Legislature(2015 - 2016)HOUSE FINANCE 519
02/12/2016 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Department of Revenue Presentation: Pension Obligation Bonds | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
February 12, 2016
1:33 p.m.
1:33:18 PM
CALL TO ORDER
Co-Chair Neuman called the House Finance Committee meeting
to order at 1:33 p.m.
MEMBERS PRESENT
Representative Mark Neuman, Co-Chair
Representative Steve Thompson, Co-Chair
Representative Dan Saddler, Vice-Chair
Representative Bryce Edgmon
Representative Les Gara
Representative Lynn Gattis
Representative David Guttenberg
Representative Scott Kawasaki
Representative Cathy Munoz
Representative Lance Pruitt
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Jerry Burnett, Deputy Commissioner, Treasury Division,
Department of Revenue; Deven Mitchell, Executive Director,
Alaska Municipal Bond Bank Authority, Department of
Revenue.
SUMMARY
PRESENTATION: PENSION OBLIGATION BONDS
DEPARTMENT OF REVENUE
Co-Chair Neuman discussed the meeting agenda.
^DEPARTMENT OF REVENUE PRESENTATION: PENSION OBLIGATION
BONDS
1:34:17 PM
JERRY BURNETT, DEPUTY COMMISSIONER, TREASURY DIVISION,
DEPARTMENT OF REVENUE, provided a PowerPoint presentation
titled "Alaska Pension Obligation Bond Corporation" (copy
on file). He began on slide 2:
Alaska's Major Pension Systems
· The State manages 2 major pension systems: Public
Employee Retirement System (PERS) and Teachers'
Retirement System (TRS)
· The PERS and TRS systems provide retirement
benefits for most public employees and teachers
in the State of Alaska
· 160 state and local employers participate in
PERS, and 60 state and local education entities
and school districts participate in TRS
· By statute the State is obligated to consider
appropriating amounts to support the PERS and
· TRS pension liabilities
· Between 1999 and 2001 PERS and TRS went from
being overfunded to carrying UAALs
Mr. Burnett read from slide 3:
How are PERS and TRS Funded
· Both are Pre funded, meaning that as retirement
benefit liabilities accrue payments intended to
satisfy those benefits are deposited into a
trust.
· The payments are based on actuarial analysis
which includes many assumptions including
employment patterns, future wages, life
expectancy, healthcare costs and an investment
return rate of 8% on the pre-payments
· The actual experience of the pension systems is
reviewed in an annual funded status report.
o A debt or "unfunded assumed actuarial
liability (UAAL)" occurs when the current
pre-funding and its future earnings are
projected to be less than the retirement
obligations.
o This debt is then repaid over time in a
fashion comparable to borrowing at the
assumed rate of return (8%)
o UAALs materialize due to the experience
being worse than the assumptions
o -An overfunding occurs when t the current
pre-funding and its future earnings are
projected to be more than the retirement
obligations
· In 2008 SB 125 capped PERS employer contribution
rate at 22% and TRS employer contribution rate at
12.56% and declared that the State shall make up
any difference between 22% and the actuarially
determined contribution rate.
· -This made the State the default funding source
for any additional funding requirement due to the
experience being worse than the actuarial
assumptions for systems
Co-Chair Neuman asked whether the fund had earned 8 percent
annually. Mr. Burnett answered that in FY 2015 the funds
had earned approximately 3.2 percent and in FY 2015 earned
well over 8 percent; the funds earned well in excess of 8
percent over the system's life. Co-Chair Neuman pointed to
the market downturn. He asked where the markets may be
headed.
DEVEN MITCHELL, EXECUTIVE DIRECTOR, ALASKA MUNICIPAL BOND
BANK AUTHORITY, DEPARTMENT OF REVENUE, replied that he did
not usually invest large sums of money; he was responsible
for borrowing money that was "somewhat different than fixed
income investing." He shared that his views on the equity
markets and fixed income markets relative to retirement
systems were not as informed and not his area of expertise.
He deferred to other professionals within the Department of
Revenue (DOR) for details.
Co-Chair Neuman noted that the individuals could address
the committee at a later time.
Representative Munoz asked whether the assumed rate for the
defined benefit plans needed to be recalculated due to the
declining number of people paying into the plan. Mr.
Burnett answered that she was referring to a "closed plan"
and noted that the plans were closed in 2007. He explained
that as earnings grew more important than deposits into the
fund the cash needs exceeded the liquidity that was
provided with an asset allocation with an 8 percent return.
He referred to an analysis that was done on the issue by
Gary Bader, Chief Investment Officer, Treasury Division,
Department of Revenue. The analysis concluded that the
problem was expected in the early 2020s. However, the
estimation was advanced because the issue was analyzed
prior to the $3.2 billion infusion the legislature had
allocated to the unfunded liability [2014]. He believed the
situation was far removed into the future. He shared that
the Alaska Retirement Management Board (ARMB) revisited the
topic annually.
1:41:23 PM
Representative Gara asked for the Public Employees'
Retirement System (PERS) and Teachers' Retirement System
(TRS) shortfall amount. He asked whether the amount was
based on a certain percentage of retired employees and what
the percentage was. Mr. Burnett answered that when an
actuarial analysis was done on a retirement system it
examined the whole universe of the system. He delineated
that the goal was to obtain a level of ongoing payments
where there were sufficient assets to pay for future
liabilities for all employees in the system receiving
benefits. Representative Gara surmised that the department
was measuring what was needed to pay 100 percent of the
entire state work force assuming they just quit and for
current retirees. Mr. Burnett replied that the measurement
was done on a "point in time" on an annual basis. He added
that rate setting was based on the contribution required by
the state in excess of the rates paid by employees.
