Legislature(2019 - 2020)ADAMS 519
02/27/2020 01:30 PM FINANCE
Note: the audio and video recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
Download Mp3. <- Right click and save file as
Download Video part 1. <- Right click and save file as
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HOUSE BILL NO. 79 "An Act relating to participation of certain peace officers and firefighters in the defined benefit and defined contribution plans of the Public Employees' Retirement System of Alaska; relating to eligibility of peace officers and firefighters for medical, disability, and death benefits; relating to liability of the Public Employees' Retirement System of Alaska; and providing for an effective date." 2:09:27 PM Co-Chair Foster MOVED to ADOPT proposed committee substitute for HB 79, Work Draft 31-LS0462\O (Wayne, 02/27/20) (copy on file). Co-Chair Johnston OBJECTED for discussion. 2:10:09 PM REPRESENTATIVE CHUCK KOPP, BILL SPONSOR, reviewed the bill. He indicated that HB 79 created a new tier retirement system containing unique features and offered financial sustainability. He characterized the proposed retirement plan designed for peace officers and firefighters as a hybrid between a defined benefit and the current Tier 4. He delineated that the bill contained levers or adjustments designed to keep the plan solvent that fell into 3 categories: cost saving features, plan asset enhancement adjustments, and plan benefit reductions. He explained that the cost saving features did not provide retirement medical insurance. The medical benefit was the equivalent to current Tier 4 benefits offering a Health Reimbursement Arrangement (HRA) acting as bridge to Medicare. The fixed age of retirement was 55 years with 20 years of service. Retirement prior to the age of 55 with 20 years of service was prohibited. The retirement benefits were calculated at the average of the top earning 5 consecutive years of employment rather than the highest 3. The plan did not provide a cost of living adjustment. He reviewed the plan asset enhancement adjustments. He reported that the employee contribution rate could be increased based on actuarial calculations to maintain solvency. The employer contribution was 22 percent with 12 percent going to the plan and 10 percent for the current unfunded liability. He elucidated that the planned benefit reduction could withhold the post retirement enhancement adjustment if the plans funding was less than 90 percent. He restated that the three features kept the plan financially sustainable. 2:14:21 PM KEN TRUITT, STAFF, REPRESENTATIVE CHUCK KOPP, reviewed the explanation of changes for the committee substitute. There were no substantive changes to the bill. The representative had met with the Division of Retirement and Benefits during the interim to review the bill. The changes were merely slight language changes making the bill clearer. The sponsor provided a PowerPoint presentation titled HB 79 Explanation of Changes version U To version O. He began with slide 2 portraying page 3 of the bill, lines 6 through 9, which dealt with the Alaska Retirement Management Board (ARMB) as follows: (C) an appropriate monthly employer contribution under AS 39.35.255(i); and (D) appropriate adjustments, if any, under (b)(5) and (b)(6) Mr. Truitt indicated that the change provided instructions for how the ARMB performed its evaluation of the plan, specifically tracking the plans features as proposed in the legislation. He moved to slide 3 that highlighted Section 2 of the bill [edited]: Sec. 2. AS 37.10.220(b) is amended to read: (b) The board may (5) adjust the amount of the increase in benefits payable to a peace officer or firefighter who first becomes a member after June 30, 2006, as provided under AS 39.35.475; (6) adjust employee contribution rates under AS 39.35.160(e). Mr. Truitt pointed to AS 37.10.220(b) which included more of the ARMBs duties and functions which corresponded with the boards new function outlined on lines 6 through 9. The administration was backing away from the term "Tier." He referred to Section 2, lines 23 and 24 and read the language, to a peace officer or firefighter who first becomes a member after June 30, 2006. He noted that the word tier was not included in the language in the bill rather, the language previously cited was used to refer to the new tier 5. 2:18:35 PM Mr. Truitt continued to the following change on page 10, Section 15 of the bill shown on Slide 4. He delineated that the language differed from the prior version only in the manner the provision proposed to ensure that the new tier contributed to the past service liability of the Public Employees Retirement System (PERS) and maintained the employee contribution at 22 percent. He commented that Section 15 amended AS 39.35.255(a): Sec. 15. AS 39.35.255(a) is amended to read: (a) Except as required by (i) of this section, an [EACH] employer shall contribute to the system every payroll period an amount calculated by applying a rate of 22 percent of the greater of the total of all base salaries Mr. Truitt moved to Section 18 which proposed a new subsection to AS 39.35.255: Sec. 18. AS 39.35.255 is amended by adding new subsections to read: (i) An employer that employs a peace officer or firefighter who first participates in the plan after June 30, 2006, shall contribute to the system every payroll period an amount equal to the sum of (1) a per capita amount that is calculated by applying a rate, determined by the board, of not less than 12 percent of the total monthly compensation the employer pays to all peace officers and firefighters who first became members of the plan after June 30, 2006; and (2) an amount, determined by the board, that is equal to the difference between the per capita amount determined under (1) of this subsection and the amount calculated under (a) of this section. Mr. Truitt reported that the new subsection (i) sets the employer contribution for the employee's retirement benefit at 12 percent under paragraph (1). Paragraph (2) specified that the remainder was applied to the unfunded liability of the existing PERS plan. The 12 percent contribution rate was greater than the contribution rate found in Tier 4. The language was clearer in the current version of the bill, but the concept remained the same as the original version. He discussed