Legislature(2017 - 2018)BARNES 124
02/16/2018 03:15 PM LABOR & COMMERCE
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HB 83-TEACHERS & PUB EMPLOYEE RETIREMENT PLANS 4:42:08 PM CHAIR KITO announced that the final order of business would be HOUSE BILL NO. 83, "An Act relating to new defined benefit tiers in the public employees' retirement system 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 and the teachers' retirement system; and providing for an effective date." 4:42:48 PM EDRIC CARRILLO, Staff, Representative Sam Kito, Alaska State Legislature, presented the bill. He stated that HB 83 would allow public employees to choose one of two state retirement systems, the defined contribution (DC) or defined benefit (DB) pension. Alaska's teachers and public employees do not earn social security benefits, and many lose their social security benefits earned under previous employment. This bill would also allow newly-hired public servants in Alaska to choose the benefit plan that best serves them, he said. For most, the DB pension makes sense; however, other choose the DC plan that allows flexibility, portability, and control. This bill would keep smart reforms to retirement benefits made several years ago and makes Alaska's pensions stronger than ever, he said. This bill would create a more stable, predictable, and DB pension tier. Since the DB pensions include sharing the risk of rising health costs, the employees would never cost employers more than the DC system, saving money for schools, cities, and the state. He thanked members for their support. 4:44:07 PM DIANE OAKLEY, Executive Director, National Institute on Retirement Security the (NIRS), stated the NIRS is a not for profit, non-partisan, research organization based in Washington D.C. She directed attention to a Power Point presentation in members' packets. She turned to slide 2, titled "DB Pension are Cost Efficient: Still a Better Bang for the Buck," which read as follows [original punctuation provided]: Cost Comparison NIRS looked at the cost to replace 53% of final income under three retirement plan structures. The DB pension cost 48% less than using Individual Accounts in a DC Savings Plan to provide the same amount of income. MS. OAKLEY explained that the DB plan cost 16 percent of pay, which is designed to provide the same amount of income from a DC plan; alternatively, for the same cost retirees will receive more income per the actuaries. MS. OAKLEY directed attention to the next slide, titled "3 Key Reasons Why Defined Benefit Pension (DB) Plans Cost Less than Defined Contribution (DC) Plans," which read as follows [original punctuation provided]: 1. Pool the longevity risks. 2. Maintain optimally balanced investment portfolio compared to down-shifting to a lower risk/return asset allocation in DC plan. 3. DB plan have higher investment returns and lower fees compared to individual investors in DC accounts. 4:47:19 PM The committee took a brief at-ease from 4:47 p.m. to 4:49 p.m. 4:49:23 PM JESSE KIEHL, Staff, Senator Dennis Egan, Alaska State Legislature, paraphrased the section-by-section analysis HB 83, Sections 1-8, which read as follows [original punctuation provided]: Sections 1 and 2 Clarify that the Teachers Retirement System (TRS) defined benefit (DB) statutes apply only to employees who participate in the DB plan and did not convert to defined contribution (DC). No employee can participate in both the DB and DC plans. Sec. 1 also puts all TRS employers on an equal footing by requiring them to offer new employees the choice between DB and DC systems. Sections 3 and 4 Set employee contributions for the new DB tier at eight percent of pay, while leaving prior tier employees' contributions unchanged. Sections 5 and 6 Require a person receiving disability benefits under the DB tiers to seek work and receive a medical examination. Sets limits on the frequency of the exams. Section 7 Closes the Tier II DB health plan to new hires and those DC members who choose to convert to the new TRS DB tier. Section 8 Establishes the eligibility standard for retiree medical benefits in the new TRS DB tier. In the new DB tier, a member with 25 years of service may receive medical benefits partially paid by the system at any age. A member without 25 years must have at least eight years of service and be eligible for Medicare. Disabled members also get system-paid medical benefits. A TRS DB retiree who does not meet those qualifications can buy health care coverage from the system, but must pay the full cost of premiums. Establishes a premium share schedule for retirees to pay a portion of their health insurance and requires actuarial adjustments to keep the pre-funding rate of the new DB tier no higher than the cost of the DC plan. Sets vesting rules for the premium share percentages so that the schedule can change during an employee's working life, but is fixed at the date of retirement. 