03/18/2009 03:15 PM House LABOR & COMMERCE
| Audio | Topic |
|---|---|
| Start | |
| HB30 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 30 | TELECONFERENCED | |
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
HOUSE LABOR AND COMMERCE STANDING COMMITTEE
March 18, 2009
3:20 p.m.
MEMBERS PRESENT
Representative Kurt Olson, Chair
Representative Mark Neuman, Vice Chair
Representative Bob Lynn
Representative Robert L. "Bob" Buch
Representative Lindsey Holmes
MEMBERS ABSENT
Representative Mike Chenault
Representative John Coghill
COMMITTEE CALENDAR
HOUSE BILL NO. 30
"An Act repealing the defined contribution retirement plans for
teachers and for public employees; providing a defined benefit
retirement plan for teachers and public employees; making
conforming amendments; and providing for an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 30
SHORT TITLE: REPEAL DEFINED CONTRIB RETIREMENT PLANS
SPONSOR(s): REPRESENTATIVE(s) HARRIS, HAWKER, MUNOZ
01/20/09 (H) PREFILE RELEASED 1/9/09
01/20/09 (H) READ THE FIRST TIME - REFERRALS
01/20/09 (H) L&C, STA, FIN
03/18/09 (H) L&C AT 3:15 PM BARNES 124
WITNESS REGISTER
REPRESENTATIVE JOHN HARRIS
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Presented HB 30 as one of the joint prime
sponsors of the bill.
REPRESENTATIVE CATHY MUNOZ
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Presented HB 30 and answered questions as
one of the joint prime sponsors of the bill.
REPRESENTATIVE PAUL SEATON
Alaska State Legislature
Juneau, Alaska
Testified and answered questions during the discussion of HB 30.
POSITION STATEMENT:
ILANA BOIVIE, Policy Analyst
National Institute on Retirement Security (NIRS)
Washington D.C.
POSITION STATEMENT: Testified during the discussion of HB 30.
KENDRA KLOSTER, Staff
Representative Cathy Munoz
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Testified on HB 30 on behalf of one of the
joint prime sponsors, Representative Cathy Munoz.
LARRY SEMMENS, City Manager
City of Soldotna
Soldotna, Alaska
POSITION STATEMENT: Testified and answered questions during the
discussion of HB 30.
ACTION NARRATIVE
3:20:35 PM
CHAIR KURT OLSON called the House Labor and Commerce Standing
Committee meeting to order at 3:20 p.m. Representatives Buch,
Lynn, Holmes, Neuman, and Olson were present at the call to
order. Representatives Doogan and Harris were also in
attendance.
HB 30-REPEAL DEFINED CONTRIB RETIREMENT PLANS
3:20:58 PM
CHAIR OLSON announced that the only order of business would be
HOUSE BILL NO. 30, "An Act repealing the defined contribution
retirement plans for teachers and for public employees;
providing a defined benefit retirement plan for teachers and
public employees; making conforming amendments; and providing
for an effective date."
REPRESENTATIVE JOHN HARRIS, Alaska State Legislature, offered a
brief overview of HB 30. He stated that HB 30 relates to the
defined contribution (DC) retirement system versus defined
benefit (DB) retirement system for state and municipal
employees, teachers, and others in the system. He recalled
state employees historically have had a defined benefit
retirement plan (DB). A few years ago the legislature took
action to change to a Tier IV, defined contribution retirement
plan (DC). Thus, all new legislators and state employees are on
a DC plan. He opined that the state reviewed its retirement
plans, held much debate, and voted to support a DC retirement
plan.
3:24:00 PM
REPRESENTATIVE HARRIS identified one reason that the legislature
voted for a different retirement system was that state debt for
the system could not be repaid and the state was accruing too
much debt. He related that HB 30 was introduced to begin
dialogue again. He recalled that the governor made strong
statements against the DC plan. He related his understanding
that the governor is interested in HB 30. He said he hopes to
have the administration involved in the process and anticipates
that reviewing the retirement plan will be a two-year process.
3:26:01 PM
REPRESENTATIVE HARRIS said that he would like honest dialogue
about which system is best for the state and state employees.
He opined that this is a big issue and relates to recruitment
issues as well as how to retain employees. He said he
anticipates that the Alaska State Trooper management and unions
may also discuss issues they have had. He said he also hopes
the committee will give the bill serious consideration. He
indicated Representative Seaton is present and was involved in
the details of the issues of DC plan versus the defined benefit
plan and welcomed his expertise.
3:27:55 PM
REPRESENTATIVE NEUMAN recalled the governor discussed this issue
during the campaign. He inquired as to whether Representative
Harris has personally held conversations with the administration
on HB 30.
REPRESENTATIVE HARRIS offered that he has made overtures to the
Commissioner of Department of Administration. Thus far, the
official position is the department will examine the issue. He
related his understanding some unofficial views are that the
Department of Administration (DOA) commissioner is not too
excited about the bill, but understood others in the DOA are
more supportive.
3:30:05 PM
REPRESENTATIVE CATHY MUNOZ, Alaska State Legislature, introduced
her staff, Kendra Kloster. She stated that HB 30 does three
things. First, it would return the retirement system to a DB
system. Next, it would provide a time certain for current DC
employees to opt into the new system. Finally, it would
preserve the Alaska Retirement Management Board (ARM). She
mentioned that when the Teachers Retirement System (TRS) and
Public Employees Retirement System (PERS) boards were dissolved
in 2005 with the passage of Senate Bill 141, the Alaska
Retirement Management Board (ARM) was established. She opined
that the process for the new retirement system was incomplete.
She surmised that conflicting information made it difficult to
make a good decision and legislators were pressured to finish
the job. She acknowledged that considering the bill was a
difficult process and she would probably not have had any
additional insight. However, she further opined the issue
remains unresolved and until the legislature can effectively
respond to its constituencies, the retirement system will
continue to be a litmus test for candidates. Meanwhile, at all
levels of government dissatisfaction remains, yet Alaskans rely
on the work of teachers, firefighters, and other public
servants. She offered current statistics such that 73,000 are
members of the PERS and TRS systems and 11,600 are enrolled in
the new DC system. She related that many of her constituents
are members of these retirement systems.
