Legislature(2019 - 2020)ADAMS ROOM 519
04/15/2019 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB32 | |
| Presentation: Pers/trs System | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 32 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
April 15, 2019
1:30 p.m.
1:30:04 PM
CALL TO ORDER
Co-Chair Wilson called the House Finance Committee meeting
to order at 1:30 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Tammie Wilson, Co-Chair
Representative Jennifer Johnston, Vice-Chair
Representative Dan Ortiz, Vice-Chair
Representative Ben Carpenter
Representative Andy Josephson
Representative Gary Knopp
Representative Bart LeBon
Representative Kelly Merrick
Representative Colleen Sullivan-Leonard
Representative Cathy Tilton
MEMBERS ABSENT
None
ALSO PRESENT
John Scanlon, Staff, Representative Jonathan Kreiss-
Tomkins; Ajay Desai, Director, Division of Retirement and
Benefits, Department of Administration; Kathy Lea, Deputy
Director, Division of Retirement and Benefits, Department
of Administration; Kevin Worley, Chief Financial Officer,
Department of Administration.
PRESENT VIA TELECONFERENCE
Chris Rose, Executive Director, Renewable Energy Alaska
Project; Stacy Barnes, Director, Governmental Relations and
Public Affairs, Alaska Housing Finance Corporation; Eric
Havelock, Lending Officer, Mortgage Operations, Alaska
Housing Finance Corporation.
SUMMARY
HB 32 AK ENERGY EFFICIENCY LOANS: ELIGIBILITY
HB 32 was HEARD and HELD in committee for further
consideration.
PRESENTATION: PERS/TRS SYSTEM
HOUSE BILL NO. 32
"An Act making certain entities that are exempt from
federal taxation under 26 U.S.C. 501(c)(3), (4), (6),
(12), or (19) (Internal Revenue Code), regional
housing authorities, and federally recognized tribes
eligible for a loan from the Alaska energy efficiency
revolving loan fund; relating to loans from the Alaska
energy efficiency revolving loan fund; and relating to
the annual report published by the Alaska Housing
Finance Corporation."
1:30:42 PM
Co-Chair Wilson shared that the bill had been heard in the
past.
JOHN SCANLON, STAFF, REPRESENTATIVE JONATHAN KREISS-
TOMKINS, relayed that the bill had been heard by two
legislatures previously. He read from a prepared statement:
Many of you might be familiar with HB 32. This is the
third legislature that the bill has seen. During the
30th Legislature, this bill passed all committees of
referrals in the House and died in House Rules. During
the most recent legislature, the 31st, this bill
passed all committees in the House, passed out of the
House of Representatives 35 to 1 in identical form as
to what you have before you, then moved over to the
Senate and died in its last committee of referral
there.
So, the bill is back.
House Bill 32 relates to the Alaska Energy Efficiency
Revolving Loan Program, or the AEERLP for short, which
is a bond authorized revolving loan program.
Presently, the only eligible entities that can apply
for energy efficiency loans from the AEERLP are public
entities, such as municipalities, school districts,
state buildings, and the University of Alaska. House
Bill 32 broadens eligibility to include nonprofits,
federally recognized tribes, and regional housing
authorities as entities that can apply for energy
efficiency loans through the AEERLP.
Under House Bill 32, churches, arts councils, regional
housing authorities, chambers of commerce, your
neighborhood VFW post, soup kitchens you name it
would be allowed to apply for an energy efficiency
loan through the AEERLP in order to finance energy
efficiency improvements, and these improvements can
enable nonprofits to save on their energy costs.
Often these kinds of nonprofit organizations have
energy inefficient buildings and are relatively cash
poor meaning they don't have a lot of ability to
make upfront capital investments, even if there's a
great return on those upfront capital investments.
That's where we believe this loan program can be
valuable.
What's unique about the AEERLP is that in order to
apply for the loan, one must first obtain an
Investment Grade Energy Audit. This audit identifies
which energy efficiency improvements could be made and
how much money would be saved as a result. The
guaranteed savings from the energy efficiency
improvements, which are identified by the Investment
Grade Audit, are used to repay the loan.
The AEERLP is administered by the Alaska Housing
Finance Corporation, also known as AHFC, and was
created by the legislature in 2010 through the Alaska
Sustainable Energy Act. At that time, in 2010, the
legislature granted AHFC the authority to bond up to
$250 million to finance energy efficiency loans a
sum which, if utilized, could save Alaskans a
significant amount on energy costs.
Unfortunately, this program has been deeply
underutilized.
Since 2010, AHFC has received only three applications
from public entities for these energy efficiency loans
and closed only one loan through this program for
$2.5 million to the City of Galena. According to AHFC,
who is on the line and can speak to this or any other
question, one applicant found alternative capital,
while the other used their Investment Grade Audit to
create a three-year capital improvement program for
energy efficiency upgrades using existing maintenance
staff.
Again, to be clear, there's not just a pot of $250
million sitting around, but this authority that AHFC
has to bond up to $250 million to finance energy
efficiency loans for Alaskans is a powerful existing
resource that's been untapped.
Moreover, to the best of our knowledge, the AEERLP
offers the only dedicated energy efficiency loan in
Alaska, and we are not aware of an analogous loan
program from a private lender. The AEERLP fulfills a
distinct purpose.
In closing, Rep. Kreiss-Tomkins originally introduced
this bill when the state began to run budget deficits
in his words, "when the gravy train was ending"
and some of his thinking was instead of nonprofits
having their problems partly solved through free money
by way of capital appropriation, this could be another
tool in the toolbox for nonprofits to be self-
sufficient in tackling their own problems, so they can
continue to serve such important roles in our
communities.
1:35:24 PM
Co-Chair Wilson noted a representative from Alaska Housing
Finance Corporation (AHFC) was available online for
questions. She appreciated Mr. Scanlon's testimony
informing the committee there was not $250 million sitting
around.
Co-Chair Wilson OPENED public testimony.
CHRIS ROSE, EXECUTIVE DIRECTOR, RENEWABLE ENERGY ALASKA
PROJECT (via teleconference), spoke in support of the
legislation on behalf of the Renewable Energy Alaska
Project (REAP). He detailed that REAP was a nonprofit
comprised of nearly 80 businesses including electric
utilities, Native corporations, and non-governmental
organizations. The organization's mission was to increase
the development of renewable energy and increase energy
efficiencies throughout the state. He shared that REAP had
supported the passage of SB 320 in 2010, which had created
the AEERLP [Alaska Energy Efficiency Revolving Loan
Program]. The organization believed energy efficiency was
the top priority, particularly for buildings. He reported
that approximately 40 percent of all energy used in the
country was used in buildings. He informed the committee
that unfortunately, many of the buildings in Alaska needed
to be energy retrofitted.
Mr. Rose highlighted that when including all energy
consumed by Alaskans, the cost was approximately $5 billion
per year. The figure included transportation and
electricity, but a large portion went to heating buildings.
He explained that if even a sliver of the expenditures
could be saved it would mean much more money in the state's
economy. He brought attention to a successful program
administered by AHFC that conducted residential retrofits.
The legislature had appropriated over $600 million over the
course of a decade for energy retrofits in 50,000
individual households. The average had been about $10,000
per household, although many households had put more money
in. The average energy bill savings from the residential
retrofits was about 30 percent. He reported AHFC's estimate
that the 50,000 homes were collectively saving about 25
million gallons of heating oil equivalent annually.
Mr. Rose explained that buildings could successfully save
money on their energy bills if they took on the kinds of
retrofits that HB 32 would allow. He underscored REAP's
strong support for the bill. He explained the bill would be
another tool in the toolbox for nonprofits and tribes to
borrow money where they may not be able to gain access to
low cost or decent interest rates. The loans would allow
borrowers to save more money monthly on their energy bills
than they were paying back. The organization believed in
the excellence of the program and strongly supported the
bill.
1:38:53 PM
Representative LeBon referred to the AHFC Home Mortgage
Energy Loan Program. He asked if AHFC recorded a lien
against a property under the program.
Mr. Rose clarified that he had been referring to the
weatherization grant program administered by AHFC and an
energy rebate program. He did not believe any kind of lien
was set against the home in either program.
Representative LeBon asked if a lien would be recorded
against a property under the program in the bill.
Mr. Rose was uncertain. He noted that someone from AHFC
would be able to answer the question.
Co-Chair Wilson informed committee members that AHFC was
available to answer questions following public testimony.
Co-Chair Wilson CLOSED public testimony.
1:40:19 PM
STACY BARNES, DIRECTOR, GOVERNMENTAL RELATIONS AND PUBLIC
AFFAIRS, ALASKA HOUSING FINANCE CORPORATION (via
teleconference), introduced herself and stated her
understanding of the question.
Representative LeBon agreed.
Ms. Barnes replied that AHFC may record a lien. She
reported that the agency had not recorded a lien on the one
project that closed in Galena because of the other
collateral available on the loan.
