Legislature(2023 - 2024)DAVIS 106
03/20/2023 06:00 PM House WAYS & MEANS
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| Audio | Topic |
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| Start | |
| Presentation(s): Analysis of Proposed Pension Reforms | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
March 20, 2023
6:03 p.m.
MEMBERS PRESENT
Representative Ben Carpenter, Chair
Representative Jamie Allard
Representative Kevin McCabe
Representative Cathy Tilton
Representative Andrew Gray
Representative Cliff Groh
MEMBERS ABSENT
Representative Kevin McKay
COMMITTEE CALENDAR
PRESENTATION: ANALYSIS OF PROPOSED PENSION REFORMS
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record.
WITNESS REGISTER
ZACHARY CHRISTENSEN, Managing Director
Pension Integrity Project
Reason Foundation
Los Angeles, California
POSITION STATEMENT: Co-offered a PowerPoint, titled "Costs and
Risks of Proposed Public Retirement Plan Changes" during the
Analysis of Proposed Pension Forms presentation.
RYAN FROST, Senior Policy Analyst
Reason Foundation
Los Angeles, California
POSITION STATEMENT: Co-offered a PowerPoint, titled "Costs and
Risks of Proposed Public Retirement Plan Changes" during the
Analysis of Proposed Pension Forms presentation.
ACTION NARRATIVE
6:03:29 PM
CHAIR BEN CARPENTER called the House Special Committee on Ways
and Means meeting to order at 6:03 p.m. Representatives Groh,
Allard, Gray, and Carpenter were present at the call to order.
Representative Tilton and McCabe arrived as the meeting was in
progress.
^PRESENTATION(S): Analysis of Proposed Pension Reforms
PRESENTATION(S): Analysis of Proposed Pension Reforms
6:04:22 PM
CHAIR CARPENTER announced that the only order of business would
be the Analysis of Proposed Pension Reforms presentation.
6:05:07 PM
ZACHARY CHRISTENSEN, Managing Director, Pension Integrity
Project, Reason Foundation, shared that he has been working on
pensions for seven years, and he worked with experts on
different reforms and the different ways to analyze pension
reforms.
6:05:41 PM
RYAN FROST, Senior Policy Analyst, Reason Foundation, said he
has been working at the Reason Foundation for four years, and
previously spent seven years as the Senior Research and Policy
Manager at the Police and Fire pension system in Washington
state.
6:06:10 PM
MR. CHRISTENSEN began the PowerPoint presentation, "Costs and
Risks of Proposed Public Retirement Plan Changes" [hardcopy
included in committee packet], directing attention to slide 2 to
talk about the Reason Foundation's Pension Integrity Project;
the project is a non-profit think tank that does policy analysis
on various subjects across the U.S., but mainly engaging at the
state level. He said the project specifically examines pensions
and public retirement plans and has engaged in 60 reforms. He
said the foundation understands that retirement plans are
emotionally important to many people, but that ultimately it is
a numbers issue. He said the project's approach to retirement
analysis is to de-mystify long-term costs that are involved in
retirement decisions with varied and independent actuarial
modeling. The foundation seeks to provide an answer to
legislators as to the price tags for different retirement policy
options. He said members will see similar challenges state to
state, and he will be able to bring that perspective.
6:08:34 PM
MR. CHRISTENSEN outlined the foundation's policy objectives on
retirement plans, while on slide 2. He said the plans should
have clear goals and offered that most people would agree on
what those goals should be. One is keeping retirement promises;
such plans are constitutionally bound and must be paid. Another
objective is retirement security, ensuring that the retirement
benefit is sufficient following retirement. He said the state
being able to predict what the cost of a benefit will be is
important. Affordability and attractive benefits provide able
competition in the recruiting space. He noted that good
governance is also an objective of a retirement plan.
6:10:16 PM
MR. CHRISTENSEN moved to slide 4 to give a history of Alaska's
retirement systems and what the project's perspective is on what
is going on in the state. He said the Teacher's Retirement
System (TRS) was established in the 1940s, and the Public
Employees Retirement System (PERS) was established in 1960.
Pension plans at the time were a predictable mechanism for
establishing retirement benefits and provided good returns;
however, things have changed. In the early 2000s, the state
experienced significant growth in unfunded liabilities due to
various factors, one of which was market turbulence. He pointed
out that pension plans experienced that nationwide. In 2006,
pensions were closed to new hires in the state and now the
primary retirement plan for public workers is the defined
contribution plan. He explained that from 2006 to today, there
have been frequent efforts to bring back the defined benefit
pension plan via proposed legislation that would give employees
the option to switch to the defined benefit plan. This would be
done by using the benefits the worker had earned to buy into a
defined benefit pension. He said the project conducted an
analysis of the bills and has developed actuarial 30-year
modeling on TRS and PERS, providing an estimate of what the
state would be paying in annual contributions.
