Legislature(2005 - 2006)SENATE FINANCE 532

04/06/2005 09:00 AM FINANCE


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09:06:55 AM Start
09:07:26 AM SB141
10:55:33 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ HCR 2 IN-STATE NATURAL GAS NEEDS TELECONFERENCED
Scheduled But Not Heard
+ SB 144 EMISSION CONTROL PROGRAM PERMITS/REGS TELECONFERENCED
Scheduled But Not Heard
+ SB 110 POLLUTION DISCHARGE & WASTE TRMT/DISPOSAL TELECONFERENCED
<Bill Hearing Postponed>
+ SB 103 OIL & GAS: REG. OF UNDERGROUND INJECTION TELECONFERENCED
<Bill Hearing Postponed>
+ Bills Previously Heard/Scheduled TELECONFERENCED
+ SB 141 PUBLIC EMPLOYEE/TEACHER RETIREMENT TELECONFERENCED
Moved CSSB 141(FIN) Out of Committee
-- Public Testimony --
                              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                                                                                

Document Name Date/Time Subjects