Legislature(2013 - 2014)HOUSE FINANCE 519

04/12/2014 02:00 PM FINANCE

Download Mp3. <- Right click and save file as

* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Delayed to Call of the Chair --
Heard & Held
Scheduled But Not Heard
Heard & Held
Scheduled But Not Heard
Scheduled But Not Heard
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 385                                                                                                            
     "An Act  relating to additional state  contributions to                                                                    
     the teachers'  defined benefit retirement plan  and the                                                                    
     public employees' defined  benefit retirement plan; and                                                                    
     providing for an effective date."                                                                                          
2:55:31 PM                                                                                                                    
ANGELA   RODELL,   COMMISSIONER,  DEPARTMENT   OF   REVENUE,                                                                    
introduced  the Public  Employees' Retirement  System (PERS)                                                                    
and  Teachers  Retirement   System  (TRS)  funding  solution                                                                    
legislation.  She understood  that  legislators also  worked                                                                    
diligently to arrive at a  solution for the state's unfunded                                                                    
liability  weighing the  long-term financial  impact against                                                                    
other demands on the state's resources.                                                                                         
Commissioner  Rodell remarked  that pension  funding was  an                                                                    
issue  for many  years.  She recounted  that  the issue  was                                                                    
addressed  in   November  2010  by  the   Alaska  Retirement                                                                    
Management Board  (ARMB) and a  number of  different options                                                                    
were  considered. She  stated that  in  September 2011,  the                                                                    
governor  asked the  ARMB to  seek  potential solutions.  In                                                                    
2012,  the ARMB  adopted  the "level  dollar" approach;  the                                                                    
lowest cost option  in the long-term. Within  two years, the                                                                    
actuarial reports  revealed the  long-term budget  impact of                                                                    
the  approach,  which   prompted  further  examination.  The                                                                    
actuarial  reports exposed  the  "real value"  in the  level                                                                    
dollar   approach  in   terms  of   lower  costs,   but  the                                                                    
administration also  understood the  real value  in creating                                                                    
"budget  certainty and  budget  durability." She  underlined                                                                    
that the solution was a  compromise between the level dollar                                                                    
approach  and   initially  pre-funding  a  portion   of  the                                                                    
liability  and creating  budget  certainty  with an  ongoing                                                                    
MICHAEL   BARNHILL,  DEPUTY   COMMISSIONER,  DEPARTMENT   OF                                                                    
ADMINISTRATION,  discussed  the  Power  Point  Presentation:                                                                    
"PERS/TRS Funding Solution, Governor  Sean Parnell" (copy on                                                                    
file). He  reported that the  first several  slides provided                                                                    
background information on  the issue. He began  with Slide 3                                                                    
and explained  that the defined  benefit pension  system was                                                                    
administered by three entities:                                                                                                 
     1) Department of Revenue                                                                                                   
        Treasury Division                                                                                                       
        Invests retirement system assets                                                                                        
     2) Alaska Retirement Management Board                                                                                      
        Sets contribution rates, invests retirement system                                                                      
     3) Dept. of Administration                                                                                                 
        Division of Retirement & Benefits                                                                                       
        Administers retirement and benefits system.                                                                             
Mr.  Barnhill expounded  that the  retirement system  assets                                                                    
amounted to $20 billion  and the defined contribution assets                                                                    
were approximately  $5 billion. He  added that the  ARMB had                                                                    
nine  members appointed  by the  Governor comprised  of PERS                                                                    
and  TRS  employees,  two   public  members,  one  municipal                                                                    
finance officer,  and two  commissioners. The  Department of                                                                    
Administration  (DOA) administered  the  pension and  health                                                                    
care benefits which amounted to $1.5 billion per year.                                                                          
Mr.  Barnhill  continued  with slide  4:  "Membership."  The                                                                    
slide depicted a chart  containing the membership statistics                                                                    
as  of December  31,  2013. He  highlighted  that the  state                                                                    
employed  27,000 active  members of  PERS and  TERS and  had                                                                    
42,000 retirees. Including  dependents approximately 120,000                                                                    
people were encompassed under PERS and TRS plans.                                                                               
Mr.  Barnhill  discussed  slide  5:  "Benefits."  The  graph                                                                    
depicted  the projected  benefits payments.  The system  was                                                                    
projected  to  pay $136  billion  in  benefits by  2070.  He                                                                    
reported  that  the  current PERS/TRS  account  balance  was                                                                    
$19.9  billion.  [The  unfunded liability  reported  on  the                                                                    
slide amounted to approximately $11.9 billion.]                                                                                 
Mr. Barnhill discussed slide 6:                                                                                                 
                         Defined Benefits                                                                                       
     Defined Benefit Pension: fixed benefit amount from                                                                         
     date of retirement to death                                                                                                
     Contributions + Investment Earnings = Benefits +                                                                           
          Experience equals actuarial assumptions                                                                               
     Actuarial Assumptions:                                                                                                     
     Inflation,  Investment   Return,  Mortality,   Date  of                                                                    
     Retirement,   Cost  of   Healthcare,  Payroll   Growth,                                                                    
     Disability, Spouse Age,  Dependent Children, COLA, Plan                                                                    
     Expenses, Turnover                                                                                                         
     Experience that falls short of projections leads to                                                                        
     unfunded liability                                                                                                         