6:13:56 PM
REPRESENTATIVE MCCABE spoke about the varied percentage rates of
returns, the fiscal notes, and the debt that would result. He
opined that 7.5 percent in anticipated returns seems optimistic.
MR. CHRISTENSEN answered yes. He explained that the plan last
year assumed 7.35 percent returns, and that the returns are
looked at over the long term. Every year the decline of returns
results in pension debt.
6:15:52 PM
MR. FROST relayed that the reason the dollar figures are high is
because of the annuitization mechanism, allowing the years of
service to be purchased in a defined benefit plan using a 7.3
percent discount rate as the annuitization factor. In summary,
when a higher rate is used, the members will be able to purchase
more service credit. Further, when all that is carried over -
and there are losses instead of returns - the hit is
significant. He noted that if it were just a brand-new tier,
the figures would not be as high.
REPRESENTATIVE MCCABE recalled being advised in a previous
legislative session that a one of the bills being offered was
"conservative" and would cost the state only $5 million. He
said that, now a year later, the cost would have been $33
million.
MR. FROST answered yes, and he suggested that the fiscal note
assumed that going forward, the plan would hit the assumed rate
of return. He said the foundation looks at such figures
differently.
REPRESENTATIVE MCCABE noted another previously proposed bill
would have ended up being six times higher.
MR. FROST answered yes, within year one.
6:17:47 PM
REPRESENTATIVE GRAY asked about the significant growth in
unfunded liabilities from the early 2000s. He offered his
understanding that prior to 2002, the defined benefits system
was well funded. Further, from 2003 to 2004, the actuarial firm
Mercer gave the state bad advice; they advised to invest zero
dollars. He said that the stock market crash and increasing
healthcare costs followed, which created a "percent storm" that
lead to unfunded liabilities. He reiterated his understanding
that, prior to 2002, the state was okay.
MR. FROST answered that's correct, but said he is unsure whether
the Mercer advice would have contributed to the total unfunded
liability. He pointed to Mr. Christensen's comment that every
state experienced dips in the early 2000s and said that the
plans that did survive had paired down risks. He said the
advice from Mercer was absolutely a contributing factor.
6:19:10 PM
CHAIR CARPENTER asked if the state could manage the percentage
storms and minimize the impact to the state's finances.
MR. CHRISTENSEN answered yes, perfect storms do happen, and the
cost analysis addressed such a scenario. He explained that the
analysis applies hypothetical perfect storms so that TRS and
PERS can survive another 20 years, if "things play out" like the
last 20 years did. He said it is valuable to look at scenarios
that apply more stress to the plan, and that is the way the
foundation calculates the cost evaluations.
6:20:26 PM
REPRESENTATIVE MCCABE recounted that oil was over $100 a barrel
in the early 2000s; he said there may have been a "storm" at
that time, but he is not sure whether he would consider it the
perfect storm.
6:20:50 PM
REPRESENTATIVE GROH spoke on the perfect storm in rising medical
costs, noting that healthcare costs in Alaska in the early 2000s
were so high that the annual rate of growth of healthcare
coverage costs was 14 percent. He said that a settlement was
made because the state's actuary saw the healthcare cost
increase and refused to believe it, went back to previous
assumptions, and lied. He asked if the presenters were aware of
what he had just described.
MR. FROST answered that he was not aware how "crazy" the health
costs were. He pointed out that the healthcare trust and the
pension trust are separate and managed independently, and that
for today's presentation, the foundation is focusing on the
state's pension trust. He offered his understanding that
Alaska's other post-employment benefit (OPEB) plans are the best
funded in the country.
REPRESENTATIVE GROH stressed that two big factors were changes
in the stock market, and the tremendous cost increase in
healthcare in the early 2000s.
6:23:20 PM
REPRESENTATIVE ALLARD referred to Mr. Frost's comment that the
state's OPEB plan is the best funded in the country.
MR. FROST responded, "One of the best funded." He explained
that the healthcare trust for Alaska is 100 percent funded and
projected to continue at that rate. The pension trust, however,
is $6.1 billion in debt, and because the trusts are separate,
the foundation did not view them the same. He reiterated that
the Alaska OPEB plan is better funded than the average plan,
while the pension system is in debt and has been closed.
