Legislature(2005 - 2006)SENATE FINANCE 532
04/02/2005 10:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB 141 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 141 | TELECONFERENCED | |
| + | TELECONFERENCED |
10:16:17 AM
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 bill had been previously heard in the Senate Finance
Committee.
Co-Chair Wilken moved for adoption of CS SB 141, 24-LS0637\F, as a
working document.
There was no objection and the committee substitute was ADOPTED.
Co-Chair Green noted this committee substitute includes changes
discussed at previous hearings. This is the version to which
amendments would be taken.
10:18:25 AM
KEVIN RITCHIE, Executive Director, Alaska Municipal League,
testified that the League formed a focus group approximately one
year prior comprised of school board members, elected officials,
business leaders and others to address the issue with municipal
leaders. He spoke to the task of educating these people on this
issue. In general, the League supports the direction of this
legislation; however because a proposal has not been finalized, the
League could not yet endorse it. He supported the defined
contribution concept, surmising it is a way to ensure stabilization
of future costs.
Mr. Ritchie attributed health benefits as a key problem with the
system's unfunded liability. He informed that retirees incur 75
percent of health care costs before they reach the age of 65. The
solution is to limit access for those who are not actually paying
toward the cost of this benefit.
Mr. Ritchie spoke to two proposed conceptual amendments included in
a letter provided by the League [copy on file]. He stated that it
is not widely known that the Public Employees Retirement System
(PERS) and the Teachers Retirement System (TRS) are not strictly a
State of Alaska program, but rather that municipalities and school
districts comprise a significant portion of the program. This fact
has never been structurally tied into the operation of the PERS/TRS
system. While this has allowed the municipalities and school
districts to not be found at fault for the unfunded liability
situation, these local governments must become involved in the
future operation. He suggested that one or two seats be added to
the proposed oversight board and be designated for municipal and
school board representatives. He further suggested that school
boards could submit three nominees to the governor for appointment
to one of the designated seats.
Mr. Ritchie gave another recommendation that a structural system be
created to secure an actuarial analysis of the impacts of any
proposed changes in benefits. This would allow employers to make
informed recommendations on those proposed changes. Benefits
provided to existing PERS/TRS members can never be reduced. The
current process allows the costs of any changes to be reflected in
fiscal notes, which does not allow adequate time for the impacts to
be analyzed.
10:25:34 AM
Co-Chair Green asked if the rates were "blended between
municipalities" in any way or if the rates were set "per entity".
10:25:46 AM
Mr. Ritchie explained the blended rate, or normal rate, that is
assessed. If the amount of that rate is insufficient to cover the
unfunded liability of a local government, a past unfunded liability
rate is added for that community.
10:26:10 AM
Mr. Ritchie reported on analysis done the previous year on the
financial impact of changing benefits provided for public safety
employees. The actuaries never tested their data with employers and
as a result, a number of municipal governments disputed the
findings based on actual experience. A process allowing for better
review should be implemented for future analyses.
10:27:14 AM
Mr. Ritchie reemphasized the "critical nature" of providing at
least two years of assistance from the State to municipalities and
school districts to offset the five percent increase to PERS rates
that would be incurred regardless of actions taken on this
legislation. Approximately 75 percent of municipalities' budgets
are paid in salaries. A five percent increase to the retirement
system is therefore significant. In addition, fuel costs and
insurance rates are increasing and impacting budgets. Local
governments could not increase property taxes sufficiently to
offset these increased costs.
10:29:00 AM
Senator Stedman understood Mr. Ritchie's comments about
representation of school districts and municipalities on the
proposed board. Senator Stedman was amenable to consider changes
the current proposed structure, as his concern was for adequate
representation for both PERS and TRS issues. However, the State has
bears most of the burden for funding the systems. Local governments
commonly seek funding from the State to offset their shortfalls.
10:30:10 AM
Co-Chair Green remarked that a committee with many members would
become unwieldy. Her intention is to frame the proposed board
similar to the Alaska Permanent Fund Board of Trustees with regard
to expertise and objectivity. Potential for conflict exists between
the beneficiary and payer.
10:30:53 AM
Senator Stedman identified the priority in sufficient involvement
with the actuary and in implementing necessary statutory changes in
a timely manner. These issues would be likely addressed in the
following legislative session. He noted that the FY 04 fiscal note
funding PERS and TRS increases demonstrated significant cost
fluctuation.
10:31:48 AM
Co-Chair Wilken appreciated the witness's involvement in this
issue. Co-Chair Wilken asked if Mr. Ritchie would be amenable to
changing the provision in Section 42 relating to the powers and
duties of the proposed board and the required 90-day comment period
before changes to the system could be made. Co-Chair Wilken noted
that a proposed change presented on the first day of a legislative
session could not be acted upon until near the completion of the
121-day session. He suggested a 60-day comment period, given the
length of time required for legislation to complete the legislative
process.
10:32:39 AM
Mr. Ritchie was agreeable to such a change.
10:32:41 AM
Co-Chair Green pointed out that the cost of the election process is
approximately $100,000, which is excessive. Other methods would be
better than an election. The Legislature has "observed with
displeasure" the appointees made by the governor.
10:33:34 AM
Mr. Ritchie qualified he was not suggesting an election process.
This would not be fiscally beneficial for employers. A structural
connection with management would have an advantage. Although the
costs are primarily and ultimately born by the State, municipal
governments must account for these expenses in the issuance of bond
debt.
10:34:19 AM
LESLIE TEDERS, University of Alaska employee, and, President,
Higher Education Crafts and Trades, testified via teleconference
from Fairbanks, that although this legislation would not directly
affect University employees, the members of the organization are
taxpayers. He expressed concern that this proposal punishes
employees who are not at fault for the current situation. A defined
contribution system would make retirement uncertain. Studies show
that most 401K plan members are not financially educated and
therefore select the investment options with the least risk, which
results in a large segment not prepared for retirement. Other
options are available for future consideration.
10:37:00 AM
TRACI CARPENTER, Staff to Co-Chair Green gave a presentation
utilizing a handout titled, "Retirement Security Act, SB 141,
Discussion Topic: Health Reimbursement Arrangement, April 2, 2005"
[copy on file].
10:37:45 AM
Page 2
What is a Health Reimbursement Arrangement?
· Reimburses employees for qualified medical expenses
during retirement years
· Intended as a supplement for medical expenses or a bridge
between "early" retirement and Medicare
· Employer paid group (or pooled) fund
· Funds accumulate over working lifetime of employee
· Tax-free to employer and employee
· Employer-determined flexible plan design (Contributions,
covered expenses, termination provisions)
Ms. Carpenter overviewed these items.
10:38:50 AM
Page 3
Alaska plan-specific design
· Employer contributes 1% of the average employer group
compensation -- maximum $500
· Annual payment on behalf of each active employee into
group fund
· Contributions recorded to individual account balances
(also tracked by employer)
· Fund managed by Alaska Retirement Management Board (ARMB)
· Interest credited annually to individual accounts, rate
determined by ARMB
Ms. Carpenter read the proposed components into the record.
Co-Chair Green noted the maximum contribution of $500 would be an
annual amount.
Ms. Carpenter affirmed.
10:39:37 AM
Page 4
Alaska plan-specific design continued
· Total Reimbursements limited to member's individual
account balance until exhausted
· Terminated employees forfeit rights to individual account
o Individual account reinstated if person returns to
work within 5 years
o Account balance restored as of date of termination
(accrues no additional interest)
· Employer may use surplus funds held in the trust for
future credit to individual employee accounts
Ms. Carpenter noted that SB 141 currently provides that an employee
must return to employment with the same employer. However, if an
employee returns to work for a different employer that participates
in the PERS/TRS program, the years of initial service are credited,
although the account balance is not restored. She suggested the
Committee discuss whether to provide the same benefits to an
employee who returns to a different employer that also participates
in PERS/TRS.