3:33:18 PM
REPRESENTATIVE MUNOZ related that she has heard many of their
stories. She offered that young teachers have shared their
401(k) reports and the depressing results. When these teachers
extrapolate what they might earn at retirement time, they are
uncertain about their future. Without social security benefits,
government workers face a very uncertain future, she opined.
She related that their stories motivated her to attempt to
restore a more reliable pension system. In 2005, the state's
unfunded liability led to a change in the retirement system as
well as concern for rising costs across the country. However,
the state's unfunded liability is not a function of which type
of retirement plan is in place. Instead, the state's unfunded
liability is a result of it not making adequate investments in
the retirement plan. She surmised that during the 1990s gross
miscalculations were made for the amount of funding necessary to
fund the state employees' retirement systems. Over time, she
related, the state's unfunded liability has escalated.
3:34:45 PM
REPRESENTATIVE MUNOZ offered her belief that one far reaching
aspect of Senate Bill 141 came to light after the bill was
signed into law. She explained at two ARM Board meetings the
longtime investment consultant told the board that since the DB
plans were essentially closed, very soon the rate of return
assumption would need to be reduced as the asset allocation
investments will need to be geared toward more liquidity and
less towards volatility. She opined that a lower rate of return
on investments will impact the state's unfunded liability due to
the DC retirement plans for state employees. She mentioned that
in 2005 the debate on Senate Bill 141 surrounded the higher
costs of the state's Tier I retirement plan. She pointed out
that the system had changed to a Tier III retirement plan well
before 2005. She offered that West Virginia faced similar
issues. She highlighted that due to its state's unfunded
liability of approximately $5 billion West Virginia (WV) closed
its DB retirement plan in 1991 and switched to a DC retirement
system. Representative Munoz stressed like Alaska, WV
supporters expected the state's unfunded liability to diminish.
However, twelve years later, in 2003, WV's unfunded liability
continued to grow and 70 percent of retirees had insufficient
retirement funds. By 2007, the average annual returns for
teachers in the plan trailed similar DB plans by 69 percent.
She concluded by stating the greatest advantage of a DB
retirement system is the opportunity to pool risks. In doing
so, investments can be calculated to ensure all retirees would
receive a monthly pension. She acknowledged retiree life spans
are uncertain. Thus, the beauty of a DB retirement system is
that employees do not need to save as if they will live to be
100 years old. Instead, employees' risk is pooled among all
retirees and new hires provide the best source of cash flow, she
opined.
REPRESENTATIVE MUNOZ emphasized that the current DC retirement
plan is the single issue most often raised during her campaign
and is the reason she introduced the bill. She said, "After
hearing many personal accounts, I am convinced it is the right
thing to do."
3:38:35 PM
REPRESENTATIVE NEUMAN recalled the discussion to change to a DC
plan. He said, "It was a long hard bloody fight." He further
recalled that the state was facing a $16 billion debt and the
legislature needed to "stop the bleeding." He related his
understanding that with guaranteed benefits under the DB plan,
the state must pay the costs. He offered his belief that nobody
in the private sector must do so. He highlighted that as the
state made reductions in employee benefits such that it has
moved from Tier I to Tier IV retirement plans. He inquired as
to whether the state should guarantee payments.
REPRESENTATIVE MUNOZ answered that the legislature should
perform an analysis between the Tier III and DC plans. The
analysis needs to be performed since it is hard to rely on
information currently available or on the information
legislators received at the time the decision was made to change
to a DC retirement plan.
3:41:31 PM
REPRESENTATIVE NEUMAN remarked that the legislature reviewed
analysis during the month long special session it spent on the
issue. He referred to a study completed by the University of
Alaska Anchorage, Institute of Social and Economic Research
(ISER) that identified salaries and benefits were the number
five reason why teachers did not stay in rural communities. He
recalled the quality of life and similar items ranked higher in
the study. He recalled one argument for a DB plan was that the
state cannot attract employees due to the retirement system. He
opined that he does not agree with that statement since the ISER
studies did not support this.
3:43:07 PM
REPRESENTATIVE MUNOZ recalled a recent conversation with a
Department of Transportation & Public Facilities (DOT&PF)
engineer who stated the current combined salary and retirement
benefits package could not attract engineers to fill critical
positions. She related that the DC plan was implemented in
2005. Thus, only three years has lapsed so it is difficult to
assess the issue of attracting and retaining employees.
However, she related her understanding from discussions with
various departments that they have difficulty in filling job
vacancies.
REPRESENTATIVE NEUMAN referred to the state's policy for
rehiring public employee retirees. He opined the policy did not
seem to be a good policy in terms of "building a bench" by
promoting lower level employees. He indicated that people who
retired were rehired to do the same job but did not pay into the
retirement system. Thus, the practice compounded the problems
since the workforce stayed at the same level, but fewer
employees paid into the system.
REPRESENTATIVE MUNOZ responded that the DB system is a closed
plan, so new enrollees do not contribute to the DB plan. She
opined this causes the state's unfunded liability rate to
increase since the expected rate of return on the retirement
plan investment is reduced. She related the current rate is an
expected rate of 8.25 percent over the last 10 to 20 years.
However, the expected rate will be reduced since the ARM board
will be compelled to invest in more liquid and stable
investments. She emphasized that will add to the state's
unfunded liability. She highlighted that is one problem with
the current system.
3:46:31 PM
REPRESENTATIVE NEUMAN inquired as to whether rehiring retired
public employees creates a problem for the retirement system.
REPRESENTATIVE MUNOZ indicated she had been speaking to the
issue of not having new enrollees paying into the plan. In
further response to Representative Neuman, Representative Munoz
offered to contemplate rehires and she offered to comment later.
3:47:19 PM
REPRESENTATIVE NEUMAN recalled hearing that if the state were to
revert to the Tier III retirement system, the automatic
implication would be that an employer contribution will be
deposited into the employee's retirement system. He described
his wife's experience as a union employee for the United Food
and Commercial Workers International Union (UFCW). He stated
that she receives a paycheck but funds are not contributed to
her retirement system.
