Legislature(2013 - 2014)BUTROVICH 205
04/08/2014 09:00 AM Senate STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| HB217 | |
| Confirmation Hearings | |
| SB30 | |
| HB310 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 30 | TELECONFERENCED | |
| + | HB 217 | TELECONFERENCED | |
| + | HB 310 | TELECONFERENCED | |
| + | TELECONFERENCED |
SB 30-TEACHERS & PUB EMPLOYEE RETIREMENT PLANS
9:46:00 AM
CHAIR DYSON announced the consideration of [SB 30].
9:46:15 AM
MIKE BARNHILL, Deputy Commissioner, Department of
Administration, noted that this morning he submitted responses
to questions the committee had previously. He asked the chair
how he would like to proceed.
CHAIR DYSON asked him to reiterate the questions that were asked
and summarize the answers.
MR. BARNHILL reviewed the following committee questions and his
written answers:
1. What is the long-term expectation of growth in the defined
benefit plans?
A. The Alaska Retirement Management (ARM) Board has adopted
the investment earnings assumption of 8 percent per year.
1.b. What will the defined benefit plans look like if the
State received an average of 4 percent, 6 percent, and 8
percent return on its investments?
A. The assumption is that the returns are long-term. At
the, The FY2012 actuarial valuations assume an 8 percent
rate of return and show an unfunded liability of $11.9
billion. That valuation will be updated at the end of April
when the ARM Board considers the FY2013 actuarial
valuations. The expectation is that the unfunded liability
will remain about the same.
If the assumed rate of return is decreased to 4 percent,
which some consider a "riskless rate of return," the
unfunded liability would immediately double to roughly $24
billion.
If the assumed rate of return is 6 percent, the unfunded
liability would be about $18 billion
MR. BARNHILL explained that the assumed rate of return
assumption has the greatest impact of any of the many actuarial
assumptions that are used to calculate the actuarial valuation
every year.
9:49:54 AM
2. What is the most current breakdown of costs between
healthcare and other pension costs for Alaska's retired
public employees?
A. For both the PERS and TRS retirement systems, the
pension unfunded liability is 69.4 percent and healthcare
liability is 30.6 percent. The FY2013 comprehensive annual
financial (CAF) report shows that for PERS the pension
benefits were just over $599 million and the health
benefits were just over $370 million. For TRS the pension
benefits were just over $380 million and the health
benefits were just about $121 million.
3. Please provide a graph with two trend lines, one being the
smooth rate of return compared to a trend showing the
fluctuations in Alaska's historic rates of return.
A. In the first chart the blue line shows the fairly
volatile rate of return across a period ranging from 1989 -
2014. The red line shows a rolling five-year annualized
return. From the late 1980s through 2000 the returns trend
from 16 percent down to 8 percent. In 2001 the line drops
in response to the dotcom collapse and then trends up and
down again for the 2009 recession. Over the last couple of
years the five-year return has started back up towards the
assumed rate of 8 percent. The next two charts show PERS
TRS returns versus the S&P 500 over the same time period.
The trend tracks fairly closely, primarily as a result of
the pension funds' 60-70 percent investment in equities.
Page 3 shows the 75 year chart on the S&P 500. The blue
line shows the annual return and is the most volatile. The
green line shows a five-year rolling return and the red
line shows the ten-year rolling rate of return.
4. If the investment rates go down, would the system proposed
in SB 30 provide lower risk for the state than the current
defined contribution plan?
A. The plan may not pencil out fiscally if the return is
less than 8 percent.
5. If one tier of the defined benefit plan took a
disproportionate amount from the retirement plan, how would
this affect the other defined benefit tiers?
A. The unfunded liability is computed as the cost to each
of the defined benefit tiers. Thus, if PERS Tier I consumed
a disproportionate amount of the resources, the system as a
whole would reflect an unfunded liability. One way this
could happen is if the mortality assumptions proved to be
incorrect and Tier I retirees lived longer than projected.
If an experience study by the actuary showed that people
were living longer than expected, there would be an update
to the mortality table and a corresponding unfunded
liability for the system would be added to the valuation.
Would the defined contribution tier be affected?
A. No.
6. Will the unfunded liability decrease with more employees in
the system?