6:24:24 PM
MR. CHRISTENSEN returned to the presentation on slide 5 and said
that the slides ahead will contain graphs with historical data
on PERS and TRS. He moved to slide 6 to show a history of PERS
funding from 2001 to 2022. He said the chart depicts the growth
in unfunded liabilities, or rather, the state's pension debt.
He informed members that this debt is accruing interest very
quickly at such a rate that when compared to an assumed rate of
return of 8 percent, the assumed rate of return is down to 7.25
percent, as of last year. He pointed out in the slide that the
2022 figures are projected figures, as the most recent reporting
is from 2021. He noted that the figures on the slide are
actuarial numbers and account for the "smoothing" that happens
over multiple years. He directed attention to the blue line,
which, after dipping down in the early 2000s, then having a
small resurgence, came back down and has been slow to recover.
The dip has left the account 70 percent funded, meaning that the
remaining 30 percent in funding that was promised to state
workers is not there. He told members that this is a matter
that needs to be dealt with quickly, or else it will be harder
to handle later, as interest is accruing. He said the
foundation believes that there is a high probability that the
current assumed rate of return will go down from 7.25 percent
and will reveal more unfunded liabilities. He said that was a
main driver for the growth on slide 6, in that assumptions were
too high at the time. He said that the price estimate that is
being reported now, by both plans, is very likely understating
the issue for the state.
6:26:56 PM
MR. FROST pointed out that both charts show that there were cash
infusions into PERS and TRS in 2014: $1 billion into PERS and
$2 billion into TRS.
6:27:18 PM
MR. CHRISTENSEN showed a graph on slide 7 depicting the history
of TRS funding, which he said is better funded at 82 percent.
He said however that the state does not have the money that it
needs to fulfill promises made to teachers. He moved to slide 8
and said that PERS liabilities are growing faster than assets;
the orange line represents the promises made to pensioners and
members, while the blue line is the asset pool that is supposed
to pay for the benefits. He said that the blue line has trouble
keeping up with the orange line, which has been consistent for
over 20 years.
6:28:10 PM
REPRESENTATIVE ALLARD referred to slide 6 and stated, "Promise
made, promise kept; we give our word, I get it." She asked what
would happen if the state's defined benefits were to continue
going at the current rate and then more was added to the
benefits, like defined benefits for teachers, as an example.
She further asked if the future slides provide data for years
past 2021.
MR. CHRISTENSEN answered yes and said the intent of this part of
the presentation is to provide historical context. He said that
that modeling will be shown later in the presentation.
6:29:03 PM
MR. CHRISTENSEN moved to slide 9 to present a graph on PERS
investment return history from 2001 to 2022. He explained that
the blue line represents the assumed rate of return, which
travels from 8 percent to the current 7.25 percent; but the gray
line represents the actual rate of return and is volatile in
rates. The orange line represents a 10-year average, and the
desired position for the orange line is to be equally above the
blue line as it is below it. He said this problem has caused
underfunding.
6:30:10 PM
MR. CHRISTENSEN moved to slide 10 and referred to Representative
McCabe's question regarding return assumptions. He explained
that each column on the chart is a bell curve, and with many
different assumptions on what market returns will be, there is a
column on the left that shows various returns ranging from 5
percent to 8 percent, with Alaska's current expectation of 7.25
percent listed as well. He noted that returns have historically
hit below 7.25 percent, and using market forecast data from JP
Morgan and BNY Mellon, the chart shows what they expect to see
for the plan in the next 10 years, with returns forecast to be
below current assumption. He said this warns that the current
price estimates that are being given are understated.
6:31:45 PM
MR. CHRISTENSEN, in response to a question from Chair Carpenter,
said the funds listed across the top of the chart were chosen
for being forecast experts.
6:32:14 PM
MR. FROST added that most actuarial firms use these same experts
when analyzing forecasts.
6:32:26 PM
MR. FROST, in response to a question from Representative McCabe,
said a 7.25 percent assumed rate of return is not recommended.
He said that would be the highest of any tier opened for a rate.
He said that a number of new tiers have opened, primarily in the
6 percent range for rate of return, but noted that this was four
to five years ago, and he would now recommend a lower number.
6:33:49 PM
MR. CHRISTENSEN presented slide 11 and said it provides
takeaways from the chart on the previous slide.
