Legislature(2005 - 2006)CAPITOL 106

03/31/2005 08:00 AM STATE AFFAIRS


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
*+ HB 214 ANATOMICAL GIFTS TELECONFERENCED
Moved Out of Committee
+= HB 170 PUB EMPLOYEES/TEACHERS RETIREMENT BOARDS TELECONFERENCED
Heard & Held
+= HB 177 STATE EMPLOYEE RETIREMENT CONTRIBUTIONS TELECONFERENCED
Heard & Held
+= HB 191 PUBLIC EMPLOYEE/TEACHER RETIREMENT TELECONFERENCED
Heard & Held
*+ HB 238 PUBLIC EMPLOYEE/TEACHER RETIREMENT TELECONFERENCED
Heard & Held
Bills Previously Heard/Scheduled
HB 191-PUBLIC EMPLOYEE/TEACHER RETIREMENT                                                                                     
HB 238-PUBLIC EMPLOYEE/TEACHER RETIREMENT                                                                                     
HB 177-STATE EMPLOYEE RETIREMENT CONTRIBUTIONS                                                                                
HB 170-PUB EMPLOYEES/TEACHERS RETIREMENT BOARDS                                                                               
                                                                                                                                
8:11:39 AM                                                                                                                    
                                                                                                                                
CHAIR SEATON  announced that  the next order  of business  was HB
191.   [Although the  chair did not  officially announce  that HB
170, HB  177, and  HB 238  were before  the committee,  they were                                                               
discussed  in  conjunction  with  HB  191.    See  the  committee                                                               
calendar for bill titles.]                                                                                                      
                                                                                                                                
The committee took an at-ease from 8:11:57 AM to 8:12:28 AM.                                                                
                                                                                                                                
8:12:57 AM                                                                                                                    
                                                                                                                                
KERRY  JARRELL, Assistant  Superintendent,  Bering Strait  School                                                               
District, testifying on  behalf of the school  district, told the                                                               
committee that  he is  also a  certified public  accountant (CPA)                                                               
and,  as  of two  weeks  prior,  an  appointee to  the  Teachers'                                                               
Retirement System (TRS) Board.  He read his testimony as follows                                                                
[original punctuation provided with some format changes]:                                                                       
                                                                                                                                
     Rhetoric  in  the  press   has  described  the  current                                                                    
     condition of  the retirement  systems as  the "PERS/TRS                                                                    
     meltdown".     The   combined   conditions  have   been                                                                    
     characterized in  the SB141 White  Paper as  a "perfect                                                                    
     storm". It  is important  to understand  that, contrary                                                                    
     to  the recent  rhetoric, the  factors that  led us  to                                                                    
     this point were not  immediate, not rapidly developing,                                                                    
     and do  not represent a  meltdown. I am  not suggesting                                                                    
     that the issues are not  real, but I am suggesting that                                                                    
     they need to be viewed in their proper context.                                                                            
                                                                                                                                
     Retirement systems  are like supertankers  that respond                                                                    
     slowly  to  environmental   conditions  and  corrective                                                                    
     actions.   The  seeds of  the problems  as well  as the                                                                    
     successes of the plans were  planted and nourished over                                                                    
     the past twenty-five years.   When critics speak of the                                                                    
     funding  "crises"  or  "meltdown" of  today,  they  are                                                                    
     actually looking twenty-five years  into the future and                                                                    
     projecting  what  cumulatively  will  occur  over  that                                                                    
     period.   Just  as  actuaries may  have  erred on  many                                                                    
     projections  over  the  past   quarter  of  a  century,                                                                    
     current  actuarial estimates  will  no  doubt miss  the                                                                    
     mark  over  the  next  quarter of  a  century.    Minor                                                                    
     changes in  assumptions can  cause enormous  changes in                                                                    
     the funding  status of the  plans.  Consider that  a 2%                                                                    
     change  up or  down  in  the estimate  of  the rate  of                                                                    
     growth  of  health  care   would  change  the  unfunded                                                                    
     liability of the plans by over a billion dollars.                                                                          
                                                                                                                                
     Actuaries  will  be  the  first  to  admit  that  their                                                                    
     projections  are far  from  an exact  science.   It  is                                                                    
     evident today  that many of the  assumptions throughout                                                                    
     the  1990's were  incorrect.   Health  care costs  were                                                                    
     growing  much  faster than  we  realized  for nearly  a                                                                    
     decade  before   actuarial  assumptions   were  revised                                                                    
     around 2002.  The  retirement plans that appeared fully                                                                    
     funded in the late  1990's were obviously under funded.                                                                    
     Correcting  those assumptions  in  2002  resulted in  a                                                                    
     multi-year  adjustment that  startled everyone.   Those                                                                    
     adjustments did not reveal  mismanagement of the assets                                                                    
     by the  ASPIB, the boards, or  the administration; they                                                                    
     simply  revealed that  the  state, its  municipalities,                                                                    
     and  its  school  districts had  been  underpaying  the                                                                    
     necessary  contributions for  health care  to keep  the                                                                    
     system healthy.   Had more accurate  rates been imposed                                                                    
     earlier, the  unfunded liability  would not sit  on the                                                                    
     books of the retirement  systems, it would be reflected                                                                    
     on  the  books  of the  municipalities,  boroughs,  and                                                                    
     school districts.                                                                                                          
                                                                                                                                
     I would  like to  offer the following  observations and                                                                    
     recommendations for the legislature to consider.                                                                           
                                                                                                                                
8:16:33 AM                                                                                                                    
                                                                                                                                
     The major  problem with our retirement  plans is health                                                                    
     care.  In  the 1980's and early 1990's  health care was                                                                    
     relatively more affordable  than it is today.   For the                                                                    
     eleven-year  period from  1992  to 2003,  69  % of  the                                                                    
     increase in unfunded  liabilities, amounting to roughly                                                                    
     $3.7  billion, came  from  excess  increases in  health                                                                    
     care  costs.   I use  the  term "excess"  to mean  that                                                                    
     health care costs were $3.7  billion more than the plan                                                                    
     benchmark or estimate  for that period.   If it weren't                                                                    
     for that  $3.7 billion  deficit, we  would not  be here                                                                    
     today and  there would be no  discussion of overhauling                                                                    
     the retirement system.                                                                                                     
                                                                                                                                
     The  retirement  super  tanker  has  developed  several                                                                    
     leaks.   By leaks, I  mean benefits have  been provided                                                                    
     that  have  not  been  funded or  calculated  into  the                                                                    
     contribution  rates.    These  leaks  mandate  payments                                                                    
     greater  than the  plan ever  intended.   For  example,                                                                    
     there  is  no  correlation  between  the  earnings  and                                                                    
     contributions of  part-time local public  officials and                                                                    
     the  eventual benefits  provided to  those individuals.                                                                    
     Under  current provisions,  a  school  board member  or                                                                    
     council member  earns and pays little  into the system,                                                                    
     but they  receive free  medical coverage  at 55  or 60.                                                                    
     Their contribution  to the  retirement system  could be                                                                    
     as low  as $1,000  over their  entire career,  yet they                                                                    
     could  receive almost  unlimited medical  for them  and                                                                    
     their dependents for up to a generation.                                                                                   
                                                                                                                                
     Additionally, many schemes have  been used by employees                                                                    
     to  boost  eligible  salaries in  the  final  years  of                                                                    
     employment.    Consequently,  salary  rates  are  often                                                                    
     considerably higher  than they should be.   Termination                                                                    
     bonuses  have recently  been identified  in the  press,                                                                    
     but   service  credits,   overtime,   final  year   pay                                                                    
     increases,   etc.  can   produce  large   increases  in                                                                    
     benefits  without   reasonable  contributions   to  the                                                                    
     system  to   offset  them.    These   practices  create                                                                    
     unfunded liabilities.                                                                                                      
                                                                                                                                
     One of  the most overlooked  leaks in the  super tanker                                                                    
     is masked  in the  benefit formula  itself.   Using the                                                                    
     high  three  years  for  benefit  calculation  produces                                                                    
     built  in losses  for the  system.   This piece  of the                                                                    
     formula, which  has been  considered sacred  until now,                                                                    
     consistently  created an  unfunded liability  for every                                                                    
     single participant.                                                                                                        
                                                                                                                                
8:19:11 AM                                                                                                                    
                                                                                                                                
     Much has  been spoken  about reducing  the risk  to the                                                                    
     employers  by  moving  to defined  contribution  plans.                                                                    
     While  the change  to a  defined contribution  plan may                                                                    
     limit  the exposure  for local  and state  governments,                                                                    
     any  plan that  undermines the  retirement security  of                                                                    
     public  employees  will  eventually drive  good  people                                                                    
     from public  service.  Retirement plans,  by their very                                                                    
     nature,  are structured  to protect  employees, not  to                                                                    
     take  advantage  of  them.   A  blended  approach  that                                                                    
     gradually  introduces  the  concept  will  spread  risk                                                                    
     equally among employers, the state, and employees.                                                                         
                                                                                                                                