10:40:59 AM
Co-Chair Green exampled an employee of a municipality who accepts
future employment with the State.
Ms. Carpenter relayed discussions on this matter. At issue is the
intention that surplus funds would be held in trust and available
for the employer to apply towards future debt. This could be
problematic if former employees were allowed to reinstate their
initial account balance with a different participating employer.
10:42:09 AM
Co-Chair Wilken asked the definition of "terminated" as it relates
to this topic.
Ms. Carpenter defined termination in this context as ending
employment for any reason, including retirement or taking a
position with a different employer.
Co-Chair Wilken clarified this includes both voluntary and
involuntary separation.
Ms. Carpenter affirmed.
10:42:47 AM
Ms. Carpenter continued outlining the final item on Page 4.
10:43:18 AM
Page 5
Who is eligible for reimbursements?
· Members of the DC plan who meet the age and/or service
requirements for medical benefits under AS 14.25.480 or
AS 39.35.880
o 25 years of service for peace
officers/firefighters; 30 years of service all
others; OR
o age 65 and have at least 10 years of service
· Surviving spouse of an eligible member
· Dependent children of an eligible member if both the
member and surviving spouse have died
Ms. Carpenter pointed out that the language of the current version
of SB 141, Version "F", inadvertently omitted language relating to
dependant eligibility. This error would be corrected
10:44:16 AM
Senator Hoffman, returning to information on Page 4, asked if the
individual account balance of a terminated employee would be held
in trust until that former employee reaches age 65 and does not
return to employment. He asked if at that time, the employer could
access those funds.
10:44:55 AM
Ms. Carpenter affirmed and explained the provision relating to
access to the fund by former employees, which she indicated should
be corrected.
10:45:17 AM
Page 6
Benefits Payable
· Monthly premiums for a major medical plan (participation
in State's retiree medical plan is not required)
· Qualified medical expenses under 26 U.S.C. 213(d) of
o An eligible member, member's spouse and dependent
children
o A surviving spouse of a qualified member and the
member's dependent children if dependent on the
surviving spouse
Ms. Carpenter stated that further clarification is needed on the
requirement of participation in a major medical plan.
10:46:13 AM
Ms. Carpenter continued outlining the items on Page 6.
10:46:37 AM
Co-Chair Green asked for an example of a procedure that would be
eligible for reimbursement from the Health Reimbursement Account
(HRA).
10:47:03 AM
Ms. Carpenter replied the eligible procedures are comparable to
those eligible for reimbursement through the existing Health Care
Reimbursement Account (HCRA), a flexible savings account available
to active employees. Medical expenses accrued by a participating
employee could be reimbursed from the employee's HCRA account.
Co-Chair Green asked whether co-payments required under a major
medical plan would be eligible.
Ms. Carpenter affirmed those plus annual deductible payments
qualify for HRCA reimbursement. She explained the application
process, noting the HRA process would likely be similar.
Co-Chair Green asked if a qualifying retiree would have to actively
seek reimbursements from the proposed HRA account.
Ms. Carpenter affirmed, unless the Division of Retirement and
Benefits made other arrangements.
10:48:29 AM
Page 7
Projected individual account balances
· HRA is a retention tool as it clearly favors longevity
[Spreadsheet depicting the Projected HRA Account Balances for
10, 15, 20, 25, and 30 years of services at 8.25% interest and
6% interest rates and with the following contributions: SB 141
1%, $500 cap, and, 1%, 1.5%, 2%, 2.5% and 3.5% with no cap.
Highlighted amounts are as follows.
Interest: 8.25%
Year 2026, 20 years of service, 2% no cap = $49,261
Year 2036, 30 years of service, 1% $500 cap = $56,465
Year 2036, 30 years of service, 1.5% no cap = $103,884
Year 2036, 30 years of service, 3.5% no cap = $242,397
Interest: 6.00%
Year 2026, 20 years of service, 2.5% no cap = $48,979
Year 2036, 30 years of service, 1% $500 cap = $37,762
Year 2036, 30 years of service, 2% no cap = $96,741
Year 2036, 30 years of service, 3.5% no cap = $169,296
A notation reads as follows.
Other assumptions: FY 06, beginning salary $35,000
Salary inflation 5.5% first 5 years; 4% thereafter
Projected Anchorage CPI (1.8017% to 4.8859%)]
Ms. Carpenter outlined the benefit amounts listed in five-year
increments.
10:49:46 AM
Page 8
Spend down scenarios
· Example 1: age 65, 30 yrs service, 10% contribution
[Spreadsheet depicting the balance of a retiree's account for
each year between the ages of 65 and 86 with reimbursements,
or deductions, made for Annual Health Premium estimates,
Annual Deductibles of $500 and Annual Interest Credited. This
data assumes the account is not accessed before the
participant reaches the age of 65 and utilizes the beginning
balance of $56,465 received from a 1% contribution rate with a
$500 annual cap as shown on Page 7.
Notations read as follows
Life expectancy*: Males = 16.3 yrs
Females = 17.9 yrs
*Source: National Vital Statistics Reports, Vol. 51,
No.3, December 19, 2002, p. 29. The tables used are for
all races based on year 2000 data.]
Ms. Carpenter overviewed this information in relation to the
information on Page 7.
10:51:01 AM
Senator Stedman noted that the current proposal would provide for a
1.5 percent contribution rate with a $500 annual maximum. Other
options are available due to an additional two percent that is
available, including increasing the contribution to the HRA to two
percent with no cap, or increasing the contribution rate to the
retirement account by two percent from the current proposed 8.25
percent, or smaller increases to both the HRA and retirement
accounts.
Senator Stedman asked whether reimbursements made from the HRA
would be taxable at the time of withdrawal.
Ms. Carpenter answered these funds would not be subject to
taxation.
Senator Stedman clarified the monies would be tax- free.
Ms. Carpenter affirmed.
Senator Stedman asked if funds drawn from the retirement account
would be taxable at the time of receipt.
Ms. Carpenter replied these monies would be subject to taxation.
Senator Stedman concluded the matter of increasing contribution to
the HRA should be considered, as it could be more beneficial to the
employee. This could provide a significant tax savings to
employees.
10:53:48 AM
Senator Bunde asked whether funds in a participant's HRA could be
accessed between the age the employee retires and age 65.
Ms. Carpenter replied that the funds would be available to a
retired employee if that member satisfied the years of service
requirement.
Senator Bunde commented the dependency of employees retiring before
the age of 65 on the HRA to cover health insurance premiums until
they become eligible to receive Medicare benefits. Health insurance
premiums have increased significantly in the past ten years and
would likely continue to increase. He asked if these projected
increases have been calculated and whether the HRA account would
provide sufficient funding for this period.
10:55:25 AM
Ms. Carpenter responded such calculations have been made and are
presented on Page 11. The annual health premium represented in the
data is the current premium rate adjusted for inflation according
to the projected trend calculated by Mercer Human Consulting. A
maximum amount of $20,000 was imposed, as it was determined that
health insurance premiums of this amount would comprise the
majority of an employee's income and that changes to the insurance
system would therefore be required to address the issue.
10:56:22 AM
Senator Hoffman asked how the premiums would be paid while the
participant is still employed.
Ms. Carpenter replied that the employer would pay the premiums,
although the employee shares the cost.
10:56:46 AM
Senator Hoffman noted this is similar to the current practice and
asked if the same health coverage provided to current employees
would be provided for new employees included in the defined
contribution plan.
Ms. Carpenter understood this would be the case.
