Legislature(2005 - 2006)SENATE FINANCE 532
04/06/2005 09:00 AM 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
| + | HCR 2 | TELECONFERENCED | |
| + | SB 144 | TELECONFERENCED | |
| + | SB 110 | TELECONFERENCED | |
| + | SB 103 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | SB 141 | TELECONFERENCED | |
MINUTES
SENATE FINANCE COMMITTEE
April 6, 2005
9:06 a.m.
CALL TO ORDER
Co-Chair Green convened the meeting at approximately 9:06:55 AM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Con Bunde, Vice Chair
Senator Fred Dyson
Senator Bert Stedman
Senator Donny Olson
Also Attending: MICHAEL O'LEARY, CFA, Executive Vice President,
Callan Associates Inc.; GARY BADER, Chief Investment Officer,
Treasury Division, Department of Revenue;
Attending via Teleconference: from an offnet location: MEG
CORDUAN, Coordinator, Chancellor's Office, University of Alaska,
Fairbanks Campus; JIM JOHNSEN, Vice President, Faculty and Staff
Relations, University of Alaska; JOE BEEDLE, Vice President,
Finance, University of Alaska; DORIS ROBBINS; ROBERT STRAHAN,
Finance Director, City of Bethel; From Kenai: MELODY DOUGLAS, Chief
Financial Officer, Kenai Borough School District;
SUMMARY INFORMATION
SB 141-PUBLIC EMPLOYEE/TEACHER RETIREMENT/BOARDS
The Committee heard from the University of Alaska, a financial
consultant and took public testimony. A committee substitute and
four amendments were adopted. The bill was reported from Committee.
SB 144-EMISSION CONTROL PROGRAM PERMITS/REGS
This bill was scheduled but not heard.
HCR 2-IN-STATE NATURAL GAS NEEDS
This bill was scheduled but not heard.
9:07:26 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 was the 11th hearing for this bill in the Senate Finance
Committee.
Co-Chair Green explained the proposed committee substitute, Version
"Y", incorporates the amendments adopted during the previous
hearing on this bill.
Co-Chair Wilken moved for adoption of CS SB 141, 24-LS0637\Y as a
working document.
Without objection the committee substitute was ADOPTED.
Co-Chair Green next informed that representatives of the University
of Alaska have requested inclusions of certain provisions in this
legislation. These relate to questions raised regarding collective
bargaining. A legal opinion was obtained, which determined that
statutory language was not required to address the issue for most
agencies with Public Employees Retirement System (PERS) and
Teachers Retirement System (TRS) members, as the practice was
standard operations. However, the University operates somewhat
differently and would require a statutory provision. To date, the
collective bargaining practices of the University have operated
under the direction of legislative intent.
9:10:21 AM
Senator Olson asked if the current collective bargaining practice
has been upheld in court challenges.
Co-Chair Green responded that the practice has not been challenged
since the original court finding was issued in 1978. The practice
has continued in the current manner since that date. The longer the
standard is maintained, the more validity the standard has.
Senator Olson surmised the issue has been argued in a court of law
only one time.
Co-Chair Green affirmed.
9:11:21 AM
Amendment #20: This amendment inserts "relating to university
retirement programs" into the title on page 1, line 4.
This amendment also inserts "participates in a" to AS 14.25.040(a)
amended in Section 5. The amended language reads as follows.
(a) Unless a teacher or member participates in a [HAS
ELECTED TO PARTICIPATE IN THE OPTIONAL] university retirement
program under AS 14.40.330 - 14.40.799, [OR] has filed an
election under AS 14.25.043(b), or has elected to participate
in the plan established in AS 14.25.310 - 14.25.590, a teacher
or member contracting for service with a participating
employer is subject to AS 14.25.009 - 14.25.220 [THIS
CHAPTER].
This amendment also inserts a new bill section on page 10,
following line 22 to read as follows.
Sec. 16. AS 14.25.115(a) is amended to read:
(a) A teacher in membership service on or after July 1.
1977, who is appointed to retirement on or after July 1, 1978,
may elect to apply unused sick leave credit in computing the
total number of years of credited service under AS
14.25.110(d) except for sick leave earned while participating
in a [THE OPTIONAL] university retirement program under AS
14.40.661 - 14.40.799. To obtain service credit for unused
sick leave, a teacher must apply to the administrator not [NO]
later than one year after appointment to retirement. Unused
sick leave shall be credited on a day-for-day basis in
accordance with the table for service after July 1, 1969,
contained in AS 14.25.220(45). Teacher contributions may not
be required for credited unused sick leave.
This amendment also inserts a new bill section on page 13,
following line 18 to read as follows.
Sec. 30. AS 14.25.220(42) is amended to read:
(42) "teacher" and "member" are used interchangeably
under this chapter and mean a person eligible to participate
in the system and who is covered by the system, limited to
(A) a certified full-time or part-time
elementary or secondary teacher, a certified school
nurse, or a certified person in a position requiring a
teaching certificate as a condition of employment in a
public school of the state, the Department of Education
and Early Development, or the Department of Labor and
Workforce Development;
(B) a full-time or part-time teacher of the
University of Alaska or a person occupying a full-time
administrative position at the University of Alaska that
requires academic standing; the approval of the
administrator must be obtained before an administrative
position qualifies for membership in the system; however,
a teacher or administrative person at the university who
is participating in a [THE OPTIONAL] university
retirement program under AS 14.40.661 - 14.40.799 is not
a member under this system;
(C) a state legislator who elects membership
under AS 14.25.040(b);
This amendment deletes "has elected to participate in the optional"
and inserts "is participating in a" to Sec. 14.25.330. Membership.
(b) added through Section 30 on page 14, line 14. The amended
language reads as follows.
(b) A teacher who is participating in a university
retirement program under AS 14.40.660 - 14.40.799 may not
participate as a member of the defined contribution retirement
plan.
This amendment also deletes the language of Section 35 on page 37,
lines 25 - 30 and inserts 15 new bill sections to read as follows.
Sec. 35. AS 14.40.661 is amended to read:
Sec. 14.40.661. Authority of board. (a) The board may
establish and maintain [AN OPTIONAL] university retirement
programs [PROGRAMS] for eligible employees in which
retirement, health, and death benefits are provided through
the purchase of annuity contracts, either fixed, variable, or
a combination of fixed and variable. Participation in a
university retirement [THE] program is in place of
participation in a state retirement system. The university may
establish retirement programs for new employees in a
participating position at any time. Retirement programs may be
optional or mandatory.
(b) The board shall
(1) provide for the administration of the retirement
programs [PROGRAM], including procedures for resolving
complaints from participating employees;
(2) designate the company or companies to which
payment of the contributions required under AS 14.40.691 may
be made, after considering the
(A) nature and extent of the rights and
benefits that the contracts will provide to employees who
elect to participate and to their beneficiaries;
(B) relation of the contractual rights and
benefits to the contributions to be made under AS
14.40.661 - 14.40.799;
(C) suitability of the contractual rights and
benefits to the needs and interests of employees who
[ELECTING TO] participate and to the interest of the
university in the employment and retention of employees;
(D) ability of the designated company or
companies to provide rights and benefits under the
contracts; and
(E) efficacy of the contracts in the
recruitment and retention of faculty and administrators;
(3) take other actions required to ensure that the
retirement programs comply with applicable provisions of 26
U.S.C. 401 - 417 [PROGRAM QUALIFIES AS A QUALIFIED TRUST UNDER
26 U.S.C. 401(a)] (Internal Revenue Code).
Sec. 36. AS 14.40.661 is amended by adding a new subsection to
read:
(c) The university retirement programs established under
this section are not subject to bargaining under AS 23.40.070
- 23.40.260 (Public Employment Relations Act).
