Legislature(2005 - 2006)CAPITOL 106
03/24/2005 08:00 AM House STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| Pers/trs Legislative Workgroup | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE STATE AFFAIRS STANDING COMMITTEE
March 24, 2005
8:10 a.m.
MEMBERS PRESENT
Representative Paul Seaton, Chair
Representative Carl Gatto, Vice Chair
Representative Jay Ramras - via teleconference
MEMBERS ABSENT
Representative Jim Elkins
Representative Bob Lynn
Representative Berta Gardner
Representative Max Gruenberg
OTHER LEGISLATORS PRESENT
Representative Bruce Weyhrauch (via teleconference)
COMMITTEE CALENDAR
PERS/TRS LEGISLATIVE WORKGROUP
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
HEATH HILYARD, Staff
to Representative Mike Kelly
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Offered comments during the PERS/TRS
Legislative Workgroup session.
MELODY DOUGLAS, Financial Officer
Kenai Peninsula Borough School Board
Soldotna, Alaska
POSITION STATEMENT: Testified during the PERS/TRS Legislative
Workgroup session.
KEVIN RITCHIE
Alaska Municipal League (AML)
Juneau, Alaska
POSITION STATEMENT: Testified on behalf of AML during the
PERS/TRS Legislative Workgroup session.
TOM HARVEY, Executive Director
NEA Alaska
Juneau, Alaska
POSITION STATEMENT: Testified on behalf of NEA Alaska during
the PERS/TRS Legislative Workgroup session.
SAM TRIVETTE, President
Retired Public Employees of Alaska (RPEA)
Juneau, Alaska
POSITION STATEMENT: Testified on behalf of RPEA during the
PERS/TRS Legislative Workgroup session.
ACTION NARRATIVE
CHAIR PAUL SEATON called the House State Affairs Standing
Committee meeting to order at 8:10:36 AM. Present at the call
to order were Representatives Gatto and Seaton.
^PERS/TRS LEGISLATIVE WORKGROUP
8:11:16 AM
CHAIR SEATON announced that the committee would engage in a
legislative workgroup regarding the Public Employees' Retirement
System (PERS) and the Teachers' Retirement System (TRS).
8:12:12 AM
CHAIR SEATON said reports of "a $5 billion problem over 25
years" in the news is not correct. He said today's presentation
will show that there is actually a $15.6 billion problem over 25
years, which could be solved if the legislature chose to take $5
billion "out of our pocket" now, invested it, and let it grow.
He indicated that the reason so much work is being done to
modify the system is to "prevent that kind of unfunded liability
in the future."
CHAIR SEATON stated that the current retirement system is a good
one. He said he has "looked deeply into it" and wants to assure
everyone that he does not blame the boards for the work that's
been done. He specified that only the legislature can set
benefits, and thus is responsible for the changes to the system.
Likewise, he emphasized that the current situation is not the
fault of the employees. He stated, "The problem is that we have
this potential for ... additional unfunded liabilities." The
focus will be on attempting to find solutions for those
additional unfunded liabilities.
8:14:26 AM
CHAIR SEATON directed attention to a Power Point presentation
that is also printed as a handout [included in the committee
packet], entitled, "Understanding PERS/TRS."
CHAIR SEATON directed attention to an unnumbered work draft
[labeled 24-LS0761\F, Craver, 3/23/05]. He explained that it is
unusual to release such a document; however, the purpose of
doing so is to join forces with employers, employees, and other
committees, to hear comments on the work draft and make changes
where needed in order to come up with the best plan possible.
8:16:14 AM
CHAIR SEATON turned to the Power Point presentation. He said
there are two plans: a defined benefit plan, in which the
benefits paid to the employee are based upon a formula set in
law and not determined by the account balance; and a defined
contribution plan, in which the member and their employer
contribute a fixed amount into the system. He talked about the
term "actuarial," which is the statistical calculation of future
costs and benefits based on adopted assumptions.
8:19:03 AM
CHAIR SEATON continued to the second slide on page 2 of the
Power Point to review the following definitions: past service
cost - the payment needed to account for the amount of benefits
that were not collected because the adopted assumptions about
the future were not correct; past service cost rate - an
actuarial determination of the yearly cost rate charged on total
salary needed to pay off the past service cost over a specified
number of years; unfunded liability - the sum of the actuarially
computed payments that will be required to be made for benefits
that were not accounted for in normal cost rate collections;
and present dollar value of unfunded liability - the amount
needed to be deposited today into a separate account that would
grow with projected interest in order to be able to make the
payments over time as they became due. He noted that the
unfunded liability is equal to the past service cost.
8:22:38 AM
CHAIR SEATON said the present dollar cost of the unfunded
liability is approximately $5.5 billion. He said another figure
that is talked about is $5 billion. He said the lower figure is
from 2002, and since then the increased past service cost to
2004 brings the total to the $5.5 billion mark. He reminded the
committee that, like the work draft, the numbers are not set in
concrete.
CHAIR SEATON returned to the Power Point presentation, to the
first slide on page 3, which provides definitions for: gross
normal cost rate - the percentage of salary needed to pay for
future benefits of a retiree and made up of both the employee
and employer normal cost rates; member normal cost rate - the
percentage of salary an employee contributes to paying for
his/her future retirement benefits; member contribution rate -
the percentage of salary an employee contributes towards paying
the actuarial computed rate; and employer normal cost rate - the
percentage of salary an employer contributes towards paying the
employee's projected future retirement benefits. Chair Seaton
said it is important to be careful when talking about a normal
cost rate to specify whether it is only "the employer's
section," or the gross or total, for example. He stated that
normal cost is the funding for all the anticipated benefits,
while past service cost is about catching up "because you didn't
collect enough to pay for the benefits that ... we are
constitutionally obligated to pay to the employees in the system
that we created."