4:51:24 PM MR. KIEHL elaborated that Section 8 is one of the significant cost savings provisions in this bill compared to previous tiers since all retirees will pay a portion of their monthly health premium based on their years of service. This provision sets up that schedule. One safety mechanism in this bill to ensure that the new pension tier does not cost the school districts or the state more than the DC tier is a periodic five-year review by the actuaries. During an employee's working life those shares of the premium at retirement can vary. Thus, it sets vesting rules for the premium share percentages so that the schedule can change during an employee's working life, but it is fixed at the date of retirement. He reiterated that this refers to the percentage of the health premium, not the dollar amount since health premiums may rise and this is a risk shared by all. 4:52:44 PM MR. KIEHL continued the section-by-section analysis of HB 83, Sections 9-11, which read as follows [original punctuation provided]: Section 9 Clarifies that the TRS DC statutes apply only to employees who participate in the DC plan and did not convert to DB. No employees can participate in both the DB and DC plans. Section 10 Puts all TRS employers on an equal footing by requiring them to offer new employees the choice between DB and DC. Section 11 Gives a newly hired teacher the choice between DB and DC systems. This is a one-time irrevocable choice. Sets timeframes and rules for the process. MR. KIEHL emphasized that it is noteworthy to emphasize that this provides a one-time irrevocable choice. He said that this decision requires an employee must receive some education prior to making the choice so that no one makes the irrevocable choice blind. 4:53:36 PM MR. KIEHL continued the section-by-section analysis of HB 83, Sections 12-13, which read as follows [original punctuation provided]: Section 12 Clarifies that the Public Employee Retirement System (PERS) DB statutes apply only to employees who participate in the DB plan and did not convert to DC. No employee can participate in both the DB and DC plans. This section also puts all PERS employers on an equal footing by requiring them to offer new employees the choice between DB and DC systems. Section 13 Sets the same minimum wage threshold for elected officials in the new DB tier as the 2004 reforms implemented for prior tiers. 4:54:02 PM MR. KIEHL said that Section 13 is unique to PERS and it matches the DC system by setting a minimum wage threshold for elected officials in the new DB tier. This is one of the safety net features that Mr. Carrillo mentioned earlier, noting that elected officials who only make an honorarium now would have a minimum salary if they were to be employed as full PERS members, he said. There would need to be an adequate contribution to the system to fund that. He turned to Section 14-18 of the Sectional Analysis of HB 83, which read as follows [original punctuation provided]: Sections 14 and 15 Set employee contributions for the new PERS DB tier at eight percent of pay, while leaving prior tier employees' contributions unchanged. Sections 16 and 17 Require a person receiving disability benefits under the PERS DB tiers to seek work and receive a medical examination. Sets limits on the frequency of the exams. Section 18 Establishes an eligibility standard for retiree medical benefits in the new PERS DB tier. In the new DB tier, a peace officer or firefighter with 25 years of service may receive medical benefits partially paid by the system at any age. A peace officer or firefighter who does not have 25 years of service must be eligible for Medicare and have at least 10 years. Other PERS employees require 30 years of service to get medical benefits partially paid by the system unless they are Medicare eligible, in which case they require a minimum of 10 years. Disabled members also get system-paid medical benefits. A PERS DB retiree who does not meet those qualifications can buy health care coverage from the system, but must pay the full cost of premiums. Establishes a premium share schedule for retirees to pay a portion of their health insurance and requires actuarial adjustments to keep the pre-funding rate of the new DB tier no higher than the cost of the DC plan. Sets vesting rules for the premium share percentages so that the schedule can change during an employee's working life, but is fixed at the date of retirement. MR. KIEHL emphasized that Section 18 sets up the eligibility standards for retiree medical benefits, which is comparable to the TRS and will provide a significant cost savings in the new pension system as compared to the old system. Every retiree pays a share of his/her monthly premium which provides for risk sharing for those retiree health insurance costs. 4:55:29 PM MR KIEHL continued the section-by-section analysis of HB 83, Sections 19-24, which read as follows [original punctuation provided]: Sections 19 and 20 Put all PERS employers on an equal footing by allowing employers that return to PERS after terminating participation to hire employees the same way other PERS employers do, and allows employees to earn service credits in the appropriate tier when working for those employers. Section 21 Clarifies that the PERS DC statutes apply only to employees who participate in the DC plan and did not convert to DB. No employees can participate in both the DB and DC plans. Section 22 Puts all PERS employers on an equal footing by requiring them to offer new employees the choice between DB and DC systems. Section 23 Gives a newly hired public employee the choice between DB and DC systems. This is a one-time irrevocable choice. Sets timeframes and rules for the process. Section 24 Repeals sections that let non-vested employees convert from DB to DC and required employers to match the funds transferred dollar for dollar. Repeals sections related to political subdivisions that participate only in the DC plan. Repeals a requirement that DB employees who refunded contributions from the system and return to work after July 1, 2010 participate only in the DC plan. (Such employees will thus be treated as new hires.) MR. KIEHL added that Section 24 would allow non-vested employees convert from DB to DC and take employer funds along, which is no longer necessary because the window is closed and under the bill new hires have a choice. 