Representative Gara stated that many people may believe the
assumption may be excessive. He asked what the projected
debt was for both systems currently. Mr. Burnett answered
that as the latest evaluation that occurred on June 30,
2014, the unfunded liability for PERS was $6.252 billion
and $3.822 billion for TRS. He recounted that the amounts
did not include the legislative appropriation of $3 billion
($1 billion into PERS and $2 billion into TRS). The actual
amounts were different. Representative Gara asked for
updated numbers calculated after June 2014. Mr. Burnett
answered that draft numbers for June 2015 had been
presented to the Department of Administration and DOR. He
related that Buck Consultants, the state's standard actuary
and Gabriel, Roeder, Smith and Company, the state's review
actuary and ARMB needed to review the draft numbers. The
departments assumed that the draft numbers were close to
being correct, but the actuaries and ARMB had not yet seen
the figures. He summarized that the figures were in draft
and not fully reviewed.
Co-Chair Neuman asked whether the numbers could be
presented to the committee in draft form. Mr. Burnett
responded that he could speak to an approximate number but
until the number was reviewed by the second actuary they
would remain an estimate. He shared that Mr. Mitchell was
"free" to speak to the estimates and he would release the
amounts as soon as possible. Co-Chair Neuman remarked that
the department was unable to answer questions regarding
stock market projections and state savings. He questioned
the presenter's preparedness for the meeting.
Representative Gara interjected that the presenters were
also not able to tell the committee what the state owed.
Mr. Mitchell relayed that the figures were typically not
disseminated to anyone until they were reviewed by the
ARMB. The department was granted limited access to the
draft numbers due to the governor's proposal to use Pension
Obligation Bonds (POB). He indicated that the limited
access specifically required that the figure could not be
divulged to third-parties and was a unique situation. He
revealed that the calculations for sizing the POB had been
included in the presentation but DOR was not planning to
address a draft report.
Co-Chair Neuman asked whether the presenters thought they
would be asked the question. Mr. Burnett replied that they
would get the numbers to the committee. He expected to
discuss "the sizing of the deal" without delving into the
specific numbers that would change. The numbers in the
proposed governor's budget always lagged one year.
1:49:18 PM
Representative Pruitt noted his frustration with the lack
of specific information and noted that he experienced the
situation before. He wondered whether the committee should
move into an executive session so some of the figures could
be brought forward. He asked what the percentage of funding
was. He wondered whether the retirement system was at the
level of private funds. Mr. Mitchell remembered that the
TRS health care was 100.6 percent funded and the pensions
were funded 86 percent. He added that for PERS health care
was funded in the high 90 percent range, pensions were
funded in the low 70 percent and the blended percentage was
in the high 70's. Representative Pruitt ascertained that
the state was within the required ranges. He asked how the
state's POB levels related to IRS requirements. Mr. Burnett
answered that the state was not under the same rules. The
POB's were currently in the 90 percent range and the
situation "was much improved" and moved the debt to the
pension systems at lower costs.
1:53:33 PM
Representative Pruitt wanted to hold the state to the same
standards as private industry. He surmised that "the weight
in the system was shifted to the general fund." Mr. Burnett
replied that under Generally Accepted Accounting practices
(Governmental Accounting Standards Board (GASB) under which
the state operated the unfunded liability of the pension
systems and the amount paid in excess of 22 percent (paid
by the employer) resided on the states book as a liability
similar to borrowing money. The POB strategy did not change
the state's liability on a balance sheet but changed "the
liability to an investor from a liability to a pension
fund," which was operated for the benefit of state and
local government employees. Representative Pruitt surmised
that strategy was not about the debt, but about the
potential risk of borrowing and earning more for the money.
Mr. Burnett answered that his statement was "almost" the
case. He explained that the state was proposing to
refinance debt paid at an 8 percent assumed interest rate
because the money the state was replacing was comprised
entirely from the General Fund (GF). The pension obligation
bonds would be a debt to another party at a much lower
interest rate, which resulted in reduced budgetary costs.
He stated that the proposal was not "an arbitrage play,"
but was a refinancing play. The difference between a POB
and a retirement system was that it was more difficult for
the legislature to miss a payment in a specific year
because the results were different. In one the unfunded
liability increased and in the other the loan was in
default.
1:56:48 PM
Co-Chair Neuman reiterated Representative Gara's question.
He asked how much was currently in the fund. Mr. Burnett
answered that the amount was roughly $15 billion in the
PERS fund and $8 billion in the TRS fund. Co-Chair Neuman
asked whether the original balance was approximately $10
billion. Mr. Burnett replied in the affirmative. Co-Chair
Neuman asked whether Alaska's retirement funds were viewed
as one of the best funded retirement system in the nation.
Mr. Burnett was not able to answer the question. Co-Chair
Neuman referenced the legislature's $3 billion cash
infusion into the system. He asked how much the state's
payments would have been without the cash injection and how
much the state paid currently. Mr. Burnett replied that if
the legislature had not infused the $3 billion the payment
would be approximately $1 billion in the current year. Co-
Chair Neuman was trying to understand why the strategy was
currently being proposed and "start out in the hole." He
sensed that the markets would probably not increase in the
next year. He wondered why the rush to implement POBs and
"start out at 4 or 5 percent in the hole" instead of
waiting until the percentage increased to 8 percent.