Representative LeBon asked if AHFC needed to be in a senior
position or would be willing to take a junior position if a
lien was recorded.
Ms. Barnes answered it would depend on the risk associated
with the loan and the loan size. She detailed that any
loans over $1 million required approval by the AHFC board
of directors, which took a number of factors into
consideration.
Representative LeBon asked if AHFC required an appraisal on
a property being approved with the energy efficiency.
Ms. Barnes answered that an appraisal was not required;
however, an energy audit was required prior to work taking
place and prior to a financing commitment.
Representative LeBon asked for verification that AHFC's
interest in the collateral was about energy efficiency and
not related a loan to value.
Ms. Barnes deferred the question to a colleague.
Representative LeBon elaborated that his question pertained
collateral positions; first, second, or junior liens;
collateral valuation, and traditional real estate lending.
He asked if AHFC would look at the loan as collateralized
or unsecured credit.
ERIC HAVELOCK, LENDING OFFICER, MORTGAGE OPERATIONS, ALASKA
HOUSING FINANCE CORPORATION (via teleconference), replied
that it was a hybrid of what Representative LeBon was
referring to as conventional real estate financing. The
corporation looked for a form of collateral that was
acceptable to its board. He detailed it could be either
conventional collateral (e.g. a deed of trust secured
against real estate) or an assignment of a revenue stream.
Representative LeBon noted that AHFC would record a lien
position if it was conventional collateral in the form of
real estate on the property being improved. He asked if
AHFC had developed a policy identifying what the lien
position needed to be, what loan to value needed to be
achieved, and whether the value of the collateral needed to
be formalized.
Mr. Havelock answered that AHFC had not yet developed
internal procedures as HB 32 was a bill in progress. He
informed the committee that it was in AHFC's best interest
to look for some form of collateral.
1:43:38 PM
Representative LeBon stated there had been a reference made
earlier that the private sector was not interested in
"these types" of loans or improvements. He asked if he had
heard correctly.
Mr. Havelock responded that to AHFC's knowledge there was
not an analogous loan program currently offered by the
private sector. He could not speak to whether the private
sector was interested in offering one or not.
Representative LeBon replied that the private sector was
willing to make the loans. He had made a number of the
loans in his past banking career. He reported that banks
looked for value of collateral, loan to values, repayment
ability, lien positions, and capacity to repay. He remarked
that if those issues (that were common in the private
sector) had not been thought out, the program [addressed by
the legislation] was not fully developed.
Co-Chair Wilson noted it was her understanding that the
program had not been used because many entities had found a
better way to finance their program. She asked if the
statement was accurate.
Mr. Scanlon replied it was his understanding based on
information from AHFC.
Co-Chair Wilson asked if the program was taking business
away from banks.
Mr. Scanlon deferred the question to AHFC. The sponsor's
understanding was that it was the only dedicated energy
efficiency loan program that calculated the repayment based
on guaranteed savings. He noted that AHFC could also speak
to interest rates. He did not believe the bill would take
anything from private lending institutions.
1:46:34 PM
Co-Chair Wilson noted that the backup materials for the
bill showed that one reason the program had been
underutilized was that after entities had made energy
efficiencies, they had gone somewhere else for the money.
She was trying to determine why the nonprofits would not go
to the institutions. She asked what AHFC offered that
institutions did not.
Ms. Barnes emphasized that AHFC did not view itself as a
competitor to private institutions. She informed the
committee that banks, credit unions, and mortgage companies
were partners with AHFC in providing home loans to
Alaskans. There had been other capital available for public
facilities in Alaska at a reduced interest rate. Under the
proposed AEERLP program, there was no subsidized interest
rate to those who may come to AHFC for a loan. In 2015, the
corporation's research and rural development/energy
department had surveyed a number of facility owners across
the state. She detailed that 33 percent of the respondents
reported using cash on hand to make energy efficiency
improvements, 29 percent used bonds, and 22 percent used
grants.
Vice-Chair Ortiz spoke to the question about taking
business away from private enterprise. He noted that with
other state revolving loan programs, before an applicant
could take out a revolving loan, they had to produce a
denial letter from a commercial bank. He asked if the same
would be true under the bill.
Mr. Scanlon deferred the question to AHFC.
Ms. Barnes answered that no denial would be required by
AHFC. She added that the project would have to stand on its
own merit in order for AHFC to approve the loan.
Representative LeBon considered loan approval and asked if
AHFC made loans on a direct basis or if it looked to banks
to underwrite the loan and submit it for approval.
Ms. Barnes replied that AHFC would directly do the loan
under the specific program in HB 32.
1:49:26 PM
Representative Carpenter asked what the program enabled
that could not be done through the private sector.
Mr. Scanlon spoke to the unique aspects of the AEERLP. He
detailed there were two steps: 1) securing the investment
and 2) AHFC developed a loan repayment schedule based on
the guaranteed savings instead of the upfront capital
costs. The loan repayment schedule for dedicated energy
efficiency loans was unique.
Co-Chair Wilson asked for verification that the program
would make the option available to entities that could not
currently get a loan.
Mr. Scanlon answered in the affirmative. At present, only
public entities had access to the loan; the bill would
expand to nonprofits, regional housing authorities, and
federally recognized tribes. He detailed that in past years
capital appropriations may have been available [which were
no longer available]. The program would provide another
tool in the toolbox for those entities to become more self-
sustaining.
Representative LeBon followed up on the repayment program.
He asked if the payment amount was predicated on
establishing savings through energy efficiency
improvements, whether the interest rate would be fixed for
the life of the loan. He asked if the term of repayment was
backed into based on the maximum payment amount if it was
all predicated on how much was saved on the energy. He
supposed an entity could end up with a 15 or 20-year
repayment period.
Mr. Havelock answered the interest rate was set based on
the term of the loan; the longer the loan term, the
interest rate was slightly higher. The amount of the term
was tied to the projected recapture of the energy savings.
Under the current program (there were not guidelines for
the bill yet), there was a 1.2 debt coverage on the
savings, which meant the cash flow from the energy savings
must exceed the debt payment by at least 20 percent.
1:52:34 PM
Vice-Chair Ortiz remarked that one of the selling points of
the bill was that it would result in greater utilization of
a fund that was currently underutilized. He asked if there
had been an analysis done on what kind of response would
result from the broadening of the marketplace.
Mr. Scanlon replied that anecdotally Representative Kreiss-
Tomkins had a number of conversations with would-be
eligible entities in his district and across the state that
had expressed interest in pursuing the loans. He relayed
that Representative Kreiss-Tomkins and AHFC had done a
great deal of outreach to the presently eligible public
entities. He reported that there had only been three
applicants after nine years. He reiterated that anecdotally
organizations were interested in looking into the loans to
determine whether they were the right fit.
Co-Chair Wilson asked AHFC to address the fiscal note.
Ms. Barnes relayed the department had submitted a zero
fiscal note for the bill [OMB Component Number 110]. She
reviewed the note with a prepared statement:
The primary function of our organization is to invest
in home mortgages for Alaskans. Under federal law,
housing finance agencies like ours are uniquely
positioned to use the tax-exempt bond market, and
Alaska is one of just five states with the ability to
offer qualified veterans mortgage loans. The
operations of our agency are supported by the income
from our investments, we are a non-general fund
agency, and the debts of the corporation are not the
debts of the State of Alaska. Our bonds are currently
rated by S&P and Fitch at AA+, and by Moody's at AA2.
Banks, credit unions and mortgage companies are our
partners. They are the ones who offer home loans to
eligible Alaskans.
The enabling legislation in 2010 that allowed AHFC the
opportunity to go to market to finance energy
efficiency improvements for public buildings was part
of a larger energy omnibus bill (HB 306). At the time,
the price of oil in the State of Alaska was much
higher than it is today which meant that public
facilities were spending more to keep their buildings
warm. There was also a recognition that infrastructure
was aging, and there was an opportunity to make those
buildings more energy efficient. Alaska Housing had
also been the recipient of state funds that would go
onto create the Home Energy Rebate and expand the
weatherization programs, so we had some experience
with efficiency efforts.
Around the same time, Alaska Housing received federal
funds under the American Recovery & Reinvestment Act
stimulus package that we used to conduct detailed
energy audits on 327 public facilities, including
schools, maintenance facilities, libraries and more.
From our work in the residential space with Home
Energy Rebate and Weatherization programs, we knew
that Alaskans were saving approximately 30% in their
energy consumption. Similar savings were forecast
achievable in public facilities.
HB 32 expands AHFC's authority. No longer would we be
supporting public facilities alone but non-profits
would be eligible under future bond issuances for
eligible energy efficiency improvements.
In the same way that public facilities found financing
outside of Alaska Housing, non-profits may as well;
hence a view that this adds a tool to the nonprofits
toolbox.
We will apply the same rigor that we use on public
facilities today or with our home loans to any entity
seeking funding.
The interest rate for a loan under this program will
not be subsidized.
There is no "fund."
