Legislature(2005 - 2006)CAPITOL 106

04/02/2005 10:00 AM STATE AFFAIRS

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* first hearing in first committee of referral
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Moved CSSSHB 133(STA) Out of Committee
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Bills Previously Heard/Scheduled
HB 238-PUBLIC EMPLOYEE/TEACHER RETIREMENT                                                                                     
11:00:05 AM                                                                                                                   
CHAIR SEATON announced that the  next order of business was HOUSE                                                               
BILL  NO.  238,  "An  Act  relating  to  contribution  rates  for                                                               
employers  and  members  in  the defined  benefit  plans  of  the                                                               
teachers' retirement system and  the public employees' retirement                                                               
system and  to the ad-hoc  post-retirement pension  adjustment in                                                               
the  teachers'  retirement   system;  requiring  insurance  plans                                                               
provided  to  members of  the  teachers'  retirement system,  the                                                               
judicial  retirement  system,  the public  employees'  retirement                                                               
system,  and  the  former  elected  public  officials  retirement                                                               
system to provide a list  of preferred drugs; relating to defined                                                               
contribution  plans  for  members  of  the  teachers'  retirement                                                               
system  and   the  public   employees'  retirement   system;  and                                                               
providing for an effective date."                                                                                               
CHAIR  SEATON noted  that there  is a  sectional analysis  in the                                                               
committee packet.  He opened public testimony.                                                                                  
11:00:45 AM                                                                                                                   
BILL  BJORK, President,  NEA-Alaska,  said  he represents  12,500                                                               
employees in Alaska.  He  highlighted key points from his written                                                               
testimony  [included  in the  committee  packet].   He  said  the                                                               
purpose  of the  retirement  system is  stated  in AS  14.25.012,                                                               
which read as follows:                                                                                                          
          (a) The purpose of this chapter is to encourage                                                                       
     qualified teachers to enter and  remain in service with                                                                    
     participating  employers by  establishing a  system for                                                                    
     the  payment  of   retirement,  disability,  and  death                                                                    
     benefits to or on behalf of the members.                                                                                   
MR. BJORK read from his written testimony as follows:                                                                           
     Although  there is  some  anecdotal  evidence that  the                                                                    
     retirement benefits  can be  used for  recruitment, its                                                                    
     main  attraction is  a  tool  for retaining  educators.                                                                    
     Job   satisfaction,    competitive   compensation   and                                                                    
     retirement benefits  are the three major  reasons for a                                                                    
     person to remain in education.                                                                                             
11:02:34 AM                                                                                                                   
MR. BJORK  said currently the  average number of years  a teacher                                                               
serves  before retiring  is 27.   He  addressed some  of the  key                                                               
assumptions  made going  into deliberations  over changes  in the                                                               
retirement system.   He stated  assumption 1:  "An  educator with                                                               
27  years of  service  ought  to be  able  to  receive an  annual                                                               
annuity of at  least 55 percent of their salary  at retirement to                                                               
be  able to  retire with  dignity."   He noted  that he  provided                                                               
information  regarding the  average  [teacher]  salary and  "what                                                               
that represents as  a percentage."  He said HB  238 would require                                                               
teachers to  work at least  30 years [before retiring],  which is                                                               
three more years than the current average.                                                                                      
MR.  BJORK  said assumption  2  is  in  regard  to the  level  of                                                               
investment  return.   He stated,  "We agree  with the  assumption                                                               
currently in  the retirement  systems of  8.25 percent;  ... it's                                                               
consistent with permanent fund assumptions,  as well."  He stated                                                               
assumption 3:   "The  combined contribution  of the  employee and                                                               
the  employer to  the  pension must  be at  least  20 percent  of                                                               
salary ...."   He said  assumption 4  is in regard  to inflation.                                                               
The present  actuarial assumption  is 3.5  percent annually.   He                                                               
said that is not consistent  with permanent fund assumptions.  He                                                               
asked, "Given  that inflation has  been 2.6 percent over  any 10-                                                               
year  period  in  Alaska,  why  would  we  adopt  a  3.5  percent                                                               
inflation rate?"   That half a percent over 25  years would add a                                                               
huge amount  of money to the  past service cost.   He stated that                                                               
assumptions are  critical in determining  the necessity of  a new                                                               
and improved  retirement system and  making the wrong  ones today                                                               
will  only  lead  to  retirees having  no  dignity  and  becoming                                                               
dependent on the State of Alaska  for Welfare.  He said, "We must                                                               
take time to  reach agreement on the actuarial  assumptions to be                                                               
11:05:10 AM                                                                                                                   
MR. BJORK  stated his  belief that there  is agreement  that "the                                                               
actuarial assumptions  made in the  past have brought us  to this                                                               
point, particularly in  the area of health care."   He noted that                                                               
the delayed  used of [updated]  mortality rates and  the addition                                                               
of  benefits in  the retirement  system, without  a corresponding                                                               
increase  in  contributions,  are  major factors.    Two  of  the                                                               
factors can be  corrected without the adoption of a  new tier for                                                               
TRS and PERS.   He stated that the legislature  could mandate the                                                               
use  of the  most  recent  mortality tables,  and  it could  also                                                               
require an  actuarial evaluation of any  proposed benefit changes                                                               
and  require an  increased  contribution "to  cover past  service                                                               
cost at the time of passage."  He offered an example.                                                                           
11:06:28 AM                                                                                                                   
MR. BJORK stated that NEA-Alaska  believes that health care costs                                                               
can be managed  to provide a more predictable rate  increase.  He                                                               
stated,  "It   seems  that  the   health  cost   trend  actuarial                                                               
assumptions  provided  to  the   administration  June  30,  2002,                                                               