2:00:12 PM
Mr. Burnett answered that currently the system would likely
be fully funded, if the system had been funded in 2009 when
the market was down. He indicated that the market was down
and it was a better time to buy. In 2008, when the
legislature created the Alaska Pension Obligation Bond
Corporation interest rates were in the 6 percent range.
Currently interest rates were in the 4 to 5 percent range.
He stated that the current situation favored potential
savings. He referred to the collapse of the market in 2008
and the inability to borrow money. He mentioned the tax
exempt financing rate of 5.9 percent in 2008 (for the Goose
Creek Prison) was the highest rate the state had paid since
the 1980s. He revealed that the law required the state to
borrow below a 6.5 percent interest rate with an 8 percent
return expectation; therefore, the state was not able to
borrow at the time. The commissioner and ARMB was
constantly monitoring the market and did not want to
implement POB's when the market was peaking or rapidly
falling. The department retained timing discretion for a
sale.
Representative Wilson asked who managed the retirement
funds. Mr. Burnett answered that the ARMB managed the funds
and was manned by the Treasury Division investment staff.
Representative Wilson asked why the Alaska Permanent Fund
Corporation (APFC) was not managing the money. Mr. Burnett
answered that there were different mandates for the various
funds. He shared that DOR and ARMB had better returns than
the Permanent Fund 21 out of the last 31 years.
Representative Wilson requested more information. Mr.
Burnett detailed that the Treasury Division and ARMB had
approximately 40 separate asset allocations and mandates
for investments and each contained different results over
time compared to APFC that had only one mandate. He voiced
that the funds were managed "completely differently."
Representative Wilson asked how the 22 percent state
employer contribution rate for PERS and the 12.5 percent
for TRS had been decided and how the legislature could
amend the rates.
2:05:26 PM
Representative Gara was concerned over a statement by Mr.
Burnett regarding proposing the bond sale when the market
was lower and not peaking. He voiced that the department
had proposed the strategy when the market was peaking. Mr.
Burnett replied that when the department had begun
considering the idea the prior August there was a market
"correction." The department did not time the market, but
they could control the interest rate.
Mr. Burnett continued and read the portion of slide 3:
· The actual experience of the pension systems is
reviewed in an annual funded status report.
o A debt or "unfunded assumed actuarial liability
(UAAL)" occurs when the current pre-funding and
its future earnings are projected to be less than
the retirement obligations.
ƒ This debt is then repaid over time in a
fashion comparable to borrowing at the
assumed rate of return (8%)
ƒ UAALs materialize due to the experience
being worse than the assumptions
o An overfunding occurs when the current pre-
funding and its future earnings are projected to
be more than the retirement obligations
· In 2008 SB 125 capped PERS employer contribution rate
at 22% and TRS employer contribution rate at 12.56%
and declared that the State shall make up any
difference between 22% and the actuarially determined
contribution rate.
o This made the State the default funding source
for any additional funding requirement due to the
experience being worse than the actuarial
assumptions for systems
Mr. Burnett related that prior to 2008, PERS was an agent
multi-employer system where each employer had its own
unfunded liability and rate. He delineated that some
"political subdivisions" could have had rates higher than
100 percent of its payroll if actuarial results had not
been updated.
Co-Chair Neuman noted that Representative Louise Stutes was
present in the room.
Mr. Burnett addressed slide 4 titled "Alaska has Actively
Addressed its UAAL with Several Reforms":
· 2005: SB 141 closed PERS and TRS to new employees
· 2007: SB 123 created Alaska Retiree Health Care Trusts
· 2008: SB 125 capped PERS employer contribution rate at
22% and TRS employer contribution rate at 12.56%
· 2008: HB 13 created Alaska Pension Obligation Bond
Corporation (APOBC) and authorized issuance of $5
billion of Pension Obligation Bonds (POBs)
· 2014: Deposited $1 billion in PERS and $2 billion in
TRS from Constitutional Budget Reserve
· Fund
· 2016: Planned implementation of POB strategy to
diminish growth of the annual increase of the
· State's appropriation to the systems
2:10:39 PM
Mr. Burnett delineated that the state had always prefunded
health care for retirees and had the "best funded retiree
healthcare of any state." Accounting requirements for
retiree healthcare was impending under GASB rule 72.
Representative Pruitt asked if the POBs had been issued in
2008. Mr. Burnett replied in the negative. Representative
Pruitt asked whether the department had the authority to
issue POBs without the legislature's authority. Mr. Burnett
answered in the affirmative. He detailed that the APOBC was
comprised of the commissioners of the Department of
Administration (DOA), Department of Commerce, Community and
Economic Development (DCCED), and DOR and was analogous to
the state bond committee. He voiced that the APOBC did not
want to market bonds without legislative approval because
investors needed the assurance that legislative bodies were
supportive.
Vice-Chair Saddler referred to a document titled "Pension
Obligation Bonds - Are They a Good Move for Alaska?" (Copy
on file). He asked whether the administration would issue
the bonds "absent committed indication" by the legislature
that annual repayment appropriations would be a made. Mr.
Burnett related that he was DOR's commissioner designee for
the APOBC and he would be "incredibly reluctant" to issue
POB's without legislative support and thought the action
would be irresponsible. Vice-Chair Saddler asked what the
corporation's mechanism for making the decision was. Mr.
