Legislature(2005 - 2006)SENATE FINANCE 532
03/17/2005 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB46 | |
| SB141 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 46 | TELECONFERENCED | |
| = | SB 141 | ||
| + | TELECONFERENCED |
SENATE BILL NO. 141
"An Act repealing the termination date of certain provisions
that require the reporting of social security numbers and
automated data matching with financial institutions for child
support enforcement purposes; relating to social security
numbers on applications for commercial fishing licenses; and
providing for an effective date."
This was the second hearing for this bill in the Senate Finance
Committee.
Co-Chair Green noted that the sponsor's March 16, 2005 bill
presentation has received positive reviews.
Senator Stedman, the bill's sponsor, informed the Committee that he
would be addressing the information included in the "Retirement
Security Act SB 141" handout dated March 17, 2005 [copy on file].
Co-Chair Wilken asked for further information regarding the graph
titled "What went wrong?" that was included on page ten of the
March 16, 2005 SB 141 handout [copy on file]; specifically the
relevance to that graph of the language in the "Actuarial Value of
Assets" paragraph that read, "Prior to 2002, Mercer used a
'corridor method'. Beginning in 2002 they switched to a 5-year
'smoothing method'".
Page 10
[March 16, 2005 SB 141 Handout]
What went wrong?
[Line graph showing Combined PERS & TRS Actuarial Valuations
(2003): Accrued Liabilities, Actuarial Value Assets, and
Market Value Assets for the years 1994 through 2003. The data
for 2003 is as follows.
Accrued Liabilities: $16,397,262
Actuarial Value Assets* 11,439,566
Market Value Assets: 10,994,074
*Asset Market Value is adjusted by the actuary in an
effort to bring more order and predictability to the
employer contribution rate and to smooth out year to year
market fluctuations. Prior to 2002, Mercer used a
"corridor method". Beginning in 2002 they switched to a
5-year "smoothing method".]
We Have Been Understating Our Liabilities For the Past Several
Years
Senator Stedman responded that the page ten graph details the
portfolio valuations beginning with the year 1994. The State's
actuarial consultant, Mercer Actuarial Services (Mercer), utilized
"a smoothing mechanism" during the first years reflected on the
graph. This methodology amortized the portfolio's gains and losses
over a five-year period, going forward. This assisted in smoothing
out the employer contribution rate so that it would "not swing with
the gyrations of the financial markets". However, as a result of
the "extended" capital market upswing in the late 1990s, "the value
of the portfolio [increased] up above targeted growth rates quite a
bit," as reflected by the Market Value Assets line on the graph.
Continuing utilization of the smoothing method would have produced
"a substantially larger over-funding of the plan, assets to
liabilities" and, the Actuary was concerned that the Boards might
decrease "the employer contribution rate to unsustainable levels,"
with the possibly of reducing it to as low as zero. Therefore,
Mercer changed the method for calculating the gains to the
"corridor method", which established a "band" with a maximum 20-
percent deviance from the market value. The band "artificially
lowered the assets for the calculation of how far they were over-
funded" as depicted by the line titled Actuarial Value Assets. The
corridor method was utilized for several years during the "equity
expansion or bull market" of the late 1990s.
Senator Stedman stated "that one of the items of correction"
recommended by a 2001 audit was that the smoothing method with a
five-year amortization schedule, be reinstituted. This is the point
in time reflected on the graph where the Accrued Liabilities line
and the Market and Actuarial Value lines "substantially deviating
away from each other".
Senator Stedman stated that in order to make that transition "it
was necessary to bring the assets to market value". This endeavor
is depicted by the intersection of the Actuarial Value Assets and
Market Value Assets lines on the graph in the year 2002.
Senator Stedman voiced that, moving forward to the year 2003, the
Market Value Assets reflect a value of $10,994,074 and the
Actuarial Value Assets had a value of $11,439,566. "The difference
between those two numbers is just the five-percent smoothing or
five-percent amortization of that loss going forward".
Senator Stedman communicated that this year the numbers would
reflect "a gain" as the portfolio performed above the projected
8.25 percent target. That gain would be spread out over the next
five years. The Legislature "as policy makers" should review both
values, "recognizing that the Actuarial Value is just a value to
sooth the contributions". Particular attention must be paid to
Market Values, as that would reflect the portfolio's actual value.
10:17:10 AM
Page 14
[March 16, 2005 SB 141 Handout]
What went wrong?
[Bar graph showing Factors Contributing to PERS Employer Rate
Increase* (% of Cumulative 1998 to 2003 Rate Increase
Attributed to Each Factor) as follows:
Actuarial Loss (Increased Employer Rate)
Assumption Changes -34.19%
Investment Experience -11.62%**
Health Experience -11.28%
Demographic Experience -8.89%
Asset Valuation Method -4.42%**
Contri Shortfall Due to
2 Year Calculated Rate -3.37%
102% Funding Ratio
Adjustments -2.02%
Ad hoc PRPA -1.56%
System Benefit Changes -0.64%
Actuarial Gain (Decreased Employer Rate)
Salary Experience 6.47%
Past Service Amortization
Change 15.52%
*PERS Employer Rate increased 18.3% from 7.36% in 1998 to
25.63% in 2003
**Total Asset Side Impact of 16.04%
A Combination of Factors Created Our Present Situation
Senator Stedman informed that, as depicted on the page 14 chart in
the March 16th handout, changing from the smoothing method to the
corridor method and then back to the smoothing method placed
"downward pressure on the Employer Contribution Rate"; amounting to
15.5 percent of a total 18.3 percent change in the Employer
Contribution Rate between the years 1998 and 2003. "That was a
positive. It lowered the contribution requirement down".