absolutely  defied  common   sense  or  logic."     He  said  the                                                               
projections  provided,  as  printed in  the  retirement  booklet,                                                               
showed  increases in  health care  of:   7.5 percent  for [Fiscal                                                               
Year 2001  (FY 01)], 6.5  percent for FY  02, 5.5 percent  for FY                                                               
03,  5 percent  for  FY  04-08, and  declining  after  that.   He                                                               
stated, "Anyone  using health care  services could tell  you that                                                               
those rate projections  were not based in reality."   He said the                                                               
next year the  assumptions were changed to show:   12 percent for                                                               
FY  04,  12 percent  for  FY  05, 11.5  percent  for  FY 06,  and                                                               
declining until the  increases would only be 5 percent  in FY 17.                                                               
He questioned how such a drastic  change could occur in one year.                                                               
He queried,  "These numbers,  when graphed,  would make  a pretty                                                               
downhill slope, but  are they based in reality?"   He stated that                                                               
this kind of dramatic change  does not inspire credibility in the                                                               
actuary.  He  asked, "Is this the kind of  assumption that the $5                                                               
billion unfunded liability is based upon?"                                                                                      
11:07:48 AM                                                                                                                   
MR. BJORK  said NEA-Alaska appreciates  the efforts  made through                                                               
HB 238 to provide important access  to health care and payment of                                                               
premiums for  retirees.   He said once  everyone agrees  on which                                                               
health care inflation  assumption to use, it will  be possible to                                                               
"evaluate the  proposal and its  impact on retirees'  standard of                                                               
living."   Mr. Bjork stated  for the  record that a  teacher that                                                               
begins a  career at  age 22  and works nonstop  for 30  years, as                                                               
outlined in HB 238, will be eligible  to retire at age 52.  Since                                                               
the teacher must retire directly  out of the system, he/she would                                                               
have to teach  for 38 years to  reach age 60, or  pay for his/her                                                               
health  care  for  8  years,   which  would  erode  the  pensions                                                               
annuities significantly.                                                                                                        
MR. BJORK  said NEA-Alaska  believes that  several things  can be                                                               
done to  provide a  new and improved  retirement system  for both                                                               
teachers and public employees and  "stands ready to work with the                                                               
[House  State  Affairs  Standing]   Committee  to  determine  the                                                               
appropriate  actuarial assumptions  upon which  a new  retirement                                                               
system could  be built that  meets the purpose of  recruiting and                                                               
retaining qualified educators and public employees."                                                                            
11:09:29 AM                                                                                                                   
CHAIR SEATON expressed appreciation for  the focus of Mr. Bjork's                                                               
testimony, which he said parallels the committee's own focus.                                                                   
11:09:33 AM                                                                                                                   
REPRESENTATIVE LYNN asked how the  legislature would use more up-                                                               
to-date mortality  tables when  they only  are produced  every 10                                                               
11:10:15 AM                                                                                                                   
MR.  BJORK said  Representative Lynn  raises an  excellent point.                                                               
He continued as follows:                                                                                                        
     We just  believe that  we ought  to implement  the most                                                                    
     recent actuarial  table ...  available.   The mortality                                                                    
     table, as you  correctly point out, is a  key driver of                                                                    
     cost.  If  we change from one mortality table  to a new                                                                    
     mortality table and it  shows increased longevity, then                                                                    
     the actuarial  assumptions trigger a huge  past service                                                                    
     increase.   So,  you're absolutely  right.   When these                                                                    
     are published, though, we ought to be using them.                                                                          
     But  the  actuarial  assumption that  is  a  particular                                                                    
     problem ... is the  increase in medical coverage costs.                                                                    
     Those projections  ... were just simply  not real world                                                                    
     based.    To say  that,  at  some  point in  the  magic                                                                    
     future, medical cost increases would  only be 4 percent                                                                    
     just simply  isn't ... reflecting  the kind  of reality                                                                    
     that  all  of  us   experience  when  we  need  medical                                                                    
11:11:36 AM                                                                                                                   
REPRESENTATIVE LYNN asked if the health cost is "a bigger driver                                                                
of the problem" than the actuarial tables.                                                                                      
11:11:51 AM                                                                                                                   
CHAIR SEATON explained  that the two systems are  different.  The                                                               
"health  cost"  is the  largest  driver  in TRS,  accounting  for                                                               
approximately 40 percent  of the unfunded past  service cost, but                                                               
it's much  less in PERS.   He said the two  systems contribute at                                                               
different  rates and  the  age  at which  a  person qualifies  is                                                               
11:12:58 AM                                                                                                                   
CHAIR SEATON asked:                                                                                                             
     Do  you have  an  analysis  at all  on  how much  those                                                                    
     [RIPs]  lowered the  retirement  age, and  how much  of                                                                    
     that 3-year gap between the  30 that [HB] 238 calls for                                                                    
     and  the 27  which is  your average  coming out  of the                                                                    
     system  -  how much  of  that  do  you think  would  be                                                                    
     accounted  for  by  the   different  [RIPs]  that  went                                                                    
11:14:01 AM                                                                                                                   
MR. BJORK noted that both state  and local RIPs were offered.  He                                                               
said it's  difficult to answer  Chair Seaton's  question, because                                                               
only a small number of the  total retirees actually got access to                                                               
those RIPs;  therefore, it's hard  to "spread that  number across                                                               
the  retired population  to  give  you a  straight  up answer  on                                                               
that."   He noted that about  27 years of active  service is that                                                               
average  for   "those  retirees,"  not  factoring   in  the  RIP,                                                               
