Legislature(2021 - 2022)ADAMS 519
05/05/2021 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB70 | |
| HB55 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 70 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
| += | HB 55 | TELECONFERENCED | |
HOUSE BILL NO. 55
"An Act relating to participation of certain peace
officers and firefighters in the defined benefit and
defined contribution plans of the Public Employees'
Retirement System of Alaska; relating to eligibility
of peace officers and firefighters for medical,
disability, and death benefits; relating to liability
of the Public Employees' Retirement System of Alaska;
and providing for an effective date."
2:57:48 PM
AT EASE
2:58:12 PM
RECONVENED
DAVID KERSHNER, PRINCIPAL AND CONSULTING ACTUARY, BUCK
GLOBAL (via teleconference), shared that the firm was the
actuary for the Department of Administration Division of
Retirement and Benefits. He continued that Buck Global had
completed a cost-benefit analysis for the bill. He asked if
he should summarize the key elements of the bill and the
costs.
Co-Chair Merrick agreed.
Mr. Kershner explained that the bill would allow active
members of the Peace Officers and Firefighters an
opportunity to transfer to the Public Employees' Retirement
System (PERS) Defined Benefit (DB) Plan which currently
only covered employees hired prior to July 2006. The
Defined Contribution (DC) Plan covered those hired after
2006. The bill proposed that all future hires would enter
the DB plan. There was a separate schedule of benefit
provisions that would apply to the members covered by the
bill, as well as cost-sharing provisions. He relayed that
the Alaska Retirement Management (ARM) Board oversaw the
funding of the PERS system, and per statute all employers
contributed a fixed 22 percent of pay to the PERS system. A
portion went to the DC plan and the remainder of the 22
percent went to the DB plan. The cost sharing would not
change, but under the bill a new separate trust would be
established in the PERS system that would cover the
benefits provide for the members affected by HB 55. All the
assets contributed to the trust would be separately tracked
and dedicated for the members.
Mr. Kershner continued to describe the provisions of the
bill. He explained that currently PERS employer
contribution rate was fixed at 22 percent, and the
actuarial contribution was based on ARM board policy. The
excess of the contribution rate was the additional state
contribution rate. He cited that currently the members
covered under HB 55 had just under 10 percent of pay
contributed to the DC plan, and the remainder contributed
to the DB plan. Under HB 55, there would be 12 percent
going to the trust as well as the HRA accounts currently
set up, which left 12 percent to go towards the DB plan.
The portion of the employee contribution going toward the
DB benefit plan for members would decrease from 12.2
percent to 10 percent of pay. The difference would have to
be made up per ARM Board policy and was made up by
additional state contributions. The fiscal note included
the estimated increase for five years starting of about
$5.3 million in FY 23 and $28.4 million for the five years
after.
3:04:57 PM
Representative Thompson asked what the figure would be with
correctional officers included.
Mr. Kershner replied that he was not certain the
corrections officers were included in the group of peace
officers and firefighters in the bill.
Representative Josephson clarified that corrections
officers were covered as part of the group.
Mr. Kershner was happy to provide further details or answer
questions.
Representative Josephson asked if the plan would be solvent
if Alaska had just become a state and the only DB plan was
for peace officers and firefighters.
Mr. Kershner answered in the affirmative. If the plan had
just started there would be no assets or liabilities, and
under the funding policy each year a percentage of pay
would be contributed that was equivalent to the cost of
benefits accruing under the plan. As long as the actuarial
calculations projected dozens of years into the future, and
if there were related to life expectation, length of
employment, and salary amounts. He acknowledged that in any
given year the assumptions would not be correct, but they
should be reasonably close to actual experience in the
long-term. He noted that every year there were deviations
from the assumptions, and if assets did not earn as much as
expected there were created losses to the plan and the
losses had to be funded over a period of time.