Burnett answered that the corporation would meet, seek
presentations from staff (including Mr. Mitchell) and take
action on a resolution. Vice-Chair Saddler asked if there
would be a vote. Mr. Burnett answered in the affirmative.
He added that signatures would be required.
2:14:18 PM
Representative Guttenberg stated that the department had
the authorization since 2008. He asked whether this was the
first time the department had requested further
authorization. Mr. Burnett responded in the affirmative.
Representative Guttenberg asked whether in the ensuing
years since 2008, opportunities existed to issue POB bonds.
Mr. Burnett answered that discussions had taken place. He
furthered that there were several administration changes
since 2008 and the relative health of the state had
changed.
Mr. Mitchell expounded that the interest rate environment
on the borrowing side was not favorable during the time
period. The taxable rates for most of that interim was
close to the 6 to 6.5 percent rate; at the level from a
historical perspective, there was still "a double digit
probability of not beating" 6.5 percent. At a 5 percent
interest rate the success rate was in the high 90th
percentile.
Representative Munoz deduced that if the rate was 5 percent
the rate of failure was close to 10 percent. She asked for
clarification. Mr. Mitchell answered that the failure rate
was closer to 1 percent. He elaborated that in 2008, former
DOR deputy commissioner Brian Andrews performed historical
analytical analysis to provide the statistical
probabilities, which created confidence and contributed to
passage of the legislation. He clarified that the current
prefunded system assumed an earnings rate of 8 percent and
if the rated dropped to 7.5 percent the unfunded liability
nearly doubled. The state had already made an investment in
the state's future.
Representative Munoz referred to her earlier question about
the assumed rate of 8 percent. She asked whether he thought
the rate was "generous" since the plans were closed and
future contributions became more limited over time. Mr.
Burnett restated that the issue was a concern at some point
out in the future and reminded her that ARMB and actuaries
regularly reviewed the assumed rate and determined it was
reasonable. He did not know what the future would bring over
a long period of time. He indicated that whether or not the
state did POBs, the unfunded liability significantly
increases under any scenario where the earnings were less
than 8 percent. Representative Munoz asked whether POBs
carried a risk that if they do not perform as anticipated
the unfunded liability grew. Mr. Burnett responded that
"under almost any scenario," unless the funds was losing
money, selling POBs would not make the unfunded liability or
the payments towards the unfunded liability any worse. He
explained that underperformance would shift part of the
unfunded liability payment onto the investor and the other
part onto the fund. The point of POVs were to "smooth out
and reduce" the payment on the 8 percent debt.
Representative Munoz observed that the liability would go
from a "soft to a hard commitment… to transferring to a
commitment that is real." Mr. Burnett answered that the
commitment was just as real either way. The distinction lied
in repayment and "what the consequences for making payments"
were.
2:23:07 PM
Co-Chair Neuman referred to Mr. Burnett's statement that
the payments would not change. He discussed a scenario
where only 3 or 4 percent was earned and not the expected 8
percent return. He asked whether the difference in the year
end payments would be paid in GF dollars. Mr. Burnett
answered that either way the shortfall would have to be
made up with GF. The unfunded liability would still grow
between the difference of 8 and 3 percent. The retirement
system required annual actuarial analysis. Co-Chair Neuman
restated his question regarding reconciling the difference
in GF dollars. Mr. Burnett replied in the affirmative. He
expounded that the shortfall would be filled with GF
whether POBs were used or not. He stated that POB investing
was fundamentally different than if the "pension fund
itself was borrowing money for leverage;" "the state was
borrowing money and changing the nature of who the
liability was owed to and did not extinguish the liability
but it put the money in a different place."
Co-Chair Thompson asked whether issuing POBs could be
viewed as an act of desperation by the state. He wondered
whether the action could contribute to a rating downgrade.
Mr. Burnett responded that if the POBs were issued to
address the current year's payment; converting short-term
debt to long-term debt, under a certain scenario did not
look good. However, converting long-term 8 percent debt to
a long-term debt of 5 percent was considered positive. He
reported that the state discussed POBs with the rating
agencies.
2:27:05 PM
Co-Chair Neuman asked whether POBs would negatively impact
the state's ability to bond for other projects. Mr. Burnett
replied in the negative and stated that it would actually
help.
Representative Wilson asked why the state did not issue
bonds in 2008 "instead of" the $3 billion payment. Mr.
Burnett restated that the legislature made the choice and
that the payment occurred in 2014. Representative Wilson
asked that if POBs were such a good idea why was in not
chosen as an option in 2014. Mr. Burnett answered that
there were a number of different options in 2014 and the
state chose cash. In 2014, the two consecutive prior years
the price of oil was $110 per barrel and the payment was
not perceived as a problem. Representative Wilson thought
the reasoning was nonsensical. She believed the concept of
POVs was a sound option and reasoned that it was a good
option in any year. She voiced that "if we can make more
money than what we are borrowing off it that should always
have been something that would have made more sense at the
time, unless we are not getting the whole story." Mr.
Burnett reiterated that the interest rates had not been as
favorable in 2008. Representative Wilson asked what the
interest rates had been in 2008. Mr. Mitchell reiterated
that interest rates were roughly 6 to 6.5 percent. It was
impossible to "sell bonds like these in the market for a
period of time" subsequent to the market's collapse. A
"hard cap" was built into the legislation and the state
could not borrow unless a return greater than 6.5 percent
was realized. He restated that all the department could do
was control interest rates and attempt to make informed
decisions on the reinvestment of the money to ensure that
the state did not engage in unnecessary risk. He remarked
that after a 20 year time period the state would reevaluate
whether the choice was correct or the trust would be
underfunded.