6:34:13 PM
MR. FROST moved to slide 13, which points to problems with four
bills in the current legislature: HB 22, SB 35, SB 11, and SB
88. Problem one is poor plan design, in that the proposed
pension plan does little to balance risk between
employees/employers. Problem two is minimal actuarial scrutiny.
He said that the Pension Integrity Project modeling of PERS and
TRS through a standard stress scenario shows clear costs and
added funding challenges that the proposed bills may put on the
state. Problem three is that pension cost increases are already
coming based on the state's current debt figure; the assumed
rate of return is higher than the national average and appears
to be a race for pensions to go to a rate of 6 percent. He
relayed examples from New York and California. Problem four is
that a pension swap won't solve retention issues. He said that
the foundation reviews a variety of different pension plans and
has not seen any data that would suggest that one plan design
retains employees more than another.
6:37:41 PM
MR. FROST moved to slide 14 to expand on problem one, poor plan
design. He said that when making a new plan, accurate plan
assumptions are important, but right now planned assumptions are
outliers among the other defined benefit plans. Another point
is that some bills close the defined contribution plan to all
new hires, and the foundation believes that pension plans should
benefit all employees and that shorter term employees are better
off with a defined contribution plan than a defined benefits
plan. Further, some plans cap employee contribution rates from
8 to 10 percent, while employers pay 12 percent or higher in
unfunded liabilities. He said because of the contribution cap
of 22 percent, opening a new tier would put less money into the
underfunded legacy PERS tier.
6:39:01 PM
MR. FROST, in response to a question from Chair Carpenter about
employee contribution rates that fluctuate from 8-10 percent,
confirmed that employees are given notice when the board adopts
a new rate, and typically, rates are set two years in advance.
6:40:00 PM
MR. FROST, in response to a question from Representative McCabe
as to what will happen if the state cannot pay down the legacy
PERS tier and how that might affect retirees, explained that
there is a capped contribution rate for non-state employees, at
22 percent. He said since the defined benefit rates are higher
than what is going into the current defined contributions plan,
the state has to pick up a larger portion of the underfunded
liability.
6:42:08 PM
MR. FROST moved to slide 15 to discuss problem two, minimal
actuarial scrutiny. He said that there is no publicly available
long-term actuarial forecasting or stress testing performed by
the PERS/TRS actuaries; the most seen was a six-year cost
estimate using the plans' assumed rates of return. He stated
that supporters claim that "tweaks to the new pension would
eliminate financial risk to the state," but those claims have
faced minimal actuarial scrutiny to support them. He raised the
question, "What happens to costs and unfunded liabilities if
plan experience differs from expectations?" He explained that
for new pension liabilities in the defined contribution plan
currently priced at 7.25 percent, any lowering means that the
plans are underfunded or the costs of the benefits have risen.
He said that the proposed reform rollback would commit Alaska to
unpredictable long-term costs.
6:44:16 PM
MR. FROST, in response to Representative Gray, pointed out that
there is an ongoing pension evaluation process that happens
every year. When a large pension reform bill comes before a
legislature, typically the planned actuary gives a range of cost
outcomes of the legislation in question. He said the annual
cost evaluation is not going to shed light on what costs may be
in 20 to 30 years. He clarified that the foundation is not
interested in the ongoing evaluation process, but rather to
study what the bills would do and how they could change the plan
over a long period of time. In response to further comment from
Representative Gray, he stated that the current defined benefit
bill before the legislature is better than the previous defined
benefit bill; variable rates are better than fixed statutory
rates. In talking about best practices for defined benefit
plans, instead of the employee contribution of 8 to 10 percent,
the foundation would instead recommend a 50/50 split between
employee and employer for all costs. He stressed that the first
point on slide 14 is the biggest issue, in that the assumptions
are outside what the foundation would consider accurate.
6:48:32 PM
MR. CHRISTENSEN said that the foundation is relaying
improvements to help control future runaway costs; it can show
those costs in the analysis, but the scope of the improvement
will be shown later in the presentation.
6:49:13 PM
REPRESENTATIVE MCCABE referred to Mr. Frost's comments regarding
the minimal stress testing on PERS and TRS. He suggested that
this may be what the foundation is talking about when the topic
of "actuarial evaluation" is taken up.
MR. CHRISTENSEN answered that's correct, and he explained that
the foundation would suggest a stress test that applies several
probable scenarios based on the Monte Carlo analysis, so that it
is able to show that the state could afford the plan, even in
the worst-case scenario. In response to a follow-up question,
he confirmed that that is not what Buck is doing; annual reports
are standard for actuarial evaluations, but in such reports,
stress scenarios are not applied to the plan.