Mr. Kershner continued that if the plan started in the
present, and all of the experience matched assumptions for
the future, accrued benefits would be funded and the state
would never have any of the losses. The state would only be
funding the benefits accruing annually in the 8 to 9
percent range. He noted that the PERS DB plan was
significantly underfunded at present and the cost for the
DB plan was a makeup for the current costs in addition to
unfunded liabilities accumulated over time. He affirmed
that if the plan were to start today, the cost sharing and
contribution rates proposed in SB 55 would be enough to
cover the cost of the benefits if all future experience
matched the assumptions.
3:10:08 PM
Representative Josephson reiterated that if the plan was
starting fresh it would be solvent at inception and without
a negative history. He referenced HB 79 from the previous
legislature, which was related to the same topic and
"virtually identical." He recalled that Mr. Kershner had
determined that HB 79 was anticipated to be somewhere above
99 percent anticipated solvent.
Mr. Kershner answered that the HB 55 trust that would cover
the liabilities for the members as well as the assets being
transferred in, was expected to remain solvent for many
years. He addressed the $5.3 million cost increase for FY
23 that was due to the portion of the 22 percent employer
contribution currently going into the DB plan, and noted
that more would go to the new trust. The increase was not
because the HB 55 trust was not solvent or expected to
remain solvent, rather there was a shifting of the 22
percent between the various trusts was giving rise to cost
increases.
3:12:45 PM
Representative LeBon referenced HB 79 from the previous
legislature, which was related to the same topic. He
recalled that the fiscal note had totaled $18 million
through the five years ending 2027, and he thought the note
had jumped up to $28 million for the same period. He asked
about the unfunded liability for the PERS program, and
referenced an amendment proposed to transfer about $1
billion from the Permanent Fund to PERS to close the
unfunded liability. He asked what impact the action would
have had in the discussion about a DB program as proposed
by HB 55.
Mr. Kershner replied that if $1 billion were transferred
into the DB plan, the cost impact of HB 55 would likely be
similar to what Buck had determined for the bill because
the current additional state contribution would go down.
The plan would start from a lower funding point, and the
provision of HB 55 would enact the same cost increases
through a shifting of contributions. Under HB 55, the state
would contribute about $5.2 million less into the DB plan,
and the cost would be independent of the $1 billion. He
contemplated the scenario of putting $3 billion or $4
billion into the PERS system, which would likely wipe out
the initial state contribution entirely with no increase.
He acknowledged that a $1 billion contribution would help
the funding of the DB plan, but it would not eliminate
underfunding, and there would still be an additional state
contribution of a lower amount.
Mr. Kershner mentioned the analysis of HB 79 and noted that
the most recent analysis was in February 2020. The process
had started about a year earlier and was based on 2018 data
because it had been the most recent available data at the
time. The HB 55 analysis was based on 2020 data, and in the
two years the payroll for peace officers and firefighters
had increased about 11 percent in total for a larger pay
base resulting in larger dollar amounts than under HB 79.
3:17:09 PM
Representative LeBon stated that one of his motivations in
the discussion was two-fold. He believed that establishing
a new DB program meant the state needed to consider that
the current DB plan was still underfunded. He believed it
needed to be fixed. He stated that it would take 18 years
to close the current liability. He added that he may have
included Teachers' Retirement System (TRS) in the estimate.
He asked about fixing the liability and making room in the
budget for a new DB plan.
Co-Chair Merrick noted that Mr. Kershner had referenced an
11 percent increase in payroll. She asked if it was because
the state had hired more officers or increased pay for
existing officers.
Mr. Kershner answered that the increase was a combination
of both factors. There were more active members than in
2018, and the recent pay increases had been more than
expected.
3:19:41 PM
Representative Wool referenced Representative Josephson's
question about whether the plan from SB 55 would be solvent
if it was isolated on its own. He thought Mr. Kershner had
given the plan a high score.
Mr. Kershner answered affirmatively.
Representative Wool thought because the state already had
an underfunded DB system, it was not possible to keep the
two plans separate entities. He asked if it was possible to
pay down the old system while maintaining the new system
proposed in the bill.
