Legislature(2023 - 2024)SENATE FINANCE 532

01/23/2024 01:30 PM Senate FINANCE

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01:33:04 PM Start
01:34:00 PM SB88
03:25:01 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 88 RETIREMENT SYSTEMS; DEFINED BENEFIT OPT. TELECONFERENCED
Heard & Held
-- Invited Testimony <Time Limit May Be Set> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 SENATE FINANCE COMMITTEE                                                                                       
                     January 23, 2024                                                                                           
                         1:33 p.m.                                                                                              
                                                                                                                                
1:33:04 PM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Olson called the Senate Finance Committee meeting                                                                      
to order at 1:33 p.m.                                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Donny Olson, Co-Chair                                                                                                   
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Click Bishop                                                                                                            
Senator Jesse Kiehl                                                                                                             
Senator Kelly Merrick                                                                                                           
Senator David Wilson                                                                                                            
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Senator Cathy Giessel; Ken Alper, Staff, Senator Donny                                                                          
Olson; Senator Forest Dunbar.                                                                                                   
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Gene   Kalwarski,   CEO,    Cheiron;   Teresa   Ghilarducci,                                                                    
Economist, Pension Coalition.                                                                                                   
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
SB 88     RETIREMENT SYSTEMS; DEFINED BENEFIT OPT.                                                                              
                                                                                                                                
          SB 88 was HEARD and HELD in committee for further                                                                     
          consideration.                                                                                                        
                                                                                                                                
Co-Chair Olson noted that former Speaker of the House John                                                                      
Harris was in the audience as well as former Representative                                                                     
Chuck Kopp.                                                                                                                     
                                                                                                                                
SENATE BILL NO. 88                                                                                                            
                                                                                                                                
     "An Act  relating to  the Public  Employees' Retirement                                                                    
     System of  Alaska and the teachers'  retirement system;                                                                    
     providing  certain employees  an opportunity  to choose                                                                    
     between  the defined  benefit and  defined contribution                                                                    
     plans  of the  Public Employees'  Retirement System  of                                                                    
     Alaska  and   the  teachers'  retirement   system;  and                                                                    
     providing for an effective date."                                                                                          
                                                                                                                                
1:34:00 PM                                                                                                                    
                                                                                                                                
Co-Chair Olson relayed that it  was the first hearing for SB
88.  The bill  was  heard during  the  previous session,  at                                                                    
which  time  the  committee   heard  public  testimony.  The                                                                    
committee adopted a Committee  Substitute (Version O) on May                                                                    
12, 2023.                                                                                                                       
                                                                                                                                
1:34:35 PM                                                                                                                    
                                                                                                                                
KEN  ALPER,   STAFF,  SENATOR   DONNY  OLSON,   discussed  a                                                                    
presentation  entitled "Senate  Bill  88  - Defined  Benefit                                                                    
Pensions  -  Update  on  Process  to  Date,  Senate  Finance                                                                    
Committee -  January 23,  2024" (copy  on file).  He relayed                                                                    
that at the end of his  presentation there would be a motion                                                                    
to adopt a new Committee Substitute (CS).                                                                                       
                                                                                                                                
Mr. Alper  looked at slide 2,  "Current Defined Contribution                                                                    
System in Place since 2006":                                                                                                    
                                                                                                                                
     • Alaska's  public employees (PERS) and  teachers (TRS)                                                                    
     had  a  traditional  "defined benefit"  pension  system                                                                    
     from 1961 (PERS) or 1955 (TRS) until 2006                                                                                  
     •  Beginning in  2002,  Alaska  started seeing  growing                                                                    
     "past service  cost," driven in  part by  bad actuarial                                                                    
     advice and under-contribution to the system                                                                                
     • SB141  passed in  May 2005; the  new "tier"  for both                                                                    
     PERS  and  TRS  took   effect  for  all  new  employees                                                                    
     beginning on July 1, 2006                                                                                                  
     o  New plans  also changed  the retirement  health care                                                                    
     system, putting most  of the costs on  retirees and the                                                                    
     Medicare system                                                                                                            
     •  Subsequent  legislation   from  2008  established  a                                                                    
     process for the state  to make additional contributions                                                                    
     to the system to help pay down the unfunded liability                                                                      
                                                                                                                                
Mr.  Alper  noted that  the  term  "past service  cost"  was                                                                    
defined in statute and signified  the difference between the                                                                    
future  cost  to  pay  pensions  and  the  amount  of  funds                                                                    
currently  available. He  expanded  that  a synonymous  term                                                                    
sometimes used was "unfunded liability."                                                                                        
                                                                                                                                
Mr. Alper  spoke to slide  3, "Various Proposals  to Restore                                                                    
Defined Benefit in Recent Years":                                                                                               
                                                                                                                                
     •  Proposals to  return  to Defined  Benefit have  been                                                                    
     introduced in every legislature beginning in 2007                                                                          
     • There  have been  bills for  full repeal/restoration,                                                                    
     hybrid  systems, and  plans limited  to certain  worker                                                                    
    groups such as teachers or public safety employees                                                                          
     • Proposals coalesced around principles of:                                                                                
          o Restoring Defined Benefit for all employees                                                                         
          o Minimizing chance of accruing new past service                                                                      
          costs                                                                                                                 
          o Keeping the current retirement health system                                                                        
                                                                                                                                
Mr.  Alper  discussed  attempts  to go  back  to  a  defined                                                                    
benefit (DB) system.                                                                                                            
                                                                                                                                
1:38:06 PM                                                                                                                    
                                                                                                                                
Mr.  Alper   referenced  slide  4,  "Specific   Concerns  on                                                                    
Recruitment and Retention":                                                                                                     
                                                                                                                                
     • High vacancy rates/reduced customer service                                                                              
     • High turnover/high training & recruitment costs                                                                          
         Increasing  number   of   employees  taking   their                                                                    
     training,  and their  portable retirement  accounts, to                                                                    
     jobs out of state                                                                                                          
     • Growing use of bonuses and other work-arounds                                                                            
     It is  unclear to  what extent this  is related  to the                                                                    
     pension system, but many  employers and employee groups                                                                    
     believe there is a strong  correlation. There is also a                                                                    
     growing body of research indicating this.                                                                                  
                                                                                                                                
Mr. Alper  relayed that much of  the conversation pertaining                                                                    
to the  bill was related  to recruitment and  retention, and                                                                    
the  state  having  a  full   workforce.  He  mentioned  the                                                                    
presentation from the Office of  Management and Budget (OMB)                                                                    
earlier  in the  day that  had referenced  vacancy rates  in                                                                    
state  agencies. He  discussed the  effects of  high vacancy                                                                    
rates and increased  training costs. He cited  that the goal                                                                    
of the pension  system was to eliminate  the problems listed                                                                    
on the slide.  He stated that it was unclear  to what extent                                                                    
the state's  personnel problems were related  to its pension                                                                    
system  but  thought  many  believed   there  was  a  strong                                                                    
correlation and he thought there was a strong connection.                                                                       
                                                                                                                                
Mr. Alper turned to slide 5, "Major Provisions of Bill":                                                                        
                                                                                                                                
     SB88 was  introduced on  March 1, 2023  and has  11 co-                                                                    
     sponsors                                                                                                                   
     • Pension  accrual of  2% to 2.5%  per year  of service                                                                    
     comparable to pre-2006 tiers                                                                                               
     • Variable  employee contribution  rate between  8% and                                                                    
     12% that  can be  increased by the  ARM board  when the                                                                    
     fund is stressed                                                                                                           
     • Variable  employer contribution  that can  be reduced                                                                    
     when well funded                                                                                                           
     • Variable  post-retirement (inflation)  adjustments to                                                                    
     keep the plan funded at greater than 90%                                                                                   
     • No  changes to  the current retirement  health system                                                                    
     (both the "Health  Reimbursement Arrangement" (HRA) and                                                                    
     the  share  of  major  medical  premium  costs).  Major                                                                    
     savings vs. the legacy health plan                                                                                         
     • New employees enrolled in new system                                                                                     
     •  Option  for   current  active  Defined  Contribution                                                                    
     employees  to transition  to  new  system. Division  of                                                                    
     Retirement and  Benefits will calculate how  to convert                                                                    
     each  employee's  DC  account  balance  into  years  of                                                                    
     service                                                                                                                    
                                                                                                                                
Mr.  Alper  discussed post-retirement  inflation  adjustment                                                                    
and cited  that it was not  automatic and only kicked  in if                                                                    
there were adequate  funds in the system. He  cited that the                                                                    
current health  plan, which was  kept in place  with passage                                                                    
of the bill, was a great savings to the state.                                                                                  
                                                                                                                                
Mr.  Alper  noted  that  the   Division  of  Retirement  and                                                                    
Benefits (DRB) would have a  short-term surge of activity to                                                                    
calculate  the transition  of current  employees to  the new                                                                    
system.                                                                                                                         
                                                                                                                                
1:42:39 PM                                                                                                                    
                                                                                                                                
Mr. Alper considered  slide 6, "Process in  Senate Labor and                                                                    
Commerce Committee":                                                                                                            
                                                                                                                                