8:24:51 AM
CHAIR SEATON moved on to the second slide on page 3 of the Power
Point presentation, which defines: actuarial computed rate -
the percentage of salary, calculated by the actuary based on a
set of assumptions that would be needed to pay the unfunded
liability and the future benefits of the retiree minus the
employee's contribution to those benefits; and health
reimbursement account - an employer paid account that reimburses
employees for medical expenses up to the deposited dollar
amount. Chair Seaton said the actuarial computed rate includes
both the normal cost rate and the past service cost. He noted
that the health reimbursement account is between the employer
and individual employee and is not shared with a group.
8:25:58 AM
CHAIR SEATON turned to the first slide on page 4, which shows
that potential and anticipated variables can create additional
unfunded liability. He explained, "Now this is the whole reason
why we're going through this exercise, ... because we're worried
that there are additional factors that are going to come into
play in the next several years that will create an additional
unfunded liability, in addition to the $15.6 billion that we're
talking about now." The first of those variables [as shown in
the second slide on page 4] is mortality rate assumptions. He
reviewed that, since 1984, the legislature has been using the
1984 mortality table. Finally, in 2002, the legislature adopted
the 1994 baseline mortality table, which "jumped everybody's
retirement lifetime expectancy by 2.5 years." He explained that
that meant an insufficient amount of money had been collected
from 1984-2002 to fund the additional 2.5 years of lifespan of
all those employees. Currently, the legislature is working off
of a 1994 table. He said, "They have a 2000 table that is being
set forward to 2004." He offered his understanding that it may
be about one year before the legislature may adopt that table.
CHAIR SEATON said some people have considered whether the
legislature could solve this problem by adopting the 1970
mortality table, which set the average lifespan at six-seven
years less than the table in use currently. He explained as
follows:
It doesn't mean that if those people do live as we
really expect them to from our current tables that
we're not going to have to make those payments; it
just means that we don't recognize those [payments].
And if we don't recognize those payments, what that
means is when they have to do the overall report, the
funding of the system - what percentage have we funded
our plan at - instead of being at ... 68 percent, it
goes to 40 percent, and goes to 30 percent, and pretty
soon we're in the dire situation that some other
states are in which haven't collected enough money for
their health and ... retirement system[s].
8:28:42 AM
CHAIR SEATON said Alaska has a big problem; however, he said
everyone should recognize that Alaska is in great shape compared
to a lot of other states. He said he doesn't think it's
advisable to make that comparison and decide not to do anything.
He said, "I think that that's the whole purpose of the exercise
is to make sure that we work for the fiscal responsibility of
the state and the employees, as well." Chair Seaton stated that
some people have characterized this issue as an
employer/employee battle, but he said it's not. He indicated
that the state pays a certain amount of money towards municipal
revenue sharing and direct funding of education, for example,
and there is only a certain amount of money. He asked, "If we
create unfunded liabilities and make $300 million a year payment
into ... TRS ..., how much money is there going to be to fund
the education system for elevating teacher salaries [and] for
doing those kind of things." He said everything is
interconnected; it's a balancing act.
8:29:49 AM
CHAIR SEATON listed the medical inflation rate as another
[potential and anticipated variable that can create additional
unfunded liability]. He noted that the medical inflation rate
was 7.5 percent for many years, and then in 2002, it raised to
12 percent. He said, "That's scheduled to be at 12 percent for
three years and then decrease by .5 percent a year to 10
percent." He said 10 percent is Alaska's historic inflation
rate. Having 7.5 percent throughout the 90s instead of 10
percent meant losing 2.5 percent a year. He explained that's
one of the reasons that TRS has a 40 percent liability due to
medical costs. Making the wrong assumptions, he said, can
create "a huge hole."
CHAIR SEATON turned to the second slide on page 5, which shows
the automatic cost of living adjustment (COLA). He noted that
COLA was established in 1961 to encourage Alaskans to stay in
Alaska; it provides a 10 percent cost of living adjustment for
those living in Alaska. He noted that a [2004] court decision
required Alaska COLAs to be distributed to all system members
outside of Alaska if the cost of living in their community
equals or exceeds Anchorage, Alaska. He said this is another
example of an unfunded liability caused by an assumption, and he
emphasized the importance of designing these plans carefully.
The employees that are hired under a particular system maintain
that system throughout their entire employment and retirement
history with the State of Alaska.
8:32:36 AM
CHAIR SEATON addressed the Ad Hoc Post Retirement Pension
Adjustment (PRPA). He explained that when there has been an
increase in the cost of living and when the fund permits, the
administrator may increase benefits to cover that increase in
cost of living. Unfortunately that means that whenever the fund
is doing well it probably will not collect additional dollars to
help smooth out leaner times but pay that as unfunded benefits.
Chair Seaton said it's difficult to try to make a system healthy
that is set up to give money away when it is flush. He said
other people have other perspectives on that issue, but it is a
challenge.
8:34:02 AM
CHAIR SEATON spoke about the Retirement Incentive Programs
(RIPs) - a program established to encourage employees to retire
early so employers would be able to hire lower wage employees.
He said it turned out that the benefits under none of the RIPs
were ever realized. The trouble with the RIPs, he explained,
was that the schools looked for the most qualified teachers to
replace the ones that had retired, which meant that the idea of
hiring the lower paid entry-level teacher was not a reality.
