Legislature(1995 - 1996)

04/29/1995 02:55 PM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
  SENATE BILL NO. 148                                                          
       An Act  relating to  a defined  contribution retirement                 
       plan for state employees.                                               
  Co-chairman  Halford directed that SB 148  be brought on for                 
  discussion.   Senator  Rieger, sponsor  of the  legislation,                 
  noted  earlier  adoption of  a  draft CSSB  148 (9-LS0941\O)                 
  which  he   explained  spoke  to   a  defined   contribution                 
  retirement system which  would represent tier III  for state                 
  employees.  It  provided for a  state contribution of 6%  of                 
  payroll on behalf of each employee  and a 5% contribution by                 
  the employee.  The administration has been working on a tier                 
  III  approach  of its  own which  retains  the concept  of a                 
  defined  benefit plan.    The defined  benefit, in  terms of                 
  cost, is approximately  the same as  that in the draft  CSSB                 
  BOB   STALNAKER,  Director,   Division  of   Retirement  and                 
  Benefits, Dept.  of Administration,  came before  committee.                 
  He stressed the administration's support for  the retirement                 
  incentive  program,  describing it  as  a valuable  tool for                 
  employers  facing  declining revenues.    The administration                 
  thus introduced  incentive legislation which is  now coupled                 
  with CSSB 148.                                                               
  The administration  feels that  the appropriate approach  to                 
  tier III is to  work during the interim with  all interested                 
  parties  and  the  public  in  an  effort  to  achieve  full                 
  disclosure  and  full  cooperation  by  all  parties.    Mr.                 
  Stalnaker voiced concern over the cost to employers and need                 
  to lower that cost while still providing meaningful benefits                 
  that act as  an incentive for  employees to work for  school                 
  districts  and  other   public  employers.    If   tier  III                 
  legislation  is  to  be passed  in  the  last  weeks of  the                 
  session,  a  delayed  effective  date   would  be  of  great                 
  importance  in allowing  the  administration to  continue to                 
  work on provisions and return to the legislature, next year,                 
  with the results of those efforts.                                           
  Referencing defined contribution provisions  of the original                 
  bill, Mr. Stalnaker  suggested that  Alaska is uniquely  ill                 
  suited to putting  "all of its eggs  in one basket" in  that                 
  type of approach.                                                            
  Mr. Stalnaker next spoke to tier III  provisions proposed by                 
  the administration.  He cautioned that the proposal has  not                 
  been  discussed  at  length  with  impacted  parties.    The                 
  administration   proposes   a   contribution    rate   split                 
  approximately  50/50 between  employee  and  employer.   The                 
  employee's  contribution   rate  would  be   5.5%,  and  the                 
  employer's  rate,  as  estimated   by  actuaries,  would  be                 
  approximately 5.5%.                                                          
  End:      SFC-95, #59, Side 1                                                
  Begin:    SFC-95, #59, Side 2                                                
  As background information,  Mr. Stalnaker advised  that tier                 
  II costs at this point are 10%  of pay for PERS and 8.8% for                 
  TRS.    Under   tier  III,   the  percentage  for   employee                 
  contributions would be  5.5 for teachers and others  in PERS                 
  and 6% for peace  officers and fire fighters.  That  is a 3%                 
  decrease over tier II  for teachers and 1.25% for  all other                 
  public employees.                                                            
  The proposed normal retirement age would be 60, the same age                 
  as under tier  II.   For peace officers  and fire  fighters,                 
  normal retirement age would be 60 or upon attaining 25 years                 
  of service.   Current provisions  allow for 20  years.   All                 
  employees, including teachers,  would have  "a rule of  85."                 
  That combines an employee's  age with length of service.   A                 
  55-year old employee  with 30 years of  service could retire                 
  with an unreduced  benefit.   A 52-year old  person with  33                 
  years of service could do so  as well.  This would be a  new                 
  provision.  The current arrangement under tier II is "30 and                 
  out."  Teachers presently have a 20 and out provision.  Tier                 
  III would not include  that for teachers.   Early retirement                 
  would remain at 55.                                                          
  The  cost  of  living  increase   (post  retirement  pension                 
  adjustment,  PRPA) would  be  50% of  the  CPI for  disabled                 
  members and retirees 60 years of age and over.                               
  Major medical service  would be  provided to retirees  only.                 
  They would  have the  ability to  purchase it  for dependent                 
  spouses  and  children at  their option  and cost.   Medical                 
  would be provided  at no charge  for retirees 65 and  older.                 
  Retirees 60  to 65  would pay  half the  cost, and  retirees                 
  under 60 would pay the full system cost.                                     