     • Eight hearings in March and April                                                                                        
     Major changes of Committee Substitute:                                                                                     
     •  Increased  maximum  employee contribution  rate  and                                                                    
     made  employer contribution  rates able  to flex  lower                                                                    
     when adequately funded                                                                                                     
     • TRS  "high 5"  years to  determine basis  for pension                                                                    
     can be non-consecutive                                                                                                     
     •   50%   reduction   to  post   retirement   inflation                                                                    
     adjustment (PRPA) for nonresidents                                                                                         
     •  Tighter  requirement  for ARM  Board  to  separately                                                                    
     track the accounting for the new tier                                                                                      
     •  Provision  added  to allow  employees  transitioning                                                                    
     from DC to  the new plan to buy back  any time if their                                                                    
     funds are inadequate                                                                                                       
     • Former  DC employees who  return to service  can also                                                                    
     opt into new plan                                                                                                          
                                                                                                                                
Mr. Alper  commented that Senator  Jesse Bjorkman  had heard                                                                    
the  bill  eight  times  in  the  Senate  Labor  &  Commerce                                                                    
Committee. The  bill would  allow for  purchase of  years of                                                                    
service.                                                                                                                        
                                                                                                                                
Mr.  Alper  displayed  slide  7, "Process  to  Date  in  the                                                                    
Finance Committee":                                                                                                             
                                                                                                                                
     • Five hearings  between May 2 and the  end of session,                                                                    
     including public testimony                                                                                                 
     •  Work draft  Committee Substitute  \O adopted  on May                                                                    
     12. The CS made a handful of mostly technical changes                                                                      
     • Two  additional amendments received,  incorporated in                                                                    
     new CS\T                                                                                                                   
     • We've heard from three separate actuaries:                                                                               
          • The Finance Committee hired an actuary, Gene                                                                        
          Kalwarski (Cheiron), who presented his report and                                                                     
          analysis on May 12                                                                                                    
          • The stakeholders' actuary, Flick Fornia, also                                                                       
          presented on May 12                                                                                                   
          • The Department of Administration's actuary,                                                                         
          David Kershner (Buck) presented his analysis and                                                                      
          fiscal note on May 13                                                                                                 
                                                                                                                                
1:46:34 PM                                                                                                                    
                                                                                                                                
Co-Chair Olson asked Mr. Alper to allow time for questions.                                                                     
                                                                                                                                
Senator  Wilson asked  if the  Department of  Administration                                                                    
(DOA) had created a new  note for the forthcoming CS Version                                                                    
T.                                                                                                                              
                                                                                                                                
Mr. Alper explained  that the fiscal note  the committee had                                                                    
was written  to Version D of  the bill, which had  come from                                                                    
the  Senate Labor  & Commerce  Committee. He  explained that                                                                    
there  would   be  new  fiscal  notes   generated  when  the                                                                    
committee  passed the  bill. He  explained that  the changes                                                                    
made in  committee were relatively  small in  fiscal impact.                                                                    
He thought  some of the  source data would be  different and                                                                    
would result in a different analysis.                                                                                           
                                                                                                                                
Senator Wilson  asked about  accounting being  separate from                                                                    
the health  trust and wondered  about fiscal aspects  of the                                                                    
bill being changed.                                                                                                             
                                                                                                                                
Mr. Alper  did not  know to what  extent the  assumption was                                                                    
built  into  the  fiscal notes.  He  recalled  that  Senator                                                                    
Wilson  had raised  the question  the  previous session.  He                                                                    
noted that  the health plan in  the bill and in  the current                                                                    
system  were   the  same.   He  referenced   an  inadvertent                                                                    
"diminishment issue,"  where people from one  plan would pay                                                                    
for the people from another  plan. He mentioned that the new                                                                    
CS  contained  an amendment  that  stipulated  that the  two                                                                    
plans would remain separate from each other.                                                                                    
                                                                                                                                
Senator  Wilson   commented  that   the  current   plan  was                                                                    
significantly   overfunded  and   expressed  concern   about                                                                    
financial ramifications with  a new plan. He  wanted to know                                                                    
if the department had a way  to contact the actuaries to see                                                                    
if  the  matter had  been  incorporated  into the  actuarial                                                                    
assumptions.                                                                                                                    
                                                                                                                                
Mr.   Alper  cautioned   that  he   was  not   qualified  to                                                                    
substantively answer  Senator Wilson's question.  He relayed                                                                    
that invited  testimony could  better address  the question.                                                                    
He noted  that DRB would  be in committee the  following day                                                                    
and could address the topic.                                                                                                    
                                                                                                                                
1:49:57 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman thought  there was  always confusion  when                                                                    
there were  dueling fiscal notes  and dueling  actuaries. He                                                                    
thought the legislation was  significant. He understood that                                                                    
Buck  Consulting was  doing an  updated  analysis, which  he                                                                    
thought would  clear up some  of the discussion.  He thought                                                                    
there  needed  to  be  more of  a  comparison  and  contrast                                                                    
between the  current system and  the system proposed  in the                                                                    
legislation. He thought  both systems had pros  and cons. He                                                                    
suggested that  the committee ask the  department to address                                                                    
things  with clarity  during its  presentation in  committee                                                                    
the following day.                                                                                                              
                                                                                                                                
Mr.  Alper   agreed  that   having  dueling   actuaries  was                                                                    
problematic  and  noted  that   his  upcoming  slides  would                                                                    
address the topic. He thought  upcoming testimony would also                                                                    
be addressing  the topic.  He noted that  he had  spent some                                                                    
time  during  the  interim discussing  the  matter  and  had                                                                    
learned some interesting things.                                                                                                
                                                                                                                                
Co-Chair Stedman  commented on  references to the  causes of                                                                    
high  vacancy rates.  He thought  salaries and  housing were                                                                    
big  issues. He  wanted  the committee  to  note that  North                                                                    
Dakota  had switched  to a  defined contribution  (DC) plan,                                                                    
and had  shut down its  defined benefit (DB) plan,  and were                                                                    
$2  billion in  deficit. He  thought the  vacancy issue  was                                                                    
nationwide, regardless of the benefit plan.                                                                                     
                                                                                                                                
Co-Chair Olson  agreed that there  was a  workforce shortage                                                                    
nationwide.                                                                                                                     
                                                                                                                                
Mr. Alper referenced the three actuaries listed on slide 7.                                                                     
                                                                                                                                
Mr.  Alper  highlighted  slide 8,  "Actuarial  Analysis  and                                                                    
Fiscal Notes":                                                                                                                  
                                                                                                                                
     • All analyses have  separately modeled three different                                                                    
     employee groups: PERS general,  PERS public safety, and                                                                    
     TRS                                                                                                                        
     •  Cheiron  "base  case"  was  more  or  less  fiscally                                                                    
     neutral                                                                                                                    
     • Buck  analysis showed a cumulative  $1.2 billion cost                                                                    
     to  the state  over  16 years,  with  $700 million  for                                                                    
     state employees  and $500  million in  additional state                                                                    
     contributions  towards  municipal and  school  district                                                                    
     employees                                                                                                                  
     • The  first six  years of the  Buck analysis  was used                                                                    
     for the two major fiscal notes attached to the bill                                                                        
                                                                                                                                
Mr.  Alper relayed  that the  Buck  Consulting analysis  had                                                                    
been surprising and was part  of the two fiscal notes before                                                                    
the committee.                                                                                                                  
                                                                                                                                
1:55:05 PM                                                                                                                    
                                                                                                                                
Mr. Alper looked  at slide 9, "General  Concerns with Fiscal                                                                    
Notes":                                                                                                                         
                                                                                                                                
     Cheiron's   analysis   was   an  "apples   to   apples"                                                                    
     comparison  assuming the  same employee  base for  both                                                                    
     the status quo  and if the bill  passed Buck's analysis                                                                    
     assumed   rapid   and   substantial   improvements   to                                                                    
     recruitment  and   retention  should  the   bill  pass.                                                                    
     Because of this:                                                                                                           
          ?  The bill  led  to  longer-tenured, higher  paid                                                                  
          employees   and  lower   vacancy   rates,  and   a                                                                    
          significantly higher payroll  than the status quo.                                                                    
          By  the last  year of  the analysis  (2039), there                                                                    
         was a $250 million difference in payrolls                                                                              
          ? The Buck analysis also increases the state                                                                        
          contribution    rate    when    needed,    without                                                                    
          concurrently adjusting the employee contributions                                                                     
     The bulk of  the fiscal note cost is due  to the larger                                                                    
     payrolls  and  the  bill's  "success"  in  solving  our                                                                    
     workforce problems.                                                                                                        
                                                                                                                                
     If  it  doesn't actually  work,  those  costs won't  be                                                                    
     incurred                                                                                                                   
                                                                                                                                
Mr.  Alper   discussed  the   assumptions  behind   the  two                                                                    
actuaries' analyses.                                                                                                            
                                                                                                                                
Co-Chair  Olson  asked  how  Buck  Consulting  could  be  so                                                                    
certain  about  the  improvement   of  the  recruitment  and                                                                    
retention rate.                                                                                                                 
                                                                                                                                
