Legislature(2011 - 2012)SENATE FINANCE 532

02/08/2012 09:00 AM FINANCE

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Heard & Held
Heard & Held
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SENATE BILL NO. 187                                                                                                           
     "An Act creating the pension  reserve fund; changing the                                                                   
     manner  in which  employer contributions  to the  Public                                                                   
     Employees' Retirement  System of Alaska  are calculated;                                                                   
     repealing  a requirement  that  the  state make  certain                                                                   
     contributions,  in addition  to employer  contributions,                                                                   
     to  pay  the  past service  liabilities  of  the  Public                                                                   
     Employees'  Retirement  System   of  Alaska;  preventing                                                                   
     certain  transfers to the  Public Employees'  Retirement                                                                   
     System  of  Alaska  from causing  reductions  in  damage                                                                   
     awards  for  wrongful  or  negligent  conduct  of  third                                                                   
     parties; adding  to the duties of the  Alaska Retirement                                                                   
     Management Board; and providing for an effective date.                                                                     
9:04:03 AM                                                                                                                    
TIM GRUSSENDORF,  STAFF, SENATOR  LYMAN HOFFMAN,  stated that                                                                   
the  main purpose  of the  bill was  to establish  a plan  to                                                                   
eliminate  the unfunded  liability  in the  Public  Employees                                                                   
Retirement   System  (PERS),   without  paying  hundreds   of                                                                   
millions of dollars  in annual state assistance  to the trust                                                                   
fund.  He explained  that in FY08  the state  took action  to                                                                   
address the concerns  of other political subdivisions  of the                                                                   
state-managed PERS  system. He noted  that 60 percent  of the                                                                   
unfunded liability was for state  employees, but the other 40                                                                   
percent was political  subdivisions. He continued  that in FY                                                                   
08 a  shared cost system  had been adopted  as a  solution to                                                                   
the subdivision  concerns; setting the employer  contribution                                                                   
rates at  22 percent  of payroll, and  shifting the  cost and                                                                   
excess of  the percentage to the  state. He relayed  that the                                                                   
actions  had not  reduced the  total  cost of  PERS, but  had                                                                   
provided   state  financial  assistance   to  the   political                                                                   
subdivisions. He listed the events  that had put the state in                                                                   
the   position   of   having   to   make   escalated   annual                                                                   
contributions  to the trust  fund in order  to keep  the fund                                                                   
assets in-line with the accrued liabilities:                                                                                    
   · the stock market crash                                                                                                     
   · the rising cost of healthcare                                                                                              
   · the extended life expectancy of the covered population                                                                     
   · the lowering of the future investment expectations of                                                                      
     the fund by the Alaska Retirement Benefit Board                                                                            
Mr. Grussendorf  stated  that the combination  of events  had                                                                   
put the state  assistance costs, the costs above  22 percent,                                                                   
at  an  escalating, unsustainable  rate.  He  explained  that                                                                   
state  assistance to  the  PERS system  had  grown from  $108                                                                   
million in  FY 10; to $165  million in FY11, $242  million in                                                                   
FY12, and $307  million in FY13. He reiterated  that the cost                                                                   
of state  assistance was  projected to  escalate; reaching  a                                                                   
peak of  $533 million annually  before turning  downward near                                                                   
FY30.  He illuminated  that the  legislation  would create  a                                                                   
separate  reserve  account  that would  supplement  the  PERS                                                                   
trust fund  as needed to  insure that the unfunded  liability                                                                   
ratio  was maintained  at no less  than 50  percent. He  said                                                                   
that a  $2 billion  infusion of funds  was projected  to save                                                                   
the state  $7.3 billion  in annual  payments  over a 20  year                                                                   
period.  He furthered  that  the plan  would  bring the  PERS                                                                   
trust  fund  back on  track  and  would  allow the  state  to                                                                   
recover its original $2 billion investment.                                                                                     
9:08:09 AM                                                                                                                    
Mr. Grussendorf cited the sectional  analysis (copy on file).                                                                   
He explained  that Section 1  prevented money  transfers from                                                                   
the proposed pension  reserve fund, to the PERS  system, from                                                                   
causing reductions  in potential  damage awards  for wrongful                                                                   
or negligent  conduct of  third parties.   He furthered  that                                                                   
Section  2 added  management of  a  proposed pension  reserve                                                                   
fund  to  the  primary  mission   of  the  Alaska  Retirement                                                                   
