Legislature(2005 - 2006)SENATE FINANCE 532
03/29/2005 04:30 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB141 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 141 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE BILL NO. 141
"An Act relating to the teachers' and public employees'
retirement systems and creating defined contribution and
health reimbursement plans for members of the teachers'
retirement system and the public employees' retirement system
who are first hired after July 1, 2005; establishing the
Alaska Retirement Management Board to replace the Alaska State
Pension Investment Board, the Alaska Teachers' Retirement
Board, and the Public Employees' Retirement Board; adding
appeals of the decisions of the administrator of the teachers'
and public employees' retirement systems to the jurisdiction
of the office of administrative hearings; and providing for an
effective date."
This was the fifth hearing for this bill in the Senate Finance
Committee.
Co-Chair Green noted the discussion at this hearing would focus on
the normal cost rate and a proposal to change the employee
contribution rate.
Senator Stedman gave a presentation referencing a handout titled,
"Retirement Security Act, SB 141, Discussion Topic: Contribution
Rate of Existing Employees, March 29, 2005" [copy on file.]
4:46:50 PM
Page 3
Contribution Rate Setting Process
· Each year, the actuary computes the Normal Cost Rate for
the next contribution year
· The Normal Cost Rate is simply the percent of payroll
required to pay for the benefits expected to be earned by
all members during the coming contribution year
· The process runs two fiscal years in advance - for
example, the FY 07 Normal Cost Rate was estimated this
month by the State's actuary
FY 07 Normal Costs:
PERS
Medical cost component 8.86%
Pension component 11.27%
Normal Cost Rate 20.13%
TRS
Medical cost component 8.75%
Pension component 13.69%
Normal Cost Rate 22.44%
Senator Stedman defined the normal cost rate as the percentage of
members' payroll required to pay the benefit for all members during
a benefit year.
4:48:04 PM
Page 4
Contribution Rate Setting Process
· If our economic, demographic, and financial projects were
always correct - the annually reviewed Normal Cost Rate
would fully fund the retirement system
· Unfortunately, those projects can never be 100% accurate
· If too much was contributed, the system is overfunded; if
too little, it is underfunded
· The actuary amortizes the unfunded amount over 25 years
and computes a Past Service Rate
· The Past Service Rate is the additional percent of
payroll required to begin paying off the unfunded
liability
Senator Stedman stated that if projects were correct, the normal
cost rate would fully fund the plan. However, the economy and other
factors change the actual required need.
Senator Stedman stressed the substantially different rate between
the current normal cost rate of today and the past service rate,
the rate that is used to fund benefits accrued in the past.
4:49:30 PM
Page 5
Contribution Rate Setting Process
· Once the Normal Cost Rate and the Past Service Rate are
known, the employer's total contribution rate is
calculated as follows:
FY 07 Contribution Rates
PERS
Normal Cost Rate 20.13%
Less
Employee Contribution* -6.81%
Equals
Employer Normal Cost 13.32%
Plus
Past Service Rate 14.87%
Total
Employer Contribution 28.19%
TRS
Normal Cost Rate 22.44%
Less
Employee Contribution* -8.68%
Equals
Employer Normal Cost 13.76%
Plus
Past Service Rate 28.02%
Total
Employer Contribution 41.78%
*Employee Contribution Rate shown is the average rate for
all members of the systems. Actual rates vary by employee
class and are 6.75%, 7.5 % or 9.6% for PERS or 9.65% for
TRS
Senator Stedman noted these figures are averaged.
Senator Stedman remarked that the employer must not only pay the
current benefit costs but also the benefits that had been accrued
previously.
Senator Stedman stated that the past service rate is larger for
both the Public Employees Retirement System (PERS) and the Teachers
Retirement System (TRS) than the employer normal cost. The biggest
challenge is "dealing with history".
Senator Bunde pointed out that the normal cost rate and past
service rate for TRS is somewhat higher than that for TRS. He asked
if this is due to economy of scale and why the groups differ.
Senator Stedman responded that the plans differ in benefit
structures and contribution amounts. He would detail this later in
the presentation.
4:52:57 PM
Page 6
Weakness of the Process
· The Employee Contribution rate is set in statute, so any
increase in the Normal Cost Rate is borne entirely by the
employer [Graph from Page 6 is shown with Employee
Contribution and Employer Contribution amounts
highlighted]
· These are the actuary's recommended rates…currently, the
PERS and TRS boards may adopt different rates
· When the boards adopt lower rates, our unfunded liability
increases
Senator Stedman emphasized that the employer contribution rate is
the amount recommended by the actuarial. When the boards adopt
lower rates, the liability of the system would expand.
4:54:19 PM
Page 7
SB 141 Addresses these Weaknesses
1. Sets the employee's contribution to the greater of:
· Current statutory rate or
· 1/2 of the Normal Cost Rate
· With the additional provisions that the increase may not
exceed 0.50% annually (Current SB 141 language sets the
maximum annual increase at 5.0%, but we are now proposing
that be reduced to 0.50%
2. Requires the new Alaska Retirement Management Board (ARMB)
to adopt a contribution rate that is no less than the
actuarially computed Employer Normal Cost Rate
Senator Stedman outlined this information. He emphasized the intent
that the employee increase would not exceed 50 basis points
annually. He stressed that the employee increases would only be for
the normal service cost and not for the past service rate. This
would equalize employer and employee contributions somewhat.
4:55:52 PM
Page 8
Historical & Projected Total Normal Cost Rate
[Line graph showing the TRS Total Normal Cost and the PERS
Total Normal Cost for the years 1983 through 2031.]
FY 83 - FY 07
PERS
Mean: 17.82%
StdDev: 1.17%
Range: 16.05% - Low
20.14% - High
TRS
Mean: 19.22%
StdDev: 1.98%
Range: 16.35% - Low
23.47% - High
FY 08 - FY 32
PERS
Mean: 19.52%
Range: 19.21% - Low
19.92% - High
TRS
Mean: 23.13%
Range: 21.71% - Low
24.92% - High
Senator Stedman qualified the projections for the years following
2007 are estimates. He pointed out that the rates change from year
to year due to volatility.
4:56:26 PM
Page 9
Employers are Paying the Majority of the Normal Cost
FY 07 Normal Cost Rates
Total Normal Cost
PERS 20.13%
Share 100%
TRS 22.44%
Share 100%
Employee Cost*
PERS 6.81%
Share 33.8%
TRS 8.68%
Share 38.7%
Employer Cost
PERS 13.32%
Share 66.2%
TRS 13.76%
Share 61.3%
*Employee Contribution Rate shown is the average rate for
all members of the systems. Actual rates vary by employee
class and are 6.75%, 7.5% or 9.6% for PERS and 8.65% or
9.65% for TRS
Currently, increases in the Normal Cost are borne entirely by
the employer
Senator Stedman compared the percentage of the burden paid by the
employer compared to the employee. The policy discussion is whether
to maintain this practice or whether the rate should be "floated"
between the employee and employer split. This legislation proposes
an equal share for each the employer and the employee.