Sec. 27. AS 14.40.671(b) is amended to read:
(b) An election under (a) of this section to participate
in a university retirement [THE] program is irrevocable. The
election shall be made in writing on a form provided by the
board and approved for the state by the commission of
administration. The form must be filed with the university not
[BOARD NO] later than 30 days after the date on which the
employee is notified by the university that the employee is
[FIRST BECOMES] eligible to participate in the program. A copy
of the form shall be delivered to the appropriate state
retirement system. The election becomes irrevocable on the
date it is received by the board.
Sec. 38. AS 14.40.671(c) is amended to read:
(c) Participation in a university retirement [THE
ELECTION TO PARTICIPATE IN THE] program constitutes a waiver
of all rights and benefits under the state retirement systems
earned on or after the effective date of the election if the
participation is optional, or the effective date of the
participation if the participation is mandatory, and while the
employee is participating in a university retirement [THE]
program.
Sec. 39. AS 14.40.671(d) is amended to read:
(d) Except as provided in (e) of this section, if a
nonvested member of a state retirement system participates
[ELECTS TO PARTICIPATE] in a university retirement [THE]
program, the employee may choose to transfer the amount in the
employee's contribution account to a university retirement
[THE] program. If the employee chooses to transfer the
account, the appropriate state retirement system shall pay to
the university on behalf of the employee an amount equal to
the balance in the account. The payment must be made within 45
days after notice of the employee's decision to transfer the
employee's contribution account to a university retirement
program [THE ELECTION] is received by the state retirement
system. The financial officer of the university shall
[IMMEDIATELY] pay the amount received to the designated
company or companies for the benefit of the employee as soon
as possible. An employee who transfers assets under this
subsection may not reclaim the corresponding service in the
state retirement system if the employee is reemployed under
the state retirement system.
Sec. 40. AS 14.40.671(e) is amended to read:
(a) An employee whose rights to transfer assets out of a
state retirement system are subject to a qualified domestic
relations order is entitled to transfer assets from the state
retirement system to a university retirement [THE] program
only if the requirements for receiving a refund under AS
14.25.150(b), 14.25.360, [OR] AS 39.35.200(c), or 39.35.760,
as appropriate, are met.
Sec. 41. AS 14.40.671(f) is amended to read:
(f) If a vested member of a state retirement system
participates [ELECTS TO PARTICIPATE] in a university
retirement [THE] program, the employee ceases to be an active
member of the state retirement system on the effective date of
the participation in a university retirement [THE] program.
The employee retains all benefits accrued in the state
retirement system.
Sec. 42. AS 14.40.671(g) is amended to read:
(g) An employee who does not [ELECT TO] participate in a
university retirement [THE] program under this section becomes
or remains a member of the appropriate state retirement
system.
Sec. 43. AS 14.40.671 is amended by adding new subsections to
read:
(h) Notwithstanding (b) of this section, the university
may establish a mandatory retirement program for new
employees.
(i) Notwithstanding (b) of this section, the university
may offer an employee who made an election not to participate
in an optional university retirement program at the time the
employee was eligible to participate in the program an option
to enroll in a different university retirement program first
established by the university after the effective date of this
subsection.
Sec. 44. AS 14.40.681 is amended to read:
Sec. 14.40.681. Retirement system membership. An
[ELIGIBLE] employee participating [ELECTING TO PARTICIPATE] in
a university retirement [THE] program may not participate in a
state retirement system during the time the employee is
employed in a participating position. If the employee is later
employed in a position covered by a state retirement system
that is not a participating position, the employee may not
continue to participate in a university retirement [THE]
program and shall begin to participate in the state retirement
system.
Sec. 45. AS 14.40.691(c) is amended to read:
(c) The board may specify that contributions required by
this section are made by a reduction in salary under 26 U.S.C.
403(b) or 26 U.S.C. 414(h)(2) (Internal Revenue Code).
Sec. 46. AS 14.40.701 is amended to read:
Sec. 14.40.701. Benefits. Payment of benefits to
participants of the program is the responsibility of the
company or companies designated by the board and is not the
responsibility of the board, the university or the state. The
benefits are payable to participants or their beneficiaries in
accordance with the terms of the applicable retirement plan
document [ANNUITY CONTRACT OR CONTRACTS. HOWEVER, RETIREMENT
BENEFITS MUST BE PAID IN THE FORM OF A LIFETIME INCOME. EXCEPT
FOR DEATH BENEFITS, A SINGLE-SUM CASH PAYMENT IS NOT PERMITTED
UNDER THIS SECTION.]
Sec. 47. AS 14.40.799(3) is amended to read:
(3) "contribution account" means the member
contribution account under AS 14.25.009 - 14.25.220, the
individual account under AS 14.25.310 - 14.25.590, [AS 14.25
OR] the employee contribution account under AS 39.35.095 -
39.35.680, or the individual account under AS 39.35.700 -
39.35.990 [AS 39.35], whichever is appropriate;
Sec. 48. AS 14.40.799(5) is amended to read:
(5) "participating position" means a position that
is a permanent position that is at least a .5 full-time
appointment and is included in the applicable retirement plan
document [AS
(A) A FACULTY APPOINTMENT; OR
(B) AN ADMINISTRATOR AND THE POSITION HAS BEEN
DESIGNATED BY THE BOARD FOR INCLUSION IN THE PROGRAM];
Sec. 49. AS 14.40.799(6) is amended to read:
(6) "program" means a [THE OPTIONAL] university
retirement program;
Sec. 50. AS 14.40.799 is amended by adding a new paragraph to
read:
(8) "university" means the University of Alaska.
This amendment also inserts a new bill section on page 61,
following line 24 to read as follows.
Sec. 84. AS 39.35.120 is amended to read:
Sec. 39.35.120. Commencement of participation. (a) An
employee of the state shall be included in this system upon
commencement of employment with the state, or on January 1,
1961, whichever is later. Unless an employee participates in a
[HAS ELECTED TO PARTICIPATE IN THE OPTIONAL] university
retirement program under AS 14.40.661 - 14.40.799, an employee
of a political subdivision or public organization that becomes
an employer shall be included in the system on the effective
date of the employer's participation or the date of the
employee's commencement of employment with the employer,
whichever is later.
(b) Inclusion in the system is a condition of employment
for an employee except as otherwise provided for
(1) an elected official;
(2) an employee making an election under AS
39.35.150(b); and
(3) an employee of the university who participates
in a [HAS ELECTED TO PARTICIPATE IN THE OPTIONAL] university
retirement program under AS 14.40.661 - 14.40.799.
This amendment also inserts a new bill section on page 72,
following line 28 to read as follows.
Sec. 117. AS 39.35.680(21) is amended to read:
(21) "member" or "employee"
(A) means a person eligible to participate in
the system and who is covered by the system;
(B) includes
(i) an active member;
(ii) an inactive member;
(iii) a vested member;
(iv) a deferred vested member;
(v) a nonvested member;
(vi) a disabled member;
(vii) a retired member;
(viii) an elected public officer under AS
39.35.381;
(C) does not include
(i) former members;
(ii) persons compensated on a contractual
or fee basis;
(iii) casual or emergency workers or
nonpermanent employees as defined in AS 39.25.200;
(iv) persons covered by the Alaska
Teachers' Retirement System except as provided
under AS 39.35.131 and 39.35.381, or persons
covered by a [THE OPTIONAL] university retirement
program;
(v) employees of the division of marine
transportation engaged in operating the state ferry
system who are covered by a union or group
retirement system to which the state makes
contributions;
(vi) justices of the supreme court or
judges of the court of appeals or of the superior
or district courts of Alaska;
(vii) the administrative director of
courts appointed under art. IV, sec. 16 of the
state constitution unless the director becomes a
member under AS 39.35.158;
(viii) members of the elected public
officers' retirement system (former AS 39.37); and
(ix) contractual employees of the
legislative branch of state government under AS
24.10.060(f);
(D) may include employees of the division of
marine transportation excluded under (C)(v) of this
paragraph provided that
(i) the State of Alaska formally agrees
to their inclusion through the process of
collective bargaining; and
(ii) no collective bargaining agreement
has the effect of obligating contributions made by
the state under AS 39.30.150 in the event the state
resumes participation in the federal social
security system;
New Text Underlined [DELETED TEXT BRACKETED]
This amendment also makes conforming changes and renumbers bill
sections as necessary.