2:31:31 PM
Representative Wilson viewed the situation as "déjà vu from
2014."
Representative Edgmon asked whether the administration was
modeling the sovereign wealth concept along with the POV
"risk adjusted rate of return for the state." Mr. Burnett
replied in the affirmative. He revealed that there was a
very robust model for the sovereign wealth fund and "a lot
of modeling by investment banks" were performed for POBs.
Representative Edgmon asked whether Alaska would be the one
sovereign entity with so much connection and wealth tied to
the equity markets if both plans were enacted. Mr. Burnett
was not certain but surmised that the state would
"certainly" have large exposure relative to "most places
given the size of the state's population."
Representative Munoz discussed the state struggling to
bring the unfunded retirement costs down in 2014 due to the
growth of the unfunded liability in relation to the state's
budget. She wondered what would happen to the amount the
state owed annually if the POB option was exercised. Mr.
Burnett replied that they would address the issue later in
the presentation. He read from slide 5:
· Fund TRS to 90% - approximately $675 Million
· Fund PRS to eliminate state contributions required
when actuarially determined rate goes above 22%
· of payroll - $1.1 Billion to $1.8 billion
· Don't use the 23 years of savings to avoid short term
payments
· This is how Illinois or New Jersey used POBs
· Use savings to reduce the projected increases in
future payments
· Otherwise we are leaving even more for a future
generation to fund
· Take advantage of low interest rates. Current taxable
interest rates are historically low - over
· 1.5% lower than when the POBC Legislation was
approved.
· The lower the cost of capital the higher the
probability of success
· The stock market has undergone a correction
· Strategies may be implemented on the reinvestment side
to dollar cost average or otherwise limit risk of
buying into an overvalued market
2:36:47 PM
Mr. Mitchell turned to slide 6 titled "How Would Pension
Obligation Bonds Authorized in 2008 Work?" The narrative on
slide 6 follows:
Taxable municipal bonds are issued to refinance all or a
portion of the Pension Plans' UAAL
· The State borrows at a rate of 6.5% or lower
(currently 5%) to "refinance" the existing liability
being amortized at an 8% rate
· Proceeds of the APOBC bonds are deposited in Pension
Funds; funds will be invested according to pension
fund policy
· The State's periodic UAAL amortization payments (or a
portion thereof) are replaced with principal and
interest payments to bondholders secured by State
appropriations
· Just like the other pre-paid benefits, the actual
experience of the transaction will be determined when
the future investment performance of the pension
trusts is realized
Mr. Mitchell mentioned a graphic on slide 6 that depicted
the narrative. He turned to slide 7 titled "TRS - Current
Unfunded Liability Breakdown - Buck Consultants have
provided draft 2015 Actuarial Valuation results displaying
the projected TRS UAAL payments by contributor at an
assumed 8.0 percent actuarial rate." He referred to the
chart that portrayed TRS UAAL contributions. He explained
that the non-state employer contribution was approximately
$22 million in 2016, increased to over $25 million in 2038
and began to decline in 2039. He indicated that the state's
TRS contribution was "relatively small" because the state
was not a large TRS employer. He pointed to the blue column
that depicted the state's contribution on behalf of the
system that held the employers harmless at 11.56 percent.
The amount grew from $130.1 million in 2016 to over $265
million in 2039, which was the focus of the POBs.
Co-Chair Neuman spoke to the 8 percent actuarial rate and
asked whether the state had averaged 8 percent for the
previous 25 years. Mr. Burnett replied in the affirmative
and noted that the average was higher than 8 percent.
Vice-Chair Saddler what the employer rate percentage was.
Mr. Burnett answered that the rate was 12.56 percent (TRS).
Representative Wilson asked whether the only risk was
whether the money earned 8 percent. Mr. Mitchell reiterated
that if 8 percent was not reached the state would pay more
in either scenario. He elaborated that the idea encompassed
in POBs was savings. The amount of the TRS fund balance was
deficient by $1.4 billion for employees' benefits that had
already accrued; i.e., the unfunded liability amortized
over 23 years at 8 percent was a much larger figure than at
5 percent. The state would realize savings over 23 years
paying at 5 percent instead of 8 percent.
2:41:01 PM
Representative Wilson asked whether the risk was realizing
returns under 5 percent. Mr. Mitchell answered in the
affirmative.
Mr. Mitchell moved to slide 8 titled "PERS - Current
Unfunded Liability Breakdown - Buck Consultants have
provided draft 2015 Actuarial Valuation results displaying
the projected TRS UAAL payments by contributor at an
assumed 8.0 percent actuarial rate." He explained that the
non-state employer contribution was approximately $118.8
million in 2016 and increased to over $272.3 million in
2039. He reported that the state employer rate was over
$132 million in 2016 and $302.9 million in 2039. He pointed
to the blue column depicting the state's contribution on
behalf of the system that held the employers harmless at 22
percent and reported that the state's contribution was
$126.5 million in 2016. He noted that the reduced payments
beginning in 2017 were partly due to the large deposit in
2014 and complex actuarial calculations. The contributions
did eventually grow to $283 million by 2039, which was the
reason for the POBs; attempting to flatten the growth in
the annual payment.