4:57:40 PM
Page 10
Employee Contributions Rates Haven't Increased Since 1987 in
PERS and 1991 in TRS
Statutory Changes in Employee Contribution Rates
PERS
Before 1/1/87
Police/Fire 5.0%
All Others 4.25%
School Districts* 4.25
Since 1/1/87
Police/Fire 7.5%
All Others 6.75%
School Districts* 6.75
Since 7/1/99
Police/Fire 7.5%
All Others 6.75%
School Districts* 9.6%
FY 07 Average 6.81%
TRS
Before 1/1/91
Most Members 7.0%
Supplemental Plan** 8.65%
Since 1/1/91
Most Members 8.0%
Supplemental Plan** 9.65%
FY 07 Average 8.68%
*Beginning in 7/1/99, school district PERS members can elect
the higher 9.6% contribution rate and receive a full year of
service credit for 9 months vs. contributing 6.75% for 12
months
**TRS Members who joined the system before 7/1/82 and elected
to participate in the supplemental contributions provision are
required to contribute an additional 1% of their salaries
Senator Stedman pointed out that the normal employee cost rate has
changed. He reiterated that the proposed normal cost rate increase
would not include the past cost rate. This increase would address
only the cost of benefits accrued "today".
Senator Bunde relayed that he received a publication from the
National Education Association (NEA) and was unsure if information
it contained was a distortion due to lack of knowledge or
intentional. He indicated the publication asserts that this
legislation would "take money from all current employees checks to
help pay off the multi-billion dollar shortfall." He had understood
that no employee contribution would go toward past service rates.
Senator Stedman affirmed. He could not speak to the intent of the
misstatement.
Senator Bunde gave another reference in the NEA publication
charging, "this legislation and other legislation like it, would
reduce school district contributions far below current levels."
Senator Stedman remarked this was also distorted and inaccurate
information.
4:59:50 PM
Page 11
Constitution of the State of Alaska
Article XII - Section 7
Retirement Systems. Membership in employee retirement
systems of the State or its political subdivisions shall
constitute a contractual relationship. Accrued benefits
of these systems shall not be diminished or impaired.
Normal Cost Rate is the cost of benefits expected to be
earned during the coming contribution year
· We contend that employee contributions applied
towards the Normal Cost Rate are not part of the
accrued benefit to which members are entitled
· An accrued benefit is one that has already been
earned - not one that has yet to be earned
· Benefit rights accrue as they are earned - year to
year
· Employee contributions cannot be changed
retroactively to pay for past benefits (Past
Service Costs or any unfunded liability), but they
can be changed prospectively to pay for future
benefits
Senator Stedman stated this explains why the NEA allegations could
not occur. These statements are important in considering not only
restructuring of the current system, but also in addressing the
unfunded liability of $5.7 billion.
5:01:35 PM
Page 12
PERS Employee Normal Rate Projections
[Spreadsheet of PERS - Average All Employees showing Total
Normal Cost; Projections at Current Rate for: Employee Normal
Cost Rate, Employee Share of Total Normal Cost, and Employer
Share of Total Normal Cost; and Projections at SB 141 Rate
for: 50% of Total Normal Cost, SB 141 Employee Rate, Resulting
Employee Share, and Increase Over Previous FY, for the years
2006 through 2032.]
· SB 141 Proposes to split the Total Normal Cost 50/50
between Employer and Employee
· However, the Employee Rate could never increase by more
than 0.50% a year
· Based on current Mercer projections, it would take 6
years to reach the 50/50 shared rate
· If Normal Costs drop in the future, employer and employee
rates would drop
Senator Stedman outlined the information on this table.
5:03:31 PM
Page 13
Effect of Employee Contribution Rate Increases on Average PERS
Employee
[Spreadsheet showing the Normal Cost of 20.13%; 50% of Normal
Cost of 10.07%; Current Rate @ 6.75%; and SB 141 Proposed Pre-
Tax Payroll Deductions (every 2 weeks) for the years FY 06
through FY 12 and the Cumulative Increase; for various salary
ranges and the Average PERS Members. A notation reads:
Estimate is based on FY 07 Total Normal Cost for PERS "Other"
and assumed to be fixed for FY 07 to FY 12. The figures for
the Average PERS Members are as follows:
Annual Earnings $43,823.00
Normal Cost 3,651.92
50% Normal Cost 1,825.96
Current Rate 6.75% 123.25
SB 141 Proposed
FY 06 - 7.25% 132.38
FY 07 - 7.75% 141.51
FY 08 - 8.25% 150.64
FY 09 - 8.75% 159.77
FY 10 - 9.25% 168.90
FY 11 - 9.75% 178.03
FY 12 - 10.07% 183.78
Cumulative Increase 60.53]
Senator Stedman explained this demonstrates the impact of this
legislation.
Senator Stedman qualified that it should be expected that
collective bargaining units could negotiate "back" these increased
payroll deductions.
Senator Stedman remarked that the increases in payroll deductions
are intended to ease the impact of any hardships to employees. He
pointed out that the figures in the spreadsheet are pre tax
dollars. The year-to-year increase of $9.13 to the average PERS
members would equal $7.50 in after taxed dollars.
5:05:58 PM
Page 14
TRS Employee Normal Rate Projections
[Spreadsheet of TRS - Average Rate showing Total Normal Cost;
Projections at Current Rate for: Employee Normal Cost Rate,
Employee Share of Total Normal Cost, and Employer Share of
Total Normal Cost; and Projections at SB 141 Rate for: 50% of
Total Normal Cost, SB 141 Employee Rate, Resulting Employee
Share, and Increase Over Previous FY, for the years 2006
through 2032.]
· Based on current Mercer projections, it would take 5
years to reach the 50/50 shared rate in TRS
Senator Stedman noted this spreadsheet is similar to that on page
12, although applied to the TRS system.
5:06:30 PM
Page 15
Effect of Employee Contribution Rate Increases on Average TRS
Employee
[Spreadsheet showing the Normal Cost of 22.97%; 50% of Normal
Cost of 11.49%; Current Rate @ 8.69%; and SB 141 Proposed Pre-
Tax Payroll Deductions (every 2 weeks) for the years FY 06
through FY 12 and the Cumulative Increase; for various salary
ranges and the Average TRS Members. A notation reads: Estimate
is based on FY 07 Total Normal Cost for TRS and assumed to be
fixed for FY 07 to FY 11. Salaries are based on the 2004-05
Anchorage School District salary schedule. The figures for the
Average TRS Members are as follows:
Annual Earnings $53,948.00
Normal Cost 4,495.67
50% Normal Cost 2,247.83
Current Rate 8.69% 195.34
SB 141 Proposed
FY 06 - 9.19% 206.58
FY 07 - 9.69% 217.82
FY 08 - 10.19% 229.05
FY 09 - 10.69% 240.29
FY 10 - 11.19% 251.53
FY 11 - 11.49% 259.16
FY 12 - 2.80% 183.78
Cumulative Increase 62.83]
Senator Stedman outlined this information, noting that the after
tax impact would also be approximately $7.50 per month year-to-year
increase to the average TRS member salary.