11:15:08 AM                                                                                                                   
CHAIR  SEATON returned  to assumption  3, which  Mr. Bjork  noted                                                               
would  require that  the contribution  must  be 20  percent.   He                                                               
noted that the  current version of HB 238 would  require that the                                                               
contribution  be 22  percent.   He asked,  "Does that  fit within                                                               
your range  of expectation  for a plan  that would  provide those                                                               
equality of benefits?"                                                                                                          
11:15:47 AM                                                                                                                   
MR. BJORK stated, "It's our  experience that 20 percent of salary                                                               
needs to  go towards the pension."   Regarding the 22  percent in                                                               
HB 238, he noted that "a  chunk of that goes toward major medical                                                               
coverage  and also  the  health  reimbursement rate";  therefore,                                                               
"those percentages are not going  directly into the pension."  He                                                               
stated his  experience with [NEA-Alaska's] own  employees is that                                                               
is  takes  about  20  percent  of  salary  into  the  pension  to                                                               
accomplish retirement with dignity.                                                                                             
11:16:24 AM                                                                                                                   
CHAIR SEATON  offered some statistics and  explained, "I'm trying                                                               
to  figure out  where the  20  percent into  the retirement  plus                                                               
medical comes from if that hasn't  been the history in any of the                                                               
last 20 years in the current program."                                                                                          
11:17:37 AM                                                                                                                   
MR. BJORK  responded that he  agrees with the numbers  that Chair                                                               
Seaton put forward.  Notwithstanding  that, he said, "That is our                                                               
experience that  it takes  20 percent of  salary to  accomplish a                                                               
defined ... contribution  program that would allow  an annuity of                                                               
sufficient  size to  last a  person  throughout their  retirement                                                               
11:18:03 AM                                                                                                                   
CHAIR  SEATON  said he  appreciates  knowing  that Mr.  Bjork  is                                                               
talking  about  "the  amount  that would  be  necessary  under  a                                                               
defined  contribution  [plan]."    He   asked  if  Mr.  Bjork  is                                                               
factoring  in  an  8.25  percent   rate  or  a  lower  percentage                                                               
investment  rate based  on the  history  of defined  contribution                                                               
programs, such as 401K, versus a defined benefit program.                                                                       
11:18:30 AM                                                                                                                   
MR. BJORK said he is factoring in an 8.25 percent [rate].                                                                       
11:18:39 AM                                                                                                                   
WILLY  DUNNE,  President,  Kachemak  Bay  Chapter,  Alaska  State                                                               
Employees'  Association (ASEA),  which includes  approximately 60                                                               
state employee members,  noted that he sent  in written testimony                                                               
[included in the  committee packet].  He stated  that the members                                                               
of the chapter are concerned  about any increase to their current                                                               
contribution.  They  have not seen a pay increase  in a couple of                                                               
years and are due for a small  one this year, which would be lost                                                               
if there was any increase in the contribution rate.                                                                             
MR.  DUNNE  said most  of  the  employees  are doing  their  jobs                                                               
because they like  doing them; they could make more  money in the                                                               
private sector or  working with the federal  government, and many                                                               
employees are lost  to both.  He stated  that retirement benefits                                                               
are one  of the  factors that  keeps state  employees going.   He                                                               
asked the committee to carefully  evaluate any changes to current                                                               
employees'  benefits, and  he cautioned  the  committee to  think                                                               
carefully  before structuring  a new  tier.   He said  the latter                                                               
could   negatively   impact   recruitment.      He   stated   his                                                               
understanding that "there's  a big, $5 billion  problem out there                                                               
that has to be dealt with."                                                                                                     
MR. DUNNE  said he read a  study that shows that  state employees                                                               
have lost  approximately 30 percent  buying power in  their wages                                                               
over the past 25 years.   He predicted that any further reduction                                                               
would  cause  employees to  "think  about  jumping ship  and  not                                                               
sticking it  out."  He  expressed appreciation for the  work that                                                               
Chair  Seaton  and  his  staff   have  put  into  [HB  238],  but                                                               
reiterated that  he would like  the committee to  think carefully                                                               
about [what  may] harm employees  "any more than we  already have                                                               
11:23:13 AM                                                                                                                   
CHAIR SEATON  said one  segment of  the retirement  program being                                                               
considered would be switching to  a defined contribution program.                                                               
No  element  of  that  program would  change  [the  benefits  of]                                                               
existing  employees, unless  they were  not vested  and opted  to                                                               
change from  the current Tier III  defined benefit to a  new Tier                                                               
IV defined contribution plan.                                                                                                   
11:24:10 AM                                                                                                                   
REPRESENTATIVE  GARDNER asked  for verification  that going  to a                                                               
defined contribution plan with a new  tier level would not in any                                                               
way affect the shortfall; it would only deal with the future.                                                                   
11:24:27 AM                                                                                                                   
CHAIR  SEATON answered  that's correct.   As  a point  of general                                                               
information, he reviewed that the  past service cost is generated                                                               
by looking  at the  projected payments  of state,  municipal, and                                                               
school   employers   and   figuring  out   what   the   projected                                                               
expenditures are going  to be, amortized over the  next 25 years.                                                               
He  explained  that  the  benefits  expected  to  be  accrued  by                                                               
employees are  looked at to determine  their cost.  Based  on the                                                               
amount  of  money in  the  bank,  the  percentage of  the  future                                                               
benefits  that  will be  covered  can  be  predicted at  an  8.25                                                               
percent growth  rate.  The  payments that  would have to  be made                                                               