  Both teachers and public employees would vest  after 5 years                 
  of service.                                                                  
  The benefit formula for employees in  tier III would be 1.5%                 
  per  year  of  service.     Disability  benefits  under  the                 
  teachers' retirement system  would be  brought in line  with                 
  those under the public employees' retirement system.                         
  The net result  of the foregoing  changes would be that  the                 
  employer's  contribution rate would be approximately 5.5% as                 
  would the rate for employees.  Since the state currently has                 
  a mix  of tier I and  tier II and unfunded  liabilities, the                 
  present rate is approximately  14%.  For a tier  I employee,                 
  the   department  estimates   the  current   PERS  cost   at                 
  approximately 13% and 14% for a tier I teacher.                              
  Senator Rieger referenced a recent  survey of private sector                 
  retirement systems  nationwide  and asked  how  the  state's                 
  system compares.   Mr.  Stalnaker said  that the  department                 
  reviewed  averages for  union  plans, private  sector plans,                 
  other public sector plans, and  social security.  Provisions                 
  under Tier III  match favorably  with private sector  plans.                 
  They also match  favorably with public  sector plans at  the                 
  same employee contribution rate.   Generally, public  sector                 
  plans  where  employees pay  approximately  5% would  have a                 
  benefit  multiplier  of  about  1.5%.    Survivor  benefits,                 
  disability benefits,  and health insurance  are not provided                 
  under  a defined contribution  plan.  They  are essential to                 
  the State  of Alaska because the state  does not participate                 
  in social security.                                                          
  Senator Rieger next asked what an  employee who works for 30                 
  years under  the new  system could  expect upon  retirement.                 
  Mr. Stalnaker explained  that in  applying the 1.5%  benefit                 
  formula, the retiree would receive 45%  of pay (based on the                 
  high three years).  With contributions under SBS, they could                 
  expect  another  40%  if  they   have  contributed  and  not                 
  withdrawn  their SBS  for the entire  30-year period.   That                 
  would total to the 80-90% range.                                             
  Senator  Sharp  voiced  his  understanding  that  under  the                 
  present  PERS system  a  retiree with  30  years of  service                 
  receives  67.5%  of  the  high   three-year  average.    Mr.                 
  Stalnaker responded affirmatively.  In response to a further                 
  question, Mr.  Stalnaker said  that SBS contributions  total                 
  12.26% of  pay for both the employer  and employee up to the                 
  social security match  of $64.0 of  salary.  Over a  30-year                 
  period that accumulates.   Senator Sharp suggested  that the                 
  combination  amounts  to  100%.   Mr.  Stalnaker  responded,                 
  "There  are  certainly people  that  would probably  be over                 
  Senator  Rieger  noted that  he has  been  a proponent  of a                 
  defined contribution plan for many years and has sought that                 
  change.    He  acknowledged  the  argument for  retaining  a                 
  defined benefit component.   He suggested  that it would  be                 
  workable to combine  the defined benefit  proposal submitted                 
  by the administration within CSSB 148  where the cost to the                 
  employer  is  fixed,  overall,  between  SBS and  Tier  III.                 
  Employers  will then  know  what their  costs  will be,  and                 
  employees will enjoy the benefits of a defined benefit plan.                 
  That can be done by meshing SBS and Tier III into one system                 
  whereby the costs of the benefits provided are one component                 
  of an overall cost described as the total cost for both.  As                 
  an example, if the statute states that the total cost of the                 
  employer contribution  to SBS plus  Tier III PERS  is 12.5%,                 
  under Tier III with  costs of 5.5%, the contribution  to the                 
  employee's SBS would actually be 7%  higher than the present                 
  6.13%.   If  in  subsequent years  the legislature  chose to                 
  increase defined benefits and the cost of Tier III increased                 
  to 7%,  the contribution  to the  SBS portion  would be  the                 
  remaining  5.5%.    That  would  provide both  benefits  and                 
  predictable employer costs.                                                  
  Senator  Rieger  said he  would  undertake preparation  of a                 
  draft  combining  the   two  elements   in  an  attempt   to                 
  accommodate  the  administration.    The   only  things  the                 
  proposal would not accomplish is immediate vesting and total                 
  defined contribution self-direction.   That is a  trade off,                 
  and  there  are  policy  arguments  for  both  sides.    Mr.                 