The rate (on the loans) will be subject to market
conditions and costs, and the risk associated with the
loan for a term up to 15 years.
Borrowers will bear the cost of that risk, which is
why we have submitted a zero fiscal note. If the same
loan that we funded in 2016 were come to us today, the
rate would be approximately 4.625 percent."
Co-Chair Wilson noted amendments to the bill were due the
following day.
HB 32 was HEARD and HELD in committee for further
consideration.
^PRESENTATION: PERS/TRS SYSTEM
1:58:05 PM
AJAY DESAI, DIRECTOR, DIVISION OF RETIREMENT AND BENEFITS
(DRB), DEPARTMENT OF ADMINISTRATION, introduced a
PowerPoint presentation titled "Public Employees'
Retirement System (PERS) Teachers' Retirement System (TRS)
2019 Update" dated April 15, 2019 (copy on file). He began
with an organizational chart on slide 2 showing how the
Department of Revenue (DOR) and Department of
Administration (DOA) worked cohesively together with the
Alaska Retirement Management Board (ARMB). He detailed that
ARMB served as a trustee for the pension and retiree health
trusts, the State of Alaska Supplemental Annuity Plan, and
Deferred Compensation Plans as of October 1, 2005.
Responsibilities were to manage and invest assets in a
manner that was sufficient to meet the liabilities and
pension obligations of the systems. Some of the activities
included establishing investment policies, reviewing
actuarial earnings assumptions, establishing asset
allocations, setting contribution rates for employers,
providing investment options, and monitoring performance.
Mr. Desai moved to slide 4 showing PERS chronology:
• January 1961: Established as a joint contributory
Defined Benefit (DB) plan
• 1975: Retiree Health Insurance with system-paid
premiums added
• July 1986: Tier II established
• July 1996: Tier III established
• July 2006: Defined Contribution (DC) Plan established
• July 2008: Cost Share with 22% employer contribution
rate
Mr. Desai elaborated that any contribution beyond 22
percent was supported by state assistance in order to fund
the pension systems.
Co-Chair Wilson asked why the state had not stayed with
Tier I instead of moving to Tier II in 1986 and what
adjustments needed to be made under Tier III. She believed
committee members were more clear about why the system had
been changed to Defined Contribution. She asked what the
state was trying to change when it moved to Tiers II and
III.
KATHY LEA, DEPUTY DIRECTOR, DIVISION OF RETIREMENT AND
BENEFITS, DEPARTMENT OF ADMINISTRATION, explained that Tier
II had been established on July 1, 1986 to implement
numerous cost containment measures because the liability
had been growing with the Tier I benefits. Under Tier II
the retirement age for normal retirement had been moved
from age 55 to age 60. Additionally, the receipt of the
Alaska cost of living allowance (10 percent of a person's
retirement and benefit if they remained living in Alaska)
had changed to age 60 instead of right at retirement. She
expounded that a person could receive the cost of living
allowance if they had an early retirement under Tier I, but
not under Tier II. The medical eligibility had been changed
to age 60 or with 20 years of service or 30 years of
service for an "all other" person.
Ms. Lea relayed the changes resulting in Tier II were
supposed to have solved all of the funding issues
associated with the plan; however, 10 years later, Tier III
had been established to implement more cost-containment
measures. She detailed that Tier III added a premium
payment to the medical plan for early retirement.
Additionally, there had been a geographic differential
payment change. She explained that Tier I employees living
in an area with a geographic salary differential were able
to use the differential immediately in the calculation of
their retirement benefit. One of the cost-containment
measures in Tier III required a person to serve half of
their service time in an area with a differential in order
to use it. The implementation of Tiers II and III were made
in order to contain costs of the growing liability for the
benefits.
Ms. Lea continued that in 2006 the Defined Benefit (DB)
Plan was closed, and the Defined Contribution (DC) Plan was
instituted. She explained that under a DB Plan, all of the
risk fell on the employer to pay benefits. She detailed
that contributions for the employee were set in statute and
if the cost for the benefits increased, the employer
continued to pay. Under the DC Plan, the risk fell on the
employee. Employees had an investment account they could
use to accrue their investment earnings. The DC Plan also
had health insurance, occupational death and disability
benefits, and a health reimbursement arrangement that
provided some assistance paying medical premiums.
Co-Chair Wilson stated her understanding that reopening a
closed system could have ramifications to the state's
credit rating. She believed that one of the passes the
state received was a result of the closed system that was
not accruing further damage. She asked if there could be
some unintended consequences for reopening closed tiers.
2:05:44 PM
Ms. Lea answered that she could not speak to the credit
rating of the state. She relayed that because of the
structure of a DB Plan where all of the risk and cost
resided with the employer, the DB Plans would continue to
accrue a liability (as was visible in the tiers created to
contain costs), which would at some point be an unfunded
liability.
Representative Sullivan-Leonard stated her understanding
that when the DC Plan had been established in 2006, it was
a time when many employees were not staying in state
government longer than eight to ten years. She explained
that the idea was the plan would be portable where once an
employee was vested after five years, they could take the
contribution to reinvest with a new employer. She asked if
any studies had been done to see if the system was working
or was a challenge for state employment and recruitment.
2:07:19 PM
Ms. Lea answered that the workforce was changing as younger
generations were not remaining in jobs as long as past
generations. The division had kept statistics on the
retention of DB and DC members since 2006; there was a
slight difference in the retention between DB and DC Plans
- DC retention was slightly lower. She did not believe it
was possible to definitively identify the reason for the
difference. She noted that the workforce was younger and
was moving more. Many of the problems in recruitment and
retention that were blamed on the DC Plan were actually due
to lack of information provided by employers. She expounded
that employees were learning about the DC Plan from their
DB Plan coworkers who did not really know anything about
the plan.
Ms. Lea reported that many DC Plan employees who thought
they had a poor plan were quite happy with the plan after
attending an introductory seminar on the plan provided by
the division. She clarified it did not mean everyone was
happy with the plan. She explained that it appeared the
plan was better received by employees when a stronger
educational effort was made by the division. The division
had been working on developing marketing materials for
teacher associations and a pilot program DRB was running
with the Department of Public Safety to aid in recruitment
and retention by providing more robust information about
the plan.
2:09:33 PM
Representative Sullivan-Leonard thanked Ms. Lea for her
answer and explained she had been trying to determine
whether the program was working as intended.
Representative Josephson was concerned about the enormous
evidence that public safety workers/first responders were
leaving the state because they did not have a DB plan. He
noted that at some point there may be a legislative hearing
on the topic and there would be scores of people calling in
making the same argument. He thought there was some merit
in the claim. Alternatively, he wondered if the division
thought the individuals were all misunderstanding the
beauty of the DC Plan.
Ms. Lea answered that the police/fire group was somewhat
different than the "all other" group, which was the 30-year
retirement group. She explained the former group was
different predominantly because they had a shorter period
of time to earn a retirement; therefore, their benefits
were somewhat less than a 30-year employee would have. She
believed there were some valid things to be looked at in
the police/fire group and DRB had provided information to
bill sponsors the previous session. She thought it was
necessary to ask whether the return to a DB plan was the
only solution to the a retirement income issue and whether
the state was willing to take on that type of liability
again.
2:12:04 PM
Representative Josephson referenced Ms. Lea's earlier
statement that the unfunded liability would have to be
realized and come to terms with. He believed that was
already occurring annually. He explained the liability was
amortized to about $200 million per year. He believed there
was no day of reckoning because the state reckoned with
paying the liability down on an annual basis.
Ms. Lea deferred the question to a colleague.
KEVIN WORLEY, CHIEF FINANCIAL OFFICER, DEPARTMENT OF
ADMINISTRATION, replied that the presentation included a
slide related to the additional state contributions. He
relayed that the dollar amounts under discussion were right
in line. He explained that the liability "doesn't come due
today" or when a valuation report was completed, but it was
currently tracked through 2039. He stated that the day of
reckoning was about 20 years in the future; however, the
state looked at the number, made modifications, and
requested what the dollar amount would be on an annual
basis.
Co-Chair Wilson asked for verification that even though
adjustments had been made between Tiers I, II, and III,
there was still a large liability the state was having a
hard time containing.
Ms. Lea answered that the situation described by Co-Chair
Wilson was due to the structure of a DB Plan where all of
the cost and risk rested with the employer. She detailed
that any plan would look well for around ten years because
no one was able to retire from it, but once it began
maturing two things could not be controlled within the
structure. The first was the investment returns on the
funds and the second was longevity. When the plans had
originally been designed at the turn of the last century,
they had been designed to pay out at age 65 when the
average life expectancy was significantly less. Currently,
there were people receiving benefits from the plans who had
worked less years for those benefits than they had been
drawing.
Co-Chair Wilson thought it was something that should be
examined.