over the next 25 years add up to $15.6 billion.                                                                                 
CHAIR  SEATON  noted  that  there are  charts  [included  in  the                                                               
committee packet]  that show that.   He indicated that  it's only                                                               
the present  dollar value  that is $15.6  billion.   He explained                                                               
that  "if   you  take  those   costs  and  back   ...  calculate,                                                               
subtracting 8.25  percent interest  per year,"  the result  is an                                                               
unfunded liability  of $5 billion  in 2003 present  dollar value.                                                               
He said the assumption is that if  the $5 billion in 2003 was put                                                               
in the bank and earned 8.25  [percent], that amount would grow to                                                               
[meet the  future payments of  expected benefits].   That deposit                                                               
was  not made  in  2003; therefore,  the  2004 numbers  basically                                                               
escalated by  8.25 percent and,  because there was one  less year                                                               
to grow that amount, the unfunded liability is now $5.6 billion.                                                                
CHAIR  SEATON stated  that $5.6  billion is  "the present  dollar                                                               
cost that  we would need  to have  invested at 8.25  [percent] to                                                               
cover the projected liabilities of  $15.6 billion."  Chair Seaton                                                               
indicated that  if nothing  is done this  year, the  $5.6 billion                                                               
will grow  by 8.25 percent,  resulting in an even  larger present                                                               
dollar value unfunded liability next  year.  The $15.6 billion of                                                               
projected  payments are  still the  same, but  there won't  be as                                                               
many years  to invest an initial  sum of money now  that can grow                                                               
to cover the shortfall.                                                                                                         
11:27:09 AM                                                                                                                   
CHAIR SEATON said one option would  be to spend $5.6 billion from                                                               
the  general fund  this year  and let  it grow  at 8.25  percent,                                                               
which would  cover every  bit of the  past service  cost, without                                                               
having to  have an increase  in employer contribution rates.   He                                                               
described another option as  increasing the employer contribution                                                               
rates.   A third  way, he  proffered, would  be a  combination of                                                               
paying  off some  of the  unfunded liability  and increasing  the                                                               
employer rate or having a matching employer/employee rate.                                                                      
CHAIR  SEATON said  the calculations  [presented by  Mercer Human                                                               
Resource Consulting  - "Mercer"]  are all  based on  the employer                                                               
rates [escalating to  as much as] 44 percent of  the total salary                                                               
of all the  school districts.  Because the  calculations are made                                                               
on the total [population] base growing  at 1 percent a year, even                                                               
if  a defined  contribution plan  is instituted  and there  is no                                                               
actual  past  service cost  associated  with   [those  individual                                                               
employees] under that  plan, the employer is still  going to have                                                               
to  pay the  same amount  of money  into the  system because  the                                                               
calculations of [the  past service cost] rates  [from Mercer] are                                                               
based on the  total salary of the employer.   Chair Seaton stated                                                               
that  it gets  confusing.   He  indicated that  there  is a  past                                                               
service  cost liability  to the  employer even  though a  defined                                                               
contribution  program would  mean that  each individual  employee                                                               
does not  have a past  service cost associated with  him/her, and                                                               
the employer would be responsible for that liability.                                                                           
11:29:29 AM                                                                                                                   
CHAIR  SEATON  explained  that  if  the  wage  base  of  the  new                                                               
employees under  the defined contribution  plan is  not included,                                                               
then  as soon  as  there are  an equal  number  of new  employees                                                               
[under the  defined contribution  plan] and old  employees [under                                                               
the defined  benefit plan],  the contribution  rate -  instead of                                                               
being at 44 percent - would be  at 88 percent and would result in                                                               
[the same  dollar rate distributed  among] fewer employees.   The                                                               
actuaries, he explained, have tried  to calculate a [past service                                                               
cost] rate  that is reasonably  fixed over time -  amortized over                                                               
time -  to give  a stable  percentage, and they  have to  use the                                                               
entire wage  base [to make  those calculations].  If  a declining                                                               
wage base is  used, pretty soon there would  be 200-300 employees                                                               
left  that  hadn't  retired  yet, and  "you'd  be  paying  10,000                                                               
percent of  their salary,"  because [the  employer] still  has to                                                               
contribute the same  dollar amount and would not  be spreading it                                                               
over the [entire] wage base.                                                                                                    
11:30:21 AM                                                                                                                   
REPRESENTATIVE  GRUENBERG  asked  Mr.  Dunne  about  a  study  he                                                               
previously mentioned  that shows  that, over  last 25  years, the                                                               
earning power of governmental employees has declined 30 percent.                                                                
11:30:51 AM                                                                                                                   
MR.  DUNNE recollected  that that  study was  part of  the public                                                               
safety employees'  negotiation, and  he offered  to track  down a                                                               
11:31:14 AM                                                                                                                   
CHAIR SEATON echoed that he would like a copy of the study.                                                                     
11:31:51 AM                                                                                                                   
CHAIR  SEATON noted  that Mr.  Dunne had  mentioned the  existing                                                               
tiers during  his testimony.  He  noted that HB 238  would change                                                               
three things:   First,  a preferred provider  drug list  would be                                                               
required for existing  employees.  Second, the  bill would change                                                               
the definition of the Ad  Hoc Post Retirement Pension Adjustments                                                               
(PRPAs), so that "when the system  can support it" means when the                                                               
system is  100 percent  funded.  Third,  the bill  would equalize                                                               
contributions  between employers  and employees.   He  noted that                                                               
Mr. Dunne had testified to  that and indicated that the committee                                                               
would give that careful consideration.                                                                                          
11:33:15 AM                                                                                                                   
REPRESENTATIVE GRUENBERG  said Representative Elkins had  asked a                                                               