REPRESENTATIVE MUNOZ offered her belief that the DB plan has
"lost steam" but not as much as the DC plan. She related her
understanding that the DC losses were approximately 30 percent,
whereas the DB plan losses were about 20 percent.
3:49:00 PM
CHAIR OLSON pointed out that employees affected by the state's
retirement plans represent approximately 25 percent of the
workforce in the state. He related his understanding that the
remaining 75 percent of Alaska's employees have individual
retirement accounts (IRAs), Simplified Employee Pensions (SEPs)
plans, or have no retirement plan at all. He mentioned the
state does not have a state sales or income tax either. He
opined the state has saved over $200 million since switching to
the DC plan. He offered his belief that the state's unfunded
liability was also reduced to $7.5 billion. He further opined
that in order to reduce the state's unfunded liability, the
state would need to use general fund dollars. He recalled that
$550 million has been appropriated. However, the state's
unfunded liability has continued to rise to approximately $10.5
to $11 billion. He reiterated that the plan applies to less
than 25 percent of the state's workforce, which is a relatively
small segment of the workforce.
CHAIR OLSON recalled a discussion with local government
officials in his district, who indicated that they have not had
problems filling job vacancies or positions under the current DC
plan.
REPRESENTATIVE MUNOZ responded that as the employer, the state
must consider issues which pertain to state employees. She
mentioned that state employees do not receive social security
benefits, although private sector businesses pay into the
federal social security system. In "looking at the big
picture," the goal should be to provide a state retirement plan
that is predictable. She stated that HB 30 is the top priority
of public employee groups in her district, which is the reason
she has sponsored the bill.
3:53:07 PM
CHAIR OLSON opined that if he were a Tier II employee who had
missed opting into Tier I retirement benefits he would be
concerned as a Tier IV public employee who missed opting into
Tier III retirement benefits. He remarked that the state has
changed its system approximately every ten years, although Tier
I retirement system was in place about 26 years before the Tier
II retirement plan was adopted. He further opined that the
reasons for the changes to the state's retirement system were to
keep the system competitive and to save money for the state. He
indicated that his vote on Senate Bill 141 was the hardest vote
he has made as a legislator.
REPRESENTATIVE LYNN said, "I said go, go, go. Keep defined
benefits."
3:54:23 PM
REPRESENTATIVE MUNOZ said she appreciated the difficulty for
legislators when considering the DC retirement plan. She
remarked that she is not trying to be critical. She said she
was not a member of the legislature in 2005 and cannot predict
how she would have reacted. She said, "I do not think given
what we know today, that it was the right thing to do at the
time."
3:54:58 PM
REPRESENTATIVE DOOGAN related that the vote on Senate Bill 141
also predates his service to the state. He offered his belief
that cost needs to be considered when attempting to evaluate
retirement systems. He related his understanding that would
require analysis of the relative cost of the DB retirement
system which is Tier III for the PERS and Tier II for TRS. It
would also require evaluating current DC retirement system,
which is Tier IV for PERS and Tier III for TRS. He inquired as
to whether any such evaluation has been conducted.
3:56:11 PM
REPRESENTATIVE MUNOZ recalled employer statistics but she did
not recall that any in-depth analysis was performed. She agreed
that such analyses would assist the state to make an informed
decision of whether to reopen and reestablish the DB retirement
plan.
REPRESENTATIVE DOOGAN related his understanding that it would
also be helpful to determine whether more people are leaving the
state, and if it is harder to obtain new employees under the DC
plan. He said he hopes the legislature will have access to that
information. He opined that any retirement system is a balance
between what it will cost the employer, and the employment
effects. He surmised there would also be other considerations.
REPRESENTATIVE MUNOZ agreed that a number of issues should be
analyzed and incorporated into an accurate study, such as direct
and indirect costs.
3:58:39 PM
CHAIR OLSON recalled discussions with the administration on a
number of occasions and offered his belief that he received
accurate answers. Currently the administration has not taken an
official position on the issue. He opined that several years
ago the administration actively pushed in one direction. He
observed that this administration has been more consensual.
REPRESENTATIVE MUNOZ commented that she did not mean to
disparage the current administration. She simply would like to
"see those numbers and that analysis," which she related would
be very helpful.
CHAIR OLSON referred members to a one-page analysis from
Legislative Research in the committee packets which provide
information from the administration.
3:59:38 PM
REPRESENTATIVE PAUL SEATON, Alaska State Legislature, agreed
that he would also like to see the analysis performed. He
opined one reason the system was changed was that the state was
not able to fill vacant positions such as electrical workers,
special education, or other teachers under Tier III retirement
plan. He related that is still the current complaint, and some
suggest reverting back to Tier III retirement plan will cure the
problem. He affirmed that research would be helpful. He
inquired as to whether new employees represent the best choice
of cash flow for the state.
REPRESENTATIVE MUNOZ clarified the rate of return on investments
by the ARM board is currently about 8.25 percent. Since the DB
plan is a closed plan, the expected rate of return will be
reduced over time to about 6 percent. She speculated the
difference will be significant, perhaps more than $1 billion
dollars will be added to the state's unfunded liability.
REPRESENTATIVE SEATON said he was relieved that the state was
not asking its employees to move to the federal social security
system. He recalled that during consideration of Senate Bill
141 in 2005, the state hired Mercer Human Resource Consulting
(Mercer), followed by Buck Consultants (Buck). He further
recalled both consultants analyzed an alternative method. He
stated the most recent predictions are that the state's unfunded
liability was probably even larger than either Mercer or Buck
had predicted. He offered his belief that the legislature tried
to obtain accurate analysis. He recalled that at 8.25 percent,
the projections were $30 billion to pay scheduled payments of
$45.5 billion, which left us at $15.6 billion of scheduled
payments. He stated that some question exists about returning
to the prior retirement system that would create new state
unfunded liability. He opined that if the only way to reduce
the unfunded liabilities would be general fund dollars, that
would impact future budgets. He inquired as to how to balance
consideration of the retirement system with the prospect of
unfunded liabilities with other important needs of Alaskans.
