Legislature(2013 - 2014)BARNES 124
01/25/2013 03:15 PM House LABOR & COMMERCE
| Audio | Topic |
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| Start | |
| Overview: Department of Administration | |
| Overview: Regulatory Commission of Alaska | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
HOUSE LABOR AND COMMERCE STANDING COMMITTEE
January 25, 2013
3:16 p.m.
MEMBERS PRESENT
Representative Kurt Olson, Chair
Representative Bob Herron
Representative Dan Saddler
Representative Andrew Josephson
MEMBERS ABSENT
Representative Lora Reinbold, Vice Chair
Representative Mike Chenault
Representative Charisse Millett
COMMITTEE CALENDAR
OVERVIEW: DEPARTMENT OF ADMINISTRATION
- HEARD
OVERVIEW: REGULATORY COMMISSION OF ALASKA
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
BECKY HULTBERG, Commissioner
Department of Administration (DOA)
Juneau, Alaska
POSITION STATEMENT: Presented the Department of
Administration's (DOA) overview.
MIKE BARNHILL, Deputy Commissioner
Department of Administration (DOA)
Juneau, Alaska
POSITION STATEMENT: Testified during the overview on the
Department of Administration (DOA).
T.W. PATCH, Chair
Regulatory Commission of Alaska (RCA)
Department of Commerce, Community & Economic Development (DCCED)
Anchorage, Alaska
POSITION STATEMENT: Presented an overview of the Regulatory
Commission of Alaska (RCA).
ACTION NARRATIVE
3:16:43 PM
CHAIR KURT OLSON called the House Labor and Commerce Standing
Committee meeting to order at 3:16 p.m. Representatives
Josephson, Herron, Saddler and Olson were present at the call to
order.
^Overview: Department of Administration
Overview: Department of Administration
3:17:10 PM
CHAIR OLSON announced that the first order of business would be
an overview by the Department of Administration.
3:17:40 PM
BECKY HULTBERG, Commissioner, Department of Administration
(DOA), stated that the DOA is a complex department. She
referred to the organization chart of divisions and independent
agencies, noting one core department function is to provide
business support services to state agencies and to the public.
She related the department is evenly divided between the two.
She pointed out the department has a number of independent
boards and commissions, including the Violent Crimes
Compensation Board (VCCB), the Alaska Oil & Gas Conservation
Commission (AOGCC), the Alaska Public Offices Commission (APOC),
the Alaska Public Broadcasting Commission (APBC), and the
Office of Administrative Hearings (OAH), which is an independent
body that hears administrative appeals. She stated the DOA has
core offices in Anchorage, Fairbanks, and Juneau, but maintains
a statewide presence offering services through the Division of
Motor Vehicles (DMV), the Office of Public Advocacy (OPA), and
the Public Defender Agency (PDA) [slide 3]. She reported the FY
13 staff figures, including a total of 1,145 employees, with
1,087 fulltime, 18 part-time, and 40 non-permanent employees.
She said the budget is approximately $335 million this year.
COMMISSIONER HULTBERG provided the DOA's "Strategic Plan
Highlights" [slide 4]. She stated the DOA's mission is to
provide consistent and efficient support services for state
agencies. She reported the department has undergone an internal
strategic planning process and has developed four department
goals: to provide excellent customer service, reduce the rate
of spending growth to sustainable levels, and provide efficient
delivery of services, and encourage employee development and
provide employee support.
3:21:28 PM
COMMISSIONER HULTBERG turned to "Department Level Results"
[slide 5]. She stated the five-year trend in expenditures has
been growing at a smaller and smaller rate. In 2009 the
department was growing at a 5.75 percent rate of growth, whereas
this past year had a 2.41 percent growth rate. She alluded to
challenges outside the DOA's control this year that may impact
the growth rate of expenditures. She referred to the core
growth of personal services, which was 5.45 percent. She
explained that the personal services component represents the
largest component of expenditures for most departments. In
conclusion, since the DOA's rate has fallen to 2.41 percent, it
means that the DOA is finding efficiencies or other ways to
transfer money into personal services.
3:22:45 PM
COMMISSIONER HULTBERG described the "Services to the Public"
[slide 6]. She identified Amy Erickson as the new DMV director.
She pointed out numerous positive changes have occurred at the
DMV, including that customer service has improved in the past
several years; however, it can continue to improve. She
highlighted technology initiatives for the DMV, including
drivers' licensing and identification security, and knowledge-
testing system replacement.
COMMISSIONER HULTBERG noted the role of the Public Defender
Agency (PDA) is to uphold the rights of the accused, which
represents an important constitutional principle. She stated
the state can also step in through the Office of Public Advocacy
(OPA) to provide counsel in instances in which the public
defender has a conflict, but the office also manages the Court
Appointed Special Advocate (CASA) program and the public
guardian program, including the guardian ad litem program. At
this time she highlighted she did not anticipate requesting any
supplemental funding for the two agencies: the PDA and OPA.
She reported if so, it will be the first time in its history the
PDA does not require any supplemental funding.
3:25:18 PM
REPRESENTATIVE JOSEPHSON noted the [Department of Law's Criminal
Division] prosecutor's office has asked for increases in
funding. He asked whether the DOA would be requesting any
increases in funding for the PDA since the system tends to work
best when the funding for the PDA and the prosecuting office is
balanced.