8:19:52 AM                                                                                                                    
                                                                                                                                
     Recommendations:                                                                                                           
                                                                                                                                
     Immediate changes  need to be  made to the  health plan                                                                    
     in order  to maximize  savings in every  area possible.                                                                    
     Aggressive steps should be  taken to initiate preferred                                                                    
     provider  networks.   Preferred prescription  providers                                                                    
     and the  use of  generic drugs should  become mandatory                                                                    
     under the  plan.  Increasing co-payments  for drugs and                                                                    
     services  would  spread  the  cost  of  services  among                                                                    
     beneficiaries  and the  plan.   Disease management  and                                                                    
     large  case management  have been  extremely beneficial                                                                    
     in   reducing  unnecessary   procedures  and   limiting                                                                    
     hospital  stays.    I have  personally  administered  a                                                                    
     large self-funded plan for our  school district for the                                                                    
     past ten  years.  We have  successfully implemented all                                                                    
     of these  procedures and realized  considerable savings                                                                    
     from them.   The PERS/TRS  Health Plan is  large enough                                                                    
     to wield considerable  influence in negotiating savings                                                                    
     with service providers.                                                                                                    
                                                                                                                                
     Implement the  changes in health care  access that were                                                                    
     recommended in  the PERS &  TRS Tier Proposals.   These                                                                    
     included   limiting  entry   into   the  system   until                                                                    
     beneficiaries  reach  the  age   of  65  and  assessing                                                                    
     premiums based  on years of  service.   Limiting access                                                                    
     to health  care for  part time elected  officials would                                                                    
     also help relieve the unfunded liability.                                                                                  
                                                                                                                                
     Stop  the  leaks  caused by  unfunded  benefits.    Any                                                                    
     provision in the current statutes  that drains from the                                                                    
     system should  be identified and  corrected.   Make the                                                                    
     necessary  changes  to  statutes that  currently  allow                                                                    
     supplemental  earnings  to  boost  the  wage  base  for                                                                    
     retirement calculations.                                                                                                   
                                                                                                                                
     Amend the  formula for retirement benefits  to create a                                                                    
     more reasonable  base period for eligible  salaries.  A                                                                    
     minimum of  ten years  of earnings  should be  used for                                                                    
     benefit  calculation purposes.   This  will dilute  the                                                                    
     effects  of any  large payouts  in the  final years  of                                                                    
     employment  and will  help  insure  that benefits  more                                                                    
     evenly match contributions.                                                                                                
                                                                                                                                
     Take  a  very  conservative  approach  in  implementing                                                                    
     elements of a defined  contribution plan.  The division                                                                    
     of  retirement and  benefits has  offered PERS  and TRS                                                                    
     Tier Proposals that  incorporate a defined contribution                                                                    
     plan that  is more gradual.   It provides significantly                                                                    
     more protection for the state  and the employer without                                                                    
     totally abolishing  the benefits  of the  current plan.                                                                    
     The plans are healthy in  terms of their ability to pay                                                                    
     pension benefits.  In spite  of all of the bear market,                                                                    
     low  interest  rates,  legislative changes,  etc.,  the                                                                    
     pension portion of the plans  were well funded and were                                                                    
     in the top  ten percent of state  retirement systems as                                                                    
     measured by  one of the  top pension  experts, Wilshire                                                                    
     Research.   The success  of that  portion of  the plans                                                                    
     should be preserved to the extent possible.                                                                                
                                                                                                                                
     The plans have served the  state and its residents well                                                                    
     for  many  years and  can  continue  to  do so  in  the                                                                    
     future.  Rather than dismantling  the plan, we urge you                                                                    
     to  consider a  combination  of mid-course  corrections                                                                    
     and prospective changes.                                                                                                   
                                                                                                                                
       We thank you for the opportunity to address these                                                                        
     issues.  I would be happy to answer any questions from                                                                     
     the committee.                                                                                                             
                                                                                                                                
8:23:39 AM                                                                                                                    
                                                                                                                                
CHAIR  SEATON  reminded  testifiers  to  address  HB  191,  which                                                               
establishes a defined contribution plan.                                                                                        
                                                                                                                                
8:24:45 AM                                                                                                                    
                                                                                                                                
MR. JARRELL, in response to  questions from Representative Gatto,                                                               
said the district he represents  has 11 school board members, and                                                               
there are 1,800  students spread over 15 villages, in  an area of                                                               
approximately 80,000 square miles.                                                                                              
                                                                                                                                
8:25:00 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GATTO noted  that  many of  the  teachers in  Mr.                                                               
Jarrell's district  don't make  big salaries.   He asked  if that                                                               
would  be  an  indication  of   what  Mr.  Jarrell  talked  about                                                               
regarding people who contribute a  small amount to the retirement                                                               
system, yet  reap the health benefits.   He asked, "Are  you just                                                               
as guilty as  anyone could be of having 11  school board members,                                                               
all of  which qualify to  take money from  the plan and  yet fund                                                               
very little of it to the plan?"                                                                                                 
                                                                                                                                
8:25:05 AM                                                                                                                    
                                                                                                                                
MR. JARRELL  agreed that  his school  district certainly  fits in                                                               
that category.  He said, "As  an observer and a representative of                                                               
the retirement system, if we're ever  going to have a system that                                                               
keeps up -  contributions keep up with benefits -  that's an area                                                               
that will have to be corrected."                                                                                                
                                                                                                                                
8:26:21 AM                                                                                                                    
                                                                                                                                
CHAIR SEATON  said that municipalities  and school  districts are                                                               
finding that  someone getting  paid $50  a month  for being  on a                                                               
school board or city council for  10 years not only has access to                                                               
the medical benefits,  but also has access to  retirement if that                                                               
person was a  previous employee of the borough  or state, because                                                               
the liability  accrues for  the number of  years that  the person                                                               
worked.   That  person  will  get the  liability  for their  full                                                               
pension.                                                                                                                        
                                                                                                                                
8:27:39 AM                                                                                                                    
                                                                                                                                
MR. JARRELL said there are  technical corrections that need to be                                                               
made.   He  suggested  looking at  10 years  or  even the  entire                                                               
number of years in a person's  career, and to base the retirement                                                               
benefit on  the overall average  of the earnings.   He explained,                                                               
"That  way the  contribution to  the system  would bear  a direct                                                               
correlation to the benefits that  were eventually accrued by that                                                               
person."                                                                                                                        
                                                                                                                                
8:28:06 AM                                                                                                                    
                                                                                                                                
CHAIR SEATON responded that he agrees with that, except:                                                                        
                                                                                                                                
     We don't  have the  accrued payments by  the individual                                                                    
     employer's school  district, versus how much  you paid,                                                                    
     but how many  years of service.  So, even  if you did a                                                                    
     spread   that  would   lower   the  people's   eventual                                                                    
     retirement amount, but there's  a portion that is going                                                                    
     to be absorbed by the  school district by having people                                                                    
     - basically  volunteers - working  on there  and having                                                                    
     them  have  access to  that,  it's  still going  to  be                                                                    
     proportionately  much greater  than their  ... monetary                                                                    
     contributions into the system.                                                                                             
                                                                                                                                
MR. JARRELL stated that he believes that's true.                                                                                
                                                                                                                                
CHAIR SEATON continued:                                                                                                         
                                                                                                                                
     And I  guess the ...  question about how it  relates to                                                                    
     [HB]  191   is  that   if  ...   this  was   a  defined                                                                    
     contribution  program,  then  that problem  goes  away,                                                                    
     right?    Because  whatever  ...  contribution  they've                                                                    
     gotten  from the  school  board,  that's the  liability                                                                    
     that  the  school  board  has  to  put  forward.    And                                                                    
     whatever  contribution they've  gotten  from the  state                                                                    
     employment or employment with  the borough, that's that                                                                    
     portion.     So,   all  of   a  sudden   we  get   this                                                                    
     proportionality, so that we're  switching from how many                                                                    
     years  you were  active  in  an area  to  how much  you                                                                    
     contributed to the system from that employer.                                                                              
                                                                                                                                
MR. JARDELL responded that's correct.                                                                                           
                                                                                                                                