MEG CORDUAN, Coordinator, Chancellor's Office, University of
Alaska, Fairbanks Campus, testified via teleconference from an
offnet location, to request this amendment be adopted to provide
clarification. The unions covering University employees have never
attempted to bargain the current practice; however it would be
beneficial to include statutory language.
AT EASE 9:13:28 AM
Co-Chair Green requested an explanation of the amendment.
JIM JOHNSEN, Vice President, Faculty and Staff Relations,
University of Alaska, testified via teleconference from an offnet
location that the proposed amendment would modify the statute that
provides the optional retirement program for the University. The
intent is to "provide a clear statement that the optional
retirement plans and the University's pension programs are not
subject to collective bargaining." This amendment would allow the
Board of Regents to establish a system to allow or require new
employees to participate in an optional retirement plan. The Board
could also permit existing employees who had initially chosen to
not participate, or were ineligible to participate in the optional
retirement plan, an opportunity to do so. This would be a one-time
availability for existing employees to change their retirement
plan. Currently only faculty and executive administrators are able
to participate in the optional retirement plan.
Mr. Johnsen continued that this amendment would also allow the
Board of Regents to implement a health benefit provision in all or
part of the plan. The current work plan is a limited defined
contribution retirement plan without any health care coverage. A
health care reimbursement account is one option for consideration.
Co-Chair Green moved for adoption of the amendment and objected for
discussion.
9:17:12 AM
Senator Hoffman clarified that the witness stated that many
employees had opted to participate in the optional retirement plan
with the understanding that electing to participate was a one-time
decision; and that this amendment would allow employees to change
that decision to no longer participate in the optional retirement
plan.
9:17:55 AM
Mr. Johnsen corrected the intent is not to provide an opportunity
to allow employees participating in the optional retirement plan to
chose to instead participate in the PERS or TRS plans. Rather the
amendment would permit the Board to allow those employees who had
opted to participate in PERS or TRS to instead participate in the
optional retirement plan.
There was no objection and the amendment was ADOPTED.
9:18:51 AM
Amendment #17: This amendment to Section 110 on page 98 lines 18 -
20 deletes the new paragraph added to AS 44.64.030(a) and inserts
two new paragraphs to read as follows.
(36) AS 14.25.006 (teachers' retirement
system);
(37) AS 39.35.006 (public employees' retirement
system.
Co-Chair Green moved for adoption and objected to the motion to
provide an explanation.
Co-Chair Green relayed that an administrative law judge pointed out
that the initial paragraph, which specified AS 37.10.210 -
37.10.390 (Alaska Retirement Management Board), would have
inadvertently allowed the administrative law judge to hear appeals
to Alaska Retirement Management Board decisions. Co-Chair Green
stressed that this was not the intent and that this amendment would
correct this. The appeals actually originate from TRS and PERS
decisions.
The amendment was ADOPTED without objection.
9:20:32 AM
Amendment #18: This amendment deletes Sec. 39.35.975.
Administrative director of courts., on page 92, lines 22 - 25,
added by Section 101.
Co-Chair Green moved for adoption and objected to provide an
explanation.
Co-Chair Green stated this amendment would remove the option of an
administrative director or the Alaska Court System to withdraw from
the Judicial Retirement System and participate in the public
employees' defined contribution retirement plan. There is only one
administrative director position within the Alaska Court System and
"one can never envision them opting to move to the defined
contribution plan."
Without objection the amendment was ADOPTED.
9:21:49 AM
Amendment #19: This amendment deletes "plan [SYSTEM]" and inserts
"retirement fund" to the language of Section 17 on page 11, line 5.
The amended language reads as follows.
Sec. 17. AS 14.25.143(a), as that subsection read following
amendment by sec. 12, ch. 106, SLA 1988, until amended by sec.
12, ch 97, SLA 1990, is amended to read:
(a) When the administrator determines that the cost of
living has increased and that the financial condition of the
retirement fund permits, the administrator shall increase
benefit payments to persons receiving benefits under this
plan. For purposes of this subsection, the financial condition
of the plan would only permit an increase in benefits when the
ratio of total fund assets to the accrued liability meets or
exceeds 110 percent. In this subsection, "accrued liability"
means the present value of all member benefits accrued by
member service in this plan [SYSTEM].
This amendment also changes the statutory reference in subsection
(a)(5) of Sec. 14.25.440. Distribution Requirements., added through
Section 30, on page 21, line 17. The amended language reads as
follows.
(5) notwithstanding (a) of this section, a
participant whose account has a balance of $1,000 or less
meets the requirements of AS 14.25.410, at which time the
participant must take payment of the participant's account.
This amendment also deletes "working" following "professional" from
subsection (3) of AS 37.10.390. Definitions., amended by Section 47
on page 46, line 7. The amended language reads as follows.
(3) "recognized competence" means a minimum of 10
years' professional experience working or teaching in the
field of investment management, finance, banking, economics,
accounting, pension administration, or actuarial analysis;
New Text Underlined [DELETED TEXT BRACKETED]
Co-Chair Green moved for adoption and objected to offer an
explanation. She stated that the changes proposed in the amendment
are to correct drafting errors.
There was no objection and the amendment was ADOPTED.
9:22:57 AM
Senator Hoffman asked if a revised fiscal note would be prepared to
reflect the amendments just adopted.
Co-Chair Green replied that the only fiscal changes relate to the
University of Alaska system and that a fiscal note revision was not
necessary.
Senator Hoffman contended that the legislature would be responsible
for changes that impact the University budget and should therefore
be reflected in a fiscal note.
Co-Chair Green indicated she would research the matter.
9:23:56 AM
MELODY DOUGLAS, Chief Financial Officer, Kenai Borough School
District, testified via teleconference from Kenai, read into the
record the following.
The District is the largest employer on the Kenai Peninsula
and the fourth largest district in the State, employing
approximately 11,000 people.
You're going in the right direction with much of the
legislation contained in SB 141 for PERS and TRS employees and
elected officials. Thank you for your hard work. I would like
to bring a few issues to your attention today for further
discussion and resolution.
Creating a new tier for both PERS and TRS is essential to the
health of these systems. However, a significant issue in my
mind is the unfunded liability of the nearly $6 billion if
paid today, most of which is coming from full health benefits
for retirees younger than 65. I ask that pension bonds be
explored to address this matter. I have heard it said that we
(the state) can't commit those coming after us by such a
financing arrangement. The fact is that the financial
commitment is already here; we are just paying for it with
increased employer contribution rates. It's not only prudent;
it is our responsibility to address this matter. Pension
bonds, for even a portion of the unfunded liability if not
all, would have the affect of lowering employer contribution
rates. Estimated bond rates of 5.5 to 6% would generate a
savings as compared to the 8.25% currently charged to
employers for the PERS and TRS unfunded liability. However,
the benefit of this option will decline as interest rates
rise.