8:35:25 AM
CHAIR SEATON turned to the subject of re-hire of retiree's
[shown on the second slide on page 6]. The re-hire allows
retirees to be hired back without contributing to the retirement
system, which creates additional unfunded liability to the
system. The employer does not pay the past service cost rate
associated with the employee's wages. This, too, adds to the
unfunded liability to the system. He said there are bills being
heard by the legislature to address the issue.
8:36:44 AM
CHAIR SEATON discussed another issue currently in the
legislature, which could impact the system's solvency: lowering
vesting requirements for police/fire. He said the legislation
asks that those in police and fire employment be allowed to
qualify for full medical [benefits] five years earlier than
currently. Making that change when the benefits are not paid
for is what creates an unfunded liability.
8:37:35 AM
CHAIR SEATON directed attention to [the first slide on page 8 of
the Power Point presentation], which shows that the system is
currently 69.5 percent funded. He reminded the committee that
there is another law that says the amount of contributions can
only be increased by 5 percent a year. He gave an example of an
actuarial amount much higher than what is being collected. For
every year that the gap between what is collected and what needs
to be collected is bridged at the limit of 5 percent a year, the
amount needed is not being met. He said, "So, that unfunded
liability isn't created by [that], but it's pushed off into the
future. And whenever you push something off, that means you
don't have the 8.5 interest gain on the money by collecting it
today. That's why the $15 billion problem can be solved with $5
billion today, ... because you're talking about the present
dollars earning interest over time to work on it."
8:38:49 AM
CHAIR SEATON said some have asked if this isn't just related to
the stock market. He directed attention to the second slide on
page 8, which shows a graph compiled by the actuary, Mercer
Human Resource Consulting, for TRS. The top [dashed] line shows
that if there were a prolonged recession, it could drastically
increase rates. The midline [showing below the dashed line] is
where the state is presently. Just below that is [the bottom
dotted line]. He said, "So, you can see that by just having
good performance in the stock market, we're not going to get
there." He noted that it's the same for PERS [shown in the
first slide on page 9].
CHAIR SEATON turned to [the second slide on page 9], which he
said shows a "projection of amortizing the past service cost
over 25 years [for PERS]." He pointed to the dark bars, which
show the population increase of 2 percent and reach 25-28
percent [contribution rate], but then decrease. He explained
that as population grows there is a greater wage base and, thus,
more dollars collected. Normally, he said, the population
increase done throughout all projections is at 1 percent. He
reminded the committee that "population" refers to number of
employees. There is a bar on the graph that follows the 1
percent increase. Chair Seaton pointed to the bar that is
higher when there is no increase in the population of employees.
He said the same thing shows for TRS [on the graph in the first
slide on page 10].
8:41:24 AM
CHAIR SEATON directed attention to the second slide on page 10,
which shows an unfunded liability comparison between the present
value and the total value over 25 years. He continued as
follows:
... We are also going to put together what the real
payments are. Because the payments aren't ... equally
spread over 25 years, what we're trying to do is
spread the pain over collecting for that money over 25
years. Most of it's going to paid out in those 25
years; but the rate of payments and the actual
payments that will made are based on ... how many
people retire, [and] whether they live in Alaska or
don't live in Alaska. That's 10 percent right there.
If all those retirees would leave Alaska and not go to
some place that had a cost of living over Anchorage,
the liability for the system would decrease by 10
percent overnight. So, that's the sensitivity that
these portions of the unfunded liability have.
CHAIR SEATON said nobody is trying to get rid of retirees, so
this is not a solution, simply a change that is not calculable
at present. He said "our" job is to give the actuary the best
data possible and the most honest assumptions to try to avoid
ending up with unfunded liabilities.
8:43:42 AM
CHAIR SEATON pointed out that [the first slide on page 11] shows
the actual dollar value of increase in past service cost
payments, which depicts "what the payments are going to be."
[That concluded the "Understanding PERS/TRS" Power Point
presentation.]
8:44:07 AM
CHAIR SEATON directed attention to [a two-page handout included
in the committee packet], entitled, "Summary Of State Affairs
PERS/TRS Bill." He said he would review this handout first,
rather than "going through page by page in the bill." He
pointed to the first category: "Changes to Existing Tier." The
changes listed are: equal employee and employer contributions;
preferred drug list; and definition of Ad Hoc Post Retirement
Pension Adjustment (PRPA). Chair Seaton said in the House State
Affairs Standing Committee's bill, [the employee would
contribute half of the actuarially computed rate], but there
would be a ceiling of 13 percent for PERS and 14 percent for
TRS. The employer [would contribute half of the actuarially
computed rate], but there would be a floor of 10 percent [for
PERS] and 11 percent [for TRS]. He explained that 10 percent is
a reasonable number. Allowing that number to drop to 8 percent
when the stock market is doing well, for example, would not
provide the money needed in leaner times.
8:47:48 AM
REPRESENTATIVE GATTO offered his recollection that the City of
Chicago set its contribution rate at 0 percent in the early 90s
when times were good, but now the city is in trouble.
8:48:42 AM
CHAIR SEATON said this proposed change is based on a Legislative
Legal and Research Services analysis that said the legislature
can change the contribution rate; the benefits cannot be
changed.
HEATH HILYARD, Staff to Representative Mike Kelly, Alaska State
Legislature, [speaking off microphone from the back of the
committee room], mentioned that Representative Kelly had
requested a revised opinion from Legislative Legal and Research
Services regarding this issue and a court case, and would supply
the answer to the committee when it was made available.