8:29:39 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE RAMRAS  said he  has been  speaking with  "some of                                                               
the  PERS/TRS people  that have  been  in our  hallways the  last                                                               
couple of  days."   He offered some  names.  He  said HB  191 "is                                                               
forced savings;  ... it takes it  up to a 10  percent ... savings                                                               
rate."   He  asked what  the effect  would be  on retention.   He                                                               
mentioned an article, in which  Dr. Short, the superintendent for                                                               
the Fairbanks North  Star Borough, indicated that  she would lose                                                               
200  teachers immediately,  because  they would  not  be able  to                                                               
"afford the higher savings rate that  was put on them."  He said,                                                               
"If you read  this documentation, a defined  contribution plan is                                                               
going to end  up with wealthier, better-off  retirees 20-30 years                                                               
from now, and a lot of this just seems like fear of change."                                                                    
                                                                                                                                
8:31:48 AM                                                                                                                    
                                                                                                                                
MR. JARRELL deferred to Dr. Solie.                                                                                              
                                                                                                                                
8:32:31 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE RAMRAS  told Chair  Seaton that  he would  like to                                                               
hear Mr. Jarrell's opinion.                                                                                                     
                                                                                                                                
8:32:42 AM                                                                                                                    
                                                                                                                                
CHAIR SEATON  said how  much money  there is  "at the  end" would                                                               
depend on what the contribution rate is.                                                                                        
                                                                                                                                
8:32:56 AM                                                                                                                    
                                                                                                                                
MR.  JARRELL  said  he  thinks   results  will  depend  upon  the                                                               
knowledge and investment experience of  each individual.  He said                                                               
he  thinks that  to completely  remove the  defined benefit  from                                                               
people will  leave a number  of them with no  benefit whatsoever.                                                               
He  noted  that  teachers,  in particular,  do  not  have  social                                                               
security; they have  no other benefits whatsoever.   He said PERS                                                               
employees generally do, or have  the Supplemental Benefits System                                                               
(SBS), which  takes the place of  social security.  He  said many                                                               
teachers  are good  at what  they do  but are  not savvy  when it                                                               
comes to  their own financial  investments.  With a  blended plan                                                               
there would be at least some benefit.                                                                                           
                                                                                                                                
8:34:10 AM                                                                                                                    
                                                                                                                                
CHAIR SEATON  asked if  Mr. Jarrell  would approve  of a  plan in                                                               
which there  was a requirement  that investments such as  SBS had                                                               
to be made.                                                                                                                     
                                                                                                                                
8:34:49 AM                                                                                                                    
                                                                                                                                
MR. JARRELL reiterated that he would  like to defer to Dr. Solie.                                                               
Notwithstanding that, he  said if half of  the contributions were                                                               
going  into a  defined contribution  plan  with a  fixed rate  of                                                               
return, then  it would be  acting the  same as a  defined benefit                                                               
plan and "should take care of at least a portion of that."                                                                      
                                                                                                                                
8:35:26 AM                                                                                                                    
                                                                                                                                
CHAIR SEATON  noted that there  is a committee substitute  for HB
191.                                                                                                                            
                                                                                                                                
8:35:38 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE MIKE  KELLY, Alaska State  Legislature, testifying                                                               
as sponsor  of HB 191,  said the bill  focuses only on  a defined                                                               
contribution plan.   He noted that another bill  of his addresses                                                               
a  change in  the structure  of the  boards [HB  170], while  yet                                                               
another would bring the 45,000  existing employees to the payment                                                               
table  [HB  177].    None  of the  plans  would  change  existing                                                               
benefits, "except for the new employees coming into the door."                                                                  
                                                                                                                                
8:37:05 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GATTO moved  to  adopt  the committee  substitute                                                               
(CS) for HB 191, Version  24-LS0461\I, Craver, 3/30/05, as a work                                                               
draft.   There  being  no  objection, Version  I  was before  the                                                               
committee.                                                                                                                      
                                                                                                                                
8:37:51 AM                                                                                                                    
                                                                                                                                
HEATH HILYARD,  Staff to Representative Mike  Kelly, Alaska State                                                               
Legislature,  presented Version  I  on  behalf of  Representative                                                               
Kelly, sponsor.  He indicated the changes made by Version I.                                                                    
                                                                                                                                
8:39:43 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GRUENBERG asked Mr. Hilyard  to prepare a chart in                                                               
detail, citing by page and line the changes he just reviewed.                                                                   
                                                                                                                                
MR. HILYARD said he would do so.                                                                                                
                                                                                                                                
8:40:28 AM                                                                                                                    
                                                                                                                                
CHAIR SEATON reminded the committee  that the following bills are                                                               
related:   HB  191, HB  170, HB  177, and  HB 238.   He  said the                                                               
committee  should not  be  contrasting any  of  those bills  with                                                               
"what's happening in the other body."                                                                                           
                                                                                                                                
8:41:46 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE RAMRAS  repeated his previous  questions regarding                                                               
retention, the fear factor, and the rate increase.                                                                              
                                                                                                                                
8:42:40 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KELLY reiterated  that the DC plan  has nothing to                                                               
do with existing  employees.  He said it's  important to remember                                                               
that "there are  ways to put sideboards so that  folks that don't                                                               
have ...  that special  talent to  invest" can  "leave that  in a                                                               
much more conservative protected status."                                                                                       
                                                                                                                                
8:43:43 AM                                                                                                                    
                                                                                                                                
CHAIR SEATON asked:                                                                                                             
                                                                                                                                
     So,  Representative Kelly,  in your  bill you  have the                                                                    
     board assigning  a number of investment  managers, such                                                                    
     as  SBS.    Is  that  correct?    I  mean,  this  isn't                                                                    
     individually the  pure 401K, where  you can go  out and                                                                    
     then put all your money in  Enron stock or ... in Dell,                                                                    
     or someplace  else.  This  is money managers  that have                                                                    
     been approved  by the board,  and you could  select ...                                                                    
     certain   money  managers   with  different   risk  ...                                                                    
     portfolios.                                                                                                                
                                                                                                                                
8:44:08 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KELLY answered that's  correct.  Regarding fear of                                                               
new plans,  he submitted that  for the  new person coming  in the                                                               
door, the defined  contribution plan "has every  bit the ability"                                                               
to  attract  and   retain  that  a  defined   benefit  plan  has.                                                               
Furthermore, for  the younger employee  who is probably  going to                                                               
change careers several times in  the 40-plus years they work, the                                                               
defined contribution  plan is highly  portable and "turns  out to                                                               
be quite attractive  to the younger set."  He  said, "That's that                                                               
unvested portion  in the current  DB plan;  if they want  to stay                                                               
there, they'll  have that option.   But if they want  to transfer                                                               
across, then  it's a  simple education program  to show  them the                                                               
comparative analysis of the two plans ...."                                                                                     
                                                                                                                                
8:45:15 AM                                                                                                                    
                                                                                                                                
CHAIR  SEATON referred  to a  summary included  in the  committee                                                               
packet.    He said  the  employer  contribution would  eventually                                                               
reach  8  percent  for  TRS  and 8.75  percent  for  PERS.    The                                                               
contribution by  employees would be  higher in TRS than  in PERS.                                                               
He asked why the plan was made that way.                                                                                        
                                                                                                                                
8:46:31 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KELLY  said  "this" takes  the  two  alternatives                                                               
formulated by Mercer Human Resource  Consulting and reflects some                                                               
of  the  different  retirement   options  among  the  classes  of                                                               
employee.   He offered  his understanding  that it  would attempt                                                               
"on TRS side"  to at least partially address  the social security                                                               
"opt  out  impact."    He deferred  further  explanation  to  the                                                               
Division of Retirement & Benefits.                                                                                              
                                                                                                                                
8:47:08 AM                                                                                                                    
                                                                                                                                
CHAIR SEATON  noted that the medical  portion of Version I  of HB
191  shows that  3.5 percent  of  the contribution  would be  for                                                               
medical,   with   another  1   percent   for   the  health   care                                                               
reimbursement plan.   He  said he  is trying  to figure  out "how                                                               
this  works in  the  first  several years."    He observed  that,                                                               
regarding  employer contribution  rates,  4.75  percent would  be                                                               
dedicated, but only  between 0 and 2 percent is  being taken from                                                               
the  employer in  the first  and second  year, respectively.   He                                                               
asked if that was intentional.                                                                                                  
                                                                                                                                
8:48:11 AM                                                                                                                    
                                                                                                                                
MR. HILYARD said  at this time that was intentional;  it was left                                                               
at  a  graduated  level  with the  understanding  that  it  would                                                               
provide no benefit in year one.                                                                                                 
                                                                                                                                
8:48:39 AM                                                                                                                    
                                                                                                                                
CHAIR SEATON  asked, "So, the bill  lays that out that  there are                                                               
no  contributions for  medical benefits.    ... Is  that for  the                                                               
first four years or so?"                                                                                                        
                                                                                                                                