New tiers should be based on a defined contribution retirement
system for new employees. Corporate America has transitioned
to a defined contribution system because they could no longer
afford to incur all the risk of a defined benefit retirement
system. The Public Sector must follow suit; the Kenai
Peninsula Borough School District does not have the funds to
address ongoing employer rate increases without draconian cuts
in the classroom. I am concerned about attracting and
retaining quality employees throughout the State. I don't see
a defined contribution system and recruiting and retention as
mutually exclusive if the system includes a combination of say
50% fixed (less risky) investing, and 50% flexible investing,
in conjunction with a health care benefits. Requiring a fixed
investment component will ensure a secure level of retirement
benefits for individuals. Portability of an individual's
retirement fund is an attractive feature of a defined
contribution system, given that younger generations are
expected to change jobs 7 or more times during their career.
9:27:06 AM
Co-Chair Green interrupted to request that the witness conclude her
testimony, as the next speaker must depart shortly to catch an
airplane. [Ms. Douglas resumed testifying later in the hearing.]
9:27:19 AM
MICHAEL O'LEARY, CFA, Executive Vice President, Callan Associates
Inc., gave his presentation highlighting portions of a handout
titled "ASPIB Asset Allocation Background" [copy on file].
Page 3
Callan Associates Inc.
· Independent employee owned pure investment consulting
firm serving 289 plan sponsor clients as of 12/31/04
· 171 employees including dedicated specialists in
quantitative modeling, manager research, and performance
monitoring
· Largest investment consulting practice serving public
funds
o 88 public fund clients with aggregate assets of
$692 billion
o average more than 22 asset liability and 100 asset
allocation studies annually
o last conducted an asset liability study in 2003
o annually update asset allocation only analysis
Mr. O'Leary told of the activities of the company he represents.
Page 14
Efficient Portfolios
· For any given rate of return, no other portfolio has less
risk
· For any given level of risk, no other portfolio provides
superior returns.
· Efficient portfolios lie somewhere on the efficient
frontier.
· In practice, it is not uncommon to find portfolios that
are inefficient in a risk-return context.
And
Page 15
Asset Liability Concepts
Benefits = Contributions + Earnings - Expenses
Benefits - traditional retirement benefits dependent on future
inflation impacting salaries and post retirement adjustments
Contributions - dependent on funding status, plan
demographics, expected earnings & discount rate, actuarial
budgeting approach
Earnings - dependent on asset allocation policy, manager
success and cost (frequently dominated by size factors but
also varied by asset type).
Often misunderstood reality - actuarial loss is failure to
achieve assumed actuarial return (8.25% per year for AK).
Simply failing to earn anything over 3 years results in a $1
million liability becoming a $1.268 liability.
Mr. O'Leary gave a background of how the Alaska State Pension
Investment Board (ASPIB) has established investment policy, which
is similar to the policies governing the State's Supplemental
Benefit System (SBS) and Deferred Compensation funds. Like most
major public pension systems, modeling capital market theory is
utilized to set policies.
Mr. O'Leary explained the method of managing a defined benefits
plan by utilizing actuarial information to model the range of
liabilities. Because the Alaska plans provide medical benefits, the
modeling gives an "appearance that the liabilities are "incredibly
sensitive" to health inflation; much more so than any of the other
public funds" Callan Associates advises.
Mr. O'Leary described the formula shown on page 15 as "the given in
pension funding". The typical defined benefit plan has significant
inflation sensitivity because the benefit is defined in terms of
final pay plus post-retirement cost of living adjustments.
Therefore defined benefit plans are subject to both wage inflation
and price inflation.
Mr. O'Leary continued that contribution is the "actuary's realm".
He likened this to a budgeting process, in which it is determined
how contributions would be made and the timeframe of those
contributions. This affects the ability of a system to achieve
earnings because earnings could only be achieved on funds available
for investment.
Mr. O'Leary spoke of confusion heard in media reports over the
definition of loss in this instance. He stated that from the
actuarial perspective, a loss includes earnings less than the
amount projected. The earnings assumption for the PERS and TRS
systems is 8.25 percent; therefore earnings of any amount less than
this percentage is considered a loss.
9:32:11 AM
Page 17
Efficient Frontier Mixes & Proposed Asset Mix Policies
[This table compares Expected Return, Standard Deviation, and
Sharpe Ratio for the following portfolios:
Military
Mix 1
Mix 2
Mix 3
Mix 4
Judicial
PERS/TRS
Mix 5
Mix 6
By list the following components and corresponding maximums:
Large Cap 100
Small/Mid Cap 100
International Equity 100
Domestic Fixed 100
Non US Fixed 100
Real Estate 15
Private Equity 6
High Yield 10
Absolute Return 0
Other 0
A comment reads:
Please note that the optimizer was not allowed to select
"absolute return" or "other". Liquid investments in
private equity and "other" were not made available for
use in the Judicial or Military mixes. Real estate &
private equity were also excluded from consideration for
the Military program.
Information for PERS/TRS portfolio reads as follows:
Large Cap 30
Small/Mid Cap 6
International Equity 15
Domestic Fixed 24
Non US Fixed 2
Real Estate 9
Private Equity 6
High Yield 2
Absolute Return 3
Other 3
Total 100
Expected Return 7.83
Standard Deviation 11.76
Sharpe Ratio 0.41]
Mr. O'Leary explained that the figures for each portfolio are
"points along the efficient frontier". The ASPIB "studiously
reviews" this information annually and alternatives are considered.
Policies are adopted annually and every several years a "full
integrated asset liability study" is conducted. The last study was
conducted in 2003.
Mr. O'Leary pointed out that the expected return of the current
policy is 7.83 percent, which is below the actuarial earning
assumption of 8.25 percent. In developing the projections, the
actuary tends to consider long-term periods of 40 or more years;
effectively the life expectancy of the youngest participant. The
assumptions compiled by Callan Associates are focused on a five-
year period. The inflation assumption is 2.6 percent rather than
the 3.5 percent calculated into the actuarial evaluation. If the
same inflation assumption were utilized, the nominal expected
return for this policy would be higher. This issue has received
considerable discussion at the PERS and TRS boards' annual
meetings.
9:35:01 AM
Page 18
Efficient Frontier Graph
Efficient Frontier 2005 Adjusted Optimization Set
[This line graph shows the trend of Projected Return compared
to the Projected Risk with PERS/TRS, Judicial and Military
noted on the trend.
Accompanying comment reads:
PERS/TRS is above the efficient frontier because asset
categories not available to the optimizer are included in
the policy (absolute return & other).]
Mr. O'Leary relayed that as a professional advisory, he
"encourages" clients to place their funds "anywhere on the
efficient frontier". The PERS/TRS funds have a slightly higher
projected return because it includes asset categories that the
Judicial and Military funds are restricted from participating in.
9:35:59 AM
Page 19
Unique Factors
· Medical program inclusion
o Extraordinary health inflation at a bad time
o Projecting medical inflation at rates well in
excess of projected returns for any asset class
(i.e. 10% or more for next 5 years)
o Terminal projected inflation rate = 5% versus
Callan CPI projection of 2.6%
· Embedded salary inflation assumption greater than Callan
inflation projection & inflation embedded in current
financial markets (e.g. TIPS)
· Actuary is assuming less than 5% "real return"
Mr. O'Leary noted this are some factors unique to the PERS and TRS
system. The extraordinary health inflation and the timing of that
inflation has had a significant impact. He was troubled by the
implication made by Mercer Human Resource Consulting at a recent
ASPIB meeting that inflation would be ten percent plus an average
annual inflation over the next five years. More significantly,
Mercer expressed an expectation that "going forward" the inflation
would only decline to five percent over a very protracted period.