Co-Chair Neuman asked about slide 8 related to the PERS
state contribution. Under the current system, the state's
contribution would be $99.1 million in 2017 and decreased
[through 2025] in the current system. He asked whether the
figures in the column were "expected." Mr. Mitchell
responded that the information in the presentation was not
available when the budget was developed. The information
was not typically distributed until after the legislative
session. Co-Chair Neuman noted that the legislature was
trying to develop its budget. He asked whether the
estimates were reliable. Mr. Burnett believed that the
numbers were a likely outcome in 2017. Co-Chair Neuman
stated that the estimates were "good information for the
committee."
Representative Pruitt referred to the numbers on slide 8.
He thought that the infusion of cash in 2014 would level
the state's payments to approximately $500 million per year
for the "entirety of the rest of the time" and the results
did not "pan out." He noted that the legislature was
experiencing "shell shock" and just wanted to figure out a
solution. He wondered what would happen if the 8 percent
was not realized in a particular year. He asked whether
"the state would have to cover what should have been made"
or would the state engage in "yet another discussion" about
increased costs in retirement because POVs did not perform
as intended.
2:47:40 PM
Mr. Burnett replied that the actuaries used a "smoothing
formula" which captured the results of investments over a
period of years. He offered that the results would be
variable over the years due to a time lag but would result
in a "smoothing of assets." He reminded the committee that
the legislature, in relation to the $3 billion infusion
into the unfunded retirement liability, directed ARMB to
remove the "smoothing out" for one year to allow the cash
infusion to "catch up' and "reset rather than averaging the
$3 billion over several years." The delay in asset
smoothing was reflected in the rapid reduction in payments
depicted on the slide. The increased contribution out in
the future over time happened for a number of reasons. He
explained that the main reason was that actuaries assumed
payroll growth.
Mr. Mitchell discussed slide 9 titled "TRS - 8.0% Actuarial
Rate - Comparison of State Payment - Refunded UAAL vs POB
Debt Service" which depicted a chart and graphs
illustrating the estimated total state obligation after a
POB transaction. He indicated that the plan was to fund the
PRS system up to the 90 percent level. He pointed to the
column labeled "prior state obligation" and noted that in
2017 the state would pay $116.7 million and a POB issue
would refinance $75.9 million of the amount. The remainder
of $40.8 million was the unfunded actuarially assumed
liability payment. The $48.3 million payment in the middle
white column reflected the "hard liability" or POB debt
service payment, which remained relatively "static" for the
23 year life of the bond. He referred to the first dark
blue column which reflected the total state payment after
the transaction that was $89 million and 17.88 percent of
the total contribution rate (second dark blue column).
Finally, the last white column showed the cash flow
difference of $27.6 million. The cash flow diminished in
the first year and increased in years 2, 3, and 4. The
"backend loading" was very apparent and built to $45
million in 2039, which was intentional resulting in
flattening the payment curve. He referred to a small bar
graph on the upper right portion of the slide. The rising
black line on the top of the bars reflected the current
system. The dark blue bars presented the POB option and
represented savings or a "diminishment of payment." The
department attempted to "push the savings out" over the
years to diminish the growth. The POB debt service was
reflected in the bottom light blue layer of bars and
remained steady. The orange line that rose slightly through
the amortized years above the light blue bars reflected the
amount of refinanced liability. He shared that another cash
payment would "chop off the blue line and diminish" each
column bars by $48.3 million which would show the impact of
a cash repayment versus borrowing the money. The impact on
the total system was depicted in the bottom bar graph and
was very similar in the case of TRS. He stated that the
benefit accrued to the state due to the 12.56 percent
contribution rate. He referred back to the second dark blue
column on the chart reflecting the rate and pointed to the
low of 17.88 percent in FY 17 that increased to 24.39
percent in 2019. He commented that the state would always
provide the shock absorber function as the "deep pocket"
whenever a deficiency existed. The state's contribution
would diminish if for instance, the returns were greater
than 8 percent.
2:55:36 PM
Co-Chair Neuman deduced that in 5 or 6 years the state's
payments would be higher. Mr. Mitchell responded in the
affirmative. Co-Chair Neuman wondered where the chart
depicted the estimated difference in money. Mr. Mitchell
answered the difference was shown in column F labeled "cash
flow difference," which totaled $417.5 million. Co-Chair
Neuman was concerned about 2017 through 2021. Mr. Mitchell
answered that by design POBs pushed the savings into the
future. Co-Chair Neuman remarked on the current budget
crisis. He determined that it was not advantageous to pay
more in TRS/PERS payments under a system that was 80
percent funded. He wondered whether delaying POBs until the
state was on better financial footing was a better
strategy. Mr. Mitchell answered that the $27.8 million
reduction in 2017 would offset the next three year's
underperformance. He communicated that the underperformance
years could be eliminated. The goal of refinancing was to
get the growth in the annual state contribution as level as
possible to benefit the future rather than in the present.
Co-Chair Neuman stated that the legislature was concerned
about the present day. He surmised that the bond rating
agencies would view the debt negatively. Mr. Mitchell
responded that the proposed debt restructuring was the most
"conservative way of structuring" the type of transaction.
The option was not banking on savings to bail the state
out. The transaction would be banking on savings to bail
the state out in the long-term. Co-Chair Neuman emphasized
his concern about the next couple of years and thought the
proposal would place "more burden" on the state in the
short-term.
2:59:34 PM
Representative Munoz asked how the non-state employers
contributed to their share of the debt service. Mr.