10:57:19 AM
MELANIE MILLHORN, Director, Division of Retirement and Benefits,
Department of Administration, testified to the indicated intent
that members of the proposed defined contribution plan would
receive the same coverage as currently provided to all employees.
10:57:57 AM
Senator Hoffman asked if the medical costs incurred after
retirement have been averaged to determine the adequacy of the
estimated HRA balance and whether the contribution rate should be
one or two percent or greater. He cautioned against under funding
these accounts, as most medical expenses occur later in a person's
life.
10:58:59 AM
Ms. Carpenter reported the average FY 04 health cost experience for
pre-Medicare age retirement was approximately $5400 per person.
10:59:37 AM
Ms. Carpenter then asked Ms. Millhorn whether retirees with health
insurance coverage through an entity other than the State, such as
through another employer or a spouse, could qualify for HRA
reimbursements.
Ms. Millhorn affirmed that retirees would not be required to
participate in the State insurance plan, but would have the option
of obtaining a different policy and utilizing the HRA towards the
premium on that policy.
Co-Chair Green asked for clarification.
Ms. Millhorn specified that this practice would be allowable
provided the retiree satisfied the service requirements.
Ms. Carpenter reiterated that reimbursements from the HRA could
provide for the premiums of any health insurance policy regardless
of whether it is offered through the State.
11:01:19 AM
Page 9
Spend down scenarios
· Example 2: age 65, 20 yrs service, 20% contribution
[Spreadsheet depicting the balance of a retiree's account for
each year between the ages of 65 and 75 with reimbursements,
or deductions, made for Annual Health Premium estimates,
Annual Deductibles of $500 and Annual Interest Credited. This
data assumes the account is not accessed before the
participant reaches the age of 65 and utilizes the beginning
balance of $49,261 received from a 2% contribution rate with
no annual cap as shown on Page 7.
Notations read as follows
Life expectancy*: Males = 16.3 yrs
Females = 17.9 yrs
*Source: National Vital Statistics Reports, Vol. 51,
No.3, December 19, 2002, p. 29. The tables used are for
all races based on year 2000 data.]
Ms. Carpenter noted this table demonstrates a scenario of an
account with less accumulation.
11:02:17 AM
Page 10
Spend down scenarios
· Example 3: age 65, 30 yrs service, 10% contribution
[Spreadsheet depicting the balance of a retiree's account for
each year between the ages of 65 and 89 with reimbursements,
or deductions, made for Annual Health Premium estimates,
Annual Deductibles/Expenses of $3000 and Annual Interest
Credited. This data assumes the account is not accessed before
the participant reaches the age of 65 and utilizes the
beginning balance of $103,884 received from a 1.5%
contribution rate with no annual cap as shown on Page 7.
Notations read as follows
Life expectancy*: Males = 16.3 yrs
Females = 17.9 yrs
*Source: National Vital Statistics Reports, Vol. 51,
No.3, December 19, 2002, p. 29. The tables used are for
all races based on year 2000 data.]
Ms. Carpenter noted the higher contribution rate resulted in a
larger beginning account balance. Therefore, as depicted on this
spreadsheet, reimbursement was available for additional expenses.
11:02:49 AM
Page 11
Spend down scenarios
· Example 4: age 55, 30 yrs service, pays full premium
[Spreadsheet depicting the balance of a retiree's account for
each year between the ages of 55 and 66 with reimbursements,
or deductions, made for Annual Health Premium estimates,
Annual Deductibles of $500 and Annual Interest Credited. This
data assumes the account is not accessed before the
participant reaches the age of 55 and utilizes the beginning
balance of $242,397 received from a 3.5% contribution rate
with no annual cap as shown on Page 7.
Notations read as follows
Life expectancy*: Males = 16.3 yrs
Females = 17.9 yrs
*Source: National Vital Statistics Reports, Vol. 51,
No.3, December 19, 2002, p. 29. The tables used are for
all races based on year 2000 data.]
Ms. Carpenter pointed out this scenario demonstrates the use of the
HRA to reimburse the full cost of a health insurance premium for an
employee retiring at age 55. The account could be utilized to pay
the premiums on the insurance coverage required for qualification
of health care benefits beginning at age 65.
Senator Hoffman asked if consideration had been given to
contribution rate of one percent with a $500 annual cap. If such a
rate were adopted, he wanted to know if the funds would be taxable.
Ms. Carpenter stated the amount of employer contribution in such a
fund is optional, although employees are not allowed to contribute.
Senator Hoffman noted the matter of determining the appropriate
level of funding and subsequent contribution rate. He asked if an
employee could contribute to the HRA as well and whether those
contributions would be taxable.
Ms. Carpenter replied that federal regulations stipulate that an
employee could not contribute to a HRA.
Co-Chair Green understood that the account would loose its tax-
exempt status if employee contributions were allowed.
11:05:52 AM
Ms. Carpenter was unsure if the account would loose its tax exempt
status, but that it would be considered a health savings account,
which is more similar to a 401K account that is owned by the
employee and accessible to the employee at any time. Under the
proposed HRA plan, the employee could not access the funds until
retirement and the funds could only be utilized for qualifying
medical expenses.
11:06:37 AM
Senator Bunde spoke to benefits provided by the State of Alaska to
those provided by other states. He understood that other states
have higher age requirements for retirement.
Ms. Carpenter affirmed.
Senator Bunde pointed out that 38 states appear to have more rigid
retirement requirements for its public employees than Alaska has.
11:08:01 AM
Ms. Carpenter detailed that 25 states stipulate a retirement age of
at least 65. Other states have a higher age requirement than
Alaska.
Senator Bunde noted the requirement for retirement in Alaska of age
60 with eight years of service. Other states establish the
retirement age of at least 62 or 65 with ten years of service or
allow retirement for teachers at any age with 20 years of service.
He heard the argument that changes to the TRS plan would make
recruiting teachers more difficult. However, Alaska's system is
currently more flexible than most states and the proposed changes
to it would not be less flexible than the national average, rather
closer to the systems of other states.
Ms. Carpenter understood the same. The national trend is a
retirement age requirement of 65. This is the requirement of the
states located nearest to Alaska.
11:10:56 AM
Senator Bunde informed that at age 66 he has been retired from the
TRS plan for 13 years. He has benefited from the current system.
11:11:14 AM
Co-Chair Wilken pointed out that the State of Arizona does not have
a specified teachers retirement system and asked what category of
public employees teachers were placed.
Ms. Carpenter answered that teachers are categorized as "other"
employees, separate from public safety employees.
11:11:55 AM
Ms. Carpenter gave the next presentation utilizing a handout
titled, "Retirement Security Act, SB 141, Discussion Topic,
Conversion Option from DB to DC, April 2, 2005" [copy on file.]
Page 2
Discussion: Conversion Option from Defined Benefit plan to
Defined Contribution plan
11:12:24 AM
Ms. Carpenter pointed out that provisional language to allow for
such conversion has not been included in SB 141 to date, although
the intent is to proposed language in a future draft Committee
substitute.
11:12:44 AM
Page 3
Eligibility for members to convert from the DB plan to the DC
plan
· An employer must first choose to allow their DB plan
employees to transfer into the DC plan.
· Only unvested members of the DB plan will be eligible to
transfer into the DC Plan
o PERS members with less than 10 years of service
o TRS members with less than 8 years of service
· Participation in the defined contribution retirement plan
is in lieu of participation in the defined benefits plan.
· There is no option to return to the DB plan if you opt
into the DC plan.
Ms. Carpenter stated that the employer must chose whether to allow
members to convert, given the significant cost of this option.
Transferring vested members from the existing trust account is
unadvisable.