                         Employer Takes the Risk                                                                                
Mr. Barnhill informed the committee  that the critical piece                                                                    
of the defined benefit  formula was investment earnings. The                                                                    
state's active  employees contributed  6.75 percent  to 8.75                                                                    
percent of  their salary  to the plan.  The actuary  set the                                                                    
rates  each  year for  the  amount  the employer  needed  to                                                                    
contribute. The  rates were highly unstable  since 2002. The                                                                    
current balance determined the rates;  set at 12 percent for                                                                    
TRS and under 10 percent  for PERS. In addition, health care                                                                    
cost   projections    were   not    satisfactory.   Employer                                                                    
contribution  rates   rose  dramatically  since   the  early                                                                    
2000's. The  projected FY 15 employer  contribution rate was                                                                    
over 40  percent for PERS  and over  70 percent for  TRS. He                                                                    
elaborated that  two types of  costs or rates  were included                                                                    
in a  defined benefit system.  The normal cost was  the rate                                                                    
collected from  employees and employers.  Nothing additional                                                                    
was  necessary  beyond  the normal  cost  if  all  actuarial                                                                    
assumptions  were correct.  The  actuarial projections  were                                                                    
not correct and were underestimated  over the last 10 years.                                                                    
The  underestimated  contributions  were known  as  a  "past                                                                    
service   liability"   and    a   past   service   liability                                                                    
contribution  rate  was  established by  the  actuarial.  He                                                                    
emphasized  that  when   the  actuarial  underestimates  the                                                                    
employer takes the  risk. The situation lead  to the current                                                                    
challenge  for  the state  of  how  to manage  the  unfunded                                                                    
3:05:04 PM                                                                                                                    
Mr. Barnhill turned to slide 7: "Events."                                                                                       
     2002 - Milliman actuarial audit; dotcom collapse                                                                           
     2003  -  FY  2002   valuations  released  with  revised                                                                    
     $4.1B unfunded liability                                                                                                   
     2005  -  SB 141  enacted:  DB  plans closed;  DC  plans                                                                    
     created; PERB/TRB/ASPIB sunset; ARM Board created                                                                          
     2007  -  ARM  Board   files  suit  against  Mercer  for                                                                    
     actuarial negligence; SB 123 enacted: PERS cost share                                                                      
     2008  - SB  125  enacted:  employer contribution  rates                                                                    
     capped;  state   assistance  begins;   Great  Recession                                                                    
     2009 - PERS / TRS investment loss: (20.5%)                                                                                 
     2010  -  Mercer  litigation  settled  for  $500mm  (net                                                                    
     $403mm); other states begin to  cut DB benefits, change                                                                    
     2012 -  ARMB adopts  level dollar  amortization; $11.9B                                                                    
     unfunded liability                                                                                                         
     2013 - 12.5% investment gain; recession over?                                                                              
Mr.  Barnhill  summarized  that throughout  the  1990's  the                                                                    
impact of  growing healthcare costs were  underestimated and                                                                    
the  collective downturn  in the  investment  market in  the                                                                    
early 2000's and  again in 2009 were the  largest drivers of                                                                    
the current unfunded liability of $11.9 billion.                                                                                
Mr. Barnhill moved to slide  8: "PERS/TRS Balance Sheet." He                                                                    
explained  that an  80 percent  funding ratio  was a  common                                                                    
gauge for  a healthy  system. Both  PERS (61.3  percent) and                                                                    
TRS (52.1  percent) were well  under the 80  percent funding                                                                    
ratio  which indicated  additional funding  was needed.  The                                                                    
total  balance  for  both  accounts  was  approximately  $20                                                                    
Mr. Barnhill  addressed the  graphs on Slides  9 and  10. He                                                                    
believed   that  the   state  appropriated   "extraordinary"                                                                    
amounts on  behalf of public employees  and school districts                                                                    
each  year.  The  current  year  contribution  totaled  $3.3                                                                    
billion;  $1.7   was  appropriated   on  behalf   of  school                                                                    
districts  and   $1.6  billion   for  state   and  municipal                                                                    
employees.  He  questioned  whether school  districts  could                                                                    
have existed without the state's contributions.                                                                                 
Mr. Barnhill discussed the multiple  approaches to deal with                                                                    
the  unfunded liability.  He  discussed  Slide 9:  "PERS/TRS                                                                    
Approaches  to  Unfunded  Liability."  He  noted  that  ARMB                                                                    
amortized  the  unfunded  liability  over 25  years  at  the                                                                    
"level percentage  of pay" methodology. The  payments on the                                                                    
unfunded liability  were expected to  grow at the  same rate                                                                    
as payroll would grow (approximately  4 percent).  He termed                                                                    
the system  as a "back loaded"  amortization methodology and                                                                    
defined  it as  a system  where contributions  were less  in                                                                    
earlier  years  and  increased in  later  years  in  nominal                                                                    
dollar terms. He  noted that slide 9  illustrated the trend,                                                                    
depicting  payments  ranging  from  $700  million  per  year                                                                    
currently and  increasing to well  over $2 billion  per year                                                                    
in  the  late  2020's.   The  ARMB  considered  the  payment                                                                    
methodology  with  dozens  of scenarios  with  the  goal  of                                                                    
paying it down in an affordable way.                                                                                            
Mr.  Barnhill discussed  slide 10:  "PERS/TRS Approaches  to                                                                    
Unfunded Liability." The ARMB  adopted a new methodology for                                                                    
amortizing the unfunded liability  called "Level Dollar." He                                                                    
delineated  that   level  dollar   was  formula   based  and                                                                    
