Legislature(2005 - 2006)CAPITOL 106

04/16/2005 09:30 AM STATE AFFAIRS


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ SB 90 ALASKA TERRITORIAL GUARD DAY TELECONFERENCED
Moved Out of Committee
+= HB 34 EXPUNGEMENT OF SET ASIDES TELECONFERENCED
Heard & Held
Bills Previously Heard/Scheduled
+= SB 141 PUBLIC EMPLOYEE/TEACHER RETIREMENT/BOARDS TELECONFERENCED
<Bill Hearing Canceled>
+= HB 238 PUBLIC EMPLOYEE/TEACHER RETIREMENT TELECONFERENCED
Heard & Held
HB 238-PUBLIC EMPLOYEE/TEACHER RETIREMENT                                                                                     
                                                                                                                                
[Contains brief mention of SB 141 and HB 191.]                                                                                  
                                                                                                                                
10:23:29 AM                                                                                                                   
                                                                                                                                
CHAIR SEATON announced that the  last 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."                                                                                               
                                                                                                                                
10:23:33 AM                                                                                                                   
                                                                                                                                
CHAIR  SEATON said  the hearing's  focus will  be on  the medical                                                               
element.   He noted that  SB 141  was recently received  from the                                                               
Senate and has medical elements similar to those in HB 191.                                                                     
                                                                                                                                
10:24:14 AM                                                                                                                   
                                                                                                                                
KATHERINE  SHOWS, Staff  to  Representative  Paul Seaton,  Alaska                                                               
State Legislature,  on behalf  of Representative  Seaton, sponsor                                                               
of HB  238, directed  attention to  a [two-page]  handout showing                                                               
possible medical scenarios for members  of [the Public Employees'                                                               
Retirement System  (PERS)] and  [the Teachers'  Retirement System                                                               
(TRS)] before  Medicare eligible age.   She said the  handout was                                                               
created by  extrapolating data from  a chart prepared  by [Mercer                                                               
Human Resource  Consulting ("Mercer")], which was  distributed at                                                               
the House State Affairs Standing Committee meeting on 4/14/05.                                                                  
                                                                                                                                
10:25:13 AM                                                                                                                   
                                                                                                                                
CHAIR  SEATON clarified  that the  charts from  Mercer total  [16                                                               
pages, including the contents page]  and showed "Projected Values                                                               
for Health Reimbursement Accounts."                                                                                             
                                                                                                                                
10:25:31 AM                                                                                                                   
                                                                                                                                
MS.  SHOWS  noted  one  change  in  the  aforementioned  two-page                                                               
handout is that in all the  examples, the retirement age has been                                                               
changed from  55 to 60.   She highlighted that [shown  at the top                                                               
of the first page] the PERS  "other" early hire, who works for 30                                                               
years and retires  at age 60 would receive a  90 percent subsidy.                                                               
The medical cost  would be $304,491, the subsidy  amount would be                                                               
$200,739,  and  the  amount  paid  by  the  health  reimbursement                                                               
account (HRA) would  be $160,578.  When the last  two amounts are                                                               
subtracted from  the first amount, the  net out-of-pocket expense                                                               
to  the   retiree  for  his/her  60-month   pre-Medicare  medical                                                               
coverage would be -$56,826.                                                                                                     
                                                                                                                                
10:28:10 AM                                                                                                                   
                                                                                                                                
CHAIR SEATON clarified that the  negative amount means that there                                                               
is still  $56,826 in  the health  reimbursement account  for that                                                               
employee.     In  response   to  questions   from  Representative                                                               
Gruenberg, he  reviewed how the  new handout correlates  with the                                                               
Mercer handout, including that the  page numbers shown just below                                                               
each chart  in the new  handout correlate  with the pages  of the                                                               
Mercer charts.  He offered examples and further details.                                                                        
                                                                                                                                
10:33:26 AM                                                                                                                   
                                                                                                                                
MS. SHOWS  highlighted the two  other possible  medical scenarios                                                               
shown for PERS:  "other" late  hire, retiring at 60 with 20 years                                                               
and  a  60  percent  subsidy,  with  and  without  spouse.    She                                                               
explained that  the second  page shows  the same  three scenarios                                                               
for TRS retirees.                                                                                                               
                                                                                                                                
10:35:35 AM                                                                                                                   
                                                                                                                                
MS.  SHOWS,  in  response  to   a  question  from  Chair  Seaton,                                                               
explained  that  the reason  that  the  net  amount left  in  the                                                               
account  is higher  for  TRS  than PERS  is  because the  average                                                               
salary for  TRS employees is  higher and the percentage  that was                                                               
put into the HRA would be larger.                                                                                               
                                                                                                                                
10:36:06 AM                                                                                                                   
                                                                                                                                
CHAIR  SEATON  reminded  the  committee  that  when  there  is  a                                                               
percentage shown next  to the HRA - for example  2 percent - that                                                               
percentage is  on the average  salary, not an  individual salary.                                                               
Everyone gets  the same  HRA contribution,  because a  U.S. anti-                                                               
discrimination   clause   provides   that   there   can   be   no                                                               
discrimination between  people based on  salary.  He  stated that                                                               
the  same  is not  true  for  the  percentage  that goes  into  a                                                               
person's subsidy amount.                                                                                                        
                                                                                                                                
10:38:52 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  GARDNER   offered  her  understanding   that  the                                                               
scenarios in the  two-page handout are just "examples  of how the                                                               
system works."   She observed that the examples are  for a person                                                               
who retires at  the age of 60, when  Medicare eligibility doesn't                                                               
begin  for 60  months -  at  age 65;  however, the  age at  which                                                               
Medicare eligibility begins is apt to change.                                                                                   
                                                                                                                                
10:39:22 AM                                                                                                                   
                                                                                                                                
CHAIR  SEATON answered  that's correct.   He  clarified that  the                                                               
intent of  the bill is  to have the  retirement age be  60 months                                                               
[five  years] before  whatever the  Medicare eligibility  age is.                                                               
Therefore,  the  age  is  set  at 60  for  the  current  Medicare                                                               
eligibility age  of 65,  but it could  shift should  the Medicare                                                               
eligibility age be raised.                                                                                                      
                                                                                                                                
10:40:37 AM                                                                                                                   
                                                                                                                                
MS. SHOWS concluded highlighting the scenarios for TRS.                                                                         
                                                                                                                                
10:41:55 AM                                                                                                                   
                                                                                                                                
CHAIR SEATON reminded the committee  that the scenarios are based                                                               
on the current actuarial assumptions, which he briefly reviewed.                                                                
                                                                                                                                
10:43:24 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE   GRUENBERG   stated   his   concern   about   the                                                               
possibility that the actuarial figures may not be accurate.                                                                     
                                                                                                                                
10:45:07 AM                                                                                                                   
                                                                                                                                
CHAIR SEATON  reminded the committee  that Milliman was  hired to                                                               
conduct  an  audit  on  the   Mercer  Human  Resource  Consulting                                                               
actuarial numbers and, beyond that,  he indicated that he doesn't                                                               
know what else can be done.                                                                                                     
                                                                                                                                
10:46:32 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE GRUENBERG suggested that  the only assumption that                                                               
the committee  can use is that  it cannot predict.   He indicated                                                               
that the only  sure thing is that [medical  costs] will increase.                                                               
He  suggested  that  something  be built  into  the  system  that                                                               
requires  the  legislature, every  few  years,  to reexamine  the                                                               
health care plan.                                                                                                               
                                                                                                                                
10:49:11 AM                                                                                                                   
                                                                                                                                
CHAIR SEATON  responded that  SB 141  tackles that  issue through                                                               
its proposed reconstruction  of the [retirement] board.   He said                                                               
the  committee has  a plan  that is  based on  estimates, so  the                                                               
question  is  how  to  get  a  plan  that  works  well,  provides                                                               
benefits,  attracts   and  retains  employees,  and   has  fiscal                                                               
stability.   He said  if nothing is  done, the  legislature would                                                               
basically be  okaying the status  quo.   He stated his  intent to                                                               
get all the choices on the table.                                                                                               
                                                                                                                                
10:51:12 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE GARDNER  listed her view of  the possible choices:                                                               
the  state  has  known  costs   and  the  employees'  costs  vary                                                               
according to  what the true  costs are; the employees'  costs are                                                               
set and the  states' vary; or the risk is  shared by employee and                                                               
employer.    She  observed,  "But  the  plan  that  protects  the                                                               
employer  and the  state by  limiting costs  is a  discouragement                                                               
under our  current system  for ...  recruitment and  retention of                                                               
employees, unless  pay scales  are higher."   She  said a  lot of                                                               
people  have stated  that  they  deal with  lower  pay scales  in                                                               
exchange for a  more secure retirement.  If  additional costs are                                                               
built  into retirement,  [the employer]  will have  to give  more                                                               
[salary] to keep the employee.                                                                                                  
                                                                                                                                
10:52:18 AM                                                                                                                   
                                                                                                                                
CHAIR SEATON talked  about the 30-year employee  and the scenario                                                               
shown in the  previously reviewed two-page handout.   He said the                                                               
legislature has to  decide what comparisons it wants  to make and                                                               
what it wants to "be able to afford to do."                                                                                     
                                                                                                                                
10:53:27 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  GARDNER  responded  that much  of  [the  outlined                                                               
scenario] is  for an  employee who  works for  30 years,  and she                                                               
questioned how many people stay 30 years in the same job today.                                                                 
                                                                                                                                
10:53:45 AM                                                                                                                   
                                                                                                                                
CHAIR SEATON  said, "You're  right," yet  reminded Representative                                                               
Gardner that  two of each of  the PERS/TRS scenarios were  set up                                                               
for retirement after 20 years.                                                                                                  
                                                                                                                                
10:53:51 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE LYNN  asked if there  might be  a way to  design a                                                               
system  whereby employer/employee  costs  fluctuate depending  on                                                               
health care costs.                                                                                                              
                                                                                                                                