8:51:38 AM
CHAIR SEATON addressed the proposed preferred drug list. He
noted that the current insurance provider to the state is Aetna.
He said this provision is estimated to save about $6.5 million a
year. The PERS and TRS Boards and the Division of Retirement &
Benefits have been trying to educate employees to use generic
drugs. The use of generic instead of brand name drugs has
increased from 37 percent to 41 percent. Every 1 percent, he
noted, saves $1 million. He said there are some exceptions.
For example, a doctor may write on a prescription that a brand
name drug is medically necessary. If an employee has a
preference for any reason for a brand name drug, he/she can get
it, but will pay the difference in price between the brand name
and generic drug.
8:53:53 AM
CHAIR SEATON, regarding the definition of ad hoc PRPAs, said the
committee's bill would ensure that the administrator of the
system understands that "if the system can support it," means
it's fully funded. He offered further details.
8:55:33 AM
CHAIR SEATON moved on to the next heading on the handout:
"Creating a Defined Contribution (DC) Tier." He said the
employee contribution would be 10 percent for PERS and 11
percent for TRS "into their own account." The employer
contribution would be equal. The employer contribution would be
broken down to 3.5 percent for medical, 1 percent for the health
reimbursement account (HRA), and 5.5 percent to the retiree's
defined contribution (DC) account for PERS, and 3.75 percent for
medical, 1.5 percent for HRA, and 5.75 percent to the retiree's
DC account for TRS.
8:56:24 AM
MR. HILYARD pointed out a drafting error on the committee's [yet
unnamed] bill: on page 38, line 4, "11 percent" should be "10
percent".
8:57:00 AM
CHAIR SEATON encouraged everyone to flag mistakes as they see
them.
8:57:36 AM
CHAIR SEATON stated that for PERS, 20 percent of base salary
would go into the retirement system. That number for TRS would
be 22 percent. He opined that that would be a good system that
"gives people enough money for real retirement." He commented
that some say people who are self-employed should be putting 10
percent of wages away towards retirement. He said in this
scenario, the employer is matching the amount that the employee
puts in, so he predicted that this would be viewed as one of the
best contribution plans in the country. He explained that the
choice to have the employer pay 11 percent has to do with trying
to design a plan that is good for both employees and employers.
Employers need to attract good employees and 11 percent is close
to the historic average. He said he has not talked to one
employer yet who said, if they had stability and were
contributing 11 percent, that that was something that would
concern them. He said, "I worry when we start talking about
trying to squeeze pennies out of the employer contribution rate
that we actually go backwards and we get a plan that isn't going
to be sufficient for recruiting and retaining employees in the
system."
9:00:03 AM
REPRESENTATIVE GATTO proffered that when new teachers are hired,
their number one issue is salary; however, after 3 or 4 years,
their major issue becomes their retirement plan. He concluded
that good teachers would generally be more attracted to come
teach with a good retirement plan than with a better salary.
9:00:44 AM
CHAIR SEATON said employees would have a [one-time] choice to
contribute based on their base salary only or full salary. This
would give an employee the option not to have to pay 10 percent
on money given as reimbursement, for example, for living in the
Bush. Chair Seaton said employees would be immediately vested
in both their portion of their DC account and their employers -
excluding medical and HRA, which cannot be included because of
federal law. Chair Seaton opined, "I think that ... employees
that are happy with the system - that don't feel like they're
getting squeezed or undermined by the system - are much more
likely to stay in the system than to stay ... because they are
told they must in order to get anything."
9:03:38 AM
CHAIR SEATON said employees would be able to choose between
several investment options. He explained that employees would
be able to change some of the risk and reward parameters, but
[the investment options] would all be within the fiduciary
responsibility of money managers approved by the state. He
presumed the board would use the same system as the Supplemental
Benefits System (SBS).
9:04:34 AM
CHAIR SEATON said the plan would allow someone who is not a
vested member to roll his/her money into an account that will
build at a certain percentage. He said those who come to the
state and plan to stay four to five years want portability in a
plan. Allowing a one-time transfer for nonvested employees is
unique to the plan, he stated.
9:07:02 AM
CHAIR SEATON said the most unique part of the plan is regarding
state aide to past service cost. He asked the committee to
remember from the previous discussion of past service cost that
an employer must pay the rate for the normal cost and past
service cost for all employees. He said his intent is to try to
find out how to provide relief in the system. The solution
would be to create a past service offset account, which would
pay the individual employer's past service cost rate associated
with their DC tier employees, [new hires and transfers], up to
the average past service cost rate for all members.
9:10:07 AM
CHAIR SEATON directed attention to a graph in the committee
packet, labeled, "PERS Aide to Communities From Past Service
Offset Account: Actual Dollar Value." He explained that the
"red" [top] line shows the total past service cost payments that
will be made from 2005 to 2021; the existing tiers are shown on
the "green" [bottom] line. He explained that the red line shows
a steady increase because new employees are being hired all the
time and, thus, become an increasingly higher percentage of the
employee population. He stated, "The difference between what's
being paid for existing tiers and the total up there is Tier
IV." He noted that the dollar amounts to the left side of the
graph are in millions of dollars.
CHAIR SEATON directed attention to a 4-page chart labeled,
"State of Alaska Public Employees' Retirement System Projections
Based on July 1, 2003 Valuation Population Growth 1 Percent."
He said it shows how much is paid annually to the past service
cost, with a total of [approximately] $9 billion. The current
tiers are Tiers I, II, and III, while Tier IV would be the new
DC tier. The annual payments to the past service cost for Tier
IV over time would total [approximately] $6.1 billion.
