Legislature(2013 - 2014)HOUSE FINANCE 519

04/15/2014 01:30 PM FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
--Delayed to 2:15 p.m. Today--
+ Bills Previously Heard/Scheduled TELECONFERENCED
Moved Out of Committee
Heard & Held
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."                                                                                          
2:15:45 PM                                                                                                                    
Co-Chair Stoltze  asked the  commissioner of  the Department                                                                    
of  Revenue  (DOR) to  discuss  the  bill and  corresponding                                                                    
fiscal notes.                                                                                                                   
2:16:33 PM                                                                                                                    
ANGELA   RODELL,   COMMISSIONER,  DEPARTMENT   OF   REVENUE,                                                                    
reported that  the bill incorporated the  governor's plan to                                                                    
place  $3 billion  from  the  Constitutional Budget  Reserve                                                                    
(CBR) into  the Public  Employees' Retirement  System (PERS)                                                                    
and   Teachers'  Retirement   System   (TRS)  trust   funds;                                                                    
approximately $1.8  billion into PERS and  $1.1 billion into                                                                    
TRS.  She  indicated that  the  bill  stipulated an  ongoing                                                                    
deposit into each  of the respective funds  every year; $343                                                                    
million into TRS  and $157 million into  PERS. She commented                                                                    
on  the sustainability  of the  governor's plan  and alleged                                                                    
that  it could  be  supported in  future operating  budgets,                                                                    
paid  in full  by FY  36. The  governor's plan  afforded the                                                                    
state to  maintain its  AAA credit  rating. In  1961 Moody's                                                                    
Investors Service issued Alaska  its first AA credit rating.                                                                    
At present,  the state  had a AAA  ranking. She  opined that                                                                    
the  governor's   plan  placed  the  state   in  the  needed                                                                    
financial  position to  address its  liabilities and  future                                                                    
contracts  for major  infrastructure projects  including the                                                                    
gasline. A  large cash infusion  payment was required  in FY                                                                    
15.  Yearly  payments would  become  part  of the  operating                                                                    
budget starting in FY 16.  She acknowledged that the payment                                                                    
amount  may need  to be  adjusted  up or  down depending  on                                                                    
actuarial and market experience.  She urged the committee to                                                                    
support HB 385.                                                                                                                 
Representative Wilson  relayed her concerns about  the vague                                                                    
language of the  bill referring to a payment of  "up to $500                                                                    
million"  rather than  a specific  amount.  She pointed  out                                                                    
that the state should make  a yearly payment of $500 million                                                                    
to ensure meeting the specified timeline.                                                                                       
2:20:36 PM                                                                                                                    
Commissioner  Rodell  responded  that  she  anticipated  the                                                                    
request would  be $500 million;  $343 designated  in statute                                                                    
for TERS and $157 for PERS.  She stated that in the bill the                                                                    
actuary  was  required  to do  performance  calculations  to                                                                    
ensure the  state stayed  on target  with the  timeline. The                                                                    
way the  bill was  currently written,  the state  could seek                                                                    
legislative approval for a larger  or smaller payment amount                                                                    
depending on the performance of the state's trust funds.                                                                        
Representative  Wilson clarified  that  the  state would  be                                                                    
adding $2.3  billion to the  unfunded liability fund  due to                                                                    
an anticipated  $700 thousand not  being included in  the FY                                                                    
14 operating budget.  She also assumed that  the state would                                                                    
be  looking for  $500 million  out  of the  FY 15  operating                                                                    
budget. Commissioner Rodell responded affirmatively.                                                                            
2:22:24 PM                                                                                                                    
Vice-Chair  Neuman   reviewed  the  information   from  Buck                                                                    
Consultants,  page  2  (copy on  file).  He  referenced  the                                                                    
funding policy and noted that  the projections provided were                                                                    
not  predictions but  rather expectations  supposing all  of                                                                    
the  actuarial assumptions  were exactly  realized including                                                                    
an 8  percent investment  rate of return  in each  year from                                                                    
2014 through 2043.  He wondered if, at any  time and period,                                                                    
an 8 percent average rate of return had been realized.                                                                          
Commissioner  Rodell  responded  that the  average  rate  of                                                                    
return for the  previous 28 years was just  under 8 percent.                                                                    
In analyzing  different time periods  the state  had varying                                                                    
results.  For example,  the rate  of return  over the  three                                                                    