4:56:42 PM MR KIEHL continued the section-by-section analysis of HB 83, Sections 25, which read as follows [original punctuation provided]: Section 25 Gives employees hired into the TRS and PERS DC plans who have not refunded out of those plans a 90-day period from the effective date of the bill to irrevocably convert into the new DB tier. Contributions move from the DC plan to the DB plan trust if they make the switch. MR. KIEHL clarified that Section 25 is the first of the conversion options. This would allow employees who are working in the DC system a one-time option to make irrevocable conversion into the new DB tier. He directed attention to Section 26, which read as follows [original punctuation provided]: Section 26 Sets the procedure for the conversion election in Sec. 25 and allows the administrator to adopt regulations related to the conversion. The choice to convert is irrevocable, and certain information must be provided to the employee. An employee who transfers receives credited service in the defined benefit plan equal to the value of the employee's DC account. If that amount is insufficient to 'buy' the employee's actual service time, the employee may create an indebtedness to purchase the difference. If the employee's individual account has an excess, the difference is transferred into the Supplemental Benefits System or a comparable account, in keeping with federal tax law. 4:57:05 PM MR. KIEHL explained that Section 26 lays out the rules of the conversion. He highlighted that if an employee wants to earn a pension instead, the value of the employee's account, including employer contributions, is actuarily calculated and buys up to the employee's actual years of service time. If insufficient funds exist to purchase the employee's actual years of service, the employee may create an indebtedness to purchase the difference, but the employee is not entitled to it as a matter of right. The state or municipality would not "kick in" extra funds to buy the time. He offered his belief that in rare instances in which an employee had more money in his/her account, the federal government would require it to be rolled over into a supplemental benefits account or an individual retirement account. It would not be taken from the employee, he said. MR KIEHL continued the section-by-section analysis of HB 83, Sections 27-29, which read as follows [original punctuation provided]: Section 27 Allows the Commissioner of Administration to adopt regulations to implement and make specific the bill's provisions. Section 28 Is an immediate effective date for sections 26 and 27 of the bill. Section 29 Makes the bill effective July 1, 2017, except as provided in Sec. 28. 4:58:26 PM MR. KIEHL stated that this provision makes the effective date July 1, 2017, which needs to be adjusted going forward. CHAIR KITO agreed that the date would be fixed. 4:58:51 PM MS. OAKLEY reiterated the three "Key Reasons" as the longevity pool, maintaining an investment portfolio, and since typically a DB plan will have more assets than an individual account, the fees are lower. Historically, in reviewing DB and DC plans, what economists call behavioral drag exists, in that individual investors invest on their own, she said. She clarified that sometimes employees do not make the right investment decisions, for example, buying or selling at the wrong time. MS. OAKLEY referred to slide 4, titled "Colorado State Auditor: DB Pension Higher Income Replacement over DC." She referred to the graph on the slide that summarizes data from a report that is produced by the Colorado State Auditor. She explained that Colorado does give its employees a choice between a DB pension and a DC plan. The auditor's analysis shows the percent of income being replaced by PERA, [Public Employee Retirement Association], the side-by-side DB/DC plan, and a specific DB "Cash Balance" plan. She further clarified the DB "Cash Balance plan is one that works like a DB plan with contributions, but unlike a regular DB plan in which the individual has control over the investment, this gives them a fixed investment return. She referred to the bottom line of the chart, which shows the amount of income that would be replaced in a self-directed DC. Each column represents an employee at a given age, for example, an employee age 40 with 3 years of service is compared to someone who retires at 65 with 30 years of service. Over time, the DB plan will ultimately provide a career employee with a higher income than for a short-term employee. It would provide a higher amount of income than a self-directed DC plan would, she said. 5:02:26 PM MS. OAKLEY refereed to slide 5, titled "Different Workforces: Public Sector Has Job Tenure Twice that of Private Sector." She explained that this slide gives an indication of the tenure of employees derived from data by the United States Department of Labor. Referring to a graph on slide 5, she indicated the gold line reflects the public sector and the green line reflects private employees. She explained that the public employees typically have a longer tenure than the private sector employees, about twice that of the private sector. This provides one reason why the DB plan is attractive to many employees in the public sector. In addition, the DB plan encourages them to stay longer and maintain their employment relationship with the state or local agency. 