COMMISSIONER HULTBERG answered the DOA will monitor closely the
resources for the public defenders and prosecutors. She said
the DOA wants to work within its budget, philosophically, which
is why the department is not planning to request any
supplemental funding for the PDA; however, she said that doesn't
mean there won't be an increment in the FY 14 budget.
3:26:20 PM
REPRESENTATIVE SADDLER said he had some experience with the
DMV's computer system, which is not the most up-to-date system.
He asked the commissioner to generally address the DOA's
information technology (IT) resources.
COMMISSIONER HULTBERG answered that the department has a multi-
year plan to replace the core DMV system and add new
functionality. She reiterated the core system would be
replaced, but over time the DMV will also add some functionality
that the insurance companies need, such as "real-time" records.
She added the process will take time. In further response, she
clarified the insurance companies need crash information
transmitted. In response to a further question, she said the
department has two significant IT projects: the Core Enterprise
Technology Services, which provides telecommunications, network
services, and main-frame computer services for the state as an
enterprise; and the Integrated Resource Information System
(IRIS) project, which is a project to replace the legacy
accounting and payroll systems. She described IT within the
divisions as being decentralized, but noted the two broad
projects will affect nearly everyone. Thus, the DOA's divisions
have planned separate IT projects, including that the DMV has a
significant IT project, Personnel [and Labor Relations] has a
Workplace Alaska replacement project, and the Division of
Retirement and Benefits (DRB) also has one planned.
3:29:26 PM
COMMISSIONER HULTBERG turned to "Services to State Agencies"
[slide 7]. She characterized the DOA as paying wages to its
employees, who perform tasks. Consequently, the DOA must
negotiate labor agreements, manage health care, and provide for
retirement and benefits for its employees. Further, she related
the department also provides its staff with IT services,
commodities such as office furniture and supplies, as well as
insurance, office and lease space. She offered to discuss each
area to discuss how the department plans to contain and manage
costs, which ultimately are borne by all state agencies.
3:30:46 PM
COMMISSIONER HULTBERG related the historic rate of personal
services has been level at 5.45 percent a year since 2006 [slide
8]. She explained that personal services includes negotiated
cost of living allowances (COLA), negotiated and statutory merit
increase and pay increments, plus increases in employer-paid
health insurance premiums. Retirement contributions are also
made by the state, she said. She pointed out the list of state
employees by bargaining unit on the slide, including exempt and
partially-exempt employees. She noted that agencies are
typically funded to cover the negotiated COLA and increases for
health care premiums; however, appropriations are not made for
merit increases. She highlighted that a state employee
typically is hired at the "A" step, receives a 3.5 percent
increase annually through the "F" step, and subsequently receive
a 3.75 percent increase at the "G" step every other year into
perpetuity.
3:32:32 PM
REPRESENTATIVE SADDLER asked whether it is possible to eliminate
state employees' raises or if it depends on negotiated
contracts.
COMMISSIONER HULTBERG answered the primary source of pay
increases is by negotiated contracts. She stated that merit
increases and the pay increment system is not typically "on the
table" in bargaining sessions, but the increases represent part
of the basic compensation packet for employees. She said it
doesn't mean these items can't be considered, but in past years
merit increases and pay increments have not been considered.
Further, she pointed out exempt and partially-exempt employee
increases are statutory requirements. She emphasized the
necessity for employers to keep all employees on the same pay
structure. She highlighted that typically three state contracts
are negotiated each year and the department is currently
negotiating the general government, supervisory unit, and
confidential employees, which include the human resource
employees and a few others. In further response to a question,
she said the contracts typically cover three years in length and
are staggered since it takes substantial manpower to negotiate
the agreements.
3:34:26 PM
COMMISSIONER HULTBERG discussed "Benefits," including the
state's contributions to active employee health plans [slide 9].
She said the bar chart shows the increase in the employer
portion of the premium for employee health plans, noting not all
employees are covered under the Alaska Care's active plan. The
state funds four union health trusts, but the unions cover their
employee's health insurance with contributions. She listed the
union health trusts as Alaska State Employees Association
(ASEA), the Long-term Care (LTC) 51 Health Trust, the Public
Safety Employees Association (PSEA), and Masters, Mates & Pilots
(MM&P) Health Trust. She emphasized that the employer's
contribution rates keep climbing, noting the state funds 100
percent of the basic premium for a family economy plan. She
pointed out Alaska is only one of seven states that pay one
hundred percent of the basic premium plan. She highlighted that
the escalation of costs is of significant concern the
department. Thus, the DOA has developed strategies to control
costs.
COMMISSIONER HULTBERG said retirees are covered by the Alaska
Constitution's diminishment clause and these benefits cannot be
changed as the insurance market changes. The court has
interpreted that the dollar amount of the retirees' contribution
is subject to the diminishment clause, which makes it very
difficult for the state to change benefits. Essentially, this
means the retirees' plan is increasingly valuable since the
department cannot adjust the deductible or copay over time, she
said. She highlighted that essentially what was once an "80/20"
plan is now a "95/5" plan. She listed some benefits not
included in the retiree plan, such as dependent coverage to age
26, or preventive care. While the department does not disagree
with the coverage, as commissioner, she is reluctant to add
costs to a plan that cannot be later removed without providing
an offsetting enhancement. Currently, the liability associated
with state retirees is a $4 billion health care liability, which
is part of the overall $12 billion in liability costs. She
acknowledged that plan changes are possible, and one option is
to litigate, whereas another choice is to create an optional
retirees' plan that retirees can opt into. The department
decided to create an optional retirees' plan, which is in draft
form. She reported that the DOA's actuary is currently
reviewing the optional retirees' plan. She offered to discuss
enhancements and cost-savings under the proposed retirees' plan
at some point.