MR. FROST added that the actuarial evaluation is just a one-year
look back at the plan and what it experienced; the foundation is
analyzing what could happen to the plan in 30 years.
6:51:29 PM
MR. FROST returned to the presentation on slide 17 to talk about
how pension swaps are unlikely to solve retention issues. He
stated that the claim that employers are having trouble
recruiting and retaining members because of the lack of a
defined benefit pension does not hold up to the data, as 86
percent of police stations across the country are facing a
shortage of members, and every one of those stations outside of
Alaska has a pension with some defined benefit component. He
shared that the foundation has an academic working paper that
suggests that retention rates did not change when Alaska swapped
from defined benefits to defined contribution in 2005, and he
noted that the paper specifically covers teachers.
6:53:27 PM
MR. FROST, in response to Representative Groh, offered that
teachers do not receive social security, and that all state
employees have access to the social security replacement, known
as the Supplemental Benefits System (SBS) plan. He said that
non-state employees are more mixed, with one-third having access
to either social security or the SBS. In response to a follow-
up question, he said he does not consider the defined
contribution plan to be less generous than the defined benefit
plan, and that the foundation has benefit modeling coming up in
the presentation. He described retirement [savings] as
comprising three legs of a stool: pension - whether defined
contribution or benefit; social security; and personal savings.
He said missing social security or SBS, no matter the plan,
would be detrimental to a person's retirement.
REPRESENTATIVE GROH emphasized that every experience he has had
in the state tells him that the presenters are "just flat wrong"
about what the effects are. He said there is a mountain of
evidence that the combination of no social security and the new
defined contribution system has caused problems in public
employment in the state. He suggested that the issue is that
the presenters are "flying around" from state to state and "not
having the Alaska experience."
6:56:14 PM
CHAIR CARPENTER suggested that the committee could evaluate data
from the foundation, as well as data that Representative Groh is
using to support his statement.
6:56:37 PM
REPRESENTATIVE MCCABE expressed his disagreement with
Representative Groh's comments and lauded the job of the
foundation in comparing Alaska with the Lower 48. He noted that
the Alaska Department of Public Safety (DPS) has a 5 to 6
percent vacancy rate, and he offered his understanding that the
national shortage of emergency medical personnel is over 30
percent. He read information that "many police agencies are
discovering that traditional employment models, the promise of a
steady job with good fringe benefits, and a pension after 25
years is not enough to keep today's workers from leaving for
another police department or another profession." He said the
workforce is doing this, not the defined benefits program or
pensions. He mentioned a 2019 survey by DPS that supported that
premise.
CHAIR CARPENTER requested that Representative McCabe provide
that information to staff and committee members when the meeting
was concluded.
6:59:11 PM
REPRESENTATIVE ALLARD concurred with Representative McCabe. She
remarked that anytime someone from outside of Alaska [studies]
the state, some say the presenter does not know Alaska; however,
she observed that "the numbers don't lie." She mentioned the
high salaries of Anchorage police officers. She thanked the
presenters for their perspective from the Outside, and she
posited that the foundation has nothing to gain from this.
7:00:33 PM
CHAIR CARPENTER, regarding retention, asked why the state chose
not to include social security as part of the retirement system.
MR. FROST responded that every local government had to choose
whether or not to be a part of social security. He said he does
not know if that option is still there but reiterated that
having access to social security or SBS is a very important part
of a retirement package.
CHAIR CARPENTER offered his understanding that the entities that
are not participating in social security or SBS had opted to do
that at the time the new retirement system was created. He
pondered whether opting into social security and SBS now might
be an alternative to keep on the table.
7:02:09 PM
MR. FROST, in response to a question from Representative McCabe,
said every new public safety officer he has known has been
informed of the importance of having a 457 plan.
7:03:29 PM
MR. CHRISTENSEN returned to the presentation on slide 19, and he
said that the next group of slides will include the modeling
that the foundation has done on companion bills HB 22 and SB 35.
Both bills open the pension for public safety workers, and so
the foundation sought to analyze what such an act would do and
what pension debt and costs would look like in 30 years.
7:04:10 PM
MR. CHRISTENSEN moved to slides 20 and 21 and addressed the
assertion made by proponents of defined benefits that there will
be little to no impact on debt. He said that when an analysis
on a bill is made, and there was no stress testing, it would be
easy to show that there would be little to no cost to any
pension reform being done. In a scenario where the pension plan
is opened up again for public safety workers that have worked
for 15 years, he said that would have some effect; the chart on
slide 20 shows what the unfunded liability would look like if
the worker were to achieve the 7.25 percent return every year.
