Legislature(2009 - 2010)HOUSE FINANCE 519
02/05/2009 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB81 || HB83 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 81 | TELECONFERENCED | |
| += | HB 83 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
February 5, 2009
1:34 p.m.
1:34:46 PM
CALL TO ORDER
Co-Chair Stoltze called the House Finance Committee meeting
to order at 1:34 p.m.
MEMBERS PRESENT
Representative Bill Stoltze, Co-Chair
Representative Bill Thomas Jr., Vice-Chair
Representative Allan Austerman
Representative Harry Crawford
Representative Anna Fairclough
Representative Les Gara
Representative Reggie Joule
Representative Mike Kelly
Representative Woodie Salmon
MEMBERS ABSENT
Representative Richard Foster
Representative Mike Hawker, Co-Chair
ALSO PRESENT
Annette Kreitzer, Commissioner, Department of;
Administration; Pat Shier, Director, Division of Retirement
and Benefits, Department of Administration; Jerry Burnett,
Deputy Commissioner, Division of Treasury, Department of
Revenue; Kevin Brooks, Deputy Commissioner, Department of
Administration; Kathy Lea, Retirement Manager, Division of
Retirement and Benefits, Department of Administration;
Representative Carl Gatto
PRESENT VIA TELECONFERENCE
SUMMARY
HB 81 "An Act making appropriations for the operating
and loan program expenses of state government, for
certain programs, and to capitalize funds; making
supplemental appropriations; and making
appropriations under art. IX, sec. 17(c),
Constitution of the State of Alaska; and providing
for an effective date."
HB 81 was HEARD and HELD in Committee for further
consideration.
HB 83 "An Act making appropriations for the operating
and capital expenses of the state's integrated
comprehensive mental health program; and providing
for an effective date."
HB 83 was HEARD and HELD in Committee for further
consideration.
1:36:04 PM
BUDGET OVERVIEW - PERS/TRS UPDATE
ANNETTE KREITZER, COMMISSIONER, DEPARTMENT OF ADMINISTRATION
presented her staff and previewed the handouts for the
committee (copies on file).
1:39:34 PM
Co-Chair Stoltze noted that the Department of Revenue was
available for questions.
PAT SHIER, DIRECTOR, DIVISION OF RETIREMENT AND BENEFITS,
DEPARTMENT OF ADMINISTRATION provided a PowerPoint
presentation on the basic overview of the retirement
system, State of Alaska, Public Employees' Retirement
System, Teachers' Retirement System, Presentation to the
House Finance Committee on PERS/TRS 2009 (copy on file).
He reported on the history of PERS/TRS and on those who
were covered by the system (page 2-3). He mentioned that
the State of Alaska serves as both an employer and the
entity, under SB125, that has agreed to pay a large portion
of the unfunded liability. Mr. Shier explained that three
governing boards had been consolidated into the Alaska
Retirement Management Board (ARMB) (page 4). He named the
plan categories in The PERS system, the Defined Benefit
(DB) and the Defined Contribution Retirement (DCR) (page
5). He referred to the constitutional prohibition against
diminishment of the retirement system in Article 12,
section 7 of the Alaska constitution (page 6).
1:45:02 PM
Co-Chair Stoltze asked theoretically if future legislators
did not fund the retirement system could the courts take
money out of the permanent fund. Commissioner Kreitzer
preferred not to give a legal opinion on the subject.
1:46:35 PM
Mr. Shier explained how the retirement system works (page
7). He elaborated that contributions to the system were
from three sources, the employee, the employer and SB 125
(page 8). He broke down the employee contributions into the
defined benefit (DB) and the defined contribution
retirement (DCR-Hybrid) (page 9). Mr. Shier noted that
employer contributions were defined at one adopted rate by
the ARMB but the legislature capped employer rates lower
therefore, the difference is now paid by the state (page
10).
1:49:25 PM
Representative Fairclough questioned how often the
arbitrator reviews the employer contribution percentage.
Mr. Shier replied that it is reviewed annually.