Management Board (ARMB).                                                                                                        
9:08:39 AM                                                                                                                    
Mr.  Grussendorf  continued  that   Section  3  added  duties                                                                   
related  to the management  of the  proposed pension  reserve                                                                   
fund  to the  existing  duties of  the  ARMB, which  included                                                                   
making annual comparisons  of the value of the  assets of the                                                                   
PERS  system and  the value  of  the combined  assets of  the                                                                   
proposed pension  reserve fund  and the total  liabilities of                                                                   
the PERS  system. He explained  that Section 4  established a                                                                   
pension  reserve fund,  allowed appropriations  to the  fund,                                                                   
and required money  appropriated to the fund be  spent on the                                                                   
past service  liability of  PERS or  returned to the  general                                                                   
9:09:06 AM                                                                                                                    
Mr. Grussendorf  elaborated that  Section 5 allowed  the ARMB                                                                   
to determine the percentage rate  that employer contributions                                                                   
to the PERS  system were based on. He furthered  that Section                                                                   
6  added the  requirement  that;  notwithstanding  subsection                                                                   
(i), proposed in  section 7 of the bill, the  annual employer                                                                   
contribution rate  may not be  less than the rate  sufficient                                                                   
to cover payment of employer contributions  required for both                                                                   
the defined contribution plan  of the PERS system and for the                                                                   
teachers'   and  public   employees'   health   reimbursement                                                                   
arrangement  plan  trust fund,  as  required  by the  defined                                                                   
benefit plan of the PERS system.                                                                                                
9:09:45 AM                                                                                                                    
Mr. Grussendorf discussed Section  7, which required that the                                                                   
rate used to  calculate employer contributions  under Section                                                                   
5 of the  bill may not exceed  22 percent when the  assets of                                                                   
PERS and the pension reserve fund,  combined, are equal to or                                                                   
greater  than  60  percent  of the  total  of  that  system's                                                                   
9:10:08 AM                                                                                                                    
Mr.  Grussendorf  explained  that   Section  8  eliminated  a                                                                   
reference to AS  39.35.280, in connection to  retiree medical                                                                   
benefits, because  AS 39.35.280 would be repealed  by section                                                                   
9 of the bill.                                                                                                                  
9:10:19 AM                                                                                                                    
Mr.  Grussendorf   concluded  that  Section  9   repealed  AS                                                                   
39.25.280,  a  law  that  required   the  state  to  annually                                                                   
contribute money  to the past  service liability of  the PERS                                                                   
system in  addition to  the contributions  the state  made to                                                                   
the system  as an  employer. He added  that Section  10 would                                                                   
establish an effective date of June 30, 2012.                                                                                   
9:10:55 AM                                                                                                                    
Senator  Olson asked  how the  state  acquiring $7.2  billion                                                                   
three years  after the  initial $2  billion deposit  into the                                                                   
fund had been calculated.                                                                                                       
Mr.  Grussendorf deferred  the  question to  the director  of                                                                   
legislative finance. He added  that modeling had been done by                                                                   
Buck Consultants that would be presented to the committee.                                                                      
9:11:38 AM                                                                                                                    
DAVID   TEAL,   DIRECTOR,   LEGISLATIVE   FINANCE   DIVISION,                                                                   
introduced the  slide, "Cost of  State Assistance to  PERS --                                                                   
with and  without a $2 Billion  Deposit." He stated  that the                                                                   
annual cost  depicted on  the graph appeared  as a  small and                                                                   
fairly flat line because the annual  costs were in the $100's                                                                   
of millions,  while the scale  of the graph was  in billions.                                                                   
He stated  that as  the $100's  of millions in  contributions                                                                   
accumulated, the  graph reflected the  total cost as  it grew                                                                   
over  time.  He  relayed  that through  FY12  the  state  had                                                                   
contributed approximately  $1 billion to the  PERS trust. The                                                                   
graph illustrated  that  a one-time FY13  contribution  of $2                                                                   
billion would allow  the state to avoid $2  billion in annual                                                                   
contributions   by  FY18,  while   maintaining  an   employer                                                                   
contribution rate  no higher than 22 percent.  He shared that                                                                   
the  content of  the graph  had  been determined  by using  a                                                                   
model produced by the actuarial  company Buck Consultants. He                                                                   