4:03:27 PM
REPRESENTATIVE MUNOZ offered her belief the state's unfunded
liability is not a direct function of whether it has a DC or DB
retirement system. Instead, the state's unfunded liability is a
direct function of investing the amount recommended by the
actuaries into the state's retirement plan. She reiterated that
the rate of return on closed plans will add to the state's
unfunded liability. She recalled that West Virginia (WV) was
compelled to go back to a DB plan. She further recalled that WV
did not reduce its unfunded liability under a DC plan. Instead,
WV's unfunded liability continued to worsen. She opined that a
DB retirement plan is not directly linked with increased state's
unfunded liability. She maintained her belief that funding the
DB retirement plan means investing the proper amount recommended
by the actuaries into the retirement plan.
4:04:53 PM
REPRESENTATIVE SEATON recalled stock market fluctuations only
amounted to 11 percent of the state's unfunded liability. He
surmised that the major portion of the state's unfunded
liability is due to people living longer. Thus, health care
costs subsequently increase, which he recalled was the source of
the 56 percent of the state's unfunded liability. He opined
that the DB system is exclusively the cause of the state's
unfunded liability. He related that under a DB system the state
guarantees to pay a certain amount, regardless of the cost, and
burgeoning health care costs add to the state's unfunded
liability. He related that when people live longer, the DB plan
continues to pay out retirement benefits to retirees, which
increases the state's unfunded liability. He offered that under
a DC plan a specific amount is contributed, which limits the
unfunded liability. He emphasized that the state's unfunded
liability is exclusively the result of a DB plan, in fact, is
the definition of defined benefits.
4:07:01 PM
REPRESENTATIVE SEATON stated that the ARM board relies on
structured investment advice. The majority of PERS and TRS
Boards cases represented the adjudication of challenges. He
inquired as to how the current investment board will spend 80
percent of its time on PERS and TRS claims since qualifications
for the ARM board do not provide that expertise.
REPRESENTATIVE MUNOZ opined that the current ARM Board is
working well, which is one of the most positive results of
Senate Bill 141. She related her understanding that the
Department of Revenue commissioner is also involved in the
appeals process. She said she cannot answer the specifics, but
offered to provide the information later. She further related
her understanding that all parties seem happy with the
structure.
4:08:28 PM
REPRESENTATIVE BUCH said he welcomes discussions on these
issues. He opined that a major component of the retirement
system issue is the employer contribution rate. He recalled in
the early 1990s, changes were made to employer contributions.
He said that he agrees with Representative Seaton's assessment
of the task before the legislature. He related his own
retirement plan eliminated health care benefits. He recalled
that every state has suffered, driven by health care costs,
which he characterized as divisive. He stated when people turn
65 years old they are mandated to use Medicare, which is
essentially socialized medicine. He further opined the current
health care system needs to be revamped. He related that the
process of evaluating retirement benefits will likely be a long
endeavor and he offered to "roll up his sleeves."
4:11:14 PM
REPRESENTATIVE DOOGAN offered his belief that the state has two
roles, one as the payer and the other as the employer. He
offered that the two roles may be in conflict. He related that
one goal of this committee should be to bring those two roles
into alignment to the extent possible. He pointed out his
discovery does not persuade him one way or the other. He
recalled someone once said the most difficult decisions are not
between a right and a wrong but between two rights.
4:12:35 PM
ILANA BOIVIE, Policy Analyst, National Institute on Retirement
Security (NIRS), stated that she hopes the committee finds the
NIRS research helpful. She referred to a PowerPoint previously
distributed to the committee labeled "Pensionomics" and "A
Better Bang for the Buck". She explained that the first few
slides provide background information on the NIRS. She related
that "pensionomics" refers to measuring the economic impact of
state and local pension plans.
MS. BOIVIE referred to slide 5, labeled "Why we did This Study"
and related that the NIRS wanted to measure the "economic
footprint" of state and local pension plans to quantify how much
and where pension benefit expenditures make an impact. She
related that economists know defined benefit (DB) plans act as
an "automatic stabilizer" for the economy. She explained that
retirees with a reliable pension can maintain spending for basic
needs even in tough economic times. Thus, the report provides a
sense of stabilizing effect state and local pensions may have on
the U.S. economy.
MS. BOIVIE explained the report compiled state-by-state data
compiled in state fact sheets. She reviewed NIRS's findings in
Alaska, and referred to slide 6, titled "What We Found -
Nationally". She stated the NIRS found a large footprint,
specifically in 2006, when expenditures of state and local
retirement benefits supported 2.5 million jobs nationwide that
paid $92 billion in income which supported $358 billion in
economic output with $186 billion in "value-added" and $57
billion in federal, state, and local tax revenue.
MS. BOVIE referred to slide 7, titled "What We Found - Alaska".
She related in 2006, retirement benefits supported 6,270 jobs
that paid $385 million in income, $1 billion in economic output
statewide, and $155 million in federal, state, and local tax
revenue. She explained Alaska also had a significant multiplier
effect, such that for every $1 paid out in benefits $1.25 in
total output was generated. For every $1 contributed by Alaska
taxpayers to pensions, $6.35 in economic output was generated.
MS. BOIVIE referred to slide 10, titled "Overview of State and
Local DB Pensions in Alaska" which provides background
information. She referred to slide 11, titled "Financing of
State and Local Pension Plans in Alaska" demonstrates the
funding sources for Alaska's pension plans. She offered that 82
percent is garnered from investment earnings and employer
contributions made between 1993 and 2006. She pointed out that
the chart demonstrates investment earnings which provided nearly
70 percent of the retirement benefits.
MS. BOIVIE referred to slide 15, titled "Alaska Results: Total
Economic Impact". She opined that purchases have a ripple
effect through the state's economy, so one person's spending
becomes another person's income, which is magnified by
subsequent expenditures. She referred to slide 21, titled
"Conclusions". She related that state and local pension plans
have a large economic footprint in the U.S. and Alaska. She
reiterated that state and local pensions have significant ripple
effects such that one retiree's spending becomes another
person's income. She further opined that state and local
pensions have sizeable multipliers.
MS. BOIVIE referred to slide 22, also titled "Conclusions". She
stated that state and local pensions provide a critical source
of reliable income for 7.3 million retired Americans and 35,000
retired Alaskans. She emphasized that pensions support the
macro economy and support 6,270 Alaskan jobs, $358 billion in
national activity, and $1 billion in Alaska economic benefits.
