Good afternoon. Welcome to Senate Labor and Commerce. The time is at 1.32 p.m.
And I would like to call this meeting of the Senate labor and commerce committee to order.
We are in belts room 105 at the Thomas Stewart building in the nation's most beautiful capital city of
Juneau, Alaska. I'm excited to be with all of you again today. We will have our
typical cast of labor commerce characters here with us throughout the year.
our state auditor, many folks from the Division of Insurance, and all manners of folks that
really make many things in our private economy run here in the state of Alaska. I would like
to take a moment to recognize someone who has moved on from our typical slate of folk
who might hear from here at Labor and Commerce this year. Steve Ramos from The
Department of Administration has left the state, unfortunately, and we will miss his expertise on many issues here before the committee.
So we certainly wish Director Ramos well, in Idaho.
Very well.
Today is Friday, January 23rd. Members present today are Senator Merrick, Senator Ray Jackson,
Senator Yunt and myself.
Chair Bjorkman let the record reflect that we have a quorum to conduct business
Please turn off our silencer cell phones. I would like to extend and especially warm Senate labor and commerce. Welcome to our recording secretary
Carrie Tupo and our LIO moderators Susan Quigley and
Renzo Moses. We have one in one bill only on our agenda for today. It is House Bill 78
retirement systems defined benefit option brought to us by the House Finance Committee here to present the bill
is the honorable representative Chuck Kup and his staff, Julia O'Connor.
Please join us at the table.
This is our first hearing on the bill,
so we'll go through a rundown of the Bill,
get a general overview.
I think three of us may be familiar with the
bill but as it is a new legislature and
a New Labor and Commerce Committee hearing this bill this time around,
we will have a thorough hearing
on The Bill and then move on from there.
Representative cop, thank you for joining us today.
Thank you, Chair, Senator Borkman and committee members.
Greatly appreciate the opportunity to present for you today
for the record.
My name is Chuck cop house representative for district 10.
And I am accompanied today by my lead staff
on this legislation.
And i will allow her to introduce herself.
Thank You, Julia O'Connor staff to representative cop.
Thank.
Committee members we are excited to pre before you what we see as really an
emergency fiscal response to what We see going on it to in our communities
across the state and into our ability to deliver critically needed public
services to the State of Alaska. We are currently in the middle of
reliable service delivery. We need something transformative that is
structural to the way that we look at our retirement system beyond just pay
and benefits but a structural reform to look
at delivering state services in a way
that our agencies are not being hollowed out. Let's go to
the next slide. Our current system has resulted in these headlines that
every day across the state. Many of you are familiar with these. I don't need to really
get into them, but we see that it is resulting in service delivery challenges from public safety
to drivers for our school districts, to our firefighters and public
And these are headlines that we are all very familiar with.
They all tie back to according to our state commissioners,
their recruitment and retention challenges.
Almost every single commissioner in the FY27 budget
has identified that recruitment
and retaining of personnel is their number one concern
in their state agencies.
We see that it isn't isolated.
It's systemic in our system right now.
Our agencies are not able to keep experienced staff
and they're highlighting this.
So what has the state done?
With public assistance just a couple of years ago,
we added $20 million to their budget
and funded over 100 positions.
And still, the turnover is so high.
We know that we've been fined tens of millions of dollars
for not handling public-assistance programs correctly.
That's also part of our headlines.
The agencies that I'm talking about are reflected here.
You see service delivery across the state.
We're very proud of our public workforce.
And this is a reminder that these people also issue the permits
for heavy industry mining, oil and gas, DEC and DNR.
There are DOT engineers building bridges and roads.
Our highway system people, Longshoreman.
what estate we have and this this slide really reflects service delivery statewide
but I really want to draw your attention Mr. Chairman and Committee to the quote from our
state auditor at the bottom of this at a recent meeting just a couple months ago November 11th
to this last year highlighting how the errors in the state audit of all agencies are going up
She said historically 30 to 35 significant financial process accounting
errors are found.
Now we're about 80 to 90.
But what that really means and what our auditor highlighted is we have
errors and emissions that are happening that
are costing the state.
hundreds of millions of dollars. We have a single grant in FY 24 where the state did not apply for
reimbursement of a federal grant of almost 280 million dollars because the Department of Health
people who received a pass through grant from Department and Military and Veterans Affairs
for COVID-19 relief did no to apply. That's a lot of money to our state treasury. I think we can
So, that's an omission in error would be the fines that were incurring for not submitting
timely reports, not getting public assistance, the temporary assistance to needy families.
the money that we're getting from the federal government not getting it out and
reported back timely so we are incurring fines. So those findings are
nearly tripled and what the auditor has said it's directly related to our
agencies not keeping experienced staff who are knowledgeable in the work and
who can provide mentorship and training to new employees because the turnover is
so high. They're always in a training mode.
Those kind of compliance gaps create real risks and liability to state government
So this picture shows kind
Of what we're at right now next slide. Thank you representative cop. I forgot to mention and recognize
Senator Giesle who has been here from the beginning of the committee meetings
She of course carried this bill in our committee there in the last slide a slasher. Please continue.
Thank You.
Thank, you chair. So how did we get here?
This is a slide that shows what happened to our defined benefit system that the State
of Alaska had until 2006 when we opted for a new policy going into a defined contribution,
essentially a 401k only.
Prior to this time, our pension system was well-funded.
What happened is we entered about a three-year period where the state's actuary Mercer gave
critically bad advice, the state and the lawsuit,
felt it was borderline criminal
because when Mercer discovered their error,
they failed to disclose to the State
that we were under-contributing.