added that  the company was  working on modifications  to the                                                                   
model that  would allow  the state to  work with  the trigger                                                                   
mechanisms built into the legislation.                                                                                          
9:14:26 AM                                                                                                                    
Co-Chair  Hoffman asked  if the calculation  of $5.3  billion                                                                   
included the repayment of $2 billion.                                                                                           
Mr.  Teal  replied in  the  negative.  He clarified  for  the                                                                   
committee that the bill allowed  for recovery of money in the                                                                   
long-term.  He  said  that  because  of  the  large  unfunded                                                                   
liability  the  state currently  faced,  too  much money  was                                                                   
being contributed  to a closed  system. He added  that normal                                                                   
actuarial methods would cause  over contribution to the fund.                                                                   
He explained  that the bill backed  away from that  model and                                                                   
allowed the state to recover the $2 billion in later years.                                                                     
9:15:52 AM                                                                                                                    
Mr. Teal discussed  the slide, "Projected  Reserve Balances."                                                                   
The graph  illustrated that the  reserve balances  would drop                                                                   
by $2  billion with  the deposit, but  because the  state was                                                                   
not  making annual  contributions the  reserve balance  would                                                                   
recover  and end  up being  higher  than it  would if  annual                                                                   
payments were  to continue to  be made. He observed  that the                                                                   
balance would drop  down given the numbers for  projected oil                                                                   
revenue and expenditures.                                                                                                       
9:16:50 AM                                                                                                                    
Mr. Teal turned  to the chart, "PERS Actuarial  Projection --                                                                   
with  $2 billion  Deposit to  a  Reserve Fund  in FY13  (Buck                                                                   
9:17:34 AM                                                                                                                    
AT EASE                                                                                                                         
9:17:35 AM                                                                                                                    
9:18:00 AM                                                                                                                    
Mr.  Teal  relayed  that  the chart  showed  the  assets  and                                                                   
liabilities  of the  fund. He  stated  that the  goal was  to                                                                   
match assets  to liabilities.  He explained that  liabilities                                                                   
continued to  increase in an  open system; because  the state                                                                   
had  closed the  system,  as the  last  person under  defined                                                                   
benefits retired, the curve would  turn downward. He asserted                                                                   
that the  concept embodied  in the  legislation was  that the                                                                   
state  did not  need to  follow  standard actuarial  methods,                                                                   
which  would   have  the  state  chase  the   ever  extending                                                                   
liability curve,  and instead join the curve  as it declined.                                                                   
He  detailed that  the bill  would  put $2  billion into  the                                                                   
reserve fund,  which raised the  funding ratio.  He explained                                                                   
that  the   funding  ratio  was   the  ratio  of   assets  to                                                                   
liabilities. He said  that a 100 percent funded  system meant                                                                   
that the  assets and  liabilities were  equal, and  the lower                                                                   
the number,  the worse  off the  system. He  stated that  the                                                                   
current  PERS  funding  liability  was  at  62  percent,  the                                                                   
deposit would  push it up towards  70 percent where  it would                                                                   
hover  and decrease  back to 65  percent before  it began  to                                                                   
recover and went up to full funding.  He noted that according                                                                   
to the graph where assets and  liability were equal the state                                                                   
was  at 100  percent funded.  He highlighted  that the  chart                                                                   
illustrated  the rate  at which employers  paid. He  remarked                                                                   
that the rate  was currently capped at 22 percent,  and would                                                                   
remain at 22 percent until the  funding ratio began to climb.                                                                   
He said  that when the  ratio began to  climb the  rate would                                                                   
fall towards  the  normal cost  of the system  and the  state                                                                   
would  begin  to  recover  excess money  from  the  fund.  He                                                                   
likened  the legislation  to  a very  long-term  loan to  the                                                                   
retirement system.                                                                                                              
9:20:41 AM                                                                                                                    
Mr.  Teal offered  that the  logical  progression was  simply                                                                   
that  the  bill  established a  reserve  fund  because  money                                                                   
contributed directly  to the PERS  trust fund could  never be                                                                   
withdrawn.  He said  that putting  the money  into a  reserve                                                                   
fund would keep it from being locked-up.                                                                                        