11:13:29 AM
Co-Chair Green asked if this is detailed in the memorandum
addressed to the Division of Retirement and Benefits from Deloitte
Consulting LLP dated April 1, 2005 [copy on file.] The subject of
this communication is "SB 141 - New PERS and TRS Operating Costs;
Asset and Liability Commingle Issues".
Ms. Carpenter affirmed.
Co-Chair Green advised Committee members to review this letter.
11:13:44 AM
Senator Bunde asked if the defined contribution plan could be made
available for vested members.
Senator Hoffman replied that benefits for existing employees could
be changed but not reduced.
Senator Bunde asked if any requirement exists to extend the defined
contribution plan to current members.
Ms. Carpenter answered there is no such requirement.
11:14:22 AM
Senator Bunde did not anticipate a significant number of transfers
would occur if allowed. He asked the projected impact of transfers
on the current system.
Senator Stedman understood that transfers would have no impact on
the unfunded liability of the existing system, as it is based on
accrued liability. Depending on the age and number of years of
service of an existing member, transferring to the defined
contribution plan could be beneficial. Employees in the Tier 1 and
Tier 2 plans would likely not benefit, although younger employees
included in the Tier 3 system could benefit if they did not already
have many years of service. The benefits received through the
proposed defined contribution plan would be comparable to those
provided to Tier 2 members.
11:16:23 AM
Senator Bunde surmised that allowing existing members to transfer
out of the defined benefit system would further impact the
financial situation of the current system, as deposits on behalf of
those members would no longer be contributing to the payout of
benefits to current retirees.
Co-Chair Green corrected that the transfer of existing employees
out of the current system would reduce the future liability of the
fund.
11:17:05 AM
Senator Stedman detailed the impact in ratios and actual cash flow.
An existing employee who opted to transfer from the defined
benefits plan to a defined contribution plan would receive some
credit from the years of service towards the new plan. However, the
unfunded liability of the existing plan would be reduced, as future
benefits for that employee would not be paid through the defined
benefits plan and therefore not calculated into the total unfunded
liability.
11:18:12 AM
Ms. Carpenter continued that the intention is to only offer
transfers to those employees not already vested. Benefits from the
defined benefits plan would not be paid to those employees. If an
existing member elected to transfer to the defined contribution
plan, that transfer would be irrevocable and the employee would
forfeit all rights under the current system.
11:19:09 AM
Page 4
Mechanics of Conversion
· Present value of the member contribution account balance
held in DB trust will be transferred to a new account.
· A 100% matching employer contribution will be made on
behalf of the employee to the new account; however, this
must be new money.
· Service credit earned under the DB plan will be credited
for purposes of vesting in medical benefits.
Ms. Carpenter outlined this information.
11:20:02 AM
Senator Hoffman asked if the employee would be allowed a period of
time before making a decision whether to transfer from the defined
benefit plan to a defined contribution plan.
Ms. Carpenter replied that a time limit has not been proposed;
however once an employee becomes vested in an existing tier plan,
the opportunity would be eliminated.
11:20:57 AM
Ms. Carpenter acknowledged the complexity in implementing a
deadline for transferring, as a Tier 3 PERS member becomes vested
for retirement benefits after five years, but does not become
vested for medical benefits until ten years of service has been
completed.
11:21:45 AM
Page 5
Potential Cost to Employers
[Spreadsheet indicating the costs for participants of Tier 1,
2 and 3 based on the number of years of service for both PERS
and TRS members as follows.
PERS
Service Years <5
Tier 1 $ 9,910,842
Tier 2 55,804,740
Tier 3 101,423,157
Total System 130,265,858
Service Years 5 to <10
Tier 1 $ 55,804,740
Tier 2 128,224,601
Tier 3 96,023,581
Total System 280,052,923
Service Years 10 to <15
Tier 1 $ 79,577,922
Tier 2 216,672,102
Tier 3 99,905
Total System 296,349,928
Service Years 15 to <20
Tier 1 $166,029,809
Tier 2 199,618,440
Tier 3 0
Total System 285,648,249
Service Years 20 to <25
Tier 1 $246,455,352
Tier 2 1,033,437
Tier 3 0
Total System 247,488,789
Service Years 25 and >
Tier 1 $141,721,266
Tier 2 123,906
Tier 3 0
Total System 141,845,172
Totals
Tier 1 $ 699,499,932
Tier 2 484,604,344
Tier 3 197,546,643
Total System 1,381,650,918
TRS
Service Years <8
Tier 1 $ 9,622,483
Tier 2 91,841,386
Total System 102,463,869
Service Years 8 to <10
Tier 1 $ 11,597,202
Tier 2 41,796,620
Total System 53,393,822
Service Years 10 to <15
Tier 1 $ 35,530,960
Tier 2 106,276,667
Total System 141,807,626
Service Years 15 to <20
Tier 1 $136,923,592
Tier 2 6,547,816
Total System 143,471,408
Service Years 20 and >
Tier 1 $221,422,095
Tier 2 0
Total System 221,722,095
Totals
Tier 1 $415,096,333
Tier 2 247,462,488
Total System 662,558,821
Grand Total By Tier
Tier 1 $1,114,596,264
Tier 2 732,066,832
Tier 3 197,546,643
Total System 2,044,209,739
Limit Conversion Option to: $290,288,124]
Ms. Carpenter pointed out that the total dollar amount would be
over $2 billion if all current members were allowed and
subsequently opted to transfer from the defined benefits plan to
the defined contribution plan.
Co-Chair Green clarified this is the scenario if the transfer
option were extended to all existing PERS and TRS members.
Ms. Carpenter affirmed emphasizing this is the reason the option
would be limited to unvested members.
11:23:03 AM
Co-Chair Wilken, returning to page 4 and the reference to "present
value of the member", asked for an explanation of the provision
that 100 percent of matching employer contribution made on behalf
of a transferring employee must be "new money".
Ms. Carpenter exampled that if a member has invested $10,000 into
the current system, the employer must match that amount so the new
account for that employee would hold $20,000.
Co-Chair Wilken questioned the requirement that the employer funds
must be new money.
Ms. Carpenter spoke of the inadvisability of transferring funds
from the existing trust account.
11:24:15 AM
Senator Bunde correlated this to the need to address concerns about
the increasing deficit of the current system.
11:24:23 AM
Page 6
Example of retirement lifetime benefits under DB plan
· PERS "Other" member, Tier III
· Beginning salary $35,000
· Member Contribution rate = 6.75%
· Semi-annual interest = 4.25%
· Works 30 years
· Normal Retirement at age 60
· Male Life Expectance = 23.8 years
30 Years of Member Contributions
and Interest $ 209,269 11.48%
Average Highest Consecutive 5 years 68,750
Benefit Formula = (2% x 10 yrs)
x (2.25% x 10 yrs)
+ (2.5% x 10 yrs) 67.5%
Annual Benefit 46,406.25
Annual Benefit x Life Expectancy 1,104,469
Lifetime Medical Premiums 394,514
Total Employer Benefits Payments $1,823,408 88,52%
Ms. Carpenter outlined this information.
11:27:27 AM
Senator Stedman corrected the male life expectancy to age 78, and
recalculated the total employer benefits payment to be $1.4
million.
11:27:58 AM
Ms. Carpenter indicated the spreadsheet would be corrected. The
purpose of this information is to compare the payout of the
employer and the employee.
11:28:15 AM
Senator Bunde clarified this information represents the conversion
of an existing member of Tier 3.
Ms. Carpenter affirmed.
Senator Bunde asked the representation of the percentages listed to
the right of the dollar amounts on the spreadsheet.
Ms. Carpenter explained the percentages demonstrate the ratio of
the employee payout to the employer payout. The employee
contribution is 11.48 percent and the employer contribution is
88.52 percent of the total benefit amount. Statute dictates that
the member contribution is paid out first.
