                                                                                                               
CHAIR  DYSON  asked  his  staff   to  compile  the  requests  and                                                               
questions from each  committee member. He restated  his desire to                                                               
see the information in graph form.                                                                                              
10:05:07 AM                                                                                                                   
SENATOR COGHILL asked for the  anticipated pool of employees, the                                                               
different benefit options in order  to extrapolate the benefit to                                                               
the state  and employee  of pooling the  money, and  the expected                                                               
healthcare risk under the options.                                                                                              
MR. KIEHL said he would argue  that the risk of rising healthcare                                                               
costs  falls  almost  entirely  to  the  employee  pool.  Another                                                               
benefit to  the state  from pooling investments  is that  an open                                                               
trust fund into  which new money is put to  cover future benefits                                                               
can maintain an  almost permanent time horizon and  thus a higher                                                               
rate  of return  as  opposed to  a closed  trust  fund that  must                                                               
gradually take less risk in its  investments as the need for cash                                                               
becomes more immediate. With an  open trust fund and new benefits                                                               
being accrued  and paid  for, the  state can  continue to  gain a                                                               
tremendous portion of  the economic benefit of  pensions from the                                                               
global economy instead of Alaskans.                                                                                             
SENATOR  COGHILL asked  if the  new money  coming into  the trust                                                               
fund could only  be paid out only  to the new tier,  and never go                                                               
to the unfunded liability.                                                                                                      
MR. KIEHL  explained that  the bill  puts the  contributions from                                                               
the new defined benefit employees  and the employer into the same                                                               
trust. If they were split into  a separate trust fund, the legacy                                                               
defined benefit trusts would have  the same issue with their time                                                               
horizon. To get the benefit of  that open trust fund and the near                                                               
permanent time  horizon, both assets  and liabilities  would need                                                               
to be pooled, although they could be accounted for separately.                                                                  
10:09:19 AM                                                                                                                   
CHAIR DYSON asked if  the new tier would be a  draw on the legacy                                                               
trust funds if it doesn't work as anticipated.                                                                                  
MR.  KIEHL  explained that  if  they're  invested together,  they                                                               
would move in tandem. If  they were invested separately, the same                                                               
market forces  and changes  that might occur  in the  world would                                                               
affect both.                                                                                                                    
CHAIR DYSON asked  how a disproportionate draw in  one tier would                                                               
affect people in the other tiers.                                                                                               
MR. KIEHL replied his initial response  is that any given tier of                                                               
hires is comprised  of a variety of people of  a variety of ages,                                                               
but he'd give more thought to a worst case scenario.                                                                            
SENATOR  WIELECHOWSKI asked  if it  would alleviate  some of  the                                                               
unfunded  liability problem  by  opening things  up  so that  all                                                               
public employees are contributing to the system.                                                                                
10:12:08 AM                                                                                                                   
MR. KIEHL answered that he  believes it does, particularly in the                                                               
out years, because  an open system has a longer  time horizon and                                                               
can potentially gain greater returns.                                                                                           
SENATOR COGHILL offered his understanding  of the risk if returns                                                               
are less than eight percent.                                                                                                    
CHAIR DYSON held SB 30 in committee.                                                                                            

Document Name Date/Time Subjects
SB030-DOA-DRB-03-26-14.pdf SSTA 4/1/2014 9:00:00 AM
SB 30