He said that it may appear to not be that costly, but once
stress is applied, it would look like the chart on slide 20,
which shows PERS modeling. He said if the legislature chooses
to open up PERS just to public safety workers, the impact is
muted. He said the blue line represents the impact HB 22 and SB
35 would have on the state's pension debt, which would be higher
under the proposed bills. As part of the stress test modeling,
the chart models for two recessions in the next 30 years, and
for the years in between, the "spikes" have a return rate of 6
percent applied instead of 7.25 percent. He said that forecasts
show that 6 percent is more likely to be the returns in the
short term, and he said that the analysis point to a 5 percent
return rate is also likely. In summary, he said the stresses in
the test are based off the last 20 years, and if the last 20
years were to happen again, the chart on slide 20 shows what
that would mean to PERS.
7:06:28 PM
MR. CHRISTENSEN moved to slide 21 to discuss the long-term cost
impact of HB 22 and SB 35. He explained how to determine the
cost of a pension plan: add all annual contributions over the
next 30 years plus the cost of the unfunded liability at the end
of the 30 years. The equation is the same when applying stress
or not. He said that modeling with no stress makes the plan
appear no-cost, and such models assume a return rate of 7.25
percent every year for 30 years. He discussed a scenario where
stress is applied to the long-term cost, located at the bottom
of the chart, which shows that rolling back the state's pension
reform could cost the state $800 million in added costs though
just adding public safety workers to PERS.
7:08:16 PM
MR. CHRISTENSEN moved to slide 22 to talk about SB 11, which
seeks to open the state's pension plans, PERS and TRS, to all
state workers. He showed a chart on slide 23 showing the impact
of SB 11 on Alaska's pension debt, with stress applied. He
pointed out that anytime there is a loss, the state's pension
plans are going to suffer larger increases in unfunded
liability. With stress applied, he said that the unfunded
liabilities are still high, meaning that the state is making
little progress in fulfilling the promises made.
7:09:00 PM
MR. CHRISTENSEN moved to slide 24 to show the long-term cost
impact of SB 11. If the plan were to open to all new employees,
he said, the foundation's modeling shows that the state could be
taking on upward of $9.2 billion dollars in increased costs over
the next 30 years. He reiterated that applying stress truly
shows what the state is expected to pay if the state were to
roll back the pension reforms that were made about 16 years ago.
7:10:05 PM
MR. CHRISTENSEN moved to slides 26 and 27 and said the next
analysis is around SB 88, which would also open up the pension
plans to all state workers but contain cost-saving measures.
That said, he noted that the cost-saving would not be a lot. He
said that while the cost-saving measures may save the state $600
million in 30 years, the figure is still dwarfed by the increase
to long-term budgets. He indicated that under SB 88, the
state's responsibility would still amount to $8.6 billion.
7:11:46 PM
MR. FROST, in response to a question from Representative McCabe
about healthcare in Alaska, said there is no maneuver one can
make to "backfill" the costs. He further stated that the costs
of healthcare cannot just be moved over to fulfill unfunded
pension liabilities.
7:12:55 PM
MR. CHRISTENSEN moved to slide 28 to talk about recent
foundation modeling that compares the actual benefit that can be
earned by individuals. He explained that the modeling considers
factors like a new employee's age and assumed growth in payroll;
the models show how much benefit that employee would earn. He
informed members that defined contribution and defined benefit
plans each have their own advantages and disadvantages and said
that the foundation has worked in other states to set up such
plans. He said it is important to see who is benefiting from
the retirement plan, who the state is trying to help, and who
may be at a disadvantage.
7:14:25 PM
MR. FROST added that the benefit modeling in the slides ahead
compares the current defined contributions plan over the old
defined benefits plan, not the defined benefit packages that are
within the bills.
7:14:42 PM
MR. CHRISTENSEN moved to slide 29 to show a bar graph comparing
the annual annuity of the defined benefit plan versus the
current defined contribution plan for non-public safety PERS.