Senator Bunde remarked that most teachers are paid on a monthly
basis and asked if the data on the spreadsheet represents monthly
or bi-monthly paychecks.
Senator Stedman replied that the spreadsheet indicates payments
every two weeks to allow comparison with the PERS system.
5:07:32 PM
Page 16
Board Adopted Employer Contribution Rates - FY 90 thru FY 07
[Spreadsheet showing: Funding Ratio, Employer Normal Rate plus
Past Service Rate = Actuarial Computed Rate - Board Adopted
Rate = Diff Computed Rate, and the corresponding Mercer Data
Year, Board Adopted Year, and Rate for FY, for PERS and TRS
for the years 1987 through 2007.]
· Currently, the PERS/TRS boards set the annual Employer
Contribution Rate
· When the boards adopt a rate below the Employer Normal
Cost Rate, the unfunded liability may increase
· SB 141 requires the Board to adopt an Employer
Contribution Rate no-less-than the Employer Normal Cost
Rate
Senator Stedman noted that the normal rate changes continually.
This spreadsheet presents a history of the actuarial computed rates
compared to the boards' adopted rates.
Senator Stedman remarked that this legislation is drafted to ensure
that the boards' adopted rate is never again less than the
actuarial computed rate. The fund could become overfunded in the
future; but that would not occur for many years. In that event, the
legislature could adopt statutory changes to allow for lower
contribution rates.
5:09:51 PM
Page 17
PERS Payroll Contribution Trend & Forecast
[Bar Graph showing percentages for: Employer Past Service
Cost, Employer Normal Cost, Employee Contribution, and Total
PERS Payroll Contribution, for the years 1983 through 2031.]
Senator Stedman overviewed this graph.
5:10:38 PM
Page 18
TRS Payroll Contribution Trend & Forecast
[Bar Graph showing percentages for: Employer Past Service
Cost, Employer Normal Cost, Employee Contribution, and Total
TRS Payroll Contribution, for the years 1983 through 2031.]
Senator Stedman told of the significant documentation from Mercer
Consulting Inc. utilized in preparing these graphs. He commented
that in addressing the employer contribution rate, it is "easy to
forget" the employee contribution rate.
5:11:17 PM
Page 17
PERS Payroll Contribution Trend & Forecast
Senator Stedman pointed out that the payroll contribution rate has
historically been less than 20 percent until FY 05, when the rate
increases to 35 percent then up to 60 percent in future years.
Page 18
TRS Payroll Contribution Trend & Forecast
Senator Stedman listed the current calculated rate at approximately
42 percent under the latest actuarial study and is forecasted to
increase to over 60 percent.
Senator Stedman noted that the unfunded liability is demonstrated
as light blue bars on this graph. He asserted that these funds
should not be redirected from goods and services, social services
and education needs. However, the funds are being diverted to this
expense. He gave this a dollar value of approximately one half
billing dollars statewide in four years. The sooner the issue is
addressed and rectified, the better off the State would be.
5:13:13 PM
Co-Chair Wilken asked how the proposed employee contribution is
reflected in this graph.
Senator Stedman responded the proposed increase is not reflected on
this graph. He explained that the yellow bar representing employee
contribution would rise and the darker blue bar representing the
employee contribution would shorten until the length of both bars
are equal.
Senator Stedman indicated he would prepare another graph to
demonstrate increased employee contributions that would show that
the total employee and employer contribution would not increase,
although the percentage of each would change.
Co-Chair Wilken asked if this change would lower the total PERS
payroll contribution amount reflected on the graph.
Senator Stedman answered it would not. This legislation does not
address the unfunded liability to the plan. The intent is that once
this law is passed, the newly created board would make
recommendations to the legislature on how to best address the
unfunded liability. Options include: paying off the liability
entirely; ignore the liability and allow the system to eventually
drain of cash in several years; lower the employee contribution
rate and targeted rate and allow the liability to increase over
years, and; direct the pension board to reinvest for a higher rate
of return, which assumes higher risk. The unfunded pension
liability of approximately $5.7 billion is a separate issue than
that of normal cost. This discussion pertains to whether the
contribution rate should remain as it is or be changed. The cost of
health care is substantially higher currently than it was ten years
prior. The employee contribution rate should be periodically
reviewed to determine whether it is appropriate.
Co-Chair Wilken asked the value of the proposed employee
contribution rate increase on the State's general fund.
5:18:47 PM
Co-Chair Green estimated the increase would generate approximately
$2.2 billion.
Senator Stedman calculated the increase at 3.32 percent of the
entire payroll.
5:20:01 PM
Senator Hoffman referenced the past service rate of 14.87 percent
for PERS and 28.02 percent for TRS necessary to fund the $5.7
billion liability. He asked if these percentages are fixed over
time until the liability is paid. He also noted the schedules of
pages 17 and 18 demonstrate the liability would substantially
decline in the year 2028 and asked the year the liability would be
paid. At that time, he asked if the past service rate would be
eliminated from the employers contribution.
Senator Stedman replied that the past service cost does fluctuate
from year to year. If substantial gains in the portfolio were
realized, the contribution rate would be "shorted" or "shallowed".
In years in which performance of the portfolio is less than the
targeted rate. In determining the contribution rate, the actuary
averages any gain over the target 8.25 percent earnings rate over
fives years and averages in any loss. Substantial profits are
anticipated for the following year. Theoretically, once the
unfunded liability is paid, the past service rate would be zero.
5:22:52 PM
Senator Hoffman asked the distribution of the $5.7 billion unfunded
liability between the PERS and TRS programs.
Senator Stedman replied he would calculate the amount. He estimated
the unfunded liability for PERS is $3.2 billion.
5:23:05 PM
Senator Hoffman surmised it conceivable in the future that the
unfunded liability would be paid for one plan and an obligation
would remain for the other plan.
Senator Stedman agreed the repayment for the plans would not be
identical. He furthered that members of the police and fire systems
are included in PERS, and benefits are calculated differently for
those members.
Senator Stedman also pointed out differences of liability structure
for the various municipal employers He pointed out that the PERS
system for one municipality located in State Senate District A is
actually overfunded.
5:24:12 PM
Senator Hoffman asked the percentage of the $5.7 billion liability
is the obligation of the State.