Representative Fairclough asked for the current shortfall
number. Commissioner Kreitzer responded it would be
discussed later in the presentation.
1:50:23 PM
Mr. Shier remarked that the process in the ARMB adopted
rate is based on 25 variables including the investment rate
of return and assets value, life expectancy, payroll growth
and future healthcare costs (page 11). He revealed that
normal cost is the actuary's estimate of how much money to
collect this year for only this year's benefit accrual. He
noted that past service cost pays for the unfunded
liability (page 12).
1:52:47 PM
Commissioner Kreitzer revealed the 2007 unfunded liability
for PERS is $4.6 billion and TRS is $2.8 billion for a
total of $7.4 billion. She added that when factoring in the
last calendar year losses it approaches $9.4 billion.
1:54:04 PM
Representative Fairclough declared that the market is
affecting long term projections. She understood that $1
billion had already been put in the retirement system but
asked for clarification if there was also tax financing.
Representative Fairclough inquired if there were plans to
buy down the debt, and if so, at what percent. Commissioner
Kreitzer remarked that the state came close to issuing
pension obligation bonds but chose not to take that action.
Representative Fairclough repeated what would be the
trigger to issue state pension obligation bonds and at what
percentage or cap would be used.
1:56:18 PM
Commissioner Kreitzer referred to Jerry Burnett. She added
in reference to Representative Fairclough's first question
of why is the fund still behind after adding $1 billion she
remarked that although there have been short term losses in
the market; the board invests for the long term.
Commissioner Kreitzer reported that historically good rates
are returned in long term investment.
Co-Chair Stoltze asked if this was similar to a credit card
bill out of control. Commissioner Kreitzer replied that is
a short term versus long term view.
JERRY BURNETT, DEPUTY COMMISSIONER, DIVISION OF TREASURY,
DEPARTMENT OF REVENUE answered that the targeted interest
rate would be in the range of 5.5 to 6 percent with the
actuarial rate of 8 percent. He did not want to speculate on
a trigger target.
1:59:47 PM
Representative Fairclough expressed her delight that they
were not in the market. She questioned if the 80 percent
funding ratio would be determined by the administration. She
wondered if the department was able to take the funding rate
down further than 80 percent. Mr. Burnett replied that the
legislation authorized up to $5 billion in pension
obligation bonds. He added that there have been no
discussions that indicated any plans to go beyond $2
billion.
2:01:03 PM
Representative Salmon wondered how the program had changed
since enacting the bill for the defined contribution
retirement. Commissioner Kreitzer replied that the state is
making significant contributions above what is actuarially
required to fund the system but she stressed that 75 percent
of the money needed is from investments. The Commissioner
noted that the down market had a significant impact on the
value of the funds which is why the money is invested on a
long term basis.
2:02:46 PM
Representative Salmon questioned if things were better or
worse since passing the bill. Commissioner Kreitzer had no
immediate answer during this overview meeting.
2:03:45 PM
Mr. Shier continued the presentation with another view of
the ARMB adopted rate (p. 13). Commissioner Kreitzer
interjected that this page shows again the state pays the
difference in the ARMB adopted rate and the statutory rate.
2:05:02 PM
Representative Austerman asked if the 22 percent statutory
rate was for all participants or just state employees.
Commissioner Kreitzer answered it was for all participants
not just Alaska state employees. Mr. Shier clarified that
this is the same rate paid on all defined benefit and
defined contribution retirement employees in the PERS
system. Mr. Shier defined investments as assumptions and
asset allocations (page 14). He remarked that determining
the rate of return and life expectancy are considered
assumptions. Asset allocations are the difference between
how much of the fund is in stock, bonds, real estate and
other choices for investments. He declared that assumptions
and asset allocations are executed using a long-term view.
Mr. Shier remarked that for the 2008 calendar year PERS
losses amounted to 22.24 percent of the assets on hand; the
DCR amounted to 35.46 percent. He signified that for PERS
alone there was a calendar year decline in value of $2.7
billion and for the DCR, a $9.8 billion decline. Mr. Shier
added that the DCR plan was newer and immature so the
percentage is higher.