Co-Chair Wilken understood that had the smoothing methodology been
the sole methodology utilized since 1994, the Actuarial Value
Assets line might have tracked similarly to the Market Value Assets
line on page ten's graph. He asked therefore whether the State
would have the five billion dollar shortfall today, "had the
decision been made to stay with the smoothing method and resisted
the temptation to lower the Employer Contribution Rates because of
the robust capital market".
Senator Stedman replied that the lines would have tracked "pretty
close". However, had the Corridor Method not been implemented, the
Public Employees Retirement System (PERS) and Teachers Retirement
System (TRS) Boards "would have been under more pressure to lower"
the Employer Contribution Rate, as it is doubtful that, at the
time, the Boards "realized that their value of the assets were so
under-valued; that liabilities they were looking at were not the
actual liabilities", as he believed there was some miscalculation
in the liabilities which "led to a false impression that they were
at an artificially low level…if the liabilities would have been
more accurately calculated back in the mid to late 90s it would
have tracked almost on top of the market value of the portfolio and
there would have certainly been no pressure to lower rates".
Co-Chair Wilken acknowledged the explanation. Continuing, he voiced
that the State "depends a lot on our Actuary". To that point, he
asked how much they are paid for their service.
Senator Stedman provided some "rough numbers"; approximately four
million dollars has been paid to the Actuary between the years 1997
to 2005. The highest amount, $717,000, was paid was in the year
2000. The targeted rate is $500,000 a year. The forecast for 2005
is $425,000. The "complex mathematical modeling work" that is
conducted is extensive and it is "unfortunate that it was not as
accurate" as he would have liked to have seen it in the late 1990s.
Senator Bunde, while acknowledging, "that this is a complicated
field", voiced concern that were the answers not to one's liking,
"we just change them to a different calculation until we get an
answer that we like". He recalled, "being told by the experts …
that the fund was basically over-capitalized. That we were
contributing too much". Based on that advice, the Legislature made
a decision within the past ten years to reduce its contribution,
separate from the pressure applied to further reduce the
contribution rate. He asked for confirmation that the Legislature's
action was based on "information that we were over-capitalized".
Senator Stedman understood that some withdrawals had been made;
however, this would have to be further reviewed.
Senator Bunde recalled the action occurring around 1994.
Senator Stedman acknowledged that something had occurred, but that
his research has focused on recent years' activities. He affirmed
that the action of removing assets from a plan when it is over-
funded would "exaggerate" the problem were the day to come when the
plan was under-funded.
Senator Bunde communicated that he was furthering this point
because people are saying, "that the State screwed up, why should
we have to increase our contribution". He declared that that the
idea that "the Legislature reduced their contributions in an
attempt to artificially show they were cutting the budget" is
unfounded. The Legislative action taken was in response to advice
from the PERS/TRS Boards who acted on the advice of the actuarials.
Senator Stedman clarified that in the late 1990s, both Boards
lowered the employer contribution rate below what was recommended
by the actuary. That action placed "more negative pressure on the
system". Efforts to rectify this are being furthered in this bill.
Co-Chair Green understood that "some of that changing and lowering
of rates was done without Legislative permission".
Senator Bunde believed this was the case with the latest change.
Senator Stedman calculated that a $160 to $190 million decrement
had resulted from the lowering of the Employer Contribution Rates.
While this is a lot of money, it is not, in the context of the
overall five billion dollar shortfall.
Page 8
[March 16, 2005 SB 141 Handout]
What is the [status] of Alaska's system?
[Line graph showing Historical PERS & TRS Funding Ratios for
each year from 1975 through 2003. The PERS ratio is 72.8
percent and the TRS ratio is 64.3 percent for 2003. Other
information reads:
1975 System Population
Active: 19,998
Retire: 1,734
2004 System Population
Active: 43,300
Retire: 28,279
Terminated (Vested) 6,689
Terminated (Non-Vested) 14,606]
Senator Hoffman noted that the 70-percent PERS funding ratio for
2003, as depicted on the graph on page eight of the March 16, 2005
presentation, is approximately the same level as the 1980 funding
ratio. Given the fact that economists and President George W. Bush
proclaim that the economy is turning around and markets are
rebounding, and, in light of the fact that page seven of the March
16th report indicates that 2006 would have a positive flow, he
anticipated that the 2003 level would be the lowest point going
forward. He asked whether the sponsor would agree. Continuing, he
asked whether, in addition to the changes in the Employer
Contribution Rates, there had been "any major changes" in the late
1970s or early 1980s that would have influenced the rebounding of
the Funds or was it simply the growth of State government at the
time. While he is not arguing against making management changes, he
opined that the system has worked well.
Page 7
[March 16, 2005 SB 141 presentation]
What is the [status] of Alaska's system?
[Drawing of fuel barrel labeled with data specific to the
Alaska system based on 2003 Actuarial Valuation. The barrel
lists $11.4 billion Net System Assets (Combined PERS & TRS
Actuarial Asset Values) and $16.4 billion Assets Needed to
Meet Accrued Liabilities, with a difference of $5.0 billion.
Pipes attached to the barrel are labeled as follows.