identical  to home  mortgage  amortization  with equal  flat                                                                    
level payments over the amortization  period; referred to as                                                                    
a "front  loaded" amortization  methodology. He  pointed out                                                                    
that the profile of the graph  curve from FY 2015 through FY                                                                    
2030  depicted higher  payments earlier  and lower  payments                                                                    
later. If  adopted the payments  would go from  $630 million                                                                    
in FY 2014  up to $975 million in 2015  and would crest over                                                                    
$1 billion  in FY 2016  through FY  2020 and begin  to trend                                                                    
down. The main concern was  finding consensus on what amount                                                                    
was affordable.  He thought that  the general  consensus was                                                                    
that multiple  billion dollar payments were  not affordable.                                                                    
The  administration searched  for a  more affordable  way of                                                                    
responsibly amortizing  the unfunded  liability in  the next                                                                    
several years.                                                                                                                  
GARY  BADER, CHIEF  INVESTMENT  OFFICER, TREASURY  DIVISION,                                                                    
DEPARTMENT  OF REVENUE,  announced  that  that the  benefits                                                                    
were   secure  today,   but  unless   addressed  soon,   the                                                                    
combination   of   increased   benefits   and   insufficient                                                                    
investments impacted the rate  of return, leading to reduced                                                                    
earnings  and increased  contributions. He  turned to  slide                                                                    
     Fund Liquidity Analysis                                                                                                    
     Although there is a substantial unfunded liability in                                                                      
     both the PERS and TRS, there are billions of dollars                                                                       
     to pay benefits well into the future.                                                                                      
     Benefits  payments will  increase substantially  in the                                                                    
     next  decade.  Unless  addressed,  the  combination  of                                                                    
     increased benefit  payments and insufficient  assets in                                                                    
     the  trusts  will  require  investing  in  more  liquid                                                                    
Mr.  Bader discussed  slide  13:  "Comparative Returns."  He                                                                    
stated  that  the  table  illustrated  the  returns  of  the                                                                    
state's  largest   funds:  PERS/TERS,   CBR  (Constitutional                                                                    
Budget  Reserve)   and  the  APFC  (Alaska   Permanent  Fund                                                                    
Corporation.) He pointed  out that the PERS and  TRS and the                                                                    
Permanent Fund  had similar earnings  over time.  Both funds                                                                    
outperformed the  CBR. The purpose  of the  funds determined                                                                    
the  investment strategy.  He stated  that the  PER/TRS were                                                                    
invested  for  the  long  term. The  permanent  fund  was  a                                                                    
perpetual fund  invested for  the long  term. The  long term                                                                    
nature of  the fund allowed  the funds to invest  in certain                                                                    
asset  classes such  as private  equity called  "ill-liquid"                                                                    
Mr. Bader discussed slide 14:                                                                                                   
              "ARMB Private Equity Program."                                                                                    
     Private  equity  is largely  made  up  of interests  in                                                                    
     limited  partnerships that  make equity  investments in                                                                    
     privately held operating companies.                                                                                        
     Private  equity   is  expected  to   deliver  long-term                                                                    
     returns in excess of the  public markets and to enhance                                                                    
     diversification.  To   earn  higher   returns,  private                                                                    
     equity gives up liquidity.                                                                                                 
     Performance  has been  good,  generating 10.2%  returns                                                                    
     through 2013  versus a public market  equivalent return                                                                    
     of 4.6% for the S&P 500 and 5.1% for the Russell 3000.                                                                     
     The private  equity program has generated  $800 million                                                                    
     in  additional  fund value  for  the  ARMB compared  to                                                                    
     investing in the public equity markets.                                                                                    
     The ARMB  started investing in  private equity  in 1998                                                                    
     and  now   has  $1.7   billion  invested   across  200+                                                                    
     partnerships; private  equity is a 9%  asset allocation                                                                    
     for the ARMB.                                                                                                              
Mr. Bader  emphasized that  prompt access  to the  CBR funds                                                                    
were necessary  and therefore not conducive  to investing in                                                                    
the long  term asset  class. The  PER/TERS were  expected to                                                                    
earn a  higher percentage of  return on investments  after a                                                                    
transfer  of funds  from  the CBR  into  the PERS/TRS  Trust                                                                    
3:15:32 PM                                                                                                                    
Commissioner Rodell turned to slide 16:                                                                                         
     "Problem:  $11.9  Billion  Retirement  System  Unfunded                                                                    
     The  Public  Employees  Retirement  System  (PERS)  and                                                                    
     Teachers'  Retirement  System (TRS)  combined  unfunded                                                                    
     liability is $11.9 billion                                                                                                 
     •State Assistance  payments to  PERS and TRS  rise from                                                                    
    $629 million in FY2014 to over $1 billion per year                                                                          
     •Funding State Assistance  solely through the operating                                                                    
     budget  crowds  out  funding  for  other  vital  public                                                                    
     •Rating  agencies express  concern with  the increasing                                                                    
Commissioner Rodell moved to slide 17:                                                                                          
     "Proposal: $3 Billion Investment in Trust Funds."                                                                          
     Invest a total  of $3 billion in  the Retirement Trusts                                                                    
     in FY2015:                                                                                                                 
     $1.12 billion - Teachers' Retirement Fund                                                                                  
     $1.88 - Public Employees' Retirement Fund                                                                                  