She opined that pensions are "automatic stabilizers" since
retirees spend money on basic needs whereas people in a 401 (k)
plan defer their spending. Thus, the retirees tend to stabilize
the economy and act as a stimulus during tough economic times,
she concluded.
4:18:27 PM
MS. BOIVIE explained that the second part of the study is titled
"A Bigger Bang for the Buck". She recalled claims that "DC
plans save money." She offered that the NIRS wanted to address
the claim by evaluating retirement benefits costs for the DB and
DC plans. She explained that the NIRS worked with a pension
actuary and performed an "apples to apples" comparison of the
two plans for any given benefit level.
MS. BOIVIE referred to slide 26, titled "Results: What We
Found". The NIRS determined that the DB approach is more cost
effective than the DC approach for three reasons. First, the DB
pension pools longevity risks so that the plan can save for the
average life expectancy. Secondly, the DB pension plans
maintain a better diversified portfolio and do not need to make
more conservative investments. Third, DB pension plans
consistently achieve better investment returns.
MS. BOIVIE referred to slide 27, titled "DB Plan Can Deliver
Same Benefit at About Half the Cost of DC Plan". She pointed
out that the chart demonstrates the DB plan offers a 46 percent
savings over the DC plan. She referred to slide 28, titled "DB
Plan Can Do More with Less" which is for members' reference.
She concluded by stating the DB plan has built in economic
efficiencies and provides a "better bang for the buck" in terms
of savings for taxpayers. She highlighted that clearly cutting
employee benefit levels will always save money, no matter what
retirement system is used. However, this study shows that for
any given benefit level, the DB plan is the most cost efficient
retirement plan.
4:20:45 PM
REPRESENTATIVE SEATON referred to slide 27. He remarked that
the slide states "Less Balanced Performance and Lower
Returns/Higher Fees". He inquired as to whether the NIRS
reviewed the Alaska retirement system or DC plans in general
such as a 401 (k) or another plan that allows employees to
direct their own investments.
MS. BOIVIE recalled that the NIRS used their own scenario and
models for both the DB and DC plans. She referred to slide 29,
titled "Methodology: What We Did" and stated that the model was
based on a scenario in which 1,000 female teachers worked for 30
years and using a final salary of $50,000.
REPRESENTATIVE SEATON recalled several analyses that examined a
DC plan and the historic lesser return rates. He pointed out
that in Alaska a person cannot invest their own retirement funds
but must choose between professionally managed accounts with
different methodologies. He reiterated that Alaskan retirees
cannot direct their own portfolio. He related his understanding
that the DC plans were much lower. He inquired as to whether
the NIRS reviewed historic views of all DC plans, not
professionally managed account, but only portfolio managed
accounts.
4:22:55 PM
MS. BOIVIE recalled that the NIRS used a difference of 80 basis
points or approximately .8 percent per year, which represented
the lower end of the spectrum. She explained that the NIRS
performed a brief review of estimates ranging from 80 to 200
basis points. Thus, the NIRS selected the lower range of
estimates to arrive at the difference between the returns for DB
and DC plans. She noted with interest that the DC accounts are
professionally managed in Alaska. She affirmed that it would be
interesting to do a study solely in Alaska. She countered that
professional management may still not take advantage of
economies of scale the DB plan would achieve, such as investment
opportunities that very large pools of funds have access to
which are not likely to be available to smaller investors. She
surmised that the gap would likely be much smaller, but she said
she imagined a gap might still exist.
REPRESENTATIVE SEATON inquired as to whether the DB plan takes
into account state's unfunded liability. He inquired as to
whether the scenario assumed contributions were made at the
appropriate level, but pointed out that would also change when
circumstances change. He inquired as to whether he was "missing
something."
MS. BOIVIE agreed the model was an idealized view of both
structures. She explained that for the DB plan, NIRS arrived at
the 12.5 percent payroll but did not differentiate between
contributions made by the employer or the employee and also
assumed deposits were consistently made. The analysis of the DC
cost of 22.9 percent did not consider any unfunded liability.
She offered that consideration of unfunded liability was beyond
the scope of the study. She said, "It's kind of like an
idealized setting. Everyone's going to get to that retirement
level, but how much does it take to get them there, year to
year."
CHAIR OLSON responded, "I think that's the big question."
4:26:04 PM
KENDRA KLOSTER, Staff, Representative Cathy Munoz, Alaska State
Legislature, speaking on behalf of a joint prime sponsor of HB
30, Representative Cathy Munoz, referred to the Buck consultant
letter dated February 12, 2009, which compares the state's
defined benefit plan and DC plan. She referred to page 1, to
employer's contributions. She related that the costs for the DB
plan for Tier III were 10.95 percent, while the costs for the DC
plan were 9.23 percent. Thus, the DB plan costs were higher.
She referred to page 2, and related the TRS costs under the DB
plan were 8.96 percent, but under the DC plan were 11.4 percent.
Thus, the overall pension plan employer contributions
differences were less than one percent between the retirement
plans. She emphasized that this data was derived from Buck
Consultants, but the administration has reviewed the information
and agreed with the analysis. She related that she would not
review the sectional analysis of HB 30, since most members are
familiar with the bill.
4:29:07 PM
REPRESENTATIVE SEATON referred to page 1 of the Buck
Consultant's letter dated February 12, 2009 to the DB plan
employer normal cost rate contribution rate of approximately
three percent. He inquired as to whether this refers to the
average cost. He opined that means a five percent contribution
could be made into the health reimbursement account (HRA),
depending on where the employee is in terms of his/her
longevity. Thus, the average overall amount would be three
percent. However, he recalled that federal law requires
everyone to be treated the same. He surmised that new employees
would initially receive almost five percent in their HRA which
will grow over time and have a much greater effect.