A. The unfunded liability is computed with respect to every
employee so adding new employees will have no impact. A new
tier of defined benefit employees may or may not meet or
exceed actuarial assumptions but it won't impact the
existing unfunded liability associated with the current
members of the plan.
7. What number does the administration use to calculate
investment returns?
A. Eight percent.
8. Please provide a graph that shows the effect of SB 30
employee and employer contributions.
A. The chart (with yellow bars) is modeled on the previous
version of the bill, Senate Bill 121. The actuarial
calculations are somewhat stale and both the model and
calculations probably warrant updating.
9:57:56 AM
SENATOR WIELECHOWSKI asked if the bill has a positive or
negative fiscal note when using the actuary and ARM Board
assumption of an 8 percent investment return.
MR. BARNHILL replied the administration's fiscal note is
indeterminate, primarily because it reflects the inherent
uncertainty in any defined benefit plan. He credited the sponsor
for going to great lengths to eliminate certain types of
uncertainty, particularly with respect to healthcare costs, but
continued to assert that it isn't possible to eliminate risk
with respect to all of the assumptions. He cited the assumed 8
percent investment earnings, mortality assumptions, and
inflation as examples.
10:00:02 AM
SENATOR WIELECHOWSKI pointed out that fiscal notes are prepared
all the time when all the variables aren't known. He cited the
price of oil as an example. He asked if the fiscal impact to the
state is positive or negative, using all the assumptions that
the actuary and the ARM Board used.
MR. BARNHILL conceded that the actuary letter indicates a short-
term savings over "the first X years" under the assumptions that
go into the bill.
SENATOR WIELECHOWSKI asked how much.
MR. BARHILL replied it's $68.9 million.
CHAIR DYSON asked if there is a discernable difference in
recruitment and retention of PERS and TRS employees since the
State adopted the defined contribution plan.
MR. BARNHILL said he would provide the trend data that was
prepared for Senator Giessel and the committee could draw its
own conclusions. The State of Alaska hasn't done an employee
movement report since the end of FY2011 but those numbers didn't
show an increase in employee terminations subsequent to FY2007
when the defined contribution plan was adopted. They showed a
small decrease in people leaving the state, but that could be
due to the nationwide economic recession. Alaska experienced
fairly high rates of employee turnover prior to the closing of
the defined benefit plan and he believes that's the nature of
Alaska.
CHAIR DYSON asked if the state has a formal process for looking
at trends and analyzing the efficacy of the salary and benefits
program.
MR. BARNHILL replied there is an informal process where the
State is constantly being asked to evaluate the fairness of its
salary schedules and pension benefits. He segued to highlight
the benefits of the existing PERS Tier IV defined contribution
plan. The employee contributes 8 percent of their income into an
account that they control and the PERS employer contributes 5
percent. There is also the Supplemental Annuity System (SBS) in
which the employee contributes 6.13 percent and the employer
matches that contribution. The combined total comes to a
contribution rate of 25.26 percent of an employee's salary. In a
defined contribution system, employees are expected to stay
employed for 30-35 years. That's not unreasonable; it's a normal
working career. He submitted that testimony suggesting fewer
years isn't reasonable because it's not possible to build a
sustainable retirement plan on a 20-year career. With
compounding, 35-40 years of contributions to a defined
contribution pension plan add up to a secure retirement.
MR. BARNHILL described the array of investment options that the
ARM Board and the Division of Treasury put together as
phenomenal. Under the U.S. Department of Labor regulations,
defined contribution employees default into a target date fund
that's based on their age. The funds are professionally managed
and have low administrative and investment expenses. For
example, the 2040 Target Date Fund charges 0.26 percent, which
is far less than the administrative costs paid to the investment
managers in the defined benefit plan. An employee who remains
employed by the State of Alaska for 30-40 years may build up a
defined contribution of over $1 million, assuming an 8 percent
rate of return. Adding in the SBS roughly doubles that amount.
10:09:42 AM
CHAIR DYSON commented that the defined contribution also allows
portability.
MR. BARNHILL agreed.
10:10:43 AM
CHAIR DYSON stated he would hold SB 30 in committee. Although he
didn't believe that the bill would pass this year, he said he
was impressed with the efforts that were put forth to make it
happen.