Employer Contributions: $162.1 million
Member Contributions: $167.9 million
Investment Results: $373.1 million
Admin & Investment Expenses: -$32.6 million
Benefits & Refunds Paid: -$778.3 million
PERS & TRS Have A Combined $5.0 Billion Unfunded Liability
Senator Hoffman observed that the graph on page seven of the March
16, 2005 presentation appears to be inverted, as the barrel's
contents should reflect the State's Net System Assets as two-thirds
full rather than being depicted as one-third full. The graph, as
presented "over-exaggerates" the situation.
Senator Stedman responded "it would be extremely difficult" to
replicate the funding ratio trends of the late 1970s to early 1980s
due "the magnitude" of today's experiences; specifically the number
of employees, the number of retirees, and "escalating" health care
costs issues. "From 1982 through 1990, a real strong capital
market" assisted in increasing the values; and in the late 1970s
and early 1980s, the State experienced a huge [economic] expansion.
10:30:04 AM
Senator Stedman shared that the Actuary would be providing their
most recent funding ratio report soon, and it is expected that the
funding ratios would decrease even though last year's portfolio
performed above the projected 8.25 percent target. He reminded that
the smoothing method calculations would amortize those gains over
the next five years, and therefore, even thought the funding ratios
might reflect that the Systems are "in worse shape" …"the real
affect" is that "we are in a little bit better shape than we were a
year ago". "From this point going forward" the situation is hopeful
that another decline in the financial market would not be
experienced for at least another two or three years. While the
portfolio should move toward being fully funded, this would not
occur "near as fast" as it did in the late 1970s and early 1980s.
Senator Stedman concurred that the barrel depicted on page seven
could have been presented in the reverse. This would be corrected
in the presentation going forward. The $16.4 billion total
liabilities and the $11.4 billion in net assets were prominently
displayed on page seven in order to clarify "what is full and what
is empty". He agreed with Senator Hoffman that even though the
State has a five billion dollar under-funding issue, "it is not
anywhere near the point where we have a cash flow problem meeting
our obligations" … "There is no reason for any of the retirees or
current participants to expect that their benefit levels are in
jeopardy. That's not the issue".
Senator Stedman emphasized that one purposes of SB 141 is to
restructure the PERS, TRS, and ASPIB Boards. One of the
reconstituted Board's tasks would be to determine how to address
the five billion dollar under-funding situation. "One of the
solutions is just to ignore it; another one is to pay it off; and
the other one is some combination" of the two. A multitude of
options are available, but "the overriding factor that squeezes us
on that under-funding" is employer contribution levels "relative to
the rest of their salaries … "It squeezes the schools" and
municipalities "to direct more money into current cash flow and to
benefits". "It directs current cash flow today into benefits that
were accumulated" in many cases over ten years ago. The issue of
alleviating the pressure on cash flow must be addressed.
Senator Hoffman proclaimed that this bill would provide "major"
alterations in the system, specifically the change in the Funds'
management structure. He voiced concern regarding the "magnitude of
the changes" being proposed considering that Alaska is in better
shape than other states. Changes to the systems could be pursued
after the initial focus of changing the management structure.
Changing the whole process might jeopardize "the financial security
and ability to draw employees back into State services". These
things should be taken into consideration.
10:35:28 AM
Senator Bunde voiced that there is public perception that the
Legislature "is trying to sneak this through too quickly". However,
he attested that the discussion about changing from a Defined
Benefit Plan (DBP) to a Defined Contribution Plan (DCP) has been
occurring for at least ten years.
Senator Bunde noted that in 1975, there were approximately 2,000
active employees supporting approximately 1,700 retirees in the
Retirement System; today, there are approximately 43,300 active
employees and 28,000 retirees. "The ratio is diminishing". He asked
whether the trend line might someday project one active employee
per retiree.
Senator Stedman responded that the answer is yes. In 1975 there
were 1,700 retirees, today there are 28,000 retirees, and there are
another 20,000 individuals "who have some claim on the system were
they come back in and work a few more years" and retire. This is
one of the challenges in determining whether the trends of the late
1970s and early 1980s could be replicated. "There is a substantial
waiting difference today concerning our retirees and the cash flow
demands it places on the system." This is why, he agreed "with the
conclusion drawn by the Actuary that you're not going to invest
your way out of this situation at all".
10:38:21 AM
Senator Bunde responded that were everyone who had a claim on the
Retirement System "to realize that claim, we would actually have
one retiree for every worker making contributions to the System".
That does not sound sustainable.
Senator Stedman affirmed that there are numerous Tier 1 former
State workers who worked for the State in the 1970s and 1980s, who
could be rehired and retire from the System with lifetime health
benefits. This could amount to $100 million in potential
liabilities to the State. Were 20,000 former State workers to
resume working for the State and then retire from the System, there
would be more retirees than active employees. This scenario would
occur anyway over the next 20 to 30 years as more people retire
from the System. Even though the State's Retirement System is being
challenged today, it is in a better situation that many other
states that did not pre-fund their retirement systems. The State
"should be congratulated" for having the foresight to pre-fund
health care in its retirement system. This has assisted in
addressing the situation Senator Bunde has alluded to where there
is a one employee to one retiree ratio.
Senator Olson asked how the ratio might appear in ten years.
Senator Stedman responded that this information would be provided,
as projections have been calculated for the next 25 years.
Senator Olson asked for further information regarding how the price
of North Slope crude oil affected the funding status of the System
as it relates to the trends of the PERS/TRS funding ratios depicted
on page eight's chart.
Senator Stedman responded that the two largest impacts on the trend
lines are the value placed on the Systems' liabilities and the
value of the assets in the portfolio. The upward trend occurred
during robust economic times even thought there were "times of
fluctuating oil prices". Aside from the impact that oil prices have
on the economy, the retirement portfolio is not aligned with oil
prices.