5:03:44 PM MS. OAKLEY referred to slide 6, titled "DB Plan's Role in the Public Sector: Workforce Management," which read as follows [original punctuation provided]: • DBs improve public sector productivity: Employees are more likely to value their work and tend to invest more in their skills. • Pensions help recruit and retain quality workers. Moving to a DC design could affect recruitment, retention, and productivity. • Teacher effectiveness increases with experience. Greater teacher retention means higher overall teacher productivity. When a mid-career teacher is replaced by an inexperienced teacher, the school as a whole sees a drop in productivity. MS. OAKLEY said this slide represents a summary of some of the research that has been done to examine how the DB plans help the public sector manage its workforce. She paraphrased the bullet points, commenting that firemen, police officers, and teachers are all valued members of the community. Further, greater teacher retention means higher overall educational productivity. When a mid-career teacher is replaced by an inexperienced teacher, the overall productivity in the school tend to drop, she stated. 5:05:41 PM MS. OAKLEY directed attention to slide 7, titled "Palm Beach Case Study: Costs Due to Employee Turnover Wasn't Considered," which read, in part, as follows [original punctuation provided]: In 2012, Palm Beach closed its DB pension and opened a Combined DB/DC plan, greatly reducing benefits. During the next four years (2012-2015), a total of 109 police officers and firefighters left the forces before retirement, including 53 vested officers. MS. OAKLEY explained that slide 7 summarizes the result of a case study. She said that the City of Palm Beach closed its DB pension and opened a combined DB/DC plan, which greatly reduced benefits in the DB plan. She noted that the matching contribution was 100 percent for the employees' contribution of four percent, which went into the DC plan. In 2011, a year prior to the plan change, the city had about 60 police and firefighter employees. In the next four years, the department lost 109 employees, who left before they were eligible to retire. In addition, 20 percent of the workforce retired as soon as the new DB/DC plan was adopted. Thus, police and firefighter employees left in droves, she said. In fact, in the four years prior to the change only two vested employees left. In the four years after the combined plan was adopted, 53 experienced police and firefighters left. She compared that to the trend for new police and firefighter employees. In the four years prior to the change, only four new employees left, yet in 2015, 31 firefighters left. She explained that the young officers came to Palm Beach, went through the academy and rookie training, but left as soon as an opportunity arose to join a force with a DB plan. Ultimately, the lost training funds exceeded $20 million, she said. She implied that the city was short-sighted, thinking it was saving money in pension funds, but losing not only training costs, but overtime costs, as well, due to short staffing. 5:09:20 PM MS. OAKLEY turned to slide 8, titled "92% of Americans: Public Pensions a Good Way to Recruit and Retain Employees," and to the illustration on the slide that captured the public sentiment in a survey. She reiterated that plans are valuable for recruiting and retaining employees. In a survey, when the public was asked whether the person agreed or disagreed that pensions are a good way to recruit and retain qualified teachers, police officers, and firefighters, 92 percent agreed, of which 6 out of 10 strongly agreed. She concluded that demonstrates the level of support that many public pensions have in the broader public arena. 5:10:05 PM MS. OAKLEY turned to slide 9, titled "Economic Impact of Alaska Public Retirees Spending," which read, in part, as follows [original punctuation provided]: Expenditures by state retirees provide steady economic stream to Alaska. In 2016, these expenditures supported in Alaska: • Over 7,600 jobs that paid $400 million in wages. • $1.2 billion in total economic output. Each dollar in DB benefits supported $1.12 in total economic activity. • $168 million in federal, state, and local tax revenues. • Each taxpayer dollar "invested" in plans supported $4.39 in total economic activity in the state. MS. OAKLEY paraphrased statistics on expenditures by retirees in Alaska. She recapped that the pension enables the retirees to spend, knowing they have an income stream. If retirees in a DC plan were worried about running out of money, they would be less likely to take more money out of their pensions and spend it. 5:12:40 PM REPRESENTATIVE CHENAULT, referring to slide 7, asked about the Palm Beach employee turnover. He suggested that the chart seemed a bit deceiving. He asked for clarification on the actual numbers of employees between 2011 and 2015. MS. OAKLEY answered that in each case the [year listed] is capturing the prior four years, from 2012 to 2015. She further explained that 2011 is capturing from 2008 to 2011. She offered to provide information that details the difference in the composition of the staff at that time. She recalled that by 2015 half of the firefighters and police officers had less than five years of service. 