question  regarding  the  meaning  of  "qualified  domestications                                                               
relations order" (QDRO).   He said QDROs are  required under both                                                               
federal  and  state  law  to  meet  the  requirements  "of  these                                                               
statutes"  and  the  Employment Retirement  Income  Security  Act                                                               
(ERISA).  He offered further details.                                                                                           
11:34:45 AM                                                                                                                   
CHAIR SEATON explained  that in the bill,  "member" means someone                                                               
who was in  a retirement program and  "participant" could include                                                               
a child or spouse, for example.                                                                                                 
11:35:19 AM                                                                                                                   
REPRESENTATIVE GRUENBERG added that those  two words are terms of                                                               
art that are known throughout the industry.                                                                                     
The committee took an at-ease from 11:35:42 AM to 11:36:49 AM.                                                              
11:36:50 AM                                                                                                                   
CHAIR  SEATON  mentioned  the  article  in  the  March  6,  2005,                                                               
Anchorage Daily  News, written by  David Reume  entitled "State's                                                             
salaries are  falling behind".   [The article is included  in the                                                               
committee packet.]                                                                                                              
11:37:46 AM                                                                                                                   
KATIE SHOWS,  Staff to Representative  Paul Seaton,  Alaska State                                                               
Legislature,  on behalf  of Representative  Seaton, Chair  of the                                                               
House  State   Affairs  Standing  Committee,   sponsor,  directed                                                               
attention  to  a  [single-page,   double-sided]  handout  in  the                                                               
committee packet.   She  said the  handout is  a model  showing a                                                               
defined contribution pension account amount,  based on a model by                                                               
Richard Solie,  Ph.D.  She  stated, "All offices have  this model                                                               
and have  been working with it."   She directed attention  to the                                                               
front  page, entitled,  "Projected Benefits-Rate  of Return  6.73                                                               
percent."  She said that is  based on the Anchorage "CPI" of 3.73                                                               
percent and  a [real rate of  interest] of 3 percent.   She noted                                                               
that the  real rate of interest  mistakenly shows on the  page as                                                               
4.52 percent,  and should  read 3 percent.   It's  a conservative                                                               
rate of return based on  the assumption that individually managed                                                               
accounts  will   collect  less  interest  than   a  group-managed                                                               
account,  because  the  employee will  choose  more  conservative                                                               
investment options.                                                                                                             
11:40:32 AM                                                                                                                   
MS. SHOWS  said the chart  shows what  the amount of  the defined                                                               
benefit account lump  sum would be at termination at  10, 20, 30,                                                               
and 40 years.   She said the  lump sum amounts would  be the same                                                               
for both  males and  females, assuming a  base salary  of $37,538                                                               
and  a salary  increase,  including inflation,  of 5.73  percent.                                                               
She  highlighted further  details regarding  the lump  sums.   In                                                               
response  to  a  question  from  Chair  Seaton,  she  stated  her                                                               
understanding  that  the  column  which shows  the  lump  sum  at                                                               
termination is "in the real  dollar value at retirement," whereas                                                               
the  column that  shows  the beginning  annuity  in 2004  dollars                                                               
shows the annual  pension benefit for the  retiree, calculated in                                                               
2004 dollars.   She noted  that the  reason the number  is higher                                                               
for men than  women, under the beginning annuity  in 2004 dollars                                                               
column,  is because  women tend  to live  longer than  men.   She                                                               
directed attention  to the last  column, which shows  the percent                                                               
funded  compared  to  the  current defined  benefit  plan.    She                                                               
offered  an example.    She  added, "And  that  also assumes  the                                                               
defined contribution pension account  percentage of 15.5 percent,                                                               
which  is what  HB 238  has for  PERS employees.   It's  slightly                                                               
higher -  15.75 percent - for  TRS employees.  So,  after medical                                                               
benefits  are  taken  out  of  the  equation,  this  is  what  is                                                               
attributed to a defined contribution account."                                                                                  
11:43:48 AM                                                                                                                   
REPRESENTATIVE GRUENBERG  directed attention to a  portion of the                                                               
fourth  paragraph  of  previous  testifier  Mr.  Dunne's  written                                                               
testimony, which read:                                                                                                          
     Most  state  employees have  not  had  a pay  raise  in                                                                    
     several years.   We  are scheduled  to receive  a small                                                                    
     (1.5%) raise this year ....                                                                                                
REPRESENTATIVE  GRUENBERG said  it  looks like  the charts  being                                                               
reviewed assume a salary increase  of 5.73 percent the first five                                                               
years, then  4.23 percent,  based on  the assumptions  of Mercer.                                                               
He said that seems to be contrary to what Mr. Dunne has said.                                                                   
11:44:37 AM                                                                                                                   
MS. SHOWS responded as follows:                                                                                                 
     The  assumptions  included  here [are]  a  real  salary                                                                    
     increase of 1.5  percent for the first  five years, and                                                                    
     then  .5 percent  for  the following  years.   So,  the                                                                    
     additional percentage  is indexed  for inflation.   And                                                                    
     we  are going  off  of  - as  is  Dr.  Solie's table  -                                                                    
     Mercer's assumptions.                                                                                                      
REPRESENTATIVE GRUENBERG  said he is  just trying to  compare the                                                               
chart in  front of  the committee  with the  conflicting previous                                                               
11:45:17 AM                                                                                                                   
CHAIR SEATON answered that's correct.                                                                                           
11:45:42 AM                                                                                                                   
MS. SHOWS  turned to the back  of the page, which  shows the same                                                               
headings, but  for a rate  of return of  8.25 percent.   She said                                                               