2:07:42 PM
Co-Chair Stoltze asked how much of the decline is based on
the shorter time that defined contributions had been in play
in the volatile market. Mr. Shier replied the market did
play a part but hard to tell to what extent. Co-Chair
Stoltze requested accurate statistics for greater
understanding. Representative Kelly asked for the impact on
the unfunded liability loss in the investment value on the
defined benefit versus the defined contribution retirement.
Mr. Shier replied that there is no affect on the unfunded
liability from the losses in the DCR, all the losses came
from the DB side.
2:09:43 PM
Mr. Shier stressed the need for the investment returns for
cash flow because contributions alone would never be
sufficient to make the required payments (page 15).
Representative Kelly remarked that "smoothing" is an
accounting term but he did not think it described the hits
in 2000 and 2008. He believed this could never be smoothed.
Mr. Shier agreed that 5-year smoothing tries to fold in 20
percent at a time the effects of both extraordinary earnings
and losses. He cautioned that it would be hard to predict
how much over the 8.2 percent line it would be in the long
term after these recent volatile times.
2:11:41 PM
Mr. Shier continued to Pay-Retirement incomes (page 16). He
asserted that there were 32,500 retirees, 60 percent in the
state of Alaska, 40 percent out of state. He noted that this
translates into $60 million per month in retiree income.
Mr. Shier remarked that if you added health care it would be
another $25 million per month. He added that there are
26,000 dependents associated with the 32,500 retiree figure.
Representative Austerman questioned if there is any
statistical difference between the present retirees and new
employees heading toward retirement or will it remain 32,500
forever. Mr. Shier warned that this plan is still very
immature and the retiring population is growing.
2:13:36 PM
Representative Fairclough asked for a tier breakdown of the
32,500 retirees. Mr. Shier replied that the department is
working on fact sheets that will include detailed
information on the tier breakdown. He reported that the fact
sheets would also be available on the ARMB website.
Representative Fairclough commented that she was interested
in knowing the tier breakdown numbers to see if this creates
less liability and obligation for the state in the long run.
2:15:06 PM
Representative Joule wondered if those in the system who
retired before the present PERS/TRS system were included in
the 32,500 number. Mr. Shier responded that some retirees in
the prior system, as well as those in the judicial system,
were not included in the number.
2:16:25 PM
Mr. Shier referred to the PERS Funding Ratio History and the
TRS Funding Ratio History graphs (copies on file). He
mentioned that the funding ratio is a measurement of assets
compared to liabilities. He alleged that during 2001-2002
there was a decline in the investment market (page 17).
Before that time PERS/TRS enjoyed funding rates at or near
100 percent. He defined the term OPEB as "Other Post
Employment Benefits." Mr. Shier remarked that Alaska is in
good shape in this respect as the state has consistently
prefunding those liabilities where many other states have a
pay-as-you-go philosophy. This is one of the fast growing
components of the liabilities for the retirement fund.
Commissioner Kreitzer interjected that OPEB equates to
health costs. Mr. Shier remarked that trust funds were
calling for significant additional contributions but because
of limitations in law of only being able to put in 5 percent
more. That restriction has since been removed. Mr. Shier
remarked that the rates today are what the actuary indicates
the trust fund needs this year to meet its obligations by
paying down a 25 year mortgage on unfunded liability.
Alaska's response was to create the DCR-Hybrid plan in SB
141, a new retirement plan plus a new employer-funded health
benefit plan. This was followed by SB 123, a clean-up bill
that allowed the system employers to assess all pay roll at
the statutory 22 percent rate for PERS and 12.56 percent for
TRS to assist in the pay down of the unfunded liability in
future periods (page 19). Mr. Shier reiterated that SB 125
has the state of Alaska pay the difference between the
statutory rate and the ARMB rate.
2:20:15 PM
Representative Austerman asked for a projection for 2008.
Mr. Shier remarked that states around the United States are
going to see some improvement in their condition because
states started to respond to these economic circumstances in
the early 2000. Mr. Shier added that because there is a lag
time coupled with the 5-year smoothing it might be possible
to see the improvement in the funding ratio although he
believed it will be temporary.