Basically, The State got good news.
You're fully funded.
Your contributions are very low.
municipal governments, some of them were told they don't have to contribute at all,
everything was looking great. Mercer realized no, that was bad advice, but they
sat on it for a year and a half, at least because they knew they were going to lose
a client, the state of Alaska. The state and the lawsuit estimates that we
under contributed between 1.8 and 2. 8 billion dollars. We know the time value of
that money coming up today compounded.
is about five to eight billion in liability.
It just so happens to be that the liability we have
of our legacy pension is right around.
five and a half, six billion dollars.
Now, have we done a good job since then?
Yes, the legislature immediately pivoted,
did a triple safeguard on the actuaries,
we no longer rely on one, we rely three.
The arm board has their actuary,
the state of Alaska has an actuary,
and we have a third actuaary that trues
both of them up every few years.
So we've taken steps in the right direction,
but.
The argument that we left a bad system that was underfunded is not shown to be true in reality.
We left the system as a reaction to terrible actuarial advice that did get us in trouble.
So critics who would say that
we ended up with legacy debt that were unfortunate are right and we are rightly concerned to
stay on top of that. But I want to do is not allow the fear of what happened here to paralyze
us for making a structural reform to a modern retirement system that in no way resembles
the higher risk systems of our previous legacy system.
But today is a shared risk system that the actuaries say they are not even able to model
a scenario outside of the normal market correction ranges that would ever introduce additional
unfunded liability to the state.
Next slide.
We talked briefly about the Mercer information.
This is it is great slide, it's a little worried, but I'm gonna just break it down real quickly.
Define benefit funding
Valuations are right here. TERS is currently funded at 80% and PERS at 70 percent, but I want to give this context in
2014, Mr. Chairman
TRS was at 48 percent and Purse was that 54 percent
So we can see that the decisions that this state is making in the legacy system
Which again is past service costs it has nothing to do with future service
of House Bill 7-8. I want to really keep this separate. But we are making great strides and we
are on track to be 100% funded by 2039, which is considerable. It is going to
be a celebration year for our state and there is no reason to expect that we will do less than that.
What I wanted to point you attention is to our returns.
We are often criticized that the actuaries, which the legislature doesn't set, the Alaska
Retirement Management Board Actuary, sets an expected return rate, and that's how they
determine what the contribution should be.
They set a return rates of 7.25.
What did we get?
Well, you heard the governor last night say that we actually got a 10% return.
We just read the actual report.
It's a very high nine.
I think it's 96 or 97.
was 11, but the average over the year was very close to 10%.
And we've done that two years in a row.
It has resulted in billions of dollars in excess returns
that are driving the liability down.
I heard a member of our body just the other day
say we had $8 billion in liability.
Actually, that's not true from the pension system today.
That number's closer to $6, because the returns are doing good,
and we have to give credit to our pension fund management.
I think they're doing a great job.
So this shows that if you make your contributions and you have a good conservative management
structure, even with a legacy high-risk tier, we're able to pay that off and get ourselves
in a spot where a low-cost plan, such as we are presenting here, is going to bring a new
Next, Mr. Chairman, I would just like to talk about the cost of doing nothing or the
cost what we're doing now in this situation.
We've talked about service disruptions and how expensive that is and what Alaskans are
feeling every day with those service disrupions.
What does that mean to the state treasury?
It's the premium pay costs, the errors and admissions, which I talk
by our training dollars and our our churn and high turnover of employees and never recapturing
those costs. So instead of continuing to throw at it, we're trying to.
keep people in and keep them from going. This next slide really shows what that looks like.
This is a premium pay slide. These numbers are all from our administration.
This over time, holiday, hazard double time differential standby and on call.
Most of this is surrounding just covering staffing as you can see, covering call outs
and making sure you have minimum staffing levels met in agencies.
In FY20, we had $83 million, essentially, in this premium pay.
You can see in FY25, it went up exponentially to almost $150 million.
And you can only see six months into this fiscal year.
We are already at $112 million but we can all do the math in our heads and look at,
we are well on track to be over $200 million in the year, I would just like to point out
is far more than double the cost of the investment of
the new pension plan that the actuaries say absolutely
will fill these seats.
it is structurally designed to retain and hold on to personnel to deliver these services.
It will drive these costs down. Will it make them all go away? No, will it drive it down considerably?
Yes. So workforce instability is a significant cost to the state and that's not counting the
errors and admissions that I talked about earlier which are in the hundreds of millions by themselves
churn and the training dollars that are going out the door next slide this slide
shows the workforce profile and this is a picture
of what is going on when I talk about turnover, you can see most of our workforce is into one
to four year range. And those slices of the pie are very big because people are coming and going
in that range and then the more senior ranges that pie gets really narrow because we have fewer
people staying on. We have half of work force in the one to 4 year age. Next slide. This slide
retirement plan that we currently have in a defined contribution, it shows the
behavior that is being incentivized in our current plan. So this is from the
arm board. The last 12 months ending June 30 showed that the PERS and TERS plan
withdrawals and the DC plan were 160 million but if you add their
It's nearly $500 million.
Again, that was in just one year, 12 months.
90% of those are happening after five years of service
when you can collect your employee
and your employer contributions together and you
can go and most of these people are leaving public service
entirely and they're not coming back.
So we've incentivized a cash and go plan.
If we treat people like day labor, that's what they'll do.
They'll take the money and they will go.
But we are not incentivizing behavior of people to buy homes,
start businesses, build families and build community
and put their kids in school and become, you know,
anchors of our state.