Senator Stedman would calculate the amount.
Senator Stedman stressed the focus of this hearing is not the
unfunded liability. The unfunded liability is figured to the
community level.
5:24:47 PM
Senator Hoffman regardless of the market performance, the
obligation currently is a finite amount of $5.7 billion. For
budgetary purposes, he asked why a fixed rate over time was not
adopted.
Senator Stedman explained the repayment of the unfunded liability
is amortized over 25 years at 8.25 percent. Years of higher and
lower returns would cause the actual amount to fluctuate.
Senator Hoffman understood that the amount is fluctuating and
therefore the actual date the unfunded liability would be paid
could not be determined.
Senator Stedman affirmed that not all factors could be predicted,
particularly future returns on the portfolio and future normal
costs. Also, the actuary recalculates the past service cost of the
unfunded liability and that cost is re-amortized. Currently,
increases to employer contribution rates are limited, although the
rate is below the actuarial recommended rate. One year from now,
the liability would be increased to $6.1 billion.
5:26:34 PM
Senator Hoffman contended this matter is before the Committee
because of the unfunded liability. He questioned the proposal to
change from a defined benefits system to a defined contributions
system, when the "main thrust" should be stabilizing the situation
and addressing the shortfall.
5:27:41 PM
Senator Stedman expressed intent to stabilize the system first by
reconstituting the boards and establishing a better relationship
between the liabilities and the assets of the plan.
5:28:03 PM
Senator Hoffman cited the graphs on pages 17 and 18 showing the
normal cost rate stable at approximately 20 percent. This
legislation would make employee and employer contributions equal,
which would decrease the State's obligation and increase the
employees' obligation. Addressing Senator Bunde's earlier comments
regarding taking money from "employee's pockets", Senator Hoffman
asserted this proposal would "be digging into employees' pensions."
Senator Stedman agreed that dividing the normal service cost
equally between the employer and the employee would impact the
employees. However, he surmised that when the initial system was
created, the health care situation was different.
5:29:47 PM
Senator Hoffman countered that increased health care costs that
would result in increases to the normal service cost is not
reflected in these charts; but rather shows that the normal service
cost would remain at about 20 percent. If health care costs would
continue to increase, the overall normal service cost should
increase.
Senator Stedman characterized the unchanged normal cost rate shown
on the graphs as a distortion. Although the normal cost rate has
been relatively unchanged for current years, historically the rate
has experienced volatility and similar volatility would be expected
in the future. The issue is whether to "freeze" employee volatility
or fluctuate with market conditions.
5:32:15 PM
Senator Hoffman opined the employee contribution rate should remain
frozen. Employee salaries are unchanged. The issue is how to remedy
the unfunded liability, not to "change the rest of the game."
5:33:02 PM
Senator Bunde remarked the issue is a "philosophical call". The
Committee has the choice between continuing the current practice
with the "majority of Alaskans paying the cost" or "asking"
beneficiaries to pay more. The unfunded liability shown on the
graphs as light blue bars represents the "money of all Alaskans"
and subsequently money that all Alaskans could utilize. If the
current practice were unchanged, the unfunded liability would
continue to increase.
5:34:30 PM
Senator Stedman pointed out that the employee contribution rate
would gradually increase and not be fifty percent of the normal
cost rate contribution for several years. Meanwhile, the liability
would continue to increase.
Senator Bunde clarified that if no changes were made to the current
system, the unfunded liability would continue to increase.
5:35:07 PM
Senator Stedman replied that depending upon how much time passes
before the matter is addressed the unfunded liability would
continue to increase. No "robust capital markets" are anticipated
for the portfolio during the current fiscal year and employer
contribution rates are not meeting actuarial recommendations.
5:35:57 PM
Senator Bunde understood that if substantial changes were made, the
unfunded liability would continue to increase over time. If changes
were made, the unfunded liability would continue to increase over a
shorter period of time.
5:36:31 PM
Senator Stedman affirmed if employer rates were not increased the
unfunded liability would continue to increase. This liability would
redirect hundred of millions of dollars in Alaska away from goods
and services. Municipal officials have been writing letters to
legislators about the challenges local governments are having
meeting other financial obligations.
5:37:13 PM
Senator Bunde calculated the potential employer contribution rate
to the retirement system in 20 years for employees in the PERS plan
would be fully one-third of the employee's salary. The rate for TRS
employees would be substantially higher. He asked why the same
scenario applied to TRS employees is fifty percent.
Senator Stedman responded he would provide detailed information.
TRS employees are required fewer years of service and subsequently
the retirement system is different. Also, the TRS board has adopted
different employer contribution rates.
5:39:42 PM
Senator Bunde therefore surmised that if a single board governed
the process the differences in adopted rates would "tend to level
out", as one group would be making decisions based on the actuarial
data.
5:40:06 PM
Senator Stedman predicted that a combined retirement board would
likely result in one rate adopted for both PERS and TRS and that
the board would not recommend contribution rates below the
actuarial recommendation for one plan and not the other.
5:40:31 PM
Co-Chair Wilken expressed that the data contained on the charts of
pages 17 and 18 raise so many questions as to make one "almost
ill." He asked, "What the hell happened?" This situation could not
have been predicted.
Senator Stedman explained that many years during the 1990s, the
liability of the fund was substantially underestimated, which
provided faulty data that was used in the decision making process.
At the time the fund was said to be overfunded, it likely was not
such. The current situation did not occur "overnight", no "perfect
storm" occurred, and the investment market was not the primary
factor. The miscalculation of the liability was.
5:42:16 PM
Co-Chair Green asked the number of additional employees that could
be hired if the liability did not exist. This liability would
redirect funds from classrooms, teachers, supplies, etc. Fewer
employees could be hired in the future as a result of this
situation.
5:42:49 PM
Senator Bunde calculated the amount of the liability could fund a
fifty percent increase in the number of teaching positions.
5:42:59 PM
Senator Hoffman calculated the past service rate, as demonstrated
on page 5, to be almost three times the amount of the debt and
significantly higher than the employer normal service cost rate. He
understood inflation and rounding of figures are a factor.
5:44:21 PM
Senator Stedman informed that the actuary has provided a dollar
calculation utilizing a discount rate of 8.25 percent. If the
portfolio earns a higher rate over the next 25 years, the unfunded
liability would be less; likewise, if the portfolio earns less than
8.25 percent, the liability would be higher. The likelihood of
earning less than 8.25 percent is low. The value of the dollar over
time must also be considered. The issue is complex.
5:47:08 PM
Senator Hoffman noted that in some years a past service cost was
imposed, but rarely. He asked if this is a new concept intended to
separate past service costs from normal service costs.