11:30:02 AM
Senator Stedman announced the next presentation would follow the
handout titled, "Retirement Security Act, SB 141, Discussion Topic,
Containing Liability in Our Current System, April 2nd, 2005" [copy
on file.]
11:30:40 AM
MILES BAKER, Staff to Senator Stedman gave the presentation. He
noted he would address three items intended to limit the growth of
the fund's liability and allow for prediction of future growth. One
suggestion is included in the bill and other items are proposed for
inclusion and have been discussed previously.
11:31:58 AM
Page 2
Refunded Accounts
Mr. Baker indicated this is the first proposal.
Page 3
Refunded Accounts By System
PERS
Tier 1
>5 5,251
3-5 5,292
<3 31,179
Tier 2 14,999
Tier 3 7,667
Total 64,388
TRS
Tier 1
>8 388
6-8 369
<6 10,008
Tier 2 2,534
Total 13,299
PERS/TRS Total 77,687
All these members refunded their contributions when they
left state service.
However, they can come back, set up their indebtedness,
serve until vested and then get a benefit from the
system.
5,639 members are already vested.
They can be rehired, pay their indebtedness, leave
immediately and have 100% system paid medical at
retirement.
Refunded Accounts Represent a Looming Liability for the
System
Mr. Baker outlined this information and noted that of the 77,687
members eligible for this option, it is unknown how many would
chose to participate.
11:35:01 AM
Senator Bunde asked if statute could be adopted to prevent those
unvested members who cashed out their benefits from returning to
employment and repaying their indebtedness to receive the
retirement benefits. He asked if such a change to the existing
tiers would be constitutional.
11:35:47 AM
Mr. Baker elaborated on the different opinions on the matter. He
relayed a viewpoint opposing such a rule change, noting various
circumstances including an employee leaving to raise a family.
These circumstances are one basis for providing limited benefits to
rehired employees in the proposed Health Reimbursement Account
system.
11:38:05 AM
Senator Bunde suggested that although the practice could remain
permissible, the employer could be made to understand that the
legislature would be unlikely to provide funding for the increased
costs an employer would incur from the rehiring of these members.
11:38:37 AM
Page 4
[Line chart showing "Age Distribution of PERS & TRS Refunded
Accounts". A notation points out the "27,000+ Refunded
Accounts in the Retirement Age Eligibility Zone" of ages 50 to
61. A statement reads "Refunded Accounts Represent a Looming
Liability for the System.]
Mr. Baker cited the Division of Retirement and Benefits estimation
that two percent of the unvested members with refunded accounts
would return to employment in the system. This is based in part on
demographics, age distribution and other factors. He noted that
several employees working in the State Capital Building are rehired
members aiming to secure medical retirement benefits.
11:39:54 AM
Mr. Baker referenced a separate spreadsheet titled "Examples of
Refunded Accounts" provided by the Division of Retirement and
Benefits dated April 2, 2005 [copy on file.] This spreadsheet
examples various refunded accounts in which the member has been
rehired and has repaid, or is in the process of repaying,
indebtedness.
11:41:41 AM
Mr. Baker detailed the rules for Tier 1 members to become vested
through employment with the State Legislature. The normal service
requirement for Tier 1 members is five years, although one regular
legislative session is accounted as one year of service for
legislative employees. Current statute provides that service of at
least 60 days during a regular legislative session constitutes
service of one regular session and subsequently one year of
service. As a result, some members are allowed to work 60 days,
regardless of the length of the session, to fulfill the requirement
and achieve one year of service. To address this discrepancy, a
change to require at least 120 days of service for legislative
employees is proposed.
11:42:49 AM
Senator Stedman directed attention the reference on the spreadsheet
of a member who worked only one day upon being rehired to qualify
for the retirement benefits. He asked if this is an error.
11:43:05 AM
Mr. Baker explained the individual in question had 10 years of
service prior to separation from State employment and had chosen to
withdraw the benefits in cash at that time. To become eligible to
repay the debt and receive the medical retirement benefits, a
member must be rehired into the system. This member worked one day,
repaid the debt and then retired. The hiring manager did not
necessarily know of this member's intention and could have chosen
the most qualified applicant for the position. However, the new
employer must share in the retirement costs of this employee, even
if the amount is small.
11:45:52 AM
Co-Chair Wilken alleged that in some instances a hiring manager
could be aware of the member's intentions and deliberately hire the
member for that member's benefit regardless of the best interest of
the State or municipality affected.
Senator Hoffman understood the benefit to Tier 1 employees to
return to service. He asked the advantage to the one Tier 2
employee listed on the spreadsheet.
11:46:56 AM
Mr. Baker replied that although the benefits are different for Tier
2 employees, they are substantial. The age at which a qualifying
member becomes eligible to receive the retirement medical benefits
is later than the age required for Tier 1 members; however, the
total benefits remains substantial.
11:48:38 AM
Senator Bunde noted the majority of the rehire dates listed on the
spreadsheet occur during or after the year 2000. He asked if this
practice is a current trend and that as the advantages become well
known whether more members would participate, causing an increased
debt for the system. The legislature and State agencies must become
aware of this situation and the possibility of a significant
deficit. He asked if this situation could be monitored on a monthly
basis in the event of a "hiring rush".
11:49:55 AM
Mr. Baker expressed uncertainty as to whether the data on the
spreadsheet is representative of the history of this program. The
information is intended to present examples of the practices.
Utilizing the assumptions included on Page 4 of the presentation,
the demographics indicate increased participation as more Tier 1
and some Tier 2 members are reaching retirement age.
Mr. Baker could not speak to whether this discussion would alert
members to potential benefits they were previously unaware existed.
The Division of Retirement and Benefits regularly educates members
on all aspects of the benefit program.
11:51:23 AM
Senator Bunde asked whether participation in this aspect of the
program is a growing trend.
11:51:34 AM
Ms. Millhorn replied that the Division had analyzed the data of the
previous five years for this report. She offered to review a longer
time period. She emphasized that the indebtedness of the PERS and
TRS systems is unusual and not contained in other public retirement
systems.
11:52:34 AM
Senator Bunde asked if the witness' opinion on whether the current
provisions could be changed to disallow members who have been
refunded from participating in the benefit program in this manner.
11:52:49 AM
Ms. Millhorn responded that the issue has been studied and that the
Department of Law would need to review the legality of the options.
However, given the costs incurred over the previous five years, the
cost of any legal challenges could be mitigated by the savings that
would be realized by eliminating this practice.
11:53:21 AM
Senator Bunde recalled assertions that the current unfunded
liability situation of the retirement program is not the result of
a "perfect storm". He listed the current deficit, the lawsuit
requiring the system to retroactively pay large cost of living
increases and the "rush to reclaim" benefits by former employees as
an indication that "the clouds are certainly gathering."
11:53:37 AM
Senator Stedman further noted the existence of "a couple more
skeletons laying around."
11:53:56 AM
Senator Stedman suggested a phasing out of this practice over a
period of five years as an option for discussion. He opposed
policies that would disadvantage former employees. He asked if a
mechanism could be implemented to stop the abuse of this provision.
He asked if length of employment requirements could be instated in
a manner to be fair to both the employee and employer.
11:56:15 AM
Ms. Millhorn replied that the Division of Retirement and Benefits
could convey heightening awareness of the instances involving
manipulation of the system to hiring managers. The Division of
Personnel within the Department of Administration could also
participate in educating and monitoring hiring managers. She noted
Co-Chair Wilken suggestion that a hiring manager knowingly engaging
in this practice could be considered culpable and reckless.
11:57:25 AM
Co-Chair Wilken directed attention to the data of one member who
returned to service at the Fairbanks North Star Borough School
District. He requested additional information on this instance.
Ms. Millhorn replied that the information is confidential.