This next slide shows what is going on with a decline
in their full-time state agency positions.
Again, these are numbers from the administration.
It shows that the positions field is declining year over year.
I would point out that a little bump up a percent or two more recently were our bonuses
and our wage increases that we make.
And then you can see it dropped off again because wage bonuses aren't sustainable.
sign-on bonuses and in cash bonuses. So overall, the state for a number of years now has been
in decline. I really want to draw your attention to the DOT number at the bottom, 24 and a half
percent vacancy. Which agency now are we most desperate to be staffed appropriately to get
work out on the road so our contractors can be fixing our roads and bridges? And it's this
when they are hiring away their engineers and project management leads faster than they can get
them trained. And that is why we have our contracting community so concerned about DOT's capacity to
get work out on the road. This picture explains a little bit of what's happening there. Next slide.
This is the real question before us is, do we want our state to be competitive again
like we were in the 80s?
Many of us growing up here, I'm a lifer, you know, lifelong Alaskan and grew up around
the state and rural and urban communities.
And I remember when our, our positions, whether you work for DOT or whether your teacher or
public safety or whatever your job was, they were competitive jobs and people would move
And we see that that's not the case now.
So we have to compete nationally for talent.
We are in a race for that.
We're the only state that does not have a competitive
retirement system, no pension for teachers or public
safety, and we don't offer social security.
So when we bring people up here, they work 20, 25 years,
and they realize they've never contributed to social
security, then all of a sudden they think, man, I better.
I better get another part-time job in addition to my teaching job where I can contribute to social security.
Otherwise, when I hit 62, 65, 67, there's nothing there for me in social
security, so that's a disincentive.
When we look at that, we realize what we're talking about today is an emergency fiscal response.
House Bill 78 is not a luxury.
It is a plan that is going to be a net revenue positive to the state and help stabilize our workforce and stop the bleeding of talent.
And the crumbling of our resource delivery services.
So now we are looking at our proposed solution, and that
It's actuarially modeled and proven to be responsible.
The shared risk in it includes retirees.
It includes current employees and the employer.
All with skin in the game, no longer like the old system
where the employers bear all the risk.
And we'll see that the states that are doing this
are going very well.
We look at it as a very strategic investment
in our workforce and it's modeled on best practices
to keep us solvent.
Next slide.
So here is how it is structured. The employee contribution is 8 to 12%
Model so they'll start off at 8% of their of there pay will go into the plan that is consistent with what we're doing now
It can be adjusted all the way up to twelve percent based on this 90% trigger the actuary
It's a audited annual report says the fund has hit 90 percent or lower
the arm board can raise it all the way up to 12.
Now, the actuaries say that every 0.1% raises a lot of money.
So they never see big jumps happening, but they said because the plan does react live
to the market, it's extremely hard for it to ever go into an underfunding position.
And this is only one of the triggers that does this.
So employees share the risk and they contribute more if the
market has a downturn.
So, then we look at states, I said other states do this.
These are a number of states that have an 8 to 10 percent range.
We are suggesting even a higher range, so more of a skin in the game for employees going
all the way up to 12 percent.
The states have this, have a average funding valuation, well over 80, in fact I think the
average there is 85 percent, some states are over 100 percent and that one actually would
be Wisconsin.
So, these are practices that we know are working well in states.
Next slide.
This one shows the employer contribution.
Right now, PERS employers are capped at 22 percent payroll.
But just to give us an example of what that is, 22% of payroll statewide is $440 million.
That's what local government pays in.
Every percent is about 20 million dollars in payroll.
The reason why tourists got a better deal, a lower cap, is they actually
had needed more help at the time from the state when school districts were in 2008,
when they modeled this, they said local government has more capacity to bring more money.
School districts have less capacity, so the State just made an agreement, said,
This bill does not propose changing the amount that local governments pay
They're still capped and school districts are still kept at these at the amounts of 22 and 12
But notice the lower end mr. Chairman, and this is what's important. The lower-end is 12
And that's just the floor.
And the reason why we put that there
is because the actuaries say the actual cost of this pension
going forward when the legacy debt is paid off in 2039,
it's 10.05% for PERS.
It's 9.5%
for teachers.
What does that mean to local governments?
Hundreds of millions of dollars in immediate fiscal relief.
It is going to mean hundreds of
millions dollars
in additional
cost to the state where they don't have to. There is no pain above the cost of the cap.
There will be no cap that's been exceeded. So, conservatively, when the legacy pension debt is
paid off, we are looking at $300 to $400 million a year in savings between local government into
the State by just staying the course, paying the Legacy debt off making the responsible payments
Some would say, well, why don't we just wait to 2039 to make this new plan?
I think the response, Mr. Chairman, is do we want to continue this churn for the next
13 years and continue the spiral we're on or arrest it now and have an incrementally
small cost compared to what we are doing now, the cost of doing nothing, and in a decade
being an entirely different situation.
So here we see a little more of the structure, Mr. Chairman. It's a it's
a five-year vesting period for purrs and turs. That's consistent with the prior
pension plan under tier three purs and it aligns purr's and
turrs. You probably met as a teacher, the turds used to be eight years for
vestting. And so under here, we just made it the same as purirs. Easy
And we feel like there was some fairness in that
with similar service times that employees
are vested with five years of service.
Next slide.
So the qualifications for retirement.
What does it take to get your pension?
This answers that question.
If you're in a non-public safety position,
you need to be 60 years
of age with 5 years
of services or at any age,
as long as you've done 30 years
of Service.