10:54:28 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE GRUENBERG  said Chair  Seaton has used  a variable                                                               
whereby  the retirement  age shifts  with  the Medicare  eligible                                                               
age,  with 60  months between  the  two.   He suggested  allowing                                                               
other variables.                                                                                                                
                                                                                                                                
10:55:19 AM                                                                                                                   
                                                                                                                                
CHAIR  SEATON  proffered, "As  a  percentage,  it's not  a  fixed                                                               
dollar.   It's  a limited  dollar, but  it's a  contribution that                                                               
does change as a percentage of the medical cost."                                                                               
                                                                                                                                
10:55:57 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE LYNN  clarified that  he is trying  to think  of a                                                               
new idea that the committee has yet not considered.                                                                             
                                                                                                                                
10:56:13 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE MIKE  KELLY, Alaska  State Legislature,  said this                                                               
issue  is so  overwhelming in  terms  of future  dollars that  it                                                               
would behoove  the legislature to  be extremely  conservative "on                                                               
the theory  that ...  once you lock  it in, that  is going  to be                                                               
locked in and remembered for all  time to come for that new class                                                               
of employee."  He said the  numbers show that young employees are                                                               
brought in the door by things other than retirement benefits.                                                                   
                                                                                                                                
10:58:51 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  GRUENBERG noted  that  Representative Kelly  said                                                               
retirement benefits don't  bring new people into  the system, yet                                                               
he has  been told the  opposite.  He  emphasized that that  is an                                                               
essential issue to address.                                                                                                     
                                                                                                                                
11:00:13 AM                                                                                                                   
                                                                                                                                
CHAIR  SEATON  said he  thinks  there  are two  separate  issues:                                                               
attracting  people to  the  system and  retaining  people in  the                                                               
system.                                                                                                                         
                                                                                                                                
11:01:55 AM                                                                                                                   
                                                                                                                                
CHAIR SEATON said  it would be known what  the unfunded liability                                                               
would be  going forward, because it  would be set at  a maximum 5                                                               
percent increase per year.                                                                                                      
                                                                                                                                
11:03:11 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE ELKINS  stated that he agrees  with Representative                                                               
Kelly that the young are focused  on dollars in the pocket rather                                                               
than retirement savings.  In  regard to pushing the bill forward,                                                               
he said he  would rather see a  task force work on  the bill over                                                               
the interim to put to a vote the first part of the next session.                                                                
                                                                                                                                
11:04:18 AM                                                                                                                   
                                                                                                                                
CHAIR   SEATON  said   he   appreciates  Representative   Elkins'                                                               
comments, but wants  the committee to work as work  hard and fast                                                               
as possible.                                                                                                                    
                                                                                                                                
11:04:28 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE KELLY  indicated that  he doesn't want  to "buckle                                                               
under the pressure" and "ship  it forward into an election year."                                                               
He stated that he is a strong  advocate of putting a new board in                                                               
place with the  charge of tuning up the plan.   He concluded, "We                                                               
can do it, if we have the will."                                                                                                
                                                                                                                                
11:05:19 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  LYNN,  regarding  the  motivation  of  employees,                                                               
said, "The closer  you get to retirement the more  likely you are                                                               
to  stay in  there."   Regarding Representative  Kelly's comments                                                               
about an  election year, he said,  "I don't think we  should vote                                                               
yeah and nay  on this or any other bill  in the legislature based                                                               
upon what is and is not an election year."                                                                                      
                                                                                                                                
11:06:54 AM                                                                                                                   
                                                                                                                                
MS. SHOWS  mentioned a study  that shows that "salary's  far more                                                               
important than benefits" for beginning teachers.                                                                                
                                                                                                                                
11:07:19 AM                                                                                                                   
                                                                                                                                
CHAIR SEATON  directed attention to a  one-page handout entitled,                                                               
"Comparison  of the  States  Normal  Retirement by  Age/Service,"                                                               
compiled  by   the  Senate   Finance  Committee   from  [National                                                               
Association  of State  Retirement Administrators  (NASRA)] public                                                               
fund survey data.  The date  shows the years and ages for various                                                               
retirement scenarios for teachers and "other" for all 50 states.                                                                
                                                                                                                                
11:09:09 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  GRUENBERG  said  he  would like  to  see  related                                                               
numbers for federal government jobs.                                                                                            
                                                                                                                                
11:09:47 AM                                                                                                                   
                                                                                                                                
MS. SHOWS  reviewed two  individual pages,  labeled "A"  and "B,"                                                               
showing details of major medical coverage  for HB 238 and SB 141,                                                               
respectively.   [This information  is available in  the committee                                                               
packet.]                                                                                                                        
                                                                                                                                
11:12:32 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE GARDNER offered her  understanding that, under the                                                               
proposed  plan, if  the retiree  does  not keep  up with  his/her                                                               
premium cost, he/she loses both access  to the system, as well as                                                               
the 60-month subsidy prior to Medicare.                                                                                         
                                                                                                                                
11:12:38 AM                                                                                                                   
                                                                                                                                
MS.  SHOWS  answered  that's  correct.    She  said  this  is  an                                                               
encouragement for "employment up to age  60."  She added that if,                                                               
for example, an  employee serves for 30 years  and retires early,                                                               
he/she  would have  to "bridge  the gap  between [his/her]  early                                                               
retirement  age  and  60  months  pre-Medicare  with  some  other                                                               
qualified medical insurance."                                                                                                   
                                                                                                                                
11:13:14 AM                                                                                                                   
                                                                                                                                
CHAIR  SEATON  added  that "other  qualified  medical  insurance"                                                               
could be insurance from a  spouse or through previous employment,                                                               
for example.  He offered further details.                                                                                       
                                                                                                                                
11:15:15 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE GARDNER  stated that  it seems  unfair that  if an                                                               
employee  has worked  30  years  and earned  the  60 months  pre-                                                               
Medicare care coverage  but can't afford to keep  up the premiums                                                               
for the 10-12  years between retirement and  eligibility, it will                                                               
cost him/her  "that entire 60 months."   She said, "As  you said,                                                               
it's  an incentive  to  keep working,  but it  seems  to sort  of                                                               
unfairly stack the deck in favor of the employer."                                                                              
                                                                                                                                
11:16:01 AM                                                                                                                   
                                                                                                                                
CHAIR SEATON said  that's not the intent.  He  clarified that the                                                               
intent is to say that the  employee cannot bring in to the system                                                               
five  years of  unserviced [accumulated  and unaddressed  medical                                                               
problems]  medical  costs.    He  said  that's  the  purpose  for                                                               
requiring that  someone retire  directly out of  the system.   He                                                               
said it's a conundrum that is difficult to solve.                                                                               
                                                                                                                                
11:16:49 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  LYNN   proffered  that  the  intent   is  not  as                                                               
important as what actually happens to the employee.                                                                             
                                                                                                                                
11:17:14 AM                                                                                                                   
                                                                                                                                
CHAIR  SEATON predicted  that 30  years from  now employees  will                                                               
have  a  very  definite  incentive to  remain  employed,  because                                                               
medical costs will have risen so substantially.                                                                                 
                                                                                                                                
11:18:14 AM                                                                                                                   
                                                                                                                                
CHAIR  SEATON,  in response  to  a  question from  Representative                                                               
Gardner,  confirmed that  HRA  funds can  be  used for  insurance                                                               
premiums.   He added that they  can also be used  for any medical                                                               
deductible or  co-pay, for  example.  He  described [the  HRA] as                                                               
dollars  in  an  employee's  pocket to  spend  on  any  qualified                                                               
medical expense, including insurance.                                                                                           
                                                                                                                                
11:18:43 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE GRUENBERG  asked if older people  who are changing                                                               
careers will be  attracted to work for the state  or if they will                                                               
be  discouraged  because they  will  "never  be  able to  have  a                                                               
portable health care system."                                                                                                   
                                                                                                                                
11:19:20 AM                                                                                                                   
                                                                                                                                
CHAIR SEATON  reminded Representative Gruenberg that  some of the                                                               
scenarios  that   the  committee  has  seen   are  for  employees                                                               
beginning  at age  40  and  working for  20  years.   He  offered                                                               
further details.                                                                                                                
                                                                                                                                
11:22:07 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE KELLY emphasized the  importance of portability in                                                               
a plan.                                                                                                                         
                                                                                                                                
11:23:11 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE GRUENBERG  indicated that it is  important to many                                                               
to  be able  to change  careers  mid-stream, and  [the result  of                                                               
doing so  as it  relates to  HB 238] would  have to  be carefully                                                               
explained to the public.                                                                                                        
                                                                                                                                
11:24:02 AM                                                                                                                   
                                                                                                                                
CHAIR  SEATON  directed  attention  back  to  the  aforementioned                                                               
handout "A"  and the list  of employee percentages of  premium at                                                               
various  years  of service.    In  response  to a  question  from                                                               
Representative  Gardner,  he  stated  that the  subsidy  base  is                                                               
variable and can escalate up to 5  percent a year.  If it rose to                                                               
7 percent, the employee would have to pick up 2 percent.                                                                        
                                                                                                                                
11:27:09 AM                                                                                                                   
                                                                                                                                
CHAIR SEATON  highlighted aspects of handout  "B" to SB 141.   He                                                               
noted,  "There's less  difference between  the two  plans in  the                                                               
length of  service and  the subsidy you'll  get."   The component                                                               
for having 60  months pre-Medicare eligibility does  not exist in                                                               
SB 141.                                                                                                                         
                                                                                                                                
11:28:48 AM                                                                                                                   
                                                                                                                                
CHAIR SEATON reviewed some of  the decisions before the committee                                                               
regarding the  medical aspects  of a retirement  plan.   He asked                                                               
the committee members  if they could decide whether  they want to                                                               
support  a  pre-Medicare  eligible  plan or  to  "be  looking  at                                                               
everything post-Medicare eligible."                                                                                             
                                                                                                                                
11:31:04 AM                                                                                                                   
                                                                                                                                
MS. SHOWS directed attention to  a one-page, double-sided handout                                                               
[available  in the  committee packet],  entitled, "Comparison  of                                                               
Other  States' Experience  with  Widespread Defined  Contribution                                                               
Plans."                                                                                                                         
                                                                                                                                