     Funding source: the Constitutional Budget Reserve                                                                          
     •Includes state assistance payments for FY2015.                                                                            
     •Beginning FY 2016, State  Assistance payments would be                                                                    
     fixed at $500 million annually:                                                                                            
                    $157 Million - PERS                                                                                         
                    $343 Million - TRS                                                                                          
     •State  Assistance projected  until  FY2036; length  of                                                                    
     time depends on actuarial gains or losses experienced                                                                      
Commissioner  Rodell  discussed  the   graph  on  slide  18:                                                                    
"Governor's  Proposal." She  noted that  the graph  depicted                                                                    
what the governor's proposal would  look like over time. She                                                                    
pointed  out  that  the   previous  graphs  depicting  level                                                                    
percent  of  pay  (slide  9) and  level  dollar  (slide  10)                                                                    
indicated variability  in payment amounts from  2008 through                                                                    
20014. The lump sum leveled  out the annual payments to $500                                                                    
million per year.                                                                                                               
Commissioner Rodell turned to slide 19:                                                                                         
                  "Governor Parnell's Approach.                                                                                 
     •  Pays down  the  retirement system  debt rather  than                                                                    
     passing it on to future generations.                                                                                       
     •A   comprehensive    and   straight-forward   approach                                                                    
     addressing   the  problems   of  both   PERS  and   TRS                                                                    
     retirement systems.                                                                                                        
     •Addresses   Alaska's  biggest   budget  driver   while                                                                    
     keeping  the  State's  promise to  our  retired  public                                                                    
     •Dramatically    reduces   future    operating   budget                                                                    
     obligations  and  provides  predictability  for  future                                                                    
     budget planning.                                                                                                           
     •Improves  municipal  balance  sheets  and  aligns  the                                                                    
     interest   of   the   State    of   Alaska   with   our                                                                    
     municipalities by sharing gains and losses.                                                                                
     •Addresses  the number  one  credit  concern raised  by                                                                    
     rating agencies.                                                                                                           
     •Improves and strengthens the  health of the retirement                                                                    
Commissioner Rodell commented that the administration                                                                           
believed the legislation was the "right approach."                                                                              
Commissioner Rodell provided a sectional analysis of HB                                                                         
385. She read from the prepared sectional.                                                                                      
      Section 1:                                                                                                                
      This  section amends  the Teachers'  Retirement System                                                                    
     (TRS)  state assistance  statute  (AS 14.25.085).  This                                                                    
     statute was  enacted in 2008  by SB 125,  and currently                                                                    
     provides that  the state  shall appropriate  the amount                                                                    
     sufficient  to   fully  pay  the  total   past  service                                                                    
     liability  for the  year at  the employer  contribution                                                                    
     rate adopted by the  Alaska Retirement Management Board                                                                    
     (ARMB).  In   practice,  this  means  that   the  State                                                                    
     appropriates  the amount  that reflects  the difference                                                                    
     between  the  TRS  employer contribution  rate  cap  of                                                                    
     12.56% and  the actuarial contribution rate  to the TRS                                                                    
     trust  funds. In  FY14, this  amount was  approximately                                                                    
     Section  1   amends  AS  14.25.085  to   implement  the                                                                    
     Governor's  proposal.  Under the  Governor's  proposal,                                                                    
     $1.1   billion   would   be   appropriated   from   the                                                                    
     constitutional budget  reserve to  the TRS  trust fund,                                                                    
     and  then from  FY16-FY36,  an annual  flat payment  of                                                                    
     $343mm would be appropriated as state assistance.                                                                          
     The  Governor's   plan  would  convert   the  actuarial                                                                    
     approach for TRS from  an actuarial ratemaking paradigm                                                                    
     to  a  fixed  contribution paradigm.  In  a  ratemaking                                                                    
     paradigm,  each   year  the  actuary   calculates  what                                                                    
     contribution  rate   is  necessary  to  pay   down  the                                                                    
     accumulated  past service  liability.  In Alaska,  this                                                                    
     has resulted  in highly volatile  employer contribution                                                                    
     rates that  over the past  decade have ranged  from 12%                                                                    
     to over 70%.                                                                                                               
     In a  fixed contribution paradigm, the  rate volatility                                                                    
     is  eliminated.  Instead  the  annual  contribution  is                                                                    
     fixed. In the  case of TRS, the  annual contribution is                                                                    
     fixed at  $343mm. What can  change each  year, however,                                                                    
     is the  term of the amortization.  Under the Governor's                                                                    
     plan, the  initial amortization term is  21 years-fixed                                                                    
     payments  of  $343mm  through FY36.  In  the  event  of                                                                    
     actuarial  losses,  the  actuary may  advise  that  the                                                                    
     amortization term needs to be  extended. So if there is                                                                    
     a market downturn that results  in investment losses in                                                                    
     FY18,  the actuary  may  advise  that the  amortization                                                                    
     term  must  be  extended  to FY43  in  order  to  fully                                                                    
     amortize the TRS unfunded liability.                                                                                       
Co-Chair  Stoltze referred  to the  payment language  in the                                                                    