5:14:50 PM REPRESENTATIVE SULLIVAN-LEONARD asked whether she had discussed with the Department of Administration (DOA) what it would take to change to the proposed system and any actuarial valuation that would need to be done prior to a change in retirement systems. MS. OAKLEY answered no; that she has not had the opportunity to have that discussion with the department. Currently, the state operates a DB plan for employees hired prior to 2006. The skill sets to invest those dollars exists within the departments that administer the retirement system. She offered her belief that the state has been operating the two systems, so it would not be difficult to take it back to one system. She offered that these choices are ones occurring throughout the country, that state employees in approximately 12 states currently have a choice between a DB and DC plan. 5:16:28 PM REPRESENTATIVE SULLIVAN-LEONARD recalled prior committee discussions that indicated an actuarial study and analysis would need to be performed so the legislature could decide whether the state could afford to move forward with this type of system. CHAIR KITO answered that his office had held discussions with DOA. He reported that the department has advised that it is not prepared to perform such an intensive actuarial analysis until the bill is before the House Finance Committee. The DOA would like the committee to provide any recommended policy changes and the actuarial would only perform the analysis once. 5:17:43 PM REPRESENTATIVE JOSEPHSON asked for clarification on subsequent hearings. He offered his support for the bill. CHAIR KITO was unsure of the time commitment. He expressed an interest in having the actuarial review done at the time the bill is before the House Finance Committee. 5:18:44 PM REPRESENTATIVE WOOL asked whether the existing Palm Beach employees were forced into the new plan. MS. OAKLEY answered that the city council voted to move the employees into the new plan, thus, employees were forced into the new plan. She indicated that many of the employees did not feel there were any benefits to stay in Palm Beach. Their benefits were frozen based on their salaries and would not increase, she explained. She pointed out that nearby communities were offering retirement plans like their old plans. The "churning part" by the new employees in the Palm Beach study is something that the state would likely want to consider. 5:20:32 PM JACOB BERA, Public School Teacher, shared his personal background, offering his support for HB 83, based on his experience as a public-school teacher for the past 15 years in Eagle River. His goal is to help the committee understand how the current retirement plan affects student learning and the effective use of the limited budget and core education. After he finished his time in the United States Marine Corps Reserve, he and his wife, who is also a teacher, moved from Wisconsin to Alaska to start their careers in education. The beauty of the state attracted them since they both like to run and spend time in the mountains; however, they also want to start a family and put down roots. He emphasized that the retirement plan has made a big difference for his decision to stay in Alaska. Since their teacher service started in 2003, they fall under the Tier II DB plan, which allows them to contribute to a pension plan after they retire. When the plan changed in 2006, public employees could no longer contribute to the DB plan. If they had been considering moving to Alaska after 2006, they simply would not have done so as it would not have made economic sense. He said they learned that all new public employees cannot participate in the Social Security [Old-Age, Survivors, and Disability Insurance (OASDI) program administered by the Social Security Administration (SSA)]. In fact, employees lose Social Security benefits in Alaska by becoming public employees in Alaska. They could contribute to both plans in Wisconsin, but they opted to stay to supplement their losses by opening a Roth IRA [individual retirement account]. 5:22:11 PM MR. BERA said that when he explains the public employee's choices to other Alaskans, especially those not in the public sector, they better understand the risks that public employees take. He acknowledged that he and his wife feel lucky to be under the Tier II plan, even absent the ability to contribute to the OASDI [Social Security], that they are still trying to make their retirement system work for them. Other colleagues moved to Alaska for a few years for the adventure, but have taken their savings and left, in part due to budget cuts and increased demands. For those reasons, Alaska is becoming less attractive for teachers to stay, he said. The state has continued to lose the money it invested in attracting and training teachers. Teacher turnover is rising in Alaska and schools and educators suffer. MR. BERA said he hopes the committee will understand the quality of the educators who remain, noting he is one of four nationally board-certified teachers in his school, and one of 200 in the state. His college friend who teaches in his school just won the Milken Educator Award. He described a recent experience that illustrated teacher dedication. Despite his son's teacher's facing family medical issues that day, the teacher immediately focused on the school conference and his son's progress in school. He emphasized the importance of retaining teachers, noting he often hears students express an interest in teaching. He said the state is not competitive with other states in terms of salary and benefits. Teacher positions are being cut and relatively new teachers must make choices to stay in Alaska or to leave, invest and build up their retirement plans, including building their social security benefits. Even he and his wife must consider their options due to job security issues. MR. BERA offered his belief that HB 83 could provide an incentive for public employees to stay in Alaska by providing the ability for them to earn a better retirement security for their future. Attracting and keeping the best educators makes the most economic sense for Alaska, especially for the children who attend public schools. 5:25:24 PM [HB 83 was held over.]