8:49:01 AM                                                                                                                    
                                                                                                                                
MR.  HILYARD  clarified, "That  graduation  would  apply to  both                                                               
rates:   the 3.75  [percent] for  the medical  and then  the 4.25                                                               
[percent] ... in ... TRS....   So, you would essentially graduate                                                               
by increments of 25 percent of the total."                                                                                      
                                                                                                                                
CHAIR SEATON said he would flag that area for later work.                                                                       
                                                                                                                                
8:49:16 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KELLY stated the  intent was to encourage "someone                                                               
to stay with us," which is why it is graduated.                                                                                 
                                                                                                                                
8:49:28 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GATTO  noted that  police/fire employees  are able                                                               
to  retire  after  25  years,   instead  of  30;  however,  their                                                               
contribution rate is  higher than that of  the 30-year employees.                                                               
He said  he did not  notice that there  would be a  difference in                                                               
the contribution  rate for police/fire  for employers.   He asked                                                               
if "this group of employees"  would not "become more expensive to                                                               
the system"  because of leaving  it earlier without  supplying as                                                               
much in contributions.                                                                                                          
                                                                                                                                
8:50:34 AM                                                                                                                    
                                                                                                                                
MR. HILYARD responded that the  sponsor was essentially following                                                               
the Mercer Human Resources Alternative  2 option.  He said, "With                                                               
respect  to  adjustment, I  think  that  is definitely  something                                                               
that's open  for discussion and  amendment.  We were  just trying                                                               
to use  a baseline of  a plan, so  that we could  bring something                                                               
forward to the committee."                                                                                                      
                                                                                                                                
8:51:12 AM                                                                                                                    
                                                                                                                                
CHAIR SEATON  interpreted that  new employees  in TRS,  PERS, and                                                               
police/fire would  all be  retirement eligible at  30 years.   He                                                               
directed attention  to page  2 of the  summary, which  shows that                                                               
under  the  medical system  a  person  would have  to  retirement                                                               
directly from the system with 30  years of service, or be 65 with                                                               
at least 10 years.                                                                                                              
                                                                                                                                
8:51:57 AM                                                                                                                    
                                                                                                                                
MR. HILYARD answered  that's correct.  He noted  that lines 15-28                                                               
on page 11 refer to TRS.  He  noted that there is a provision for                                                               
PERS and  Public Safety  employees on page  39, lines  2-3, which                                                               
says that the member must have at  least 25 years of service as a                                                               
peace  officer  or  fire  fighter  and 30  years  for  all  other                                                               
employees.                                                                                                                      
                                                                                                                                
8:53:15 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KELLY mentioned gap  coverage provisions, by which                                                               
a  person can  get access  to coverage  before a  certain age  by                                                               
paying for it.                                                                                                                  
                                                                                                                                
8:54:30 AM                                                                                                                    
                                                                                                                                
CHAIR SEATON  stated his understanding  that the  medical portion                                                               
of Version I had not been changed from the original bill.                                                                       
                                                                                                                                
REPRESENTATIVE KELLY  [off microphone]  said the  medical portion                                                               
has changed.                                                                                                                    
                                                                                                                                
CHAIR SEATON  noted that  it is  the same  as the  tier committee                                                               
task force recommendation.                                                                                                      
                                                                                                                                
8:56:33 AM                                                                                                                    
                                                                                                                                
MELANIE MILLHORN,  Director, Division  of Retirement  & Benefits,                                                               
Department  of Administration,  stated that  the medical  plan is                                                               
same for  both Alternative  1 and Alternative  2.   She indicated                                                               
that   those  alternatives   set  out   the  criteria   by  which                                                               
individuals  are able  to  receive medical  coverage.   The  tier                                                               
committee specifically determined that  an employee had to retire                                                               
out of the system, had to be age  60, and had to have 10 years of                                                               
service,  or satisfy  the requirements  through years  of service                                                               
instead of age.  The years  of service for police/fire and TRS is                                                               
25 years, and 30 years for PERS.                                                                                                
                                                                                                                                
8:58:30 AM                                                                                                                    
                                                                                                                                
MS.  MILLHORN,  in response  to  a  question from  Chair  Seaton,                                                               
stated the following:                                                                                                           
                                                                                                                                
     The two  specific components within the  medical design                                                                    
     include  pre-65 and  post-65.   So,  pre-65 includes  a                                                                    
     defined  dollar  benefit for  the  members.   ...  It's                                                                    
     based on  years of service,  so each year  the division                                                                    
     would  determine what  the premium  amount is  for that                                                                    
     particular  coverage,  and  then,  based  on  years  of                                                                    
     service,  the member  would  receive  a subsidy  amount                                                                    
     associated  with that.   ...   Post-65  medial coverage                                                                    
     coordinates  with  Medicare.    It's  also  derived  by                                                                    
     looking  at the  years of  service for  the individual,                                                                    
     and  the  individual  will pay  a  contribution  amount                                                                    
     based  on  that  premium   amount  established  by  the                                                                    
     system.                                                                                                                    
                                                                                                                                
9:00:19 AM                                                                                                                    
                                                                                                                                
MS.  MILLHORN, in  response to  a follow-up  question from  Chair                                                               
Seaton,  clarified that  if a  person  has not  been employed  30                                                               
years [in PERS] he/she  would have to be age 60  with 10 years of                                                               
service.   She said a  person who is 65  and has worked  25 years                                                               
would receive  a subsidy  amount under  the defined  benefit plan                                                               
for medical  coverage at 75 percent.   In response to  a question                                                               
from Chair  Seaton, she  said, "It's the  premium that's  set out                                                               
based on  the claims amount  that year."   In 2004,  for example,                                                               
the premium was $5,962.                                                                                                         
                                                                                                                                
9:02:41 AM                                                                                                                    
                                                                                                                                
MS. MILLHORN, in response to Chair Seaton, explained as follows:                                                                
                                                                                                                                
     When  we  establish  that  premium  amount,  one  other                                                                    
     component  associated with  the defined  dollar benefit                                                                    
     portion  - the  pre-65 -  is that  there's a  5 percent                                                                    
     medical inflation factor that  is considered every year                                                                    
     for that subsidy amount.                                                                                                   
                                                                                                                                
9:03:06 AM                                                                                                                    
                                                                                                                                
CHAIR SEATON  asked if the premium  can only grow at  5 percent a                                                               
year.                                                                                                                           
                                                                                                                                
9:03:25 AM                                                                                                                    
                                                                                                                                
MS. MILLHORN answered that's correct.   She confirmed that that's                                                               
true no  matter what  the medical  costs are.   In response  to a                                                               
follow-up  question from  Chair  Seaton, she  indicated that  the                                                               
member would have a portion that he/she will have to absorb.                                                                    
                                                                                                                                
9:03:44 AM                                                                                                                    
                                                                                                                                
CHAIR  SEATON  asked  that  Ms.   Millhorn  give  a  Power  Point                                                               
presentation  on  Saturday regarding  the  medical  aspects of  a                                                               
defined contribution program.                                                                                                   
                                                                                                                                
9:04:32 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GATTO  asked Ms. Millhorn if,  during her upcoming                                                               
presentation, she could offer some sample scenarios.                                                                            
                                                                                                                                
9:05:49 AM                                                                                                                    
                                                                                                                                
MS. MILLHORN said  one important component that fits  in with the                                                               
medical  plan design  is  the  health reimbursement  arrangement,                                                               
which is  designed to  ensure that  members have  "those expenses                                                               
allowable  for them  to  pay that  additional  cost" between  the                                                               
defined  benefit pre-65  portion and  the defined  health benefit                                                               
for post-65.                                                                                                                    
                                                                                                                                
9:06:36 AM                                                                                                                    
                                                                                                                                
CHAIR  SEATON  asked  that  Ms.  Millhorn  be  prepared  to  make                                                               
comparisons between the medical benefits in HB 191 and HB 238.                                                                  
                                                                                                                                
9:09:09 AM                                                                                                                    
                                                                                                                                
CHAIR  SEATON, after  considering Dr.  Solie's schedule,  said he                                                               
would allow him to talk about  the other related House bills, but                                                               
asked him to specify whenever he changed focus.                                                                                 
                                                                                                                                
9:10:11 AM                                                                                                                    
                                                                                                                                
RICHARD  SOLIE, SR.,  Ph.D., testifying  as a  member of  the TRS                                                               
Board, noted  that he  is a retired  professor of  Economics, and                                                               
was also the  head of the department, as well  as the acting dean                                                               
of the School of Management.   He stated that he was appointed to                                                               
the TRS Board by Governor Frank  Murkowski in the summer of 2003,                                                               
and reappointed to  a full term in  January 2004.  He  was one of                                                               
the four  members on the  tier committee charged  with developing                                                               
proposals for a new retirement plan for both TRS and PERS.                                                                      
                                                                                                                                