KEVIN BROOKS, DEPUTY COMMISSIONER, DEPARTMENT OF
ADMINISTRATION remarked that there were losses in calendar
year 2008 but 2007 produced some significant returns. He
reminded the legislators that the department takes a 25 year
overview because despite the rise and falls, the market
tends to level out over time.
2:22:50 PM
Representative Austerman asked if the prior 10 to 15 year
level spread will be followed by 10 to 15 down years. Mr.
Shier believed that to stay down that long should not be the
goal of any retirement system but emphasized the importance
of trying to get back to a higher level in any way possible.
Representative Austerman wanted to know the reality of the
situation. Mr. Brooks replied, the actuary determined rate,
all things being equal, that if the contribution amount is
equal to paying for normal costs as well as past service
costs then over a 25 year period there should be an increase
tending closer to 100 percent. He added there is no way of
predicting future markets and health care costs but here are
25 assumptions that help the actuary arrive at a good
estimate.
2:24:49 PM
Vice-Chair Thomas discussed a special teacher situation in
his community.
KATHY LEA, RETIREMENT MANAGER, DIVISION OF RETIREMENT AND
BENEFITS, DEPARTMENT OF ADMINISTRATION replied that when
combining PERS and TRS time it is necessary to look at
whether it is in reference to the DR or DCR. In the DR
program there is a public service provision that would allow
teaching time to be incorporated into the PERS system as
long as the combined time equaled five years. She informed
there is no provision for such a benefit in the DCR plan.
2:27:11 PM
Representative Joule wondered if the transferability was
tied to being vested or not. Ms. Lea replied that for the
public service benefit in the defined benefit plan it is not
necessary to be vested in either one just the combined
service has to equal five years. She added that there is a
conditional service benefit plan that requires the recipient
to be vested in one system and a minimum of two years of
service in the other in order to be eligible for the
benefits.
2:28:10 PM
REPRESENTATIVE CARL GATTO speculated on a theoretical
PERS/TRS situation. Ms. Lea responded that in the defined
benefits plan for the public service benefit it is specific
to people who are not vested in either system. In the
conditional service benefits, it is only necessary to be
vested in one system and a minimum of two years of service
in the other to be eligible for a benefit. The years are not
combined but a benefit is received based on TRS service and
salaries and PERS service, with the associated rules. Ms.
Leas explained the only connection between the two is if the
employee is vested TRS and the TRS salary is higher then
PERS, then the TRS salary can be used to calculate the
benefits.
2:29:47 PM
Vice-Chair Thomas asked when former Tier 1 employees who
left service must return to work in order to get vested. Mr.
Shier replied that a Tier 1 employee must refund
contributions and return to service by June 30, 2010.
2:31:02 PM
Commissioner Kreitzer indicated that the department would
be willing to come to individual offices to help provide
more information. She mentioned that information is
available on the department's website. Co-Chair Stoltze
wondered how Alaska's situation would look if health care
costs were removed from the ratio. Commissioner Kreitzer
indicated that the department always looks if state
comparisons are just for pensions or also include health
care benefits.
2:33:15 PM
Representative Austerman commented that a retiring employee
signs up for a different medical plan than the active plan.
He noted there is a fee after retiring for the medical plan
which is taken out of their retirement check. He continued
that when the retiree reached the mandatory age for Medicare
the fee remains the same even though the state only picks up
a portion of the health costs. Mr. Shier noted that in
earlier tiers there was system-paid health care. In this
system, prior to Medicare, the state system picks up the
entire premium amount. He continued that when the retiree
reaches the age of 65, Medicare, by federal law, becomes the
primary payer, but when looking long term, 60 percent or
more of the entire health care spending will be for the post
Medicare group. Representative Austerman wondered if the
costs to retirees needed to be raised. Mr. Shier explained
that the reference only applied to the system-paid coverage
where there is no cost to the employees.
2:36:30 PM
Commissioner Kreitzer signified that the department's focus
has been trying to find ways to control health care costs.