Senator Stedman replied that in some years during the 1990s, the
fund had a potential surplus. He qualified that during this time,
the figures misstated the liabilities. Once the liabilities were
restated and corrected, the unfunded liability portion increased
significantly. This unfortunately occurred at the same time as
"challenges" in the financial market.
5:48:29 PM
Senator Hoffman clarified that the past service costs are
mislabeled and are actually under-funded rates.
Co-Chair Green asked if this "speaks to" the difficulty in
calculating the funding status at exactly 100 percent needed for a
given year. To be cautious, the fund could be calculated at 103
percent before it is considered fully funded.
5:49:11 PM
Senator Stedman indicated the ranges are under consideration as
well as other technical issues.
5:49:32 PM
Co-Chair Green announced further questions could be addressed at a
later time.
5:49:52 PM
GAYLE HARBO, Member, Teacher Retirement Board, recited her written
testimony into the record, which reads as follows.
I have been a resident of Alaska since 1957, most of the time
living in Fairbanks. I taught in Fairbanks for 25 years, most
of the time at Lathrop High School and was the Chair of the
Math Dept. and Advanced Placement Coordinator for almost 20
years. I am here as a member of the Teacher Retirement Board.
The joint boards thank Senator Stedman for his willingness to
teleconference with us on Friday Mar. 25. We are sorry that
his plans changed but since he could not teleconference hope
he and the Committee will read the verbatim transcript of the
morning's discussion so they realize the debt of true concern
that each Board member has regarding all the bills, which
seriously impact a retirement system, which has worked well
for 50 years. The only significant changes that have been made
in recent years have been enhancements of benefits due to
legislation. The Joint Boards have sent letters to the
Legislature these past two years asking that you not introduce
any bills, which enhance benefits and the Administration has
agreed to testify against these bills because all would
increase the unfunded liability.
I am going to address three topics in my remarks and will be
happy to answer any questions. If I don't know the answer I
will try to find out.
My first issue is the interaction of the three pension boards.
As you know the main work of the TRS and PERS boards is
listening to appeals of members, recommending employer
contribution rates and adopting actuarial assumptions every
five years based on the recommendations of the commission of
[the Department of] Administration and the actuary. ASPIB
manages and invests the contributions to the system. The Joint
Board members have great admiration and respect for the way
ASPIB and the staff of [the Department of] Revenue, who work
with Gary Bader, invest and care for our funds. Over the past
ten years the funds have earned almost 9% annually, at or near
the assumed rate of our actuary. Earnings are not the problem
causing the unfunded liability.
This leads to my second issue. The main driver of the decrease
in the funding ratio has been the rapid increase in health
care costs, a problem not unique to Alaska. You have seen in
past presentations that without the inclusion of medical costs
the funding ratio is a respectable 91% for TRS and 120% for
PERS. Health care costs have accounted for 50 % of the
employer contribution rate increases in past few years. The
Administration can make changes in the Health Care plan
without legislation. First, changes can be made to the plan
for current tiers if they do not diminish benefits, but are a
matter of choice or convenience. (An example would be
requiring members use hospitals, both in and out of Alaska,
which are preferred providers so significant savings could be
negotiated - Providence in Anch is not a PP yet over 80 % of
retirees go there, the hospitals in Juneau and Sitka are owned
by their respective cities. They are not preferred providers
and there is little savings to the state.) Secondly,
significant changes can be made to the plan for employees
hired after a specific date.
About 5 years ago the Joint Boards recommended an education
program to encourage members to use Generic Drugs. The members
responded and now 42% of the drugs used are generic. Every
percent of brand name drugs replaced by generics saves the
plan 1M (see Oct. '04 Newsbreak). The Health Care Committee
has for several years recommended the state pilot a disease
mgt. program particularly for diabetes, but we were told that
the start up cost of $240,000 was too much. In speaking with
other health plan administrators who utilize disease mgt. I
have been told that the cost savings in the first years are
considerable and would more than recoup the start up costs.
Mr. Mike Humphries, from the benefits division at the U of A,
the NEA Health Trust and, perhaps Mr. Jarrell, our new trustee
from Bering Straits School District, indicate their plans
incorporate this element. For retirees this past year, 474
members had claims of over $50,000 each and accounted for 53M
of the medical expenses to the State plan. Surely disease mgt
could have reduced some of this cost. Other than the generic
drug campaign no substantive cost savings measures have been
taken. The Health Care Committee has presented a list of
several cost savings measures that we, and the entire Jt.
Board, would like to see initiated. The Boards can only
recommend, however not implement. I feel we would not be at
this juncture, with drastic changes recommended to the system,
if this Administration and past Administrations had held a
Forum with employers, legislators, representatives of unions
and the Municipal League and medical professionals to discuss
methods of resolving these skyrocketing costs. We all
recognize the problem and would like to be part of the
solution, not adversaries. Senator Seaton has a bill regarding
generics and closed formularies. This does not have to be
legislated - the Administration can make those changes now as
long as they do not diminish benefits to the current tiers.
My third issue deals with the comments by some that the Boards
have not been responsible in recommending the employer
contribution rate and with the awarding of the ad hoc PRPA.
Wrt TERS and the employer rate, it is a recommendation, the
Administration can set the rate higher. The Boards act with
information provided them by the Administration and the
actuary. In the early '90's the TRS Bd adopted a 12% employer
rate and to ensure stability for employers for future
planning, they intended this rate be used for at least 20
years. In 2000 and 2001, however, when setting the rates for
FY 02 and FY 03, Mercer, our actuary, recommended rates as low
as 7.09% and 8.29% for those fiscal years. The TRS Bd did, in
those two years drop the rate to 11%; had they not, the
employers may have been upset. In '03 we set the rate at 16%,
though the first motion was for 17%. The contribution rate has
been higher - in FY 83 and '84 the combined rate for state and
school district was close to 18%. When I started teaching in
the '60's, employee, employer and the state each contributed
7%. The employee population at the University that is not
under TRS, but under private accounts, has a match by the
employer of roughly two to one.
The other issue of Ad Hoc PRPA's apparently needs to be
clarified since you were given a paper dated Mar. 18 from
Mercer regarding the funding status due to plan changes,
mostly enhancements through legislation, and Ad Hoc PRPAs. As
you know the Boards recommend Ad Hocs on the basis of
information provided by the actuary and the Commissioner of
Administration. The Boards have only made recommendations when
the funds were healthy. No Ad Hoc has been recommended since
2003. A retiree gets either the Ad Hoc or the automatic PRPA,
not both. In the past years when the Ad Hoc has been awarded
it only causes a small "blip" in the increase of the employer
contribution rate, probably less than .06%. The Mar. 18 letter
fails to indicate that probably 99% of the ad hoc cost
mentioned, resulted from the settlement of a lawsuit in the
mid '90's. The state lost the lawsuit and as a result had to
make all retirees whole, from the time they retired, wrt the
PRPA. The dollars paid out include not only past prpas but the
interest earned. Many individual retirees who had been retired
30 to 40 years received checks close to $10,000. The lawsuit,
as many of you may remember resulted because past
administrations had not awarded a prpa when the fund was
"healthy".