So if you start.
right out at let's say you're 22 years old you get a job as a teacher you could retire at 52
or police officer the same 30 years of service working straight through you would have earned
your pension i'm not talking about anything other than the pension right now prayers public safety
it's a little shorter age 50 with 25 years if service or 55 with 20 years in service why is it
with the health care aspects of the job
and the fact that, well, they just wear out faster
and you don't want old firefighters and policemen
wrestling 20 year olds.
That's kind of bottom line.
Public safety life's a little tougher on you.
As a retired police officer, I'll touch for that.
Next slide.
Retirees have skin in the game.
This is really a big one
because
What this plan does not do is it doesn't bring back the cost of living allowance of the old pensions where when you turn 65 years old
You get a 10% increase in the base of your pension
That all went away
Because it was expensive and necessary to keep it solvent, but it literally saves the plan
Hundreds and millions of dollars next slide
What we have done
is we've made the inflation protection,
the inflation proofing based on market valuation.
If the fund drops below 90%, you can lose your,
you could lose you inflation proof or have it reduced.
And this is important because it does keep the plan solvent,
and you see the states that do this.
Are funded very well. You say well, excuse me. I'm sorry.I'm gonna have some drink water
brief at ease
Thank you under siege
We're back on the record.
It's 1.59 PM.
Please continue.
Thank you for that kindness, Mr. Chairman.
On the inflation-proofing, again, this
is how retirees have skinned in the game,
is they will lose that 1 and 1 half, 2%, maybe bump,
yet the arm board recognizes as the impact of inflation
on their dollar.
That can just go away.
the dollar amount doesn't change but that's how they share the risk and the
actuaries have said that makes this plan very strong and there there is not a
lot of states that do this but the ones that we found that
do do it you can see they have very
strong retirement well-funded plans and that keeps everybody with skin in the
game which that what we want is a shared risk plan next slide kind of cop I
Like to sharpshoot legislation and poke holes, which is our job
But are there states out there?
That have plans similar to this proposed plan that their plan is in trouble
It's underfunded. It s going down. Are there are other examples of that? Can we go out? There and find?
Some state that has a plan similarly constructed and it's not doing well
I've been at this since 2016 and I haven't found any plan
That has this type of shared risk
That's anywhere close to being in trouble, you know, that mean I think you
know plans that are like this you they are solidly in the mid 80s to over a
hundred percent funded. They're very soft. Our plan is unique in that it has
actually more funding trigger levels than any other plan I've seen that share
the risk. There's very few plans to do the inflation proofing.
That have a 90% trigger that can move the employee and employer contribution
To adjust to the market to keep it at 90 percent funded
That's a that it's rare to have all those things coming into play
That what this plan does we we wanted to go overboard to
Have a plan that would consistently be well funded and if the legislature finds 10 years later that they don't want to pension
Thats 130 percent, funded
The way you can adjust that down is you
can say, well, maybe a teacher doesn't
have to work for 30 years.
Maybe they can work at 28 years and get their pension.
But future legislatures can decide that.
What we wanted to do is make sure
that what we had on the table was something
that was as bulletproof as possible.
And our review of states that have all these levers,
and it's not just our view.
It's the state's actuary.
Mr. David Kirschner.
The person that the state of Alaska relies on more than the other actuary to keep us out of trouble has said
This plan and their 25-year modeling
They do not see it producing any future unfunded liability in fact
They don't think the 90% levers will ever be triggered because it is so
It's structured so conservatively with the shared risk between the retirees the employees and the employers
So I'm confident that we're not gonna
Find a situation or a state that's like ours because it is unique how we structured it or one that has these levers that is under fund
Thank you. Thank You, Mr. Chairman
So retirement medical coverage. This is an important slide a lot of questions around medical care
We have found people care about this more than we all do
Health care is is really a big deal what we have done. I think to improve the
What current employees are facing is there is a requirement for all current
employees that work in this legislature that worked for this for the state or
local government who are in the defined contribution plan.
They have to retire directly from the plan now.
What that means is that to get your state of Alaska supplemental health card
when you hit Medicaid age at 65.
If you didn't have your minimum years of service and let's say you're a teacher and you were required to work 30 years, but you worked 20.
You would have to come back at 64 years age and work that year so
you could retire directly from the plan into Medicare at 65.
So you would hope a senator or a house member would hire you as a staff member at 54.
I'm just giving you an example.
I mean, you do,
you have come to back.
and get that job and work for a year because it requires that you be actively employed in
the plan 12 months prior retirement. The only way you could avoid that is if you work straight,
did your 30 years as a teacher or your 25 years, as the police officer, and you had all your time,
but that's not the way a lot of people do. They'll work 10 years. There'll be gone,
they'll go in the private sector for awhile and then they will come back and
we remove that requirement to retire directly from the plan because it acted
as a gatekeeper to keep people from ever getting their Medicare their medical
eligibility and in talking to the Alaska Retirement Management Board and about
our overfunded health trust we know there 150% over funded you know hundred
hundred and thirty eight percent funded depending on whether it's purge or
So, we're looking at how can we be more fair to employees because what the bill requires
is that you serve a minimum of 10 years.
If you've served 10 year, you will get your supplemental state health to help offset the
cost when you are basically dumped on the medic here.
You'll have some assistance from the state.
Now, do you pay more premium if you only work 10
years?
Yes.
employees who work 25 to 30 years will only have about a 20 percent premium.
Employees who only work 10 years can have
about 40 to 50 percent premiums.
So the premium takes care of that.
Your tiers of service are awarded by giving you a low-cost supplemental health plan
when you turn 65 to supplement Medicare.
So you see here what we've done for perrs and ters to get your pension.