4:31:17 PM
LARRY SEMMENS, City Manager, City of Soldotna, provided a brief
work history, offered that he previously served as the city
manager for eight months, was the finance director for City of
Kenai for 12 years, and held various other positions in the
finance department at the Kenai Peninsula Borough. He offered
that he served as a trustee of the ARM Board, but due to a
technicality, he is no longer eligible to serve. He lamented
that he can no longer serve on the ARM board, which he found
very rewarding. He indicated that he has extensive knowledge
PERS and TRS retirement systems and is also a certified public
accountant (CPA). He read from a prepared statement,
occasionally providing additional comments. He said:
My name is Larry Semmens and I am the City Manager of
the City of Soldotna. I was also a Trustee on the
Alaska Retirement Management Board for the first three
years of its existence and have fairly extensive
knowledge of PERS and TRS issues. I am a certified
public accountant with over 25 years experience in
local government in Alaska.
I am against repealing the pension plans commonly
known as the 'defined contribution plans' PERS tier IV
and TRS tier III, which were effective July 1, 2006.
I will refer to these plans as the DC plans, but in
reality these plans are blended plans that have both
defined contribution and defined benefits attributes.
4:33:14 PM
MR. SEMMENS continued:
I want to say upfront that the City of Soldotna is not
having problems hiring or retaining personnel with the
current Tier IV retirement plan. Since implementation
we have successfully hired several police officers,
both inexperienced and experienced, equipment
operators, and office personnel. The vacancies were
created primarily from retirements.
4:34:29 PM
MR. SEMMENS, in response to Representative Doogan agreed
that everyone's retirement statements look bleak. He also
pointed out that one position the city was not able to fill
was its engineer position. He related that the salary was
not set high enough to attract an engineer.
MR. SEMMENS continued:
The reason I am against going back to the full DB
plans is that they are too costly and the total cost
cannot be known until the last person in the plans
dies, let alone at the time wages are paid. Our
current situation is a case in point. Prior to a few
years ago we were all blithely going along thinking
our pension plans were fully funded. Surprise - they
were not and recently the investment markets have
dealt us another staggering blow. The result was, is
and may continue to be, skyrocketing contribution
rates. With the DC plan the cost is known, the
employer pays it one time at the same time that the
services are rendered. If we find it difficult to
hire employees we will need to raise wages, but at
least that is a local control decision.
MR. SEMMENS opined that he has always been in favor of
raising wages. He said he has favored the DC plan since it
was first discussed. He offered his belief that in order
for a public retirement system to be competitive with the
private sector, wages also need to be competitive. The key
is wages. However, the level of wages for employees is
under local control, and is not the result of a retirement
system "wagging the whole decision-making process."
MR. SEMMENS continued:
At June 30, 2007, which is the date of the last
Actuarial Valuation, the total state's unfunded
liability for PERS and TRS was $7.5 billion. Since
then investment returns have not met the actuarial
assumption of 8.25 percent. Although we do not have a
more current actuarial valuation, I think it is
reasonable to predict that the state's unfunded
liability will be up at June 30, 2008 because
investment returns were negative, about 3 percent.
That is over 11 percent short of the actuarial
assumption. This fiscal year investment returns are
over 20 percent negative and if it doesn't turn around
I can absolutely predict that the state's unfunded
liability will be up at June 30, 2009.
4:37:26 PM
MR. SEMMENS added that the actuarial evaluation for June
30, 2009 will not be available until April 2010, and the
rates will "kick in" in 2012. Thus, a long lag time exists
as a result of the investment returns. He said:
This will put upward pressure on the 2012 contribution
rates. At June 30, 2007 total assets of the PERS and
TRS pension funds were $15.8 billion. At June 30,
2008 assets were $15.5 billion and as of January 31,
2009 the latest available financial statements show
total market value of assets to be $12.1 billion, a
decrease of $3.7 billion since the last valuation.
Clearly, assets are going in the wrong direction.
Ideally we would have been making progress on paying
down the state's unfunded liability, but we have not.
I do not want to be critical of the investment
performance, nearly every pension system in the
country is experiencing similar returns.
MR. SEMMENS acknowledged that the investment team is
phenomenal and are frequently in the top-tier. He related
that the whole country is experiencing problems. In
response to Chair Olson, he agreed the investment team has
routinely outperformed the permanent fund. He said:
As an employer I like the DC plan for the certainty of
cost that such a plan provides. The employer is
responsible to pay the retirement contribution one
time only and the cost is known.
MR. SEMMENS offered a scenario in which a city manager
prepares a budget setting snow plowing costs at $800,000
ten years later discovers the costs were actually $900,000.
He said:
Ten years from now employers will not be asked to make
additional contributions to cover investment losses or
for the many other reasons that DB pension plans
become underfunded. The private sector has fled DB
plans because they need to know how much it costs to
produce their products. They cannot go to their
customer 10 years later and say they should have
charged them more because it has come to light that
pension benefits earned back then actually cost more
than they figured into the sales price. Should the
public sector be any different?
Shouldn't we tell our constituents how much it will
cost to plow the streets or run the ice rinks without
the specter of revising that cost years later due to
changes in retirement costs?
MR. SEMMENS opined that one would need to search long and
hard to find a private sector employer who offers a
retirement plan similar to the PERS Tier III or the TRS
Tier II retirement plans.
4:41:37 PM
MR. SEMMENS said:
Please consider carefully before you make promises to
future employees that the residents of Alaska will
provide them with guaranteed retirement benefits the
cost of which you cannot possibly know. My experience
of the last several years tells me that even the
experts may not be able to reasonably predict such
costs.
MR. SEMMENS related that he has observed many actuarial
evaluations. He opined that one year they say one thing
and the next year they say something else. He opined that
it is not exact science. He stated he has heard the
process characterized as an art. He said:
Please ask yourselves the question - is it right to
require future generations of Alaskans to pay the cost
increases that seem to inevitably beleaguer defined
benefit plans?
MR. SEMMENS stated that he has been "in the business" for
25 years. He opined that his children will be responsible
for the cost of $10 billion in unfunded liability of his
retirement benefit. He said, "Personally, I don't think
it's right."
Major corporations have gone bankrupt due to their
inability to fund these pension plans. I am very
concerned that governments are headed down the same
path. I am very concerned that the City of Soldotna
will not be able to continue the service levels that
our residents enjoy today if our PERS contribution
rates increase any more than they already have.