legislation  that specified  a  fixed  contribution "up  to"                                                                    
$343 million. He inquired how  a fixed contribution could be                                                                    
any amount from $0 to $343 million.                                                                                             
Commissioner  Rodell replied  that the  legislature retained                                                                    
its   appropriation  authority   in  the   legislation.  The                                                                    
administration   recognized  the   legislature's  right   to                                                                    
determine the contribution amount.  The governor intended to                                                                    
appropriate  the  fixed  contribution amounts  but  included                                                                    
language in  the legislation that  payments were  subject to                                                                    
legislative appropriation.                                                                                                      
Commissioner Rodell continued with the sectional.                                                                               
     There could  be cases where  the actuarial loss  over a                                                                    
     particular   period  is   sufficiently  profound   that                                                                    
     payment of $343mm over any  length of amortization term                                                                    
     is  insufficient   to  fully   pay  off   the  unfunded                                                                    
     liability.  In such  case, the  actuary  will assign  a                                                                    
     date  on which  the  TRS trust  fund  will exhaust  its                                                                    
     funds  unless  the  $343mm  annual  payment  amount  is                                                                    
     increased.  The actuaries  call this  date the  "cross-                                                                    
     over" point.                                                                                                               
Co-Chair Stoltze  wondered why  the legislation did  not use                                                                    
the  term  "at least"  when  referring  to the  contribution                                                                    
payment. He wanted the legislation  to lend "moral guidance"                                                                    
to the legislature.                                                                                                             
Commissioner Rodell  replied that  the goal of  the language                                                                    
was  to   allow  for  legislative  flexibility   within  the                                                                    
Co-Chair Stoltze opined that both  terms: "at least" and "up                                                                    
to" were not adequate. He felt that "up to" was ambiguous.                                                                      
3:26:18 PM                                                                                                                    
Commissioner Rodell  continued with the sectional  and moved                                                                    
on to Section 2.                                                                                                                
     Section 2.  This section implements the  same amendment                                                                    
     as   does  section   1,  for   the  Public   Employees'                                                                    
     Retirement System  (PERS) state assistance  statute, AS                                                                    
     A benefit to making this  amendment in the PERS context                                                                    
     is  that  a  fixed  contribution  paradigm  aligns  the                                                                    
     respective  interests  of   all  PERS  employers.  PERS                                                                    
     employers  all share  in the  actuarial gains,  through                                                                    
     having a  shorter amortization  schedule, and  share in                                                                    
     actuarial losses, through  having a longer amortization                                                                    
     schedule. Under  the current  version of  AS 39.35.280,                                                                    
     PERS  municipal employers  are  largely indifferent  to                                                                    
     the  impact   of  market  downturns  that   create  new                                                                    
     unfunded liability because their  rate does not change,                                                                    
     and the  State absorbs  100% of the  impact of  any new                                                                    
     unfunded  liability.   The  Governor's   proposal  cost                                                                    
     shares such  new unfunded  liability in  a fair  way by                                                                    
     extending   the  amortization   term,   so  that   PERS                                                                    
     employers pay  at the 22% capped  contribution rate for                                                                    
     a longer period of time.                                                                                                   
Commissioner Rodell  concluded with Section 3  and Section 4                                                                    
of the sectional.                                                                                                               
     Section 3.  This section makes  the bill  contingent on                                                                    
     the  enactment of  constitutional  budget reserve  fund                                                                    
     appropriations to  TRS in the  amount of  $1.1 billion,                                                                    
     and to PERS in the amount of $1.9 billion.                                                                                 
     Section 4. Establishes the effective date of this act                                                                      
     as July 1, 2014.                                                                                                           
3:28:45 PM                                                                                                                    
DAVID TEAL,  DIRECTOR, LEGISLATIVE FINANCE  DIVISION, wanted                                                                    
to offer context to the figures  in HB 385. He presented the                                                                    
fiscal  outlook model  [presented as  an excel  spreadsheet]                                                                    
(copy  on file).  He recapped  that the  model included  the                                                                    
state's forecasted  oil price and revenue  and the operating                                                                    
budget  which totaled  $4.35 billion.  He  pointed out  that                                                                    
spending on the  House budget was flat.  The model comprised                                                                    
statewide operations,  which included  the debt  service and                                                                    
the  growing  retirement  contributions. Finally  the  model                                                                    
included  a stagnant  Capital budget  of approximately  $550                                                                    
Mr. Teal  reminded the  committee that  the budget  was well                                                                    
beyond  the  long-term plan  and  the  funding cap  of  $5.6                                                                    
billion  announced  by the  governor.  He  relayed that  the                                                                    
retirement  plan was  not included  in the  funding cap.  He                                                                    
referred  to  a document  that  contained  2 graphs  titled,                                                                    
"Unrestricted  General  Fund Revenue/Budget"(copy  on  file)                                                                    
and "Budget  Reserves" (copy on  file). He pointed  out that                                                                    
the  Budget  Reserves  bar graph  depicted  budget  deficits                                                                    
escalating and  the reserves  depleted by  2024 in  both the                                                                    
base  scenario and  current scenario.  He remarked  that the                                                                    
depleted reserves sparked the  concern over retirement costs                                                                    
and  cost  containment.  The bar  graph  demonstrated  lower                                                                    