the final change in Section 25, page 13 of the bill depicted on Slide 5: Sec. 25. AS 39.35.475 is amended by adding new subsections to read: (g) A person who receives a benefit under AS 39.35.370(l) is eligible to receive an increase in benefits under this section. (h) If the board determines that the portion of the unfunded liability of the plan that is attributable to all peace officers and firefighters who first become members of the plan after June 30, 2006, is greater than 10 percent, the board may reduce the amount of the increase under (b) of this section that is payable to a peace officer or firefighter who first becomes a member after June 30, 2006. At any time, the board may terminate a reduction made under this subsection. Mr. Truitt reported that the administration had flagged the section that pertained to the post-retirement pension adjustment (PRPA) benefit reduction. He explained that the section had intended to allow the ARM board to reduce the plans benefit when necessary to keep the new tier financially viable. However, the administration discovered that the prior version of the bill referred to the PERS unfunded liability as a whole and the HB 79 plan benefit would always be reduced until the unfunded liability was paid. The change included the following specific language, the plan that is attributable to all peace officers and firefighters who first become as a corrective measure. Co-Chair Foster WITHDREW his OBJECTION. Representative Carpenter OBJECTED. Representative Carpenter spoke to his objection. He asked for clarification regarding the word attributable. Mr. Truitt responded that if the language in the CS was not included the post-retirement pension adjustment benefit would always be reduced and the members would never receive it. He clarified that the new language allowed for the benefit if the plan was found to be solvent and funded at 90 percent or more. 2:25:10 PM Representative Carpenter surmised that there was a certain level of risk with the proposed plan and if it was not solvent the benefit was not distributed. He asked whether he was correct. Mr. Truitt answered in the affirmative. He added that all the features in the bill were included to plan for uncertainty in the future. Representative Carpenter thought it was worrying that a peace officer would participate in a retirement plan with a risk of not receiving benefits in the future. Representative Kopp remarked that Representative Carpenters statement was oversimplified. He explained that there was a lack of certainty in a future benefit because the plans levers kept it reactive to market conditions. He recounted that the committee heard testimony in the prior session from an actuary in the state of Washington in charge of a similar plan. He reported that the plan was consistently funded at over 100 percent as well as a similar plan in Colorado. The model was proven to perform reliably in other states. The proposed plan will be tracked separately from other PERS participants to determine the funding level of the plan. The new language in the bill was necessary to target the plans members apart from the larger PERS group to allow calculation of the post- retirement pension adjustment. He reminded the committee that the adjustment was eliminated when the plan was funded under 90 percent and that maintaining a funding level of 90 percent was the gold standard for retirement plans. Representative Carpenter understood but was uncertain a peace officer or firefighter would find comfort in the plan. 2:29:13 PM Representative Josephson inquired whether only the PRPA could be suspended and not the bulk of the pension benefit. Representative Kopp responded in the affirmative. Representative Josephson surmised that the tier 5 participant would have 90 percent confidence in their retirement benefit amount. Representative Kopp answered in the affirmative. He voiced that there was a high degree of confidence in the overall plan but the lever to suspend the PRPA benefit was available to the actuary. He reminded the committee of Deven Mitchells [Executive Director, Alaska Municipal Bond Bank Authority, Department of Revenue] prior testimony regarding Tier 4 models showing that within 10 years Tier 4 was only performing slightly better than social security alone. He offered that while the HB 79 plan was very conservative, there was greater surety for peace officers and firefighters than Tier 4. Representative Josephson wondered about the difference between a Cost of Living Adjustment (COLA) and a PRPA. 2:31:29 PM TOM WESCOTT, PRESIDENT, ALASKA PROFESSIONAL FIREFIGHTERS, responded that a COLA was awarded under the legacy Defined Benefit plans (DB). He furthered that in other states the COLA was an inflation proofing adjustment, but in Alaska it was awarded for remaining in the state. The COLA was eliminated in HB 79. Representative Josephson deduced that the lack of a COLA disincentivized elderly retirees to remain in the state. Mr. Wescott agreed that the COLA benefit had been stripped out. He suggested that the expensive nature of living in Alaska should be compensated for in employees pay throughout their career. 2:33:08 PM Representative LeBon asked about the 5 year average the retirement benefit was built upon. He wondered whether the 5 year average included annual overtime pay. Representative Kopp replied in the affirmative. Representative Carpenter WITHDREW his OBJECTION. There being NO OBJECTION, it was so ordered. The proposed CS was ADOPTED. Co-Chair Johnston asked for a brief introduction to the bill. Representative Kopp indicated that the bill was in response to recruitment and retention issues related to peace officers and fire fighters. He detailed that only the older experienced employees in DB plans and younger, less experienced new recruits were retained. The middle class of managers, sergeants, lieutenants, and battalion chiefs were leaving the state for defined benefits. Many positions had been left open because of a lack of interest due to a lack of surety in benefits. The scenario resulted in proposing a very conservative hybrid plan. The idea behind HB 79 was to retain employees and address unmet needs. The medical cost savings feature was a very significant part of the plan. The feature would allow a person to purchase the best plan possible after retirement