CHAIR OLSON advised new members that colorectal cancer screening
set off the debate last year.
3:39:03 PM
COMMISSIONER HULTBERG turned to "Business Processes" [slide 10].
She said the Integrated Resources Information System (IRIS)
Project is the replacement of the core accounting and payroll
system. She added IRIS will provide human resources and
procurement functionality at an enterprise level for the state.
She characterized this as a significant IT project for the
entire state and will affect everyone, in particular, in the way
that accounting and procurement jobs are performed.
3:40:02 PM
COMMISSIONER HULTBERG turned to "Space Costs" [slide 11]. She
referred to the graph, which depicts the ever increasing costs
for leases. She highlighted two components contributing to the
cost growth. First, one component of cost increases has been
due to the inflation of leases. Secondly, agencies typically
have needed more space over time. She explained the DOA has
little direct control over the costs since leases are typically
performed through a request for proposal (RFP) process and the
department selects the most competitive respondent; however, the
DOA can ensure that its space is used effectively. She said the
department just implemented universal space standards modeled on
private sector standards [slide 12]. She related the square
footage per employee will shrink; however, the state will offset
this by also limiting the number of private offices and by
moving offices from exterior walls. She concluded this will
result in lighter spaces and "neighborhood" should enhance
collaboration and teamwork. She pointed out private meeting
spaces will be available for employees to use. She highlighted
the conservative estimate is that the state will save $125
million over a twenty-year timeframe.
3:41:59 PM
COMMISSIONER HULTBERG turned to "Purchasing" [slide 13]. She
said most purchasing is done at the department level, although
the department has enterprise-level agreements and manages for
bulk purchases. She pointed out some of the savings listed on
slide 13, including $11,991,321 in software savings and
$7,123,706 in savings for computers, printers, and peripherals.
3:42:22 PM
COMMISSIONER HULTBERG turned to "IT Services" [slide 14]. She
said this slide identifies the six enterprise technology
services priorities, including bandwidth, security, mobile
device strategy & support, continuity of operations, identity
management, and experienced-based rate-setting and rate-setting
alignment with budget process. She emphasized the DOA wants to
ensure its rate structure is fair, makes sense, and aligns
agencies' costs.
3:43:18 PM
COMMISSIONER HULTBERG, in response to a question from
Representative Saddler, said she would need to research the
baseline year of comparison on purchasing [slide 12], but she
believed the savings represents what the state would have spent
if it did not have the contracts in place for the current fiscal
year.
3:43:40 PM
COMMISSIONER HULTBERG turned to "Insurance and Injury: Risk
Management" [slide 15]. She pointed out the Division of Risk
Management (DRM) has a significant budget. This division
provides property insurance and has responsibility for workers'
compensation. She highlighted that often the DRM expenses
exceeds its authorization since the agency has a catastrophic
reserve fund, which allows the risk management section to pay
claims when necessary. She stated the fund was about $5
million; however, in FY 12 the bulk of the fund was expended.
She advised that the DOA will request funds for risk management
since the agency has exhausted its reserve.
3:44:41 PM
REPRESENTATIVE HERRON identified slips and falls as the major
reason for injury for public and private sector employees. He
asked the commissioner to evaluate the department's response to
assist employees in returning to work, and identify whether the
DOA is aggressive or somewhat aggressive in its efforts.
COMMISSIONER HULTBERG responded the DOA could be more proactive
in preventing some workplace injuries. She acknowledged the DOA
has identified the need to develop a return to work program,
which is not currently available. She highlighted that the
department encourages workers to come back to work, but when a
person can no longer perform his/her job the DOA does not have a
specific program to assist him/her. She indicated the
department is conscious of this and an opportunity exists to
become a bit more proactive.
REPRESENTATIVE HERRON agreed. He reported that the Alaska
Public Entity Insurance (APEI) and Alaska Municipal League Joint
Insurance Association Inc. (AMLJIA) have found organizations
that "hold the employee's hand" from time of injury until the
time they get back to work accrue cost savings. Additionally,
he pointed out the longer employees are off the less likely they
will return to work. He referred to slide 4, and asked for
clarification on a spending growth reduction strategy.
COMMISSIONER HULTBERG answered the Division of Retirement and
Benefits (DRB) anticipates a huge influx of new retirees since
"baby boomers" are beginning to retire. The DOA recognizes the
volume will increase so if the department continues to provide
the same services, it will be necessary to hire more people or
with better processes. Thus, the division has reorganized and
is currently using operational excellence tools to identify
processes and remove waste. She reported she learned today one
process can be done in 50 percent less time. She concluded that
actions like finding efficiencies will help the department meet
the growing demand using the same resources and without hiring
additional staff.
3:47:49 PM
REPRESENTATIVE JOSEPHSON referred to the DOA's decision not to
provide health care services for dependents up to age 26 on
retirees' plans. He understood this was not an option due to
the diminishment clause, but he asked for further clarification.