By comparison, the general inflation expectation is 2.6 percent.
Mr. O'Leary added that the salary inflation embedded in the
assumptions utilized by Mercer is 3.5 percent and in the long term,
general prices would have to increase at a level "near the salary
rate". A 3.5 percent salary increase has not been realized and Mr.
O'Leary did not expect this to occur within the next five years.
Mr. O'Leary told of an investment option available to these plans
that provide inflation-protected securities. Unfortunately no
health care related inflation-protected securities exist. However,
TIPS [acronym not defined] currently has an embedded inflation
assumption of approximately 2.7 percent, which is similar to Callan
Associates' five-year expectation. A system could be protected
against inflation by investing solely in TIPS; however the real
rate of return above the reported inflation rate, would be less
than two percent.
9:39:16 AM
Page 21
Asset Allocation Versus Public Funds
Asset Class Weights vs. CAI Public Fund Sponsor Database
[Graph depicting the 10th, 25th, 75th and 90th Percentiles and
the Median for Domestic Equity, Domestic Fixed, Short
Term/Cash, Real Estate, International Equity, Int'l Fixed-
Income, and Alternative, with Funds and Targets specified.
A comment states "Note that 'alternative' includes private
equity, absolute return & other."]
Mr. O'Leary explained this chart depicts how the PERS/TRS funds are
invested relative to Callan Associates' database of over 100 public
fund systems. PERS/TRS funds are invested similar to other funds,
although with a higher percentage of real estate and international
equity investments, both of which have benefited the system
significantly.
9:40:00 AM
Page 22
Thirteen & 1/4 Year Attribution Analysis
[This page includes two spreadsheets titled "Thirteen And One-
Quarter Year Annualized Cumulative Attribution Effect", one
representing PERS and the other TRS, that lists the
percentages of Effective Weight, Avg Trgt Weight, Actual
Return, Target Return, Manager Effect and Asset Allocation for
Domestic Equity, Domestic Fixed-Income, High Yield, Real
Estate, International Equity, Int'l Fixed-Income, Private
Equity, Other, Absolute Return, and Short Term/Cash asset
classes. The Actual Return, Target Return, Manager Effect, and
Asset Allocation total for PERS is 8.94% = 8.96% x (0.00%) x
(0.02%), and for TRS is 9.00% = 8.96% x (1.01%) x 0.04%.]
Mr. O'Leary stated that 13.25 years is the length of time available
to make the calculations. The long-term "record" has been above the
actuarial earnings assumption, although it includes periods of
"great strengths in the financial markets" particularly bond
return. Given the current level of interest rates, returns of this
magnitude could not likely be replicated in the future. However, a
significantly lower "inflation environment" has occurred in the
last several years and is predicted to continue for the following
several years. The funds have achieved greater than a five-percent
real return. This is important because the real return estimate
embedded in the actuaries is approximately 4.75 percent. The
current policy, which results in the expected return of 7.83
percent, is consistent with a real return in excess of five
percent.
Mr. O'Leary concluded the presentation.
9:42:08 AM
Page 8
Measuring Risk
Standard Deviation - Measures the Variability of Returns from
Their Mean
[Diagram of a bell curve showing the Broad Domestic Equity
Range of Returns. The standard deviation of nine percent for
66 percent of the observations is 16.9 percent.]
Senator Stedman referenced this page and asked if the percentage of
observations should be 68 percent rather than 66.
Mr. O'Leary answered that the amount is two-thirds.
9:42:42 AM
Senator Stedman next directed attention to Page 17 and recalled
conversations on the five percent real return. He noted the use of
two different growth rates: 7.8 percent for the short term of five
years and 8.25 percent for the long term of 20 to 40 years and
questioned why a "double shift growth model" was not used.
Mr. O'Leary replied that he knew current interest rates and
inflation rates, but did not "have a clue" what those rates would
be over the next 40 or 50 years. The bond market indicates
investors' aggregate projected inflation rate, which Callan
Associates utilizes as a basis for judgment. The actuary's
predictions differ. Mr. O'Leary's preferred bond rates to be
higher, as this would help all public funds. The current national
average is eight percent and has been such for several years
9:45:06 AM
Page 5
Annual Stock Market Returns
1926 - 2003
[Bar graph showing the number of times returns have been:
Below 0% (24), 0%-8% (7), 8%-12% (6), and Above 12% (41). A
notation reads as follows
Graph & data obtained from Vanguard web site. Based on
data from S&P (1926-1970) and Dow Jones Wilshire 5000
Composite Index (1971-2003). Over the 78 years, stocks
were below their long-term average (10.4% plus or minus
2%) in 31 years.]
Mr. O'Leary stated over this time period, stocks have returned 10.4
percent on average. The "normal distribution" on a year-by-year
basis is "a little funny", but the performance of years are linked
to a five-year compound return.
9:46:12 AM
Senator Stedman then characterized the line graph on Page 18 as
more like a "security market line" than an "efficient frontier", as
it is labeled.
9:46:37 AM
Mr. O'Leary clarified this graph represents a segment of efficient
frontier, and detailed that actual investments could be more or
less conservative. The drivers are the expected future return, the
volatility of the return and the correlation of the various asset
classes with each other.
9:47:12 AM
Senator Stedman asked where the data was derived.
Mr. O'Leary replied that historical performance is used as a
starting point. An extensive investigation of the historic return
pattern is conducted including the nominal and volatility of each
asset class over a "rolling five year period". The most recent
five-year pattern is then compared to the historical data.
9:48:11 AM
Senator Stedman asked if Edmonson and Associates data is used as a
source.
Mr. O'Leary affirmed this has been a valuable source from the 1920s
through the 1950s. Many additional sources of index vendors are
available for the years since. He listed Morgan Stanley, MSCI, S&P,
and Lehman Brothers, as examples.
9:49:07 AM
Senator Stedman referenced the 13-year analysis on Page 22 and the
witness' indication of the "five-year rolling average" and
"comparisons to the index." Senator Stedman was not concerned that
ASPIB "isn't within a reasonable range of where they should be on
the return for their allocation." However it would be helpful to
measure different timeframes. He predicted that with an annual
return of 8.25 percent the liability would not exist.
Senator Stedman also expressed the benefit to decisions regarding
appropriation for capital projects of knowing whether a higher than
expected draw from the system would be necessary. A "trumpeter
graph" i.e. "returns recessed to the mean going out in the future"
would also be helpful. This information should be shown in dollars
rather than standard deviation.
9:51:37 AM
Senator Stedman requested the witness' professional opinion of the
outcome in the event that the current practices were unchanged.
Questions were raised about the possible underestimations of the
growth of the liabilities. He asked if investments could "grow us
out of this problem" without increasing risk.
9:52:23 AM
Mr. O'Leary gave his personal opinion, which also is Callan
Associates' opinion but not necessarily the opinion of ASPIB. He
was "struck by the very significant growth in the liabilities,"
especially liabilities related to medical costs as discovered
through the Asset Liability Study conducted in 2003. At that time,
the consultant presented several investment options to ASPIB. The
conclusion was reached that a policy similar to the current policy
would be appropriate because higher return policies would have made
significant use of liquid investments and higher risk investments,
which would have increased the volatility.
Mr. O'Leary stated that given the contribution policy as understood
from the actuary and the reality of public pensions plans, net cash
flow is an important consideration. In the event of an aggressive
investment policy and a poor short term return environment, the
ability to maintain the policy is "highly questionable". He
therefore did not recommend a more aggressive policy for ASPIB.
Upon Callan Associates advice, ASPIB "accepted the notion" that
broadly diversifying, while continuing to pursue a five-percent
real return target, is important. This would more likely ensure
that the consistency of performance would be enhanced, with fewer
"peaks and valleys".