until Medicare. He acknowledged that the fixed age of retirement at 55 was an unpopular part of the plan. He shared that he retired from policing at the age of 44 and felt it was a more appropriate age considering the physical demands of the job. However, the older retirement age was a necessary feature of the plan. He listed the remaining cost saving features: high 5 year- average retirement income calculation, lack of a COLA, employee contribution rate increase option, and suspended PRPA. He noted the public safety communitys support for the bill despite its limitations when compared to the current plan. 2:37:25 PM Representative Sullivan-Leonard asked whether an actuarial fiscal analysis would be provided. Representative Kopp reported that he had been working with the administration to obtain the actuarial analysis. He thought that the information would be forthcoming shortly. Vice-Chair Ortiz asked if it was common to begin receiving retirement benefits at age 55 in other states. Representative Kopp indicated that in the states with similar plans age 55 was a common retirement age. A couple states lowered the age to 51. He added that in most states with DB plans retirement was based on 20 to 25 years of service. However, they were considered high liability plans. The delayed retirement helped make the hybrid plan affordable. Vice-Chair Ortiz asked whether adopting the plan would significantly help accomplish the goal of retention. He believed that if the plan did the job of retaining enough employees, other savings would be realized in areas like recruitment. Mr. Wescott replied in the affirmative. He accentuated that the plan would absolutely assist with recruitment and retention. He noted that one of the characteristics of a DB plan was that the employee was required to invest time, which was a deterrent to leaving the position as the years built up. He performed some rough estimates and determined that the state saved $4 million per year by retaining one percent of the public safety workforce at $120 thousand per employee in training costs. He ascertained that completely solving the problem was not required to pay for the new plan. Representative Wool asked Representative Kopp to review what was available to help the retiree fill the medical gap; the period between 55 and the eligibility age for Medicare. He asked whether there was an associated plan. Representative Kopp replied that the health reimbursement arrangement was a cash pool that built up through contributions and was available for any market based plan the employee chose as a bridge to Medicare. Some agencies had affiliations with certain plan participants. He deferred further answer to Mr. Westcott. Mr. Westcott agreed that the gap was significant and tough to deal with. He commented that it could be addressed in the future. He expounded that when medical benefits were attached to a pension plan it added an unknown cost that historically grew quickly. He reported that he had analyzed other pension plans and discovered that the medical benefits were typically problematic because they grew rapidly adding significant costs. 2:43:56 PM Representative Wool wondered what happened to an employee's contributions if they had to leave the state prior to retirement. Representative Kopp responded that once a participant met the vestment period, an individual could withdraw the benefit once they reached retirement age. Representative LeBon had heard that one problematic reason for the liability in the Teachers' Retirement System (TRS) and PERS was due to employees accepting positions in remote locations or working extra overtime during their last three years to build up the retirement benefit. He wondered whether the practices affected the liability the state was currently paying. Representative Kopp reported that most of the states public safety employees worked in municipalities and were not entitled to a geographic differential. He stated that few state troopers chose to work remotely for a period of time, preferring life on the road system. He did not believe that the practice affected the current liability issues. He elucidated that the state received poor actuarial advice, which caused the state to underpay over many years. In fact, many municipalities did not pay an employer contribution based on erroneous actuarial advice. 2:46:58 PM Representative LeBon assumed that a trooper working in a remote area receiving differential pay would likely leave the area upon retirement. He wondered why the retirement benefit was built upon the location differential and if eliminating overtime and location differential would help protect the plan. Mr. Westcott replied that the practice Representative LeBon described was known as spiking. He noted that the highest five years was identified in the Washington state plan as a best practice that prevented spiking and was more representative of a career. He indicated that a state trooper had to work 50 percent of their career in the remote location to receive a location differential. Representative LeBon was glad to hear the issue was addressed in the bill. He reported knowing state workers that moved to a remote location to get their 3 highest years. 2:49:36 PM Representative Carpenter voiced that just the fact that spiking was an established term meant the issue needed combating. He suggested inserting language that prevented spiking rather than using the 5 year average. He felt that a prohibition in statue was a better solution. Representative Kopp replied that when a person earned more, they also contributed more to the plan. He spoke about peace officers aversion to forced overtime and experiencing burnt-out. He indicated that municipal police departments forced overtime due to staff shortages and burn-out was affecting officers. He acknowledged that working extra overtime at the end of a career to enhance retirement happened, but it was not currently the problem. He identified the lack of recruitment, forced overtime, and burnout as the problem. He assured that by spreading out the retirement average over 5 years a person would burnout making spiking almost impossible. He was unsure how to nuance the bill to prohibit spiking. Co-Chair Johnston indicated the committee would set the bill aside. HB 79 was HEARD and HELD in committee for further consideration.