Mr.  Alper thought  Co-Chair Olson  posed a  great question,                                                                    
and  suggested that  any such  analysis would  carry certain                                                                    
assumptions.  He continued  that  there  were two  decisions                                                                    
before the  committee: whether it  wanted to pass  the bill,                                                                    
and  if the  committee was  ready  to fund  the outcome.  He                                                                    
summarized  that if  the bill  ended up  not working,  there                                                                    
would not  be an  additional cost.  He pondered  whether the                                                                    
legislature  was prepared  to  take the  chance  of the  new                                                                    
system working and  then fund the solution.  He relayed that                                                                    
he  had  been surprised  at  the  substantial difference  in                                                                    
payroll was in the "after" scenario.                                                                                            
                                                                                                                                
1:57:28 PM                                                                                                                    
                                                                                                                                
Senator  Bishop  asked  Mr.  Alper  to  define  "fixing  the                                                                    
problem."                                                                                                                       
                                                                                                                                
Mr. Alper  relayed that he  had been led to  understand that                                                                    
the problem  was in recruitment and  retention, high vacancy                                                                    
rates, and not being able  to get qualified state employees.                                                                    
He  mentioned   the  tremendous  inefficiency   of  training                                                                    
employees at great cost, after  which the employees left the                                                                    
positions after only a few years.                                                                                               
                                                                                                                                
Senator Wilson affirmed that what  Mr. Alper referenced were                                                                    
problems but did  not think all the issues were  tied to the                                                                    
pension    problem.    He   referenced    toxic    workplace                                                                    
environments.  He thought  the state  had not  addressed the                                                                    
subject of workplace culture and  that there was an issue of                                                                    
bad  management.  He  commented  on  the  fiscal  notes.  He                                                                    
considered past budgets and thought  the state had paid more                                                                    
due to overtime  and bonuses due to  a diminished workforce.                                                                    
He thought the  cost of full staffing  would not necessarily                                                                    
be greater.                                                                                                                     
                                                                                                                                
Mr.  Alper  referenced  questions  in  committee  when  Buck                                                                    
Consulting  was present  regarding  indirect  costs such  as                                                                    
bonuses, training  costs, recruitment costs, and  letters of                                                                    
agreement. He noted  that the indirect costs  were not baked                                                                    
into the personnel cost directly  and were not in the fiscal                                                                    
note.  He mentioned  forthcoming invited  testimony from  an                                                                    
economist included economic impacts  the state was currently                                                                    
absorbing that  would go away  if it solved  its recruitment                                                                    
and retention problem.                                                                                                          
                                                                                                                                
Senator Wilson  expressed confusion about whether  the state                                                                    
would see savings or more costs if the bill was passed.                                                                         
                                                                                                                                
Mr.  Alper  identified that  the  payroll  cost of  salaries                                                                    
would  go  up. Some  of  the  other  costs absorbed  by  the                                                                    
agencies  (recruitment,  training,   advertising)  would  go                                                                    
down. He  mentioned the impact  of the economy  from reduced                                                                    
government service  quality. He deferred further  details to                                                                    
invited testifiers later in the meeting.                                                                                        
                                                                                                                                
Senator Wilson  wanted to  understand the  overall financial                                                                    
impacts of the bill.                                                                                                            
                                                                                                                                
2:01:22 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman wondered  why the bill was  targeted as the                                                                    
answer  to  recruitment  and  retention  issues  when  other                                                                    
states with DB  plans had the same issues.  He thought there                                                                    
were other issues beyond retirement.                                                                                            
                                                                                                                                
Mr. Alper was not certain he had an answer to the question.                                                                     
                                                                                                                                
Co-Chair Stedman  reiterated that both  DB and DC  plans had                                                                    
strengths and  weaknesses. He thought  a weakness of  the DB                                                                    
plan  was that  the benefit  structure could  change in  the                                                                    
future  but  not  be adjusted.  He  mentioned  the  scenario                                                                    
happening  under the  old plan,  which resulted  in unfunded                                                                    
liability.  He mentioned  the  constitutional protection  of                                                                    
the  benefits  system and  the  concept  of diminishment  of                                                                    
benefits.                                                                                                                       
                                                                                                                                
Mr. Alper relayed that he was  not a part of the creation of                                                                    
the  bill. He  thought Co-Chair  Stedman had  brought up  an                                                                    
important  constitutional  protection  in the  state,  under                                                                    
which it  was not possible  to reduce a pension  benefit. He                                                                    
asserted that  the bill had  certain flexibilities  in order                                                                    
to  prevent the  system  from "going  underwater." He  cited                                                                    
components  such as  the employee  contribution rate,  which                                                                    
started at a  base 8 percent of salary, but  could be raised                                                                    
up to 12 percent under the terms of the bill.                                                                                   
                                                                                                                                
2:04:06 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman wanted  to clarify that the  bill would not                                                                    
stop the plan from being  underfunded. He understood that in                                                                    
the event  that underfunding  exceeded 90 percent,  then the                                                                    
contribution rates  changed to  alleviate and  eliminate the                                                                    
unfunded liability.                                                                                                             
                                                                                                                                
Mr.  Alper  believed  Co-Chair Stedman's  understanding  was                                                                    
accurate.                                                                                                                       
                                                                                                                                
Co-Chair Stedman  thought the bill did  not prevent unfunded                                                                    
liability, but  did have a  mechanism to have  employees and                                                                    
retirees contribute more to pay  off the unfunded liability.                                                                    
He thought the shared cost provision  was a good part of the                                                                    
bill. He  shared a concern  about teachers, who were  not in                                                                    
Social  Security nor  in the  state's Supplemental  Benefits                                                                    
System (SBS),  which was a replacement  for Social Security.                                                                    
He pondered that state retirees  had the opportunity for 100                                                                    
percent salary  replacement in retirement,  however teachers                                                                    
did not.  He was concerned that  Teacher's Retirement System                                                                    
(TRS)  employees   were  not   being  offered   a  solution,                                                                    
regardless of the system that was adopted.                                                                                      
                                                                                                                                
Co-Chair   Olson  thought   every   retirement  system   had                                                                    
different benefits.                                                                                                             
                                                                                                                                
Mr.  Alper thought  Co-Chair Stedman  was correct  regarding                                                                    
the  teachers opting  out  of SBS  and  Social Security.  He                                                                    
thought  when  there  was  a  stronger  pension  system  for                                                                    
teachers  20 to  30  years  previously, but  now  in the  DC                                                                    
system he  thought teachers  were feeling  very underfunded.                                                                    
He  thought  a  fundamental long-term  difference  in  value                                                                    
between  the  DB and  DC  systems  was  that DB  funds  were                                                                    
professionally managed and  tended to earn a  stable rate of                                                                    
return and  grow more  where as  a DC  plans were  left with                                                                    
individuals choosing  investments. He  agreed that  the bill                                                                    
did not resolve  the fact that a chunk  of retirement stream                                                                    
was missing from TRS, and that  the bill would not solve the                                                                    
matter.                                                                                                                         
                                                                                                                                
2:07:57 PM                                                                                                                    
                                                                                                                                
Senator  Kiehl thought  there had  been good  discussion. He                                                                    
thought Co-Chair Stedman was correct  in looking to peers in                                                                    
other   states.  He   mentioned  West   Virginia  led   with                                                                    
eliminating  its DB  plan for  teachers and  had soon  after                                                                    
returned to the same system  after a negative experience. He                                                                    
mentioned  the committee  having  received a  great deal  of                                                                    
information the  previous year on  the returns from  both DB                                                                    
and DC systems.  He asked Mr. Alper to  remind the committee                                                                    
if the DC  returns were generally as good as  the DB returns                                                                    
in projections.  He recalled an  average of 75  basis points                                                                    
lower.                                                                                                                          
                                                                                                                                
Mr.  Alper  recalled  that  DC returns  were  lower  to  the                                                                    
magnitude  of  75 to  100  basis  points. He  stressed  that                                                                    
individuals would  naturally not do as  well as professional                                                                    
investors.                                                                                                                      
                                                                                                                                
Senator  Wilson pondered  whether Mr.  Alper was  saying the                                                                    
purpose of  the bill  was to put  state employees'  money in                                                                    
the  hands   of  professional   money  managers   since  the                                                                    
employees could not manage it wisely.                                                                                           
                                                                                                                                
Mr.  Alper  appreciated  Senator  Wilson's  framing  of  the                                                                    
concept  with support  of  individual  rights. He  commented                                                                    
that it was fine to rely  on those with a different level of                                                                    
expertise.                                                                                                                      
                                                                                                                                
Senator Wilson was waiting to hear a yes or no.                                                                                 
                                                                                                                                
Co-Chair Olson did not think  Senator Wilson had asked a yes                                                                    
or no question.                                                                                                                 
                                                                                                                                
Co-Chair Stedman  relayed that  he had asked  the department                                                                    
to  look at  performance and  update  the DC  plan data.  He                                                                    
thought there  were clearly some  areas to improve  upon. He                                                                    
thought there were some funds  that outperformed the DB plan                                                                    
but agreed  that a  professional money  manager had  an edge                                                                    
over  a  novice,  which  needed   to  be  addressed  through                                                                    
education and  fund selection.  He thought  the contribution                                                                    
rate could be adjusted to compensate.                                                                                           
                                                                                                                                