Mitchell replied that the non-state employers would not be
paying any of the debt service. He referred to the 12.564
percent contribution rate and explained that the POB
obligation would not reach the level of impacting the other
employer's contribution rate. The lowest employer
contribution rate [in 2017} was 17.88 percent; still more
than 5 percent above the employer contribution rate floor.
Co-Chair Thompson asked whether the POBs addressed the "on
behalf payments" the state made for municipalities. Mr.
Mitchell responded that POBs addressed a portion of the on
behalf payments and the amount above the 12.56 percent was
reflected in column A. He referred to slide 7 that depicted
the non-state employer contribution of $26.7 million in
2017 versus the state's $116.7 million on behalf of the
employers in TRS and in PERS the numbers corresponded to
$132.4 million and $99.1 million in 2017.
Co-Chair Neuman asked whether the TRS payments were
"outside of the formula." Mr. Burnett answered that the
state's contribution "on behalf" was outside the formula.
Representative Edgmon referred to the employment patterns
and the actuarial analysis. He wondered what employment
figure the actuaries were modeling. Mr. Burnett explained
that the actuaries were using the actual employment
numbers. He noted that if there were a reduction in
employees the non-state employer contribution amount would
decrease and the amount paid by the state "on behalf" would
increase. He expected that the liabilities would be reduced
over time but in the short-term less employees would shift
costs on to the state's "on behalf" payment. Representative
Edgmon asked whether Mr. Burnett could order an analysis
based on a reduced number of employees. Mr. Burnett
indicated the actuarial analysis could be ordered but it
would cost additional money and "was not quick."
Co-Chair Neuman asked whether an estimate by the department
was possible. Mr. Burnett replied in the affirmative.
3:04:28 PM
Representative Gara did not understand why the state was
paying so much more in the out years after the cash
infusion in 2014. Mr. Burnett replied that the actual
direction to ARMB was to use the level percentage of
payroll, which caused the increase rather than level dollar
amortization. He offered that level dollar amortization
produced more money in the current year and fewer in the
out years and could be level on an amortization.
Co-Chair Neuman asked who made the decision. Mr. Burnett
answered that the provision was in statute.
Representative Gara opined that the POB option was a
difficult concept for the committee because the members
thought that the $3 billion cash payment was going to level
out the payments over the amortization period. Mr. Burnett
responded that the final version of the bill in 2014 did
not match earlier presentations on the bill. Representative
Gara wondered whether anyone was aware of the change at the
time.
3:07:58 PM
Representative Munoz clarified that the payment schedule
was roughly $250 million for the first 10 to 15 years and
increased to $500 million in the final years. She noted
that the numbers at the time were very similar to the
amounts in the presentation.
Representative Gara believed that the payments were much
less than $250 million in the first two years and then
increasing much higher. Representative Munoz relayed that
the combined PERS and TRS figure was approximately $250
million.
Co-Chair Neuman asked how a statute change in the other
direction would affect payments and if the question was
worth examining. Mr. Burnett responded that the action
required a significant increase in the contribution in the
current years but would level the payments out
"significantly more" in the future. Co-Chair Neuman
requested the information form DOR.
Representative Wilson remembered that the Senate had
switched the contribution amounts between PRS and TRS and
she had not caught the change before she voted for the
bill.
3:10:24 PM
Co-Chair Neuman remembered that the Senate had the
legislation first.
Representative Wilson clarified that the Senate had changed
the bill "at the last minute" and returned it to the House.
Mr. Mitchell moved to slide 10 titled "TRS -Level Debt
Service / Blended Fixed-Variable Rate. - Provided below is
a summary of a preliminary TRS pension obligation bond
transaction and the potential payment reductions to the
State at an actuarial rate of 8.0%." He related that the
charts portrayed the summary of structuring scenarios. He
requested that the committee clearly indicate "on the
record" what structure the committee was proposing. Co-
Chair Neuman wanted all of the information on all of the
options.
Mr. Mitchell continued with the slide. The scenario assumed
a total borrowing amount of $675.9 million to reach the
targeted 90 percent funding level. The amount of $506.9
million would be in fixed rate bonds and a variable rate
bond amount of $168.9 million which represented 25 percent
of the total. The deposit totaled $672.5 million in
refinancing the UAAL and the true interest cost of roughly
4.4 percent with an "all in" interest cost of 4.5 percent.
The average annual payment reduction was $18.1 million.
The total [2039] gross cash flow difference of $417.5
million was shown at the bottom left of the chart. The
present value would be $223 million. He noted the total
percentage difference was reflected at 33 percent and the
cash flow differences were shown on the right hand column.
Representative Pruitt asked about the thought process
behind the variable rate. Mr. Mitchell responded that the
states debt policy allowed up to 25 percent of a portfolio
in variable rates. Currently, the variable portfolio would
have an extraordinarily low interest rate of 1 percent. He
indicated that there was a risk which was why a variable
rate bond was a smaller component. The states analysis
assumed the variable rate would increase every year by .05
percent until it reached 4 percent and became static. He
offered that 4 percent would be a historically high
variable rate for the state.
3:14:56 PM
Co-Chair Thompson asked where the state was with its
bonding capacity and whether or not the POBs would affect
the state's ability to bond for $11 billion in reference to
AKLNG. Mr. Mitchell answered that the state had a debt
affordability analysis performed annually. He relayed that
the state's capacity was $175 million of General Obligation
Bonds (GO) and other state supported debt capacity was $225
million using historical metrics of unrestricted revenue
and not more than 5 percent of unrestricted revenue on GO
bonds and for all state supported debt no more than 8
percent of unrestricted revenue. He shared that changes in
how the state counted unrestricted revenue would result in
a change in the methodology for the affordability analysis.