9:21:11 AM                                                                                                                    
Mr. Teal  explained that  the bill  would establish  transfer                                                                   
mechanisms.  The  first  mechanism  would  be  a  50  percent                                                                   
trigger  that would  ensure that  money would  move from  the                                                                   
reserve  account  to  the  trust  fund  proper  in  order  to                                                                   
maintain a 50 percent funding  ratio. He admitted that the 50                                                                   
percent number was arbitrary and  that some could consider it                                                                   
too low,  but that the  model worked  fine at 50  percent. He                                                                   
stated  that the second  transfer mechanism,  at 95  percent,                                                                   
would allow  the state  to recover the  loans. Once  the fund                                                                   
was healthy  enough to  have a funding  ratio of  95 percent,                                                                   
money  would begin  to  flow back  to  the  general fund.  He                                                                   
relayed that the  third trigger, at 60 percent,  included the                                                                   
trust  fund   plus  the  reserve   account  and   divided  by                                                                   
liability. He  communicated that the trigger  was designed to                                                                   
prevent future legislatures from raiding the fund.                                                                              
9:24:11 AM                                                                                                                    
Co-Chair  Hoffman  referred  to  the chart,  "Cost  of  State                                                                   
Assistance  to  PERS  --  with   and  without  a  $2  Billion                                                                   
Deposit." He  wondered if the  40 percent liability  would be                                                                   
directly attributed to municipalities.                                                                                          
Mr. Teal  responded that the ratio  of 60:40 was  the current                                                                   
standing. He  said it could be  argued that the  state should                                                                   
not bear the  responsibility to put up the  entire $2 billion                                                                   
to keep rates  at 22 percent, and that  municipalities should                                                                   
put up their 40 percent. Under  that scenario the state would                                                                   
contribute $1.2 billion and the  municipalities would have to                                                                   
come  up  with   $800  million.  He  did  not   believe  that                                                                   
municipalities would  be able to  come up with the  funds. He                                                                   
furthered  that it was  a bonus  to municipalities  that they                                                                   
did not  have to produce a  share of the unfunded  liability;                                                                   
however,  they  were  continuing  to pay  a  portion  of  the                                                                   
unfunded  liability  because they  continued  to  pay the  22                                                                   
percent  rate,  half of  which  was  a contribution  to  past                                                                   
service costs. He  stressed that the state was  not absorbing                                                                   
the entire amount, but a large portion.                                                                                         
9:26:18 AM                                                                                                                    
Co-Chair Stedman  stated that the committee  would delve into                                                                   
further detail upon the next hearing of the legislation.                                                                        
9:26:34 AM                                                                                                                    
Senator Ellis  thanked Mr. Teal  for working with  his office                                                                   
on  the  legislation,   particularly  on  the   reserve  fund                                                                   
9:27:09 AM                                                                                                                    
Senator Thomas asked whether conclusions  and recommendations                                                                   
from the ARMB were reflected in the bill.                                                                                       
Mr. Teal  responded that  the board  had examined the  option                                                                   
presented  in the  bill. He did  not believe  that the  board                                                                   
supported, nor  understood, the legislation. He  thought that                                                                   
the board  should be questioned  directly. He noted  that the                                                                   
board  had  reviewed a  number  of  options, and  that  those                                                                   
options would be before the committee in the coming weeks.                                                                      
9:27:45 AM                                                                                                                    
Co-Chair Stedman  added that  the board  would be before  the                                                                   
committee in the future.                                                                                                        
9:28:21 AM                                                                                                                    
SB  187  was   HEARD  and  HELD  in  committee   for  further                                                                   
Co-Chair Stedman observed the fiscal note: NEW FN (DOR).                                                                        

Document Name Date/Time Subjects
SB 187 retirement fund sectional summary.pdf SFIN 2/8/2012 9:00:00 AM
SB 187
SB 187 sponsor statement.pdf SFIN 2/8/2012 9:00:00 AM
SB 187
SB187 020712 PERS savings.pdf SFIN 2/8/2012 9:00:00 AM
SB 187
SB187 020712 PERS Actuarial Data.pdf SFIN 2/8/2012 9:00:00 AM
SB 187
SB187 020712 reserves.pdf SFIN 2/8/2012 9:00:00 AM
SB 187
SB 171 dropout rate chart.pdf SFIN 2/8/2012 9:00:00 AM
SB 171
SB 171 JSD Support.pdf SFIN 2/8/2012 9:00:00 AM
SB 171
SB 171 report from Alaska Council of School Administrators.pdf SFIN 2/8/2012 9:00:00 AM
SB 171
SB 171 letter from haines.pdf SFIN 2/8/2012 9:00:00 AM
SB 171
SB 171 sample of district budgets.pdf SFIN 2/8/2012 9:00:00 AM
SB 171
SB 171 shares of per pupil spending.pdf SFIN 2/8/2012 9:00:00 AM
SB 171
SB 171 spending per student by state.pdf SFIN 2/8/2012 9:00:00 AM
SB 171
SB 171 sponsor statement.pdf SFIN 2/8/2012 9:00:00 AM
SB 171
SB 171 State snapshot reports.pdf SFIN 2/8/2012 9:00:00 AM
SB 171
SB 171 Support Comeau.doc SFIN 2/8/2012 9:00:00 AM
SB 171
SB 171 support emails 1.pdf SFIN 2/8/2012 9:00:00 AM
SB 171
SB 171 support emails 2.pdf SFIN 2/8/2012 9:00:00 AM
SB 171