Yes, you have to work 30
You're full health care.
We lowered that to 25 in this bill.
We did that with the working with
the arm board modeling this out and they say
this won't even make a dent in the overfunding
of the health trust.
For public safety, you still have to work
your 25 years to get your pension,
but you can get you full healthcare eligibility
when you've got 20 years in.
The idea was there is that's the main concern
of people and families is to have healthcare.
and why make them have to, you don't want somebody hanging on just for the health care,
that's the worst thing in the world to be trapped in a job, we thought it.
If we have severely overfunded health trusts and we can do that, it's good for our workforce,
it is good to our communities, and then you can see how we fund this, as far as building up
their health savings account, health retirement account. You get 3% of the average payroll in
a contribution of your individual health retirement account if you're a
purrs or turds and if your public safety it's 4%
of you job class. It's not 4 percent of
your pay. it is 4 of a percent your entire job
class for equity reasons because whether
you are the commissioner of public
safety or a first-year police officer or
saving the educators your health care needs are
the same so that's the average of the job
class thank you senator yantez question
Thank you through the chair to the representative so help me understand it and I think I got a grasp on a bit for those at home too so
One of our police officers works 22 years 23 years and so they qualify for the the health insurance part
But they don't for The pension what does that look like how much of their actual retirement do they get do
They leave just with their own contributions at that time?
what does that look like when you don't make it to the finish line 80 don t actually fully qualify
for the pension can you please explain that yes yes thank you through the chair senator yam
thank for that very good question so every year of service you accrue a percent of your base pay
so they don' t lose that so to your point if they worked 22 years and didn't quite make
22 years worth of service, which I can just tell you off the top of my head, that's going
to be around 40 some percent of their base salary would safely be theirs.
Now at 22 year they would be eligible to get their pension based on a minimum of 20 years
of services and they're at least 55 years of age.
Their other option is to work 25 years of service and then they can retire at 50
But they won't lose that once and public safety you are pension eligible
At 60 years, of age no matter what
Now you may have to wait to draw that pension until you're 60, but you don't loose any of that time
But but if you in your example, you gave me a 22 years
They would have already had the minimum beyond 22 to be able to drop their pension. Yeah
Okay, so and the and we're only talking about this because they've reached the 20 to get the health and so
Young State Troopers starts at 22 years old and at 44 years Old
He does that city he can no longer serve for whatever reason physical
where they move out of Alaska, whatever it may be.
And so he or she, they get the full health insurance,
but then they can't collect the whole pension
until they're older.
55, right.
55 at that time.
And then it's only gonna be whatever percentage.
Right.
And if they'd stayed the 25 years,
what would the percentage of their?
If they started at 22,
they would be able to,
if the 20 years are the twenty-five years straight,
they could,
they will be...
Well, 22 plus 25, 47 years, not very old.
They would be able to get a pension.
So, but under those scenarios, yes, there is a two-year point.
There's a waiting period.
You work 22 years if you're only 44 years old,
and you are not yet 50 or 55,
there's going to be a period of time
where you have to wait to collect your pension,
You know, would love to be able to say, hey, you know you can collect your pension based
on what you've accrued right away, but one of the things that makes this so fiscally
conservative is there is a minimum waiting period if you haven't completely satisfied
your required minimum years of service to get your, to
get you pension.
But again, with 22 years in service and public safety, they would have met the minimum and
then now it's just the age limit that they're waiting for so they can,
they could collect it.
If you worked for 20 years, you're able to collect it at 55.
If it worked 25 years you can collect at 50.
Thank you, sir.
Yeah.
I think this might be a good opportunity
to bring up this point.
In 2021, the Supreme Court came out
with a decision in the Metcalf case
that changed the landscape a tiny bit about this issue.
and at that time people raised the specter that suddenly throngs of
former state employees would come out of the woodwork to reclaim a benefit in a tier one or tier two
legacy pension. It's been some years since that decision has been into effect. Have we seen that
happen at all? Is there concern that that is happening? Does this bill have any effect on
Great question, thank you, Chair Borkman.
So this bill does not affect or impact
or in any way have a nexus with that court legislation.
That court, legislation, you're correct,
was referring to the legacy pension
and people who had served in it,
maybe it was just a year or two or a short period of time
left, would they ever be eligible to get back into it?
That has been ruled, but I don't know how many people actually took.
I know there were some that did certainly take advantage of that.
This pension is completely divorced and separate.
It's a separate trust account for the pension, separate health trust
account.
It is a brand new plan in no way tied to the legacy.
And one of my efforts in presenting this is to show how
It is a completely modern separate plan that's no way tied to the legacy debt.
Do I want the legacy debt to be paid off?
Yes, will this put us back in that situation?
Absolutely no, that that is not representative cop talking,
that are our state's actuary who told the House Finance Committee.
What's the best plan the state could have?
Representative Tomaszewski or Representative Joseph has to ask the question, he is without
a question.
It is this plan.
To define benefit plan as proposed in this, it is better for the employer and it's better
for employee and he's the person that keeps us out of the ditch.
So again it isn't tied to that.
That court case was allowing people to get back into that but it won't affect our proposed
payoff date of 2039.
We haven't seen anything with modeling that shows it produced a bump in liability that
Very well. Thank you. I just wanted to ask a question. It's been five years. One is no, right?
Throngs of people return as was forecast by right by some
We have we have not right that's correct sir. Thanks. You please continue
so
How is the choice
Did design you know we get a lot of questions around choice in this plan and what does it look like for current employees and new employees?