2:11:51 PM                                                                                                                    
                                                                                                                                
Mr. Alper went  back to slide 9. He recounted  that the Buck                                                                    
analysis made certain assumptions  of growing state payrolls                                                                    
and increased costs and that the bill would succeed.                                                                            
                                                                                                                                
Mr. Alper showed slide 10, "Thank You":                                                                                         
                                                                                                                                
     Feel Free to Call or Email with Any Questions                                                                              
                                                                                                                                
     Ken Alper                                                                                                                  
     [email protected]                                                                                                        
     (907) 465-8163                                                                                                             
                                                                                                                                
Mr. Alper recalled  that at the end of  the previous session                                                                    
there was  a bill and a  fiscal note, and pondered  that the                                                                    
committee  now  knew  the  source  behind  the  fiscal  note                                                                    
pointed out  that there  was a CS  that the  committee could                                                                    
consider if so desired.                                                                                                         
                                                                                                                                
Co-Chair Stedman  noted that there was  a substantial number                                                                    
of  people, including  teachers and  other employees  not in                                                                    
the state system, that were  not in SBS nor Social Security.                                                                    
He thought the  matter was a local issue  and mentioned many                                                                    
firefighters  and police  in the  state. He  referenced past                                                                    
updates  to the  retirement  system and  thought  it was  an                                                                    
oversight that employees  were not required to  be in Social                                                                    
Security, SBS, or some equivalent.                                                                                              
                                                                                                                                
Mr. Alper  noted that there  was a series of  documents that                                                                    
had  been  brought  to  committee  the  previous  year  that                                                                    
provided   details    regarding   what    Co-Chair   Stedman                                                                    
referenced.  He thought  the Municipality  of Anchorage  and                                                                    
the Municipality  of Juneau were  still in  Social Security.                                                                    
He  noted  that  the  documents included  a  list  of  which                                                                    
jurisdictions were in which plan  or neither plan, including                                                                    
teachers.  There   were  a   substantial  number   of  local                                                                    
governments  that were  in neither  plan, and  the employees                                                                    
were worse  off than the employees  that were in one  or the                                                                    
other. He thought the problem  was not addressed in the bill                                                                    
and needed to be addressed in the years to come.                                                                                
                                                                                                                                
2:15:33 PM                                                                                                                    
                                                                                                                                
Senator Kiehl  MOVED to ADOPT proposed  committee substitute                                                                    
for SB 88, Work Draft 33-LS0505\T (Klein, 1/22/24).                                                                             
                                                                                                                                
Co-Chair Olson OBJECTED for discussion.                                                                                         
                                                                                                                                
Mr. Alper noted that the "T"  version of the bill built upon                                                                    
the  "O"  version  that  had   already  been  discussed.  He                                                                    
addressed two  changes to  the bill.  He mentioned  that the                                                                    
underlying bill  allowed for both the  employer and employee                                                                    
contribution  rates  to increase  when  needed  to keep  the                                                                    
funding  solvent.  The  CS provided  that  the  costs  would                                                                    
increase  in  sync  with  one  another,  thereby  preventing                                                                    
increased costs being borne by  one entity. The new CS would                                                                    
require that both the employers  and employees would equally                                                                    
share  costs of  increased  costs. Likewise,  if the  trusts                                                                    
were  adequately  funded  and  rates were  going  down,  the                                                                    
contributions  would  do  so in  sync.  The  second  change,                                                                    
referenced  earlier  by  Senator Wilson,  pertained  to  the                                                                    
health trust.  The health  plan was  not being  changed, but                                                                    
bill added language  that the health trust for  the new plan                                                                    
would be administered separately  so there was no comingling                                                                    
or diminishment in value.                                                                                                       
                                                                                                                                
Senator  Wilson referenced  the first  change pertaining  to                                                                    
employer and  employee contribution rates, and  pondered why                                                                    
a governor experiencing financial  constraints would want to                                                                    
fund  100   percent  when  employees  and   employers  could                                                                    
contribute more and lower the deficit.                                                                                          
                                                                                                                                
Mr. Alper  reminded that employers  were both the  state and                                                                    
the  local   governments.  He  mentioned  that   the  Alaska                                                                    
Retirement  Management   (ARM)  Board  was   an  independent                                                                    
fiduciary  body  that authorized  the  changes,  and if  the                                                                    
employer rate increased it would  be shared by employers. If                                                                    
the rate was not increased and  if the fund were left short,                                                                    
it  would all  fall to  the state  through the  short-funded                                                                    
mechanism.  He communicated  that  he was  going beyond  his                                                                    
area of expertise  and should end his remarks  on the topic.                                                                    
He added  that the  intent was  to not  let the  funding get                                                                    
below 90  percent, and he  thought the language of  the bill                                                                    
stipulated that if it fell  below 90 percent, the rates were                                                                    
mandated to go up to prevent it getting worse.                                                                                  
                                                                                                                                
Senator Wilson thought  what Mr. Alper described  was in the                                                                    
new  bill in  Section 69.  He considered  how often  the ARM                                                                    
Board actuaries would review the rates.                                                                                         
                                                                                                                                
Mr.  Alper assumed  that the  director of  DRB could  answer                                                                    
Senator  Wilson's   question,  and   would  be   present  in                                                                    
committee the following day.                                                                                                    
                                                                                                                                
2:20:34 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
2:22:41 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair  Olson  WITHDREW  his  OBJECTION.  There  being  NO                                                                    
further OBJECTION, it  was so ordered. The CS for  SB 88 was                                                                    
ADOPTED.                                                                                                                        
                                                                                                                                
Co-Chair  Olson  relayed  that   the  committee  would  hear                                                                    
invited  testimony from  an actuary  that  would provide  an                                                                    
analysis of the bill.                                                                                                           
                                                                                                                                
2:23:17 PM                                                                                                                    
                                                                                                                                
GENE KALWARSKI,  CEO, CHEIRON (via  teleconference), relayed                                                                    
that as  Mr. Alper had  noted, back in May  his organization                                                                    
performed an  analysis that  had come  out cost  neutral and                                                                    
had  not  performed further  analysis  since  that time.  He                                                                    
wanted  to make  some  supplemental comments  that were  not                                                                    
shared the previous May.                                                                                                        
                                                                                                                                
Mr.  Kalwarski  discussed  a presentation  entitled  "Senate                                                                    
Bill 88 - An Actuarial Perspective" (copy on file).                                                                             
                                                                                                                                
Mr. Kalwarski looked at slide  1, "Gene Kalwarski   Selected                                                                    
Work Experience                                                                                                                 
                                                                                                                                
     • Founded Cheiron, September 2002                                                                                          
     • Opened Washington DC office of Milliman Inc,                                                                             
        in 1981 and served on the company's Board of                                                                            
        Directors                                                                                                               
     • Chief Actuary policy department of the Pension                                                                           
        Benefit Guaranty Corporation                                                                                            
     • Substantial experience in testifying before Congress                                                                     
        and Legislative bodies                                                                                                  
          – Discussed legislative proposals to address the                                                                      
             multiemployer pension crisis                                                                                       
          – Educated State and House congressional staff on                                                                     
             the legislative proposals                                                                                          
                                                                                                                                
Mr. Kalwarski reviewed slide  2, "Public Sector Experience,"                                                                    
which listed  numerous states, cities, and  counties that he                                                                    
had worked with.                                                                                                                
                                                                                                                                
Mr. Kalwarski spoke to slide  3, "Specific Plan Experience,"                                                                    
which showed six  plans that that he  considered examples of                                                                    
some of the worst-funded cities  in the country at one time.                                                                    
He mentioned the city of San  Diego, which had been a client                                                                    
of  Cheiron since  2005. In  2012  the city  had closed  the                                                                    
system and created  a DC system like Alaska.  Two years ago,                                                                    
the city was  forced by the state court to  reopen the plan.                                                                    
He noted  that it took  about two  years for most  people to                                                                    
transition back to the DB plan.                                                                                                 
                                                                                                                                
Mr. Kalwarski  referenced slide 4,  "May 2023  Buck Analysis                                                                    
on SB 88                                                                                                                        
                                                                                                                                
     •  Adds $1.2 billion in pension and health costs                                                                           
          – Primary driver is change in member retention                                                                        
          – In today's dollar the impact is $660 million                                                                        
          – Over the next five years, this impact is $147                                                                       
             million                                                                                                            
     • Buck Analysis does not reflect substantial economic                                                                      
        benefits of restoring DB pensions                                                                                       
     • Actuarial Forecasts become less and less reliable in                                                                     
        the out years                                                                                                           
                                                                                                                                
Mr.  Kalwarski noted  that the  $1.2 billion  listed on  the                                                                    
slide was a cumulative number,  and the present value with a                                                                    
reasonable discount  rate would  be around $660  million. He                                                                    
stressed the need for economic analysis.                                                                                        
                                                                                                                                