He explained that the orange bars represent defined contribution
annuity, which is when the employee can save their defined
contribution benefits and, upon retirement, buy guaranteed
monthly payments in perpetuity. He said that this is one
benefit such a plan has over a defined benefit plan, in that
there is no longevity risk. He pointed out that annuities under
a defined contribution plan accrue faster than defined benefit
annuity. He explained that a defined benefit plan is designed
to "heap on" the promised benefits to workers who stay for a
longer amount of time, and that around the 30-year mark, that is
when the annuity from a defined benefits plan surpasses annuity
benefit from a contributions plan. He said this design means
that fewer people are going to be able to take advantage of the
defined benefits plan compared to the defined contribution plan.
7:16:26 PM
MR. FROST, in response to a question from Chair Carpenter, said
that the state's workforce has changed over the years. He said
there is a study that suggests that the average new hire is
expected to work seven to eight jobs during their career,
whereas two decades ago, that number was three.
7:17:06 PM
REPRESENTATIVE ALLARD spoke about the benefit employees have in
being able to leave a job and take their defined contribution
plans with them instead of having to work a longer period of
time to qualify for their benefits under a defined benefits
plan.
7:17:58 PM
REPRESENTATIVE MCCABE noted the term "golden handcuffs" in
relation to the 30 years until the defined benefits plan breaks
even.
MR. FROST clarified that the chart on slide 29 does not include
public safety. He mentioned a "20 and out" feature. He pointed
out that for someone with a 30-year plan, who leaves after 10
years, their benefit plan does not grow over the next 20 years
until retirement but rather is frozen in place during that time.
Conversely, under the same scenario, a defined contribution plan
would continue to grow.
7:20:15 PM
MR. CHRISTENSEN, in response to Representative Groh, explained
that the 7 percent return was chosen for the graph on slide 29
because 7 percent seemed close to what is being selected to
project out, according to the current plan. He shared that the
foundation is developing a tool where a person can tweak the
return value to see the outcome. He said an effect of lowering
the return rate is that the bars representing defined
contribution annuity will also be lowered since the annuity is
not growing as quickly as compared to the current configuration
on the slide.
7:21:26 PM
MR. CHRISTENSEN moved to slide 30 to show a chart similar to the
previous slide, but with the public safety section of PERS
factored in. He explained that retirement requirements are
different for public safety workers. He pointed out that the
first 19 years of service is like the rate shown on the previous
chart, but by year 20, "20 and out" is triggered. He said the
analysis assumes that the benefits accrued in the contribution
plan would be cashed in for an early retirement; therefore, the
early retirement would lower the annuity the worker would be
able to purchase since they would be purchasing the longer
retirement. If the public safety worker were to wait until
retirement age to purchase the annuity, the bar representation
contribution plan annuity would look the same as the previous
chart. He noted that 50 percent of new public safety hires are
leaving within 10 years of service, which begs the question:
What is the purpose of a retirement plan, and what retirement
plan is the legislature seeking to establish? He said the
foundation would suggest that pension plans primarily benefit
the largest group of people, which he said would be the
reasoning behind preferring a defined contribution plan over a
defined benefits plan.
7:23:59 PM
MR. FROST added that, because public safety workers have the "20
and out" feature, the state is having to spread out the defined
contribution annuity over 35 years, so the number would be
smaller. The defined contribution plan for public safety
workers has a graduated multiplier for years of service.
7:24:31 PM
MR. CHRISTENSEN moved to slide 31 to show a similar chart to the
previous slide, but comparing defined benefits contribution to
contributions in TRS. He reminded members that the data shown
in the chart is of a worker that is just starting their career
at age 30, with a 7 percent rate of return. He reiterated that
there will be a tool available later to members that will allow
them to adjust the values in the chart as members see fit. He
explained that in the TRS contribution plan, there is a much
faster accrual of annuity, and once the retirement eligibility
is met at 20 years, if the contribution account were to be
annuitized at the moment of retirement eligibility, the annuity
growth rate decreases. He pointed out that near the end of a
teacher's career, 30 years, the contribution plan's annuity rate
would again be optimal over the defined benefit plan. He noted
that 70 percent of new teachers leave within 10 years of
service, with an average range of 8 to 18 years of the service.
7:26:35 PM
MR. CHRISTENSEN moved to slide 32 to outline the presentation's
main takeaways. He explained that the foundation's modeling
shows the different retirement plans under more realistic return
scenarios and what that could mean for the state's budget and
long-term costs. He outlined that HB 22 and SB 35 could cost
the state an additional $800 million; SB 11 could cost the state
an additional $9.2 billion with PERS and TRS combined; and SB 88
could cost the state an additional $8.6 billion. He said the
assumptions may be underestimated, considering the return
modeling, and that the situation could be worse than suggested
in those estimates. He said the foundation does not believe
that pensions are the solution to Alaska's recruitment and
retention challenges. Other states are experiencing those same
challenges, but some of the states are still operating under
pensions, so it is difficult to say whether that would be the
"magic bullet" to [address] these challenges. He addressed
defined contribution rates for public safety, and said that
there could be some improvements to ensure that all workers are
covered. He suggested that the SBS could also be expanded.