So how it's
The plan is before the committee now,
is that all defined contribution plan members,
all current employees in the defined
contribution plans will have 180 days
after this becomes law, to make a selection.
If you're defined contributions,
you can stay a defined
contribution employee.
You have six months to decide to stay,
or you have 6 months, 180
days to say, no, I want to enter
the Defined Benefit plan.
180 days during that time the arm board is going to put out an actuary analysis of individual
account so employees know exactly how much how many years of defined benefit service
their defined contribution account can purchase will it be a year for a
year or will be multiplier so it's a little bit less and then they'll be given options to
or accept that maybe they have a year, less than DB,
defined benefit, defined-benefit plan benefits
are more valuable because one,
they provide a lifetime pension to the occupational,
the death and disability benefits are better.
So those benefits, of course, are worth more.
And the other thing that this has is inflation-proofing.
So that's one reason why defined, benefit plan.
cost more simply the benefits are more valuable. But the goal is to have a one for one buy and
be as close to that as possible. And the market returns we're currently having.
A lot of employees will be able to buy in one-for-one because the markets are doing well.
So it depends on market experience. New employees. What if you're a brand new employee applying?
The new employees will be default enrolled
in the defined benefit plan, but they will have a choice
to opt out into the Defined Contribution Plan.
Maybe they're coming up for just one or two years
or three years and they know it.
They can immediately opt into
the define contribution plan.
But that choice remains open to them
until the five year investing.
So there's five years when they can decide
which plan ultimately do they want to be in.
That is how that is structured at this point next slide
Thank you through the chair and to represent in the cops I wanted to touch on that little bit that option
For me, I mean so I've I been studying the past
retirement system and trying to learn as much as possible about it.
Because I know this is going to be a big topic in the future.
And I have no doubt in my mind that the failure of that plan had a lot less to do with the
concept than it did with.
The organization of which the state of Alaska had hired that told us not to put money in, right?
That was a terrible idea.
Time value of money is a real thing.
And so.
But one of my concerns was, and maybe this has been laid to rest right now, I just want to clarify.
But somebody would have the option for either a DB or a DC
Right, that's correct and for up to five years, right?
If they get past five, years
Yeah, I mean I guess it's pretty clear in 10 or 15 years they wouldn't have an option to get back into it right but
Has there been any discussions on removing that option and trying to take away the option for people to do that and just go
Only with the defined benefit program or
Yes, so through the chair senator. Yeah, the discussion to this point
It's been a vigorous one really on on in the other body as well is is it is?
It better to have a a permanent choice in this system for new employees coming in
the proponents say if you are looking for engineers
or specifically more technical positions for projects,
a lot of those people would probably want to come up
and be in a DC plan.
They know they're going to be here two or three years
and that that would make it be more attractive
to hiring those peoples.
The other school of thought is that
the larger your defined benefit pension pool is the stronger it is and if that truly is
the plan that we believe will help stabilize and I certainly do believe it'll have a strong
stabilizing effect that that's that. We want to you know have people in that as as a as
a default enrollment right now the choice is there as you point out senator for up to
five years that choice remains I mean it's a it' s a policy choice the committee could
It is it is nice to have kind of a drop date just for this sake of the plan
That that employees are locked in at by a five-year mark to one or the other
Yeah, and I think that's probably a fair time frame
I will say going back and i was going to touch on this but you already did and all build on it
Is this state is built on very few people have been here a long time?
Like my mom's side of the family goes back to the late 1800s.
My dad's pretty new.
He was in the mid-70s, right?
People come here because of opportunity,
and maybe it's short term.
I think a lot of people's story is they came here for a year
or two or a project or to try something out,
and they fall in love with the place.
And they never want to leave.
And I would, you know, if we took that choice away
and didn't allow them to have that five-year choice.
then they might be reluctant to come here in the beginning, right?
Like you're saying, if we're trying to attack talent or engineers or whoever it may be,
I would just be very reluctant
to try to take that away because that might
be what actually helps them get here and then decide to stay,
right, and so you, yeah, I'm glad to hear there is a choice.
I was not aware of that and
so I just want to clarify and follow up on it and say I do.
I think that's a good idea.
Okay. Thank you sir.
Thank You Senator.
Okay, I think we covered that yeah
So this what what does it cost people say well, you know, what is your plan cost? So here's the slide
The the additional state contributions this slide if you just let your eyes go all the way over to the furthest right hand column
That 467 million is the key number as you can see for 13 fiscal years
um, the total investment from the state to cover the costs above and beyond the 22% cap
for local government is 467. So about 35.9, let's say 36 million a year would be the investment
pension option for their employees. The next slide shows what it would be for just state
employees so for state employees where the state is paying the full cost not just above 22% of payroll
is 687 million spread out over 13 years so that's about 52.8 million so you can see that total cost
Now, I would remind the committee that this, this investment has to be looked at in light
of the cost of what we're doing now.
We know that we are on track to pay over $200 million in just this fiscal year and overtime.
That we pay hundreds of millions of dollars in fines and errors and emissions, not submitting
And we're not able to capitalize on savings, which are conservatively estimated at 76 million dollars a year
That puts that number in
Really a stark contrast and I look at that as an investment in
Stabilizing the service delivery to Alaska
But those are the costs not not what we are saying
That's what the actuaries saying and i would also remind the committee that in 2039
when our unfunded liability from the legacy debt is paid off,
Alaska is going to be in a fantastic spot.
Going forward, next slide.
So, what do Alaskans say about this?
A couple of years ago,
a Patecan surveys did a statewide survey.
They surveyed every district in the state.
They survey labor households,
non-labor private sector, public sector.