COMMISSIONER HULTBERG said retirement plans are not covered by
the Patient Protection and Affordable Care Act (PPACA), which
mandates dependent coverage up to the age of 26. The active
plan is grandfathered under the PPACA, but is still subject to
the act, she said. While the active plan extends coverage for
dependents up to the age of 26, the retirees' plan is not
subject to the act. She surmised the intent was to avoid adding
additional coverage into retiree plans since some employers were
dropping retiree plans altogether. She explained that the
state's retirement plan is constitutionally protected; however,
the state is not required to add the dependent coverage. She
cautioned adding dependents would add additional costs and the
state is hesitant to do so. In response to Representative
Josephson, Commissioner Hultberg offered to provide figures for
the cost of covering retiree's youth, including whether it would
be under $10 million.
3:49:51 PM
REPRESENTATIVE JOSEPHSON further asked whether the department
has a position about a conceptual defined benefit bill. He
related a scenario in which all parties agree the cost to
implement a new defined benefit bill would not be more costly
than the existing defined contribution plan. He inquired as to
whether the department has other concerns besides cost.
COMMISSIONER HULTBERG deferred to Mike Barnhill; however, she
asked for clarification on the determination that a plan will
not cost more. She said a benefit plan does not start with a
built-in unfunded liability, but the employer assumes the risk
that an unfunded liability could develop in a defined benefit
plan. Even though a plan does not initially identify an
unfunded liability or that a plan is self-sustaining or less
costly from an operational standpoint, will not insulate the
state from a future unfunded liability.
CHAIR OLSON remarked some people who have indicated a proposed
new defined benefit plan will not incur cost increases may be
the same ones that got the state "into the mess" six or seven
years ago when the state's retirement plan was converted. He
identified the issue can arise with interest rates, using the
wrong mortality table, or making other erroneous assumptions.
He suggested the vote the legislature made with respect to the
conversion was difficult to make, but he offered his belief it
was the right thing to do. He acknowledged an unfunded
liability currently exists in Alaska. However, he noted other
states have followed suit, but also made drastic changes, such
as Rhode Island, whose plan changes affected not only its
current members, but retirees, too.
3:52:50 PM
REPRESENTATIVE JOSEPHSON raised options to address the unfunded
liability, including whether the legislature should move $11
billion from the constitutional budget reserve (CBR) to the
Public Employees Retirement System (PERS) and the Teachers
Retirement System (TRS) and end the problem. He identified
another approach the legislature could take would be to
appropriate $600 million now and amortize it over time. He
asked for clarification.
COMMISSIONER HULTBERG said a fundamental balancing act exists
between paying off a liability and ensuring budget flexibility
to meet all of the other needs of Alaska's citizens, such as
schools, roads, and public safety, plus make the actuarially
required contributions to manage the state's liability. She
asked whether the state would be wise to do so. She said if the
price of oil falls to $40 per barrel next year that the state
may need some of those savings to "help keep the lights on."
3:54:06 PM
MIKE BARNHILL, Deputy Commissioner, Department of Administration
(DOA), related historically the DOA provides this type of an
overview on the retirement system to the finance committees at
the beginning of the legislative session. He began his
PowerPoint presentation on "Special Focus: Retirement Funds and
Health Care Plans" by discussing membership statistics, focusing
on the active membership percentage remaining in the defined
benefit plan and what percentage is now in the defined
contribution plan. He explained the state has been stuck at
75/25 percent split between defined benefit and defined
contribution members. According to the draft FY 12 actuarial
evaluation the defined contribution population has now increased
to 31 percent, he said.
MR. BARNHILL reported the Teachers Retirement System (TRS) is
comprised of 73 percent active employees and 27 percent defined
contribution employees. In 2005, the legislature passed Senate
Bill 141, which closed the defined benefits plan to new
employees beginning on July 1, 2006. Over time, the active plan
will consist solely of defined contribution members. He
explained the process, that once the fiscal year closes the
actuaries begin work and typically provide a draft valuation by
the end of December or early January. While the DOA has the new
figures, the figures have not yet been reviewed. In 2006,
legislation required a second actuary must review the valuation
figures before presenting them to the Alaska Retirement
Management Board (ARM Board). He advised that this process has
not yet begun or is barely underway. He anticipated the figures
will be presented to the ARM Board in April 2013 and final
action will happen in late spring or possibly in early summer.
He referred to "PERS/TRS Basic Facts" [slide 19]. He stated the
unfunded liability has grown to $11.832 billion which is related
to investment returns of approximately .5 percent. He related
one of the actuarial assumptions is a return of 8 percent per
year; however, the actuarial return assumption was missed by a
fairly large margin.
3:58:04 PM
MR. BARNHILL noted the funding ratio has fundamentally decreased
so for PERS, which is funded at 61.3 percent and TRS, which is
funded at 52.1 percent. Typically, an actuary would consider a
healthy plan one that has 100 percent of its assets, and 80
percent is considered a healthy metric in an open plan. Of
course, the state would like its rates to increase to 80
percent, the investment markets to return, and ratios to improve
since these are not particularly healthy numbers, he said.
3:58:55 PM
MR. BARNHILL turned to the "TRS Basic Facts" "Health Cost
Trends" [slide 20], noting health costs is one reason for
unfunded liabilities. He pointed out this slide indicates the
premiums cost changes since 1977. Over the long term the
compound annual increase has been at 9 percent while over the
short term health care costs have flattened out over several
years resulting in low single-digit growth. This has been a
consistent long-term pattern: with sharp increases, followed by
a plateau for a few years, and then rates climbing sharply
again. He indicated this is evident in 2004-2008, with a sharp
increase reflected for 2010-2011. During the periods of sharp
increases, the department works to flatten out the rate so the
long-term annual cost growth rate is closer to the rate of
inflation or inflation plus two or three percent, he said.