The committee took an at-ease from 11:32:32 AM to 11:37:51 AM.                                                              
                                                                                                                                
11:38:03 AM                                                                                                                   
                                                                                                                                
MS. SHOWS  returned to the  aforementioned handout  - "Comparison                                                               
of Other States' Experience  with Widespread Defined Contribution                                                               
Plans" -  and noted  that Nebraska,  West Virginia,  and Michigan                                                               
are  the  states most  talked  about  when referring  to  defined                                                               
contribution  (DC) plans,  hence  those are  the states  compared                                                               
here.    She  highlighted  the  details  on  the  handout,  which                                                               
include:  which employees have  a defined contribution plan, what                                                               
the employee  and employer contribution  rates are,  the employee                                                               
investment options, aspects of vesting  and medical coverage, and                                                               
whether the state is a social security employer.                                                                                
                                                                                                                                
11:40:33 AM                                                                                                                   
                                                                                                                                
MS. SHOWS, in response to  a question from Representative Gardner                                                               
regarding Michigan's  employee contribution  rate, said  she does                                                               
not  know what  the  IRS  maximum is,  but  it  is a  significant                                                               
amount.    She  offered  an example  illustrating  scenarios  for                                                               
employer  match  amounts in  Michigan,  which  she clarified  are                                                               
significantly less than [HB 238] is suggesting.                                                                                 
                                                                                                                                
11:41:52 AM                                                                                                                   
                                                                                                                                
MS.  SHOWS,  in  response  to   a  question  from  Representative                                                               
Gruenberg, said there  are states that allow  employees to choose                                                               
between  DC  and  DB  plans.   She  noted  that  there  are  also                                                               
approximately  20  states that  have  a  small portion  of  their                                                               
public employees under some form of defined contribution plan.                                                                  
                                                                                                                                
11:42:30 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE GRUENBERG  observed that  two of the  three states                                                               
represented on the handout are changing back to DB plans.                                                                       
                                                                                                                                
11:42:45 AM                                                                                                                   
                                                                                                                                
MS.  SHOWS  reiterated  that  there are  many  states  that  have                                                               
elements  of  a  DC  plan  for some  of  their  employees.    She                                                               
specified that the DB plan that  Nebraska switched to is called a                                                               
"cash balance  benefit" and is  similar to a  DC plan.   She said                                                               
that type  of plan guarantees  an investment return of  a certain                                                               
percentage  on  an  employee's  account.    She  offered  further                                                               
details.     In  response  to  a   question  from  Representative                                                               
Gruenberg, she  stated that  currently there  are 48  states that                                                               
are primarily using a defined benefit plan.                                                                                     
                                                                                                                                
11:45:19 AM                                                                                                                   
                                                                                                                                
MS. SHOWS returned to her review of the handout.                                                                                
                                                                                                                                
11:47:33 AM                                                                                                                   
                                                                                                                                
MS. SHOWS, in  response to a question from  Chair Seaton, offered                                                               
her understanding  that "vesting"  means, "Once you're  vested in                                                               
your defined contribution  account, you can take  the full dollar                                                               
amount with you when you leave employment."                                                                                     
                                                                                                                                
11:47:46 AM                                                                                                                   
                                                                                                                                
CHAIR SEATON offered an example.                                                                                                
                                                                                                                                
11:47:54 AM                                                                                                                   
                                                                                                                                
MS. SHOWS continued with her comparison of the three states.                                                                    
                                                                                                                                
CHAIR SEATON observed that the  Michigan plan is quite similar to                                                               
HB 238.                                                                                                                         
                                                                                                                                
MS. SHOWS noted  the difference is that in the  Michigan plan the                                                               
employee doesn't have to retire  directly from the system and the                                                               
percentage subsidy is "of the premium, not of a subsidy base."                                                                  
                                                                                                                                
11:50:10 AM                                                                                                                   
                                                                                                                                
MS. SHOWS  drew attention to  the backside of the  handout, which                                                               
illustrates "the experience  of the different states."   She said                                                               
she  read  a  union  position  paper  regarding  West  Virginia's                                                               
experience,  which  concluded  that, similar  to  Nebraska,  when                                                               
employees  have to  manage their  own accounts,  they do  not get                                                               
high enough returns.  She  reiterated that many states have plans                                                               
with DC  components, and she  noted that those states  are listed                                                               
on the back  page as being:  Florida, Montana,  New Jersey, North                                                               
Dakota,  Ohio,   Louisiana,  and  South  Carolina.     Ms.  Shows                                                               
paraphrased from the  bottom of the page, "In  the private sector                                                               
more than twice as many  employees are under defined contribution                                                               
plans as defined benefit plans."                                                                                                
                                                                                                                                
11:52:06 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE KELLY pointed out:                                                                                               
                                                                                                                                
     Some of  those people that  just moved into a  DC began                                                                    
     to manage  their own money  to some extent  or another,                                                                    
     ...  then hit  the perfect  storm that  we're all  here                                                                    
     because of, and it  devastated the individual investor,                                                                    
     as well  as everyone else.   So, just as they  got into                                                                    
     their own management, they got  punched hard.  So, it's                                                                    
          not surprising that given the timing of the                                                                           
     conversions, that that happened.                                                                                           
                                                                                                                                
REPRESENTATIVE KELLY mentioned  the state's Supplemental Benefits                                                               
System (SBS) as being a model.                                                                                                  
                                                                                                                                
11:52:56 AM                                                                                                                   
                                                                                                                                
CHAIR  SEATON  highlighted  that  Nebraska,  West  Virginia,  and                                                               
Michigan are all  social security employers.  He  noted that PERS                                                               
employees have  SBS and social  security, while TRS  employees do                                                               
not.                                                                                                                            
                                                                                                                                
11:54:22 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  GRUENBERG questioned  why  TRS  doesn't have  the                                                               
option for SBS.                                                                                                                 
                                                                                                                                
11:54:50 AM                                                                                                                   
                                                                                                                                
MS.  SHOWS responded  that it's  because  teachers' salaries  are                                                               
significantly  more than  that of  PERS employers.   Furthermore,                                                               
many school districts  have their own retirement  plans for their                                                               
employees that are similar to a defined contribution account.                                                                   
                                                                                                                                
11:55:55 AM                                                                                                                   
                                                                                                                                
CHAIR SEATON  indicated that the  reason the states  with defined                                                               
contribution plans  are not happy  with them  has to do  with the                                                               
contribution rates.  He stressed,  "It's not so much whether it's                                                               
defined contribution  or defined  benefit, but  it's how  well we                                                               
structure  the plan  so that  it's ...  attracting and  retaining                                                               
employees.    And  that's  going  to depend  on  how  much  of  a                                                               
percentage ... we are willing to put into the plan."                                                                            
                                                                                                                                
11:57:26 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  GARDNER,  regarding   the  "Comparison  of  Other                                                               
States'  Experience with  Widespread Defined  Contribution Plans"                                                               
handout,  noted  that  a  lot  of  private  employers  can  offer                                                               
different  incentives  for  employees  to  stay,  such  as  extra                                                               
vacation time,  sabbaticals, and  bonuses -  all things  that she                                                               
said "we don't generally have available."                                                                                       
                                                                                                                                
11:58:10 AM                                                                                                                   
                                                                                                                                
CHAIR SEATON said one consideration  would be to have [the Alaska                                                               
State Pension Investment  Board (ASPIB)] "do the  investment."  A                                                               
decision would have to be made  whether to have a broader variety                                                               
of investment opportunities  or to keep investment  costs down as                                                               
much as possible within the system "and let that grow."                                                                         
                                                                                                                                
12:01:18 PM                                                                                                                   
                                                                                                                                
CHAIR  SEATON asked  members to  review  SB 141  before it  comes                                                               
before the committee  on Tuesday, 04/19/05.  He  discussed a plan                                                               
to hear  the bill  in the  morning and  recess to  a call  of the                                                               
chair until Tuesday night.                                                                                                      
                                                                                                                                
12:03:00 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  GARDNER mentioned  Representative Lynn's  earlier                                                               
comments  about [not  pushing something  through the  legislature                                                               
based on whether an election years is  or is not to follow].  She                                                               
noted for the record that she  received a letter from Tim Steele,                                                               
President, Anchorage School Board,  which suggested that PERS/TRS                                                               
issues should  be carried over into  the interim so that  all the                                                               
key  players can  be involved.   Mr.  Steele also  suggested that                                                               
hearings should be held around  the state, with opportunities for                                                               
all sides.                                                                                                                      
                                                                                                                                
REPRESENTATIVE LYNN  clarified that  he would like  the committee                                                               
to  "proceed  with  all  deliberate  speed"  without  rushing  to                                                               
judgment.                                                                                                                       
                                                                                                                                
JOHN  ALCANTRA, testifying  on behalf  of  NEA-Alaska, said  that                                                               
organization is  comprised of 12,500 public  school employees and                                                               
retirees.   He noted that  Governor Arnold Schwarzenegger  of the                                                               
State of California  recently decided to "go against  the DC plan                                                               
for the  time being."   He opined that several  committee members                                                               
have brought up  a good point in recommending taking  the time to                                                               
do things the correct way.   He suggested that perhaps the reason                                                               
that  some states  are changing  directions is  that they  didn't                                                               
initially take the time to do things properly.                                                                                  
                                                                                                                                
MR. ALCANTRA  noted that about 8,000  of his members are  in TRS,                                                               
and he said 7 out of 10  teachers in the state are recruited from                                                               
the  Outside.   He admitted  that salary  and intrigue  about the                                                               
state is "a draw," but said  in order to retain quality personnel                                                               
the state needs a quality retirement system.                                                                                    
                                                                                                                                