it's  a far  more  generous percentage  compared  to the  current                                                               
plan.   She  noted that  she  could make  available the  computer                                                               
program  which  she  used  to  project  these  assumptions.    In                                                               
response to a question from  Chair Seaton, she confirmed that the                                                               
chart is calculated for PERS.                                                                                                   
11:47:11 AM                                                                                                                   
CHAIR SEATON made the following observation:                                                                                    
     Basically,  the  analysis  is   showing  that,  if  the                                                                    
     defined  contribution  rate  of   return  is  equal  to                                                                    
     Mercer's  rate  of return  ...,  then  ... the  defined                                                                    
     contribution plan actually - other  than the 10 years -                                                                    
     ... for 20, 30, or 40  years of service is generating a                                                                    
     much  more lucrative  plan for  the  employee than  the                                                                    
     current  plan.    However,  if we're  looking  at  a  2                                                                    
     percent  or  ... less  return  rate  ..., [and]  if  we                                                                    
     assume  that employees  managing  their  own money  are                                                                    
     going to  earn less than  the PERS investment,  then we                                                                    
     see  that it  doesn't  compare nearly  as well,  unless                                                                    
     you're  a male  and you've  been in  the system  for 40                                                                    
CHAIR SEATON said he thinks  those are issues the committee needs                                                               
to wrestle with.                                                                                                                
11:48:31 AM                                                                                                                   
REPRESENTATIVE  GRUENBERG  noted  that   during  a  divorce,  one                                                               
question often  involves what a  pension is  worth.  Many  of the                                                               
arguments revolve around the assumptions that are made.                                                                         
11:49:31 AM                                                                                                                   
CHAIR SEATON  reminded the committee that  Mercer [Human Resource                                                               
Consulting]  is the  company that  projects the  actuarials.   He                                                               
also  mentioned  Milman,  another  actuarial firm  used  in  2001                                                               
specifically  to audit  the results  provided by  Mercer.   Chair                                                               
Seaton said that information is available through his office.                                                                   
11:51:36 AM                                                                                                                   
CHAIR  SEATON indicated  that  HB  238 would  set  "a 20  percent                                                               
rate."    Subtracting  out  the medical  portion,  which  is  3.5                                                               
percent  medical and  1 percent  health care  reimbursement rate,                                                               
what is left is "a very  good plan that's better than the defined                                                               
benefit  plan that  we have,  if we  are using  the 8.25  percent                                                               
return rate on the  account."  He added, "Or we  have a plan that                                                               
doesn't match up  if we say that we're going  to earn 1.5 percent                                                               
less  than  retirement  and  benefits   currently  earns  on  the                                                               
assumptions."   He explained  that all  the assumptions  are "the                                                               
same on both, except for the rate of return."                                                                                   
11:52:42 AM                                                                                                                   
REPRESENTATIVE  GRUENBERG asked  if there  could be  a plan  made                                                               
available  to   give  people  the   option  of   investing  their                                                               
retirements themselves or having someone else do it.                                                                            
11:53:09 AM                                                                                                                   
CHAIR SEATON  answered, "Sure."   He clarified that HB  238 would                                                               
not allow  people to  individually manage  their funds;  it would                                                               
provide for  a selection  of money managers,  similar to  that in                                                               
[the state's  Supplemental Benefits System (SBS)],  to manage the                                                               
fund.  There  have been a number of studies  that have shown that                                                               
the employee managing his/her own  money is more conservative and                                                               
thus  receives  less  reward  from  his/her  pension  fund.    He                                                               
suggested one option  may be to have one board  manage the money,                                                               
but in individual accounts.                                                                                                     
11:55:52 AM                                                                                                                   
REPRESENTATIVE GRUENBERG responded that  he thinks that's a great                                                               
idea;  however,  he suggested  that  it  should  be left  to  the                                                               
employee to choose one way or the other.                                                                                        
11:56:17 AM                                                                                                                   
CHAIR SEATON  said that's  what is  being considered  "with these                                                               
11:56:50 AM                                                                                                                   
REPRESENTATIVE GARDNER referred to  a white paper from NEA-Alaska                                                               
showing   Nebraska's  experience   of  changing   to  a   defined                                                               
contribution plan  and then  changing back  to a  defined benefit                                                               
MR. BJORK  explained that that happened  because the individually                                                               
directed  accounts had  a  lower  rate of  return  and could  not                                                               
sustain retirement.   He noted that West Virginia  made a similar                                                               
decision a  week ago to  return from a defined  contribution plan                                                               
to a defined benefit plan for the same reason.                                                                                  
11:58:09 AM                                                                                                                   
REPRESENTATIVE GARDNER  asked what  those states' rate  of return                                                               
11:58:17 AM                                                                                                                   
MR.  BJORK answered  that  the  rate of  return  in Nebraska  was                                                               
approximately 6 percent, and it  is recognized that it takes 8.25                                                               
percent to  generate the kind of  return needed to have  a viable                                                               
retirement.   He said the  numbers were  about the same  for West                                                               
11:59:15 AM                                                                                                                   
REPRESENTATIVE  GRUENBERG  said  he   would  like  to  hear  from                                                               
witnesses from one of those two states.                                                                                         
11:59:35 AM                                                                                                                   
CHAIR SEATON  said paper  work will  be made  available regarding                                                               
West Virginia.   He asked if  some of Mr. Bjork's  concerns would                                                               
be  alleviated  if [the  Alaska  State  Pension Investment  Board                                                               
(ASPIB)]  was investing  the  money  at the  same  rate that  the                                                               