4:00:51 PM
MR. BARNHILL reported the actuaries' health cost growth
assumption for the next 30 to 40 years is calculated at 6
percent per year. In short, if the state can beat this rate it
will help reduce the state's unfunded liability associated with
health care. He reported the PERS and TRS unfunded liability,
associated with health care, has risen to $4.1 billion. Even
though the overall unfunded liability has increased, most of it
is a product of pensions and not due to health costs. He
referred to the history of PERS and TRS funding ratio [slides
21-22]. Currently, at 61 percent, the state's funding ratio has
fallen to an all-time low in the history of PERS, which is a
product of poor investment returns. He reported from the mid-
1990s until 2002, the unfunded status represents misreporting
during this period since the actuaries underreported, the state
under contributed, and undercollected from employers. He
recapped that the state did not collect enough and the state
continues to pay the price.
4:02:37 PM
REPRESENTATIVE JOSEPHSON asked whether the Congresses' proposal
to extend the eligibility age to 67 for Medicare coverage would
undermine the state's efforts. He characterized the potential
federal action as "a bad thing" for the state.
MR. BARNHILL acknowledged it would be bad for the state since it
will expand the gap for health care coverage between the Tier I
normal retirement age of 55 and the Tier III retirement age at
60. He explained a gap currently exists between retirement at
age 60 and the Medicare eligible age of 65. He agreed if the
Congress increases Medicare eligibility to 67, with no change in
the retirement plan, it would result in a coverage gap that
could potentially expand forever.
4:03:44 PM
CHAIR OLSON remarked that the actuaries' actions were so
egregious they settled out of court for $500 million rather than
go to trial.
MR. BARNHILL agreed the settlement was put into the health trust
funds for PERS and TRS. He said two of the state's actuaries
were given a three-year suspension by their governing
organizations.
4:04:33 PM
MR. BARNHILL turned to "Contribution Rates" [slide 23]. In the
early 2000s, the state had relatively low contribution rates,
which was a product of underreporting, under collecting, and
poor projections on health care cost growth. In FY 02, the
state discovered problems with the actuaries' valuation. In
2004, an unfunded liability of over $4 billion was disclosed.
As a result, the retirement boards struggled with the unfunded
liability, but ultimately decided not to set the contribution
rate to the full amount; instead, the boards let that rate grow.
From 2004-2007, the contribution rate was set at five percent a
year rather use the full rate. At the time, the legislature
sunsetted the boards and replaced them with the ARM Board, which
has always set the rates at the full actuarial rate. In 2007,
rates spiked to over 50 percent for TRS and over 30 percent for
PERS, which created a problem for the legislature since
political subdivisions and school districts must also pay those
rates, too. In fact, when contributions to a pension system are
in excess of 50 percent of the payroll, the burden could tip a
school district or political subdivision into potential
bankruptcy. Thus, the legislature immediately acted. In 2007,
the legislature appropriated funds to buy down the rates, and in
2008, the legislature passed Senate Bill 125 to cap the rate at
22 percent for political subdivisions and 12.56 percent for
school districts. He concluded that this provided fairly
generous relief to school districts, although he believed it was
a fairly unusual action to take in the U.S.
4:07:02 PM
MR. BARNHILL reported some states and cities were not able to
pay their unfunded liability and filed for bankruptcy, such as
Alabama, Rhode Island, and Pennsylvania and the City of San
Bernardino, California. In 2007-2008, the markets returned in
and the improved investment returns reduced rates. In 2009,
markets crashed once again and rates began to increase, he said.
Currently, the DOA now has 2014 rates as well as the draft
proposed 2015 rates, noting a three-year rate setting lag
exists. Thus, he advised the valuation for 2012 will set the
2015 rates, which is estimated at over 60 percent for TRS and 40
percent for PERS. He remarked these rates are the highest the
system has ever seen. Since 2008, the state has contributed
over $2 billion in total to school districts and participants in
PERS. The lion's share of this assistance - $600 million - has
gone to the state as employer. The $1.4 billion in state
assistance to school districts and political subdivisions
represents an extraordinary amount of assistance. Looking
forward, the governor has put in the FY 14 budget - in the
language section - a request for an additional $630 million, he
said.
MR. BARNHILL emphasized the ARM Board instituted a methodology
change. He characterized an unfunded liability as a debt that
is amortized over time, such as a house mortgage. The payments
are the same each year, which is considered "a level-dollar
amortization." The ARM board adopted a different structure, a
"level-percentage of pay amortization," which is back-loaded.
Consequently, annual payments will go up correspondent with
growth in payroll. The ARM board used four percent per year
growth as an assumption for payroll. All things being equal, he
predicted the unfunded liability will likely continue to grow at
four percent per year. He reported the level dollar
amortization as more front-loaded and a level-percentage of pay
amortization as back-loaded or one that pays more at the end.
Until FY 14, the amounts were calculated on a level percentage
of pay amortization methodology, although the ARM Board just
adopted a level-dollar amortization methodology. This invites
the legislature to appropriate more funds for state assistance
earlier rather than to back-load it, he said.
4:11:39 PM
MR. BARNHILL turned to the "PERS/TRS GF State Assistance (SB125)
[slide 24]." In FY 15, the PERS/TERS general fund state
assistance amounts jumped sharply from $600 million to over $1
billion, noting these projections are based on the FY 11
valuation. He hoped that projections for FY 12 would be
available next week, although he did not anticipate any
financial improvements. He noted the ARM Board is essentially
inviting the legislature to accelerate payments in the form of
state assistance with payments cresting over $1 billion in FY 16
and trending down until the unfunded liability is fully
amortized, based on a 20-year amortization. In FY 2030, the
state would be able to fully amortize the initial unfunded
liability that arose in the FY 02 evaluation, he said.