previous  years   was  11.09  percent.  She   reported  that                                                                    
historically there were years  of both negative and positive                                                                    
earnings.  In  2009,  the state  had  negative  earnings  in                                                                    
excess of almost 20 percent.                                                                                                    
Vice-Chair  Neuman stated  that much  depended on  the stock                                                                    
market. Commissioner Rodell agreed.                                                                                             
2:24:27 PM                                                                                                                    
Representative Costello  discussed two  fiscal notes  for HB                                                                    
385. The first  note provided for a  direct appropriation to                                                                    
the PERS account and had a  fiscal impact of $1.8 billion in                                                                    
FY 15  and $157 million in  FY 16 through FY  20. The second                                                                    
note provided for a direct  appropriation to the TRS account                                                                    
and had  a fiscal impact of  $1.1 billion in FY  15 and $343                                                                    
million in FY 16 through FY 20.                                                                                                 
2:27:00 PM                                                                                                                    
Representative  Costello mentioned  that  of  the two  plans                                                                    
that had been put forth  during the session the current plan                                                                    
before the committee had a  higher contribution on an annual                                                                    
basis  and   would  have  a  substantial   effect  on  state                                                                    
reserves.  She wondered  about the  health  of the  reserves                                                                    
over the next decade.                                                                                                           
Co-Chair  Stoltze clarified  the reserves  of the  available                                                                    
funds for state expenditures.                                                                                                   
Commissioner Rodell  qualified that  Representative Costello                                                                    
was referring  to a document  dated April 12,  2014 prepared                                                                    
by the  Legislative Finance Division,  not by DOR.  The plan                                                                    
generated a large  request on the reserve funds  and was not                                                                    
taken lightly.  She pointed out  that the reserves  would be                                                                    
an important part  of budget discussions over  the next five                                                                    
to ten years. The department  looked at the draw on reserves                                                                    
required with  something other than the  governor's plan and                                                                    
concluded there  was more value in  maintaining reserves and                                                                    
putting  the requests  into the  trust  funds. She  reported                                                                    
that in  ten years  the state  reserves would  be exhausted.                                                                    
She opined  there would be significant  discussion about the                                                                    
state's  spending  priorities over  the  following  5 to  10                                                                    
years. She believed  that the governor's plan  would put the                                                                    
state  in  a  sound  financial  position  from  a  financial                                                                    
reporting and  rating standpoint  even if the  reserves were                                                                    
at low  levels. She  indicated that the  state would  have a                                                                    
much  better revenue  picture  in two  or  three years.  She                                                                    
opined that  the document would  guide the  legislature. She                                                                    
emphasized  that the  document  did not  indicate the  state                                                                    
would need to tap into the permanent fund.                                                                                      
Co-Chair  Stoltze stated  that it  had been  the legislative                                                                    
intent  to  provide a  deposit  into  the pension  fund.  He                                                                    
believed  that  the  efforts   of  the  Legislative  Finance                                                                    
Division to come up with a plan had been mischaracterized.                                                                      
2:32:13 PM                                                                                                                    
Representative  Holmes  stated   her  appreciation  for  the                                                                    
deliberative process that had  taken place over the previous                                                                    
few weeks.  She reiterated that  both plans required  a cash                                                                    
infusion  of at  least $3  billion up  front. She  clarified                                                                    
that  the   current  plan   the  committee   was  evaluating                                                                    
consisted of $3 billion the  first year and $500 million per                                                                    
year  split between  PERS and  TRS through  2035. A  partial                                                                    
payment covering  the remaining  balance was  to be  paid in                                                                    
Representative Holmes also  acknowledged that payments could                                                                    
potentially be adjusted up or  down, which would increase or                                                                    
decrease  the payment  time frame.  She  mentioned that  the                                                                    
state was  to meet  with its actuaries  on a  regular basis,                                                                    
adjusting things as needed, in  order to avoid an additional                                                                    
unfunded liability.                                                                                                             
2:34:40 PM                                                                                                                    
Commissioner  Rodell concurred  with Representative  Holmes'                                                                    
review of the  bill. She agreed that it was  crucial to have                                                                    