Senator Olson applauded Senator Stedman's efforts to address the
$5.5 billion liability, and stated that any delay would only
acerbate the problem.
Co-Chair Green added that "the natural inclination is for people to
turn to the State for assistance to backfill and to make good on"
future increases. There is a point at which the State" might lose
all incentive" to continue to fund that shortfall. This would
result in a drop-off in employment, as entities could not continue
to employ people when the employer contribution rate increases
upwards of 50-percent of the salary just to pay for benefits. This
is why developing a solution to the issue has become "very
important".
Senator Stedman turned the Committee's attention to the handout
dated March 17, 2005. He noted that with any major piece of
legislation, substantial modifications would be expected.
Page 3
March 17, 2005 handout
SB 141 Walk-through
Our analysis looked at both components of the problem
With the goal of developing solutions
Structural Component Financial Component
To identify the systemic To identify the causes of
Problems in PERS/TRS our liability growth
1. How do we prevent this 1. How can we stabilize future
from happening again? Employer contribution rates?
2. How can we fix the 2. How can we provide near
system and bring it back term financial relief to
Into balance? employers?
3. How can we better 3. How do we develop a long
predict and control costs solution to funding the $5.0
going forward? Billion gap?
Senator Stedman stated that the decision was made not to develop a
financial component to fix the five billion dollar shortfall in
this legislation. It was determined to be more important to deal
with the structural component in terms "of how we got here and then
after that deal with the under-funding issue because you have to
stem the hemorrhage". Efforts to address how to prevent this
situation from re-occurring would include working with the State's
actuaries and the boards to justify the values of the assets and
the liabilities to ensure that the most accurate numbers are being
presented. Efforts to address fixing the system would involve a
Board restructuring in that one entity would be involved in
addressing both the assets and liabilities so that no "buck
passing" would occur. Efforts to predict and control costs going
forward would be addressed as the bill progresses.
Senator Stedman stated that the financial side of the equation must
address stabilizing the employer contribution rates, and if
possible "lower them because of the squeeze-out affect it has on
today's cash flow to pay yesterday's benefits for the employees has
a lot of negative impacts all across the State". The issue of
providing near term financial relief to employers would be
addressed after this legislation is implemented, as the new Board
would address the shortfall issue and present recommendations
regarding how to address them. That would be an entirely separate
process.
10:46:22 AM
Senator Stedman stressed that the five billion dollar shortfall is
an obligation under the Employers Defined Benefit Plan. "It is not
the employees' problem per sec, they did not create this issue".
The Normal Cost factor is the funding that an employee contributes
today for benefits accumulated for the future. There is an
abundance of accumulated Past Service benefits that must be paid
for today. This is an area that the new Board would be addressing.
The question is what would be a "reasonable" employer/employee
contribution split under today's economic conditions with rising
health care trends. Currently PERS employers pay 66-percent and the
employees pay 34-percent. The bill includes a provision that the
contribution levels be reviewed in order to determine whether
modifications to the splits would be necessary. This issue should
not be ignored.
page 4
March 17, 2005 handout
We considered the Administration's 2004 Tier Committee work
during our analysis and in our solutions
Tier Committee Data Reviewed:
· Tier Alternative Recommendations
· Employer survey
· Member focus group results
· Benchmarking
· Benefit levels
· Demographic projections
· Implications of Medicare changes
· Trends, issues and alternative
· Cost analysis and projections
10:49:04 AM
Senator Stedman reminded that a year earlier, the Senate Finance
Committee had requested the PERS/TRS Boards to review Tier
structures and alternatives. The Boards' Tier Review subcommittee
had conducted a vast amount of work as depicted on page four. The
Boards had not, however, adopted either of the two tier
alternatives that had been recommended: one being a combination of
DBP and DCP and the other a pure DCP.
Senator Stedman stated that upon review of the Tier Review
subcommittee's report, the pure DCP plan was furthered in this
legislation.
Senator Bunde shared that "a surprising number of people" have
communicated that it increasingly difficult to hire talented people
to work for the State. The concern is that were benefits changed,
it would further acerbate this situation.
Senator Stedman responded that this concern was reviewed with the
determination being that this might or might not be a factor,
determining on how the benefit package was structured. A tier
structure detrimental to retention and hiring should not be
developed. The contribution level issue would be addressed by the
Committee. "A blanket statement that a defined contribution plan is
at a disadvantage to defined benefits is just not true. It depends
on the structure of both plans". A tier must be developed that
would be comparable to Tier III. Were both salary and benefits
levels reduced to the point where the State was "disadvantaged in
the market place" then "the organization would be hurt". It is
necessary that the employer be provided built-in flexibility so
that in the event that were to occur, they could respond.
Senator Olson asked regarding the stabilizing employer contribution
rate component identified on page three; specifically what
assurances would be made to protect the employee. It would be
unacceptable to place this burden on the employee when it was the
result of poor investment strategy on the part of the Boards.
Senator Stedman replied that in his opinion "it is not the
obligation of the employee to fund that five billion dollar
shortfall, it is an obligation of the employer". "This is part of
the risk inherent in a Defined Benefit Plan". Were inadequate
contributions made and were there to be an inadequate investment
performance, it remains the employers' responsibility to meet the
obligations. "This is an important point: the employee", either
current or retired, is not at risk of loosing their benefits. Were
any employee contribution adjustment to be made, it would not be
utilized to address the five billion dollar under-funded liability
from the past. These are two separate issues: the benefits being
accumulated today for today's service as compared to the benefits
that were accumulated in the past.