4:12:32 PM
REPRESENTATIVE JOSEPHSON related his understanding in 2007-2008,
the legislature took action to ease the burden on political
subdivisions. He suggested it appears as though it may be
necessary to do so again.
MR. BARNHILL said the result of capping rates was that someone
must pay: the school districts, the political subdivisions, or
the state. The graph shows the amounts paid by the state, which
represents the difference between the actuarial rate at 22
percent and real rate for PERS at 12.5 percent, plus the real
rate for the TRS [slide 23].
REPRESENTATIVE JOSEPHSON asked the reason the maximum rate for
PERS is set at 22 percent, but the TRS rate is only set at 12.5
percent.
MR. BARNHILL answered the 22 percent was a negotiated figure.
CHAIR OLSON recalled the percentage was arrived at to keep some
smaller cities and school districts from "going belly up." He
further recalled it was an arbitrary number.
4:14:16 PM
MR. BARNHILL agreed the PERS rate was arbitrary; however he
advised the TRS rate was based on the actuarial projection for
the normal cost for the system, in the valuation before the
legislature at the time. He offered to discuss the different
components of cost. He identified the normal cost rate as the
amount an employer will contribute to the system if all of the
actuarial assumptions are accurate. He reported adjustments are
always necessary and any adjustment falls under past service
cost rates. In this instance, 12.5 percent was the normal cost
rate for the TRS, he said. The legislature decided that the
state would pick up the entire past service costs for school
districts and share it with political subdivisions. He pointed
out the graph represents the amounts the ARM Board would like
the legislature to appropriate over the next 20 years. The
state used the level percentage of pay methodology and the bars
trend up over time; however, in the short term it is closer to
the amount the state historically has paid.
MR. BARNHILL referred to "PERS/TRS GF State Assistance" [slide
24]. Despite what ARM board recommends, the legislature still
retains the power of appropriation, he advised. At the same
time, a variety of ways exist to pay off the debt ranging from
Representative Josephson's suggestion to pay it all off to some
financing or amortization plan. As an aside, last year the
state and the ARM Board considered dozens of ways to finance the
debt. Naturally, the more that the state pays now, the less it
will need to pay later, he said. Under a level percentage of
pay the state will pay more over time; however, in doing so the
state may have ability to manage short term obligations. In
conclusion, the legislature and the governor will need to decide
the best approach, he said.
4:17:41 PM
MR. BARNHILL turned to the "Projected Retirement Population
Growth" [slide 25]. He noted between the two systems the state
expects retirees to grow to 60,000 by end of the decade.
Consequently, he said this will put pressure on the DRB to
process and administer a larger retiree population. Further,
retirees will receive benefit payments and submit health care
claims, which will put some additional pressure on cash flow.
Additionally, the cash flow demands will potentially impact the
rates of return and asset allocation must be considered.
4:18:51 PM
REPRESENTATIVE JOSEPHSON asked whether survivor benefits cover
the department's projections, in other words in instances in
which the retirees predecease their spouses.
MR. BARNHILL responded that the money flows out, but nothing
helps administer the system.
REPRESENTATIVE JOSEPHSON pointed out that retirees pay a premium
for selecting survivor benefits.
MR. BARNHILL answered the premium is not held back, but he
offered to check with the DRB and provide the committee with
exactly how that cash flow works.
4:19:55 PM
MR. BARNHILL turned to "Benefits: PERS/TRS" [slide 26]. One
way to consider the unfunded liability would be to consider the
net present value (NPV) and the figure will increase or decrease
depending on the assumptions used. Thus, by using an earnings
assumption of 8.5 percent, the estimated unfunded liability will
decrease to less than $10 billion, but using a lower earnings
assumption, such as 5 percent, the estimated unfunded liability
will increase to over $20 billion. He directed attention to
nominal dollar payouts over time, which he referred to as the
"hard liabilities" the system must meet. He said, "We have to
make these payments per the constitution. These folks have
earned these benefits. They must be paid." The department has
asked its actuaries to give the state the full projection since
the system is closed and most of the retirees will have passed
away by 2080, he said. He related the department is interested
in identifying demands for cash between now and 2080. He
reported the current cash flow at $1.5 billion; however, this
will increase to $3.5 billion by 2040 and "grades down" until
2080. Accordingly, the demands on the system will be over $3
billion per year for a period of over 20 years. He expressed
his concern with the defined benefits system since unfunded
liabilities can arise at any time. Thus, missing the assumption
- eight percent - for a couple of years could translate into
additional unfunded liability. Historically, he related,
business cycles come and go and the state earnings fluctuate
dramatically, as well. Since it isn't possible to predict
additional unfunded liabilities or shortfalls may happen he has
focused on the 20-year period in which the system will need $3
billion per year.
MR. BARNHILL suggested members keep in mind the unfunded
liability and unpredictable cycles as the legislature considers
whether to go back to a defined benefit plan, along with any
risks that such a decision might pose, and how the state will
manage its cash flow.
4:23:19 PM
REPRESENTATIVE SADDLER asked if Mr. Barnhill would comment on a
hybrid retirement plan, which would consist of a part defined
benefit and part defined contribution plan.
