Legislature(2013 - 2014)SENATE FINANCE 532
04/19/2014 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB19 | |
| HB160 | |
| HB282 | |
| HB140 | |
| HB316 | |
| HB385 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 385 | TELECONFERENCED | |
| += | HB 278 | TELECONFERENCED | |
| += | HB 19 | TELECONFERENCED | |
| += | HB 160 | TELECONFERENCED | |
| += | HB 282 | TELECONFERENCED | |
| += | HB 287 | TELECONFERENCED | |
| += | HB 306 | TELECONFERENCED | |
| += | HB 140 | TELECONFERENCED | |
| + | HB 316 | TELECONFERENCED | |
| + | HB 384 | TELECONFERENCED | |
| += | HJR 10 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 385
"An Act relating to additional state contributions to
the teachers' defined benefit retirement plan and the
public employees' defined benefit retirement plan; and
providing for an effective date."
11:45:23 AM
Co-Chair Meyer MOVED to ADOPT SCSHB 385(FIN), Work Draft,
28-LSGH2241\U (Wayne, 4/17/14). There being NO OBJECTION,
it was so ordered.
11:46:05 AM
JAMES ARMSTRONG, STAFF, SENATOR KEVIN MEYER, discussed the
committee substitute sectional analysis (copy on file):
Section 1.
This section amends the Teachers' Retirement System
(TRS) state assistance statute (AS 14.25.085). This
statute was enacted in 2008 by SB 125, and currently
provides that the state shall appropriate the amount
sufficient to fully pay the total past service
liability for the year at the employer contribution
rate adopted by the Alaska Retirement Management Board
(ARMB). In practice, this means that the State
appropriates the amount that reflects the difference
between the TRS employer contribute ion rate cap of
12.56 percent and the actuarial contribution rate to
the TRS trust funds. In FY14, this amount was
approximately $317mm.
Section 1 amends AS 14.25.085 to implement the
Governor's proposal. Under the Governor's proposal,
$1.1 billion would be appropriated from the
constitutional budget reserve to the TRS trust fund,
and then from FY16 - FY36, an annual flat payment of
$343mm would be appropriated as state assistance.
According to Buck Consultants, the Governor's plan
would convert the actuarial approach for TRS from an
actuarial ratemaking paradigm to a fixed contribution
paradigm. In a ratemaking paradigm, each year the
actuary calculates what contribution rate is necessary
to pay down the accumulated past service liability.
In Alaska, this has resulted in highly volatile
employer contribution rates that over the past decade
have ranged from 12 percent to over 70 percent.
In a fixed contribution paradigm, the rate volatility
is eliminated. Instead the annual contribution is
fixed. In the case of TRS, the annual contribution is
fixed at $343mm. What can change each year, however,
is the term of the amortization.
Under the Governor's plan, the initial amortization
term is 21 years -fixed payments of $343mm through
FY36.
In the event of actuarial losses, the actuary may
advise that the amortization term needs to be
extended. So if there is a market downturn that
results in investment losses in FY18, the actuary may
advise that the amortization term must be extended to
FY43 in order to fully amortize the TRS unfunded
liability. Conversely, actuarial gains could result in
a shortening of the amortization term of less than 21
years.
Under the Governor's plan, the length of the
amortization term necessary to pay down the unfunded
liability will be evaluated each year. There could be
cases where the actuarial loss over a particular
period is sufficiently profound that payment of $343mm
over any length of amortization term is insufficient
to fully pay off the unfunded liability. In such case,
the actuary will assign a date on which the TRS trust
fund will exhaust its funds unless the $343mm annual
payment amount is increased. The actuaries call this
date the "cross-over" point.
The last new sentence of the amendment to AS 14.25.085
is intended to address situations where a cross-over
point is reached. It provides that the state will
appropriate an additional fixed amount sufficient to
amortize the unfunded liability over a period
consistent with actuarial standards.
Section 2.
This section implements the same amendment as does
section 1, for the Public Employees' Retirement System
(PERS) state assistance statute, AS 39.35.280. A
benefit to making this amendment in the PERS context,
is that a fixed contribution paradigm aligns the
respective interests of all PERS employers. PERS
employers all share in the actuarial gains, through
having a shorter amortization schedule, and share in
actuarial losses, through having a longer amortization
schedule.
Under the current version of AS 39.35.280, PERS
municipal employers are largely indifferent to the
impact of market downturns that create new unfunded
liability because their rate does not change, and the
State absorbs 100 percent of the impact of any new
unfunded liability. The Governor's proposal cost
shares such new unfunded liability in a fair way by
extending the amortization term, so that PERS
employers pay at the 22 percent capped contribution
rate for a longer period of time.
Section 3.
This section makes the bill contingent on the
enactment of constitutional budget reserve fund
appropriations to TRS in the amount of $1.1 billion,
and to PERS in the amount of $1.9 billion.
Section 4.
Establishes the effective date of this act as July 1,
2014.
Co-Chair Kelly queried the details of the legislation.
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION, looked
at a collection of graphs titled "Cumulative Costs of
Options to Eliminate PERS and TRS Unfunded Liability" dated
4/19/2014 (copy on file). He explained that the first graph
represented the total PERS and TRS. He stated that the fine
dashed line represented the fiscal impact of the
legislation, which was $1 billion for PERS and $2 billion
for TRS at a level percent. He stated that in 2015 there
would be a $3 billion cash infusion. He remarked that the
line started at $3 billion and showed its increased
cumulative costs with added state assistance each year,
with a total cost of approximately $10 billion in state
assistance through 2040. The second graph represented the
PERS system only, with a $1 billion starting point and a
total cost of approximately $4 billion. He stressed that
there was a discount of 3 percent, which was roughly the
anticipated rate of inflation. The third graph was for TRS
starting at $2 billion cash infusion and increases to a
total cost of just over $6 billion by 2040. The numbers
represent what was used to generate the graph.