MR. ALCANTRA  said teachers in  TRS have a higher  pension amount                                                               
because,  as  a  general  rule,  they  spend  more  time  in  the                                                               
profession and  make more  money than  PERS employees.   Teachers                                                               
don't  have  access  to  social   security.    He  applauded  the                                                               
committee's  efforts, but  asked that  the legislature  take time                                                               
over summer  and fall to  work with various  groups, communities,                                                               
and task  forces to ensure  a quality  plan is adopted  that will                                                               
recruit and retain  personnel in both PERS and TRS.   In closing,                                                               
Mr. Alcantra  disclosed, "I'm a  vested member of PERS,  and I'll                                                               
be one of those  folks that only had 6.5 years  in the system but                                                               
will get a quality retirement."                                                                                                 
                                                                                                                                
12:08:42 PM                                                                                                                   
                                                                                                                                
SAM  TRIVETTE,  President,  Retired Public  Employees  of  Alaska                                                               
(RPEA), paraphrased  from the  following written  testimony [with                                                               
some format, grammatical, and punctuation changes]:                                                                             
                                                                                                                                
     I'm retired  from the  Department of  Corrections after                                                                    
     32 years.  Nineteen years of  that time I served as the                                                                    
     Director  of  the  Alaska Parole  Board,  and  in  that                                                                    
     capacity,  worked closely  with  the  legislature in  a                                                                    
     complete rewrite  of the Parole Administration  Act and                                                                    
     in  rewriting other  legislation  and  regulations.   I                                                                    
     also  worked  as  the Director  &  Deputy  Director  of                                                                    
     Probation  & Parole,  Chief  Probation Officer,  Parole                                                                    
     Officer, and  Correctional Officer.   I  have extensive                                                                    
     involvement  in leadership  positions  in various  non-                                                                    
     profit organizations at the  local, state, and national                                                                    
     level spanning 5 decades.                                                                                                  
                                                                                                                                
     I  am currently  the  President of  the Retired  Public                                                                    
     Employees   of  Alaska,   having   served  in   various                                                                    
     capacities on  its Executive Board  since 1999.   In my                                                                    
     capacity  as President,  I have  attended  many of  the                                                                    
     PERS/TRS Board and  ASPIB meetings in recent  years.  I                                                                    
     have watched them work  and participated extensively in                                                                    
     their meetings.                                                                                                            
                                                                                                                                
     I have  attended or  watched almost  all of  the Senate                                                                    
     Finance Committee hearings on  their retiree bill since                                                                    
     it was introduced and  spent countless hours discussing                                                                    
     issues  surrounding retiree  legislation with  numerous                                                                    
     people.  I have attended  many of the hearings and work                                                                    
     sessions of  this committee in  the last few weeks.   I                                                                    
     don't  consider  myself  an expert  on  the  retirement                                                                    
     system, but  I do  think I  have gained  much knowledge                                                                    
     about the  system over the  last five years  that gives                                                                    
     me a reasonable perspective.                                                                                               
                                                                                                                                
12:10:09 PM                                                                                                                   
                                                                                                                                
     Let me first complement  the committee in being willing                                                                    
     to  respectfully listen  to a  diverse group  of people                                                                    
     with an open  mind and ask important  questions.  Folks                                                                    
     that  I talked  to  in recent  weeks  that attended  or                                                                    
     watched your hearings and  work sessions were heartened                                                                    
     by your approach.                                                                                                          
                                                                                                                                
     In  spite of  some rhetoric  to the  contrary, everyone                                                                    
     I've talked  to thinks  the system  needs change.   But                                                                    
     citizens are  asking that the problem  areas be clearly                                                                    
     & accurately identified before we  try to design fixes.                                                                    
     Mr. Chair, I  thought you did an excellent  job of your                                                                    
     overview of  the system in  your work session  of March                                                                    
     24.  I  hope all of the members were  able to listen to                                                                    
     those  comments as  well as  the testimony  provided at                                                                    
     your April 6 work session  when the members of PERS/TRS                                                                    
     and ASPIB, and their attorney  testified.  I think that                                                                    
     information  is critical  to committee  members as  you                                                                    
     develop new legislation.                                                                                                   
                                                                                                                                
     Rolling  all  this  together,  here   are  some  of  my                                                                    
     observations:                                                                                                              
                                                                                                                                
   1.     The State's contracted actuaries made major                                                                           
     errors  in  judgment  and  in  calculations  that  were                                                                    
     responsible for seriously  understating the current and                                                                    
     future  liabilities  of the  retiree  systems  - a  few                                                                    
     mortality tables,  salary schedules,  medical benefits,                                                                    
     [and] statutory change impacts.                                                                                            
   2.     Because of the significant errors beginning in                                                                        
     the  mid-90s, the  actuaries'  advice  to the  PERS/TRS                                                                    
     Board  resulted in  the  adoption  of artificially  low                                                                    
     rates at a  time when full funding  would have resulted                                                                    
     in a much lower shortfall today.                                                                                           
   3.     The many intended and unintended "enhancements"                                                                       
     created by the legislature  or employers over the years                                                                    
     have  resulted  in  unintended  significant  additional                                                                    
     liabilities  for  the  systems.   These  "enhancements"                                                                    
     refer to  any law, regulation, or  practice that allows                                                                    
     an  employee to  capture a  benefit that  is not  fully                                                                    
     actuarially  funded.   Many are  legislative decisions:                                                                    
     allowing  local   governments  to   provide  retirement                                                                    
     benefits  to  elected  officials  with  minimal  system                                                                    
     contributions;  allowing legislative  staff to  vest in                                                                    
     the retirement  system with full benefits  with minimal                                                                    
     contributions;  [and] allowing  some Tier  II employees                                                                    
     Tier I medical benefits  and not requiring full funding                                                                    
     of this  change.  Some  others are the result  of local                                                                    
     government   decisions,   such   as   allowing   senior                                                                    
     employees  significant overtime  pay  during the  three                                                                    
     high years  or paying bonuses to  encourage retirement,                                                                    
     significantly increasing the employees retirement pay.                                                                     
   4.     Many of these practices have existed for decades,                                                                     
     including the  transferring of employees to  [the] Bush                                                                    
     - high  geographical pay differential  areas -  for the                                                                    
     last three  to five  years of  employment to  allow for                                                                    
     large  increases  in  retirement   pensions.    Let  me                                                                    
     stress:   Not one employee  is committing fraud  on the                                                                    
     system  or   in  anyway  doing  anything   improper  by                                                                    
     following these laws, regulations,  or rules.  They are                                                                    
     not.  The employees are only  using the rules set up by                                                                    
     the system.  But I  believe these benefits that are not                                                                    
     fully funded must be altered.                                                                                              
                                                                                                                                
12:13:12 PM                                                                                                                   
                                                                                                                                
     The logical question  is:  If all these  laws and rules                                                                    
     were  changed to  disallow the  unfunded benefits,  how                                                                    
     much money would be saved?   Would there even be a need                                                                    
     to consider the drastic  move to a defined contribution                                                                    
     system?  If you review the  minutes of the PERS and TRS                                                                    
     meetings last  fall when they  did not recommend  a new                                                                    
     defined  contribution plan,  they  believed there  were                                                                    
     many other  options that they  were not allowed  to put                                                                    
     forth and  study that could put  the retirement systems                                                                    
     on sound footing.   Besides removing the "enhancements"                                                                    
     already   discussed,   the   other   options   included                                                                    
     increasing  the  employee  contribution,  reducing  the                                                                    
     employer  Supplemental  Benefits System  contributions,                                                                    
     raising the number of years  of service before vesting,                                                                    
     and of  course adjusting  the health  benefits package.                                                                    
     These  options  need  to  be  fully  considered  before                                                                    
     adopting a defined contribution plan.                                                                                      
                                                                                                                                
     So, where  do we go from  here?  I agree  with you, Mr.                                                                    
     Chair, there is  no evidence any of the  three boards -                                                                    
     PERS, TRS,  [and] ASPIB  - have  made decisions  in the                                                                    
     recent past  that have  adversely affected  the funding                                                                    
     of the  retiree systems.   Quite  the contrary,  let me                                                                    
     mention   a  few   decisions  by   these  boards   that                                                                    
     positively affected the status of  the funds.  Most are                                                                    
     decisions  by the  PERS/TRS Boards  that deal  with the                                                                    
     "cost  savings"  or  liability side  of  the  equation.                                                                    
     Many  more  examples  exist   if  you  need  additional                                                                    
     information.                                                                                                               
                                                                                                                                
     Most of you  have heard about the  education program on                                                                    
     generic drugs that  is now saving $5-$6  Million a year                                                                    
     by  encouraging retirees  to use  generic versus  brand                                                                    
     name medications  and also [have]  prescriptions filled                                                                    
     by  mail order,  resulting  in further  savings to  the                                                                    
     state.                                                                                                                     
                                                                                                                                
     You  probably haven't  heard about  the savings  to the                                                                    
     state on  payments to the Term  Life Insurance Program.                                                                    
     Retirees  and the  state had  been overpaying  premiums                                                                    
     and fees  to the  firm administering the  retiree self-                                                                    
     funded  program for  years,  resulting  in much  higher                                                                    
     payments than  necessary.  This problem  was identified                                                                    
     after continued probing of the PERS/TRS Board members.                                                                     
                                                                                                                                
     PERS/TRS  retirees  for  years were  paying  more  than                                                                    
     necessary     into      the     self-funded     retiree                                                                    
     dental/audio/visual  plan.    By pushing  for  accurate                                                                    
     expense information on the  plan, the Board recommended                                                                    
     the state  increase the benefits.   The  plan continued                                                                    
     to make these increased  reimbursements for three years                                                                    
     before the premiums  had to be increased.   This bought                                                                    
     a huge  amount of good  will from the retirees  for the                                                                    
     system's attempts to hold down retiree expenses.                                                                           
                                                                                                                                