Remember that in 2004 the PERS rate was about 6
percent, currently it is 35 percent. It is true that
currently the City's contribution rate is capped at 22
percent, but I wonder if the State will be able to
afford to pay the difference in 22 percent and the
actuarially required rate if State revenue streams
remain under pressure. Usually something has to give
and it wouldn't surprise me if this rate went up in
the next 5 years.
To me, it seems unwise and perhaps even irresponsible
to change course on our pension plans, especially now
when it is abundantly clear that investment returns
are volatile and may not produce the returns that our
defined benefit plans depend upon. Imagine the
contribution rates that will be necessary to pay off
the state's unfunded liability in the event that
investment returns do not return to normal quickly.
Just last year the TRS rate was 54 percent of payroll.
4:44:38 PM
MR. SEMMENS said:
The contribution of the State of Alaska and the
employer of a teacher making $50,000 was $27,000 to
the retirement system. This does not seem sustainable
to me.
I would also ask that you consider carefully whether
it is right, in a moral sense, for you to promise new
employees benefits that may be impossible to pay for
30 to 50 years from now. If the answer is yes, then I
must ask is it right, in a moral sense, to make such a
promise not knowing what future generations of
Alaskans will have to sacrifice in order to pay for
this promise. This is the time for conservatism. The
private sector has certainly embraced defined
contribution plans. You will be hard pressed to find
private sector employers that offer defined
contribution plans similar to tiers II and III.
Please hold this bill in your committee and let the
rest of the U.S. catch up to the pioneering and
difficult work that the Alaska legislature did when it
adopted the blended retirement plans we have now.
This is the fiscally responsible thing to do, and in
my opinion it is the right thing to do.
Thank you for hearing me today. I would be happy to
try to answer any questions.
4:45:59 PM
REPRESENTATIVE SEATON referred to page 2, line 7 of HB 30, which
read, "The employer shall transmit the contributions calculated
in (a) of this section." He also referred to page 2, lines 10,
which read: (1) the actuarially determined employer normal cost
for the plan and all contributions required by the former AS
14.25.350 and by AS 39.30.370 for the fiscal year. He inquired
as to whether that refers to the full normal cost and the
contributions required under the former DB plan would then "fall
back to the employer" or if he is misinterpreting proposed
Section 4 of the bill.
MR. SEMMENS answered that he was not able to interpret the
specific provision of the bill. He surmised that employers
would be responsible for the normal cost rate of past service
liability. He related the state makes payments based on the
rate that the ARM board sets.
4:47:25 PM
REPRESENTATIVE SEATON referred to the fiscal note which assumes
that the liability is 22.5 percent for PERS and 12.5 percent for
TRS. He offered his belief the liability supersedes legislation
that would bring state's unfunded liability cost on the
employers.
REPRESENTATIVE SEATON next referred to a document in members'
packets titled, "Retention Rates as a Percentage: Comparison of
Final 2 years of Defined Benefit Retirement Plan to the First 2
years of Defined Contribution Plan." He referred to the last
two sets of boxes, and noted that the two year PERS retention
rate was 55 percent, and under the DC plan the rate was 57
percent. He related that the TRS retention rate increased from
59 percent to 64 percent. He inquired as to whether Mr. Semmens
experienced similar results in his experience.
MR. SEMMENS answered that the City of Soldotna has had several
new Tier IV employees, but none have retired.
4:49:33 PM
MR. SEMMENS, in response to Representative Doogan, explained
that state's unfunded liability is the difference between the
actuarial value of the assets, which is slightly different than
the market value and the calculated liability, which is present
value for the benefits when due. He explained the job of the
actuarial is to calculate the liability. He related that it is
just an arithmetic calculation to determine the difference
between the assets and the liability. He related a scenario in
which there is $25 billion in liability with assets of $15
billion. Thus, the state's unfunded liability would be $10
billion. He explained that each year results in either
liability or surpluses. The actuarial will project over 25
years, similar to a how a mortgage is calculated and will arrive
at a rate. He opined that the normal rate for earnings
currently is about 14 percent, and the difference is the state's
unfunded liability, which would be paid off in about 25 years.
4:51:32 PM
REPRESENTATIVE DOOGAN inquired as to whether his scenario was
based on assumptions of the cost of the retirement plan for a
specific set of beneficiaries for a specific time.
MR. SEMMENS answered yes. He related that every single person
is reviewed by the actuarial during the process.
REPRESENTATIVE DOOGAN related his understanding that the
assumptions represent an attempt to determine the cost of the
plan.
MR. SEMMENS agreed.
4:52:20 PM
REPRESENTATIVE DOOGAN related his understanding that the public
sector should not be treated differently from private sector.
He raised the question of whether a DB plan is an effective way
to retain state employees who might earn more in the private
sector. He inquired as to whether Mr. Semmens would advocate
paying the "market rate" for employees instead.
MR. SEMMENS answered if the state were to use a "market type" of
retirement system that it is likely the state would also need to
have "market type" of salary. He offered his belief the only
difference between the private and public sector is the "every
day health benefits" the public sector enjoys that the private
sector does not. He affirmed that Representative Doogan's point
was "right on."
REPRESENTATIVE DOOGAN observed that if future generations must
pay for retirement plans, the plans would probably be different
than the current generation of Alaskans.
4:53:57 PM
REPRESENTATIVE BUCH asked if the actuarial history for the last
15 years was available. He inquired as to the state process for
determining employer contributions prior to enacting Senate Bill
141 in 2005.
MR. SEMMENS acknowledged that he ignored the actuarial process
for many years since the rates were low. However, after the
state's unfunded liability rose in 2002, he then became
involved. He related his understanding that the historical
process is similar. He related that for 25 years the consultant
was Mercer. The process was for the consultant to review
liability for each employee and arrive at a liability number,
compare the figure to assets, and arrive at an outcome that was
often fine. He opined that people questioned the assumptions
and a review actuarial was hired. In 2005, another consultant
disagreed with the assumptions the two other consultants used.
That consultant increased the projections for the state's
unfunded liability. He pointed out an actuarial gain in 2007,
when health care costs were found not rising as quickly as the
projections. He characterized the actuarial process as an
expensive and extensive review process.