10:54:44 AM
page 5
March 17, 2005 handout
SB 141 Walk-through
Defined Benefit Plan Defined Contribution Plan
*Benefit level is fixed *Contribution level is fixed
*Benefit is based on a *Benefit is based on the amount
*Formula involving salary, of money invested and earned in
years of service, age, etc employee's account
*Benefit is paid for life *Benefit is paid until account
and to qualified runs out
survivors *Future benefit payments are
*Future benefit payments driven by investment performance
are NOT affected by the
plans funding level
Senator Stedman explained that this page compares a DBP to a DCP. A
DCP would resemble a 401(K) plan whose contributions would be
invested in pre-determined investment portfolio options from which
an employee could choose.
page 6
March 17, 2005 handout
SB 141 Walk-through
Defined Benefit Plan Defined Contribution Plan
Advantages: Advantages:
*Pooling of longevity *Portability
risk *Self-directed investing
*Guaranteed income stream *Contribution equity among
*System favors longer- employees
service employees *Predictability
*Stable costs
*Shifting of investment risk
*No long-term administrative
costs
Challenges: Challenges:
*Employer bears *Workforce management
investment risk *Employee education
*Estimation of Liabilities *Accurate retirement planning
*Rising health costs
*Unpredictable or
uncontrollable costs
Senator Stedman reviewed the advantages and disadvantages of each
plan.
10:59:58 AM
Senator Hoffman stated that since one of DBP's listed challenges is
that the employer bears the investment risk, it should be listed
under the DCP's challenges that the employee bears that investment
risk.
Senator Stedman agreed and noted that this was the intent of the
"Shifting of investment risk" under the Advantages component of the
DCP. The information would be changed to better reflect that risk
shift.
page 7
March 17, 2005 handout
SB 141 Walk-through
Current PERS Current PERS Senate Bill
Tier I/II & Tier [III] & 141 DC Plan
TRS Tier 1 TRS Tier II
DB Plan DB Plan .
PERS Employee 6.75% other 6.75% or 7.5% 8% all
Contribution 7.5% Police/ Police/Fire members
Rate Fire 7.5% Police/Fire voluntary
9.6% school 9.6% school % up to
district district IRA limits
TRS Employee 8.65 8.65% 8% all
Contribution members
Rate
Vesting 5 years PERS 5 years PERS Immediate
8 year TRS 8 year TRS for employee
contributions
Fully vested
in employer
contributions
after 5 years
Retirement 55 normal- 60 normal- Any age
Age 50 early 55 early
30 years "all 30 years "all
others" others"
20 Police/Fire 20 Police/Fire
20 Teachers 20 Teachers
PERS and TRS 2% up to 2.5% 2% up to 2.5% 11.5% per
Benefit multiplier multiplier year to DC
Formula per year DB per year DB account +
Multiplier x Multiplier x investment
years of years of earnings.
service service HRA account
x high 3 years x high 3 (TRS) accumulated
avg salary years or 5(PERS) over working
years avg salary lifetime
Senator Stedman pointed out that the third column's heading should
correctly identify Tier III rather than Tier II/III. He noted that
page eight provides the breakout details for the medical and normal
costs components for these components.
Senator Stedman referred the Committee to a separate five-page
March 17, 2005 handout titled "SB 141 Walkthrough" [copy on file].
That material includes Section numbers and pages numbers which
correspond to language in the bill. The "heart" of the proposed
benefit tier is the Defined Contribution Plan.
SB 141 Walkthrough
Defined Contribution (DC) Plan Elements
*Required Contributions
· Employee: 8.0% of compensation, deducted pre-tax by
employer. Sec.14.25.340(pg 13), Sec.39.35.730(pg 64).
· Employer: 3.5% of employee compensation. Sec.14.25.350(pg
14), Sec.39.35.740(pg 70)
· Total individual account contributions: 11.5%
*Optional Contributions
· A member may elect to contribute additional earning not
to exceed the limits established by the Internal Revenue
Code. Sec. 14.25.340(b)(pg 13), Sec. 39.35.730(c) (pg 69)
Senator Stedman reviewed the components of the retirement benefits.
The medical benefits component would be addressed separately.
Outlining the various components in this manner would allow for
them to be addressed during discussions with the Board.
*Vesting Sec. 14.25.390(pg 16), Sec. 39.35.790(pg 72)
· All members of the DC plan are immediately vested in
their own contribution and related earnings.
· Members are gradually vested in the employer
contributions and related earning on the following
schedule.
= 25% after two years
= 50% after three years
= 75% after four years
= 100% after five years
*Rollovers Sec. 14.35.360(pg 14), Sec. 39.35.760(pg 70)
· Employees can take their individual account with them
when they leave employment.
· Employees can "roll" in other qualified funds when they
are hired.
Senator Stedman noted that were the employee to terminate service
at any time, their employee contributions would accompany them at
full value. Were the employee to leave State employment after five
years, they would be entitled to 100 percent of employer
contributions. These employer contributions would be portable in
that the employee could roll them into their individual IRA or to
subsequent employers' 401(k) plans. The portability component is
beneficial as the national employment trend is that people would
"have multiple careers during their working lifetime". The national
trend is toward making retirement plans portable from one job to
another.
11:05:10 AM
Investments of Accounts Sec. 14.25.400(pg 16), Sec.