defined benefit plan would generate.                                                                                            
12:00:46 PM                                                                                                                   
MR. BJORK  answered yes.   He stated, "This  rate of return  is a                                                               
critical  money-management   assumption  within   any  retirement                                                               
system, and we  believe ASPIB has done  a very good job  ... - it                                                               
models the Alaska Permanent Fund."                                                                                              
12:01:18 PM                                                                                                                   
CHAIR  SEATON noted  that  a  report last  year  showed that  the                                                               
retirement  funds were  actually producing,  over time,  a higher                                                               
rate of  return than the Alaska  Permanent Fund did.   He offered                                                               
further details.                                                                                                                
12:01:52 PM                                                                                                                   
MR. BJORK  said employees are  naturally "risk averse"  and ASPIB                                                               
has the capacity to "dot that professional management."                                                                         
12:02:10 PM                                                                                                                   
REPRESENTATIVE  GRUENBERG  suggested  that   a  common  theme  is                                                               
security and  rate of investment.   He applauded the work  of the                                                               
chair and  the work that  the committee is  doing.  He  said "the                                                               
other bill" that  would change the makeup of  the boards concerns                                                               
him, and he opined that it  is imperative to have "the best, most                                                               
honest  people" on  the boards  to "maximize  the return  and the                                                               
12:03:33 PM                                                                                                                   
CHAIR SEATON  reviewed that  ASPIB is  an investing  board, while                                                               
the  TRS and  PERS Boards  deal mainly  with appeals  and setting                                                               
rates.   He noted  that one  section of  HB 238  would set  an 11                                                               
percent  floor  on  employer contributions.    He  mentioned  the                                                               
unfunded  liability  and  said,  "If  ...  the  state  and  local                                                               
governments have  to write checks  for $15 billion over  the next                                                               
25  years and  have  not  collected that  money,  that  is a  big                                                               
problem within the system."   He stated his understanding that 86                                                               
percent  of the  TRS retirement  section is  funded, which  means                                                               
it's in  much better  shape; "it put  a floor on  and did  not go                                                               
down below  11 percent."   He offered  further details  and said,                                                               
"It's a question  of the bottom line  and how we get  there."  He                                                               
said  the committee  members could  come in  individually to  his                                                               
office to view a Power Point presentation.                                                                                      
12:06:45 PM                                                                                                                   
REPRESENTATIVE ELKINS suggested that  it might be advantageous to                                                               
do the Power Point presentation before the entire committee.                                                                    
12:07:05 PM                                                                                                                   
TOM HARVEY, Executive Director,  NEA-Alaska, testifying on behalf                                                               
of NEA-Alaska,  commended Ms. Shows  for "generating  a mechanism                                                               
of looking  at lots of scenarios."   He said NEA-Alaska  has also                                                               
developed several  charts showing actual cases  across the state,                                                               
and he  offered to make  those charts available to  the committee                                                               
upon request.   He said Mr.  Bjork pointed out that  the question                                                               
to ask is, "What are the assumptions you're going to use?"                                                                      
MR. HARVEY noted that, regarding  salary increases, over the past                                                               
16 years, the teacher average  salary has increased 1.36 percent.                                                               
He  said,  "If  you're  making   an  assumption  that  somebody's                                                               
salary's going to increase by  ... 5.73 percent, then sure, their                                                               
annuity's  going to  look good  at the  other end.   But  when in                                                               
reality  what they're  getting are  increases of  1.36 [percent],                                                               
inflation alone  is going  to eat  more of  that up,  because the                                                               
inflation, which is another assumption  that I'd like to check on                                                               
...,  should be  the  assumption for  everything  that the  state                                                               
does."   He recalled being  continually told by  actuaries during                                                               
work on  the Percent of  Market Value  (POMV) last year  that 2.6                                                               
percent was  the inflation rate  over any 10-year period  of time                                                               
that "you would pick in the State of Alaska."  He continued:                                                                    
     So,   we  generated   charts  at   2.6  [percent]   and                                                                    
     discovered  some alarming  things  that  occur at  that                                                                    
     rate  of inflation,  versus a  salary increase  of only                                                                    
     1.3 [percent].                                                                                                             
MR. HARVEY stated  his willingness to work with  the committee on                                                               
any  number of  scenarios.   He said  teachers do  better in  the                                                               
first nine  years because of  the step increases.   However, when                                                               
they get to the  top and there are either no  raises or raises of                                                               
only 1.36 percent, that's when  the trouble begins, "particularly                                                               
when you're suggesting that a male  has to work 40 years in order                                                               
to get to a defined contribution  plan that will look the same as                                                               
the defined benefit plan."                                                                                                      
12:11:08 PM                                                                                                                   
CHAIR  SEATON  clarified,  "That  is  if  you  calculate  defined                                                               
benefit  at   8.25  [percent]  and  ...   you  calculate  defined                                                               
contribution at 6.73 [percent]."  He offered further details.                                                                   
12:11:44 PM                                                                                                                   
MR.  HARVEY said  Chair Seaton  hit  on a  potential solution  of                                                               
ensuring that  it is  an entity  like the  ASPIB Board  doing the                                                               
management so  that the  8.25 percent  return can  be guaranteed.                                                               
He stated that  the other issue will be the  assumption on health                                                               
12:13:00 PM                                                                                                                   
MR.  HARVEY,  in  response  to   a  comment  from  Representative                                                               
Gruenberg, reiterated that  he has a simple chart  that shows the                                                               
teacher  average  salaries.   He  offered  more details  and,  in                                                               
response  to  Chair  Seaton,  said   he  would  send  it  to  the                                                               