Mr. Kalwarski turned  to slide 5, "Buck  Payroll and Benefit                                                                    
Cost  Projections,"  which  showed a  line  graph  depicting                                                                    
payroll  before  and  after  the passage  of  SB  88,  taken                                                                    
directly from the Buck analysis.  The top showed the payroll                                                                    
Buck projected before  SB 88, and the green  line showed the                                                                    
payroll after SB 88. The  line showed increasingly divergent                                                                    
outcomes.  The bottom  graph showed  the pension  and health                                                                    
cost  differential.  He  pointed   out  that  not  much  was                                                                    
occurring until 2031 or 2032,  when there was change because                                                                    
of the  increase in payroll  divergence. He did not  know if                                                                    
the divergence could continue forever.                                                                                          
                                                                                                                                
Mr.   Kalwarski   considered   slide  6,   "Buck   Headcount                                                                    
Projections,"  which  showed two  bar  graphs  of new  hires                                                                    
versus SB  88 plan  transfers compared  before and  after SB
88. He  noted that  the slide was  mislabeled and  should be                                                                    
titled  "Buck Payroll  Projections." The  point was  to show                                                                    
new hires  and members  in the  DC plan.  He noted  that the                                                                    
light blue  on both  graphs denoted  new hires.  He observed                                                                    
that there  were far more  new hires  before SB 88  than the                                                                    
graph below,  because of retention,  which was shown  by the                                                                    
red  bars versus  the green  bars. He  pointed out  the last                                                                    
year  (2039), showed  twice as  many people  still there  as                                                                    
compared to the top chart.                                                                                                      
                                                                                                                                
Mr.  Kalwarski   displayed  slide  7,  "Summary   of  Buck's                                                                    
Analysis                                                                                                                        
                                                                                                                                
     •  It is arithmetically accurate                                                                                           
     • Reflects the benefit cost associated with increased                                                                      
        retention of employees which is the goal of SB 88                                                                       
     • Does not reflect the substantial economic benefits                                                                       
        resulting from increased employee retention                                                                             
                                                                                                                                
2:28:12 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  referenced increased  employee  retention                                                                    
and   thought  there   was   previous  testimony   regarding                                                                    
employees that did not stay for  20 to 30 years. He wondered                                                                    
about the  actual projected number  of employees  that would                                                                    
be  retained.  He  did  not think  the  data  pertaining  to                                                                    
retention of  DC employees versus  DB employees  showed much                                                                    
difference.                                                                                                                     
                                                                                                                                
Mr. Kalwarski thought  the question should be  asked of Buck                                                                    
Consulting   the   following   day,  since   the   retention                                                                    
assumption was made by Buck.  He mentioned the difficulty in                                                                    
retaining teachers  and public  safety employees,  who could                                                                    
leave  the  state for  a  better  DB pension  elsewhere.  He                                                                    
thought the  number was significant.  He thought  all states                                                                    
faced  a  retention  problem  but  suspected  that  Alaska's                                                                    
problem was  more severe because public  safety and teachers                                                                    
wanted a DB pension.                                                                                                            
                                                                                                                                
Co-Chair Stedman  thought the question  was straightforward.                                                                    
He thought  a comparison of retention  amongst states should                                                                    
not  be  difficult to  obtain.  He  mentioned that  Alaska's                                                                    
hiring data was public and  imagined that other states' data                                                                    
was also public.                                                                                                                
                                                                                                                                
Mr.  Kalwarski  was  certain  that  the  ability  to  retain                                                                    
particularly public safety employees  and teachers in Alaska                                                                    
was more  difficult than in  any other  state that had  a DB                                                                    
system. He suggested asking Buck  Consulting for data on the                                                                    
turnover rate  differential between  having a DB  system and                                                                    
not  having a  DB  system, which  was  what produced  higher                                                                    
payrolls.                                                                                                                       
                                                                                                                                
2:32:07 PM                                                                                                                    
                                                                                                                                
Senator  Wilson  mentioned   Mr.  Kalwarski's  inclusion  of                                                                    
slides from Buck  Consulting. He asked if  Mr. Kalwarski had                                                                    
done work for Cal PERS.                                                                                                         
                                                                                                                                
Mr. Kalwarski relayed that his  agency had done work for Cal                                                                    
PERS but was not the system's actuary.                                                                                          
                                                                                                                                
Senator Wilson  relayed that  he was  in Los  Angeles County                                                                    
and  had visited  a job  fair and  spent time  in discussion                                                                    
with  recruiters at  a California  Highway Patrol  booth. He                                                                    
mentioned  that  he  had discussed  recruitment  issues  and                                                                    
retirement and  benefits, and  the recruiters  had indicated                                                                    
that  they had  the same  set of  issues. The  recruiter had                                                                    
mentioned issues  with salaries. He discussed  work with the                                                                    
National  Conference   of  State  Legislatures   (NCSL)  and                                                                    
learning  about   the  changing   workforce  and   the  "gig                                                                    
economy." He  asked if there  was a  generational difference                                                                    
that would cause higher turnover.  He suggested that the new                                                                    
generation  of  workers  coming into  the  workforce  had  a                                                                    
higher rate of turnover.                                                                                                        
                                                                                                                                
Mr. Kalwarski  agreed that there  was a much higher  rate of                                                                    
turnover  in  younger  workers, which  was  already  in  the                                                                    
assumptions.  He  reiterated  that he  had  been  discussing                                                                    
public safety  employees and teachers that  had reached mid-                                                                    
career where  there was higher  turnover without a  DB plan.                                                                    
He noted  that Buck had  assumptions about the  subject, and                                                                    
should  be   able  to  answer  the   question  directly  the                                                                    
following day.                                                                                                                  
                                                                                                                                
Senator  Wilson  asked Mr.  Kalwarski  about  the number  of                                                                    
years before someone became a longer-tiered employee.                                                                           
                                                                                                                                
Mr. Kalwarski  noted that his  sister was a teacher  and had                                                                    
recently  retired.  He thought  that  when  she had  reached                                                                    
about  age 40  she had  realized  that retirement  and a  DB                                                                    
system  was   important  to  her.  He   qualified  that  the                                                                    
information was anecdotal.                                                                                                      
                                                                                                                                
Senator  Wilson  asked  if Mr.  Kalwarski  was  saying  that                                                                    
employees from age 24 to  age 40 were entering the workforce                                                                    
before thinking about retirement.                                                                                               
                                                                                                                                
Mr. Kalwarski clarified  that he was not saying  that the DB                                                                    
system  helped  hiring  new employees,  but  rather  he  was                                                                    
discussing retention.                                                                                                           
                                                                                                                                
2:36:19 PM                                                                                                                    
                                                                                                                                
Mr. Kalwarski returned to slide  7, and pointed out that the                                                                    
benefit cost was  limited to pension and health  and did not                                                                    
reflect economic benefits. He  noted that actuaries were not                                                                    
skilled  to  quantify  the economic  benefits  of  increased                                                                    
employee retention.                                                                                                             
                                                                                                                                
Co-Chair  Stedman discussed  the concept  of the  DB and  DC                                                                    
systems, and  asked if there was  an age group or  time span                                                                    
that the DC plan would be  of more interest to employees, or                                                                    
if the DB plan would always prevail.                                                                                            
                                                                                                                                
Mr. Kalwarski relayed that he  had seen from experience that                                                                    
people in  their 20s and  early 30s  did not care  that much                                                                    
about DB  plans because they  did not view  their employment                                                                    
as a  career, although  public safety and  teacher employees                                                                    
tended to be more career minded.                                                                                                
                                                                                                                                
Co-Chair Stedman  clarified that he was  inquiring about the                                                                    
analysis.  He asked  about those  working in  a DC  plan for                                                                    
five, ten,  or twenty  years; compared  to working  the same                                                                    
amount of time  in a DB plan. He pondered  whether there was                                                                    
a difference  in the plans where  one plan was better  for a                                                                    
certain age group or length.                                                                                                    
                                                                                                                                
Mr. Kalwarski considered a person  that worked five years in                                                                    
the DB  plan. He  estimated that  at age  65 the  DC program                                                                    
would be  greater, but  as time  went on  the DB  plan would                                                                    
take over.                                                                                                                      
                                                                                                                                
Co-Chair  Stedman mentioned  testimony that  referenced work                                                                    
going past five years into the teens.                                                                                           
                                                                                                                                
Mr. Kalwarski  thought once an  employee reached  ten years,                                                                    
the DB plan would have taken over [to be better].                                                                               
                                                                                                                                
Co-Chair  Stedman pointed  out that  the earnings  potential                                                                    
from the DC plan was almost  always less than that of the DB                                                                    
plan.  He referenced  comments  made by  Mr.  Alper. H  ewHe                                                                    
referencved                                                                                                                     
                                                                                                                                
Co-Chair Stedman noted that once  an employee separated from                                                                    
the DB plan, the benefits  were frozen and did not increase.                                                                    
If  one was  in  the  DC plan,  the  money  stayed with  the                                                                    
employee and compounded for the next 30 years.                                                                                  
                                                                                                                                