12:15:43 PM                                                                                                                   
                                                                                                                                
     Let's  take a  look  at one  mistake  made without  the                                                                    
     direct  involvement  in  the details  by  the  PERS/TRS                                                                    
     Boards or RPEA volunteers,  which caused much grief for                                                                    
     [the Division of] Retirement &  Benefits when trying to                                                                    
     successfully control  system expenses.   [The division]                                                                    
     correctly identified some  retirees were using personal                                                                    
     credit cards  to charge medications,  without notifying                                                                    
     the  pharmacies the  customer was  a retired  employee.                                                                    
     Therefore,  the retirement  system was  charged a  much                                                                    
     higher  price  for the  drug.    However, letters  were                                                                    
     mistakenly sent to  many retirees that were  not a part                                                                    
     of  the problem,  making them  angry at  the state  for                                                                    
     falsely  accusing  these  retirees  of  increasing  the                                                                    
     costs  to the  state.   Also the  letter threatened  to                                                                    
     make the retirees pay the  difference in costs, further                                                                    
     alienating the  retirees, and making it  more difficult                                                                    
     to engage them in cost cutting measures in the future.                                                                     
                                                                                                                                
     Another  important decision  was made  by the  PERS/TRS                                                                    
     Boards  several   years  ago.    After   receiving  the                                                                    
     disturbing news in the early  2000s, the funds that had                                                                    
     been over  100% funded  were now  projected to  be less                                                                    
     than 80% funded, the Boards  asked for a second opinion                                                                    
     from another  actuary.  This second  [actuarial] report                                                                    
     pointed  out  some  of  the  major  problems  with  the                                                                    
     state's [actuarial] assumptions,  and these huge errors                                                                    
     have been corrected.                                                                                                       
                                                                                                                                
     Our   belief  is   that   some  significant   potential                                                                    
     solutions  to   cost  cutting   still  have   not  been                                                                    
     identified.  Most employees  understand the current gap                                                                    
     in  funding and  would be  more than  willing to  offer                                                                    
     information  and potential  solutions to  this problem.                                                                    
     Publicly solicit their input.                                                                                              
                                                                                                                                
     Everyone  involved  with  the  systems  has  identified                                                                    
     health care  costs as  one of  the primary  culprits in                                                                    
     the funding shortfall.   Skyrocketing health care costs                                                                    
     are  a   national  crisis.     There  is   nothing  the                                                                    
     employees, the  employers, the retirees, or  any of the                                                                    
     3 boards  have done to  cause this problem.   Until all                                                                    
     of  us put  pressure on  Congress and  the health  care                                                                    
     industry to  make changes, we  will be stuck  with this                                                                    
     continued pressure on the retirement  funds.  One clear                                                                    
     example is  the new  Medicare [prescription]  drug law.                                                                    
     It  prohibits the  federal government  from negotiating                                                                    
     drug prices  with the  pharmaceutical companies.   Now,                                                                    
     if  you are  trying to  contain and  reduce costs,  how                                                                    
     much sense does  that make?  Different  segments of the                                                                    
     federal    government,     including    the    Veterans                                                                    
     Administration  and  the  Department of  Defense,  have                                                                    
     been successfully  saving huge  sums of  money annually                                                                    
     by negotiating  drug prices.   We  need to  make health                                                                    
     care  cost  reductions the  number  one  priority.   It                                                                    
     affects  all publicly  funded and  private health  care                                                                    
     systems.   Skyrocketing  health care  costs are  behind                                                                    
     the  massive  increases  in Medicare,  Medicaid,  [and]                                                                    
     Worker Compensation costs, as well.                                                                                        
                                                                                                                                
     Mr.  Chair,  your  committee  bill   is  the  only  one                                                                    
     introduced  this session  dealing  with retiree  issues                                                                    
     that  even attempts  to deal  with the  current funding                                                                    
     deficit.  We applaud you  for focusing on this critical                                                                    
     issue.   And we appreciate your  understanding that the                                                                    
     employers do  need relief this  year and the  next year                                                                    
     in meeting  their financial obligations to  the pension                                                                    
     funds.   Hopefully, the upcoming [actuarial]  review by                                                                    
     the  Michigan firm  hired  by  the Legislative  Council                                                                    
     will shed  more light  on [actuarial]  issues resulting                                                                    
     in  such a  quick downturn  of the  calculation of  the                                                                    
     fund  projections.   As  you all  have  learned, it  is                                                                    
     these projections  that are the  largest factor  in the                                                                    
     employer premium increases today.                                                                                          
                                                                                                                                
     As the PERS/TRS/ASPIB  contract attorney said, whatever                                                                    
     solutions  you  come up  with  must  be very  carefully                                                                    
     crafted to avert  additional unintended consequences in                                                                    
     the future.   Thank  you again  for the  opportunity to                                                                    
     testify.                                                                                                                   
                                                                                                                                
CHAIR  SEATON,  in response  to  a  question from  Representative                                                               
Gardner,  said Legislative  Council  is spending  $20,000 to  ask                                                               
another actuary  to look at  "the projections -  the assessment."                                                               
He  characterized  this as  a  "second  opinion of  assumptions,"                                                               
rather than a full audit.                                                                                                       
                                                                                                                                
12:21:37 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE GRUENBERG stated that  he would like the committee                                                               
to  glean  ideas  for  further  legislation  from  Mr.  Trieste's                                                               
testimony.   He asked Mr. Trivette  how long ago the  errors were                                                               
made by the actuarial firm.                                                                                                     
                                                                                                                                
12:22:11 PM                                                                                                                   
                                                                                                                                
MR. TRIVETTE  responded that the  first error  he is aware  of is                                                               
the failure  to adopt the  1994 mortality  table.  He  added, "My                                                               
impression is  that most  of those errors  were discovered."   In                                                               
response to  a follow-up question from  Representative Gruenberg,                                                               
he  said he  recently received  information from  NEA-Alaska that                                                               
there still  may be some errors  in the current system,  in terms                                                               
of the calculation of projected salary increases.                                                                               
                                                                                                                                
12:23:20 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  GRUENBERG  expressed  concern  regarding  whether                                                               
there  may  be  some  legal  recourse if  the  standard  of  care                                                               
required in the industry was not met.                                                                                           
                                                                                                                                
12:23:41 PM                                                                                                                   
                                                                                                                                
MR.  TRIVETTE  replied,  "That  was  mentioned  at  some  of  the                                                               
testimony   presented    at   [a]   Senate    Finance   Committee                                                               
teleconference,"  and  he said  he  doesn't  know if  anyone  has                                                               
followed up on  that.  He said  he thinks it would  be prudent to                                                               
talk to  the members  of PERS  and TRS  who were  available "when                                                               
these reports were being presented to them."                                                                                    
                                                                                                                                
12:24:50 PM                                                                                                                   
                                                                                                                                
JERRY  PATTERSON,  President, NEA-Alaska/Retired,  testifying  on                                                               
behalf of NEA-Alaska/Retired, noted that  he is also a former TRS                                                               
Board  member.   Mr. Patterson  read from  his written  testimony                                                               
[included in the committee packet], as follows:                                                                                 
                                                                                                                                
     I would like to start  by making some observations.  My                                                                    
     first observation is  that what goes up  will come down                                                                    
     and what  goes down  will go  up.   Unfortunately, when                                                                    
     the  stock  market was  up,  the  PERS Board  took  the                                                                    
     recommendation   of    the   actuaries    and   lowered                                                                    
     contribution  rates  excessively   costing  PERS  about                                                                    
     seven  hundred  million  dollars in  contributions  and                                                                    
     earnings.   While the TRS  Board only dropped  its rate                                                                    
     by  a  point,  they  were  hit  by  a  flood  of  early                                                                    
     retirements that  combined with the rate  drop and lost                                                                    
     earnings, resulted  in a loss  of over one  hundred and                                                                    
     fifty  million.   Currently, the  market has  rebounded                                                                    
     and PERS  and TRS combined earned  around seven hundred                                                                    
     million  over  the 8.25%  assumed  return  that is  not                                                                    
     reflected  in   the  current  actuarial  report.     In                                                                    
     addition  ASPIB  has  a history  of  outperforming  the                                                                    
     return  assumption  so  already the  condition  of  the                                                                    
     retirement funds are improving.                                                                                            
                                                                                                                                
     My second observation is that  things are never as good                                                                    
     or bad  as they appear.   When I was on  the TRS Board,                                                                    
     we received  twenty-five year projections  showing that                                                                    
     the contribution rate  could drop to one  percent.  Now                                                                    
     we  are  getting  reports that  the  contribution  rate                                                                    
     needs  to  exceed  thirty percent.    Of  course  those                                                                    
     projections are made  from the low point  in the cycle.                                                                    
     Depending on  the current  condition of  the retirement                                                                    
     funds, projections  can paint a very  rosy picture, the                                                                    
     sky can be falling, or  we can be somewhere in between.                                                                    
     It would  not be  good policy to  make a  decision that                                                                    
     has  a drastic  effect on  the system  forty years  out                                                                    
     based on one snapshot in time.                                                                                             
                                                                                                                                
     My third  observation is that  it is most  likely there                                                                    
     will always  be an un-funded  liability.  Only  once in                                                                    
     recent  memory have  our  retirement  funds been  fully                                                                    
     funded  and  it  has  never before  been  a  cause  for                                                                    
     concern.   It  is not  uncommon  to  have an  un-funded                                                                    
     liability.   Even  in 2001,  at the  peak of  the stock                                                                    
     market rise, fifty-three of the  top one hundred public                                                                    
     pension  funds  were less  [than]  a  hundred per  cent                                                                    
     funded.  A  pension fund that is  ninety percent funded                                                                    
     is considered very healthy.                                                                                                
                                                                                                                                
     My last observation  is that the condition  of the fund                                                                    
     changes all  the time.   Even  now, the  information in                                                                    
     the reports  you have received  is outdated.   When the                                                                    
     boards adopt  contribution rates  for two  years ahead,                                                                    
     it is [based]  on information that is  nine months old.                                                                    
     Most  of  the  time  those changes  are  slight  so  it                                                                    
     doesn't  matter  if the  data  is  slightly behind  the                                                                    
     times.   But occasionally the changes  are significant.                                                                    
     Between 2001  and 2002 our funding  ratio dropped about                                                                    
     thirty points.   However, half of that drop  was due to                                                                    
     a  change  in the  health  cost  assumption.   It  then                                                                    
     becomes  very  important  to examine  the  health  care                                                                    
     assumption.    In  the  fall  of  2003  Retirement  and                                                                    
     Benefits   raised  the   health  care   premium  twelve                                                                    
     percent.   At the  same time they  did a  reserve study                                                                    
     and  found  that  they  had  been  accumulating  excess                                                                    
     reserves over  the previous three  years in  the amount                                                                    
     of twenty-two  million dollars.  They  then turned back                                                                    
     to ASPIB  twenty million.   In the fall of  2004 health                                                                    
     care premiums went  up less than six  percent while the                                                                    
     anticipated  rate was  over eleven  percent.   Clearly,                                                                    
     there is a problem with  the health care assumption and                                                                    
     it needs to be reexamined.                                                                                                 
                                                                                                                                