12:14:04 PM                                                                                                                   
REPRESENTATIVE GRUENBERG  suggested that his staff  would benefit                                                               
from  some   informal  individual  instruction   regarding  these                                                               
12:15:10 PM                                                                                                                   
CHAIR  SEATON said  his staff  is already  doing that  with other                                                               
groups and  would be happy to  involve Representative Gruenberg's                                                               
staff and anyone else's staff.                                                                                                  
12:17:07 PM                                                                                                                   
CHAIR SEATON  directed attention to  a handout, "State  of Alaska                                                               
PERS &  TRS Proposed  Medical Program House  State Affairs."   He                                                               
asked the committee to concentrate  on the "pre-65" benefits.  He                                                               
said he  doesn't want to  go through this without  the department                                                               
representatives  who  have  not  yet   arrived  at  the  meeting.                                                               
Notwithstanding that,  he proffered that  there should be  a fair                                                               
amount  of difference  in  what the  contribution  rate must  be,                                                               
depending on how  the medical program is designed.   He discussed                                                               
some differences between PERS and TRS that must be considered.                                                                  
12:20:28 PM                                                                                                                   
BRADLEY  FLUETSCH  told the  committee  that  he is  a  financial                                                               
consultant  with Wells  Fargo Investment,  but  is testifying  on                                                               
behalf  of himself.   He  referred to  the "projected  benefits -                                                               
rate  of  return 6.73  percent"  page  and  said if  the  defined                                                               
contribution  pension account  percentage assumption  of 15.5  is                                                               
"ramped up"  to 28.5 and  the columns are "rerun,"  the [numbers]                                                               
would  be  almost  doubled.   He  indicated  that  when  deferred                                                               
[compensation]  is added,  the  retirement  plan becomes  "fairly                                                               
MR. FLUETSCH,  regarding West Virginia  and Nebraska,  said there                                                               
is good evidence of how  Alaskans invest their retirement through                                                               
SBS.  He  suggested, "Let's take a look at  the target retirement                                                               
funds -  target 2015,  target 2020.   These are  retirement funds                                                               
designed  for employees  retiring on  or about  a specific  year.                                                               
How are they doing relative to  the 8.25 and the 6.73 [percent]?"                                                               
Mr.  Fluetsch also  recommended  looking at  the Alaska  Balanced                                                               
Fund  to see  how  it's doing.   The  last  thing he  recommended                                                               
asking is:   "What is  the break-even  rate of return,  where the                                                               
assumptions zero  out ... where  the defined  contribution equals                                                               
the defined  benefit, so that  in this percentage  column they're                                                               
all zeros?"                                                                                                                     
12:23:26 PM                                                                                                                   
CHAIR SEATON  informed Mr.  Fluetsch that  he has  requested that                                                               
information regarding  SBS, the different funds,  and how they've                                                               
been faring.   Another consideration  will be whether or  not SBS                                                               
should  be a  factor in  a rewrite  of the  program.   He offered                                                               
further details.                                                                                                                
12:24:48 PM                                                                                                                   
MR. FLUETSCH,  in response to  a comment by Chair  Seaton, stated                                                               
that everybody participates  in SBS at the  same rate; therefore,                                                               
he  clarified  that  Chair  Seaton   is  talking  about  deferred                                                               
12:25:58 PM                                                                                                                   
HEATH HILYARD,  Staff to Representative Mike  Kelly, Alaska State                                                               
Legislature, on  behalf of Representative  Kelly, noted  that the                                                               
State of  Michigan changed to  a defined contribution  plan about                                                               
10 years  ago, and he  recommended that Michigan's plan  could be                                                               
used as a comparison model.                                                                                                     
12:26:43 PM                                                                                                                   
REPRESENTATIVE  GRUENBERG  asked  whether  any  of  the  regional                                                               
divisions  of [the  Council of  State Governments  (CSG)] or  the                                                               
National Conference  of State Legislatures  (NCSL) have  any task                                                               
forces or committees working on this issue on an ongoing basis.                                                                 
12:27:14 PM                                                                                                                   
MR. HILYARD offered  his belief that NCSL is, but  perhaps CSG is                                                               
not  involved as  much.   He  said he  has also  looked into  the                                                               
American  Legislative  Exchange  Council.     In  response  to  a                                                               
question from Chair Seaton and  Representative Gruenberg, he said                                                               
he  doesn't know  if  there are  any  House Representatives  from                                                               
Alaska serving on [the NCSL] committee.                                                                                         
12:28:20 PM                                                                                                                   
REPRESENTATIVE GRUENBERG  opined that as the  Legislative session                                                               
winds  down and  the  Interim  begins, it  is  important to  have                                                               
"somebody sitting  on ...  that committee, whatever  it is."   He                                                               
offered to look into the matter.                                                                                                
12:29:09 PM                                                                                                                   
MR.  HILYARD  stated  his  belief  that  Representative  Anderson                                                               
serves on the  Labor & Commerce labor committee for  NCSL, but he                                                               
doesn't know  if that committee  has purview over  retirement and                                                               
benefit issues.                                                                                                                 
12:30:03 PM                                                                                                                   
CHAIR SEATON  noted that the  information regarding the  State of                                                               
Michigan's plan  was being distributed.   He asked  the committee                                                               
members to  go through the sectional  and bill on their  own time                                                               
and  be prepared  to  go through  it  on Tuesday,  April  5.   He                                                               
indicated  that it  may be  necessary  to hold  an informal  work                                                               
session and  told people to let  him know if they  are interested                                                               
in participating.                                                                                                               
[HB 238 was heard and held.]                                                                                                    

Document Name Date/Time Subjects