9:12:33 AM                                                                                                                    
                                                                                                                                
DR.   SOLIE,   regarding   member   contributions,   stated   his                                                               
understanding  that there  is difference  in approach  between HB
238 and  HB 191.  Dr.  Solie named two components:  equal sharing                                                               
of normal costs,  and equal sharing of past due  liabilities.  He                                                               
said both  components are relevant  to HB 191 and  are "partially                                                               
relevant  with  respect to  HB  238  ...."    He stated  that  he                                                               
philosophically agrees with  the concept of equal  sharing of the                                                               
normal  costs.    Both  Alternatives 1  and  2  include  employee                                                               
contributions that would  be as high or higher than  those of the                                                               
employer.  He  said he would agree with doing  that with existing                                                               
plan members "if it will pass court muster."                                                                                    
                                                                                                                                
DR.  SOLIE  stated  concern  regarding   the  5  percent  a  year                                                               
potential increase.   He said,  "If it  were a sharing  of normal                                                               
costs,  that really  wouldn't  come  into play,  but  if it  were                                                               
sharing  in the  past ...  unfunded liabilities,  then it  would.                                                               
And I  have a real  problem with that.   I think you  can imagine                                                               
what a  teacher or public employee  would feel like if  they were                                                               
faced  with the  kind  of increases  that  were envisioned  there                                                               
...."   He stated  that it was  the 5 percent  issue, not  the 10                                                               
percent   employee   contribution   under  a   proposed   defined                                                               
contribution plan,  to which previously  mentioned Superintendent                                                               
Short in Fairbanks had responded.                                                                                               
                                                                                                                                
9:16:06 AM                                                                                                                    
                                                                                                                                
CHAIR SEATON told  Dr. Solie that HB 238 would  have a 13 percent                                                               
cap for  PERS and a  14 percent  cap for TRS.   He asked  if that                                                               
would solve the problem for Dr. Solie.                                                                                          
                                                                                                                                
9:16:50 AM                                                                                                                    
                                                                                                                                
DR.  SOLIE responded  that  that  solves a  lot  of the  problem;                                                               
however, he still has a  philosophical problem.  He mentioned the                                                               
percentages of  "ramp up" for  PERS and  TRS to "cover  the total                                                               
maximum."  He  said he thinks that it would  be difficult to ramp                                                               
that up  in one  year.   He emphasized that  he is  speaking both                                                               
personally and  philosophically on  the subject; he  cannot speak                                                               
on behalf of TRS  or PERS members as a whole.   He said he thinks                                                               
there is a fairness in the idea of sharing the normal cost.                                                                     
                                                                                                                                
9:17:41 AM                                                                                                                    
                                                                                                                                
CHAIR SEATON asked  Dr. Solie what percentage of  "ramp up" would                                                               
be acceptable to him.                                                                                                           
                                                                                                                                
9:18:12 AM                                                                                                                    
                                                                                                                                
DR. SOLIE responded  that he is reluctant to say,  but less would                                                               
be better than more.  He continued:                                                                                             
                                                                                                                                
     I wouldn't have  ... had a personal problem  with ... a                                                                    
     2.5 percent  ramp up,  but I suspect  that there  are a                                                                    
     number that  were not  in the position  that I  was, in                                                                    
     where it would  have been a much  more difficult thing.                                                                    
     I  mean, I  think  just view  it  from the  standpoint:                                                                    
     it's  a  federal tax.    If  you  were told  that  your                                                                    
     federal tax was going to go  up - no exemptions on it -                                                                    
     ...  2.5 percent  a year,  or 5  percent, or  whatever,                                                                    
     it's  significant.   And  so, the  slower  the rate  at                                                                    
     which that could be phased in, the better it would be.                                                                     
                                                                                                                                
9:19:17 AM                                                                                                                    
                                                                                                                                
CHAIR SEATON said the committee would consider that issue.                                                                      
                                                                                                                                
9:19:32 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GATTO said  saying  one amount  is "better  than"                                                               
another breeds  the question: "Better  for [whom]?"  He  said any                                                               
time  something is  better  for one,  it's got  to  be worse  for                                                               
another.                                                                                                                        
                                                                                                                                
9:20:24 AM                                                                                                                    
                                                                                                                                
DR.  SOLIE responded  that he  thinks his  previous remarks  were                                                               
clearly from  the standpoint  of the employee  and the  impact on                                                               
the turnover.  He continued:                                                                                                    
                                                                                                                                
     But my point was that the  amount lost to the fund by a                                                                    
     slower  ramp up  is  not  going to  be  great.   And  I                                                                    
     personally  think that  the tradeoff  between what  the                                                                    
     fund would lose in a slower  ramp up would be more than                                                                    
     offset by the  lessened impact on the  employee and the                                                                    
     turnover situation.                                                                                                        
                                                                                                                                
9:21:03 AM                                                                                                                    
                                                                                                                                
DR.  SOLIE,  in  response to  Representative  Gruenberg,  offered                                                               
further details regarding his positions at the university.                                                                      
                                                                                                                                
9:21:59 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GRUENBERG  observed  that  Dr.  Solie  was  in  a                                                               
position to observe the management  and retention issue regarding                                                               
at least one  part of the university.  He  stated that he doesn't                                                               
want to  do anything that  would impede the  university's ability                                                               
to attract  the best faculty.   He said  he knows one  issue that                                                               
attracts  and  keeps good  people  is  the  pension plan  of  the                                                               
university system.   He asked Dr. Solie to evaluate  which plan -                                                               
defined  benefit  or defined  contribution  -  would attract  and                                                               
retain the best.                                                                                                                
                                                                                                                                
9:23:25 AM                                                                                                                    
                                                                                                                                
DR. SOLIE opined that the  current defined benefit plan "would be                                                               
the most attractive."   He said he thinks that  for an individual                                                               
coming to Alaska  for a shorter period of time  with no intention                                                               
of  staying  long term,  a  defined  contribution plan  would  be                                                               
superior.  He  said that may apply to attracting  teachers to the                                                               
Bush, because he said he suspects  that a lot of the teachers who                                                               
go out  to the Bush don't  do so with  the idea of making  that a                                                               
career.                                                                                                                         
                                                                                                                                
9:24:32 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GRUENBERG  said  he   would  like  to  limit  his                                                               
question to the university system.                                                                                              
                                                                                                                                
9:24:46 AM                                                                                                                    
                                                                                                                                
DR. SOLIE  said -  as it pertains  to attracting  younger faculty                                                               
members - that  it is not overwhelmingly  significant whether the                                                               
retirement plan  is defined benefit,  defined contribution,  or a                                                               
hybrid.  He  noted that when he was involved  with the university                                                               
there was a Supplemental Benefits  System (SBS).  He opined that,                                                               
particularly  with   younger  employees,  salary  is   much  more                                                               
important than the benefit plan.   In response to a question from                                                               
Representative Gruenberg,  he said he  thinks that is  still true                                                               
today.   He listed some  areas that  are tough to  recruit people                                                               
in:  accounting, finance, economics.   He talked about initiating                                                               
a step plan in salary for  those areas that were tough to recruit                                                               
for,  which enabled  the university  to attract  people to  those                                                               
areas.                                                                                                                          
                                                                                                                                
9:27:23 AM                                                                                                                    
                                                                                                                                
CHAIR    SEATON    reminded   Representative    Gruenberg    that                                                               
representatives of the university had  - during another hearing -                                                               
talked about the university's optional  retirement plan (ORP) - a                                                               
defined contribution  plan, which a majority  of eligible members                                                               
have chosen.                                                                                                                    
                                                                                                                                
9:28:10 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GRUENBERG explained  that  he  was interested  in                                                               
hearing Dr. Solie's perspective, because  it is from the point of                                                               
view of a person who's made his career at one institution.                                                                      
                                                                                                                                
9:28:33 AM                                                                                                                    
                                                                                                                                
DR.  SOLIE  said  he  thinks retention  is  different  issue;  as                                                               
professors  get   older,  the  defined  benefit   plan  takes  on                                                               
significance.    Furthermore,  access  to the  health  care  plan                                                               
becomes a critical issue in terms of retention.                                                                                 
                                                                                                                                
CHAIR  SEATON said  it should  be possible  to get  exact numbers                                                               
from  the  university, regarding  how  many  people are  in  PERS                                                               
versus how many chose ORP.                                                                                                      
                                                                                                                                