2:14:48 PM
Mr. Desai moved to slide 5 and reviewed the PERS membership
in the DB and DC Plans:
• 157 Member Employers
• 3 Defined Benefit (DB) Plan Tiers
o 35,139 retirees
o 5,606 terminated members entitled to future
benefits
o 13,611 actives (40%)
o 54,356 total DB members
• 1 Defined Contribution (DC) Plan
o 59 retirees
o 1,183 terminated members entitled to future
benefits
o 20,811 actives (60%)
o 22,053 total DC members
Co-Chair Wilson referred to the 35,139 DB Plan retirees and
asked how many were in Tiers I, II, and III.
Mr. Desai answered that he would follow up with the
breakdown. He moved to slide 6 showing FY 19 PERS
contribution rates:
Defined Benefit
Employee:
• 6.75% All Other employees
• 7.50% Peace Officer/Firefighter
• 9.60% School District Alternate Option
Employer:
• 22% Cost Share
State:
• 5.58% Additional State Contribution
Defined Contribution
Employee:
• 8% All Employees
Employer:
• 5% Investment Account
• 0.94% Health Care
• 0.76% Occupational Death & Disability Peace
Officer/Firefighter
• 0.26% Occupational Death & Disability All
Others
• HRA flat dollar, 3% of all PERS/TRS average
annual compensation
2:18:00 PM
Mr. Desai turned to slide 8 showing TRS chronology:
• March 1945: Established Defined Benefit (DB) Plan
• 1951: TRS excluded from Social Security
• 1955: Became a joint contributory plan
• 1966: Retiree health insurance (RHI) added
• 1975: System-paid premiums for RHI
• 1990: Tier II established
• 2006: Defined Contribution (DC) Plan established
2:18:48 PM
Mr. Desai moved to slide 9 and reviewed the number of TRS
membership in the DB and DC Plans.
• 57 Member Employers
• 2 Defined Benefit (DB) Plan Tiers
o 12,962 retirees
o 801 terminated members entitled to future
benefits
o 4,457 actives (47%)
o 18,220 total DB members
• 1 Defined Contribution (DC) Plan
o 29 retirees
o 614 terminated members entitled to future
benefits
o 4,937 actives (53%)
o 5,580 total DC members
2:19:59 PM
Co-Chair Wilson asked whether the TRS defined benefits were
different than PERS defined benefits. She stated that TRS
only included two tiers. She wondered if teachers received
a different retirement than public employees.
Ms. Lea answered that there were some structural
differences between the PERS and TRS DB Plan. She reported
that the benefit formula was somewhat higher on the PERS
side because the TRS side included a 2 percent multiplier
for the first 20 years and did not increase until the 20th
year. Under PERS, a 0.25 percent increase occurred after
the first 10 years and another 0.25 percent increase
occurred after the 20th year. The total resulted in a 2.5
percent increase beginning in the 20th year. Under
police/fire, the number went from 2 percent to 2.5 percent
at the 10-year mark. She elaborated that there had been a
lower benefit multiplier to calculate the benefits under
TRS. Additionally, the group was smaller and there had been
less volatility compared to the PERS plan.
Vice-Chair Ortiz looked at PERS membership on slide 5 and
pointed to the 40 percent active membership under the DB
Plan and 60 percent active membership under the DC Plan. He
moved to slide 9 and pointed out the difference between the
TRS DB Plan and DC Plan active membership was much smaller
at 47 percent versus 53 percent respectively. He asked for
the reason in the difference.
Ms. Lea responded that DRB had not done a study on the
issue, but the composition in the two groups was different.
She detailed that TRS included professional certificated
teachers who usually had a bachelor's or master's degree
and tended to be in a career. Whereas, the PERS system had
a large turnover and a larger number of people who did not
have the same level of education or certificate
requirements. She explained the more turnover, the more new
employees coming in.
2:23:02 PM
Mr. Desai turned to slide 10 showing FY 19 contribution
rates for TRS:
Defined Benefit
Employee:
• 8.65% All Employees
Employer:
• 12.56% Cost Share
State:
• 16.34% Additional State Contribution
Mr. Desai elaborated that in FY 19, the total contribution
was approximately 28.9 percent; 16.34 percent of the number
was supported by additional state contributions. He
continued with the remainder of slide 10:
Defined Contribution
Employee:
• 8% All Employees
Employer:
• 7% Investment Account
• 0.79% Health Care
• 0.08% Occupational Death & Disability
• HRA flat dollar, 3% of all PERS/TRS
2:24:16 PM
Representative Sullivan-Leonard compared the FY 19
contribution rates for PERS and TRS shown on slides 6 and
10. She looked at the PERS DB employee category showing a
9.6 percent school district alternate option. She asked
what positions were included in the number.
Mr. Desai replied that the 9.6 percent were performing PERS
jobs, not TRS. He asked Ms. Lea to elaborate.
Ms. Lea clarified that the individuals were PERS employees
who worked for the school districts for less than 12 months
a year. The individuals had elected to pay a higher
contribution in order to have their service calculated the
way a teacher's service would be calculated. She elaborated
that a PERS employee earned service on a day-for-day basis
at 0.00274 for each day of the calendar year. A teacher
earned a full year of service if they had served 172 or
more days in the school year. The alternate option allowed
the PERS classified employee in the school district to pay
a higher contribution in order to earn a full year of
service in a school year even though they may have only
worked 9 or 10 months in a year. The burden for the extra
cost rested with the employee.
2:26:23 PM
Mr. Desai moved to slide 12 and reviewed the PERS and TRS
balance sheet. He began with PERS DB pension and healthcare
figures for 2016 and 2017. The difference between the 2016
assets based on actuarial value of approximately $16.5
billion and accrued liabilities [of approximately $21.4
billion] reflected the unfunded liability. He noted that
the unfunded liability had increased from approximately
$4.9 billion in 2016 to nearly $5.1 billion in 2017.
Similarly, under TRS the unfunded liability had increased
from $1.7 billion in 2016 to $1.8 billion in 2017. He
reported that combining PERS and TRS resulted in a total
unfunded liability of almost $7 billion as of the last
valuation of 2017.
Vice-Chair Ortiz asked for a better definition of unfunded
liability.
Mr. Desai answered that under the DB Plans, the employer
carried all of the liabilities and responsibility to
provide the benefits for a participant's lifetime. He
explained that each year DRB determined DB Plan employee
benefits as of that day and as of the particular cutoff
date. The division determined how much money needed to be
put aside to cover an individual's retirement date through
a general life expectancy - the number was determined by
certain calculations and the present value was determined.
The division considered how much money would be necessary
to put aside for a specific individual from the current
date to their projected retirement date and then from their
projected retirement date to end of life. The present value
was then computed across the board for the entire
population.
Mr. Desai provided a hypothetical scenario where the value
of the money the state needed to set aside was about $100
million. The state's system assets were determined related
to current market value and interest rate and it was
compared to the value calculated at present. The difference
between the two was the unfunded liability if the value
came out to be lower than the assets. If the value was
higher, it meant the system was overfunded. He provided an
example where the shortfall was $20 million. The question
was whether an unfunded liability was a bad thing. He
stated it was a bad thing, but there were no plans in
existence that remained fully funded all of the time.
Vice-Chair Ortiz asked Mr. Desai to repeat his last
statement.
Mr. Desai complied. He reported there were no plans in the
public or private sector that remained 100 percent funded
all of the time. Values were based on demographics,
actuarial assumptions that changed every four years, and
based on market terms and conditions. All of the mechanics
went into place and DRB used the method to assume the cost
for future payouts. He explained that because it was not
possible to know the length of a person's lifespan, the
numbers were based on records and reports using the best
science. Each year, the exercise was conducted to determine
whether the system was on the same track as the year
before; it considered whether something had changed in
demographics, the market value, and expectations. Future
projections were continued to be tweaked up or down
depending on the difference in the market.
2:31:45 PM
Vice-Chair Ortiz asked if there was a public employee
compensation plan standard that states attempted to meet.
He asked if a rating of unfunded liability existed.
Mr. Desai answered in the affirmative. He detailed that
most private sector pension plans were governed by the
Internal Revenue Service (IRS) Employee Retirement Income
Security Act (ERISA). He relayed that ERISA had established
that a funding ratio of 80 percent was considered very
healthy and was in the green zone. At 77 percent the zone
became orange and below a certain percentage the zone
became red. He explained that employers were required to
adopt and meet certain guidelines under ERISA and to bring
their plan above 80 percent. The private sector considered
anything above 90 percent to be a very healthy and secure
plan. He reported that in the private sector the target was
a funding level of 100 percent. Similarly, Alaska had
targeted its PERS and TRS plans to be fully funded by 2039.
Vice-Chair Johnston speculated that if the state aimed for
the plans to be funded at 100 percent, the last retirees
could be quite wealthy.
Mr. Desai agreed. He explained that once the plan went
beyond the 100 percent threshold, mostly on the multi-
employer plan, it could not be maintained at that level.
The state would have to either lower or stop the
contributions from the employer side or increase the
benefit to keep the benefit up to the 100 percent level.