7:29:11 PM
MR. FROST, in response to a question from Representative Allard,
said the foundation has not analyzed whether teachers are a
"dying breed." To a follow-up comment, he said the foundation
could look at its considerable municipal and state data to
consider this issue.
7:30:35 PM
MR. CHRISTENSEN, in response to Chair Carpenter, said it would
be difficult to say the number of states that have moved from a
defined benefit plan to a defined contribution plan because
there are different combinations of those types of plans among
states.
7:32:44 PM
MR. FROST added that 30 states created a hybrid option between
the two plans.
7:33:16 PM
MR. CHRISTENSEN, in response to a question from Chair Carpenter,
relayed West Virginia is the only state that transitioned from a
benefits plan to contributions plan and then later switched
back.
7:34:18 PM
MR. CHRISTENSEN, in response to Representative Gray, said the
foundation could provide, at a later date, the actuarial
assumptions that were made to forecast $800 million, $9.2
billion, and $8.6 billion. He added that the foundation used
the same actuarial assumptions as "the plan" does for payroll
growth and life expectancy; it used its own adjusted assumption
for return rate. In response to further comment by
Representative Gray, he agreed that under a defined contribution
plan, the risk is to the worker, whereas with a defined benefit
plan, the state takes on more risk.
7:38:13 PM
MR. CHRISTENSEN, in response to a question from Representative
Allard as to whether state recruitment has been impacted by the
legalization of marijuana in Alaska and if the foundation has
analyzed whether this is a problem in other states, answered no.
7:40:04 PM
MR. FROST, in response to Representative McCabe, confirmed that
the foundation gathered its data directly from the State of
Alaska retirement system.
7:42:43 PM
MR. FROST, in response to questions from Representative Gray,
explained that the projection for debt being paid off is 2039 if
all the assumptions "are hit," and later, if not. He said the
figure of $6 billion is from the PERS actuarial evaluation, and
that that figure is the current debt in the pension fund.
7:44:32 PM
MR. CHRISTENSEN noted that 2021 is the latest year for publicly
reported numbers.
MR. FROST proffered that for the most up-to-date dollar figure
of plan assets, the quarterly and monthly reports are useful.
7:45:44 PM
MR. FROST returned to slide 32 and said that a takeaway is that
defined contribution rates for public safety could be improved
due to shorter careers. He said granting all employees access
to the SBS would make Alaska's pension plans some of the best in
the country, and he said he knows of no other state that offers
a social security replacement "this good," in that it will dwarf
the returns a normal social security would provide. He said the
SBS is important to factor when discussing retirement plans in
Alaska, but for those that do not have social security, having
access to SBS would be hard to beat when compared to other SBS
programs.
7:47:16 PM
MR. FROST, in response to Representative McCabe, said that
social security invests in bonds and gives the individual a
defined benefit based on the number of years. He said the
dollar you put into social security, when compared to an SBS
invested dollar, are similar, but the return rate benefit from
the SBS is better than social security.
7:48:09 PM
MR. FROST, in response to Representative Allard, explained that
if and when social security runs out of money, what would follow
would be similar to what happens when a trust fund goes under:
every dollar being put in is no longer being invested in the
market but instead is going "out the door" to government and
pension checks.
7:49:13 PM
MR. FROST returned to slide 31 and recapped that the current
defined contribution plan greatly benefits members who do not
work a full career with the same employer. He stated that while
the proposed legislation does provide some risk prevention
measures, it does not go far enough in preventing runaway costs.
He said that such costs include minimal cost sharing not aligned
with market expectations, and no improvements to amortization
policies.
7:53:28 PM
CHAIR CARPENTER responded to a comment from Representative
McCabe regarding issues to address in the future.
7:54:14 PM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
7:54 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HW&M Reason Foundation Presentation 2023.03.20.pdf |
HW&M 3/20/2023 6:00:00 PM |
Reason Foundaion Costs and Risks of Proposed Public Retirement Plan Changes |
| HW&M Supporting Document Reason Foundation 2023.03.20.pdf |
HW&M 3/20/2023 6:00:00 PM |