MR. BARNHILL responded that a bill was introduced in the Senate
this week; however it is identical to a bill that passed the
Senate last year, Senate Bill 121. He said the administration
opposed the bill last year and will continue to oppose any pure
defined benefit plan. He pointed out some other states have
experimented with alternatives to defined benefits, which they
called hybrids. The administration would be willing to
entertain the discussion so long as the state is protected from
the type of unfunded liability that has arisen with the current
plans, he said. Further, the state would also be willing to
consider other retirement plan; however, the DOA's concern with
any defined benefit plan is that these plans do not provide a
secure retirement. Lastly, other states, such as Colorado,
Rhode Island, South Dakota, and Minnesota have cut benefits to
current retirees, which the administration believes is unfair,
he said.
MR. BARNHILL, in response to a comment, agreed some states have
also cut benefits to current employees. For example, it might
not be fair to shut the library so a retiree can get a full
pension, he said. Further, it wouldn't be fair cut teachers'
salaries either and the administration wants to avoid doing so.
On response to a question on trends, Mr. Barnhill said the state
is unquestionably a leader in terms of its decision to move from
a defined benefits plan. He said most states have considered
hybrids or are keeping their plan open and he credited former
Governor Frank Murkowski for having taken action to address the
issue.
4:26:54 PM
REPRESENTATIVE JOSEPHSON acknowledged he is alarmed by what he
sees; however, the overview points to rising health care costs,
including premiums increasing in cost from $500 to $1,300 in
twelve years. He asked whether a proposal to omit retiree
health care could be a starting point to make Tier V more
solvent.
MR. BARNHILL predicted the administration would likely oppose
any pure defined benefit proposal. He acknowledged a problem
with health care costs exists, but the unfunded liability also
relates to investment returns. In fact, when an employer is
responsible for making the plan whole, but investment returns
stagnate over time, the result is an unfunded liability, he
said. Thus, the solution is to look beyond pure defined
benefits to equitable risk sharing and creative alternatives
similar to ones adopted by other states. He concluded his
presentation by stating that he is proud of what Alaska has done
since it has not cut benefits or "changed the deal" for its
defined benefits' retirees.
^Overview: Regulatory Commission of Alaska
Overview: Regulatory Commission of Alaska
4:28:54 PM
CHAIR OLSON announced that the final order of business would be
an Overview by the Regulatory Commission of Alaska (RCA).
4:29:12 PM
T.W. PATCH, Chair, Regulatory Commission of Alaska (RCA),
Department of Commerce, Community & Economic Development
(DCCED), stated some aspect of the RCA's activities touches
every Alaskan each day of the year. He said everyone at the RCA
works to ensure safe, reliable, reasonably continuous, just and
reasonably-priced utility service is available to Alaskans. He
commended Commissioner Hultberg's observation that the state may
need "cash to keep the lights on." In essence, he related, this
is a concern the RCA attends to every day.
4:31:12 PM
MR. PATCH asked members to pose questions. He hoped members had
already received a copy of the DCCED's budget overview and the
RCA's annual report. He characterized his comments today as
being general and not providing a detailed financial report of
the RCA.
4:32:59 PM
MR. PATCH described his workday for members in an effort to
illustrate his wide-ranging duties. He stated his day,
including that he prepared for a conference in Washington D.C.,
handled matters re the Naknek Electric Association's bankruptcy,
requested grant funding, and interacted with the Federal Energy
Regulatory Commission's (FERC) staff on its decision to allow
Hawaii's to import liquefied natural gas (LNG). Additionally,
he edited correspondence to the governor on a request and
fielded calls, including one from President Jones of the
National Association of Regulatory Utility Commission about an
upcoming conference and to accept a potential appointment to the
National Regulatory Research Institute. Further, he said he
assisted procuring an appointment for Bob Pickett to a
subcommittee on Liquefied Natural Gas (LNG) exports, attended an
RCA staff meeting, prepared for and attended a hearing related
to the Chugach Electric Association (CEA), Matanuska Electric
Association (MEA), Golden Valley Association (GVA), Enstar, and
Matanuska-Susitna Electric Association (MEA), which also
included the attorney general. He highlighted the matter is
complex and was not resolved, but is on a positive track and may
afford CEA and GVE some savings to members. He then edited and
reviewed orders, notices, and letter orders. Next, he conferred
with the executive director of the Alaska Telephone Association
(ATA) on several matters. Finally, he related he is attending
this hearing and will finish his day by packing his briefcase
for weekend reading.
4:38:26 PM
MR. PATCH decided to use numbers to illustrate and conveying his
overview of the RCA, similar to what he did during his
presentation last year. He said numbers can represent dollars,
dollars are often paid as rates, and rates for service translate
to utility company billings. He said he asked the Legislative
Budget and Audit Committee (LB&A) to allow the RCA an eight-year
extension. The RCA's last sunset review was in 2011, and
although the LB&A recommended an eight-year extension, the
legislature only granted the RCA a three-year extension until
2014. He identified some current staffing issues, noting the
RCA has four commissioners, but RCA's Commissioner Kate Giard,
resigned effective January 4, 2013. He reported the governor is
currently considering appointees and he hopes to make an
appointment soon.