CHAIR SEATON said there are some employers with huge past
service costs. He offered the example of the Fairbanks North
Star Borough, which basically sold off its utility. He said,
"To get the high value for the utility they retained the
liability for retirement. So, now they have ... [approximately]
87 employees in the system who are supporting 470 retirees." If
there hadn't been any past service cost that wouldn't have been
a problem, he said. He offered another example in the City of
Seward. He said he doesn't want people to think bad decisions
are being rewarded. Sometimes, he explained, the decisions were
not bad at the time they were made.
9:15:40 AM
CHAIR SEATON directed attention to the right-hand side of the
chart, which shows the present value of past service cost
payments. The chart shows the total payments at [approximately]
$2.8 billion. Regarding Tier IV, the total that would need to
be deposited today to "make all of those payments" is
[$1,660,287,000]. He turned to page 3 of the same handout,
which shows the figures for TRS. The total is [approximately]
$6.6 billion, while the total [annual payment to the past
service cost] for Tier III [which would be the new tier in TRS]
is [approximately] $4.8 billion. The total for the present
value of past service cost payments [for Tier III] is
[$1,292,193,000]. He talked about giving employers reason for
wanting to go to a DC plan.
9:19:08 AM
CHAIR SEATON returned to the "Summary of State Affairs PERS/TRS
bill." He addressed the medical components of a defined
contribution tier. He noted that a retiree would have to retire
directly from the system to be eligible for medical benefits,
either at the age of 60 with 10 years of service, or with 30
years of service. The member must be employed in the system a
minimum of 12 continuous months before retiring. A retiree who
has satisfied 30 years of service but has not yet reached [60]
will receive access to the medical plan. He offered details.
Normal retirement is at age 60 whereupon the retiree is granted
access to a [medical] plan and a subsidy [to pay the premium for
that plan] depending on the years of service. The subsidy
amount begins at 30 percent for 10 years of service, increasing
incrementally by 3 percent for each additional year of service
[until 30 years or a 90 percent subsidy]. Upon becoming
eligible for Medicare - currently at age 65, but not specified
in this plan - the retiree's plan will remain the same, however
his/her premium is reduced. He offered further details. An HRA
is established for each member to help pay for premiums, co-
pays, deductibles, and any other applicable health care expenses
the member or their dependents may have. He noted that the
employer will contribute 1 percent [for PERS and 1.5 percent for
TRS]. He said one of the problems with paying cash for services
is that the hospital charges three times as much. Therefore,
part of the plan is that "people providing service must provide
those HRAs ..., which are cash dollars to them at the time, at
the lowest cost available through the system."
9:24:28 AM
CHAIR SEATON noted that age 60 is in the plan, but if a new
mortality table is adopted, that could change to 61.
9:25:12 AM
REPRESENTATIVE GATTO noted that the mortality tables show that
in an 18-year span the longevity went up 2.5 years. He surmised
that the legislature should [adopt new adjusted] mortality
tables once a year. In regard to RIPS, he offered an extreme
case scenario where everybody retires and gets rehired again.
He said all the people who are rehired contribute zero into the
retirement system, but they all would receive benefits.
Regarding retirement age, he said, "There is some thought to
tying the retirement age to the mortality tables," as Chair
Seaton mentioned. He said maybe that age ought to "float." He
predicted that the plan may be received negatively because it
places an additional burden on members; however, if the plan is
to work forever, certain adjustments have to be made. He added,
"And naturally you would expect that the burden falls upon the
plan members."
9:28:18 AM
REPRESENTATIVE GATTO mentioned a single mother who had testified
the prior day who suggested that the committee not make any
changes. He said if the legislature doesn't make changes to
protect that person, then 10 years from now there'll be another
person just like that person who will be in a bankrupt system
and have to make enormous contributions. He said that second
person will ask, "If you've known about this for 10 years, why
didn't you do something about it then?" He said he has an
interest as a recipient to save the system for others. He said
this issue is difficult for the members of the legislature and
he apologized to those who would face increased costs. He said
he hopes the legislature has the support of members in these
changes.
9:32:20 AM
CHAIR SEATON directed attention to a [two-sided, 3-page] chart
[included below and in the committee packet], which shows
current PERS & TRS benefit plans with proposed plans by the
Senate and House. [The chart was prepared by Representative
Seaton's staff]. He began comparisons starting with the second
[labeled] column from the left and moving right.