Mr. Kalwarski hypothesized about a  DB plan frozen at $1,000                                                                    
per  month,  and the  value  of  the $1,000  increased  with                                                                    
interest as  the employee approached  age 65.  He summarized                                                                    
that the  present value of  $1,000 per month payable  at age                                                                    
65 was  much greater  than the present  value of  $1,000 per                                                                    
month at age 30, payable 30 years in the future.                                                                                
                                                                                                                                
Co-Chair Stedman thought the vast  majority of employees did                                                                    
not stay for 30 years.                                                                                                          
                                                                                                                                
Mr. Kalwarski  respectfully disagreed. He believed  that for                                                                    
a person  who left at 15  years, a DB pension  at retirement                                                                    
was greater than accumulated contributions from a DC plan.                                                                      
                                                                                                                                
2:41:44 PM                                                                                                                    
                                                                                                                                
Senator  Kiehl thought  it  sounded  as though,  considering                                                                    
plan  design and  employee incentives,  an employee  working                                                                    
five to eight years in a DC  plan and then left money in the                                                                    
plan and moved  elsewhere for a DB plan would  get a maximum                                                                    
individual retirement.                                                                                                          
                                                                                                                                
Mr. Kalwarski agreed because in  the first five years the DC                                                                    
plan benefit could be greater.  He qualified that it was not                                                                    
common for employees  that worked only five or  six years in                                                                    
a  DC plan  environment to  leave money  for 30  years. Many                                                                    
individuals took the money out to use for expenses.                                                                             
                                                                                                                                
Senator  Kiehl  considered  plan design  and  estimated  the                                                                    
average age  of a new  employee in Alaska  was 44 or  45. He                                                                    
mentioned the state's desire to  recruit young Alaskans into                                                                    
public service, and thought it  sounded like for the average                                                                    
individuals coming  in mid-career  would be better  off with                                                                    
the DB plan. He thought that  without a DB plan there was an                                                                    
incentive for the employees to go.                                                                                              
                                                                                                                                
2:44:13 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman   wanted  to   hear  from   Mr.  Kalwarski                                                                    
regarding  when a  DC plan  might  be preferential  to a  DB                                                                    
plan.                                                                                                                           
                                                                                                                                
Mr. Kalwarski thought there was  no one answer, and that Co-                                                                    
Chair  Stedman's  question  was   dependent  upon  the  plan                                                                    
provisions. He  asked for  an example of  a DC  plan formula                                                                    
versus a DB plan formula.                                                                                                       
                                                                                                                                
Co-Chair Stedman  thought Mr. Kalwarski's testimony  made it                                                                    
sound  as though  the DB  plan was  always preferential.  He                                                                    
recalled other  testimony in committee that  suggested there                                                                    
were  pros  and  cons  to  each  plan,  depending  upon  the                                                                    
structure  and   retention  issues.    emHe   mentioned  the                                                                    
structure  of  the economy,  and  generations  and how  they                                                                    
viewed employment.                                                                                                              
                                                                                                                                
Mr. Kalwarski noted  that his early comments  were not meant                                                                    
to indicate  that a DB  plan was  always better, and  he had                                                                    
expressed that in  the short term a DC plan  could provide a                                                                    
better benefit.                                                                                                                 
                                                                                                                                
Mr.  Kalwarski   turned  to  slide   8,  "What   The  Forest                                                                    
Includes                                                                                                                        
                                                                                                                                
     • Extra $2.7 billion in payroll                                                                                            
          – Where will the money be spent?                                                                                      
          – Where will the higher pensions be spent?                                                                            
          – How much more taxes will the state receive?                                                                         
          – Higher income => Improved Morbidity                                                                                 
          – What will be the impact of improved services?                                                                       
     • Significant cost savings in employee recruitment and                                                                     
        training                                                                                                                
     • Etc.??..                                                                                                                 
                                                                                                                                
Mr.  Kalwarski  noted that  actuaries  were  not trained  in                                                                    
economics,  and he  had urged  all  parties to  seek out  an                                                                    
economist  that could  speak  to the  issues  listed on  the                                                                    
slide.                                                                                                                          
                                                                                                                                
Senator Bishop commented that the  third biggest cost driver                                                                    
in  the budget  was health  care. He  mentioned living  with                                                                    
dignity in one's retirement years.  He commented on the cost                                                                    
of staying  in a retirement  home. He mentioned  his father,                                                                    
whose DB plan was paying his way in a retirement home.                                                                          
                                                                                                                                
Co-Chair  Olson  relayed  that the  next  presenter  was  an                                                                    
economist on  contract with the Pension  Coalition. He noted                                                                    
that she had  provided the committee a report  on the fiscal                                                                    
and economic impact of SB 88 (copy on file).                                                                                    
                                                                                                                                
2:48:27 PM                                                                                                                    
                                                                                                                                
TERESA  GHILARDUCCI,   ECONOMIST,  PENSION   COALITION  (via                                                                    
teleconference), introduced herself  and explained that many                                                                    
of the  questions that Co-Chair  Stedman had asked  had been                                                                    
asked  and  answered  by economists  over  the  previous  20                                                                    
years,  especially   from  data   from  the   University  of                                                                    
Michigan.  The university  had utilized  a survey  on health                                                                    
and retirement  that had looked  at how people fared  in old                                                                    
age  and stayed  connected  to their  jobs throughout  their                                                                    
lives.  She mentioned  references in  her report  to factors                                                                    
such as  the generational turnover rate,  and experience and                                                                    
productivity profiles of police  and teachers. She discussed                                                                    
pension  design that  was appropriate  to high  peak careers                                                                    
versus shorter  careers. She thought she  had anticipated an                                                                    
answered  many of  Co-Chair Stedman's  questions. She  noted                                                                    
that  her testimony  would  hone  in on  about  50 years  of                                                                    
research  by labor  economists that  want to  help employers                                                                    
align compensation to the needs to the employee.                                                                                
                                                                                                                                
2:50:48 PM                                                                                                                    
                                                                                                                                
Ms. Ghilarducci referenced her biography  (copy on file) and                                                                    
noted that  she had been  teaching for about 40  years, with                                                                    
25  years  at  the  University  of  Notre  Dame  as  a  full                                                                    
professor.  She  was an  economist  and  had advised  former                                                                    
California   Governor  Arnold   Schwarzenegger  on   pension                                                                    
design, and had  worked for eight years as a  trustee of the                                                                    
Indiana Public  Employees System  to oversee  employees move                                                                    
from  a DC  plan to  a DB  plan. She  mentioned similarities                                                                    
with Alaska including  high turnover and fear  of poverty in                                                                    
old age.  She thought DC plans  could work on paper,  but in                                                                    
real  life  people tended  to  draw  from the  plans  before                                                                    
retirement and studies showed that  those with only DC plans                                                                    
had  a high  risk of  poverty in  old age.  Those with  a DB                                                                    
plan, even in  the plan for 10 to 15  years, had almost zero                                                                    
risk of poverty in old age.                                                                                                     
                                                                                                                                
Ms. Ghilarducci  shared that she  had been appointed  by the                                                                    
President  of  the United  States  for  12 years  a  pension                                                                    
advisory board  for design. She  had recently  consulted for                                                                    
the government of Puerto Rico  and had testified in Congress                                                                    
over 15  times as well  as before the state  legislatures in                                                                    
multiple states.  She noted that Nebraska  was another state                                                                    
that had  gone to a  DC plan,  and because of  problems with                                                                    
turnover in occupations where  experience mattered had moved                                                                    
over to a DB plan.                                                                                                              
                                                                                                                                
Ms.  Ghilarducci emphasized  that  employee recruitment  and                                                                    
retention  would  cost more  money.  She  pondered that  the                                                                    
state  could raise  pay quite  a bit  to overcome  incentive                                                                    
that DC plans  gave before moving on. She  considered that a                                                                    
less costly way  of keeping people was to  change the design                                                                    
and adopt a  DB plan, which she thought was  the best design                                                                    
for employers who employees  had productivity that increased                                                                    
over  time and  were essential  for training  and onboarding                                                                    
new employees. She  noted that a state that  cared about the                                                                    
efficiency of  the pension  dollar would  choose a  DB plan,                                                                    
which earned on  average .7 percent more than a  DC plan. If                                                                    
one  added  risk and  fees,  a  DB  plan earned  even  more;                                                                    
primarily because  of scale. A  DB plan had scale  and could                                                                    
have much more  of a diverse portfolio, which  could offer a                                                                    
much higher return for lower risk  than a DC plan. She added                                                                    
that  DC plans  had almost  all liquid  assets. She  thought                                                                    
that  matching   employees'  contributions   through  liquid                                                                    
assets (when  they were  supposed to save  long term)  was a                                                                    
mismatch  of the  appropriate  assets to  the  goals of  the                                                                    
savings.                                                                                                                        
                                                                                                                                
Ms. Ghilarducci  relayed that her much  longer report showed                                                                    
that  there  were  four sources  of  economic  savings  from                                                                    
switching from  a DC plan to  a DB plan. She  would speak to                                                                    
two of the sources, which were  the most direct and added up                                                                    
to  about $76  million in  savings  per year  to the  Alaska                                                                    
treasury.  She cited  that the  biggest direct  cost savings                                                                    
from reducing the hiring, training,  and separation costs of                                                                    
employees.  She  noted that  there  were  many studies  that                                                                    
showed a  DB plan  design was  very much  causal of  a lower                                                                    
turnover rate, especially for those in their seventh year.                                                                      
                                                                                                                                