9:29:32 AM                                                                                                                    
                                                                                                                                
DR.  SOLIE, regarding  past unfunded  liabilities -  particularly                                                               
with respect to HB  191 - said, "That would share  all of the way                                                               
up on  the unfunded liability."   He said that  could potentially                                                               
mean  as much  as  "25-32 percent  sharing."   In  response to  a                                                               
remark by  Chair Seaton,  he confirmed that  he is  talking about                                                               
the  combination  of  the  normal  cost  and  the  past  unfunded                                                               
liability.  He  added that it's the past  unfunded liability that                                                               
is "the really big part of it."  He continued as follows:                                                                       
                                                                                                                                
     There, I  think that  would be  a very  serious problem                                                                    
     from two standpoints.  Number  one, just the amount.  I                                                                    
     mean, that  would be  a potential  killer.   And that's                                                                    
     the issue upon which  Superintendent Short in Fairbanks                                                                    
     said she would have  these 190-some teachers that would                                                                    
     walk out the door the next day.                                                                                            
                                                                                                                                
9:31:33 AM                                                                                                                    
                                                                                                                                
CHAIR SEATON reminded Dr. Solie  that [HB 238] "doesn't take that                                                               
tack."                                                                                                                          
                                                                                                                                
CHAIR  SEATON said  he  thinks  that part  of  the  issue can  be                                                               
dropped, because  the House State  Affairs Standing  Committee is                                                               
fully  aware that  it can't  be taking  25 percent  of somebody's                                                               
salary and putting it into their retirement plan.                                                                               
                                                                                                                                
9:31:49 AM                                                                                                                    
                                                                                                                                
DR. SOLIE suggested  that a relevant point is the  balance of the                                                               
unfunded liabilities  that are  attributable to  current retirees                                                               
as compared to  "current actives."  He said a  question to Mercer                                                               
[Human Resource Consulting] revealed  that in TRS, "approximately                                                               
72  percent   of  the  unfunded   liabilities  are   attached  to                                                               
nonactives; only about 28 percent  are attached to actives."  For                                                               
PERS, the  numbers are a little  bit lower:  about  67 percent of                                                               
the unfunded liabilities  are attached to nonactives.   He stated                                                               
his point  is that  a vast majority  of the  unfunded liabilities                                                               
are  attached to  the  current retirees  "and  nobody is  talking                                                               
about  sending them  a  bill  for it."    He  explained that  the                                                               
existing employees would  be paying a major part of  the bill for                                                               
those retired;  they would  be paying for  something that  is not                                                               
going to benefit them and in no  way is attributable to them.  He                                                               
added that even  among current active employees there  would be a                                                               
serious imbalance, because the individual  who is about to retire                                                               
has accrued a major part  of that unfunded liability, whereas the                                                               
new employee who  comes into the system has none.   He said, "And                                                               
yet it's  the new employee ...  who's going to pay  that bill for                                                               
his whole career."                                                                                                              
                                                                                                                                
9:34:14 AM                                                                                                                    
                                                                                                                                
CHAIR SEATON said,  "That's some of the reason why  we need a cap                                                               
that works  into the  realm of those  contributing people  in the                                                               
current tiers  [who] would  be looking at  past service  costs on                                                               
the benefits  that they're going to  receive."  He noted  for the                                                               
record:    the  increased  contribution amount  is  addressed  in                                                               
Representative Kelly's HB 177; HB  191 addresses only the defined                                                               
contribution plan; and both elements are addressed in HB 238.                                                                   
                                                                                                                                
9:34:39 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GATTO  asked if  Alaska would be  a model  for the                                                               
federal government to fix its own social security problem.                                                                      
                                                                                                                                
9:35:07 AM                                                                                                                    
                                                                                                                                
DR.  SOLIE  replied  that the  federal  government's  problem  is                                                               
simpler.   He explained that  the projections indicate  that once                                                               
the social  security fund runs dry  the benefits have to  be paid                                                               
out  of current  contributions, and  at  that point  in time  the                                                               
contributions are  estimated to pay  for about 75 percent  of the                                                               
benefits.  Over  time that will dip to  approximately 68 percent.                                                               
Even with that  significant reduction, the system  is capable, on                                                               
the  basis  of current  income,  of  providing  the bulk  of  the                                                               
benefits.   Conversely, if Alaska  doesn't cover it's  costs, TRS                                                               
will be  broke in  about 25 years  and the  current contributions                                                               
would be a much smaller fraction  of the benefit.  He offered his                                                               
understanding that, regarding social  security, about a 2 percent                                                               
increase in  the social security tax  would fix the problem.   He                                                               
added, "Also, lifting the maximum would go part of the way."                                                                    
                                                                                                                                
9:36:54 AM                                                                                                                    
                                                                                                                                
CHAIR SEATON  said that with  social security "it's  all unfunded                                                               
liability."    He  explained, "Present  dollars  are  paying  the                                                               
present."  Alaska  is attempting to collect enough  money so that                                                               
it will grow  over time to pay the benefits  that are "related to                                                               
that employee."                                                                                                                 
                                                                                                                                
9:37:36 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  RAMRAS  asked if  Dr.  Solie  is concerned  about                                                               
rushing a solution, and whether  he thinks the legislature should                                                               
find a solution this year, or reflect to next January.                                                                          
                                                                                                                                
9:38:20 AM                                                                                                                    
                                                                                                                                
DR.  SOLIE  stated  that  he's  heard it  said  that  anyone  who                                                               
recommends   delaying  the   solution   doesn't  understand   the                                                               
seriousness of  the problem,  but he said  he doesn't  agree with                                                               
that.   He said  he thinks  this is  a serious  issue.   Once the                                                               
legislature establishes  a new  tier, based on  the way  that the                                                               
supreme  court  has  ruled  in   the  past,  those  benefits  are                                                               
basically set in  concrete.  He stated that it  would behoove the                                                               
legislature to  get it right the  first time.  He  said he thinks                                                               
the tier  committee came up with  some good ideas, but  he is not                                                               
prepared to  say that it  was the best plan.   He said  there are                                                               
things  being proposed  that need  serious consideration  and the                                                               
cost of delaying one year would cause minimal effect.                                                                           
                                                                                                                                
DR.  SOLIE noted  that  actuarial projections  show  that if  the                                                               
legislature, as of  July 1, [2005], was to  eliminate the benefit                                                               
plans  completely for  all new  employees, it  would still  be 10                                                               
years before the  PERS rate would drop to 25  percent and the TRS                                                               
rate would still be 30 percent at  that point.  He said, "The new                                                               
plan is only going to bring  that down gradually."  He said there                                                               
are things  that can be done  within the current plan  that don't                                                               
require   action  by   the  legislature.      For  example,   the                                                               
administration can  make changes to  the health care  plan, which                                                               
is where he said the biggest problem is.                                                                                        
                                                                                                                                
9:40:40 AM                                                                                                                    
                                                                                                                                
DR. SOLIE said he has spoken  with [Sam] Trivette of [the Retired                                                               
Public Employees  of Alaska (RPEA)] and  found him to be  open to                                                               
addressing some of the issues  and to work cooperatively with the                                                               
state.                                                                                                                          
                                                                                                                                
9:41:11 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  RAMRAS   stated  concern  that   the  legislature                                                               
doesn't have bankers  and economists to explain what  it means to                                                               
solve a problem like this.                                                                                                      
                                                                                                                                
9:41:53 AM                                                                                                                    
                                                                                                                                
DR. SOLIE  said his written  testimony shows that he  agrees with                                                               
the concept of  increased professionalism on the  boards and with                                                               
the  concept of  bringing in  some  outside members  who are  not                                                               
members  of [either]  system.   He clarified  that that  does not                                                               
mean  that  he doesn't  have  the  greatest  of respect  for  the                                                               
current members  of the board.   He added, "But I  do think that,                                                               
with some of  the issues that we grapple with,  some expertise in                                                               
the areas spelled  out in some of the bills  would be a positive,                                                               
and  bringing in  the public  perspective would  be a  positive."                                                               
Regarding HB  170 - the recomposition  of the boards -  he stated                                                               
concern that there be guaranteed  seats on the board [for] people                                                               
"representing those plans."  He  explained that it is trust funds                                                               
put in trust  for [PERS/TRS members] that the  board manages, and                                                               
large sums of  money have been put into those  funds by [PERS/TRS                                                               
members] for the purpose of  providing for their retirement plan.                                                               
He stated that  he thinks it is absolutely  essential that [those                                                               
members]  be  represented on  the  boards  and "should  have  the                                                               
majority."                                                                                                                      
                                                                                                                                