reserves over  the next  ten years in  either plan.  He said                                                                    
the "pay  as you  go" plan (base  scenario) was  designed to                                                                    
minimize  near term  costs. The  plan  improved the  reserve                                                                    
position by $2  billion which kept the  reserves flexible to                                                                    
ensure  cash for  gasline investment.  He  offered that  the                                                                    
governor's  scenario,  although  accepted by  the  actuaries                                                                    
"cannot significantly  improve" the near term  health of the                                                                    
reserve  fund. He  concluded that  the  governor's plan  was                                                                    
designed to improve  the health of the  retirement system in                                                                    
the long term and did not  consider near term cash flow like                                                                    
the   pay  as   you  go   plan,  which   reduced  retirement                                                                    
contributions as much as possible.                                                                                              
Mr. Teal  continued that the  governor's plan which  paid $3                                                                    
billion initially and $500 million  per year over the next 9                                                                    
years  totaled  $7.5 billion  or  half  of the  state's  $15                                                                    
billion in reserves.                                                                                                            
Mr. Teal  discussed the long  term outlook and  examined the                                                                    
cumulative  retirement costs.  He turned  to a  graph titled                                                                    
"Cumulative  Costs  of  Options to  Eliminate  TRS  Unfunded                                                                    
Liability" (copy  on file). The  graph illustrated  that the                                                                    
governor's plan,  which extended into 2043  was initially $1                                                                    
billion higher  than the base  scenario paying  lower yearly                                                                    
contributions. The total  cost of the plan  grew slower than                                                                    
the base scenario  and crossed paths with  the base scenario                                                                    
in 2023 similar to the  previous graph. The results were the                                                                    
same;  the early  infusion of  cash lowered  annual payments                                                                    
and   the    lower   annual   payments    eventually   saved                                                                    
approximately  $.5  billion.   He  maintained  that  cheaper                                                                    
retirement costs  lead to  lower deficits  in the  future if                                                                    
the fiscal outlook remained the same.                                                                                           
Mr. Teal  believed that the legislature  faced tough choices                                                                    
in  the future.  The legislature  must decide  its level  of                                                                    
commitment to  maintaining a  healthy retirement  system and                                                                    
whether reserve  flexibility was an issue.  He declared that                                                                    
whether the reserves were used  for a cash infusion into the                                                                    
retirement  fund  or  for  annual  payments  the  retirement                                                                    
systems would "consume  the same amount of  reserves" in the                                                                    
10-year period regardless of the payment option.                                                                                
Mr. Teal  discussed the graph, "Cumulative  Costs of Options                                                                    
to  Eliminate TRS  Unfunded Liability".  He  pointed to  the                                                                    
year 2025 at the approximately  $4.5 billion mark, where the                                                                    
lines  intersect. He  explained that  reducing costs  in the                                                                    
early  years were  linked  to higher  costs  in total.  High                                                                    
contributions  in the  early years  brought  lower costs  in                                                                    
total. He deduced  that the situation could  be expressed as                                                                    
"you can  pay now or you  can pay more later."  The relative                                                                    
position of the intersecting  lines was maintained even when                                                                    
changing the  payment variables for  either plan.  The costs                                                                    
met on  the graph at  approximately $4.5 billion,  which was                                                                    
the amount  of the unfunded  liability. He stated  that "the                                                                    
bottom  line"  was  paying more  now  significantly  reduced                                                                    
total costs and  paying lower payments now cost  more in the                                                                    
"long  run."   All  plans  intersect   at  about   2025.  He                                                                    
maintained  that  if  the legislature  was  committed  to  a                                                                    
healthy retirement fund and knowing  that using reserves for                                                                    
a  cash infusion  had no  significant  consequences for  the                                                                    
life  or flexibility  of  the reserves  why  not choose  the                                                                    
least expensive option in the long run.                                                                                         
Mr.  Teal  questioned  why HB  385  contained  the  language                                                                    
"subject to  appropriation" and "up  to" when  the actuarial                                                                    
recommended contribution  could be higher than  $343 million                                                                    
at the standard amortization of  25 years. He concluded that                                                                    
if  the legislature  was  seeking  solutions that  minimized                                                                    
contributions over the  next ten years and took  a long term                                                                    
view of the system then  larger cash infusions were a better                                                                    
solution in  the long run  and in the short  run. Minimizing                                                                    
contributions  cost more  but both  approaches  catch up  to                                                                    
each other in the 2023 to  2025 year period. After that time                                                                    
"the deficits would be lower and the systems healthier."                                                                        
Co-Chair Stoltze OPENED public testimony.                                                                                       
KAREN  CRANE,  ALASKA  MUNICIPAL  LEAGUE,  spoke  in  strong                                                                    
support  of  HB 385.  She  relayed  that the  bill  provided                                                                    
predictable  and affordable  annual  payments  for both  the                                                                    
state   and  municipalities.   The   legislation  kept   the                                                                    
liability  in check  and allowed  future earnings  to offset                                                                    
future contribution requirements  and strengthened the state                                                                    
and   municipal   credit    ratings.   The   plan   extended                                                                    
amortization of the unfunded  liability and local government                                                                    
would  "bear" a  $1.5 billion  share of  the liability.  The                                                                    
league felt  the time  to deal  with the  issue was  now and                                                                    
should not be left to burden future generation.                                                                                 