39.35.800(pg 72)
· The Alaska Retirement Management Board will provide a
range of investment options.
· Participants direct the investment of their funds.
Distribution of Accounts
· Employee may elect a distribution of funds upon
termination of employment, after 60 days. Sec.
14.25.410(pg 17) - Sec. 14.25.430(pg 19), Sec.
39.35.810(pg 73)-Sec. 39.35.810(b) (pg 73)
· Subject to IRC regulations.
· May receive funds prior to 60 days for financial
hardship. Sec. 14.25.410(b) (pg 17), Sec. 39.35.810(b)
(pg 73)
Senator Stedman stated that the investment options would be similar
to those offered in the Supplemental Benefits System (SBS). The
employees "would bear the risks and the rewards". The employee
could remove their funds from the system 60 days after terminating
employment.
11:06:04 AM
Senator Bunde asked regarding the frequency of the retirement
disbursement.
Senator Stedman stated that this would be developed as the language
progresses. However, the list of available options would include
the mandatory age 70.5 distribution. "Most people would take this
plan and roll it into their IRAs upon separation of service" or the
employer would have "a whole range" of options through which to
address monies left in the System.
Senator Bunde shared a constituent's question regarding whether
there was a safety net through which to address the needs of
someone who upon retirement, might have invested poorly or expended
all their funds.
Senator Stedman responded that the investment options provided by
the Alaska Retirement Board would have standard selections.
However, were someone to retire, the employer would not be held
responsible at that point forward. The employer would provide a
multitude of investment information.
11:09:23 AM
Medical Program Elements
· Required Contribution by Employer Sec. 14.25.480(pg 24),
Sec. 39.35.870 (pg 80)
· 3.75% of employee compensation.
· Contribution is made to group health and life insurance
trust fund to be used for employer share of retiree's
monthly medical premiums.
TRACI CARPENTER, Staff to Co-Chair Green, reviewed the medical
components of the bill, which she attested define "where the
concept of retirement really comes" into play in the DCP. The
contribution rate of the employer would be set at 3.75 percent, as
recommended by Mercer. This rate "is considerably lower than the
current nine percent".
Retirement Sec. 14.25.470 (pg 24), Sec. 39.35.870 (pg 80)
· Retirement from the DC plan is required to obtain access
to major medical insurance and the health reimbursement
arrangement (HRA)
· Access means that an eligible person may not be denied
insurance coverage except for failure to pay the required
premium.
· A member is eligible to retire if they have reached:
= normal retirement age of 65 and has minimum of 10
years; or
= has 25 years of service for peace officer/firefighter;
or
= has 30 years of service for all others; and
= has been an active member for at least a year prior to
retirement.
11:13:43 AM
Ms. Carpenter read the retirement components and stated that a
person must be: employed for a minimum of one year before they
could apply for retirement and must meet the age and service
requirements.
Major Medical Insurance Sec. 14.25.480 (pg 24), Sec.
39.354.880(pg 80)
· A member who meets the retirement provisions is eligible to
enroll in the retiree major medical insurance plan.
= Insurance coverage includes the spouse and dependent
children of the retiree.
· The surviving spouse of a retiree who was enrolled in the
retiree major medical insurance plan is also eligible to
enroll.
= Insurance coverage includes the dependent children of
the surviving spouse.
· Retirees who meet the required years of service, but who
are less than Medicare age eligible (presently 65), must
pay the full premium to receive coverage.
· Retirees who are Medicare age eligible will pay only the
portion of monthly medical premiums depending on years of
service:
+ 10-14 years = 30%
+ 15-19 years = 25%
+ 20-24 years = 20%
+ 25-29 years = 15%
+ 30+ years = 10%
· Only one premium per retiree and family.
· Different premiums developed for single retirees and
retirees with spouse and/or children.
Ms. Carpenter reviewed the Major Medical Insurance component.
Health Reimbursement Arrangement (HRA) Sec. 39.30.300(pg 47)
Required Contributions
= Employer contributes an annual amount per employee to the
health insurance trust fund.
= Calculation is 1% of average annual employer group
compensation, to a maximum of $500.
= Contribution is recorded in both an individual employee
record of account and an employer record.
= Interest is posted to individual records annually, the rate
determined by the ARMB.
= Contributions and interest accumulate over working lifetime
of employees.
Employer Fund Sec. 39.30.350(pg 48)
= The HRA Trust is an employer owned fund.
= Individual accounts of record are maintained for five years
if an employee terminates without retiring.
= Terminated employee accounts revert to the employer unless
the individual returns to work within the five-year period.
= A person who returns to work within the five-year period is
attributed the account balance recorded in their name on the
date of termination.
= Employers may use surplus funds held in the trust to credit
individual employee records with the annual contributions owed
by the employer.
Reimbursements
= Who is eligible? Sec. 39.30.390(pg 48)
+ Members who retire directly from the system plus their
spouse and dependent children
+ Spouse and dependent children are still eligible if the
retiree dies
+ Dependent children are still eligible if both retiree
and spouse die.
= Reimbursements made for qualified medical expenses under (RC
213(d), including medical premium payments. Sec. 39.30.400 (pg
49)
= Total reimbursements are limited to an individual's recorded
amount.
= No set limits other than exhaustion of account balance.
Ms. Carpenter stated that the "HRA is a new feature". The idea is
to have a separate fund to which the employer contributes a
specified dollar amount for each employee. The employer group
compensation method would "ensure equity" for each employer as the
amount is based on a groups' average salary. The fund would be an
employer owned fund in that employees do not contribute to it.