Current Current State Senate Bill 141 - House Bill 191 -
PERS Tier PERS Tier Affairs DC DC DC
I/II & TRS II/III & PERS/TRS
Tier DB TRS Tier II Bill
Plan DB Plan
(1 yr 0%, 2 yr
rd
average (TRS) or 5 & 3.75% for vesting scale of 25%, 3yr 50%,
thth
salary (PERS) year medical) 25% increase per 4 yr 75%, 5 yr+
average year) 100%)
salary
HRA - 1% average
salary of employee
subgroup up to
$500 annual limit
Medical
Do not have Do not have Must retire Must retire Must retire
to retire to retire directly directly from the directly from the
directly directly from the system at age system at age
from the from the system with 65 w/ 10 years of 65 w/ 10 years
system to system to either service of service
be service be service 60 years OR OR
or age or age adjusted to 25 yrs police/fire 25 yrs
eligible eligible the change 30 yrs other police/fire
for medical for medical in mortality 30 yrs other
coverage coverage rate when Access to medical
adopted w/ coverage with one Access to medical
Medical Must have 10 years of year of active coverage with one
plan 10 years of service service prior to year of active
premium service for OR retirement and age service prior to
st
Normal Cost
Normal Cost Normal Cost medical, 1% pension, 3.75% conditions - 1
nd
Rate PERS
Rate 13.24% Rate 13.24% HRA) medical, 1% max yr 0%, 2 yr 25%,
rdth
(8.68% $500 HRA) 3 yr 50%, 4 yr
medial, 75%, 5yr+ 100%
20 year rest
average pension)
10.86%
20 year
average
10.86%
st
Rate TRS
Rate 13.24% Rate 13.24% 1.5% HRA) medical, 1% HRA) conditions - 1
nd
(9.07% yr 0%, 2 yr 25%,
rdth
medical, 3 50%, 4 yr
20 year rest 75%, 5yr+ 100%
average pension)
11.16% 20 year
average
11.16%
Risk
Employer Employer Employer Employer risk is Employer risk is
bears all bears all risk is minimal, employee minimal, employee
the risk the risk minimal, bears investment bears investment
employee risk risk
bears
investment
risk
Salary only
All salary All salary Employee Unknown Base salary only
(including (including option base
overtime, overtime, salary or
bonuses, bonuses, total salary
etc) etc)
Roll Over
Accepts Does not Roll over Roll over accepted Does not accept
rollover accept roll accepted from qualified roll over from
from over from from programs and you qualified
qualified qualified qualified can roll over into programs but you
programs programs programs and a qualified can roll over
nor can you you can roll program into a qualified
rollover over into a program
into a qualified
qualified program
program
Investment
ASPIB ASPIB ASPIB Participant ASPIB manages
Options
manages manages manages controls investments
investments investments investments investments and
similar to has access to a
SBS range of
investment options
from the ARM Board
ARM has all
fiduciary
responsibility.
Managed similar to
SBS
State
N/A N/A Past Service 69.5 million to None
Financial
Cost Offset compensate 5%
Help
Account increase in
2.681 employer costs
billion FY05
-FY06 (for school
districts this is
inc. in the BSA)
Transfer of
N/A N/A Allows the None None
employee to
transfer of
a DC plan
current,
non-vested
employees to
a DC account
within 90
days from
the
enactment of
legislation
CHAIR SEATON said he thinks the committee will be changing the
access to medical coverage requirement from age 65 to Medicare
eligible age, in order to have flexibility in the system to
respond when the federal government makes changes. Regarding
the investment risk, he said, "That investment risk is somewhat
ameliorated by the choices that the board allows the employee to
make with the money." Regarding investment options, he reminded
the committee that SB 141 would combine the Alaska State Pension
Investment Board (ASPIB) with the PERS and TRS Boards, and he
stated his presumption that the model would be similar to the
SBS plan.
9:40:19 AM
CHAIR SEATON, regarding state financial help, said the $2.681
billion deposit under the committee's plan would be what pays
the employer costs on all the new DC employees over time.
Regarding the transfer of employees to a DC plan, after noting
that the committee's plan is the only one that offers that
option, he said it is not known how many people will want to do
that; therefore, all the calculations on the past service cost
account are based on all the actuarial models of 1 percent
employment growth and when people are retiring and being
replaced. He said there are some possible glitches in the plan;
perhaps the rate of retirement would not match the actuarial.
That would mean that not as much money would be needed in the
offset account.
9:43:32 AM
CHAIR SEATON noted that Representative Kelly's proposed HB 170
addresses changing the PERS and TRS Boards. He said, "We may
well be looking at rolling the PERS and TRS Boards together;
there doesn't seem to be a good reason to have the functions of
the boards and the actuaries in two different boards." He said
he thinks there is agreement among members that there is a need
to ensure employee members are on the board. He said, "We
haven't seen, at this point, the justification for taking the
investment board - ASPIB - and rolling that into the ... kind of
things that [the] PERS and TRS [Boards do]." He said he's heard
that the PERS and TRS Boards don't really "talk together well"
and "the actuarials aren't corresponding well." He stated that
he wants to ensure a consistent program over time. He expressed
his willingness to work with Representative Kelly regarding the
boards. He added, "We have some concerns of taking financial
managers and then rolling them into the other kind of decisions
that are being made."
9:45:33 AM
REPRESENTATIVE RAMRAS, via teleconference, applauded the chair
for making excellent progress on a difficult matter.
9:46:37 AM
CHAIR SEATON asked Representative Ramras to bring back "real
life opinions" from Fairbanks.
9:48:17 AM
REPRESENTATIVE RAMRAS noted that the City of Fairbanks has 89
active employees supporting 453 retirees because of decisions
that were made in the past.
9:48:59 AM
MELODY DOUGLAS, Financial Officer, Kenai Peninsula Borough
School Board, thanked the committee for its work on the issue
and expressed appreciation for the recap on the comparison. She
said it's a weighty issue, and she stated her appreciation of
Chair Seaton's diplomacy and care in talking about the issues
that have "brought us to the conversation today," particularly
in his effort to avoid finger pointing.
9:51:42 AM
CHAIR SEATON invited Ms. Douglas to look up the committee's work
draft through the Legislative Information Office or on his own
Website and offer feedback when she's read it. He added that he
would also like to hear how the school district and employees
feel about the level of the DC plan at 20 or 22 percent and the
medical plan.
9:52:07 AM
MS. DOUGLAS said she expects to [respond] to the committee by
the first of the week.
9:52:21 AM
MR. HILYARD said Representative Kelly has a work draft for HB
191 that he would like the committee to adopt in order to
discuss.