The Mar. 18 letter also attributes nearly 1B of the increase
to the unfunded liability to benefit enhancements by the
legislature. The Boards have said many times that "tinkering"
with the tiers, once they have been established has not been
in the best interest of the funds and for some of these
changes the actuary has not accurately predicted the rapid
rise in health care costs. In the assumptions adopted by the
Boards, the last time in Dec. of 2000, Mercer had a Medical
assumption rate of 5.5%. We now know was not a realistic
assumption. The Boards requested an Actuarial Audit in 2001
and the resulting report indicated that we should look at
Medical assumptions on an annual basis. You also know that the
RIP programs advocated by the Legislature in the early '90's
were to be cost neutral, but this past year Mercer indicated
they have had a negative affect on the funding ratio,
primarily because of escalating Medical costs. Despite this
poor advice, if you examine Mercer's budget line item over the
past few years, you will see there has been a 100% increase in
their fees.
I thank you again for your time and hope you will carefully
consider whether drastic measures need to be taken at this
time. We all agree there is a problem and we hope by working
together we can begin to solve it, but please do not burden
future hires for the mistakes of others. Changes can be made,
without legislation, to control current and future costs.
Please let us work together to make Alaska continue to be the
place young people will want to come to work, as you and I
once did.
6:03:59 PM
Senator Stedman expressed that he did not know individual board
members when this process was undertaken and therefore this matter
is not a personality issue. He noted that currently two boards
address appeals and one addresses assets, but no board addresses
liabilities. Correcting this is not a matter of changing members
serving on these boards, but rather changing the structure of the
process. To continue without a structural change would not be
prudent; rather the problem of "how we got here" must be solved.
The next step is to address the underfunding issue. The goal is to
have the assets and liabilities balanced.
Senator Stedman determined that the ad hoc, PRPA issue has impacted
the cost to employers. The ad hoc comprised approximately 1.5
percent of the entire 7.36 percent employer contribution, which is
"fairly small". The most significant issue is the assumption
changes that increased the liabilities; the second most significant
factor is investment experience and health care costs. Additional
information is available on the Internet [address not specified].
6:06:29 PM
Co-Chair Wilken announced that Ms. Harbo taught two of his
children. He asked the definition of PRPA.
Ms. Harbo defined PRPA as: post retirement pension adjustment.
Co-Chair Wilken asked if this adjustment was a retroactive
"surprise".
Ms. Harbo told of automatic PRPAs and ad hoc PRPAs, which are tied
to the Consumer Price Index (CPI). Members could receive either one
or the other.
Co-Chair Wilken asked the process of the PRPA.
Ms. Harbo compared this to the cost of living adjustment (COLA)
applied for social security benefits, which is automatically
awarded. The State COLA is a ten percent increase paid to members
residing in Alaska.
6:08:26 PM
Co-Chair Wilken recalled the lawsuit of the 1990s. He told of a
friend who was a retired Alaska State Trooper and department
commissioner who received a check for $340,000.
Ms. Harbo disputed this, surmising it must be related to a
different lawsuit. The highest payment she knew of was between
$3,000 and $4,000. She received $25.
6:09:19 PM
Senator Bunde referenced Ms. Harbo's testimony to "legislative
initiative on early retirement". He remarked that the early
retirement program was requested by school districts as a cost
reduction measure that would have no impact on the retirement
system.
6:10:03 PM
KERRY JARRELL, Certified Public Accountant, Assistant
Superintendent, Bering Strait School District, and Teacher
Retirement System Board Member, read his written testimony into the
record as follows.
Rhetoric in the press has described the current condition of
the retirement systems as the "PERS/TRS meltdown". The
combined conditions have been characterized in the SB 141
White Paper as the "perfect storm". It is important to
understand that, contrary to the recent rhetoric, the factors
that led us to this point were not immediate, not rapidly
developing, and do not represent a meltdown. I am not
suggesting that the issues are not real, but I am suggesting
that they need to be viewed in their proper context.
Retirement systems are like supertankers that respond slowly
to environmental conditions and corrective actions. The seeds
of the problems as well as the successes of the plans were
planted and nourished over the past twenty-five years. When
critics speak of the funding "crises" or "meltdown" of today,
they are actually looking twenty-five years into the future
and projecting what cumulatively will occur over that period.
Just as actuaries may have erred on many projections over the
past quarter of a century, current actuarial estimates will no
doubt miss the mark over the next quarter of a century. Minor
changes in assumptions can cause enormous changes in the
funding status of the plans. Consider that a 2% change up or
down in the estimate of the rate of growth of health care
would change the unfunded liability of the plans by over a
billion dollars.
Actuaries will be the first to admit that their projections
are far from an exact science. It is evident today that many
of the assumptions throughout the 1900's were incorrect.
Health care costs were growing much faster than we realized
for nearly a decade before actuarial assumptions were revised
around 2002. The retirement plans that appeared fully funded
in the late 1900's were obviously under funded. Correcting
those assumptions in 2002 resulted in a multi-year adjustment
that startled everyone. Those adjustments did not reveal
mismanagement of the assets by the ASPIB, the boards, or the
administration. They simply revealed that the state, its
municipalities, and its school districts had been underpaying
the necessary contributions for health care to keep the system
healthy. Had more accurate rates been imposed earlier, the
unfunded liability would not sit on the books of the
retirement systems, it would be reflected on the books of the
municipalities, boroughs, and school districts.
I would like to offer the following observations and
recommendations for the legislature to consider.
1. The major problem with our retirement plans is health care.
In the 1980s' and early 1990's health care was relatively more
affordable than it is today. For the eleven-year period from
1992 to 2003, 69% of the increase in unfunded liabilities,
amounting to roughly $3.7 billion, came from excess increases
in health care costs. I use the term "excess" to mean that
health care costs were $3.7 billion more than the plan
benchmark or estimate for that period. If it weren't for that
$3.7 billion deficit, we would not be here today and there
would be no discussion of overhauling the retirement system.
2. The retirement super tanker has developed several leaks. By
leaks, I mean benefits have been provided that have not been
funded or calculated into the contribution rates. These leaks
mandate payments greater than the plan ever intended. For
example, there is no correlation between the earnings and
contributions of part-time local public officials and the
eventual benefits provided to those individuals. Under current
provisions, a school board member or council member earns and
pays little into the system, but they receive free medical
coverage at 55 or 60. Their contribution to the retirement
system could be as low as $1,000 over their entire career, yet
they could receive almost unlimited medical for them and their
dependents for up to a generation.
Additionally, many schemes have been used by employees to
boost eligible salaries in the final years of employment.