PAT  BRANSON, MAYOR,  KODIAK, testified  in  support of  the                                                                    
legislation.  She   stated  that  the  city   supported  the                                                                    
infusion  of $3  billion dollars  into the  PERS/TRS reserve                                                                    
account  and  maintaining  the  municipalities  contribution                                                                    
rate  of  22  percent.  The provisions  allowed  for  future                                                                    
interest  in contribution  requirements, reduced  the budget                                                                    
pressure  on state  and  local  governments and  facilitated                                                                    
planning  for  leaner  budget  years.  She  appreciated  the                                                                    
committee's consideration.                                                                                                      
LARRY  DEVILBISS,  MAYOR,  MAT-SU BOROUGH,  appreciated  the                                                                    
legislation.   The  borough   supported  front-loading   the                                                                    
liability. He stated that  the municipalities contributed 22                                                                    
percent  to each  payroll. The  solution brought  relief for                                                                    
tax  payers  by lifting  the  municipality's  burden of  the                                                                    
unfunded  liability.  He  hoped  for  a  solution  that  was                                                                    
fiscally responsible and fair to taxpayers.                                                                                     
BOB  BARTHOLOMEW,  FINANCE  DIRECTOR, CITY  AND  BOROUGH  OF                                                                    
JUNEAU,  relayed  the  city's  support  for  the  governor's                                                                    
proposal.  He  understood   that  a  contribution  extension                                                                    
mandated  by  the  actuary  was   a  necessary  expense.  He                                                                    
challenged the  notion that  reducing the  cost in  the long                                                                    
term caused giving up flexibility  or resources in the short                                                                    
term. He believed that transferring  the lump sum money from                                                                    
the  CBR  into  the  retirement  fund  increased  investment                                                                    
earnings.  The potential  returns were  higher. He  believed                                                                    
investment   compounding  was   paramount.   He  felt   that                                                                    
"compounded interest"  was the  "reward" of giving  up short                                                                    
term reserve  funds. The gain  was a benefit to  the initial                                                                    
loss of  the reserve  flexibility. The stabilization  of the                                                                    
plan benefited both the state and local governments.                                                                            
3:51:21 PM                                                                                                                    
MIM MCCONNELL,  MAYOR, CITY  OF SITKA  (via teleconference),                                                                    
testified  in  support of  HB  385.  She stated  the  reason                                                                    
municipalities were  in favor of  the legislation.  The bill                                                                    
enabled  municipalities to  plan a  budget based  on the  22                                                                    
percent   contribution  rate   which  maintained   necessary                                                                    
community services without increasing  the local tax burden.                                                                    
She shared  that the  city increased  its electric  rates 49                                                                    
percent  since   December  2012.  The  bill   decreased  the                                                                    
municipality's  amount   of  the  unfunded   liability.  She                                                                    
believed  that  addressing  the  liability  now  instead  of                                                                    
sometime in the future was sensible.                                                                                            
JOHN  SWEENEY,   FINANCE  DIRECTOR,   CITY  OF   SITKA  (via                                                                    
teleconference), stated  that the city supported  HB 385. He                                                                    
was grateful that the  municipal contribution was maintained                                                                    
at 22 percent. The city  of Sitka was currently deliberating                                                                    
its  municipal  budget.  The legislation  enabled  proactive                                                                    
planning for municipal contributions  to PRS/TRS funding. He                                                                    
cautioned   that  Sitka's   budget   process  would   become                                                                    
"reactive" if the legislation was  not adopted. He urged for                                                                    
passage of the bill.                                                                                                            
RICK  KOCK,   CITY  MANAGER,  KENAI   (via  teleconference),                                                                    
testified in support of the  legislation. He appreciated the                                                                    
financial   stability   the  legislation   established   for                                                                    
municipalities. He thanked the  legislature for its diligent                                                                    
work on the issue.                                                                                                              
JENNIFER  JOHNSTON,  ANCHORAGE  ASSEMBLY,  ALASKA  MUNICIPAL                                                                    
LEAGUE,   ANCHORAGE  (via   teleconference),  testified   in                                                                    
support  of the  legislation.  She noted  that the  unfunded                                                                    
liability for the city totaled  $651 million. She elaborated                                                                    
that new rules  allowed that some or all of  the money could                                                                    
be reallocated to  either the city's enterprise  fund or the                                                                    
water  and   waste  water   utility;  Anchorage   Water  and                                                                    
Wastewater Utility  (AWWU). She mentioned problems  with the                                                                    
city's  aging  water  treatment  facilities  and  the  costs                                                                    
associated  with  upgrades.  She supported  the  process  of                                                                    
front-loading  the  unfunded  liability.  She  compared  the                                                                    
unfunded liability to a how a credit card bill worked.                                                                          
Co-Chair  Austerman appreciated  the fact  that the  city of                                                                    
Anchorage  claimed its  $651 million  share of  the unfunded                                                                    
liability. He expressed frustration  about the criticism the                                                                    
legislature received  for allegedly  not wanting  to fulfill                                                                    
its    retirement    obligations.   He    appreciated    the                                                                    
JIM  WILLIAMS,  CHIEF  OF  STAFF,  CITY  OF  FAIRBANKS  (via                                                                    
teleconference),  supported  the legislation.  He  commented                                                                    
that  the   bill  was  an  "important   and  time  sensitive                                                                    
opportunity"  to control  the  projected unfunded  liability                                                                    
and,  by  infusing  cash  into  the  system,  eliminated  an                                                                    
"uncertain" financial  burden that  would be  transferred to                                                                    
municipalities.  He  discussed  learning  of  a  proposed  2                                                                    
percent increase  in the  municipal PERS  contribution rate.                                                                    