9:44:15 AM                                                                                                                    
                                                                                                                                
CHAIR  SEATON  offered  his understanding  that  the  PERS  board                                                               
members are currently selected through  an election process which                                                               
costs  approximately  $80,000.   He  asked  how TRS  selects  its                                                               
members.                                                                                                                        
                                                                                                                                
DR. SOLIE  said, "I think  there is  a ... provision  where there                                                               
can be nominations  from employee groups, but  the governor makes                                                               
the appointment."                                                                                                               
                                                                                                                                
9:45:37 AM                                                                                                                    
                                                                                                                                
DR. SOLIE,  in response  to a question  from Chair  Seaton, noted                                                               
that  the board  is comprised  of people  who are  either current                                                               
retirees or  "current actives."   He said there is  no "guarantee                                                               
of access" for  the TRS Board.  He stated  that although that has                                                               
worked well, he  sees emerging from the bills  being discussed an                                                               
emphasis  on professionalism  and  outside experience.   He  said                                                               
that makes him  fear that "it might shift away  and it would lose                                                               
sight of  the need to have  representation from this group."   In                                                               
response to  a follow-up  question from  Chair Seaton,  Dr. Solie                                                               
stated:                                                                                                                         
                                                                                                                                
     Frankly,  the appointment  process  doesn't bother  me,                                                                    
     even if it weren't a  nomination, as long as there were                                                                    
     some  dedicated seats.   And  I'm sure  that the  labor                                                                    
     organizations would have a different view of that than                                                                     
     I.                                                                                                                         
                                                                                                                                
9:46:39 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   ELKINS  asked   Dr.  Solie   if  he   has  given                                                               
recommendations to  the administration  and if  it has  shown any                                                               
indication  that   it  might  be   willing  to   implement  those                                                               
regulations.                                                                                                                    
                                                                                                                                
9:47:10 AM                                                                                                                    
                                                                                                                                
DR. SOLIE answered  yes.  He qualified that he  can only speak in                                                               
a limited  fashion regarding  that, because he  has only  been on                                                               
board  for 1.5  years, and  he  was not  a member  of the  health                                                               
committee, which  has been primarily responsible  for "forwarding                                                               
some of  those recommendations."   However, he  said he  knows in                                                               
the  past  that  "they  dealt significantly  with  the  issue  of                                                               
increasing  ... the  generic drug  participation."   During  that                                                               
time,  as   a  result   of  an   educational  program   that  was                                                               
implemented, Dr.  Solie said he  thinks there was an  increase of                                                               
at least  5 percentage points  in the percentage of  generic drug                                                               
usage.   He  noted  that  each percentage  point  saves about  $1                                                               
million.                                                                                                                        
                                                                                                                                
DR.  SOLIE reported  that there  were  about 8  issues that  were                                                               
forwarded   in   the   most  recent   board   meeting   and   the                                                               
administration seemed open  to a request to give a  report on the                                                               
progress of those  issues at the next PERS/TRS meeting.   He said                                                               
HB  238   -  a  closed   formulary  issue   -  was  one   of  the                                                               
recommendations.   There are  others that  could be  cost saving.                                                               
He said  he heard that 80  percent of hospital care  in Anchorage                                                               
is provided by Providence Hospital,  and yet that hospital is not                                                               
a preferred provider.  He indicated  that if it were, the savings                                                               
could equal 20-30 percent.  He  concluded, "So, I think there are                                                               
things that  can be done  that will engender  significant savings                                                               
out of the current program without the need for change."                                                                        
                                                                                                                                
9:50:12 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ELKINS  said he  understands and  appreciates what                                                               
Dr. Solie is saying.  He thanked him for being well spoken.                                                                     
                                                                                                                                
9:50:50 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GRUENBERG  said he  finds  the  testimony of  Dr.                                                               
Solie helpful  and he encouraged  letting Dr. Solie  continue his                                                               
testimony by teleconference in the future.                                                                                      
                                                                                                                                
9:51:29 AM                                                                                                                    
                                                                                                                                
DR. SOLIE, in  response to a question  from Representative Gatto,                                                               
stated  his understanding  that there  would be  one hospital  in                                                               
Anchorage,  for example,  that would  be named  as the  preferred                                                               
provider,  and if  anyone who  went to  another hospital,  he/she                                                               
would pay the additional cost.                                                                                                  
                                                                                                                                
9:51:57 AM                                                                                                                    
                                                                                                                                
DR.  SOLIE stated  that he  is not  opposed to  the concept  of a                                                               
defined  contribution plan.   He  asked the  committee to  recall                                                               
that the  Alternative I  proposal advanced  by the  tier proposal                                                               
committee  was a  hybrid of  a defined  contribution and  defined                                                               
benefit  plan.   He  said  the  [tier proposal]  committee  voted                                                               
unanimously against  the Alternative II  plan.  One of  the basic                                                               
reasons  for  the  committee's choice,  he  explained,  was  that                                                               
"there was a recognition that many  of the employees in the State                                                               
of Alaska and none of the  teachers within the system are covered                                                               
by  social security;  thus they  don't have  the basic  floor ...                                                               
that  social security  provides."   He  said  the committee  felt                                                               
strongly  that there  was a  need for  a floor,  which is  why it                                                               
proposed "the 1 percent [defined benefit plan]."                                                                                
                                                                                                                                
DR.  SOLIE stated  that surveys  conducted showed  that employers                                                               
were in favor  of reducing costs and sharing the  risk.  They did                                                               
not indicate  that they  wanted to  shift the  whole risk  to the                                                               
employees,  nor   did  they   want  the   employees  to   bear  a                                                               
tremendously large additional increase.                                                                                         
                                                                                                                                
9:53:46 AM                                                                                                                    
                                                                                                                                
CHAIR  SEATON  responded  that  he  has  had  "a  very  different                                                               
conversation with  the employers."   He  said their  main concern                                                               
was not  reducing costs  from the current  normal cost  rate, but                                                               
was in regard to  a huge escalation of costs.   He stated that if                                                               
the  legislature decides  on a  defined contribution  plan it  is                                                               
critical to  figure out  whether to  drop below  the contribution                                                               
rate that employers have been paying  for the last 20 years or to                                                               
focus on not jumping the rate up.                                                                                               
                                                                                                                                
9:55:32 AM                                                                                                                    
                                                                                                                                
DR. SOLIE responded as follows:                                                                                                 
                                                                                                                                
     Number one,  we had  no control  over the  past service                                                                    
     unfunded liability.  That's an  issue that was separate                                                                    
     that we  couldn't do anything  about, frankly.   All we                                                                    
     could deal  with is  the cost  of employees  entering a                                                                    
     new  tier, other  than these  other  factors that  I've                                                                    
     mentioned of  potential savings  mainly in  the medical                                                                    
     side.    But  the  plan that  we  proposed  would  have                                                                    
     reduced the  employer contribution to 8.75  percent for                                                                    
     TRS and to  8 percent for PERS.  It  would have had the                                                                    
     employee contribution  at 10 percent  for TRS and  at 8                                                                    
     percent for PERS.                                                                                                          
                                                                                                                                
9:56:22 AM                                                                                                                    
                                                                                                                                
CHAIR SEATON asked if, knowing  the past service costs were going                                                               
to increase, reducing the normal  service cost was the only thing                                                               
that could be controlled.                                                                                                       
                                                                                                                                
                                                                                                                                
9:56:36 AM                                                                                                                    
                                                                                                                                
DR. SOLIE answered  that's right.  He said, "We  were focusing on                                                               
reducing the normal cost on the part  of the plan that we felt we                                                               
had some authority to affect."                                                                                                  
                                                                                                                                
9:56:45 AM                                                                                                                    
                                                                                                                                
CHAIR SEATON  surmised that the  driving force for that  was that                                                               
"the total  contribution rate was  going to  be so high  that you                                                               
were trying  to reduce  it wherever you  could, and  that's where                                                               
you thought you could."                                                                                                         
                                                                                                                                
9:57:00 AM                                                                                                                    
                                                                                                                                
DR. SOLIE  indicated that is  partly the  reason.  He  stated, "I                                                               
also  feel  that  ...  there  are   going  to  need  to  be  some                                                               
adjustments in  retirement plans, and  ours is amplified  by that                                                               
huge unfunded liability."                                                                                                       
                                                                                                                                
9:57:50 AM                                                                                                                    
                                                                                                                                
CHAIR  SEATON  drew  attention  to  a  draft  sectional  analysis                                                               
compiled by his staff [included in the committee packet].                                                                       
                                                                                                                                
9:58:07 AM                                                                                                                    
                                                                                                                                
DR. SOLIE, in regard to HB 238, stated the following:                                                                           
                                                                                                                                