9:53:12 AM
CHAIR SEATON replied that there would be no problem doing so.
9:53:34 AM
MR. HILYARD, regarding Chair Seaton's previous comment about
restructuring the PERS/TRS Boards, asked, "Do you anticipate
incorporating that into the corpus of your broad bill, or are
you looking at, perhaps, an individual bill on that?"
9:53:53 AM
CHAIR SEATON answered that he thinks he would look at an
individual bill and hopes Representative Kelly would be amenable
to that. I said he thinks that would fix some of the problems
people perceive in having the two different boards. He
acknowledged that Representative Kelly's HB 170 addresses that
issue and has begun a good structure. He stated that no one has
really identified to him where the PERS Board or the TRS Board
has independently "come out and done something wrong." He
explained, "They adopted some numbers that didn't turn out to be
right, but they did [that] in conjunction with the legislature."
9:56:25 AM
MR. HILYARD, on behalf of Representative Kelly, said, "I think
we would be absolutely willing to entertain that notion. And if
you would like to have it in a version coming specifically from
[the House State Affairs Standing Committee], that would
certainly be your option, but I think that Representative Kelly
would entertain the notion of allowing you to essentially strip
out what he has currently in HB 170 and making the appropriate
changes as you suggest ...."
9:57:16 AM
CHAIR SEATON said his preference would be to have Representative
Kelly "carry ... a board fix from the House side," and then
speak to Senator Stedman to see "how we can get the best
aggregation of the plan." He reiterated that he hopes people
will come forward as soon as possible with comments.
9:58:11 AM
KEVIN RITCHIE, Alaska Municipal League (AML), testifying on
behalf of AML, noted that there has been a "school district,
municipal, university working group" meeting for the last six
months, and the former testifier, Ms. Douglas, is an active
member of that group. He stated, "As employers, we're all in
the same boat - the university, the school districts, the
municipalities, and the state." He said one of the top
priorities of AML and the Alaska Conference of Mayors is to have
a PERS fix and a "reordering of the plan" to avoid repeating
past mistakes.
MR. RITCHIE stated that the health portion of the benefit plans
have been the cause of more of the liability problem than the
pension portion. He said AML considers the proposed solutions
to issues regarding health care are the most important part of
the equation. He offered information from the Division [of
Retirement & Benefits] that shows that three-quarters of the
entire cost of the retirement system accrues to providing health
benefits to people that are under 65; only 25 percent of [that
cost] goes toward providing health benefits to people over 65.
He explained that is "largely because of the Medicaid issue."
MR. RITCHIE said his second point is that whenever additional
money is taken out of employees' take-home pay, "it's going to
be an issue at the bargaining table."
10:01:05 AM
MR. RITCHIE suggested three points to focus on: First, he
opined that at this point it's important to look at comparisons
to ensure the plan will attract and retain employees. He
suggested that some comparisons be made against other potential
employers who might be competing for employees the state may be
considering. He also suggested making employees more
comfortable by illustrating base cases to show what kind of
retirement they can look forward to.
MR. RITCHIE turned to his second point. He noted that the state
only hires approximately one third of the employees in the
system; the other two-thirds work in the school districts,
university, or municipalities. He emphasized the importance of
having direct representation on the boards from that two thirds,
which he said would create accountability. He opined that some
of the best comments that would be heard would come from those
people.
10:03:53 AM
MR. RITCHIE brought the committee to his third point by
directing attention back to page 10 of the Power Point
presentation, which shows the unfunded liability comparison. He
continued as follows:
I think you may have heard from some folks about the
possibility of pension bonds. ... The ... possible
advantage of pension bonds is that [the] total value
over 25 years of $16 billion is predicated upon 8.25
percent increases in that liability over time. If ...
a pension bond ... [that] was either ... 5.5 or 6
percent was purchased, it would be interesting to see
what it would do to that value of unfunded liability
over 25 years. And it may be possible to do that, but
it may not be possible for municipalities, school
districts, and the university to access that without
specific state ... help.
... A municipality cannot do a general obligation bond
for pension benefits; it's unconstitutional. However,
our pension liability with this program is as
stringent as a bond; ... we can't get out of that
liability. So, the possibility of doing a pension -
if it could ... reduce the liability for the state and
municipalities of maybe 25 percent - and looking at
what those possible savings could be over time could
be very, very valuable.
10:06:04 AM
REPRESENTATIVE GATTO asked Mr. Ritchie if he thinks it's too
generous to assume an 8.25 return.
10:06:16 AM
MR. RITCHIE responded that the 8.25 percent return over the next
25 years may or may not be achievable. He indicated that it
would be scary if the average return over time falls below
"whatever you would be able to purchase a pension bond at." But
if that happened the whole system would collapse. He said,
"This may or may not be a good option for all municipalities ...
or ... the state, but it's certainly one that seems worthy of
exploration."
10:07:09 AM
CHAIR SEATON reiterated the previously provided information
regarding the past service offset account. He offered further
details, and then remarked that he is not an actuarial and the
committee could seek more information on this subject.
10:08:53 AM
MR. RITCHIE stated, "Your looking to the finances of school
districts, ... communities, the university, and the state for
the future is very, very much appreciated." He said AML is at
the disposal of the committee.
10:11:01 AM
TOM HARVEY, Executive Director, NEA Alaska, testifying on behalf
of NEA Alaska, stated he thinks it's clear to everybody that
it's the assumptions that are made that ultimately produces past
service costs, the normal cost rate, and the actuarial cost
rate. The issue, he said, is deciding which assumption to make
and knowing how to adjust for those assumptions in the future if
they are wrong. He proffered, "What is the assumption around
the growth rate of compensation of employees, since it is the
percentage of their compensation that is the real basis for this
whole change?"