The highest risk of increasing the benefit with a 100
percent funding level was there was no guarantee that the
funding level may not go down and the promised benefit may
be taken away. He believed there was a major risk at
remaining at 100 percent. He stated that a 100 percent
funding level was a great target, but maintaining that
number was challenging.
2:34:36 PM
Vice-Chair Johnston noted that in the past when the system
had been severely underfunded the PERS, TRS, and health
benefits had accounted for almost one-third each. She asked
where the health liabilities had been in the past five
years and what percentage of the unfunded liability they
accounted for.
Mr. Desai replied that DRB would follow up with the
information.
Vice-Chair Johnston thought there had been some actuarial
savings.
Mr. Desai agreed to provide the information.
Representative Merrick referenced Mr. Desai's description
of unfunded liability as a promise by the state to pay the
benefits. She asked what ramifications there were to the
state if it did not pay the benefits.
Mr. Desai answered that not many plans were 100 percent
funded. Annually, the valuation of the plan was determined
as of a specific date; if the plan was underfunded and
there was no particular remedy to bring it up to the
necessary level, the plan would be at risk. However, if
there continued to be a contribution and remedy to pay
towards the unfunded liability to meet the targeted level,
it demonstrated being in the process of meeting the
obligations. He explained that under the circumstance, it
was not considered a particular risk. He explained that
what the state was trying to fund at present would be
cashed out over the next century. He elaborated that it was
understood if the plan was not fully funded at present
because the state was trying to target 100 percent funding.
Once the plan was funded at 100 percent (the 2040 target)
the last person collecting a pension check from PERS and
TRS would be in 2116 according to the actuarial assumption.
2:37:23 PM
Representative Merrick asked what would happen if the state
did not pay the benefit.
Co-Chair Wilson remarked there would be many angry emails
and people.
Mr. Desai answered there were ramifications under the IRS
regulations. He detailed the state was required by federal
regulations to maintain the funding at a certain level; if
that was not followed, the state would be asking for non-
qualification of the plan.
Co-Chair Wilson clarified that the legislature did not plan
on going down that road.
2:38:10 PM
Representative Josephson referenced the payment of $3
billion that had been made towards the unfunded liability
around 2014. He believed the cash infusion had reduced the
annual payments to the current $200 million range. He noted
that the payments had previously been as high as $700
million. He remarked that the large payment had helped
stabilize the fiscal picture for the outyears. However, the
downside was that effectively the $3 billion would be lost
and consumed by the failure to pay in a different,
aggressive amortized way. He believed the benefit of the $3
billion was the lower payments for the next 10 to 20 years,
but effectively the $3 billion would be gone. He believed
it was essentially the payment for enjoying the reduced
payment.
Mr. Desai answered if the $3 billion cash infusion had not
gone into the PERS and TRS plans, the current liability
could have been much larger. He stressed that the $3
billion had made a significant difference in bringing both
plans closer to a healthy funding level. The $3 billion
would also help to reduce the future contribution. He
detailed that the plans were reviewed annually to evaluate
whether they were close to meeting assumptions from the
past couple of years. In a perfect world, the lower
contribution levels would continue. Unfortunately, the
market did not follow wishes. Subsequent slides would show
expectations of rate returns was different than reality and
it changed and impacted all of the additional employer
contributions.
Co-Chair Wilson asked what life expectancy the data was
based on.
Mr. Desai replied that the number was currently somewhere
between ages 83 and 86. When the benefits were computed,
the assumptions were used as an average age. He noted that
it was an average and some individuals lived shorter or
longer lives. The numbers were reviewed annually and were
tweaked by a fraction.
2:41:16 PM
Vice-Chair Johnston asked for verification that the
difference between the DB Plan and the Social Security
defined benefit was that the parameters of Alaska's DP Plan
could not be changed. She did not think the state could
specify that an employee could not start receiving benefits
at age 55 "and some plans are," or at 65 where most "of us
around here" would not be getting their Social Security at
65.
Mr. Desai replied that the rules were different from plan
to plan. In Alaska's DB Plan, the three tiers each had
different had different rules established related to the
retirement age. Once a plan was set and benefits were
calculated, they could not be reduced or changed.
Vice-Chair Johnston referenced Representative Merrick's
earlier questions and remarked that the state was mandated
to pay the retirement benefits. She asked for verification
that the only way the state would be relieved of the
responsibility was if it was bankrupt.
Ms. Lea answered that the benefits were guaranteed under
the Alaska Constitution, Article XII, Section 7. She stated
it became a contract between the plan and the employee;
therefore, the state could not diminish the benefits that
were in effect as of the date they hired and any increases
that occurred during employment and subsequent lifetime.
The only way the state could not pay the benefits was if it
was bankrupt.
Co-Chair Wilson was happy to report the state was not
bankrupt.
Mr. Desai turned to slide 13 and reviewed ARMB long-term
returns for the PERS and TRS systems through June 30, 2018.
He reviewed the 34-year returns and the 1-year returns:
Annualized Returns PERS TRS Average
34 Year 8.97% 9.30% 9.14%
1 Year 9.61% 9.62% 9.61%
2:44:18 PM
Mr. Desai moved to the actual rate of return and funding
ratio for PERS for the past 20 years. The second column
showed the funded ratio for each year, the third column
showed the actuarial earnings rate, and the fourth column
showed the actual rate of return. He highlighted 1996 as an
example and reported that the system's funding ratio was
perfect at 105.8 percent. He noted that between 1996 and
2001 the state's actuary had not provided the true factual
information - as a result, the information in the actuarial
report could be erroneous. He estimated that the number
could be 95 to 100 percent when viewed from a conservative
perspective. He pointed out that the earnings rate had been
8 percent, but the actual rate of return had been 13.79
percent, which was very healthy. He noted that the funding
ratio had increased to 106.3 percent in 1997. Additionally,
the earnings rate assumptions had increased to 8.25 percent
and the actual rate of return had increased to 18.18
percent.
Mr. Desai pointed to the rows for 2001 to 2003 where the
projected return rate was 8.25 percent. He noted that in
2001 the actual rate of return had been -5.25 percent,
meaning the PERS plan had technically lost about 13
percent. Similarly, in 2002, the plan had lost another 5.48
percent (a loss of nearly 13.7 percent). The trend
continued in 2003, with a return of 3.67 percent (it was
positive, but did not meet the 8.25 percent actuarial
earnings rate). In those few years, the plan had lost about
27 percent. He explained it was one of the other reasons
the funding ratio had dropped. He reported that history
showed that a plan that was 100 percent funded did not
always remain at that level; it was not controllable. He
continued that it was not that the state paid a high
benefit during those years or continued to expand expenses,
but the state had lowered employer contributions (because
the plan was funded above 100 percent) based on incorrect
information, which had resulted in disaster. He reported
that ever since, the plan had been trying to return to the
100 percent level.
Representative LeBon looked at the actual rate of return
column on slide 14. He asked for the average rate of return
for the time period.
Mr. Desai replied that DRB would follow up with the
information.
Representative LeBon thought it would be interesting to
know if the average actual return was above or below the
actuarial earnings rate of 8 to 8.25 percent.
Mr. Desai noted that the ARMB set the rate for 8.25 percent
and when the actual returns were lower or higher, the
figures are smoothed out. He explained that the returns
were not immediately used for the following fiscal year's
evaluation. The data was spread over 3 to 7 years. Under
one plan, the data was spread over 5 years. For example, if
the plan received a 13 percent return instead of 8 percent,
the following year the calculation would only use an
additional 1 percent and spread the 5 percent over the next
5 years. He explained that the actuarial perspective over
value (what showed in the plan) was different than the
market value.
2:49:11 PM
Vice-Chair Johnston asked what the current best practices
earnings rate was for the industry. She understood the rate
had been declining. She asked if it was 8 percent.
Mr. Desai answered that the number was reviewed in the
actuarial experience study the previous year. The average
was anywhere from 7 to 7.5 percent depending on the plan.
There were fewer and fewer plans remaining at 8 percent.
Mr. Desai turned to a chart on slide 15 comparing the
actual rate of return, funding ratio, and earnings for
PERS. The actuarial earnings rate was pretty standard and
had been increased to 8 percent to 8.25 percent in 1997.
The rate had remained at 8.25 percent until it had been
reduced to 8 percent in 2011. He reported that at the last
actuarial study the rate had been dropped to 7.38 in the
preceding year. Slides 16 and 17 showed the same
information (as slides 14 and 15) for TRS. He noted that
the chart on slide 17 the actual rate of return and funded
ratio moved in similar wavelengths. He noted that the
funded ratio was smoothed out over a five-year period.
Representative Sullivan-Leonard asked what occurred from
2007 to 2009 where a large decline [in the actual rate of
return] occurred for PERS and TRS.
Mr. Desai answered that the expected return in 2007 was
8.25, which the actual return exceeded by more than 10
percent; however, in 2008 the market had declined between
30 and 33 percent on average for many plans. He detailed
that in 2009 the actual rate of return for TRS was -20.62,
which was better than the average loss of 30 to 33 percent.