A two percent increase translated  to a $200 thousand budget                                                                    
expense  for the  City of  Fairbanks,  which could  decrease                                                                    
services  or increase  property  taxes.  He appreciated  the                                                                    
legislature's support.                                                                                                          
4:02:21 PM                                                                                                                    
SALLIE  STUVEK, HUMAN  RESOURCES  DIRECTOR, FAIRBANKS  NORTH                                                                    
STAR  BOROUGH (via  teleconference), relayed  the assemblies                                                                    
unified  support for  the legislation.  She believed  the $3                                                                    
billion cash infusion provided a  sound financial model as a                                                                    
way of addressing and eliminating  the unfunded liability by                                                                    
2037.   She   stated   that  the   cash   infusion   allowed                                                                    
municipalities to  save in  future contributions  when state                                                                    
revenues  would likely  be reduced.  The  assembly passed  a                                                                    
resolution (copy  on file) in  support of the  cash transfer                                                                    
into the retirement trust fund  in 2015. She appreciated the                                                                    
efforts to  address the  unfunded liability  and maintaining                                                                    
the municipality's contribution rate of 22 percent.                                                                             
JON BOLLING,  CITY OF CRAIG (via  teleconference), supported                                                                    
the  legislation.  He concurred  with  all  of the  previous                                                                    
testimony  and expressed  gratitude  for the  predictability                                                                    
maintaining  the established  22  percent contribution  rate                                                                    
STEPHANIE    SCOTT,     MAYOR,    HAINES     BOROUGH    (via                                                                    
teleconference),  testified in  support of  the legislation.                                                                    
She relayed  that the assembly unanimously  supported the $3                                                                    
billion  cash   infusion  into  the  retirement   fund.  The                                                                    
assembly supported  HB 385 and  the premise that  by "paying                                                                    
more now all will pay less later."                                                                                              
Co-Chair Stoltze  noted that there  had been a  large volume                                                                    
of  retirees   interested  in  the  bill.   He  favored  the                                                                    
solution's approach,  which was  in the form  of legislation                                                                    
rather  than an  appropriation. He  stated that  both bodies                                                                    
had been dealing with the  retirement issues and expressed a                                                                    
commitment  to making  the deposits.  He explained  that the                                                                    
House  Finance  Committee's  approach to  separate  out  the                                                                    
Teachers' Retirement System (TRS)  portion was well intended                                                                    
but not  well received by  the public. But there  had always                                                                    
been an agreement  about payment and that point  was lost in                                                                    
the translation.  He clarified that the  current plan called                                                                    
for  a $3  billion withdraw  from the  Constitutional Budget                                                                    
Reserve  "irrespective"  of  how   it  was  apportioned  and                                                                    
required  a   three-quarter  vote   from  each   house.  The                                                                    
governor's legislation established  certainty and "enshrined                                                                    
in  statute"  a  guarantee   with  future  politicians.  The                                                                    
legislature  would continue  to discuss  the issue  with the                                                                    
governor's staff  and with the Legislative  Finance Division                                                                    
in an expedited fashion to pass the bill.                                                                                       
Co-Chair Austerman  spoke about  the unfunded  liability and                                                                    
whose   responsibility   it    was.   He   appreciated   the                                                                    
municipalities'  thanks  for   maintaining  the  22  percent                                                                    
contribution  rate  but  commented  that he  had  not  heard                                                                    
acknowledgement of  the municipalities' liability  which was                                                                    
approximately 42  percent. He stressed  that the  22 percent                                                                    
paid by the municipalities left  20 percent of its liability                                                                    
unpaid.  The  remainder  was shouldered  by  the  state.  By                                                                    
holding the contribution at 22  percent it meant there would                                                                    
be a longer  payment period. If the  legislature changed the                                                                    
municipalities  contribution  rate  from 22  percent  to  24                                                                    
percent it  would contribute to  the upfront  cost; however,                                                                    
the municipalities did not support  the idea. He wished that                                                                    
the municipalities had voluntarily  stepped forward to offer                                                                    
to pay an  additional 2 percent to lower  the upfront costs.                                                                    
He pointed out  that the liability was not  just the state's                                                                    
responsibility. He  emphasized that the state  did not cause                                                                    
the liability.  He remarked  that a  past "bad  actuary" and                                                                    
the  stock market  crash caused  the liability.  He believed                                                                    
the  responsibility  of  the unfunded  liability  should  be                                                                    
shared and  that while the  state is paying the  majority of                                                                    
the   liability   it   is  not   exclusively   the   state's                                                                    
4:14:05 PM                                                                                                                    
Co-Chair Stoltze CLOSED public testimony.                                                                                       
HB  385  was  HEARD  and   HELD  in  committee  for  further                                                                    
4:14:25 PM                                                                                                                    
AT EASE                                                                                                                         
4:31:49 PM                                                                                                                    

Document Name Date/Time Subjects
Alaska_Fiscal Note_HB 385_Governor's Proposal 041114.pdf HFIN 4/12/2014 2:00:00 PM
HB 385
HB 385 Legislative Pres V6.pdf HFIN 4/12/2014 2:00:00 PM
HB 385
HB 385 Nineteen municipal resolutions of support for Governor's PERS-TRS plan, 12 April 2014.pdf HFIN 4/12/2014 2:00:00 PM
HB 385
HB 385 - Chenault Transmittal Letter - PERS-TRS.pdf HFIN 4/12/2014 2:00:00 PM
HB 385
HB 385 - Sectional Analysis.pdf HFIN 4/12/2014 2:00:00 PM
HB 385
HB 385 Somers Letter.pdf HFIN 4/12/2014 2:00:00 PM
HB 385
HB 385 Teal LFD 4-11-14 Fiscal Outlook Model-4.pdf HFIN 4/12/2014 2:00:00 PM
HB 385
HB 385 Teal LFD 4-11-14 Fiscal Outlook Model-3.pdf HFIN 4/12/2014 2:00:00 PM
HB 385
HB 385 Teal LFD 4 11 14 Comparing TRS Options.pdf HFIN 4/12/2014 2:00:00 PM
HB 385
HFIN Testimony RPEA HB 385.doc HFIN 4/12/2014 2:00:00 PM
HB 385