Legislature(1995 - 1996)
04/29/1995 02:55 PM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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 148. 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 that." 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 affirmatively. 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 valuable. 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 Administration. 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 1998. 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.