11:51:07 AM
Co-Chair Kelly asked for explanation of the fiscal notes.
Mr. Teal replied that the TRS was $1 billion, and the
source of the money was the Constitutional Budget Reserve
(CBR). Because the CBR required a three-quarter vote, it
would not be attached to Section 2 of the operating budget
bill, rather it would be added to the Language Section. He
stated that 2016-2020 showed reductions from the base,
where the base had a level percent of pay under the current
scenario. There would be a reduction of roughly 200 million
per year from the current scenario under the legislation.
The TRS fiscal note had $2 billion cash infusion from the
CBR, and had savings of approximately $200 million per year
in the out years.
11:52:34 AM
AT EASE
11:53:38 AM
RECONVENED
11:53:43 AM
Senator Hoffman remarked that there were conversations in
previous committees that looked at the funding level of 70
percent. He queried the percentage impact of PERS and TRS.
Co-Chair Kelly replied that the legislation would put TRS
beyond 70 percent immediately, and deferred to Mr.
Armstrong.
Mr. Armstrong pointed to the two new fiscal notes. He
looked at page two, and referred to the funding ratios. He
stated that the infusion would bring PERS to 68.8 percent
by FY17, and would exceed 70 percent in FY18. The $2
billion infusion in TRS would bring it up 20 percent in one
year. He noted that the following year had a cumulative
increase of over 70 percent.
Vice-Chair Fairclough discussed a conceptual amendment. She
stated that there were some previous numbers that showed
potential of the fund in the out years retaining a balance
that should belong to the state, because the state was
providing the initial cash infusion. She remarked that the
current TRS funding ratio was 52.1 percent. The action
before the committee would increase the number by 17
percent, and would be brought to 73 percent. She felt the
funding could level, if given the right statements over
time.
Vice-Chair Fairclough MOVED to ADOPT Conceptual Amendment
1, 28-GH224\A.1, Wayne, 4/13/14 (copy on file).
Page 1, line 2, following the second occurrence of
"plan:
Insert "and to excess assets of those plans on
termination of the plans"
Page 2, following line 6:
"Sec. 2. AS 14.25.181(b) is amended to read:
(b) If, upon termination of the plan,
all liabilities are satisfied, any excess
assets shall be deposited in the general
fund, [REVERT TO THE EMPLOYERS AS DETERMINED
BY THE ADMINISTRATOR] subject to the
approval of the termination by the Internal
Revenue Service.
Sec.3. AS 39.35.115(e) is amended to read:
(e) If, upon termination of the plan,
all liabilities are satisfied, any excess
assets shall be deposited in the general
funds [REVERT TO THE EMPLOYERS AS DETERMINED
BY THE ADMINISTRATOR], subject to the
approval of the termination by the Internal
Revenue Service."
Renumber the following bill sections accordingly.
Page 2, line 25:
Delete "This Act is"
Insert "Sections 1 and 4 of the Act are"
Page 2, line 29:
Delete all material and insert:
"Sec 6. If secs. 1 and 4 of the Act
take effect, they take effect on the
effective date of the appropriations
described in sec. 5 of the Act or July 1,
1014, whichever is later.
Sec. 7. Except as provided in sex. 6 of
the Act, this Act takes effect July 1,
2014."
Co-Chair Meyer OBJECTED for discussion.
Vice-Chair Fairclough explained the conceptual amendment.
11:58:00 AM
Co-Chair Kelly announced that the conceptual amendment
would ensure that the excess money be cycled back into the
general fund.
Vice-Chair Fairclough felt that the Department of Law
needed to review the language in the conceptual amendment.
Co-Chair Meyer REMOVED his objection. There being NO
further OBJECTION, Conceptual Amendment 1 was adopted.
11:59:33 AM
AT EASE
12:01:19 PM
RECONVENED
12:01:46 PM
ANGELA RODELL, COMMISSIONER, DEPARTMENT OF REVENUE, (DOR)
shared that she had no concerns with the proposed changes
or the amendment that was adopted.
12:03:15 PM
Vice-Chair Fairclough stressed the importance of the
legislation. She commended the efforts of the governor and
the committee's effort on the legislation.
Co-Chair Kelly appreciated Vice-Chair Fairclough's
gratefulness.
Co-Chair Kelly remarked that the Buck Consultants memo
should travel with the bill.
Co-Chair Meyer stressed that the unfunded liability
included medical liability, and hoped that the bond raters
would take note of the enormous cash infusion. He stressed
that $3 billion was a substantial amount of money.
Co-Chair Kelly remarked that the committee must be prudent,
but felt that the legislation did not address the issue of
the state's reserves.
Co-Chair Meyer MOVED to REPORT SCSHB 385(FIN) out of
committee with individual recommendations, Letter from Buck
Consultants and the accompanying fiscal note(s). There
being NO OBJECTION, it was so ordered.
SCSHB 385(FIN) was REPORTED out of committee with a "do
pass" recommendation and with two new fiscal impact notes
from the Senate Finance Committee and the Governor.
12:17:15 PM
AT EASE
12:17:50 PM
RECONVENED