SB 121-TEACHERS & PUB EMPLOYEE RETIREMENT PLANS  9:05:11 AM CHAIR WIELECHOWSKI announced that the first order of business to come before the committee was SB 121. It is the sixth hearing on the bill. At the last meeting the committee adopted two amendments, the most significant of which would help ensure that the health care costs of the new defined benefits tier never exceed those of the existing contributions program. He opined that the committee has finally achieved the sponsor's goal of crafting a retirement system that will save the state and municipalities money, while providing teachers, police officers, fire fighters, and other public employees with retirement benefits they can count on. SENATOR DENNIS EGAN thanked the committee for its work on SB 121. There have been six hearings of the bill in three cities. He commented that public servants around the state would like a choice to earn a pension. Experts talk about the benefits of both defined contribution (DC) and defined benefit (DB) systems. He stressed that the bill had changed a lot and now saves the state, at the onset, $49 million in the first five years, is cost neutral long-term, shares the risk between employer and employees, and adds nothing to the unfunded liabilities from the past. SENATOR EGAN related that SB 121 lets new hires who serve Alaska and Alaska's cities, who teach kids and respond in times of need, choose between a portable account to save for retirement or a monthly pension check. Personal accounts are great for recruiting researchers, military spouses, or corporate retirees to state and local government, and pensions are great for keeping those who spend their lives teaching children, patrolling prisons, and managing fisheries. To make the new system cost neutral, employees will share the risk of health cost rising in the future. It's a risk worth taking and is fair to Alaskans. CHAIR WIELECHOWSKI noted that he had asked the Department of Administration to prepare a fiscal note, which had not been done. He estimated that the bill would save the state $49 million over the next five year. Long-term savings would be even greater. He inquired if that was Senator Egan's understanding, also. SENATOR EGAN said it was. CHAIR WIELECHOWSKI stated that the goal of the new version of the bill is to be revenue neutral or to save money. He thanked Senator Egan for his hard work. He noted that the bill would receive a rigorous review in Senate Finance. CHAIR WIELECHOWSKI asked for a motion to move SB 121, version R, as amended, from committee with individual recommendations and two attached fiscal notes: one for $769,000 in FY 13 to help the Department of Administration get the new system up and running, and one from the Department of Revenue for $593,000 in FY13 to cover additional retirement board management fees. He noted an additional fiscal note from the Department of Administration would be forthcoming. The bill has an additional referral to the Senate Finance Committee. 9:09:14 AM SENATOR MEYER said he would make the motion, but first would like to ask a question of the Department of Revenue (DOR). He inquired about the revenue neutrality of the bill and asked if DOR agreed with the sponsor's statement. MIKE BARNHILL, Deputy Commissioner, Department of Administration (DOA), testified in opposition to SB 121. He stated that the department's goal is to make the bill cost neutral to employers in terms of normal cost. He maintained that no defined benefit bill can guarantee cost neutrality for past service cost. For that reason, DOA continues to oppose SB 121. He recalled the history of the legislation, beginning with how the first version of the bill contained $124 million in unfunded liability. Next, an incorrect fiscal note was drafted. Then, health care costs increased. He said in a defined benefit plan the state ends up owning the expense because costs increase more than what was projected. He reiterated the many problems with a defined benefit plan and argued against extending the bill for decades. SENATOR MEYER thanked Mr. Barnhill for taking a position. 9:14:14 AM CHAIR WIELECHOWSKI pointed out that fiscal notes are done to try to predict the cost of legislation. He continued to say that DOR fired an actuary who had had a year to work on the fiscal note. The latest fiscal note is a best estimate based on information learned from past actuarial mistakes, which assumed that health care costs would increase by only 3 percent per year when they actually increased by 10 percent. He pointed out that the current assumption is that health care costs will increase by 10 percent for the next 30 years. He disagreed with that predicted 10 percent increase because it would mean that in 30 years the state would be paying $150,000 per employee for health care benefits. He called it a worst-case scenario. Even so, the assumptions that DOR experts arrived at are being used in SB 121. The sponsor has put in a provision that says the cost of the defined benefit program cannot exceed 95 percent of the cost of the current program. He maintained that the system would save the state hundreds of millions of dollars. He noted that he requested a new fiscal note that has not been forthcoming from the administration. He expressed frustration at not having the new fiscal note. 9:17:06 AM MR. BARNHILL disagreed with Chair Wielechowski's assumptions. CHAIR WIELECHOWSKI maintained that they were not "his" assumptions, but rather DOR's assumptions. MR. BARNHILL debated Chair Wielechowski's arguments. He maintained that the actuaries had only a week to work on the current version of the bill. He described a cascading series of "passing along the buck" if the assumptions turn out to be incorrect. He addressed the 10 percent cost growth assumption, saying it is instead 9 percent. He said the Alaska Retirement Management (ARM) Board's health care cost growth assumptions trend down over time. He spoke of the actuarial mistakes related to the DB plan and the resulting solution to have more actuarial oversight. He maintained that a week is not enough time for a full actuarial review. 9:20:32 AM CHAIR WIELECHOWSKI countered that DOR had over a year to have the legislation fully vetted by actuaries. JESSE KIEHL, staff, Senator Dennis Egan, provided information regarding SB 121 on behalf of the sponsor. He clarified that the new version of the bill guarantees that the new tier would not exceed the normal cost of the current DC system. He noted that when a retiree under the new DB tier retires, the amount they pay for their health insurance is not fixed. The percentage of the premium is fixed once a person retires. The statutory requirement that there is an actuarial analysis of the retirement system, long precedes the 2005 enactment of the DC system. All of SB 141 safeguards for a DB system remain in place in SB 121. There will be a second actuary to check the first actuary, an ARM Board review, and a requirement that employers not pay less than the normal cost. It is the prefunding costs of the DB system that won't exceed the cost of the DC system. MR. KIEHL took issue with the statement that costs are shifted to future generations of retirees. He emphasized that the health care cost adjustment in the bill is a pooling of risk and moving that risk to employees. He concluded that the risk could become burdensome for employees, but it is a risk that Alaska's public servants are willing to take for a chance to choose a DB system. CHAIR WIELECHOWSKI asked how the fiscal note process has worked and what assumptions were used. MR. KIEHL reported that the timeframes on the actuarial analyses have varied with different versions of the bill. He believed that the administration would have a fiscal note in time for the bill to be heard in the Senate Finance Committee. He appreciated the administration's cooperation in making the actuary available to the sponsor. 9:27:48 AM SENATOR MEYER concluded that allowing state employees to have a choice of retirement systems is the best policy for the state. However, he did not know if the state could afford it. He spoke of military personnel who want a defined contribution and others who would prefer a defined benefit program. He said that most states have a hybrid system. SENATOR MEYER moved to report SB 121, version R, from committee with individual recommendations and the accompanying fiscal notes. CHAIR WIELECHOWSKI added, SB 121, version R, as amended, with two attached fiscal notes and a forthcoming DOA fiscal note. He announced that without objection, CSSB 121(STA) moved from the Senate State Affairs Standing Committee.