Co-Chair Wilken clarified he did not need the name of the employee,
only information about the position the member was hired into and
the reason employment was terminated after one day of service.
11:58:43 AM
Senator Bunde commented on the potential usefulness of determining
whether "clusters" of this practice occur in certain State
departments.
11:58:54 AM
Co-Chair Green referencing the case Co-Chair Wilken questioned,
noted that the termination date of this member's first separation
was in the 1970s.
11:59:23 AM
KATHY LEA, Retirement Manager, Health Benefits Section, Division of
Retirement and Benefits, Department of Administration, testified
that the Division could consult the employer to obtain information
regarding the circumstances of this member without disclosing the
identity of the member.
11:59:48 AM
Co-Chair Wilken requested details of this case.
12:01:05 PM
The discussion returned to the Containing Liability in Our Current
System handout.
Page 5
Fix Proposed in SB 141 (Sec 111 pg 90)
· AS 14.25.062 and AS 39.35.350
· The change would repeal the provision for letting people
repay their indebtedness to the state - effective June
30, 2010
· This provides for a 5 year window for members to
reinstate their accounts and begin paying the
indebtedness
Mr. Baker outlined this page.
12:01:55 PM
Senator Bunde questioned the viability of providing a five-year
window warning that this could result in more members participating
than would otherwise opt to do so.
12:02:17 PM
Mr. Baker replied that the entire issue should be discussed. He
shared that variations have been considered including a provision
to allow for accrued benefits. Another option would be to terminate
the refunded benefits program immediately under the argument that
an employee's decision to withdraw from the system is final. The
language proposed in the committee substitute is designed to
indicate the legislature's intent that the repayment option would
be eliminated.
12:04:01 PM
Co-Chair Green asked how the five-year time period was determined.
12:04:06 PM
Mr. Baker responded that five years was deemed equitable based on
the separate provisions relating to the Health Reimbursement
Account and the five years of service required to qualify for
benefits under that program.
12:04:21 PM
Senator Bunde encouraged the securing of legal advice on this
matter.
12:04:37 PM
Page 6
Benefit Enhancing Legislation
Mr. Baker indicated this is the second suggestion for containing
liability. He noted that Kevin Ritchie spoke to this matter in his
testimony provided earlier in this meeting.
12:04:59 PM
Page 7
Benefit enhancing legislation added $37.7 Million to our
unfunded liability in 2001 alone
Passed in 2001, HB 242
Enhanced medical benefits to existing employees by
providing full system paid medical to retired members
over age 60 and all members who retire with at least 25
years of service (TRS & Police/Fire) and 30 years of
service (PERS) regardless of hire date
· When it passed, the bill increased our system
liabilities by $23.7 Million
· Using today's health cost trends, that number has
grown to $37.7 Million
This Session, there are several new bills that if passed would
enrich benefits for existing employees and increase our
unfunded liability:
HB 6 - Allowing Fish & wildlife enforcement officers to
[claim] credit as peace officers
HB 40 - Allowing retired peace officers medical benefits
after 20 years instead of 25
SB 21 - Adding child or vulnerable adult probation
workers to the police/fire employee class
We Need Better Fiscal Analysis Before Enacting Legislation
Affecting Benefits
Mr. Baker emphasized that the legislature has limited ability to
reduce benefits. He remarked that the fiscal impact of HB 242 was
not reflected in any fiscal note at the time of its passage.
Mr. Baker stressed the need for legislators to have better
information on the cost implications when considering legislation
to increase benefits.
12:08:34 PM
Senator Bunde asked about different legislation adopted in a
previous session that provided medical benefits for patients with
certain preexisting conditions.
12:09:02 PM
Mr. Baker qualified that Page 7 did not contain an exhaustive list
of all legislation that would affect the retirement system's
unfunded liability. He stated that such information is available
through the Division of Retirement and Benefits website.
12:09:34 PM
Senator Bunde opined that if currently pending legislation
impacting PERS and TRS were heard in the Senate Finance Committee,
the members would be remiss if accurate fiscal notes were not
secured
12:09:54 PM
Co-Chair Wilken added that SB 24 should be included on the list.
12:10:10 PM
Page 8
Fix Proposed
· Establish enhanced Fiscal Note reporting procedures for
any legislation introduced that affects existing benefits
· Fiscal impact would have to be based on an actuarial
analysis of the impact on future cash flows and liability
to the system
Mr. Baker noted that provisions for this are not included in the
bill, but could be inserted. He spoke to the proposed 60-day review
period of legislation affecting the system as requested by Mr.
Ritchie.
12:12:06 PM
Page 9
Post Pension Retirement Adjustments
This is the final of the suggestions for containing liability.
12:12:20 PM
Page 10
Current Retirement Pension Adjustments
1. COLA - the greater of 10% or $50 increase in base benefit
amount paid to retirees living in Alaska
2. Post Pension Retirement Adjustment (PRPA) AS 39.45.475
· Automatic - annual increase given to eligible retirees
based [on] a percentage of the year to year change in
Anchorage CPI - 50% pre-65, 75% post-65
· Discretionary ("Ad Hoc") - Tier 1 members only. Awarded
"when the administrator determines that the cost of
living has increased and that the financial condition of
the retirement fund permits"
Mr. Baker stated that both the COLA (Cost of Living Adjustment) and
the PRPA are intended to inflation-proof pension payments.
Mr. Baker informed that the Ad Hoc provision was established in
1966. The criteria of whether the financial condition permitted
such distributions were not defined. COLA increases are easier to
determine; however the ability of the fund to support continued
increases is in question.
12:15:46 PM
Page 11
[Table detailing PRPA Eligibility and Calculation as follows
Ad Hoc
PRPA Issued
July 1st of every year. Members must meet
eligibility requirements as of July 1st.
Eligibility Requirements
Must be a Tier 1 PERS or TRS member. (Appx 24,500)
Must be a change in the Consumer Price Index (CPI)
from the date of retirement to date of PRPA
issuance.
Calculation
3 Step calculation:
1) Determine the % difference in the current CPI%
less the CPI% at retirement. Multiply the base
benefit by this percentage.
2) Determine the 4% compounded rate for each month
the member has been on retirement. Multiply the
base benefit ties this percentage.
3) The Ad Hoc amount granted is the lesser of the
results of steps 1 and 2.
Automatic
PRPA Issued
July 1st of every year. Members must meet
eligibility requirements as of July 1st.
Eligibility Requirements
1) Must be age 60, or
2) have been receiving retirement benefits for 5yrs
(PERS), 8 yrs (TRS), or
3) be receiving disability benefits
Calculation
If member meets minimum age or service eligibility,
receives 50% of the % change in CPI applied to the
base benefit plus any prior PRPAs granted.
Disability recipients and members who are age 65
receive 75% of the % change in CPI.
Notation reads, "AdHoc PRPA's Have a Huge Effect on Future
Liabilities".]
Mr. Baker outlined this information. He noted that the Ad Hoc
applied to all retirees. An attempt was made in the establishment
of the Automatic distributions to limit the eligibility pool. The
Ad Hoc also had contained a limit of a four percent increase, which
is different from the current calculation provisions.
12:17:17 PM
Mr. Baker concluded that the Automatic distribution program is
operating adequately. The program is applied annually and actuarial
trends for economies are figured into the models. The difficulty is
encountered with the Ad Hoc distribution program, as it is
discretionary and because when it would be awarded is unknown. If
an Ad Hoc is awarded after several years of no award, the amount is
calculated from the date of retirement for the recipients.
12:19:07 PM
Co-Chair Green asked if the provision stipulating that the awards
could only be made as the financial condition of the fund permits
would provide that such retroactive payments could be avoided.