     In looking to  the future there are bright  spots.  The                                                                    
     division's campaign  to encourage members to  move from                                                                    
     name brand drugs  to generics has met  with success and                                                                    
     there  is  room  for  more savings.    There  are  over                                                                    
     fifteen  thousand members  between the  ages of  fifty-                                                                    
     five  and sixty-four  that will  reach Medicare  age in                                                                    
     the next  ten years saving the  retirement system large                                                                    
     amounts  of  money,  as Medicare  becomes  the  primary                                                                    
     insurer and  the retirement system secondary.   We have                                                                    
     yet  to take  full  advantage of  PER's  tiers two  and                                                                    
     three  and  TRS  tier  two.   Take  TRS  tier  two  for                                                                    
     example.   In  2011 the  first tier  two teachers  will                                                                    
     have twenty  years of service  and will be  eligible to                                                                    
     retire.    However,  they  need  twenty-five  years  of                                                                    
     service  to receive  medical benefits.   They  will not                                                                    
     retire without  medical benefits.   So for  five years,                                                                    
     teacher retirements will be reduced  to a trickle.  The                                                                    
     contributions  to the  system will  increase while  the                                                                    
     outlay for new retirements will  be reduced.  And ASPIB                                                                    
     has  a  long  history  of  outperforming  the  earnings                                                                    
     assumption.   Each  one percent  of excess  earnings is                                                                    
     worth over a hundred and twenty million.                                                                                   
                                                                                                                                
     12:28:59 PM                                                                                                              
                                                                                                                                
     The thrust  of this new  bill has been to  reduce costs                                                                    
     to the system.  That does  not mean that it will reduce                                                                    
     costs  to  the employer.    In  fact, this  bill  could                                                                    
     increase future  costs to the  employer.   Whenever you                                                                    
     change retirement  law you change  retirement behavior.                                                                    
     Currently, the  average age at the  start of retirement                                                                    
     is fifty-five  for teachers and fifty-seven  for public                                                                    
     employees.     The   difference   between  a   starting                                                                    
     teacher's  salary  and a  teacher  at  the top  of  the                                                                    
     salary scale  is about thirty-five thousand  dollars in                                                                    
     salary  and  benefits.   If  we  average three  hundred                                                                    
     teacher  retirements a  year  and  those three  hundred                                                                    
     teachers  can not  retire because  they have  no health                                                                    
     benefits,  it will  cost school  districts ten  million                                                                    
     dollars a year  to keep those people.   If for instance                                                                    
     teachers feel they need to  be close to Medicare age to                                                                    
     retire and  add seven years  to their career,  it would                                                                    
     cost school districts seventy million dollars a year.                                                                      
                                                                                                                                
     To summarize,  we shot  ourselves in  the foot  when we                                                                    
     dropped the rates excessively.   We stressed the system                                                                    
     when  we  had  a  flood of  early  retirements  as  the                                                                    
     employers' cost shifted  their most expensive employees                                                                    
     onto  the retirement  system.   We have  a health  care                                                                    
     assumption  that  doesn't appear  valid.    We have  an                                                                    
     investment  board  that has  historically  outperformed                                                                    
     the earnings assumption.  We  have projections that are                                                                    
     taken  from  the lowest  point  in  the cycle  and  are                                                                    
     already  outdated.    We  have yet  to  reap  the  full                                                                    
     benefit of the new tiers already  on the books.  And we                                                                    
     know this  bill will  not save any  money for  years to                                                                    
     come and  in the end  will probably cost  the employers                                                                    
     more than  they save.   This is  not a good  recipe for                                                                    
     such  a drastic  change to  the retirement  system.   I                                                                    
     would urge you to vote no on this bill.                                                                                    
                                                                                                                                
     Thank you.                                                                                                                 
                                                                                                                                
12:31:45 PM                                                                                                                   
                                                                                                                                
MR.  PATTERSON  addressed  the  previously  mentioned  fact  that                                                               
teachers  have no  social security.   He  reminded the  committee                                                               
that during  the end of  the Twenty Third Legislative  Session, a                                                               
resolution  was passed  asking the  federal government  to repeal                                                               
the social  security [Windfall  Elimination Provision  (WEP)] and                                                               
the [Government  Pension Offset (GPO)] provisions.   He indicated                                                               
that  when teachers  become vested  in the  system, they  lose 60                                                               
percent  of their  social security,  and he  noted that  teachers                                                               
currently  vest at  eight  years.   He  interpreted the  proposed                                                               
legislation to mean  that a teacher would be vested  on the first                                                               
day  of employment  and thus  would  lose 60  percent of  his/her                                                               
social security  on that first  day, "unless  you get out  of the                                                               
system   and  go   back  and   continue   your  social   security                                                               
membership."                                                                                                                    
                                                                                                                                
MR.  PATTERSON  said  he  is  concerned  that  he  has  heard  no                                                               
projections regarding when the defined  benefit plan will run out                                                               
of  money.   He  stated  that  if  the  defined benefit  plan  is                                                               
currently  underfunded  and  closed,   then  there  should  be  a                                                               
projection as  to when and how  long the money will  last and how                                                               
much the  liability will be to  the state when the  fund runs out                                                               
of money.                                                                                                                       
                                                                                                                                
12:34:02 PM                                                                                                                   
                                                                                                                                
CHAIR SEATON  reviewed that  there are  two ways  the legislature                                                               
can fund the  past service cost:  by appropriating  money, and by                                                               
raising the contribution  rates.  He said  the contribution rates                                                               
are not  based solely on  people who  are in the  defined benefit                                                               
program, but on the total employer  salary base.  He said, "We've                                                               
got  a constitutional  obligation -  a supreme  court decision  -                                                               
that says we're  going to pay the benefits.   So, for ... anybody                                                               
that's  currently in  the system,  the  benefits are  guaranteed;                                                               
they've earned those benefits and they're fixed."                                                                               
                                                                                                                                
12:36:35 PM                                                                                                                   
                                                                                                                                
MR. PATTERSON,  in response to Representative  Gardner, clarified                                                               
that the bill  he urged the committee to vote  against is HB 238.                                                               
In  response  to  a  question  from Chair  Seaton,  he  said  the                                                               
problems  exist  in  the  medical  portion of  the  system.    He                                                               
indicated that the changes that need  to be made are primarily on                                                               
the  TRS side  of the  system.   For example,  he said  he thinks                                                               
eight years  to vest  and get medical  benefits for  a short-term                                                               
employee is too generous.                                                                                                       
                                                                                                                                
12:38:44 PM                                                                                                                   
                                                                                                                                
CHAIR SEATON  said he doesn't  want anyone  to get the  idea that                                                               
"we're counting everybody as if they're  retiring at Tier I."  He                                                               
offered further details.                                                                                                        
                                                                                                                                
12:39:42 PM                                                                                                                   
                                                                                                                                
MELANIE MILLHORN, Director, Health  Benefits Section, Division of                                                               
Retirement  &  Benefits,  Department of  Revenue,  testifying  on                                                               
behalf  of  the division,  directed  attention  to [a  memorandum                                                               
included in  the committee  packet] dated  April 16,  2005, which                                                               
she sent  to Chair Seaton.   She highlighted from  the memorandum                                                               
that, as  of the most  recent actuarial valuation report  of June                                                               
30, 2004,  the accrued liability for  retiree medical obligations                                                               
to  the  state's  retirees  is  $6.1 billion.    In  response  to                                                               
questions  from Representative  Gruenberg, she  said she  doesn't                                                               
know what  percentage of [the  accrued liability]  is immediately                                                               
payable today,  but there  are no outstanding  bills.   She said,                                                               
"We  are  currently 70  percent  funded  for  PERS ...  [and]  62                                                               
[percent] is our funding ratio for TRS."                                                                                        
                                                                                                                                
12:42:48 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE GRUENBERG proffered:                                                                                             
                                                                                                                                
     As  I   understand  it,  it's  like   looking  at  your                                                                    
     mortgage:   ... you might  have a $100,000  mortgage on                                                                    
     your  $150,000  house,  but it's  not  all  due  today.                                                                    
     Isn't that a good analogy?                                                                                                 
                                                                                                                                
12:43:03 PM                                                                                                                   
                                                                                                                                
MS.  MILLHORN said  it  is, because  currently  there are  active                                                               
members who  are eligible  to retire  and may or  may not  do so.                                                               
What  is known  is that  2,025 members  retired from  all of  the                                                               
systems in 2004, and in 2003, 1,800 parties retired.                                                                            
                                                                                                                                
12:44:21 PM                                                                                                                   
                                                                                                                                
MS. MILLHORN,  complying with Representative  Gruenberg's request                                                               
to  use  his mortgage  analogy,  said,  "We  are current  on  our                                                               
payments."  She stated she does not believe that                                                                                
                                                                                                                                
12:44:30 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE GRUENBERG  asked, "Do you see  anticipated deficit                                                               
in our ability to keep current in  our bills in the next ... five                                                               
years?"                                                                                                                         
                                                                                                                                
12:44:39 PM                                                                                                                   
                                                                                                                                
MS. MILLHORN  responded that  she thinks the  State of  Alaska is                                                               
fully  capable  of paying  its  financial  obligations under  its                                                               
retirement systems.                                                                                                             
                                                                                                                                
REPRESENTATIVE GRUENBERG asked, "Then why are we worrying?"                                                                     
                                                                                                                                