The percentages were based on the fact that the primary
source of revenue was based on a volatile commodity;
therefore, "were lower than they otherwise could be." He
stated that the question was difficult to answer. In
essence, the state was refinancing an existing debt with
POBs but the method should be carefully approached. He
cautioned that any debt that was issued in the current
environment should be carefully considered. He voiced that
the natural gas pipeline potential financing was a "heavy
lift" for the state based on current revenue projections.
The enormous amount of outstanding debt would negatively
impact the state's credit rating.
Co-Chair Neuman asked whether every step that the state
took to achieve the gas pipeline that provided a secure
source of revenue and 20 percent equity in a $60 billion
project was a definite advantage to the state. Mr. Mitchell
replied that in the long-term it was a benefit, but in the
short-term it was a liability. Co-Chair Neuman asked
whether the steps taken to reduce the budget and level out
the amount of income coming into the state was beneficial.
Mr. Mitchell replied in the affirmative.
3:19:16 PM
Mr. Mitchell discussed slide 11 titled "PERS -8.0%
Actuarial Rate -Partial Refund - Comparison of State
Payment -Refunded UAAL vs POB Debt Service." He noted that
the information was presented the same as for TRS. He
elaborated that the POB debt service was $72.9 million and
the state's payments "on behalf of" were eliminated through
2029. He pointed out that the total contribution rate in
the dark blue column went from 22 percent in 2017 to 20.56
percent in 2018 resulting in a benefit for the state's
budget and the employers' budget. He stated that the
department had discussions with Buck Consultants regarding
their view that they cannot hold the contribution rate for
the employers at 22 percent if the state made a deposit
that drove the contribution rate below 22 percent. In 2017,
the state benefited by $27.1 million. The cash flow
difference numbers were negative from 2018 through 2025. In
2025 through amortization the state benefit totaled over
$505 million with a $221 million present value. He shared
that he struggled with the issue. He ascertained that if
the state could hold the employer contribution rate at 22
percent the "on behalf" contribution could be reduced or
"potentially eliminated." He believed the matter required a
statutory change. He pointed to a small graph on the upper
right of the slide portraying that the majority of the
savings was pushed to the out years. The small bottom graph
representing the total system was shown in a small graph on
the bottom.
3:23:25 PM
Mr. Mitchell skipped to slide 13 titled "PERS -Level Debt
Service / Blended Fixed-Variable Rate." He pointed to the
first column and pointed to the Summary Statistics line
totaling $21.986 million representing the average annual
payment reduction for the state only that amounted to
$28.593 million in total system benefit. He indicated that
$6.5 million of the benefit was accruing to the
municipalities or other employers in the PERS system each
year for the life of the partial refund for the state's
contribution. The full refund column on the right was a
negative number for the state and the benefit was accruing
for the other employers.
Representative Gara spoke to potential savings. He
understood the TRS charts but did not understand PERS. He
wondered how much extra the state would save for the first
five years under PERS if the proposal was adopted. He
pointed to the slide titled "PERS -8.0% Actuarial Rate -
Partial Refund" and deduced that the state was in the
negative over the first 5 years. He ascertained that the
combined PERS and TRS payments would cost more than the
current system and he wondered how the state could afford
the increase costs. Mr. Mitchell replied that the payment
structure was by design. The department had been given
instructions to make the system as level as possible. The
structure kept payments more static over time. He restated
that if the legislature's direction was to retain short-
term savings the system could be restructured to accomplish
the outcome.
3:28:49 PM
Representative Gara cited that under the TRS system the
life of savings amounted to $417 million. He asked about
the PERS savings over the amortized years. Mr. Mitchell
answered that the savings were $505.7 million. In relation
to his previous question, he explained that the percentage
of payroll decreased when the funding level increased and
was not held static at 22 percent, the state paid more in
the long run because the other employers were not
contributing as much to the system so the state had to
contribute more at the back end. Representative Gara asked
whether the $505.7 million in savings scenario was
unlikely. Mr. Mitchell replied in the negative. The
scenario saved the state that amount. He offered that he
was referring to the "on behalf of" payment that was only
eliminated through 2029. He pointed to the column labeled
total contribution rate (second dark blue column)on slide
11 and noted that the rate dropped below 22 percent and the
municipalities paid less than 22 percent from 2018 through
2029.
Mr. Burnett added the state as an employer also paid less
than 22 percent but it was not a benefit to the state in
the long run because the state's employer contribution were
being paid through fund sources other than GF in some
instances.
Co-Chair Neuman asked about the combined TRS/PERS
additional cost to the state if the plan was implemented.
Mr. Mitchell replied that it would not cost the state any
additional funds. He furthered that the committee could
direct DOR to structure the payments in a way that did not
increase costs. Co-Chair Neuman asked whether the
projections were factored into Governor Walker's current
budget. Mr. Mitchell answered in the negative because the
actuarial analysis was not available at the time the budget
was introduced.
Co-Chair Thompson discussed the schedule for the following
week.
ADJOURNMENT
3:33:03 PM
The meeting was adjourned at 3:32 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| DOR Pension Obligation Bonds 2-12-15 HFIN.pdf |
HFIN 2/12/2016 1:30:00 PM |
|
| LFD Info Paper Pension Obligation Bonds HFIN.pdf |
HFIN 2/12/2016 1:30:00 PM |