  Stalnaker acknowledged  that the approach  is new.   He said                 
  that  while  he did  not disagree  that  it would  shift the                 
  investment  risk  to   the  employee   by  virtue  of   rate                 
  fluctuations  under  SBS,   he  noted  need  to   check  the                 
  qualification under 401, the  defined contribution plan,  to                 
  determine  if  "you can  have  an employer  rate  that might                 
  change  from  year  to  year."    There  could   be  federal                 
  requirements that are beyond department control.                             
  Senator Zharoff  asked if  both PERS  and TRS  members would                 
  vest in 5  years under  Tier III.   Mr. Stalnaker  responded                 
  The  Senator  than  noted  municipal  interest  in  changing                 
  participation  time  frames  for  the  retirement  incentive                 
  program.     Mr.  Stalnaker   acknowledged  that   political                 
  subdivisions have expressed interest in flexibility over the                 
  3-year period for individual budget purposes.  That has been                 
  added to the retirement incentive bill  in the House.  While                 
  the  provision   makes   the  program   more  difficult   to                 
  administer, the department is willing to take it on if it is                 
  in  municipal  best  interest  and  makes the  program  more                 
  Mr.  Stalnaker  noted   need  for  other  date   changes  in                 
  retirement  incentive  provisions  of CSSB  148.   Directing                 
  attention to page  19, line 11, Mr. Stalnaker suggested that                 
  the date be  changed from July 1  to June 30.   He explained                 
  that in order to retire, individuals must apply in the month                 
  preceding  the date  they retire.   That is  consistent with                 
  prior  incentive  programs.   An  identical  change  in date                 
  should then  be made at page 20, line  16, page 23, line 21,                 
  and page 25, line 24.   Amendments made in House legislation                 
  regarding time frames  for municipal  use of the  retirement                 
  incentive would be applied  at page 21, beginning at  line 6                 
  and  continuing through line 8.   Mr. Stalnaker advised that                 
  he  would provide  copies of  the provision  changed in  the                 
  House.  Instead  of defining participation from  December 31                 
  through June 30, 1996, new provisions would open the  window                 
  period for the entire time.  A municipal employer could then                 
  utilize the  program when most  convenient or in  the budget                 
  cycle  in  which  it  is  needed.   That  application  would                 
  continue  to be  at  the discretion  of the  Commissioner of                 
  Senator  Rieger   asked   if  changes   effected  in   House                 
  legislation would extend the window past June 30, 1996.  Mr.                 
  Stalnaker answered affirmatively,  advising of extension  to                 
  Mr. Stalnaker referenced a copy  of House amendment language                 
  and  explained that  it  would delete  language at  page 21,                 
  lines 6 through 8, and insert:                                               
            The  political  subdivision, upon  requesting from                 
            the   Commissioner   of    Administration,   could                 
            establish one  or more  periods  during which  the                 
            employees of  the political  subdivision would  be                 
            eligible to participate.  The  periods could be no                 
            longer than 60 days and no less than 30 days.                      
  The department would be given 60 days advance notice to make                 
  necessary  administrative  arrangements  to accommodate  the                 
  municipality.  Window periods would  extend from October 31,                 
  1995, through October 31, 1998.                                              
  Senator Sharp asked why the administration proposes a 3-year                 
  window and possible  multiple periods of applications.   Mr.                 
  Stalnaker explained  that the administration  intends to use                 
  the  program  as  a  strategic  tool.    It   will  approach                 
  departments impacted by budget cuts  and utilize turnover to                 
  take  advantage of the incentive  program.  It further seeks                 
  to consider normal attrition  and strategically utilize  the                 
  program by section and division  to achieve maximum savings.                 
  It  is  unreasonable  to  expect  that proper  analysis  and                 
  targeting can be done in a short period of time.  Hence need                 
  for the 3-year time frame.                                                   
  Senator Rieger voiced his belief that with Tier III in place                 
  the retirement incentive program would work since Tier I and                 
  II  employees would be replaced  with Tier III employees, if                 
  replacement occurs.                                                          
  In  response  to  a question  from  Senator  Sharp regarding                 
  employer and  employee  contributions  under  Tier  II,  Mr.                 
  Stalnaker advised of a blended rate of 14% for the employer.                 