MS. MILLHORN  replied, "Because  we are at  funding ratios  of 70                                                               
percent and  62 percent  when our targeted  funding ratio  is 100                                                               
percent, and we are approximately  $5.7 billion underfunded.  And                                                               
that under funding  is expected ... to increase  unless some very                                                               
key things  take place."   She detailed  that those  things would                                                               
include:   an infusion of $5.7  billion into the systems  to make                                                               
them whole;  having investment returns  higher than  the expected                                                               
return of  8.25 [percent], which  though it may be  possible, has                                                               
not  been determined  to be  probable;  and creating  a new  tier                                                               
level  as a  long-term solution  to  the existing  problem.   She                                                               
concluded that  she does not  want to  see a continuation  of the                                                               
unfunded system because of the obvious pain it causes employers.                                                                
                                                                                                                                
12:47:01 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE GRUENBERG explained  that he is trying  to look at                                                               
the issue from  the perspective of young people  trying to decide                                                               
whether  to choose  making state  service a  career, rather  than                                                               
from the point of view of the employer.                                                                                         
                                                                                                                                
12:47:43 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE LYNN asked if an  economic boon to Alaska would be                                                               
of great assistance to PERS and TRS.                                                                                            
                                                                                                                                
12:48:23 PM                                                                                                                   
                                                                                                                                
MS. MILLHORN responded  that the legislature is  the policy maker                                                               
regarding  benefits and  would have  to decide  what the  benefit                                                               
level is and whether to  provide additional relief to the current                                                               
underfunded  status.     In  other  words,   whatever  beneficial                                                               
economic  developments occur  to  benefit the  state  have to  be                                                               
translated into what  the legislature is intending to  do to deal                                                               
with the underfunded status for PERS and TRS.                                                                                   
                                                                                                                                
12:49:14 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE LYNN stated that to  do anything, the state has to                                                               
have enough money in its treasury.                                                                                              
                                                                                                                                
12:49:29 PM                                                                                                                   
                                                                                                                                
CHAIR  SEATON  stated  that  there  is  enough  money  currently,                                                               
because  there  is  $6  billion   in  the  earnings  reserve  and                                                               
approximately  $2.2   [billion]  in  the   constitutional  budget                                                               
reserve (CBR), but "I don't think we're going to do that."                                                                      
                                                                                                                                
12:50:14 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  LYNN   reiterated  that  if  the   state  becomes                                                               
wealthier, then some  portion of its money could be  used to help                                                               
resolve the problem.                                                                                                            
                                                                                                                                
12:50:36 PM                                                                                                                   
                                                                                                                                
CHAIR SEATON  said if that  were the case, the  legislature would                                                               
still have to create a bill  that would transfer general funds to                                                               
the Division  of Retirement  & Benefits in  "the kind  of numbers                                                               
we're talking about."  Regarding  the three options listed by Ms.                                                               
Millhorn, he  said there  is a  fourth option:   to  increase the                                                               
employer contribution rate to pay off  the past service cost.  He                                                               
said, "We've got  those scheduled in there right now.   I mean, I                                                               
don't  know  that we  can  live  with  them,  but those  are  the                                                               
proposed schedule at this point in  time."  He asked Ms. Millhorn                                                               
if that is correct.                                                                                                             
                                                                                                                                
12:51:15 PM                                                                                                                   
                                                                                                                                
MS. MILLHORN responded that's correct.                                                                                          
                                                                                                                                
12:51:59 PM                                                                                                                   
                                                                                                                                
MS.  MILLHORN,  in response  to  a  question from  Representative                                                               
Gardner, explained that the introduction  of a new tier would not                                                               
be an  immediate relief to  employers, but would keep  "the line"                                                               
from going  up.   Furthermore, it would  continue to  bring "that                                                               
line"  down   until,  after  approximately  2029,   the  unfunded                                                               
liability would  be paid  off and  a new  normal cost  would come                                                               
into the  system that is  predictable, stable, and  would provide                                                               
benefits  to members.    She spoke  of comments  on  a survey  of                                                               
employers  [discussed   at  a  previous  committee   meeting  and                                                               
included  in the  committee packet],  which  indicated that  "the                                                               
elements in  a new tier is  what they wanted."   She said, "Those                                                               
are  the parties  who  have to  recruit and  retain  and pay  the                                                               
dollars for  these plans; and  I think their voice  is especially                                                               
important."                                                                                                                     
                                                                                                                                
12:54:00 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE GARDNER  offered her understanding that  even if a                                                               
new  tier  were adopted  today,  [the  unfunded liability]  would                                                               
continue to  grow, because it is  not being addressed in  any way                                                               
with the new tier.                                                                                                              
                                                                                                                                
12:54:23 PM                                                                                                                   
                                                                                                                                
MS.  MILLHORN offered  her  belief that  introducing  a new  tier                                                               
wouldn't  allow the  unfunded liability  to continue  to escalate                                                               
and grow at "a larger proportion."                                                                                              
                                                                                                                                
12:54:44 PM                                                                                                                   
                                                                                                                                
CHAIR SEATON confirmed that the  new tier wouldn't solve the past                                                               
service  cost, because  it's establishing  a  new normal  service                                                               
cost and  would be constructed  in a way  that it can  acquire no                                                               
past service  cost.   He indicated  that the  benefit of  the new                                                               
tier would  be to stop the  pattern of new employees  being hired                                                               
under the  defined benefit  system, which results  in a  new past                                                               
service  cost  beyond that  which  already  exists.   He  offered                                                               
further details.                                                                                                                
                                                                                                                                
12:57:26 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE ELKINS offered an anecdote to lighten the room.                                                                  
                                                                                                                                
12:58:22 PM                                                                                                                   
                                                                                                                                
MS. MILLHORN reported that there  will be an actuarial assumption                                                               
study conducted  this fall for  PERS and  TRS, at which  time the                                                               
2000  mortality tables  will be  looked at,  as well  as all  the                                                               
other underlying  assumptions, including  the health trend.   She                                                               
said there  is some consternation  that the current  health trend                                                               
is too low.  She continued:                                                                                                     
                                                                                                                                
     It  is expected  that a  new assumption  study will  be                                                                    
     performed on  both of those systems,  and it's expected                                                                    
     that  there   will  be  additional  liabilities   as  a                                                                    
     consequence.  So, when the  valuation comes back to all                                                                    
     of you, as of June 30,  2005, every change right now --                                                                    
     The  five   percent  liability   change  -   if  that's                                                                    
     discovered  with the  mortality table  - or  [a] change                                                                    
     that  increases   the  health  trend   assumptions  ...                                                                    
     translates  into an  increase  to  [the] PERS  employer                                                                    
     rate of  3.4 percent.   If locate 5  percent additional                                                                    
     liability, that rate  is going up 3.4  percent to those                                                                    
     employers.  For TRS, it's 4.7 [percent].  ...                                                                              
                                                                                                                                
     That's  the  reality  right now,  and  that's  why  I'm                                                                    
     concerned.    ...  We  cover  54,000  lives  under  the                                                                    
     retiree medical plan right now.   We also have exposure                                                                    
     with all  categories of 90,000,  which, when  they have                                                                    
     one  dependent, that's  180,000  members.   That's  the                                                                    
     universe  of the  population that  we're going  to have                                                                    
     medical  system-paid  coverage   available  to  in  the                                                                    
     future, at  some point  in time.   That is  our defined                                                                    
     benefit plan.                                                                                                              
                                                                                                                                
REPRESENTATIVE   GRUENBERG   observed   that   there   are   only                                                               
[approximately] 600,000 people in Alaska.                                                                                       
                                                                                                                                
1:00:42 PM                                                                                                                    
                                                                                                                                
MS.  MILLHORN  directed  attention  to the  fourth  page  of  the                                                               
aforementioned    memorandum,    which   is    titled,    "PUBLIC                                                               
EMPLOYEES'/TEACHERS'  RETIREMENT  SYSTEM  HOUSE STATE  AFFAIRS  -                                                               
MEDICAL INFORMATION."   She  said the page  shows a  breakdown of                                                               
all members in  PERS and TRS.   The total number of  PERS and TRS                                                               
combined  is approximately  90,000, and  each member  brings with                                                               
them one  dependent.   She said, "Under  Tier I,  the projections                                                               
show that, between [age] 55 and  65, the cost to the system, just                                                               
for the  one member  - not  including the dependent  - is  half a                                                               
million dollars."                                                                                                               
                                                                                                                                
1:03:06 PM                                                                                                                    
                                                                                                                                
CHAIR  SEATON concluded  that means  the cost  to the  system for                                                               
each dependent would be another half million.                                                                                   
                                                                                                                                
1:03:11 PM                                                                                                                    
                                                                                                                                
MS.  MILLHORN  said the  half  million  dollars is  "a  locked-in                                                               
exposure that we have right  now."  She illustrated, for example,                                                               
that the low-end cost, just for  the Tier I member who retires at                                                               
age 55, is half a million dollars times [42,674] members.                                                                       
                                                                                                                                
1:04:03 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KELLY  reminded  the committee  that,  [regarding                                                               
projections],   the  first   thing   the   consultant  hired   by                                                               
Legislative Council said  was, "Don't be surprise if  I come back                                                               
and tell you that it's too low."                                                                                                
                                                                                                                                
1:05:24 PM                                                                                                                    
                                                                                                                                
MS.  MILLHORN,  in  response  to  questions  from  Representative                                                               
Gardner, said  the mortality table  currently being used  is from                                                               
1994.   She said Mercer  Human Resource Consulting  has indicated                                                               
that it will  bring the 2000 mortality table  into the assumption                                                               
experience study  and will be  making a recommendation  "for that                                                               
adoption."                                                                                                                      
                                                                                                                                
1:06:14 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER  asked, "Why would  it take five  years to                                                               
get  a recommendation  to adopt  data that  we know  is the  most                                                               
accurate?"                                                                                                                      
                                                                                                                                