Consequently, salary rates are often considerably higher than
they should be. Termination bonuses have recently been
identified in the press, but service credits, overtime, final
year pay increases, etc. can produce large increases in
benefits without reasonable contributions to the systems to
offset them. These practices create unfunded liabilities.
One of the most overlooked leaks in the super tanker is masked
in the benefit formula itself. Using the high three years for
benefit calculation produces built in losses for the system.
This piece of the formula, which has been considered sacred
until now, consistently created an unfunded liability for
every single participant.
3. Much has been spoken about reducing the risk to the
employers by moving to defined contribution plans. While the
change to a defined contribution plan may limit the exposure
for local and state governments, any plan that undermines the
retirement security of public employees will eventually drive
good people from public service. Retirement plans, by their
very nature, are structured to protect employees, not to take
advantage of them. A blended approach that gradually
introduces the concept will spread risk equally among
employers, the state, and employees.
Recommendations:
1. Immediate changes need to be made to the health plan in
order to maximize savings in every area possible. Aggressive
steps should be taken to initiate preferred provider networks.
Preferred prescription providers and the use of generic drugs
should become mandatory under the plan. Increasing co-payments
for drugs and services would spread the cost of services among
beneficiaries and the plan. Disease management and large case
management have been extremely beneficial in reducing
unnecessary procedures and limiting hospital stays. I have
personally administered a large self-funded plan for out
school district for the past ten years. We have successfully
implemented all of these procedures and realized considerable
savings from them. The PERS/TRS Health Plan is large enough to
wield considerable influence in negotiating savings with
service providers.
2. Implement the changes in health care access that were
recommended in the PERS & TRS Tier Proposals. These included
limiting entry into the system until beneficiaries reach the
age of 65 and assessing premiums based on years of service.
Limiting access to health care for part time elected officials
would also help relieve the unfunded liability.
3. Stop the leaks caused by unfunded benefits. Any provision
in the current statutes that drains from the system should be
identified and corrected. Make the necessary changes to
statutes that currently allow supplemental earnings to boost
the wage base for retirement calculations.
4. Amend the formula for retirement benefits to create a more
reasonable base period for eligible salaries. A minimum of ten
years of earnings should be used for benefit calculation
purposes. This will dilute the effects of any large payouts in
the final years of employment and will help ensure the
benefits more evenly match contributions.
5. Take a very conservative approach in implementing elements
of a defined contribution plan. The Division of Retirement and
Benefits has offered PERS and TRS Tier Proposals that
incorporate a defined contribution plan that is more gradual.
It provides significantly more protection for the State and
the employer without totally abolishing the benefits of the
current plan. The plans are healthy in terms of their ability
to pay pension benefits. In spite of all of the bear market,
low interest rates, legislative changes, etc., the pension
portion of the plans were well funded and were in the top ten
percent of state retirement systems as measured by one of the
top pension experts, Wilshire Research. The success of that
portion of the plans should be preserved to the extent
possible.
The plans have served the State and its residents well for
many years and can continue to do so in the future. Rather
than dismantling the plan, we urge you to consider a
combination of mid-course corrections and prospective changes.
We thank you for the opportunity to address these issues. I
would be happy to answer any questions from the Committee.
6:19:07 PM
Senator Bunde understood the witness' three recommendations and the
premise that if the retirement plan were changed, employment would
be "less attractive" to potential employees. However, the
recommendations would also make the plan less attractive.
Mr. Jarrell replied that the gradual shift to a defined
contribution or hybrid plan, as considered by the boards, could be
done responsibly without "driving people out of the plan". The
recommendations for changes to the health care benefits would not
compromise the quality of the health plan, but rater force the
administrators to be aggressive in delivering a more efficient
product. His proposed changes to the "leaks" in the system relate
to "abuses".
Senator Bunde countered that activities considered abuses could
also be considered incentives.
Mr. Jarrell acquiesced.
Senator Bunde understood the witness' assertion that implementing
changes slowly would not "drive people out." The end result is the
same. He commented, "In many cases, reality changes and the people
who are in the new reality probably make their judgments based on
that information and not on what someone did or had available to
them 15 to 20 years ago."
6:21:12 PM
Senator Stedman noted the witness' reference to a document
characterizing the situation as a "perfect storm". He requested the
source of this document.
6:21:37 PM
Senator Stedman made the following statement.
Through all the presentations and talk here we've always
recognized that there is no issue of solvency in the plan
immediately, [be]cause we've got $11.9 billion in assets. So
we have a substantial amount of assets sit there and the
benefit payments last year were $826 million. So we could run
for years.
So we're not saying the house is crumbling. But the issue here
at this table is "we're responsible for appropriating capital
in the State." And we were hoping that the boards would come
back with recommendations: new tier structures, help us with
[the] unfunded issue, cost containments. They did nothing.
Nothing. You guys wouldn't be here if we weren't working on
Senate Bill 141. The reason we are is because the boards
didn't come to the table.
We're not going to sit here-at least I'm not going to sit
here-for the next three years we're going to have another $370
million statewide of capital to meet these obligations
redirected. These are huge numbers. And we certainly can't sit
here and let the liability continue to grow.
I'm sure that when the actuary comes in and sits down in that
seat that you happen to be in, I'm sure it's going to get a
little warm. We need the most accurate projections we can get
and then we'll deal with whatever the numbers are, set the
policy through a good public process and move forward. But we
can't do nothing. We can't wait for non-responsive boards to
come to the table with solutions.
So we looked at the tier proposals that the board reviewed.
Went back read the minutes, talked about the hybrid plan pros
and cons, defined benefit plan pros and cons, defined
contribution plan. We decided that the defined benefit plan
that we currently have, the risk levels are too high for us to
deal with. So that comes back to the two alternatives that the
boards reviewed: the hybrid plan and the defined contribution
plan. We decided to go forward with the defined contribution
plan. I would grant you that the hybrid plan has some risk
aversion factors in it for the employee, just because it has a
defined benefit portion; and then the employer takes
responsibility.
In the private marketplace, private enterprise, you can't get
a plan like the state of Alaska has. [One] doesn't exist.
You'd go broke. We need to come somewhere from where we're at
and still stay competitive, still stay attractive as an
employer, still be able to go out and compete in the Northwest
for teachers and retain the people we have with whatever plan
we come out with today.
If we look at the proposals from the actuary, and granted
there's probably [indiscernible] and he's probably, hopefully
he's close. But under TRS, he's talking about a 41.7 percent
contribution rate. The health care portion's, excuse me, the
health care portion's eight. So if we just took that off, we'd
be roughly putting 35 percent into a defined contribution
plan. We'd have people stacked up from here all the way down
to the shorefront for the job. Those are huge, huge numbers.