Mr. Baker identified this as the "crux" of the issue. The
provision allowed Ad Hoc awards to be granted at the discretion of
the administrator. Such awards had been granted in all but two
years of the Ad Hoc program's inception in 1960 until the year it
was repealed. He told of a lawsuit arguing for retroactive payment
for the period when an Ad Hoc award had not been provided. A
settlement was reached in this case and retroactive payments were
made.
Page 12
[Spreadsheet detailing "Ad Hoc and Automatic PRPA Example" for
Tier 1 and Tier 2 retirees based on age.]
This page was not discussed.
12:20:42 PM
Page 13
[Spreadsheet showing "PRPA Awarding History" for PERS and TRS
and the "Total 12 Month Increase" and "Resulting Actuarial
Loss" for each of the years 1995 through 2002.
A notation reads, "Ad Hoc PRPA's Have a Huge Effect on Future
Liabilities."]
Mr. Baker pointed out that awards were not paid in 1995 and 1996
but were retroactively paid in 1997 in conjunction with the award
for that year.
Mr. Baker stressed that the retirement system was not designed to
allow for the increased pension for all Tier 1 retirees for the
remainder of their lives.
12:24:07 PM
Senator Stedman remarked upon the substantial amount of money. He
suggested that because the system is under funded no Ad Hoc award
likely paid for many years until the fund is again solvent.
However, past Ad Hoc awards have significantly increased the
unfunded liability.
Co-Chair Green asked about court decisions that caused the
retroactive awards to be required.
12:25:39 PM
Mr. Baker cited the situation as an example of the impacts of a
seemingly simple language change from "may" to "shall". Statutory
language initially read as "may" and had provided discretion in
granting awards. The language was later amended to "shall". This
created a situation that required the awards regardless of the
absence of a definition of "financial condition" as it relates to
the retirement system.
12:26:56 PM
Page 14
Fix Proposed
· AS 39.35.475 - Include language that defines what is
meant by "the financial condition of the retirement
fund".
· Proposal is to set a minimum funding ratio of 110%.
Mr. Baker told of the "total benefit funding level" in 1995 was
94.8 percent for the PERS fund and 89.6 percent for the TRS fund.
No Ad Hoc award was granted in that year, but the system was
required to pay out retroactively for that year when it gave an
award in 1997.
Co-Chair Green asked if statutory language could be adopted that
would provide a clearer definition of the funding level and when an
award would be appropriate.
Mr. Baker replied that the funding ratio must be at least 110
percent of the future liability.
12:29:35 PM
Co-Chair Green asked if statute should dictate that Ad Hoc awards
would not be retroactive. She asked if the proposed 110 percent
ratio applies to the financial condition of the fund at any given
year or rather reflect a longer term.
12:30:07 PM
Mr. Baker responded that the 110 percent ratio would be calculated
for the previous year in which an Ad Hoc award was under
consideration. Many years would pass before the condition of the
fund would return to a status of higher assets to liability
12:31:19 PM
Co-Chair Wilken remarked that the payments provided by the 1997
award was not insignificant. A friend received a check in the
amount of approximately $300,000.
12:31:55 PM
Senator Bunde suggested the friend's check was for different
reasons, as Senator Bunde received a check in the amount of $3,000.
This payment was the result of a class action lawsuit.
12:32:19 PM
Mr. Baker relayed the understanding that changes could not be made
to prevent retroactive payments to retirees. The Division has
exercised fiscal constraint for two years and has not issued an Ad
Hoc award. However, if an award were ever issued in the future, the
system would be required to "make whole" to the date of retirement
for those eligible to receive the award.
12:34:10 PM
Senator Hoffman asked the number of Tier 1 employees.
12:34:17 PM
Mr. Baker answered the number is approximately 24,500.
12:34:28 PM
Co-Chair Green characterized the Ad Hoc award program as a
"destructive plan" because if the financial condition of the fund
ever reached a level to permit an annual award, such an award would
not only be required but awards must be retroactively made for past
years when the fund was not in a position to make payments.
12:34:41 PM
Senator Bunde understood that the determination whether a payout
would be awarded is made by the administrator and not by the PERS
or TRS boards.
12:34:57 PM
Mr. Baker explained the commissioner of the Department of
Administration appoints the fund administrator.
Senator Bunde asked whether the actuarial consultant carries
insurance to cover losses incurred because of errors and omissions.
12:37:03 PM
Senator Stedman surmised the consultants likely carry some form of
insurance. The issue with the Ad Hoc awards is problematic because
the provisional language is so "imbedded" as to prevent "rational
business practices". The goal is to make the system totally funded.
When this is accomplished however, it would be "hit with a huge
liability" by the requirement to pay Ad Hoc awards retroactively.
Co-Chair Green asked if the retroactive payments would be required
for deceased retirees.
Senator Stedman replied that if eligible for the benefits before
becoming deceased, the future payments would be considered an asset
of the retiree's estate.
12:39:12 PM
Co-Chair Green asked if a solution could be found.
12:39:16 PM
Senator Stedman answered that this is the goal.
12:39:27 PM
Senator Stedman announced this concluded the presentations for this
hearing.
12:39:44 PM
KEVIN BROOKS, Deputy Commissioner, Department of Administration,
testified to implementation issues that could be expected in
enacting this legislation.
12:41:16 PM
Mr. Brooks reminded that the State of Alaska is but one employer
participating in the PERS and TRS systems. To date only the State
has been considered in the analysis of the impact of this bill.
However, the implications are far reaching and would affect all
school districts and other public employers.
Mr. Brooks, speaking to the impacts to the State, informed that
adjustments to the payroll system would be necessary to address the
different benefit structure for new hires. He noted a funding
request was included in the Governor's proposed FY 06 capital
budget to overhaul the State payroll system. Due to changes
resulting from recent bargaining unit contract agreements, the
accounting structure must be revised. This is one of a multitude of
issues that would make the July 1, 2005 effective date of this
legislation an "insurmountable" deadline.
12:43:52 PM
[Note: The witness references information not provided to the
Finance Committee Secretary for recordkeeping purposes.]
Mr. Brooks listed the 4,362 new hires in the PERS system and 1,231
in the TRS system during FY 04. During the first six months of FY
05 of July 1 to December 31, 2,862 new hires were made in the PERS
system and 1,088 in the TRS system. The majority of new hires in
the TRS system occur in late summer, as school districts are
staffing for the upcoming school year. Implementing the new tier
under these circumstances would present a "huge" challenge.
Mr. Brooks continued on the time required in establishing the new
board system, including identification of potential members. He
estimated that the board members could be seated within the first
90 days of the fiscal year by October 1, 2005. By January 1, 2006,
the systems could be implemented to accommodate the defined
contribution program of the new tier.
Co-Chair Green asked if implementation could be accomplished
earlier.
Mr. Brooks assured the Department of Administration would work as
expeditiously as possible to address the issue.
12:47:34 PM
Co-Chair Green noted that the transition requirements have been
addressed in committee substitute.
12:47:40 PM
Mr. Brooks understood this to be correct.
12:47:56 PM
Co-Chair Green pointed out that the FY 06 budget would provide
funding to allow a significant number of new hires. She asked if
the new hires could be categorized as tier 4 even if full
implementation of the provisions were not completed.
12:48:34 PM
Mr. Brooks had reviewed this.
Mr. Brooks could not speak for all employers as to how they would
report and submit withholding information. Participating employers
consist of some larger municipal governments and many smaller
entities. The primary concern is implementation for school
districts. Many districts cease operation after the school season
is completed and remain closed until shortly before the new season
begins. The Department would need to coordinate with the districts
to implement the new tier.
12:50:29 PM
Co-Chair Green asked if the implications of any other provisions of
this bill have been overlooked and should be addressed.