1:06:21 PM                                                                                                                    
                                                                                                                                
MS.  MILLHORN  explained  that  the  1994  mortality  tables  are                                                               
nationally  used and  "the newest  mortality  table has  recently                                                               
been  available."    She  noted that  the  1994  mortality  table                                                               
projects forward increases  in mortality.  She said,  "I think if                                                               
you were to  check most pension systems right now,  there are not                                                               
that many  that are using  the 2000  table; it has  recently been                                                               
made  available."   She explained  that  there is  some time  lag                                                               
associated with [the adoption of  mortality tables].  In response                                                               
to a  request for clarification from  Representative Gardner, she                                                               
said  the recommendation  in 2005  would be  from the  actuary to                                                               
adopt the  2000 table, whereas,  in 2000, the  recommendation was                                                               
to adopt the 1994 table.                                                                                                        
                                                                                                                                
1:07:42 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER  asked  why  the  tables  are  not  being                                                               
adopted as soon as they are available.                                                                                          
                                                                                                                                
1:07:54 PM                                                                                                                    
                                                                                                                                
MS. MILLHORN offered her understanding  that there are experience                                                               
and assumption studies done, the last  one was done in 2002.  The                                                               
factors from  the studies  are considered,  and changes  are made                                                               
accordingly.  She indicated that  the studies are conducted every                                                               
four to five years.                                                                                                             
                                                                                                                                
1:08:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER said  she would like to find  out from the                                                               
actuaries why  the latest data isn't  just routinely incorporated                                                               
as soon  as it's available.   She said  she is also  curious what                                                               
the average  employee spends on  medical costs over  the lifetime                                                               
of employment and  retirement.  She said she is  wondering if the                                                               
system could offer up to a certain amount, for example.                                                                         
                                                                                                                                
1:09:53 PM                                                                                                                    
                                                                                                                                
MS. MILLHORN said she would look into that question.                                                                            
                                                                                                                                
1:10:26 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER  offered  further details  regarding  the                                                               
information she would like.                                                                                                     
                                                                                                                                
1:10:55 PM                                                                                                                    
                                                                                                                                
CHAIR   SEATON  recollected   that   the  legislature   "recently                                                               
increased from  1 million to 2  million ... per individual."   He                                                               
said  there is  also an  availability so  that if  there are  two                                                               
people within  the state system,  "you can get the  same coverage                                                               
under the  spouse."  He asked  Ms. Millhorn, "When was  that that                                                               
the legislature increased [the] state benefit?"                                                                                 
                                                                                                                                
1:11:17 PM                                                                                                                    
                                                                                                                                
MS. MILLHORN answered:                                                                                                          
                                                                                                                                
     That was  actually the commissioner of  [the Department                                                                    
     of] Administration.   In  1999 there  were a  number of                                                                    
     plan  changes   that  occurred  with  the   retirees  -                                                                    
     probably about eight or nine -  and that was one of the                                                                    
     changes that  took place.   And the thought  process in                                                                    
     1999 was that  there would be a  number of enhancements                                                                    
     to the  retiree medical plan,  and there were  a number                                                                    
     of corresponding  decreases to the medical  plan.  They                                                                    
     were supposed to be offset  and be neutral to the plan.                                                                    
     So, for example, the increase  for lifetime benefit was                                                                    
     ... from $1 million to $2  million ....  There was also                                                                    
     an increase in the  deductibles, ... [and] the co-share                                                                    
     portion.     There  were  a  number   of  changes  with                                                                    
     corresponding enhancements and decreases, as well.                                                                         
                                                                                                                                
     What  happened there  is ...  when  those changes  were                                                                    
     implemented, the State  of Alaska was sued  ... by [the                                                                    
     Retired Public  Employees' Association (RPEA)  and NEA-                                                                    
     Alaska], and that lawsuit  is still pending resolution.                                                                    
     It went to the Alaska  Supreme Court; it's come back to                                                                    
     the superior  court for an  analysis of  those changes.                                                                    
     And the State of Alaska  argued that the framers of the                                                                    
     constitution  could  not  possibly  have  included  the                                                                    
     medical component,  based on when the  constitution was                                                                    
     enacted, because  medical costs  were not added  to the                                                                    
     retiree  plan   until  the  1970s.     They  lost  that                                                                    
     argument.   ...    The Alaska  Supreme Court  concluded                                                                    
     that medical  benefits are part  of an  accrued benefit                                                                    
     to the retirees.                                                                                                           
                                                                                                                                
MS.  MILLHORN,  in response  to  a  question from  Representative                                                               
Lynn,  said  the  mortality  tables   that  are  constructed  are                                                               
national tables.                                                                                                                
                                                                                                                                
REPRESENTATIVE  LYNN indicated  that,  "for  these purposes,"  he                                                               
cares only about what the death rate is in Alaska.                                                                              
                                                                                                                                
1:14:47 PM                                                                                                                    
                                                                                                                                
CHAIR SEATON said the committee  would "have to get the [actuary]                                                               
to give  us the  answer on how  they apply that  to Alaska."   He                                                               
pointed out, "Not only does it  not make any sense for Alaska, it                                                               
has to be the working population of Alaska."                                                                                    
                                                                                                                                
1:15:42 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  ELKINS asked  Ms. Millhorn  if he  understood her                                                               
correctly  to say  that there  is a  "formula within  the actuary                                                               
that allows us to adjust for the  lapse of time for ... moving up                                                               
toward the new actuary."                                                                                                        
                                                                                                                                
1:16:04 PM                                                                                                                    
                                                                                                                                
MS.  MILLHORN  stated  her  understanding   that  even  when  the                                                               
mortality table  is labeled 1994, there  are built-in projections                                                               
in that table that project into the future.                                                                                     
                                                                                                                                
1:16:36 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ELKINS observed that,  in reality, the lapse isn't                                                               
as bad as  it looks.  In response to  comments from Chair Seaton,                                                               
said, "Somewhere along  the line, somebody did not  make the call                                                               
to upgrade it, and  it caused the shortfall."  He  said he is not                                                               
trying to appoint blame.                                                                                                        
                                                                                                                                
1:18:27 PM                                                                                                                    
                                                                                                                                
MS. MILLHORN said,  "Essentially, what you're doing  is you don't                                                               
have  an accurate  accounting  of your  liability  when you  have                                                               
waited 2.5 years to have a  mortality table that is more updated,                                                               
because the benefits to all your  benefit recipient - 27,000 - is                                                               
to increase those by 2.8 years."                                                                                                
                                                                                                                                
1:19:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   GRUENBERG  said   it  sounds   like  there   was                                                               
insufficient control in auditing of  the actuary and other states                                                               
are experiencing similar deficits in their systems.                                                                             
                                                                                                                                
1:19:59 PM                                                                                                                    
                                                                                                                                
MS. MILLHORN  confirmed that  most, if  not all,  defined benefit                                                               
plans are "facing some very serious struggles."                                                                                 
                                                                                                                                
1:20:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GRUENBERG  said  he  is wondering  if  there  are                                                               
common roots  of the  problems, and whether  some of  those roots                                                               
are  problems with  the  actuarial methods  that  have been  used                                                               
across the country.                                                                                                             
                                                                                                                                
1:20:28 PM                                                                                                                    
                                                                                                                                
MS.  MILLHORN  responded,  "Each  ... system  would  have  to  be                                                               
analyzed  ... independently  to  make a  determination about  the                                                               
underlying   factors   that    are   causing   their   particular                                                               
circumstance.  But  universally, what we have heard  in the media                                                               
is  that some  of those  factors that  are common  to all  of the                                                               
defined benefits  plans right  now include:   rising  health care                                                               
costs,  ...  loss  of  investment  income,  [and]  ...  actuarial                                                               
assumptions   that  have   changed   that   have  increased   our                                                               
liabilities."   She stated that  she is certain if  other defined                                                               
benefit  plans were  studied, they  would be  similarly situated.                                                               
She offered an example.                                                                                                         
                                                                                                                                
1:22:15 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GRUENBERG  noted that a  few years ago  there were                                                               
similar problems  in the private  pension system and  the federal                                                               
government stepped  in.   He questioned  whether there  should be                                                               
standardized  methodology "so  we  don't continue  to face  these                                                               
problems."                                                                                                                      
                                                                                                                                
1:22:58 PM                                                                                                                    
                                                                                                                                
MS MILLHORN  noted that  Milliman did not  find that  the state's                                                               
actuary [Mercer Human Resource  Consulting] had "made assumptions                                                               
that  were anywhere  out of  the  tolerance level  that would  be                                                               
acceptable."  She  encouraged the committee to  read the findings                                                               
included [in Milliman's report].                                                                                                
                                                                                                                                
1:24:53 PM                                                                                                                    
                                                                                                                                
MS.  MILLHORN directed  attention  to an  article  from the  Wall                                                             
Street Journal,  dated March  2005, which  talked about  the fact                                                             
that  large   employers  are  moving  away   from  "coverage  for                                                               
dependents  for  retirees."    In response  to  a  question  from                                                               
Representative Gruenberg, she confirmed that  "as of that date of                                                               
retirement,  anyone who  retired  after that  date  did not  have                                                               
dependent coverage" even though they  thought they would have it.                                                               
She said, "It may not be fair, but it is legal."                                                                                
                                                                                                                                
1:26:45 PM                                                                                                                    
                                                                                                                                
CHAIR SEATON clarified that that  is not the situation in Alaska,                                                               
because the constitution  says that accrued benefits  "have to be                                                               
followed through."                                                                                                              
                                                                                                                                
1:27:43 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GRUENBERG asked, "Does  this include dependents of                                                               
the  executives,  or   just  the  workers  who   are  covered  by                                                               
collective bargaining agreements?"                                                                                              
                                                                                                                                
1:27:53 PM                                                                                                                    
                                                                                                                                
MS. MILLHORN  responded that  she doesn't  know that  the article                                                               
speaks to that directly, but  she assumes it makes no difference.                                                               
In  response   to  a   follow-up  question   from  Representative                                                               
Gruenberg, she  offered further details regarding  the article in                                                               
the Wall Street Journal.                                                                                                      
                                                                                                                                
[HB 238 was heard and held.]                                                                                                    

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