2:55:18 PM                                                                                                                    
                                                                                                                                
Ms.  Ghilarducci continued  that employee's  tenure and  age                                                                    
made people highly  sensitive to what their  future was. She                                                                    
added  that   Buck  consultants  had  access   to  the  same                                                                    
literature  and research  and agreed.  The second  source of                                                                    
direct cost savings  was a higher rate of  return that would                                                                    
yeild  about about  $14  million per  year  in savings.  She                                                                    
noted that  the indirect costs that  Senator Bishop referred                                                                    
to was that a  DB plan kept people in the  job and if people                                                                    
stayed  in jobs  they  were  more likely  to  retire in  the                                                                    
state. She cited  that a city or state  employee that stayed                                                                    
in  the  state  was  quite valuable  for  the  stability  of                                                                    
neighborhoods and for the small  businesses. A DB plan had a                                                                    
larger economic  multiplier because the spendings  stayed in                                                                    
the state,  rather than a  DC plan retiree that  might leave                                                                    
the state.                                                                                                                      
                                                                                                                                
Ms.  Ghilarducci continued  that a  DB plan  kept people  in                                                                    
jobs  longer, particularly  teachers,  and  those in  public                                                                    
service,  public health,  and public  safety. She  discussed                                                                    
the quality of schools and  public safety being an important                                                                    
aspect of private investment. An  economic benefit of the DB                                                                    
plan  was to  attract  private investment,  but  it was  not                                                                    
quantifiable and not in her  report. She continued that were                                                                    
three ways  employee turnover became important  to decrease.                                                                    
The  high turnover  lowered  productivity,  which meant  the                                                                    
cost  of the  employee was  higher  than it  should be.  She                                                                    
discussed  productivity   levels.  She   provided  examples.                                                                    
Higher  turnover   led  to   lower  morale   of  longer-term                                                                    
employees,  and having  to train  people  frequently led  to                                                                    
lower morale.                                                                                                                   
                                                                                                                                
2:59:05 PM                                                                                                                    
                                                                                                                                
Ms.  Ghilarducci  stated  that   the  third  reason  it  was                                                                    
important to  lower turnover was  that it  distracted highly                                                                    
productive employees  that were  called on to  do on-the-job                                                                    
training.  She referenced  an earlier  question by  Co-Chair                                                                    
Stedman or  Senator Wilson  regarding a  generational change                                                                    
in  attitudes  towards   retirement  security,  and  whether                                                                    
younger   people  were   less  concerned   about  employment                                                                    
security  and pensions.  She noted  that studies  showed the                                                                    
opposite, and  that the  current generation  was one  of the                                                                    
most financially  literate. She commented that  Generation X                                                                    
and  Generation Y  were more  financially literate,  perhaps                                                                    
because  because  they  have  had  to  take  on  substantial                                                                    
student debt.  She shared  she had  talked to  a 15-year-old                                                                    
the previous  day who was  interested to know how  to manage                                                                    
debt  later  on.  She  shared   that  there  was  a  lot  of                                                                    
literature  that  showed  that  attitudes  towards  economic                                                                    
security  led to  more attraction  towards better  benefits,                                                                    
including  a DB  plan. She  added  that the  DC plan,  which                                                                    
included  the ability  to withdraw  funds after  five years,                                                                    
signaled  to  an  applicant   that  perhaps  the  employment                                                                    
structure  was not  as hospitable  to someone  who wanted  a                                                                    
long-term career.  Conversely, a  DB plan signaled  that the                                                                    
employer  had  a  high commitment  to  have  an  experienced                                                                    
workforce.                                                                                                                      
                                                                                                                                
Ms.  Ghilarducci began  to conclude  her  remarks and  noted                                                                    
that economic research found that a  DB plan was best in the                                                                    
situation that  an employer  needed trusted  and experienced                                                                    
workers.  It was  especially true  when the  employee's work                                                                    
depended upon trust because it  was not easily monitored and                                                                    
quality  was  not measured  hour  by  hour  or day  by  day.                                                                    
Aligning  compensation and  benefits  with productivity  was                                                                    
consistent with  the principles of strategic  human resource                                                                    
management.  She  emphasized  that if  one's  organizational                                                                    
goal was  to have  an experienced and  productive workforce,                                                                    
then it  would need a  compensation that indicated  as much.                                                                    
She  emphasized  that  a  DB   plan  dollar  was  much  more                                                                    
efficiently invested than a DC dollar.                                                                                          
                                                                                                                                
3:02:29 PM                                                                                                                    
                                                                                                                                
Senator Wilson  clarified his earlier question.  He asked if                                                                    
the younger  generation was  more astute, if  it was  not as                                                                    
easily tricked by golden handcuffs.                                                                                             
                                                                                                                                
Ms.  Ghilarducci thought  that the  younger generation  knew                                                                    
that DB  plans were more secure,  and many of them  had said                                                                    
they do  not want to  repeat the mistakes of  their parents.                                                                    
The information came from studies  of the Pew Commission and                                                                    
was especially true  of those that wanted to  go into public                                                                    
safety, public health, and teaching.  She qualified that the                                                                    
information was empirical and not ideological.                                                                                  
                                                                                                                                
Senator Wilson  looked at  page 5 of  the study  provided by                                                                    
Ms. Ghilarducci.  He discussed  recruitment of  teachers and                                                                    
considered  university slots  for job  openings. He  thought                                                                    
the  same  could  be  said for  attorneys  and  doctors.  He                                                                    
considered how teachers  in New Jersey and New  York had the                                                                    
highest  paid teachers  in the  nation and  also had  social                                                                    
security. He  wondered if  Alaska was able  to pay  more and                                                                    
secure Social Security  for teachers if it would  be able to                                                                    
retain them as employees.                                                                                                       
                                                                                                                                
Ms.  Ghilarducci considered  which part  of the  pay package                                                                    
would connect a  worker to the position, and  thought it was                                                                    
very difficult to decompose and  quantify. She was convinced                                                                    
that  the   DB  plan   design  and  pay   were  particularly                                                                    
interesting for  workers who were  trying to  decide whether                                                                    
to  move  from  a  profession or  employer.  She  referenced                                                                    
Senator Wilson's  mention of  golden handcuffs,  but thought                                                                    
it  was often  welcome for  people  that wanted  to stay  in                                                                    
their  career. She  thought all  of the  elements helped  to                                                                    
retain  employees, but  considered that  the DB  plan design                                                                    
was of particular strength in keeping people in their jobs.                                                                     
                                                                                                                                
3:05:58 PM                                                                                                                    
                                                                                                                                
Co-Chair Olson  asked if Ms. Ghilarducci  had any additional                                                                    
remarks.                                                                                                                        
                                                                                                                                
Ms. Ghilarducci  explained that after  40 years of  401k DC-                                                                    
like plans, there was a lot  of data about what such designs                                                                    
did. She noted that a lot  of people tended to withdraw from                                                                    
the plans,  almost entirely  before retirement,  and thought                                                                    
it  was one  of  the  biggest failures  of  the American  DC                                                                    
system.  She thought  the  plans looked  good  on paper  but                                                                    
people tended to  access the cash. She made note  of a trend                                                                    
in the U.S.  for DC providers to try to  make them more like                                                                    
DB plans.  Unfortunately, the  providers were  going towards                                                                    
more  of a  commercial annuity,  which were  high-priced and                                                                    
did  not provide  the services  that  a DB  plan could.  She                                                                    
mentioned the  struggle in advising Congress  to determine a                                                                    
way to  figure out a way  of lifetime benefits to  people to                                                                    
supplement Social  Security. Advisors had found  that the DB                                                                    
plan prevented poverty in a way that the DC plan did not.                                                                       
                                                                                                                                
Co-Chair Stedman asked about the  private workplace and what                                                                    
corporations were doing with retirements.                                                                                       
                                                                                                                                
Ms.  Ghilarducci answered  that several  months earlier  IBM                                                                    
had declared its  30-year experiment with a DC  plan did not                                                                    
work in terms of keeping  its engineers and it was switching                                                                    
over  to a  DB plan.  She  shared that  the DC  plan at  the                                                                    
university  she worked  at was  being  changed. She  thought                                                                    
there seemed  to be real  concern that too many  people were                                                                    
coming into  retirement without enough  income to  last. She                                                                    
continued that  even if coming  to retirement  with $500,000                                                                    
the  ability  to  handle the  money  caused  a  considerable                                                                    
amount  of anxiety  and mental  depression when  compared to                                                                    
people  with a  DB  plan.  The head  of  benefits for  Delta                                                                    
Airlines  had   told  her  that   they  had  a   10  percent                                                                    
contribution  to the  DC plan.  The  airline knew  employees                                                                    
stayed about 10 years and  spent the money after leaving the                                                                    
airline. He wished they had not left their DB plan behind.                                                                      
                                                                                                                                