The decline had impacted the plans and the result was
witnessed in the funded ratio. He noted that the funded
ratio dramatically increased from 2014 to 2015 due to the
$3 billion cash infusion.
2:53:26 PM
Mr. Desai turned to slide 18 and reviewed the actuarial
experience study process:
Experience Study Process
Alaska Statute 37.10.220(a)(9) requires an experience
study be conducted at least once every four years
(healthcare assumptions are reviewed annually as part
of actuarial valuations)
• The experience study compares current
assumptions with actual plan experience
o Last study: Performed in 2014. Covered
experience for the 4-year period July 1,
2009 through June 30, 2013.
square4 New assumptions adopted by the ARMB
were effective beginning with the June
30, 2014 valuations.
• Current study: Covers experience for the 4-year
period July 1, 2013 through June 30, 2017.
o New assumptions (and methods) adopted by the
ARMB will be effective beginning with the
June 30, 2018 valuations (which will be used
to set FY21 contributions).
2:54:52 PM
Mr. Desai moved to slide 19 and discussed the actuarial
experience study:
Economic Assumptions
• Investment Return
• Inflation
• Salary Increases
• Payroll Growth
Demographic Assumptions
• Mortality
• Retirement
• Disability
• Withdrawal (termination of employment)
Funding Methods
• Healthcare Normal Cost and Actuarial Accrued
Liability
• Administrative Expense Load to Normal Cost
• Amortization of Unfunded Actuarial Accrued
Liability (UAAL)
Mr. Desai elaborated on the funding methods section of the
slide. He explained that the healthcare normal cost and
actuarial accrued liability based on actual practices. The
information from the actuarial experience study was brought
to ARMB and multiple options were presented to show the
biggest effects on the benefit - the interest rates and
inflation rate - what the effect would be if something was
adopted. The components on slide 19 went into the actuarial
experience study before the rate was finalized by ARMB.
2:56:34 PM
Representative Josephson referenced salary increases shown
on slide 19 and assumed it pertained to the high three
[years] concept [of a person's employment] - that it could
not be known until a person retired. He asked for the
accuracy of his statement.
Mr. Desai answered that the salary increases were based on
the last assumptions that were intact. He compared the
salary increases under the actuarial expense study adopted
four years earlier to whatever the amount would be going
forward. He elaborated that salary increases also coincided
with the active population in the plan, plan participants
under DB and DC Plans. He referenced the state's closed DB
Plan and its DC Plan where contributions were capped at 22
percent. A portion of the percentage went towards the DB
Plan unfunded liability. Salary increases and payroll
growth were included as a part of the study.
2:57:43 PM
Mr. Desai reviewed a recent history related to the
actuarial experience study on slide 20:
2009 (Eff 6/30/2010 Valuation)
• Investment Return
8.25%-> 8.0%
• Inflation
3.5% to 3.12%
• Payroll Growth
4.0% to 3.62%
2013 (Eff 6/30/2014 Valuation)
• Investment Return
Stayed at 8.0%
• Inflation
Stayed at 3.12%
• Payroll Growth
Stayed at 3.62%
2017 (EFF 6/30/2018 Valuation)
• Investment Return
8.0%->7.38%
• Inflation
3.12% to 2.5%
• Payroll Growth
3.62% to 2.75%
Mr. Desai elaborated on the 2017 data on slide 20. He noted
that the investment return of 7.38 percent was comprised of
an actual return of 4.88 percent and inflation of 2.5
percent. The rates would be used for the next four years
until a new actuarial experience study was conducted.
2:59:17 PM
Mr. Desai reviewed the DB Plan benefit formula on slide 21:
Defined Benefit Pension:
Fixed benefit amount from date of retirement to death
Contributions + Investment Earnings = Benefits +
Expenses
IF:
Actuarial assumptions are accurate. Funded ratio
remains at target of 100%
IF NOT:
Unfunded liability is created, if benefits and
expenses are greater than contributions and investment
earnings. Funding excess if contributions and
investment earnings are greater than benefits and
expenses.
Mr. Desai reported that both sides of the equation had to
be in balance in order to remain at a funded ratio of 100
percent. He explained that if one side fluctuated the plan
could be over or under funded.
3:00:21 PM
Mr. Desai reviewed a history of additional state
contributions for PERS/TRS since it had implemented the
cost share design (slide 22). Beginning in 2006 the state
had contributed nearly $7.2 billion for both systems for
additional contributions beyond 22 percent for PERS and
12.56 percent for TRS.
Mr. Desai moved to slide 23 and addressed projected
additional state contributions for PERS and TRS. The
information had been comprised based on the 2017 valuation.
Additionally, an effort had been made to do the projection
based on the recent study. The 2020 projection was based on
the 2017 valuation and showed a combined total of $300
million that would be put forward for the FY 20 budget. He
elaborated that FY 21 through FY 39 were based on the
projection in the 2017 valuation and partially assuming
additional assumption changes. Currently, the actuaries
were working on finalizing 2018 numbers to see the true
impact of an additional state contribution and what the
unfunded liability would be. The information would not be
available until May 3 when actuaries would undergo a second
actuarial review and ARMB would approve the numbers. The
slide showed projected numbers through 2039 for a fully
funded plan by 2040.
Co-Chair Wilson stated that if more money was needed in the
budget it would have to be addressed by the Senate because
the operating budget had already passed the House. She
pointed to slide 23 and asked for verification that an
additional $123 million would be required for the FY 21
budget.
3:03:01 PM
Mr. Desai answered that $123 million was the difference
between what the best estimate calculated for FY 20 and FY
21 based on the assumed rate of 7.38 percent. To compare
the true number change from FY 21, it was necessary to look
at the 2017 valuation numbers. The numbers on the table
were calculated based on the new assumptions that would
take place for 2018.
Co-Chair Wilson clarified her question. She thought the FY
21 budget would need to include $423,084,000 in order to
keep the liability from growing.
Mr. Worley agreed. He reminded committee members that slide
23 showed an estimate based on numbers from the previous
year. The department was currently waiting for the
completion of the June 30, 2018 report, which would be
adopted by ARMB. Additionally, there was a calculation done
in the summer and provided to ARMB at its September board
meeting to use more current asset numbers.
Co-Chair Wilson highlighted that the number could be better
or worse.
Mr. Worley agreed.
Co-Chair Wilson reiterated that an additional $123 million
would be required in the FY 21 budget to hold even with the
FY 20 budget. She remarked on an earlier statement that the
liability was only $300 million. She stated it was
substantially higher.
Mr. Worley clarified that the FY 20 numbers shown on slide
23 were included in the budget passed by the House.
Co-Chair Wilson restated that the budget for FY 21 would
need an additional $123 million.
3:05:14 PM
Representative Carpenter asked for verification that the
numbers on slide 23 would change if there was an increase
in salary costs or employees.
Mr. Desai agreed.
Co-Chair Wilson believed it only applied to Tiers I, II,
and III and did not have the same impact in Tier IV.
Ms. Lea replied in the affirmative.
Co-Chair Wilson noted the state had moved to Tier IV [to
contain costs] as numbers increased. She remarked that the
change related to who was responsible for covering the
increases. She noted there was still a large number of
active employees in the first three tiers.
Representative Josephson understood that the figures on
slide 23 were projected and there could be a new report
with updated numbers. He thought that if the legislature
did not increase expenditures by $123 million it would
effectively be saying it did not care what ARMB thought and
it would cross its fingers and hope for massive stock
returns and let the unfunded liability grow.
Mr. Desai agreed. He detailed that if the legislature
skipped a year of the contributions the unfunded liability
would increase. He elaborated it would reflect in the
future projections of the unfunded liability. He explained
that if the legislature continued to target 100 percent
funding for 2039, the number would continue to change to
meet the 100 percent requirements; if the contributions
were lowered in certain years, the future years would
suffer.
Co-Chair Wilson asked if the contribution level would
remain at $400 million if the legislature was okay with an
86 percent funding level.
Mr. Desai replied in the negative. He explained that the
number would change because the assumption would make a
large difference in the employer contributions. The
calculations were strictly based on the target to be fully
funded by 2039. The projections were calculated keeping the
constant number. He clarified that the 100 percent target
was reduced to 86 percent the contribution numbers on the
table [slide 23] would be significantly lower.
3:08:13 PM
Co-Chair Wilson thought Mr. Desai had testified that the
state did not necessarily want to be 100 percent funded
because it could mean people may stop paying or the benefit
amounts may need to be changed. She thought based on
earlier statements that an 86 percent funded ratio was
healthy. She wondered about the reason for remaining on the
trajectory shown.
Mr. Desai answered that a funded ratio of 80 percent was
considered to be a healthy ratio (in the green zone) in the
private sector monitored by ERISA. Comparatively, most of
the public sector recommended a target of 100 percent. In
the private sector, 90 percent was considered to be a very
healthy funded plan. He clarified that 83 to 86 was the
average retiree age he had provided earlier that was used
as an average age used to calculate assumptions for
benefits.