4:56:33 PM
CHAIR OLSON recalled that Mercer used an old table on life
expectancy. Thus, people lived longer so the amount budgeted
was insufficient. The state's unfunded liability contribution
was also not sufficient, he related. He opined that the
consultant was not totally liable. He related his understanding
some political judgments were made that also affected the
outcome. He offered his belief that the state is currently in
litigation.
4:57:25 PM
REPRESENTATIVE BUCH related that he is able to serve in the
legislature since he had a DB plan. He opined that the
difference between his retirement system and the state's system
is that his system retains 10 or 12 actuarial firms and several
firms conduct an assessment every three months to further assess
the projections. He said, "The ones that don't perform are
gone." Additionally, the actuarial firms also project 100 years
out. He opined what happened to the state's unfunded liability
is a result of Senate Bill 141. He recalled an earlier scenario
and commented that the snowplow budget is a function of the
weather, which cannot be predicted.
4:59:07 PM
REPRESENTATIVE LYNN inquired as to why municipal employees are
not paid the same wages as the private sector.
MR. SEMMENS answered one reason is that the public sector
provides other benefits. Thus, lesser wages can be paid because
other components make up the difference. He pointed out that
municipal operators are paid 12 months a year instead of the
private sector's seasonal summer or winter season.
REPRESENTATIVE LYNN recalled his military and teaching service.
He said, "I put up with a lot of guff. One of the reasons is I
had defined benefits."
MR. SEMMENS agreed. He asserted the difference is local control
issue such that a city council can decide whether to pay an
employee $20 or $25 per hour.
5:01:26 PM
REPRESENTATIVE SEATON recalled during the DB versus DC debate
that a number of municipalities who feared they would be
bankrupt with a 54 percent contribution rate for the retirement
plan. He inquired as to whether that situation would emerge if
the state went back to a DB plan.
MR. SEMMENS offered his belief that would depend on the local
government's ability to pay. He opined that at some point a
limit is reached. He predicted that as municipalities
contribute a larger amount of the available resources for
retirement benefit contributions, a limit is reached and
municipalities will opt out. He opined that this could happen
whether the plan continues to be a DC plan or if the state
returns to a DB plan. He related that result could also happen
with extremely poor investment returns or if legislators
increased benefits and the state's unfunded liability continued
to rise. He further related that the legacy DB plan will be
affected by many decisions and the investment return. He
offered his belief the greater risk is that the employer is
clearly taking on all the risk for the 11,000 employees. He
opined that a DB plan would likely cost more than a DC plan. He
said he thought that it might be 15 or 20 years before the funds
unfunded liability would need to be paid, which is what really
bothers him. He questioned how the rates could be 54 percent,
if the DB and DC plans are relatively the same costs. He asked
whether anyone could guarantee that the rates would not rise to
54 percent again.
5:04:09 PM
REPRESENTATIVE SEATON referred to page 2, to proposed Section 6.
He explained that the current law limits the cost of living
adjustments unless the plan is funded at 105 percent. He
expressed concern if the constraint is removed, that the state
would be required to make additional post retirement cost of
living adjustments. He inquired as to whether Mr. Semmens could
address the liability on the system given his experience on the
ARM board.
MR. SEMMENS answered that it would depend entirely on the
percentage of increases and the cumulative effect of the
increases over time. Clearly every time a municipality or a
school district increases teachers' salaries above the actuarial
assumption, the state's unfunded liability increases, he stated.
He remarked that in a cost share plan, everyone in the system
shares the cost equally.
5:06:09 PM
REPRESENTATIVE SEATON related that the additional post-
retirement cost of living adjustments would build each year. He
inquired as to whether that would also affect retirees currently
living out of state.
MR. SEMMENS answered that he was not certain.
5:06:59 PM
REPRESENTATIVE DOOGAN related his understanding that state's
unfunded liability is due to higher costs such as medical cost
increases, the system was not adequately funded to account for
the increased health costs, and the investments did not perform.
He inquired as to whether any other factors contributed to the
state's unfunded liability.
MR. SEMMENS agreed with the broad categories. He acknowledged
investment losses contribute to the state's unfunded liability.
Additionally, the actuarial assumptions are extensive, including
changes such as gender, life span, and the number of children.
He opined that making a change in any of the assumptions would
affect everything else. Further, he said that what actually
happens matters such as that people are living longer than
previously predicted. He emphasized the single item that has a
huge impact on the state's unfunded liability is when retirement
benefits are increased. He said, "Let's say five years from
now, by some miracle, we're 105 percent funded. You will be
getting a great deal of pressure to increase benefits because
we've got the money to pay for it. When you do that it has a
huge impact. That's another total unknown as an employer at the
City of Soldotna."
5:09:27 PM
REPRESENTATIVE DOOGAN opined that when the state changed to a
different retirement system, the state also shifted the risk.
Thus, when medical or retirement costs increase, the risk falls
on the individual rather than the state. Further, if the
investments do not perform, the risks fall on the individual, as
well. He related his understanding that making sufficient
contributions to the fund remains the state's responsibility,
although the employees in the DC plan will be solely limited to
the amount of the state's contributions. He offered his belief
if the state were to "shoulder the risks" that it would be
easier to hire and retain employees than to expect them to bear
the risk.
MR. SEMMENS answered yes. He said, "As a city manager, I would
much rather be out here recruiting with this gold-plated
retirement plan, but the question is, who is going to pay it?"
REPRESENTATIVE DOOGAN acknowledged that the state is both the
payer and the employer, which he opined results in competing
goals.
5:11:46 PM
REPRESENTATIVE SEATON remarked that at some point a job offer is
made to an employee and he/she either takes the job or does not
take the job. He related his understanding that Mr. Semmens
does not wish to place the state's unfunded liability on future
city councils to cover current employee wages and benefits, but
would rather let the employee decide if the wages and benefits
being offered are adequate.
MR. SEMMENS answered yes, that it is incumbent on the employer
to put together an employment packet. He related that $50 per
hour would not be sufficient to attract an engineer. He
concluded his whole point is that the DC plan allows for
certainty, while the DB plan guarantees uncertainty.
CHAIR OLSON announced that HB 30 would be held over for further
consideration.
5:14:12 PM
ADJOURNMENT
There being no further business before the committee, the House
Labor and Commerce Standing Committee meeting was adjourned at
5:14 p.m.