Mr. Kershner replied that based on the way the bill was
designed, the HB 55 members would be employees under the
PERS system and PERS employers contributed 22 percent of
pay, which was allocated to different trusts depending upon
the specific yearly calculations. He continued that if the
HB 55 plan was established separately from PERS, it could
turn out to be more or less expensive. He explained that
under HB 55, part of the 10 percent of the payroll for
peace officers and firefighters would being deposited into
the underfunded DB plan. Currently about 12.2 percent of
pay was deposited into the plan. The decrease from 12.2
percent to 10 percent was equivalent to about $5.2 million,
which was reflected in the increase in the fiscal note for
FY 23. The amounts would be a shifting of contributions
away from the unfunded liability in the DB plan, and the
amount would be made up through the additional state
contribution.
3:23:05 PM
Representative Wool asked about the conversations on
solvency and the efficacy of the plans. He recalled that if
the market returns dropped, there was a trigger and
employees would have to contribute more. He considered the
increased retention the groups would likely experience,
which was one of the purposes of the bill. He asked if it
was included in the analysis.
Mr. Kershner answered that there were two triggers within
HB 55 that meant if the HB 55 trust were to fall below a 90
percent funding level, the post-retirement pension
adjustment could be limited, or the current 8 percent
member contribution could be increased to ten percent. The
two provisions had not come into play because the HB 55
trust was not anticipated to fall below 90 percent funded;
however, if it did fall below, the two items could be
triggered. He asked for a repeat of the rest of the
question.
Representative Wool asked if increased retention of members
was included in the calculations.
Mr. Kershner answered in the affirmative. The current
active members were projected through retirement, all
current retired members through the retired years based on
life expectancy, and a certain percentage of the members
were expected to terminate employment every year. The
assumptions depended on age, service, gender, and other
factors. The withdrawal assumption rates were higher than
the corresponding rates in the DB plan due to the general
tendency to have more workforce mobility for those covered
by a DC plan compared to a DB plan. The lower turnover
assumptions were used for members expected to transfer into
the DB plan.
3:27:00 PM
Representative LeBon looked at the fiscal note (OMB
Component Number 2866) showing $5.3 million in FY 23 with
upward growth to $5.6 million, and $6.1 million in the
subsequent years. He was not surprised there was upward
growth in funding. He noted it dropped to $5.7 million in
FY 26 and FY 27 and thought the funding impact to the
proposed program had many unknowns. He felt there was a
sense of urgency to deal with the unfunded liability prior
to opening another DB program.
Representative Josephson was concerned about the
possibility of waiting another 20 years. He looked at the
amortization period out to pay off the unfunded liability
went out to 2041. He asked if the estimate was correct.
Mr. Kershner answered in the affirmative.
Representative Josephson shared that he was currently 56
years old and would be 77 when the unfunded liability was
retired. He thought the implication of adding the fiscal
note would result in an additional 6 months of payment.
3:29:34 PM
Mr. Kershner responded that all projections were based on
current funding status and expectations about the future,
which included assets growing about 7.4 percent per year.
He noted that in the current fiscal year assets had
returned much greater than 7.4 percent, but the previous
two or three years had been unfavorable to the plan. He
cautioned that projections could change significantly
depending upon the experience to the plan on the asset and
liability sides. There could be gains or losses on both the
returns and liabilities. He discussed the retirement
expectation and explained that if people retired earlier
than expected it would create a loss to the plan.
Similarly, if the plan population had greater or lesser
life expectancy than the standard calculation it could
cause a gain or loss to the plan.
Representative Josephson clarified that he was asking if
the bill did not add substantially to the 20-year journey
of paying down the unfunded liability.
Mr. Kershner answered that based on the current
calculations it was correct.
Representative LeBon surmised that it could become a very
short journey if the underfunded liability in the existing
plan was paid and thought it would help justify a new plan.
HB 55 was HEARD and HELD in committee for further
consideration.
Co-Chair Merrick reviewed the schedule for the following
morning.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 70 HFIN DOT CAPITAL - 05.05.2021.pdf |
HFIN 5/5/2021 1:30:00 PM |
HB 70 |
| HB 55 Amendments 1-2 041121.pdf |
HFIN 5/5/2021 1:30:00 PM |
HB 55 |