Funds that revert to the Trust could be utilized by the employer to
prepay future contributions.
[Note: Senator Bunde assumed chair of the meeting.]
Senator Bunde asked Senator Stedman to, when appropriate identify
the component of the bill that would provide flexibility to address
such things as recruiting challenges.
Senator Hoffman referenced earlier comment that one of the good
elements of the State's current medical program is that it is
prepaid. To that point, he asked how this plan would compare.
Senator Stedman opined that an employee would prefer to have a
defined benefit plan for health care in that after a specified
number of years, medical benefits "are provided for life with no
risk sharing of the premium cost increases into the future".
However, from an employer's standpoint, this would not be preferred
due to the risk level associated with it and the difficulty the
employer has in calculating future years' levels of liability. The
DCP being proposed would provide that an employee who separates
from the State early would be required to pay some portion of their
own health insurance premiums until they reach the age of 65.
11:20:15 AM
Senator Stedman stated, therefore, that the answer to the question
would depend on whether the employer or the employee is answering
it. There is a trend to move away from DBP "due to the inherent
risk level for the employer".
[Note: Co-Chair Green resumed chair.]
11:21:32 AM
Senator Stedman responded to Senator Bunde's question regarding the
flexibility that could be provided to address recruitment
difficulties by stating that one of the disadvantages recognized by
employers in the current system is that the fact that it is
embedded in the State's Constitution does not provide a lot of
flexibility were adverse conditions to arise. Under the new tier
proposal there would be flexibility in that the employer
contribution rate levels could be discussed. Some adjustments could
be made to the rates being proposed. Were the State to face
recruitment or retention challenges in the future, the ability to
revisit the rate would be provided. "It is very difficult to take
something away, but it is very easy to increase it".
Senator Bunde understood therefore that "the current systems that
are inscribed in Constitution are inflexible by definition". This
new system would not be embedded in the Constitution and would
therefore have some flexibility.
Changes to Existing Retirement System
Consolidation of Boards
· Eliminates:
= Public Employees' Retirement System Board
= Teachers' Retirement System Board.
= Alaska State Pension Investment Board.
· Creates new Alaska Retirement Management Board (ARM
Board) Sec. 37.10.210 (pg 36)
= 9 trustees appointed by the Governor
+ Commissioner of Administration
+ Commissioner of Revenue
+ 3 Alaska residents who do not participate in the
retirement system
+ 1 finance officer of a political subdivision
+ 1 finance officer of a school district
+ 1 PERS member (active or retired)
+ 1 TRS member (active or retired)
= All trustees must have recognized competence in one or
more fields of investment management, finance, banking,
economics, accounting, pension administration, or
actuarial analysis
= Terms
+ Staggered three years
+ Limited to three consecutive terms with a required
one-year break
Senator Stedman emphasized that the three current boards, the PERS,
TRS, and ASPIB Boards, would be consolidated into one Board, the
Alaska Retirement Management (ARM) Board, that would consist of
nine members.
11:25:21 AM
Authority and Responsibility of ARM Board Sec. 37.10.220 (pg
38), Sec. 39.30.155 (pg 46)
· Manage the assets of the defined benefits trust
fund to meet pension liabilities.
· Annual actuarial valuation of system plans,
coordinating with the retirement system
administrator.
· Analysis of actuarial assumptions experience:
= Health costs assumptions annually.
= All other assumptions not less than every four
years.
· Audit of actuary not less than every four years.
· Rate setting:
= Employer contribution rates, including "normal
cost" and "past service cost".
= Employer contribution rates to the extent that the
normal cost rate increases so that 50 percent
would be higher than the current rates set in
statute.
= Interest rates credited to individual employee
accounts.
= Interest rates credited to employee HRA account
records.
· Provide a range of investment options for all employee-
directed accounts.
Senator Stedman stated that the goal is to manage the assets of the
DBP Trust to meet pension liabilities. Both should be considered
when decisions are being made. Mismatching these components has
resulted in today's situation. The specified actuarial and
assumption reviews would assist in keeping the system "on track".
The rate setting components for Normal Cost and Past service Costs,
which are two separate items, must be considered in rate setting.
This bill would propose, for a discussion starting point, the
Normal Service Cost being split approximately 50/50 between the
employer and the employee. Currently that split is approximately 66
percent employer and 34 percent employee. This would increase the
employee contribution. After discussion, the decision might be to
not increase the employee percentage.
11:27:50 AM
Other Duties of the former PERS and TRS Boards Transferred
Sec. 39.35.005(pg 53)
· To the Commissioner of Administration:
= Adoption of regulations governing the retirement
systems
= Requests for a waiver of any adjustment made to the
retirement system accounts due to a change or error
in contributions or benefit computations.
· To the Office of Administrative Hearings: Sec. 109(pg 90)
=Adjudication of appeals related to decisions of the
retirement system administrator.
=Adjudication of appeals related to the denial of a
waiver for repayment of overpayments.
Senator Stedman stated that due to the fact that this legislation
would eliminate the PERS and TRS Boards, other duties of the Boards
must be re-directed.
11:30:49 AM
Senator Stedman noted that as organized labor groups weight in on
the proposals, adjustments to such things as the contribution rates
might need addressing. He reiterated that a "clear distinction must
be made" between the Normal Service Cost and the Past Service
Costs.
Senator Stedman stated that the Committee has been provided a
handout titled "Alaska Retirement System Boards" [copy on file]
dated March 17th, 2005 that provides comparisons between the
current systems and the proposed system.