     As  I calculate  it,  under HB  238,  the employer  ...                                                                    
     share  of the  normal  cost would  be  11 percent;  our                                                                    
     proposal was  8.75 [percent].   ... For the  PERS side,                                                                    
     the employer  contribution would  be 10  [percent]; our                                                                    
     proposal was 8 [percent].   Now, the fact of the matter                                                                    
     is,  it's  going  to  take  at  least  that  amount  of                                                                    
     increased contribution  on the part of  the employers -                                                                    
     or at least a combination  of employers and employees -                                                                    
     to  provide a  [defined  benefit] plan  that will  give                                                                    
     coverage that is at all  comparable to what the current                                                                    
     defined  benefit  or to  what  our  blended plan  would                                                                    
     provide.   And I  say that because  there is,  I think,                                                                    
     pretty well  established information in  the literature                                                                    
     showing  that,  typically, individually  managed  plans                                                                    
     earn  rates  of  return that  are  significantly  below                                                                    
     those of the  pool funds.  And the figure  that is most                                                                    
     commonly bandied about is about  2 percent.  I ran some                                                                    
     numbers using a 1.5 percent reduced rate.                                                                                  
                                                                                                                                
9:59:43 AM                                                                                                                    
                                                                                                                                
CHAIR  SEATON  added   that,  in  relation  to   that,  the  only                                                               
selections  are those  that are  available  from the  board.   He                                                               
said, "So, it's like SBS."                                                                                                      
                                                                                                                                
                                                                                                                                
9:59:49 AM                                                                                                                    
                                                                                                                                
DR.  SOLIE  said  he  understands  that.    He  added,  "But  ...                                                               
nevertheless,  within  that  would   be  selections  which  would                                                               
include  fixed   income  versus   equities,  and   probably  some                                                               
international  funds, and  so on.    And in  the selection  among                                                               
those,  the general  result is  that  the employee-managed  funds                                                               
earn less."   He emphasized that  those results are based  on the                                                               
figures he had  available.  He mentioned a model  that he said he                                                               
would  share  with Chair  Seaton's  staff.   He  offered  further                                                               
details on his model as it relates  to males.  He said he assumed                                                               
in his  example that the  individual would buy an  annuity, which                                                               
would be indexed  for inflation the same way as  the current plan                                                               
is.   He noted that  the numbers  would be different  for females                                                               
because  of their  longer life  expectancy.   He offered  further                                                               
details.     He  emphasized  that  females   would  be  penalized                                                               
significantly by a defined contribution plan compared to males.                                                                 
                                                                                                                                
10:02:29 AM                                                                                                                   
                                                                                                                                
CHAIR  SEATON pointed  out  that in  HB 238,  there  would be  10                                                               
percent each from employer and  employee for PERS, and 11 percent                                                               
each from employer and employee for  TRS.  He indicated that that                                                               
doesn't include the medical calculation.                                                                                        
                                                                                                                                
10:03:06 AM                                                                                                                   
                                                                                                                                
DR. SOLIE  explained that he  was just "pulling out  the portions                                                               
that  would have  been dedicated  to  the [defined  contribution]                                                               
plan," because the [tier  proposal committee's] proposal included                                                               
a medical plan in it.   He stated that the committee had proposed                                                               
a health care plan with an  8.75 percent contribution for TRS and                                                               
8 percent  for PERS.   Additionally,  as Ms.  Millhorn described,                                                               
the  employer  subsidy  was  designed  to  begin  at  the  normal                                                               
retirement of  age 60.   He said,  "I may have  missed it,  but I                                                               
quickly went  through [HB 191], and  I couldn't see it  coming in                                                               
until age 65.  So, that's a concern."                                                                                           
                                                                                                                                
10:04:28 AM                                                                                                                   
                                                                                                                                
CHAIR SEATON stated  that there is quite a  difference between HB
191 and HB 238, because the  latter does [set the retirement age]                                                               
at 60.                                                                                                                          
                                                                                                                                
10:04:37 AM                                                                                                                   
                                                                                                                                
DR.  SOLIE, regarding  the provision  of not  giving any  premium                                                               
support  until  age 65  in  HB  191,  said  there is  "a  similar                                                               
arrangement on  the Senate side."   He  said he spoke  with Miles                                                               
Baker, [Staff  to Senator  Bert Stedman].   He indicated  that [a                                                               
higher retirement  age] "reduced  the normal  cost of  the health                                                               
care plan  from 3.75 [percent] to  1 percent."  In  terms of what                                                               
is  proposed in  HB 238,  he offered  his understanding  that the                                                               
bill would give premium support at age 60.  He added:                                                                           
                                                                                                                                
     But we  had a much  more conservative approach  to that                                                                    
     ... such as  described by ... [Ms. Millhorn].   I think                                                                    
     it  was  sufficiently  complex   that  it  didn't  come                                                                    
     through.  And I have  to apologize for that, because it                                                                    
     was my  idea to do it.   But, as was  described, in the                                                                    
     60-65 period  the employer was  paying a  percentage of                                                                    
     this fixed  initial amount, which would  be inflated by                                                                    
     the increase in  health care costs, up to  a maximum of                                                                    
     5 percent  per year.   But the  premium is going  to be                                                                    
     inflated by  the health care  cost.  So, in  effect, in                                                                    
     the  60-65,  what we  were  saying  is they  start  out                                                                    
     equally, but  the ... health  care responsibility  - of                                                                    
     which the employer pays a  percentage - would rise at 5                                                                    
     percent per  year.   The actual  health care  costs are                                                                    
     going up faster.   And so, the employer  is only paying                                                                    
     a  percentage of  this part  [emphasis on  "this"]; the                                                                    
     employee  pays all  of the  additional balance  of this                                                                    
     part.  So, the employee bears  the full risk in the 60-                                                                    
     65  period  of  above average  health  care  increases.                                                                    
     Whereas in the  65-and-on period then it's  as you have                                                                    
     defined it.   So,  what you  have got  in the  60-65 is                                                                    
     really a  significantly more  expensive plan  than what                                                                    
     we proposed,  and frankly, I  would recommend  going to                                                                    
     an approach such  as ours.  Because ...  60-65, ... the                                                                    
     pre-Medicare  eligible  age, ...  is  the  one that  is                                                                    
     really killing the system;  that's the really expensive                                                                    
     part.   So, I would suggest  that you look at  that and                                                                    
     go  back to  what I  call a  [defined benefit]  type of                                                                    
     health care plan participation in  the 60-65 period.  I                                                                    
     think that will save money in the long run.                                                                                
                                                                                                                                
CHAIR SEATON said  he hopes the administration  will come forward                                                               
at the  next meeting  with a medical  presentation, in  which the                                                               
issues Dr. Solie mentioned could be included.                                                                                   
                                                                                                                                
10:07:16 AM                                                                                                                   
                                                                                                                                
DR.  SOLIE, regarding  normal retirement  age, said  the idea  of                                                               
changing the retirement  age as each mortality  table is released                                                               
could cause  some confusion.   He said  the table  could increase                                                               
that age  every year.   Additionally, there has been  a long-term                                                               
trend of  life expectancies increasing  close to 2.5  years every                                                               
decade, thus, in two decades,  the normal retirement age would be                                                               
up to  the Medicare  eligibility, unless  the latter  was raised.                                                               
He suggested  the legislature adjust  the retirement age  no more                                                               
than every five  years and cap the normal  retirement at whatever                                                               
Medicare eligibility age is.                                                                                                    
                                                                                                                                
10:09:13 AM                                                                                                                   
                                                                                                                                
CHAIR SEATON indicated  that, in [HB 238], the defined  age of 65                                                               
was taken out and Medicare eligibility was inserted.                                                                            
                                                                                                                                
10:09:25 AM                                                                                                                   
                                                                                                                                
DR. SOLIE  noted that  the tier  proposal committee's  plan would                                                               
use  Medicare  eligibility,  because   "we  were  aware  of  that                                                               
possibility in the future."                                                                                                     
                                                                                                                                
10:09:41 AM                                                                                                                   
                                                                                                                                
DR. SOLIE made  one final comment on  HB 191 and the  build up of                                                               
contributions rates in the first five  years.  He also stated his                                                               
understanding  that HB  238 "has  vesting over  the period."   He                                                               
said he thinks  the approach in HB 238 is  far superior; it gives                                                               
an incentive for the shorter-term  employees to stay.  He offered                                                               
further details.                                                                                                                
                                                                                                                                
10:10:41 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  LYNN  asked  that   Dr.  Solie  be  available  by                                                               
teleconference in the future.                                                                                                   
                                                                                                                                
[HB 191 was heard and held.]                                                                                                    

Document Name Date/Time Subjects