And we saw almost a 70 percent favorable response towards this type of a structured,
shared risk retirement plan.
You can see every area of Alaska.
Interior, Kenai, Southeast, Anchorage, Fairbanks,
Matt Sioux with the favorability was what the option,
what they opposed was, and what
the undecided and unknown was.
So we saw that we had some education
to do, the average unknown in Alaska
or undecided was 15%.
So, but.
At First Blanche, most people know we have to do something to improve the retirement system that we
have you. It doesn't take a lot of convincing because most
people are living in communities where they are concerned about turnover and churn and they're
hearing about it at their local council and assembly meetings and
they know it's a real factor. Next slide.
Internally, so that's externally. Internaly, our Department of Public Safety, surveyed
their own employees, 458 employees. 82.6% made it clear they prefer to define benefit.
Now what this shows is for those employees that have a defined benefit, almost 97% of
them, that is what they wanted to be in. And 3.3% said no, I'd rather be a define contribution.
If you if they were in the defined contribution plan
75.7 percent said I'd rather be in a defined benefit plan and
23 percent set I would rather being a define contribution and that's how you get your average of 82.6 percent prefer DB. So
We have a pretty reliable survey sample knowing where our employees are at, but what's important
when you look back to the previous slide on the actuaries that we were talking about is the
actuaries give us the most conservative number assuming 100% of your employees
are going to choose DB. But they also say they're not. You're going have 80-20 maybe 75-25 split
and these numbers will be less. Your costs actually will
be left. They will not be this high, but we have to give you a
fully loaded cost, assuming 100% of your people are all going to
come out of the defined contribution system and go into the
defined benefit. So I wanted to remind the committee that the
numbers I'm giving you are the most expensive it could possibly
be. And our actuaries are saying it will
not beat as much. But our fiduciary duties to tell you that
if you had 100%, people choose it, that's what it would be so
I just wanted to give some context that.
So now we're just to the emphasis that we are really
investing in our state's economy.
And it's not.
It's not anything other than what can we do to lower our training costs,
lower turn over, provide better services to Alaskans,
which is really what this comes down to.
We know that we're seeing more and more extreme weather events,
whether it's fire suppression, flooding, winter storms, plowing.
We need our educators, our plow truck drivers,
our public safety people.
I mean, we get this intuitively as Alascans.
You know, a world-renowned economist, Dr. Trisa Guillerducci, who's been a pension officer for
red states, blue states. Worked for President Bush on his cabinet level position on retirement.
programs and she looked at what we're doing here in Alaska and said, you know, the most
conservative estimate I can give you is the state will see a minimum of 76 million dollars
a year, bottom line savings to the Treasury just from saving these lost monies right here,
the training costs, lost workforce hours and basically restoring the services to Alaskans
paying for. I've already mentioned the errors and admissions that we're doing and our high
rates of premium pay. Next slide. So the plan where we are recommending and offer the committee
for their consideration is one that our actuaries are saying will reduce the high turnover. It will
it will you'll be able to keep your more technical people like your finance officers that are
vacating our agencies, which is causing the audits to be so poor. You know, those more
skilled technical positions, this is what that's addressing. We do look at it as a very strategic
investment in our workforce culture. And I would just quote from David Kirschner at the House
this plan is going to reduce your turnover.
It's gonna incentivize people to stay.
You will find that you will meet your goals as stated
and argued for that the state needs right now.
And that's the actuaries expectation.
So in closing, Mr. Chairman, I just want to
It clearly separates the two concepts that are often conflated in this pension discussion.
And the first is Alaska's legacy pension liability.
That liability comes from retirement tiers that closed 20 years ago.
It is already on a fixed amortization schedule under current law and is expected to be fully paid off by 2039.
That obligation exists whether we pass House Bill 78 or not.
House bill 78 does not add to that legacy debt.
What House Bill 78 addresses is the cost of future service,
the costs of providing a stable retirement benefit
that's going forward.
And according to Gallagher's actuarial analysis,
again, the state's actuary,
the normal cost
of House bills 78 by itself unburdened
by anything other than what is
the plan cost is 10% of payroll for PERS.
What are we paying now?
Local governments are paying 22 percent and the state is paying another five six seven percent more
It's gonna go all the way down to ten percent under this plan and for tours the teachers nine point five five percent
Those numbers matter because they are so far below
This what the statute cap is already requiring them to pay
That means once our legacy liability is paid off Alaska is gonna transition from a high cost
Unstable system to a predictable retirement structure with contribution rates that are materially lower than today's levels.
Doing nothing does not make these costs go away, but it guarantees we continue paying legacy debt while absorbing the much larger and less visible cost of workforce instability, premium pay turnover, vacancies, and service failures.
House Bill 78 is not about expanding pensions, it's about finishing the job responsibly.
and putting in place a retirement system that is affordable, predictable, and capable of retaining the workforce that Alaska depends on.
I want to thank you, Mr. Chairman and the committee for your patience,
and I'm happy to answer any questions.
Thank you very much, Rep. Cobb.
Any questions?
Senator Yant.
Thank You. Through the chair to Representative Cobb, so.
Couple more that we're gonna go back to the time value of money here in it
You laid to rest a really big concern of mine earlier
life expectancies are
Increasing that's a good thing. They're a lot longer than they were when our grandparents were here our parents, right?
So
The shared risk part
I appreciate that. I'm glad that sent there was that in the last plan
From it close years ago
No, it wasn't. All the risk was on the employers.
So, yeah, that's a massive improvement, and especially as artificial intelligence comes
into the market,
it does probably start helping us detect diseases earlier and live longer, right?