Mr. Worley added that the best practice was to have funding
progress go up to 100 percent; the state's target was to
reach that number by 2039.
Co-Chair Wilson appreciated the point but believed that
some people may be amenable to aiming for healthy if it
meant an additional increase of $123 million was not
necessary.
Ms. Lea considered the funding target for public versus
private plans and explained that Alaska had
constitutionally protected benefits. The state could not
reduce benefits or stop payments like the private sector if
its plan became unhealthy. She explained the target needed
to be 100 percent because the state was obligated to pay
the benefits as they had been earned.
Co-Chair Wilson did not disagree, but she thought the
number may need to be adjusted as the budget was
determined.
Vice-Chair Johnston stated that the target was 100 percent
and one of the reasons the position was assessed every four
years was that the variables changed over time. She
surmised the 80 percent funded level with a target of 100
percent was a strong position as long as the state kept
reassessing its position and avoided getting to a point of
being over funded. She thought there was a fine line
between over and under funding.
3:11:41 PM
Mr. Desai answered that the funding was simply determined
by the 100 percent - it was the line were the actuary gave
advice in its valuation. Anything below 100 percent was
considered unfunded liability, even $50,000. Anything above
100 percent was considered overfunded. He explained that an
80 percent funding ratio that was considered healthy by the
private sector, was still underfunded 20 percent.
Co-Chair Wilson clarified that the committee had not stated
the number was healthy, the department had.
Representative Carpenter asked what happened to the numbers
if the state added a new defined benefit plan.
Mr. Desai responded the new participants joining a new
defined benefit plan would not be able to collect a benefit
for the first ten years; they would have to become vested
and retire from the system to collect the benefit. Until
then, the plan would show as well funded because the plan
did not have any expenses. The only time an unfunded
liability may occur during that time was if the market
returns dropped below the rate of return threshold. Once
the plan had been in place for ten years, expenses would
begin occurring. He pointed to the formula on slide 21
where contributions and investment earnings were shown on
the left side of the calculation. He explained that in the
first ten years of a plan there was no expense - the
expense portion of the calculation was on the right.
Mr. Desai pointed out it was necessary to consider whether
a new plan would be separate from PERS. Comparatively, if a
new tier was created, the new tier would follow the 2008
statute requiring employers to pay up to 22 percent and the
state to pay anything above that amount. He explained that
the point of Tiers II and III was to keep the state's DB
Plan healthy via cost-containment. He detailed that defined
benefit plans made it easy for participants to receive a
benefit as the employer took on the obligations; however,
there were no levers determining who would pay the debts
when a plan experienced lower returns. The levers were
missing under the current defined benefit plan design and
as a result many states or other employers look towards
hybrid plans.
3:15:33 PM
Representative Carpenter looked at slide 23 pertaining to
projected additional state contributions. He surmised that
what Mr. Desai was saying was that the numbers between FY
31 and FY 39 would actually increase.
Mr. Desai agreed. He relayed that the numbers were merely
projections based on current returns and assumptions. The
numbers would stabilize for the next four years because the
assumptions were set in place. He explained that as soon as
the next actuarial study was done in four years and if
drastic changes were made to the assumptions, the number
would make a bigger difference in the future projections.
Representative Carpenter asked what the current industry
demand was for defined benefits compared to defined
contribution.
Mr. Desai answered that when Social Security had been
established in 1935 the life expectancy had been age 60. He
explained that it had not been assumed that many of the
people would collect the benefit. The thought had been that
individuals who lived beyond 60 to 65 would likely only
live another seven years; therefore, the plan would be done
with the liability and still in surplus. He detailed that
defined benefit plans are a Social Security benefit that
were adopted by many in the private sector under ERISA and
established in 1974 to provide incentive for employees to
join a company. He elaborated that when defined benefit
plans were lower funded early on, no one paid attention to
the funding ratio. The game changed in the 1990s when a
large company wiped out promises it made to its employees.
He reported that the Pension Plan Act was established in
2006 and made the funding rules very strict for many
private sector plans. Ever since, ERISA had looked very
closely at plan practices and funding mechanisms in the
private sector to ensure plans were fully qualified under
IRS regulations.
Mr. Desai continued that in the private sector defined
benefit plans were extremely popular because employees did
not have to worry about what would happen when they retire
at age 65 because the contributions of the benefits were
set. He explained that defined contribution plans did not
have the same mechanism; the employer did not take on the
responsibility. When the defined benefit plans funded
ratios started declining in the private and public sector,
defined contribution plans surfaced in 1978 (the first 401k
plan offered) because it had been determined that the
employee had to have some buy-in. Subsequently, the 401k
plan had become popular where employers and employees
contributed to benefits. He detailed that an employee was
required to contribute 5 percent and the employer
contributed 2.5 percent for retirement - the employee
received an extra 2.5 percent on top of their salary. The
401k plan had become popular and was accepted in the
marketplace. He relayed that in the mid-1990s when most
plans began to decline (especially under stricter ERISA
rules), many employers began taking shortcuts.
3:20:43 PM
Mr. Desai elaborated that employers began to consider
making only defined contribution plans available to
participants. There was nothing wrong with making the
changes, but the challenge was associated with the failure
for employers and employees to understand the differences
between defined benefit and defined contribution plans.
Under defined benefit plans, employees did not have to
manage or worry about their plans. Under defined
contribution plans employees had to allocate the money
according to their desired retirement goals - the employer
was only responsible for providing the employee with
available options. He continued that employees were
required to learn something about defined contribution
plans.
Mr. Desai continued that from the employee perspective, a
plan that did not require attention during their non-work
hours was more popular than a plan requiring an employee to
spend time learning its inner workings during their non-
work hours. He explained it was a challenge for DRB because
DC Plan employees learned about the plan from DB Plan
coworkers, which resulted in making a bad comparison. He
elaborated that fundamentally the DC Plan was a great plan
if it was managed properly. He relayed that the current
percentage was 15 percent.
Mr. Desai reported that DRB told plan participants in its
seminars that 20 to 30 percent of a person's earnings was
taken by the IRS and another 10 to 15 percent went to gas,
clothing, and other. He stated that individuals actually
lived on about 50 percent of their salary. He stated that
if a person put 15 percent aside and compounded it for the
next 30 years, they would have enough money for retirement.
Comparatively, the same 15 percent in the DB Plan had a
different volume. He explained that the current DP Plan
that had a 13 percent savings, which was significant.
3:23:25 PM
Mr. Desai continued that if the money was invested over 30
years with the proper education, it could provide a person
with a substantial retirement income. The plan also offered
a lump some at retirement rather than securing payments for
a lifetime like the DB Plan. The risk was that the money
could be spent on something like a boat or car when a
person received the lump sum. The DB Plan did not provide a
lump sum to retirees. He explained that if a person
deviated from their retirement plan the impact could be
significantly devastating - a person would not have a
retirement income. He explained it took significant
planning, education, and partnership with plan sponsors to
make the plan work. He underscored that the DC Plan would
work; it was a matter of understanding the plan better.
3:24:51 PM
Representative Carpenter asked whether a defined benefit or
defined contribution plan was in higher demand for
companies just starting up. He guessed it was likely a
company would be looking at a defined contribution plan
versus a defined benefit plan because of the large future
expense under the defined benefit plan.
Mr. Desai answered that he considered current PERS
employees with SBS to have a hybrid plan. The state had a
DB Plan for Tiers, I, II, and III and an SBS (defined
contribution) plan for the same tiers. He considered
whether an individual would choose one or the other or if
it was better to have both options under a hybrid plan. He
stated that a financial adviser would tell a person it was
better if they could manage their own money and it was
advisable to have the option. He stated that a hybrid plan
provided benefit as a monthly income and the DC Plan
provided the flexibility of additional expenses a person
may want to use the money for. He cautioned it was
important to use the money wisely instead of buying a boat.
He reported that by design, both defined benefit and
defined contribution plans were extremely strong.
3:27:38 PM
Representative Merrick clarified that she was not
suggesting that the state should not pay the benefits it
owed. The purpose of her question had been to make sure
people knew the state was mandated to pay the benefits.
Ms. Lea reported that DRB used two sources of information
to see what was going on with other states including the
National Conference of State Legislatures (NCSL) and
National Association of State Retirement Administrators.
Both entities had studies on current legislation in other
states that DRB could provide to the committee.
Predominately other states were either moving to a DC plan
or a DB/DC hybrid plan.
Mr. Desai turned to a bar chart on slide 24 showing the
unfunded liability for PERS (shown in blue) and TRS (shown
in red) from 2003 to 2017. He highlighted that the unfunded
liability was about $7 billion in 2017. Slide 25 showed the
updated funding ratio for PERS and TRS with 2017 results
for the DB pension and healthcare. The slide included the
actuarial accrued liability, valuation of assets, and the
funding ratio. As of 2017, the funding ratio was 76.7
percent for PERS and 82 percent for TRS.