4:40:21 PM
MR. PATCH pointed out the number "$500 million" as a number
often discussed. For example, $500 million is the amount the
state authorized for the Alaska Gasline Inducement Act (AGIA)
process. He characterized it as a significant figure and
related it to a utility perspective. He related that one
Southcentral Electric Utility indicated it will spend $460
million over the next four years for necessary distribution
system improvements and other capital projects related to
reliable service and two utilities anticipate combined spending
of approximately $563 million for electric services to meet
adequate generation needs. However, these utilities do not have
700,000 ratepayers to apportion the costs, as the state does,
since it can apportion its AGIA costs to its residents.
MR. PATCH turned to the "number one". He explained that "one
kilowatt" is the energy consumed by 17 60-watt light bulbs.
Further, he related that leaving the aforementioned lights on
for "one" continuous hour would result in "one" kilowatt hour
listed on an electric utility bill.
MR. PATCH said next year he hopes to quantify "one billion," in
terms of a billion cubic feet of gas and what that might look
like.
4:44:19 PM
MR. PATCH identified some significant issues for the RCA. The
RCA has arranged to host a cyber-security conference this
summer. He related that some utilities have convinced him their
systems have been attacked and the RCA will study and address
the issues related to cyber-security.
MR. PATCH indicated the state obtained a favorable long-term
credit rating from the Fitch Group, a national rating service
and the governor and legislature should be proud of this rating.
A number of larger utilities reported they also have received
positive ratings from their rating agencies as they seek capital
borrowing. He concluded that he is proud when a utility
president believes the RCA has had a positive influence on a
company's credit rating.
MR. PATCH emphasized that rural infrastructure concerns him,
whether it is the cost of fuel oil or the feasibility of
replacing aging generation. He reported the RCA has been
working on bulk fuel and with ATA. He reported that
Representative Edgmon introduced a bill to amend the Power Cost
Equalization (PCE) program. The RCA has reviewed the proposed
legislation and provided analysis that the bill does not have
any fiscal impact to the agency. He indicated the RCA plans to
send staff to provide onsite training to help communities get
reinstated in the PCE program. He hoped to accomplish training
through grant funding by mid-year. He offered to report results
back to the committee.
4:48:56 PM
MR. PATCH expressed his concern over four competing plans for
LNG, for plants under consideration by Department of Natural
Resources (DNR) or on the North Slope.
MR. PATCH referred to a large windstorm in Joplin, Missouri and
other catastrophes. He expressed concern about power outages
and his desire to provide more reliable electric utility systems
as it relates to power outages. He said he hopes the RCA can
address this issue.
MR. PATCH related the RCA has been involved in outreach with and
the Department of Natural Resources (DNR), the DNR's State
Pipeline Coordinator's Office, the Department of Environmental
Conservation (DEC), and the Alaska Oil and Gas Conservation
Commission (AOGCC) on matters such as fracking.
4:50:53 PM
CHAIR OLSON asked whether the Trans-Alaska Pipeline System
balancing with Federal Energy Regulatory Commission (FERC) is
completed.
MR. PATCH answered no. He reported the RCA received reply
briefs from the eleven parties involved. He noted carriers were
allowed up to 200 pages for reply briefs whereas other parties
were limited to 150 pages. Thus, he estimated he has about
4,000 pages of briefing to read. He reported the RCA spent
about 20 weeks of active preparation and in-hearing room time in
Washington D.C. and Alaska. He detailed that 3,000 multi-page
exhibits exceeding 15 pages, with over 600 filing entries into
12 dockets spanning from 2008 to 2012, with over 12,000 pages of
transcripts taken during the hearings and an estimated $1
billion at issue. He related carriers have not elected to
consider issues related to Pump Station 1 of the Trans-Alaska
Pipeline System. He indicated he would be discussing the case
with the chief judge for FERC while he is in Washington D.C.
4:53:26 PM
CHAIR OLSON asked for a summary of the aforementioned issue,
which he would share with the Legislative Budget and Audit
Committee (LB&A).
MR. PATCH offered to do so.
4:53:38 PM
REPRESENTATIVE SADDLER asked whether Mr. Patch needs any other
resources or assets needed.
MR. PATCH answered yes. The legislature was most generous in
funding additional engineering and financial analysts. He
clarified the importance of RCA's staff to understand emerging
issues and the best practices process to assist in forward
thinking. While the positions were authorized, the RCA needs
additional space for staff, he said. He hoped to discuss space
concerns with Commissioner Hultberg yet is well aware of the
governor's desire to hold costs and not expand the budget. He
suggested the RCA has an authorized budget and funds itself from
ratepayers so this would not be a drain on state resources.
4:57:15 PM
CHAIR OLSON remarked that the RCA complied with all matters
related to the last sunset audit. He said he did not think
extending the RCA for an additional eight years was unreasonable
in terms of the sunset extension.
MR. PATCH concluded the RCA did not ask for relief from timeline
issues. He reported the RCA has not missed a single shortened
deadline. To summarize, the RCA has kept its promise to the
legislature, the RCA has been efficient, and the utilities have
appreciated his efforts. He characterized the utilities'
feedback as being a positive motivation for him.
4:59:07 PM
ADJOURNMENT
There being no further business before the committee, the House
Labor and Commerce Standing Committee meeting was adjourned at
4:59 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| DOA-DeptOverview2013(01-25-13) H-L&C_print.pdf |
HL&C 1/25/2013 3:15:00 PM |
Dept of Administration Overview |
| DOA-DeptOverview2013(01-25-13) H-L&C _Extra-LevelPay.pdf |
HL&C 1/25/2013 3:15:00 PM |
Dept. of Administration - Additional Page |