  The Senator voiced  his understanding that with  an employee                 
  rate of 6.5%, the total is approximately 21% of payroll.  He                 
  then asked  if the  percentage applies  to base  pay or  all                 
  wages.    Mr.   Stalnaker  said  that  it  applies  to  "all                 
  compensation for services  rendered."   It does not  include                 
  bonuses,  cashed  out  leave,  etc.,  but  it  does  include                 
  overtime.  It is  thus more than simply  base pay.   Senator                 
  Rieger advised  of his  understanding that  the present  21%                 
  includes an additional  piece relating to the  "past service                 
  rate"--an additional percentage to make  up the $200 million                 
  unfunded liability in  the PERS  system.  The  true cost  is                 
  approximately 18%.   Mr. Stalnaker concurred and  added that                 
  components of the contribution rate are the normal cost (for                 
  future service) and  past service costs (which  makes up for                 
  funding shortfalls or overfunding from  prior years).  Since                 
  each employer has  its own rate calculation,  some employers                 
  are overfunded.   Their cost may be 6% of pay at the present                 
  time.  The overfunding is  helping subsidize the normal cost                 
  into the  future.   In  the  state's case  there is  a  $200                 
  million unfunded liability  that is being amortized  over 25                 
  years.  That  is approximately 2% of  pay.  Each year  it is                 
  recalculated and reconfigured as  a total contribution rate.                 
  Co-chairman  Halford  raised   a  question  concerning   the                 
  unfunded liability.   Mr. Stalnaker explained that in 1986 a                 
  law  was  passed that  provided  for a  pre-funded automatic                 
  post-retirement  pension  adjustment  and  reduced  benefits                 
  under  Tier II.    It was  immediately  recognized that  the                 
  guaranteed PRPA was a much better funding mechanism than the                 
  ad hoc  provision currently  in statute.   It increased  the                 
  unfunded liability dramatically  at that  point.  The  state                 
  has been paying  off the liability  over time.  The  dynamic                 
  was recognized when  the change was made.  The  same is true                 
  for TRS.  The Co-chairman voiced his understanding that once                 
  a PRPA is adopted, it becomes a contractual obligation.  Mr.                 
  Stalnaker concurred.                                                         
  Senator Sharp asked  if area  differentials are included  in                 
  base pay  calculations.   Mr. Stalnaker  explained that  the                 
  area differential  is included in  salary.  An  employee who                 
  worked his entire service time in Nome would have higher pay                 
  because  the  cost of  living there  was  higher.   Both the                 
  employee and  employer thus paid  higher contributions based                 
  on the  higher pay.   Retirement benefits for  an individual                 
  are based on the working years and what the employee accrued                 
  as  a benefit.    The law  was  changed in  1986 because  of                 
  concern that  an employee  could work in  Anchorage for  the                 
  bulk of  his or  her service,  transfer to the  bush at  40%                 
  higher pay for the final 3 years, and receive the additional                 
  benefit for the entire 20 years of service.  The 1986 change                 
  requires that before a person receives  a benefit based on a                 
  differential  the   individual  must   have   worked  in   a                 
  differential area for over half of the period of employment.                 
  Senator Sharp  next  asked what  would  happen when  no  new                 
  employees  are  entering Tier  II  to  help pay  off  the 2%                 
  unfunded  liability.    Mr.  Stalnaker  explained  that  the                 
  actuarial method being utilized allocates the rate among all                 
  employees.  While  a new  tier employee would  have a  lower                 
  cost, allocation  remains a means of paying off past service                 
  liability.  All employees are thus  charged the same rate by                 
  the employer.   Employees  would only  pay the  contribution                 
  rate based  upon the provisions  by which they  are covered.                 
  Tier II employees would pay at 6.75%, and Tier III employees                 
  would pay at 5.5%.  The employer still has an obligation for                 
  past service liability to a different group of employees.                    
  Senator Zharoff noted  the broad title  of the bill and  its                 
  reference to compensation.  He then asked if the legislation                 
  addresses that  issue.   Co-chairman  Halford remarked  that                 
  benefits are a part of compensation.   Mr. Stalnaker advised                 
  of provisions  in the  Governor's retirement incentive  bill                 
  that  allow for a separation bonus.  Senator Rieger directed                 
  attention to page 25 of the  draft.  Mr. Stalnaker explained                 
  that the provision would allow  a separation incentive of up                 
  to $25.0 to  encourage those  who are not  eligible for  the                 
  retirement  incentive to  leave state service.   Co-chairman                 
  Halford concurred that the title should be narrowed.                         
  Senator Rieger suggested that he arrange  for a new draft of                 
  CSSB  148 which would tighten the  title and incorporate the                 
  administration's  Tier  III  proposal  in  lieu  of  defined                 
  contributions.  Senator Zharoff requested that the new draft                 
  include   the   flexibility  requested   by  municipalities.                 
  Senator Rieger said he had no  objection to extension of the                 
  time frame to  1998 and would  include the provision in  the                 
  updated draft.   Co-chairman Halford directed that  CSSB 148                 
  be held in committee pending receipt of the new draft.                       

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