3:30:04 PM
Mr. Desai moved to slide 26 showing the PERS funding ratio
history from 1979 to 2017. He pointed out that in 1986 the
funded ratio had reached 102 percent. The ratio had ranged
from 91 percent to 100 percent over the following ten years
and had reached 106 percent in 1996. He pointed out that
from 1996 to 2001 the numbers could be overstated [due to
the state's actuary at the time]. The funded ratio had
dropped from 101 percent to 75 percent in 2002; the major
factor in the decline was due to poor market returns. He
reported that the state had been struggling to bring the
funded ratio back to its prior level ever since. In 2015
the ratio had jumped to from 70 to 78 percent showed the
significant impact of the $3 billion cash infusion. He
briefly turned the TRS funding ratio history from 1979 to
2017 on slide 27.
Mr. Desai addressed the PERS contribution rates on slide
28. He highlighted that when the shared contribution plan
had been established in 2008, employers were paying 22
percent and the additional state contribution fluctuated
based on the actuarial valuation study. He pointed out that
in 2012 the additional contribution covered by the state
was 11.49 percent. The shaded area between the blue and red
lines represented the additional state contribution. Slide
29 contained similar information for TRS.
Representative Sullivan-Leonard asked Mr. Desai to review
slide 29.
Mr. Desai discussed that employer contribution rates for
TRS were capped at 12.56 percent beginning in 2008; any
contribution above that amount was paid by the state. Slide
30 showed the projected retirement population growth.
Projections showed that somewhere around 2027 or 2028 the
highest population of the retirees under PERS and TRS would
be reached. After that time, the number would begin to
decline.
Representative Sullivan-Leonard looked at slides 28 and 29
related to the PERS and TRS employer contribution rates.
She noted that the TRS contribution had been reduced from
26 percent in 2007 to 12.56 percent in 2008. Whereas, the
PERS contribution rate had increased from 21 percent in
2007 to 22 percent in 2008. She asked why the TRS
contribution rate was not 22 percent as well.
Ms. Lea answered that the slide reflected legislation that
passed in 2008 changing both systems from an age and
employer plan where each employer had its own rate, to a
cost-share plan where everyone in the system shared the
cost. The legislation had set the contribution rates at
12.56 percent for TRS and 22 percent for PERS.
Representative Sullivan-Leonard asked why the contribution
rate for TRS had been reduced to 12.56 percent.
Ms. Lea answered that at the time, the contribution rate
for TRS had been about 12.56 percent.
Representative Sullivan-Leonard thought the chart on slide
29 showed the contribution rate had 26 percent at one point
and it had been reduced to 12.56 percent. She was trying to
figure out the rationale.
3:35:54 PM
Ms. Lea answered that TRS was already a cost-share program
at that time. She shared that number shown in 2007
reflected the normal cost share rate and the past service
rate totaling 26 percent. As of 2008, the contribution rate
had been capped at 12.56 percent, which was the normal rate
at the time.
Mr. Desai moved to a graph on slide 31 reflecting the basic
facts of PERS and TRS benefits from 2018 to 2090. The graph
showed that the state would make its highest payment around
2038 or 2039. He detailed that the state would pay
approximately $133 billion in benefits payments over the
next 94 years. The PERS and TRS account balance was $25.3
billion as of June 30, 2018. The unfunded liability as of
June 30, 2017 was $6.9 billion. The chart showed how much
the state would pay annually until the last person received
a benefit.
3:37:32 PM
Representative Josephson referenced the $133 billion in
benefit payments over the next 94 years on slide 31. He
asked for verification that much of the figure pertained to
the DC Plan, not the DB Plan.
Mr. Desai answered that slide 31 reflected DB Plan benefits
only.
Representative Josephson thought that much of the figure
pertained to the status quo - the 22 percent [employer
contribution rate for PERS] or the 12.56 percent [employer
contribution rate for TRS]. He asked for verification that
if the state only had a DC plan, the number on slide 31
would be similar. He thought the figure would be
approaching $100 million under a DC plan only.
Mr. Desai responded that under the DC Plan there were two
choices - when a participant left, they could leave their
money in the plan and draw on it when needed or could
purchase an annuity (the state purchased those through a
third-party insurance company). Under the DB Plan, the
state started making guaranteed benefit payments. The state
assumed the benefits would continue to grow until the last
person retired from the system in 2039. He explained the
state would know what its monthly payments would be going
forward until the last person received a benefit from the
system. The data was a projection, but it was close to
actual numbers based on current populations and retirees.
Each year members under the DB Plan were increasing their
benefit (based on their salary and additional year of
service), which was reflected annually in the actuarial
valuations. The chart was a projection of the estimated
payment amount up to the last person receiving benefits.
3:40:41 PM
Representative LeBon noted a reference had been made
earlier about tracking other state's activities regarding
defined benefit, defined contribution, and hybrid plans. He
noted that the state had moved to the DC Plan about ten
years back. He asked if DRB had seen an aggressive move
towards DC plans nationwide during that ten-year period. He
wondered if Alaska was in the lead on the DC approach.
Ms. Lea answered that DRB frequently received requests from
other states related to how the plan balances were accruing
because there were many states contemplating what they
wanted to do. She shared that Alaska was one of three other
states with a DC plan - the remainder were changing to a
hybrid DB/DC plan.
Representative LeBon asked if the difference between DB and
DC plans was that employees were insured through a DC plan.
Ms. Lea answered that a hybrid DB/DC plan included a DB
plan that was very similar to Alaska's legacy PERS and TRS
plans but with a significantly reduced benefit with smaller
multipliers. She detailed that Alaska's legacy plan
multipliers were 2, 2.25, and 2.5 percent. The hybrid plan
also included an individual investment account that
contributions were invested into; the two things combined
provided the retirement benefit. In some of the plans there
was a requirement to annuitize a portion of the DC plan and
others had no requirement but an individual still received
their lifetime small benefit from the DB side.
Representative Carpenter asked if the $133 billion included
an assessment or projection of salary increases for each
one of the employees that would be drawing into the future.
Alternatively, he wondered if the figure reflected current
salary rates.
3:43:49 PM
Mr. Desai agreed. He detailed that salary was also
projected, along with participants' additional submissions
up to their retirement date. The actuary would continue to
project the service for DB Plan participants to their
retirement date. The actuary would also continue to assume
the what a participant's benefit calculation would be based
on the actuary experience study adopted by ARMB and salary
draws. Additionally, the actuary would calculate how much
an individual would collect up to their life expectancy.
All of the numbers added up to $133 billion.
Representative Josephson asked if the other savings in
hybrid plans was that many did not provide healthcare
between retirement and Medicare. He noted that the state's
legacy plans provided healthcare, whereas current
legislative proposals did not provide healthcare during
that window.
Ms. Lea agreed. The most expensive healthcare was pre-
Medicare age. Under most plans, once an individual was
eligible for Medicare, the retiree plans became secondary
to Medicare, which resulted in a savings. She noted it did
not exist in the pre-Medicare age group. She elaborated
that it was true some of the newer plans proposed in other
states did not include healthcare at all. She relayed that
many state and municipal plans already did not provide
healthcare.
Representative LeBon asked for verification that if a
hybrid plan employee retired at age 55 and had to wait ten
years to be eligible for Medicare, they could continue to
be in the healthcare plan by paying a premium.
Ms. Lea answered it was a possibility that depended on how
the plan was designed. She detailed a plan could be
designed so the participant paid the full premium for
coverage during that period.
Representative LeBon remarked that the situation would be
very unusual in the private sector. He shared that he had
retired from a private sector employer and did not have the
option to continue in their health plan beyond a brief
period of several months.
Co-Chair Wilson thanked the presenters. She reviewed the
agenda for the following meeting.
ADJOURNMENT
3:47:54 PM
The meeting was adjourned at 3:47 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB032 Sectional Analysis 4.9.19.pdf |
HFIN 4/15/2019 1:30:00 PM |
HB 32 |
| HB032 Sponsor Statement 4.9.19.pdf |
HFIN 4/15/2019 1:30:00 PM |
HB 32 |
| HB032 Additional Documents-Memo Legal 4.9.19.pdf |
HFIN 4/15/2019 1:30:00 PM |
HB 32 |
| HB032 Supporting Document-Rural Retrofits Report 4.9.19.pdf |
HFIN 4/15/2019 1:30:00 PM |
HB 32 |
| HB032 Background Document-HFC Loan Program Guide 4.9.19.pdf |
HFIN 4/15/2019 1:30:00 PM |
HB 32 |
| HB032 Supporting Document-Support Letters 4.9.19.pdf |
HFIN 4/15/2019 1:30:00 PM |
HB 32 |
| DOA PERS TRS Overview HFC 04.15.2019.pdf |
HFIN 4/15/2019 1:30:00 PM |
|
| HB 32 Supporting Doc-Support ABA.pdf |
HFIN 4/15/2019 1:30:00 PM |
HB 32 |