9:55:11 AM
Senator Stedman hypothesized a five-percent rate of return were
assumed then realized, and asked if the liability would be
eliminated over time.
9:55:33 AM
Page 20
PERS/TRS Multiple Time Horizons
Range of Projected Rates of Return
PERS/TRS
Optimization Set: 2006 adjusted
[Bar graph showing the percentages of Annual Rates of Return
for 1 Year, 5 Years and 10 Years and listing the 10th, 25th,
75th and 90th Percentiles and the Median.
An accompanying comment reads:
By striving for a slightly higher expected return, the
PERS/TRS policy achieves a slightly greater probability
of exceeding a 5% real return.
The inclusion of "other" also slightly reduces the
downside return possibility (90th percentile).]
Mr. O'Leary explained this graph demonstrates rates of return over
different time periods utilizing current policy and Callan
assumptions. Actual performance could be any point within the
depicted range, and although returns higher than five percent would
be preferred, it could not be guaranteed.
Senator Stedman understood from this information that earnings
would need to be of a higher percentile.
Mr. O'Leary clarified this scenario is "driven my markets." He
continued, "Given the inputs to the modeling, that is the expected
return, the risk associated with each asset class and the
correlation. This is the range of outcomes that is possible."
9:57:49 AM
Senator Stedman remarked that the "odds are against us".
Distribution as it occurs in Las Vegas is slightly over the mean.
It is highly unlikely that the current performance of the
investment of PERS/TRS funds, despite the "reasonable job" of
ASPIB, would be able to "close the gap."
9:58:39 AM
Senator Hoffman one of the goals discussed was to stop the
"bleeding" or increasing liability. He asked if the witness' review
of the assets indicate a high probability that the losses of the
past four years would continue, or whether the portfolio would
realize gains.
9:59:27 AM
Mr. O'Leary responded that the returns over the two previous
calendar years have been in excess of 15.8 percent for both
systems. The systems are "participating fully" in the market
recovery. The situation is better than indicated from the data of
FY 03. Despite the bear market, the systems have achieved a
positive return of more than 3.3 percent over five years. However,
this is an actuarial loss because the funds did not earn the
anticipated 8.25 percent.
10:01:07 AM
Senator Hoffman cited the statement on Page 3 that Callan services
"88 public fund clients with aggregate assets of $692 billion". He
also recalled that solvency of the PERS/TRS funds are in the top
ten percentile. He asked if any of the other public funds are in
the top ten percentile and whether the administrators of those
funds were considering major changes to their programs.
10:01:44 AM
Mr. O'Leary replied that 12 states are considering shifting to a
defined contribution plan. Several clients have a defined
contribution as a tier.
10:02:26 AM
Senator Bunde asked for clarification that the rates of return on
the PERS/TRS funds are statistically likely to occur in the tenth
percentile rather than the median.
Mr. O'Leary affirmed and noted the probability is any percentile
within the range indicated on the bar graphs on Page 20. He
recommended a policy that provides at least a 50 percent chance of
achieving the ten percentile.
10:03:20 AM
Senator Bunde surmised that this indicates the need for systemic
change because the likelihood of a 14.7 percent return in five
years is the same as a 1.3 percent.
Mr. O'Leary gave a different perspective pointing out that the
funds have a 51.75 percent probability of earning 7.6 percent or
higher. He noted the most recent asset liability study integrated
the liabilities with the assets and he explained how investing for
a higher expected return increases risk and visa versa. In
understanding this, administrators of many public funds, including
the Alaska Permanent Fund, adopt a policy similar to that adopted
by ASPIB.
10:04:50 AM
Senator Dyson appreciated the emphasis on the risks associated with
health care costs. He sensed that several organizations and
entities nationwide are converting to some form a of health savings
account. He asked if the witness had the same understanding.
Mr. O'Leary affirmed he shared Senator Dyson's sense, qualifying
that although he has an interest in learning of these events,
involvement in this aspect is not typical of Callan.
10:05:28 AM
Co-Chair Green referenced the data shown on Page 5 regarding annual
stock market return percentages for the combined years 1926 through
2003 and asked whether the source, Vanguard, has this information
available for each year.
Mr. O'Leary answered no but stated he would supply the Department
of Revenue with a histogram that would demonstrate the annual
returns.
10:06:01 AM
Senator Olson was encouraged by the projections of high returns but
was concerned that the increasing price of oil would cause the
inflation rate to "spiral out of control" and no realized actual
rate of return would occur.
10:06:44 AM
Senator Olson also asked how this scenario would affect the
PERS/TRS unfunded liability and whether it would also "spiral out
of control."
10:06:59 AM
Mr. O'Leary explained that an increase in the general level of
inflation above what actuarial has incorporated would make the
liabilities greater. That is significant risk for defined benefit
programs, and even greater for PERS/TRS because the "inflation
sensitivity" of its liabilities is greater. In the long term, this
scenario supports investments that are the least adversely affected
by inflation.
10:07:59 AM
Senator Bunde continued on the topic. He noted the intent is to
make systemic changes to avoid future liabilities as well as
addressing the existing deficit. He asked if the issuance of
pension bonds, which have been discussed as an option, would be
significantly impacted by inflation.
10:08:45 AM
Mr. O'Leary stated that typically fixed income investments perform
poorly in times of accelerated inflation due to the linkage of
interest rates and inflation. If an acceleration of inflation were
known and bonds could be issued immediately at the current interest
rates, which are not based on such an acceleration, the proceeds
from those bonds could be invested in assets less harmed by
increased inflation. This would hedge against the affects of the
accelerated inflation.
10:09:45 AM
Senator Stedman recognized that the performance of the PERS/TRS
funds have been favorable since the market improvement. However,
liabilities are continuing to increase at a rate greater than
assets.
Mr. O'Leary characterized this as an illustration of the inflation
sensitivity of the PERS/TRS liabilities, in that members have not
realized a comparable increase in compensation.
10:10:46 AM
Senator Stedman noted that the markets appear favorably when viewed
in a calendar year, but viewed as a fiscal year as compared to the
liabilities, a "widening gap" continues. This must be addressed.
10:11:26 AM
Mr. O'Leary clarified that the calculations contained in his
presentation incorporates data from FY 04. Mercer representatives
reported a "slight improvement in funded status and funded ratio"
at the recent ASPIB meeting.
10:11:54 AM
Senator Stedman respectively questioned the Mercer findings, citing
the FY 04 "statements".
Mr. O'Leary relayed Mercer reported the actual market value funding
ratio changed from 64.7 percent to 63.9 percent
Senator Stedman stated that data supplied to him demonstrate that
the funding ratio dropped approximately two percent for both PERS
and TRS. He would compare the market value to the real value to
determine the actual figures. He understood the actuarial asset
value was used for his findings compared to the use of market value
in Mr. O'Leary's findings.
Mr. O'Leary affirmed that market value was utilized in his
presentation.
10:12:58 AM
Ms. Douglas resumed testifying. She read the remainder of her
statement into the record as follows.
The PERS and TRS Boards should include employer representation
in their make-up. Since employers pay the lion share of the
contribution rates to fund these systems, they should have a
voice in the deliberations of these boards. It is prudent to
evaluate the validity of what is done on a regular basis;
consolidation of these boards and evaluation of their
responsibilities and possible reassignment of some tasks is
timely.
Future benefit changes, such as increasing health benefits for
certain classes of employees, should be thoroughly reviewed
for long-term financial impact before implemented. The lack of
adequate analysis process contributed significantly to the
unfunded liability. Please establish a 90 day review process,
supported by a comprehensive long-term actuarial analysis, a
public hearing process and a recommendation of the retirement
boards prior to any legislative changes affecting PERS and
TRS. We need to ensure that these systems don't continue to
decline financially.