Representative Austerman indicated that costs for later tier
retirees can be significant.
2:37:54 PM
Representative Crawford projected that if an employee
retires at 60 under the defined contribution and sets up
retirement to last a certain amount of years, he wondered if
the health care benefits would also cap out. Commissioner
Kreitzer said health care benefits would continue. Mr. Shier
reiterated that when the life of the annuity runs out, the
health care benefits should continue. He noted in the
defined contribution retiree health plan there is a ten
percent premium that the retiree would have to continue to
pay in order to receive the benefits. Representative
Crawford asked ten percent of what. Commissioner Kreitzer
replied ten percent of the annual costs of the monthly plan
premium. He added that there is a substantial balance in the
health reimbursement account which could be used to pay the
ten percent premium and the co-pays not covered in the plan.
Representative Crawford asked if money for the health
reimbursement account was being taken out of employees
paychecks. Mr. Shier replied it is paid entirely by the
employer.
Representative Kelly stated that he had been looking at the
unfunded liability problem when it was $4 billion and now it
is around $10 billion. He asked if the conversion to the new
defined contribution plan help lessen the unfunded
liability.
2:42:26 PM
Representative Kelly requested a careful response to his
question be sent to the committee. Commissioner Kreitzer
reported the information on the unfunded liability would not
be available until next week.
2:44:33 PM
Representative Kelly commented that if the retirement system
had been left as a defined benefit instead of moving to a
defined contribution he wondered if that would have helped
matters. Commissioner Kreitzer replied that SB 123 did allow
the state to access all payrolls from all employees to pay
down the unfunded liability. Representative Kelly reiterated
that he wanted to know the comparisons between the defined
benefit and the defined contributions system plans.
Mr. Brooks stated that the department's question to the
actuary is to give an analysis of the unfunded liability not
speculate if everyone had stayed in the deferred benefits
program. He remarked it cost a lot of money to run these
numbers. Representative Kelly responded that he would still
like the answer to his question.
Representative Gatto asked if the employer picks up 100
percent of health care premiums once an employee retires.
Mr. Shier responded that once an employee retires health
care is paid for by the trust funds. Representative Gatto
questioned if the state is required to make an additional
contribution to health care when an employee reaches a
certain age. Deputy Brooks said that when an employee
retires prior to Medicare eligibility age the state covers
the full premium cost, once they reach the age of 65
Medicare becomes the primary insurance and the state picks
up the supplementary costs.
2:50:39 PM
ADJOURNMENT
The meeting was adjourned at 2:52 PM
| Document Name | Date/Time | Subjects |
|---|---|---|
| Actuarial101FINAL.pdf |
HFIN 2/5/2009 1:30:00 PM |
HB 81 |
| ARMB Fin Report.pdf |
HFIN 2/5/2009 1:30:00 PM |
HB 81 |
| Glossary of Terms and Acronyms FINAL.pdf |
HFIN 2/5/2009 1:30:00 PM |
HB 81 |
| PERS funding ratio 2007 diagram.pdf |
HFIN 2/5/2009 1:30:00 PM SFIN 2/5/2009 1:30:00 PM |
HB 81 |
| PERS TRS Tier Comparison Charts FINAL.pdf |
HFIN 2/5/2009 1:30:00 PM SFIN 2/5/2009 1:30:00 PM |
HB 81 |
| PERS TRS Tier Comparison Charts.pdf |
HFIN 2/5/2009 1:30:00 PM SFIN 2/5/2009 1:30:00 PM |
HB 81 |
| Retirement Systems 101.pdf |
HFIN 2/5/2009 1:30:00 PM SFIN 2/5/2009 1:30:00 PM |
HB 81 |
| TRS funding ratio 2007 diagram.pdf |
HFIN 2/5/2009 1:30:00 PM |
HB 81 |
| TRStimelineCONTACT INFO.pdf |
HFIN 2/5/2009 1:30:00 PM |
HB 81 |
| DOA Quiz.pdf |
HFIN 2/5/2009 1:30:00 PM |
HB 81 |