Co-Chair  Stedman observed  that Ms.  Ghilarducci felt  that                                                                    
the employer  was responsible for the  employees' well-being                                                                    
until the employees' death.                                                                                                     
                                                                                                                                
Ms. Ghilarducci clarified it was  not her who felt that way.                                                                    
She elaborated  that employers wanted to  align compensation                                                                    
to the  needs of the  employer but were concerned  that when                                                                    
they spent  so much money  it did not help  their employees.                                                                    
She mentioned  the concern  about whether  or not  the money                                                                    
was being used well, and  constant concern about health care                                                                    
spending.                                                                                                                       
                                                                                                                                
3:11:58 PM                                                                                                                    
                                                                                                                                
Senator   Wilson  asked   whether  it   was  an   employer's                                                                    
responsibility  how former  employees  used  their money  in                                                                    
retirement.  He asked  if  it was  the  employer's role  and                                                                    
responsibility.                                                                                                                 
                                                                                                                                
Ms. Ghilarducci did not think  private companies took on the                                                                    
responsibility,  unless  there  was a  union  or  collective                                                                    
bargaining  engagement. She  thought a  public employer  was                                                                    
really concerned  about whether  its retirees stayed  in the                                                                    
state.  She  continued  that   public  employers  were  also                                                                    
concerned because  they did  not want  to pay  for emergency                                                                    
housing or  an increase  in Medicaid funding.  She explained                                                                    
that  if public  middle  class employees  could stay  middle                                                                    
class retirees, there would be fiscal savings.                                                                                  
                                                                                                                                
Senator Wilson  relayed that the committee  had been hearing                                                                    
from many  people about the  life events that arose  such as                                                                    
divorce, major  medical events, and bankruptcy.  He wondered                                                                    
how  individuals could  address problems  in they  could not                                                                    
use DC  funds. He asked if  it would switch one  problem for                                                                    
another later on.                                                                                                               
                                                                                                                                
Ms. Ghilarducci  replied that she  had spent two years  on a                                                                    
bipartisan   policy  center   commission   that  looked   at                                                                    
emergency  savings   and  retirement.  The   commission  had                                                                    
concluded after two  years that employees needed  to have an                                                                    
untouchable retirement fund (to  earn compound interest) and                                                                    
a credit  union emergency  savings fund. She  expressed that                                                                    
combining  the two  items would  always short  the long-term                                                                    
needs. She pondered  that [in a DC plan]  the employer spent                                                                    
substantial money on  retirement that would only  be used to                                                                    
fund emergency  needs. She mentioned research  on workers in                                                                    
Chicago and Los Angeles,  which showed that women especially                                                                    
viewed emergencies according to  the needs of their children                                                                    
and drew  from their liquid  source of retirement  for their                                                                    
families.  She noted  that 401k  accounts were  particularly                                                                    
susceptible  for leakage  for  woman,  which was  especially                                                                    
true for divorce and family medical needs.                                                                                      
                                                                                                                                
3:15:38 PM                                                                                                                    
                                                                                                                                
Senator  Wilson   thought  it  appeared  the   state  should                                                                    
consider a credit union emergency fund for employees.                                                                           
                                                                                                                                
Co-Chair Stedman  remarked that  the State  of Alaska  had a                                                                    
supplemental   employee   benefits   system   (SBS)   as   a                                                                    
replacement of  social security,  which was  in effect  a DC                                                                    
plan with 16.13 percent of  every paycheck from the employer                                                                    
and employee to compound until  retirement. He had not heard                                                                    
any  complaints about  the  SBS system.  He  noted that  the                                                                    
funds travelled with the employee  after leaving service and                                                                    
stayed  with  the  family upon  the  employee's  demise.  He                                                                    
thought the fact ran contrary  to the current discussion. He                                                                    
had spoken with  numerous employees over the  years and they                                                                    
were  happy  with  the  SBS   system.  He  added  they  were                                                                    
virtually the same thing.                                                                                                       
                                                                                                                                
Ms.  Ghilarducci  recalled being  asked  the  question by  a                                                                    
congressman about  20 years earlier.  She knew  people loved                                                                    
their 401k  plans, in which  they could see  accumulation of                                                                    
wealth. She  continued that people that  were most satisfied                                                                    
were those  with a DB plan  and a supplementary plan  to use                                                                    
for emergencies.  She thought SBS  was not a  supplement but                                                                    
rather they were complimentary.                                                                                                 
                                                                                                                                
Co-Chair Olson noted that SBS  was taxed when one started to                                                                    
withdraw money.                                                                                                                 
                                                                                                                                
3:18:07 PM                                                                                                                    
                                                                                                                                
Senator  Kiehl  agreed  that  it  was  not  necessarily  the                                                                    
employers' job  to get a  retired employee to the  grave. He                                                                    
thought  the notion  of getting  the most  benefits for  the                                                                    
dollar and for  employee retention was an  important part of                                                                    
plan design. He  mentioned the 401a plan,  a Social Security                                                                    
replacement and supplemental benefit,  was designed when the                                                                    
state  had  a DB  pension  system.  He referenced  the  term                                                                    
"leakage"  and how  to get  the dollars  into the  state. He                                                                    
pondered how  plan design  could do  better. He  asked about                                                                    
the different  retiree inflation  adjustments for  those who                                                                    
were  long-term residents  of the  state versus  individuals                                                                    
who  were  snow  birds." He  discussed the  notion of  going                                                                    
back to  Social Security and  the guaranteed leakage  of the                                                                    
windfall  elimination  and  government pension  offset  that                                                                    
radically eroded the benefits for people with PERS or TRS.                                                                      
                                                                                                                                
Ms. Ghilarducci  responded that the  DB plan  helped prevent                                                                    
leakage in  a number of  ways. She emphasized one  could not                                                                    
withdraw  DB benefits  before  retirement,  and most  people                                                                    
took money out  of 401k plans. She  mentioned a contribution                                                                    
holiday,  which could  really put  a dent  in the  long-term                                                                    
balance. There was leakage in  terms of short-term employees                                                                    
taking  the  Alaska  contribution   and  leaving  the  state                                                                    
permanently. Other  leakage could  be employees  leaving and                                                                    
taking the  pension elsewhere. She thought  the principle of                                                                    
the Permanent Fund  Dividend (to be a resident  and keep the                                                                    
dollars in the state) had been  violated and did not seem to                                                                    
be consistent.                                                                                                                  
                                                                                                                                
3:21:48 PM                                                                                                                    
                                                                                                                                
Senator  Kiehl asked  about the  guaranteed  erosion of  the                                                                    
Social Security benefit.                                                                                                        
                                                                                                                                
Ms. Ghilarducci  noted that she  tracked bills  that altered                                                                    
the Social Security System and  answered that every year for                                                                    
the past 15  years there had been bills in  Congress but had                                                                    
been little accomplished. She thought  the system really had                                                                    
to change and was hurting teachers across the country.                                                                          
                                                                                                                                
Co-Chair Olson thanked the presenters.                                                                                          
                                                                                                                                
Mr. Alper provided closing comments  on the bill. He thought                                                                    
the  committee was  considering  huge issues  and cited  the                                                                    
role  of the  state in  regulating the  relationship between                                                                    
employers and employees,  and the well being  of workers. He                                                                    
pondered  the   issue  how   to  build   a  high-functioning                                                                    
workforce in  the state.  He thought  there were  strong and                                                                    
well-informed  opinions around  the  table.  He thought  the                                                                    
bulk of  workers appeared to want  to go to a  DB system. He                                                                    
thought the  legitimate fear  was the  cost. He  thought the                                                                    
bill was  built to  minimize the risk  of future  costs that                                                                    
were the downfall  of the prior system.  He pondered whether                                                                    
the state could  find a mechanism to meet the  wishes of its                                                                    
public employees.                                                                                                               
                                                                                                                                
SB  88  was   HEARD  and  HELD  in   committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
Co-Chair Olson reviewed the schedule for the following day.                                                                     
                                                                                                                                
ADJOURNMENT                                                                                                                   
3:25:01 PM                                                                                                                    
                                                                                                                                
The meeting was adjourned at 3:24 p.m.                                                                                          

Document Name Date/Time Subjects
SB 88 Teresa Ghilarducci biography.pdf SFIN 1/23/2024 1:30:00 PM
SB 88
SB 88 Pensions committee update presentation 1-23-24 final.pdf SFIN 1/23/2024 1:30:00 PM
SB 88
SB 88 Summary of Changes O to T 1-24-24 .pdf SFIN 1/23/2024 1:30:00 PM
SB 88
SB 88 work draft version T.pdf SFIN 1/23/2024 1:30:00 PM
SB 88
SB 88 DOA DRB 011924.pdf SFIN 1/23/2024 1:30:00 PM
SB 88
SB 88 Ghilarducci Report on SB88 final.pdf SFIN 1/23/2024 1:30:00 PM
SB 88
SB 88 012324 Kalwarski presentation.pdf SFIN 1/23/2024 1:30:00 PM
SB 88
SB 88article.pdf SFIN 1/23/2024 1:30:00 PM
SB 88