I recommend that actuarial services include a peer review
component on a periodic basis and/or a new actuary be hired
after a certain number of years. No matter that the concept of
hindsight is significantly at play in this situation, common
sense doesn't allow for decreased employer rates in a time
when increased health care costs and declining or negative
investment returns were being realized by nearly all entities
nationally. Relying on the scheduled review timeline contained
in the contract, to thoroughly actuarially evaluate these
systems, in such times is unacceptable.
It is unlikely that any legislative decision made this year
can be fully implemented by July 1. Please fund the 5% PERS
and TRS employer rate increases in effect for FY 06 for all
employers statewide. This rate increase equates to
approximately $2 million for the Kenai Peninsula Borough
School District for FY 06. The Board of Education approved the
FY 06 budget, which includes Governor Murkowski's proposed
base student allocation of $4880, Monday night. The District
will likely have to reduce this budget if additional funds are
realized to address the retirement rate increases. To put $2
million into perspective for the District, it would equate to
approximately 35 teaching positions.
Thank you for your continued work on this critical issue
facing the State of Alaska. I appreciate the opportunity to
bring these important issues to your attention.
10:15:00 AM
AT EASE 10:16:11 AM/10:16:20 AM
JOE BEEDLE, Vice President, Finance, University of Alaska,
testified via teleconference from offnet location that the
University of Alaska does not have a fiscal note related to
Amendment #20. This amendment would incur no increased costs;
rather implementation would result in a cost savings. "Modeling
this savings will be deliberative and subject to our governance
process contingent somewhat on the passage of this vehicle or
replacement legislation." He gave an estimated "cost avoidance
increase number" of a "seven to eight digit number" by FY 08.
10:17:41 AM
Senator Hoffman remarked that a negative fiscal note is still a
fiscal note. If savings are expected, it should be documented.
10:18:10 AM
Mr. Beedle described the University process involving a retirement
committee that makes recommendations to the University president,
who then advises the Board of Regents on actions regarding the
retirement system. Once the new programs have been modeled, more
accurate cost estimations could be figured. At this time, those
estimations are difficult to ascertain.
Mr. Beedle emphasized that upon passage of this legislation, the
University would "immediately act" to avoid certain cost
escalations.
10:18:53 AM
Senator Hoffman reiterated that the purpose of adopting Amendment
#20 was to affect changes. If savings are anticipated, the
legislature should have estimates on the amount of those savings.
10:19:33 AM
Co-Chair Green asked if any savings would be realized for FY 06.
10:19:38 AM
Mr. Beedle replied that some discretionary changes to the
University retirement plan are under consideration that would
result in savings for FY 06. The proposed changes are subject to
the deliberations on this legislation. One option is to limit
changes to only affect executive employees FY 06; however the final
version of this bill could provide the "confidence" to implement
those changes to other employee groups as the University continues
to develop different options for the retirement plan.
10:20:46 AM
Co-Chair Green asked if Senator Hoffman would be satisfied with an
indeterminate fiscal note.
Senator Hoffman indicated this would be possible, although the
University should provide the best possible estimates to allow the
legislature to judge whether the savings were accomplished.
Mr. Beedle stated he would prepare a document.
10:21:44 AM
DORIS ROBBINS testified via teleconference from an offnet location
in Fairbanks on her own behalf that some of the changes proposed in
this legislation are helpful, such as those affecting the rehiring
of retired and previously employed PERS and TRS members. All
retirees want the legislature to scrutinize the unfunded
liabilities of the retirement funds because it would affect them.
As a member of the Retired Public Employees Association (RPEA), she
stated the organization has been educating members on this issue as
well as the use of generic prescription drugs.
Ms. Robbins understood that the elected members of the PERS and TRS
boards attempted to influence the recommendations of Mercer Human
Resource Consulting, although the boards and retirees are being
blamed for the unfunded liability. She contended that the board
membership contains no more "rotten apples" than does the
"legislative barrel". The Administration appointed all but two
board members and the Administration advises the boards.
Additionally, the boards must follow legislative directive. It is
unfair to criticize the board and public employees when it is the
legislature that enacts the laws that govern the system.
Ms. Robbins pointed out that members of PERS and TRS accepted
salary increases in amounts smaller than cost of living increases
partially because of the good medical plan received. Use of medical
benefits has been considered a form of "back pay". She retired in
the year 2000 on "1988 wages". She spoke of attracting new
teachers.
10:28:50 AM
ROBERT STRAHAN, Finance Director, City of Bethel, testified via
teleconference from an offnet location that the City has attempted
to increased taxes, but voters rejected the proposals. Citizens
correctly argue that the increases are too high, yet the issue of
expenses must be addressed. He told of the projected loss of
$200,000 to the FY 05 budget and $1 million for FY 06 given the
facilities in need of repair. Water and sewer operations would
continue to operate at a deficit. The City has "barely enough"
reserves to cover these losses. However, residents are concerned
about paying high water and sewer rates. Therefore, it is difficult
for cities such as Bethel to meet the increased PERS and TRS costs
and continue to function.
10:33:34 AM
GARY BADER, Chief Investment Officer, Treasury Division, Department
of Revenue noted that members of the Alaska State Pension
Investment Board (ASPIB) had been present earlier in the meeting,
but were unable to remain due to other appointments.
10:34:02 AM
Senator Stedman asked the rate of return on investments for the
previous year.
Mr. Bader estimated 15 percent.
Senator Stedman asked if this percentage was calculated before or
after fees were deducted from the earnings.
Mr. Bader replied this amount is "before fees". Fees and
administrative expenses average approximately 35 basis points.
Senator Stedman commended ASPIB in achieving this target and also
in assuring assets and liabilities spread by .7 billion during that
same timeframe. This accomplishment should not be negated.
Mr. Bader stated that the target would likely be reached, although
the situation for six months was not ideal. With regard to
liability that continues to increase despite good earnings, he
cautioned that if contributions "are not in the bank" to earn
returns, a liability would result.
10:35:45 AM
Senator Olson asked Senator Stedman what is the solution to the
increasing discrepancy despite the funds meeting a 15 percent
realization.
Senator Stedman replied that SB 141 is the first step. The next
step involves the newly created board to investigate restructuring
of the liability and provide the legislature options to consider
the following session. At that time the unfunded liability is
projected to be over $6 billion. Addressing this would also include
efforts to contain health care costs. A multiple step process would
be necessary.
10:36:50 AM
Co-Chair Green shared her and Senator Stedman's contention has been
that having one body to review and govern the retirement system
would allow the issue to be better addressed. This is not a
criticism of any individual or board.
10:37:20 AM
GAYLE HARBO read her written testimony into the record as follows.
I know the legislature is trying to find solutions to a
perceived problem with a retirement system that has worked
well for almost 50 years. I respect your concern. I am not a
political person, but I am an Alaskan for almost 50 years, a
mother, a grandmother, a retired teacher and most recently a
member of the TRS Board. I urge you to go slowly, get a second
opinion from a credible actuary and talk with affected parties
about the reasons for the decrease in the funding ratio before
you impose devastating changes.
What affects the funding ratio? If you read the last valuation
you will see that TRS is almost 92% funded without health care
costs: PERS is 120% funded. Are these healthy systems???? What
would your conclusion be? Has ASPIB done a great job??? What
would your conclusion be?
Now look at the ratios with Medical costs factored in -
remember Alaska is one of only 4 states that pre-funds medical
costs. In FY 06, under GASB, all states will have to
acknowledge medical costs as a liability. With Medical the TRS
ratio drops to about 63% and PERS ratio to 73%. What would
your conclusion be? What is the major factor affecting the
declining ratio?