the  actuary continue  to do  progress assessments  into the                                                                    
Representative  Gara defended  the  plan  proposed by  David                                                                    
Teal  and   complimented  him  on   a  job  well   done.  He                                                                    
acknowledged  that  Mr. Teal  did  the  legislature a  great                                                                    
service.  The department  gave  the  legislature its  latest                                                                    
revenue source  book indicating that  within 10  years there                                                                    
would be  a reduction  in oil production  down to  below 300                                                                    
thousand barrels per day and  that excess money would not be                                                                    
available  to the  state. Mr.  Teal's approach  allowed some                                                                    
flexibility. The  state satisfied its bond  raters by paying                                                                    
a lump sum of $3 billion in  2014 in the current form of the                                                                    
bill.  He asked  the commissioner  if she  thought the  bond                                                                    
raters cared  whether the  remaining debt  was paid  over 19                                                                    
years, 20  years, or 24 years,  for example, as long  as the                                                                    
state  made  a  substantial  payment  upfront  to  show  its                                                                    
commitment to  paying off  its debt. He  asked how  the time                                                                    
frame affected the ratings.                                                                                                     
2:37:53 PM                                                                                                                    
Commissioner  Rodell  replied  that the  bond  raters  cared                                                                    
about  the length  of  time  and that  a  faster payoff  was                                                                    
optimal.  She stated  that the  commitment  grew larger  and                                                                    
more  expensive with  a  longer wait.  There  was a  balance                                                                    
between  having budget  flexibility  without over  burdening                                                                    
the state with additional debt.                                                                                                 
Representative Gara  relayed that  up to $500  million meant                                                                    
that the  amount could be  less than $500 million.  He asked                                                                    
why "up to" was used versus identifying a specific number.                                                                      
Commissioner  Rodell  replied  that the  recommendation  was                                                                    
given because earnings could be  such that the funding ratio                                                                    
required  a lesser  appropriation.  She knew  from the  Buck                                                                    
Consultants' letter,  there would be some  portion to finish                                                                    
the  funding  in  2036,  potentially   less  than  the  $500                                                                    
million.  She  added  that  another  contribution  could  be                                                                    
2:40:44 PM                                                                                                                    
Co-Chair Austerman  discussed the  total liability  of $11.9                                                                    
billion as  the combination of  PERS and TRS. He  asked what                                                                    
percentage  of the  total liability  went to  PERS and  what                                                                    
percentage went to TRS.                                                                                                         
Commissioner  Rodell replied  that approximately  two-thirds                                                                    
or $8 billion went to PERS  and one-third or $4 billion went                                                                    
to TRS.                                                                                                                         
Co-Chair Austerman  asked about who was  responsible for the                                                                    
$8  billion PERS  unfunded liability.  He commented  that it                                                                    
was not  all the state's  responsibility. He went on  to say                                                                    
that approximately  42 percent of the  liability belonged to                                                                    
the  municipalities. He  furthered  that of  the 42  percent                                                                    
paid by the municipalities 22  percent of their payroll went                                                                    
towards PERS  where they  were carrying.  He wanted  to make                                                                    
sure that it was placed on  record that the extra 20 percent                                                                    
that  the municipalities  had as  a liability,  was actually                                                                    
being paid for by the state.  The state was not requesting a                                                                    
Commissioner Rodell concurred.                                                                                                  
2:43:38 PM                                                                                                                    
Representative  Munoz   MOVED  to  REPORT  HB   385  out  of                                                                    
committee   with   individual    recommendations   and   the                                                                    
accompanying fiscal  notes. There being no  objection it was                                                                    
so ordered.                                                                                                                     
HB  385 was  REPORTED  out  of committee  with  a "do  pass"                                                                    
recommendation and with two new  fiscal notes from the State                                                                    
Assistance to Retirement Funds for  the Office of Management                                                                    
and Budget.                                                                                                                     
2:44:12 PM                                                                                                                    
AT EASE                                                                                                                         
2:50:49 PM                                                                                                                    

Document Name Date/Time Subjects
SB 138 H FIN Black & Veatch 04.15.14.pdf HFIN 4/15/2014 1:30:00 PM
SB 138