12:50:47 PM
Mr. Brooks told of a legal opinion forthcoming relating to
contribution changes for current employees.
12:51:11 PM
Senator Bunde noted a reference to the number of terminated
employees as zero and asked if this represents a net increase. He
presumed that some employees had left the system.
Mr. Brooks corrected the list represents participating employers.
He qualified that because of the hurriedness in preparation of the
information, some data should be regarded as unverified.
12:51:55 PM
Mr. Brooks stated the information reflects the number of hires into
the tier 3 PERS and tier 2 TRS systems.
Senator Bunde asked the number of terminated employees during the
time.
Mr. Brooks understood. The intent of the data is to calculate the
estimated number of new hires that would be made during the first
half of FY 06 and the impacts that a delay in implementation of
this legislation would have.
12:52:42 PM
Senator Olson pointed out that the City of Hooper Bay is listed
twice in the information.
Mr. Brooks replied that the listing is based on the PERS employer
number, and that the City of Hooper Bay could have been issued two
employer numbers.
12:53:45 PM
Ms. Millhorn commented on the "remarkable legislative process".
Co-Chair Green was impressed with the quality of work done on this
bill.
AT EASE 12:55:05 PM / 12:55:41 PM
Co-Chair Wilken spoke to conceptual changes to the committee
substitute.
12:56:32 PM
Co-Chair Wilken referenced the provisions relating to audit of the
actuary "not less than once every four years" for the retirement
portion of the plan and an annual audit of the health care portion.
He considered the performance of the actuary that "hasn't served
the State very well" as a contributor to the unfunded liability of
the current system.
Co-Chair Wilken suggested that once this legislation is implemented
the State would recruit and select an actuary, whether it remain
Mercer Human Consulting or another firm. In addition a peer review
system should be established with the State consulting both a
primary and a secondary actuary. A provision for this should be in
statute. Currently, the State expends approximately $400,000 to
$900,000 annually for actuarial advice to manage a $20 billion
fund, as well as "people's lives". Relying on one company for this
advice is "penny wise and pound foolish". Another firm should be
consulted.
12:59:13 PM
Co-Chair Green directed the Department to write suggested language
for such a provision.
12:59:36 PM
Mr. Brooks responded that such a peer review system is currently
employed. Audits were conducted on the Mercer Human Consulting
reports and adjustments to those reports were made accordingly.
These audits are done every four years. He suggested the frequency
could be increased.
1:00:15 PM
Co-Chair Green suggested the new board could be charged with
addressing this issue.
1:00:57 PM
Co-Chair Wilken remarked that a decision was made in 1995 based on
erroneous information that was not discovered until six years
later. He surmised that if a peer review system were in place, the
current situation could have been avoided. He concluded, "We have
been burned by the current system."
1:02:03 PM
Co-Chair Green noted language on pages 39 and 40 of the committee
substitute provide for audits of the actuarial reports.
Co-Chair Wilken agreed, but noted the stipulation that such audits
would occur no less than every four years. He argued the audits
should be conducted more often. He proposed that the primary
actuary present information and make recommendations based on that
information. A secondary auditor would review the findings of the
primary actuary and provide a second opinion. The audit would not
review past actions, but rather provide a second opinion on future
predictions. Such audits could be conducted every other year,
although annual reviews could be as efficient.
1:04:22 PM
Senator Stedman proposed for discussion purposes, increasing the
number of audits to once every three years. In addition, a peer
review would be conducted every other year. Allowing for too much
oversight would be preferable to too little oversight at least for
the next several years. The consequence of too little oversight
could be understated liabilities.
Co-Chair Green cited language in Section 43 of the committee
substitute providing for audits. She questioned the wisdom of
inserting additional language that could make the provision
convoluted.
1:06:22 PM
Co-Chair Wilken stated that the suggestion he proposed may not be
appropriate in this Section.
1:06:41 PM
Senator Bunde shared another conceptual change to the committee
substitute relating to the qualification requirements of board
members. He suggested that the PERS and TRS member representatives
be exempt from these requirements. PERS and TRS members could not
be expected to have the same professional working experience.
Co-Chair Green disagreed. The two board members representing the
PERS and TRS membership should have knowledge on the subject. Some
background, or at least a "professed interest" would be beneficial.
The existing board has included some members with experience and
knowledge who have been able to influence other board members.
1:09:04 PM
Senator Bunde cited the current committee substitute language as
requiring members to be "professionally credentialed or have
recognized competence in investment management, finance banking,
economics accounting, pension administration, and actuarial
analysis." He asked if an "active interest" in those fields would
be recognized as a recognized competence.
1:09:29 PM
Co-Chair Green was uncertain. She reiterated that a board member
should not be without some knowledge on the subjects. She spoke to
her difficulties in understanding this matter.
1:10:06 PM
Senator Bunde understood the requirement for a professed interest,
but questioned the stipulation that an applicant must have
recognized competence.
1:10:28 PM
Co-Chair Green remarked upon numerous teachers who have made
personal financial investments.
1:10:44 PM
Senator Stedman predicted that many TRS members would meet the
qualifications, as many are educators who have taught calculus,
accounting, business and other relevant courses. Other educators
teaching lower grade levels could also possess an interest in
participating in the board process and would likely qualify. A
teacher bringing real world experience into the classroom would be
beneficial to students.
1:12:00 PM
Senator Dyson appreciated the inclusion of health reimbursement
accounts in the proposed new tier. He also supported health savings
accounts for all State employees and has sponsored separate
legislation to do so. He asked why such a program could not be
included in SB 141.
1:12:44 PM
Co-Chair Green asked if Senator Dyson has discussed this with the
Division of Retirement and Benefits.
Senator Dyson replied he has not directly addressed the matter,
although he has been requesting assistance from the Murkowski
Administration for two years with no avail. Many other government
entities and other employers are extending this benefit and
insurance companies are offering "attractive packages". The State
of Alaska should participate as well.
1:13:58 PM
Senator Stedman, returning to the topic of recognized competence in
board members, offered language to provide that ten years
professional experience would be a qualifier.
Senator Stedman then recalled review of whether to include a health
savings account program in this legislation. It was determined that
health reimbursement accounts have greater tax benefits because the
accounts are employer controlled. Therefore the health
reimbursement account is more advantageous to both the employee and
the employer.
1:15:50 PM
Co-Chair Wilken asked about penalties on early withdrawal of
employee contributions.
1:16:18 PM
Senator Stedman explained the vesting schedule for the employer.
The employee contribution remains in that employee's account.
Co-Chair Wilken clarified that terminated employees could withdraw
the amount of their contribution to transfer to another retirement
account, or to purchase a vehicle and pay a tax penalty.
Senator Stedman affirmed.
Co-Chair Wilken asked about an employee who retires at the age of
55, then decides to withdraw the funds later.
Senator Stedman replied that the details of the variables involved
would be established. One possibility would be to roll the funds
into a private Individual Retirement Account (IRA) upon retirement.
Generally, some flexibility would be allowed in the distribution of
payouts.
Co-Chair Green furthered the federal government has established a
retirement age of 59 and one-half to withdraw these funds without
penalty from the Internal Revenue Service (IRS).
1:18:50 PM
Co-Chair Wilken asked if the committee substitute provides for
existing employee contributions.
Senator Stedman outlined the basis points.
1:19:47 PM
Co-Chair Wilken asked whether this would establish a policy in
which the employee would be expected to participate at 50 percent.
Senator Stedman affirmed clarifying this would address only the
normal service cost and not the unfunded liability.
1:20:22 PM
Co-Chair Wilken understood that future legislation would allow the
basis points to increase in varying amounts depending on the cost
to the system.
AT EASE 1:20:47 PM/1:21:59 PM
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