Medical costs have been the main factor and if the
Administration would make some allowable changes, matters of
choice and convenience, they could save millions of dollars on
the health plan for the current tiers. They can change the
Health Benefits for new hires without legislation -
prospective is the key word here. Ask them why they have not
made significant changes in the last 4 or 5 years.
You may have received a memo from Mercer, dated March 18,
which shows two items which have also contributed to the
unfunded liability. One is the enhancement of benefits that
various legislatures have passed in recent years; some which
the actuary said would be cost neutral. Actuaries, like
airlines, are cautious people and always have a disclaimer,
"subject to change without notice." They told you Retirement
Incentive Programs would not negatively affect the funding
ratio. This past year they changed their story - they did not
predict the impact of medical costs correctly. The Boards
asked for an Actuarial Audit in 2002-2003 - In our Sept. '04
Joint Board minutes the auditor, Milliman, stated (on page 6)
that Mercer's "starting point for projecting forward was a
number that was 14 percent too low." The minutes also reflect
that medical costs account for 50% of the increases in
employer contribution rates these past years. The Joint
Boards, these past two years, have asked the Legislature not
to pass legislation which will enhance benefits for existing
Tiers and you have held off.
The second item in the March 18th letter refers to the Ad Hoc
PRPA which is recommended by the Boards only when the fund is
healthy. The sheet attributes huge costs to the Ad Hoc PRPA,
but fails to mention that dollars of that cost was the
settlement of a lawsuit that made all living retires whole,
from their time of retirement, for ad hoc PRPA's that had not
been awarded. Take that out and an ad hoc is a mere blip.
In the legislation proposing a DC plan teachers are more
impacted that Public Employees. Teachers did not have the
choice of an SBS plan when they were pulled from SS. Not only
that, because they are public employees, even though they may
earn SS credits, they will not get all that is due them
because of two unfair Federal Provisions, GPO/WEP, which the
Legislature last year recognized as unfair when they passed a
resolution urging our Congressional Delegation to seek repeal.
I urge you to take time to get a second opinion. I urge you to
work with the Boards and the Employers and the AML and
successful Health Care Trusts and Plans to see how medical
costs can be properly managed.
While I respect Dr. Solie's opinion, it is a lofty one. He may
not realize that many of the people I worked with every day
did not earn enough to save and invest the minimum needed to
start a mutual fund. These people need the security and
assurance in their senior years that a Defined Benefit offers.
People need a system which recognizes inflation, as SS does,
to adjust their annual retirement income.
Dr. Solie erred in his testimony on HB 238. He implied, using
a 2000 mortality table and other assumptions used by mercer,
that a person retiring from the proposed DC plan would be
better off than a Tier I employee. It is a devastating error
to future retirees, that I, a humble, public school teacher
must point out. If this legislature did what Dr. Solie
suggested many retirees would run out of dollars long before
they died.
It is a grave error to apply group assumptions of a DB plan to
individual assumptions on which DC plans are based. You would
do grievous harm to thousands of seniors if you relied on Dr.
Solie's data. Please go slowly and check and recheck and ask
for all the information… not selected sound bits.
Please work with the Boards these next years to solve the
Medical cost problem, which is not unique to Alaska. We should
be working together. The Legislature did not ask the opinions
of the Boards before they introduced these bills. My late
colleague, Bob Boko, a respected member of the Fairbanks
Community, was not in favor of a Defined Contribution program.
He knew it would be devastating to seniors. Though he chaired
the Tier Committee and voted to recommend Option One of their
proposed plan, he did so only because the Administration put
pressure on him. After the vote in November, he wanted to meet
and confer with the Joint Board members after our meeting with
ASPIB on December 1st. He wanted to discuss the suggestions we
all had made. We were not allowed to meet. I urge you to speak
with his widow, Sharon, who shares his deep concern.
Please let us work together to make Alaska a place where young
people want to come and work. We can be a role model for
health care reform if we choose to work together. I do not
like the word "impose"; I prefer sitting down and discussion
the problem and developing a solution which works for all.
Thank you for your time.
10:45:59 AM
Co-Chair Green noted the distribution of language pertaining to the
projected fiscal impact to the University of Alaska from the
adoption of Amendment #20, as provided by Mr. Beedle.
Co-Chair Wilken offered a motion to permit the Division of Legal
and Research Services to make necessary technical and conforming
changes to this bill.
There was no objection and it was so ordered.
10:48:05 AM
Senator Bunde offered a motion to report CS SB 144, 24-LS0637/Y, as
amended from Committee with individual recommendations and
accompanying fiscal notes.
Senator Hoffman objected to comment on the need to address
financial concerns, particularly the rising costs of health care.
He indicated he would remove his objection after making a
statement. The retirement fund is growing and the rate of return
has almost doubled the targeted rate. He understood the efforts to
"tighten up the programs", such as eliminating the incentive for
employees to transfer to rural locations in their last years of
service to bolster their retirement income. This practice costs the
State millions of dollars and must be addressed.
Senator Hoffman referenced Dr. Solie's testimony in asserting that
the State is "going out in the front on defined contributions". The
amendment that Senator Hoffman had offered providing for a "blended
plan" as well as actions tightening up the program would "more than
accomplish" the goals of a viable fund. This approach would place
the State in a better position to recruit and retain employees.
Senator Hoffman remarked that the major changes contained in the
current version of this bill would have a "drastic" affect on the
ability to attract and retain competent employees. The State would
have difficulty competing for employees within the Pacific
Northwest, especially teachers and other education professionals.
Education is a "major point of contention" in Alaska. Legislators
have all avowed that education is the highest priority and actions
have been taken to fund education at higher levels.
Senator Hoffman announced he would not support this legislation. He
withdrew his objection to the motion to report the bill from
Committee.
10:51:42 AM
Co-Chair Wilken supported this bill. Although he shared concerns
about recruitment and retention, Alaska has the "most liberal"
retirement age requirements. This legislation would not place
Alaska at the bottom of the list measuring state retirement
benefits, but rather closer to the average. The benefits would be
competitive with other states.
10:53:26 AM
Co-Chair Green corrected an impression that changing certain
provisions of the current system would eliminate the increasing
liability. All options have been considered and the conclusion was
reached that the creation of a new tier system was the only
solution.
10:54:18 AM
Senator Hoffman understood that benefits could not be reduced to
current members of PERS and TRS. However, school districts in the
State are already having difficulties recruiting teachers. Some
areas of the State are unable to attract teachers. By reducing
benefits to a level that is average in comparison with other
states, higher salaries and hiring bonuses could be necessary to
compensate.
10:55:33 AM
Co-Chair Green responded that the benefit structure would be
changed, implying that it would not necessarily be reduced.
Co-Chair Green noted Senator Hoffman's objection to the motion to
report the bill from Committee had been removed.
With no further objection CS SB 141 (FIN) MOVED from Committee with
the following new fiscal notes: Department of Administration dated
3/29/05 for $116,000; Department of Administration dated 4/5/05 for
$936,500; Department of Revenue #1 dated 4/5/05 for 214,500;
Department of Revenue #2 dated 4/5/05 for -$4,144,400; Department
of Revenue #3 dated 4/5/05 for $4,734,600; Department of Revenue #4
dated 4/5/05 for -$31,916,600; Department of Revenue #5 dated
4/5/05 for $31,916,600; and Department of Administration written by
the Senate Finance Committee dated 3/17/05 for $69,531,800.
ADJOURNMENT
Co-Chair Green adjourned the meeting at 10:56 AM
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