Senator Stedman stated that this concludes his remarks for the day.
The hope is to provide the information to the public "in order to
facilitate a robust discussion of the pros and cons" of the
proposal. Amendments could be presented to further the development
of "a new tier proposal that is fair and comprehensive not only to
the employees, but to the State and to the citizens of the State".
Senator Hoffman asked whether the Past Service Cost obligation,
which "would be calculated at the time of transition" at
approximately $5.5 billion, would have an interest rate attached to
it and whether a timeframe had been established in which to address
that obligation.
Senator Stedman responded that the Past Service Cost's $5.5 billion
unfunded liability "would not change with the creation of a new
tier" and would remain with the structure associated with Tiers I,
II and III. Existing employees would continue under the terms of
the existing tiers with the exception being that new employees
would be provided the option of transferring to the new tier if
they so desired. New employees would be subject to the new tier.
11:33:49 AM
Senator Hoffman commented that, at some point, the employer must
address the Past Service Cost obligation. Therefore, he asked how
that obligation would be addressed.
Senator Stedman, expressing that Senator Hoffman is making a "good
point", stated that the proposed 50/50 employer/employee
contribution spilt would only apply to the Normal Service Cost.
"The Past Service Cost is a separate entity not related to any
50/50 split". He understood that there would be no legal obligation
on the part of current and retired employees "to go back and help
the State with the Past Service Cost. That is a liability of the
State". The 50/50 split pertaining to the Normal Service Cost is
included "to recognize that there has been large changes in the
cost of health care and benefits over the last couple of decades".
It was considered "prudent" for the State to include this ratio
split as a point of discussion. The question is whether the current
66/34 employer/employee contribution "split is fair" or should it
be changed to the proposed 50/50 split or some point in between.
The five billion dollar under-funding liability does relate to the
Past Service Cost.
Senator Hoffman acknowledged that the liability does relate to the
Past Service Cost, but stated that "at some point" that liability
must be paid off. In that regard, he asked whether a plan has been
developed under the current three tiers whereby that obligation
would be paid off or whether "that's the life of the retirement and
once those people retire then its magically paid off at that
point".
Senator Stedman responded that the Committee could issue a decision
that the debt would never be paid off; that some portion of it
would be paid; or that it could be dealt with in ten, 15 or 20
years. This discussion should be addressed after the new Board is
established and had an opportunity to review the situation and make
recommendations.
Senator Hoffman understood therefore that the employer contribution
rate components included in this legislation are applicable to the
Normal Cost Rate. The Board would address the Past Service Cost
rates. The State would continue to be obligated to fund the Past
Service Cost liability. "That bill is going to come due someday".
Senator Stedman replied that the Past Service Cost debt was not
addressed in this bill "due to the complexity of the issue". "A
clear distinction" between the Normal Cost Rate issues and the Past
Service Cost rate issues must be defined as, it would be easy for
people to incorrectly assume that an employee payment structure
would be implemented in order to address the debt.
11:38:39 AM
Senator Stedman opined that separating these issues would allow for
an orderly analysis of the five billion dollar debt to be
conducted.
Senator Hoffman stated that the five billion dollar debt is the
reason "we are here". Making "this monumental change without
addressing the reason why "we are here is not fulfilling our
obligation".
Senator Stedman expressed that the five billion dollar debt is the
result of systemic problems in the system. The systemic problems
must be identified and fixed before the resulting five billion
dollar debt issue could be addressed. Were money allocated to
address the debt without fixing whatever created the debt, the
situation might "reoccur in the future".
11:40:48 AM
Senator Stedman stressed that this "is why this is a two-step
process". It is hopeful that this legislation would be adopted and
then the five billion dollar debt could be addressed.
Ms. Carpenter noted that this legislation would not change the
manner in which the employer contribution rates are calculated.
Currently the Actuary calculates the unfunded liability, which is
the Past Service Rate. It is amortized over 25 years with an
approximate four-percent interest rate, which the employer is
required to pay. The FY 06 Employer Contribution rates are
projected to be 25.62 percent for PERS and 38.85 percent for TRS.
These escalating employer contribution rate levels for benefits are
"the big problem" that employers are facing each year.
Co-Chair Green asked whether a continual increase in the rates is
projected.
Ms. Carpenter responded that, for the next 25 years, the PERS rate
is projected to increase to the 30-percent range and TRS rate is
projected to increase to approximately 50-percent.
Co-Chair Green concluded therefore, that not doing anything would
contribute to the continuance of the problem. Changing the system
would at least stop the trend established by the current system.
Something must change in the system to address the problem.
Senator Olson found it "inconceivable that the idea of not paying
for the liability would even be on the radar screen".
Senator Stedman responded that, in his opinion, "it is not a viable
option". A variety of options could be presented, to include paying
the debt if the State had the money or "to ignore it and let the
plan run". Neither of those options is acceptable. The answer might
be somewhere in the middle. Some plan must be developed through
which to alleviate the burden placed on the employers. Otherwise,
its continuance would be detrimental to the economy of the State.
"It shifts too much cash flow into employee benefits that were
accumulated"
11:44:52 AM
Senator Stedman concluded that the solution would be somewhere in
the middle. Ignoring the problem "is not the solution and we don't
have the ability to write a check and fund it". Even were money
available, the root of the problem must be addressed. Mechanisms
could then be developed through which to address the debt.
Senator Olson declared that efforts must be taken "to insure that
the employee does not come out on the short side".
The bill was HELD in Committee.
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