So it's not that the defined contribution plan is some
inferior product that can't attract and retain employees, and
it's only a defined benefit plan, it's the level of the two
benefits they produce.
We're going to sit here and look at tier three and we're going
to try to keep the State and the schools competitive. Quite
frankly, if I was a new employee and I knew the employer was
going to be paying 42 percent of my base salary to a benefit
package, I'd say "hey, why don't you give me 30 percent of
that for my pension, my retirement plan, put it into my own
individual account and the rest to medical." I'd be out of
here in 20 years as a fat cat. These are phenomenal numbers.
I am a little impatient, and again it's the structure of the
boards and how they interrelate versus the people on the
boards. But we've got a serious issue here. Going forward and
doing nothing is not an option. At least not with me. You know
I'm not going to sit here and reallocate $370 million in
capital and just think everything is going honky dory.
I recognize your comments. I like your comments about cost
containment because I think when we look at, not only the
current three theirs there is what some of us would call as an
abuse. Some would call an abuse; some would call it a benefit.
Some of those benefits are protected by the Constitution and
we can't deal with them. But there is some cost containment
issues that we need to look at and we need help from the
board, whether it's TRS and PERS or it's a new board to do
those things. Also we need to have cost containment issues
even on the new tier going forward.
So cost containments are an issue and funding the underfunded
position $5.7 billion of some magnitude has to be addressed.
The do nothing strategy doesn't work and I will agree with you
that they're all estimates and when you forecast out 25 years,
it's a lot more accurate to forecast out five. And it's easier
for us to work in the shorter time horizon. Assumptions
change, returns change, but it's so far out of whack now that
we have to do something. If we don't we're, in my opinion,
neglecting responsibility that the citizens put us here to
make tough decisions.
I want to treat the employees fairly and I certainly don't
want to have the state of Alaska or the school system in a
competitive disadvantage for employment or retention. That was
a first issue on the table when we sat down: what are we going
to put together; we've got to meet those two goals. We'll sit
here in the couple days.
We're going to talk about contribution rates. We've talked a
little bit about it today and you can see there's not hundred
percent agreement, just on the normal service cost. But
eventually we're going to get into talking about how much
should we contribute if we have a hundred percent defined
contribution plan. Should it be 11.25? Should it be 15? Should
it be 20? Should it be 5? You know, we're using 11.25 as a
starting mark. I think that's pretty close and I'm certainly
not casting concrete on it. I'm going to work that number out
and look at the effect on the employee of the health care
costs that they're going to have to pay when they retire under
the new plan, to make sure that there isn't a burden shift.
It's a dynamic working process and I do appreciate your coming
forward and testifying and pointing out some of the issues.
6:30:08 PM
Co-Chair Green expressed that some points mentioned by the witness
should be incorporated into the legislation.
6:30:41 PM
Mr. Jarrell assured his intent is not that the legislature do
nothing. He did not join the board until after it rejected the tier
proposals. He is on record in support of those proposals. A board
member who was serving at the time the proposals were under
consideration would be at future Committee hearing to speak to the
boards actions. Mr. Jarrell assured that his "head is not in the
sand on this issue." However, throughout the 1990s the boards
assumed the actuarial assumptions were correct and acted
accordingly. It has now been stated those assumptions were not
correct. The new assumptions could not be proven correct until 25
years has passed and the experiences have occurred. He encouraged
changes to the current system, but warned they must be made slowly
and carefully.
6:32:22 PM
Senator Stedman reported he and others have been working on this
issue for about a year and have given the matter significant
considerations. He was pleased the witness was not serving on the
board at the time the tier proposals were under consideration and
during the time that the legislature was looking to the boards for
suggestions. He apologized for his assertions that the witness was
responsible and suggested the comments should have been directed to
another board member.
Senator Stedman then referenced the witness' testimony on the
funding ratio of the health care versus pension. He pointed out
that the assets were "used twice". He surmised that the witness, as
an accountant, would agree that the assets could not be spent
twice.
Mr. Jarrell replied he would review the information.
Senator Stedman furthered that the actuaries have done this,
despite the legislature directing other wise.
6:33:29 PM
Senator Hoffman commented that Senator Stedman the prime presenters
of this legislation have claimed to be "here to listen" and
requested input. This is what the witness has done, and should not
be criticized for doing so. Senator Hoffman surmised the current
language of SB 141 would be amended, and therefore the extended
hearings are intended to hear comments and recommendations. Those
suggestions should be taken and incorporated into a final plan.
There are many different ways to solve this problem to make the
retirement plan solvent.
Senator Hoffman continued that the underlying goal is to ensure
that employees could be attracted and retained. He referenced
Senator Stedman's statement that the employer contribution of 41.7
percent should have employees "lining up at the door". Senator
Hoffman countered that if the full amount of these contributions
were made directly to the employees' benefit, this could be the
case; however, 28 percent is utilized to repay past service rates.
The rates are high, but would not entirely benefit employees.
Senator Hoffman noted Mr. Jarrell attested that problems do exist
with the current system. Senator Hoffman exampled an employee
working for an annual salary of $18,000 until the final three years
before retirement at which time, the employee secures a position at
$90,000 per year, and subsequently collects a higher pension
payment. This creates an imbalance to the system. He agreed this
should be addressed and the system should be restructured; however,
this legislation "goes way, way beyond just structural changes."
6:36:04 PM
KEVIN RITCHEE, Executive Director, Alaska Municipal League, relayed
that the League had a meeting with school district officials and
municipal officials on this matter. The parties appreciated that
the annual employee increases would be no more than 0.5 percent. It
is likely fair to increase employee contributions. Bargaining units
could address this issue, as well as any offset to the increased
deductions from employees' salaries.
6:37:16 PM
Co-Chair Green expressed frustration that municipality and school
district officials have "rallied" and pled for the legislature to
fund the PERS and TRS increases for their jurisdictions. The amount
necessary to fully fund the system is much more than the State
could afford. Capital funding should be available for constructing
new schools, bridges and other capital projects.
6:38:46 PM
JOHN ALCANTRA, Government Relations Director, National Education
Association, Alaska, testified to the reference to the
Association's newsletter, The NEAA Activist, which is distributed
to over 12,000 members. The recent edition, Senator Bunde had
cited, was printed on March 15, and is now reaching its readership.
SB 141 was introduced on March 14 and contains language on page 7
to provide an increased member contribution rate "not to exceed
five percent" annually, as opposed to the currently discussed one-
half percent. Therefore, the article speaks to the original
language. Senator Stedman and staff have met with the Association
several times and have been helpful in addressing concerns.
Although Senator Stedman has stated for the record intent that the
annual employee contribution increase would be one-half percent,
the original language, providing for a five percent increase,
remains in the bill.
6:40:41 PM
Co-Chair Green remarked that the witness' comments do not speak to
the inaccuracy of the article.
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