Yeah.
The trigger, when you drop down a 90%, then the employee can go from an 8% to a 12%
contribution.
Is there a trigger prior to 90, or is that when it hits? Does it softly start setting
Wait till 90 through the chair. We center you out. That's that's a great
insightful question
So it is at 90% and the reason why that came up is the actuaries look at
90 percent as kind of being the gold standard for pension funding and in other words your your projected liabilities
compared
to the assets that you have in the plan, if you're funded at 90% or more, that's what they look at
is the ideal standard for a pension long term. And so we arrived at that with the consulting
looking at, but there is no mechanism. 90 percent would require them.
To to kick in the bill doesn't say that they may not be for them
But 90% that that is what activates the trigger. Yes, I would just encourage you to look at it
You know, if it gets all the way down at 90% you wake up as an employee one day and you go from 8% to 12
That 4% is 50% over the original eight
It's a it's big change in your paycheck, right?
And then really you've lost the opportunity for time value of money now
You're trying to make up for your investments on the backside where maybe they would have rather preferred putting in
In a quarter eight and a half nine for a while and never getting down there. So it says something to look at
I think I got all my questions for today answered through the chair, Senator, so I don't think
I emphasized this well in my initial rollout and I apologize but the actuary or David
Kirschner of the state's actuaries said that every 0.1 percent of increase actually
raises tens of millions of dollars so he said if there was an adjustment made it would be
going to 8 to 0.1. And when they modeled all the market
corrections that you know you and I have seen in the last 15
years, they were never able to come up with a market
situation where the plan ever got down to 90 percent even
with those corrections in it. But they said should we need to
do that. It would it would be a small bump. Um and so but to
address your concern which I think is great. I mean you're
right it wouldn't be shock to an employee to go from 8
But it just sets a range.
So it would have to be, you know, if there was an increase
like that, it'd be something catastrophic
that we have not seen in our lifetimes.
So.
And then real quick,
if you could please just speak to me the record,
who it is that's looking all this over
that doesn't have a vested interest on either side?
Who are the third party companies that are involved?
Who's taking a look at it that is not working
on behalf of either-side?
Sure, thank you.
Great question.
Senator Yant.
The fiduciary duty and the people who look out for the state's interest are the actuaries.
So that would be David Kirschner of Gallagher and Associates.
That would the arm board's actuary and that'd be a third party actuary who the State hires
to double check both of those.
I don't have the names of the those people.
I think one of them is, I dunno if it's Callan, but the armboard has their...
So you talk about third parties, the state relies on these basically CPAs,
but they specialize in pension finance.
Thank you. And perhaps between now and the next committee hearing,
if you could come back with who it is, their experience,
other states are working with and their resume, perhaps,
just so that we can, there's people out there that want to make sure that
we're working on with good individuals.
Thank You, Senator. We'll do that.
Any further questions?
Appreciate the commentary from Senator Yunt and your answers representative cop in talking about
Just by way of my own comments on your presentation. Thank you very much for that and talking
about the main functions and and need for
This piece of legislation, number one, I think you very well addressed the need to save money and additional cash that the state is literally bleeding because we can't attract and retain employees.
Thank you for bringing that to light.
Part of that also includes people who come here for a time and they don't have or they're not encouraged by our retirement plan and system to stay.
And I think when we talk about the option of choice for new employees,
I really need to discuss that and having a system that allows people
to practice some kind of tourism here.
But also what the alternative is,
is when people come to our state and then choose to leave
with their defined contribution plan, that money leaves our plan.
Which you point out on slide nine, if folks want to refer to the amounts of money on
our plans could have had in them those amounts of money,
$160 million, $500 million for years and years.
But since we started having defined contribution plans
which essentially flow money hundreds of millions of dollars
out of the state, not of our retirement systems,
that's a significant hit to what could
have been dollars that were used
or would have used to pay off our past service cost
So, as you look at this, we see allowing an option in this bill, although it does have
some tertiary benefits, it weakens the financial strength of this plan and makes it less financially
conservative.
Also, I think it's important to remember that when people pay into a pension and they choose
to leave after a few years, the amount of money that they rightfully earn in their pension
They still are able to get a payment from the pension that they have earned when they're eligible for it when
they reach reach the the Pensioner age
The benefit to the state of Alaska and all of the rest of
the employees that remain in that plan is that the money that
They have invested in their pension. It stays with the State of Alaska
so that we all, and that pensioner themselves with that little bit of money there,
they experience benefit from that money growing over time.
The way it's set up currently,
and if a choice option is allowed to remain in the bill, that one leaves.
And it does not, it may benefit that person who comes to Alaska to visit and says,
oh, hey, nice place back to Montana for me.
Kind of get left held in holding the bag of retraining and all of the costs that we you just discussed
So that's kind of a flip side for me of this choice issue
It is all about the time value of money and having Alaska dollars that
We put out in payroll
Stay in Alaska for the benefit of all Alaskans instead of shipping them out somewhere else to join someone else's plan
That's that so I feel about this
Appreciate that. Did you have any invited testifiers that you'd like to like join us today?
Mr. Chairman we do not very well. Well, you did great. Thank you
Further questions or comments?
Okay
Seeing no further questions comments or clarifications on this bill. We will set house bill 78 aside for further consideration at a future meeting
Our next meeting of the Senate Labor and Commerce Committee will occur on Monday, January 26th when we will again take up House Bill 78 as well as Senate Bill 170 gaming electronic pull tabs.
As there is no further business come before the senate labor and commerce committee at this time, we are adjourned at 2.39 PM.