10:12:51 AM
MR. HARVEY, in response to a question from Representative Gatto,
clarified that he is referring to what the assumption is by the
actuary as to what the increases are going to be.
10:13:05 AM
CHAIR SEATON responded that one factor is how many employees
there are. All the tables are calculated upon a 1 percent
population growth. He indicated that there was some information
that he would get to Mr. Harvey.
10:14:02 AM
MR. HARVEY stated his appreciation of the work of Chair Seaton
and his staff and how open the process has been. He said, "I
think that if people understand that what you're trying to do is
create something better, ... that will help in terms of some of
the emotion that is here on this issue." Previous changes to
the system have made the system less desirable than it once was.
He interpreted that Chair Seaton is attempting to create a tier
system that is more attractive than the present Tiers II and
III. He added that if people were attracted to the new system
and actually elected it, that would reduce the past service
liability amount.
10:15:33 AM
MR. HARVEY turned to the subject of salary fees. He stated the
following:
I have not seen the data on the assumptions, but if
the assumptions have been based on a 4 percent
increase in compensation of employees over the past
two decades, and ... [legislative] ... and local
effort ... haven't been such that 4 percent increases
... have not been happening, then one of the major
factors to the past service cost is the fact that we
haven't been providing enough funding in order to
provide for those compensation levels that are assumed
in the [actuarial] to be reached at the collective
bargaining table. And I think that now becomes a new
factor that we all just look at, in terms of: When we
make decisions in this legislature, ... do we have an
unintended consequence on the other side of the issue?
MR. HARVEY explained that he "did some scenarios at the request
of some folks." When he did them, he assumed a 2.6 increase in
salary. He said the reality is that someone making $27,000
can't afford retiring under this plan. He said, "I'll be glad
to share that information with you to show you the assumptions
made when those tables were created." He reiterated the
importance of reaching assumptions that everyone believes are
realistic and [attainable].
MR. HARVEY stated his belief that recent and past PERS/TRS Board
members should be heard. He named the following immediate past
members: Jerry Patterson and Charlie Arteaga.
10:18:55 AM
CHAIR SEATON said past members of the boards will be invited.
MR. HARVEY said the past service cost that Chair Seaton has been
talking about will be the same with or without a new tier
system. What will be different is the future normal cost rates.
10:20:38 AM
CHAIR SEATON, in response to Mr. Harvey, directed attention back
to the previously noted handout, entitled, "State of Alaska
Public Employees' Retirement System Projections Based on July 1,
2003 Valuation Population Growth 1 Percent." He said, "If
people will look on these tables, you'll see that there's a
total over there, and that is if we have a new Tier IV system;
... [it] breaks ... down ... what's happening in Tier IV or Tier
III in TRS. But that's because those are new employees coming
on in the system.
CHAIR SEATON turned to page 2 of the handout, which he noted
shows the number of employees and the projected employee
replacement. Particularly, he noted the chart shows that after
25 years, the employee base would be mostly comprised of Tier IV
employees. He said "these payments" are based on the
calculations on [the right-hand side of page 2], which shows
total projected salaries. He said, "So, it doesn't matter if a
new employee comes in ... [under] Tier II or Tier III TRS, or
Tier III or Tier IV, or [a] defined benefit or [a] defined
contribution plan, the past service cost amortization is based
on the total salary base." He continued as follows:
And there's been a lot of misunderstanding on that;
people thought that you can wave and say, "Okay, now
it's a DC plan - now we don't have to collect any past
service cost." Well, the past service cost in the
employer graphs is still paid on the entire wage base,
no matter what plan they're in. And so, I'm glad you
brought that up, because that's really critical for
everybody to understand: the past service cost is
identical if you are under a DC plan or the current
defined benefit plan.
10:22:18 AM
MR. HARVEY, regarding retirement, said, under "the present
proposal," employees who start their careers at the age of 30
and work for 30 years can retire directly from the system and
get 90 percent of their health care costs paid for "through this
fund." However, a "normal individual" who graduates from
college at the age of 22 and begins his/her teaching career at
22 or 23 would have to teach for 38 years, because he/she has to
retire directly from the system in order to qualify for health
care costs partially paid for by the system. He suggested that
it is a rare person who can survive the rigors of the classroom
and teach for 38 years. He said he doesn't think most people
consider how rigorous working in schools is today. He added,
"All you have to consider is the safety issues and the fear that
is in people's minds as they go to work, and how that plays on
them in terms of the stress of the day." Mr. Harvey revealed
that he is 56 years of age and indicated that he has worked in
his job for 34 years. He said someone could decide to terminate
his employment. He noted, "After 34 years, I can't access my
retirement - my health care portion, because I haven't retired
directly out of the system. I think that's a problem."
10:25:28 AM
MR. HARVEY stated that portability is good in most professions,
but he's not so sure it's good in education. He explained that
stability is a major factor in student achievement. Mr. Harvey
reported that the number one reason that people stay in their
jobs is job satisfaction. If a teacher is successful in his/her
job, then compensation and retirement place second and third as
factors in decision-making. He added, "[They] quickly become
number one and number two if job satisfaction isn't there. You
only have to look to what's happening in rural Alaska to see
that, and to see the migration to the urban centers in Alaska
over the last decade."
MR. HARVEY said the portability at the end of five years, under
the "present proposal," coincides with what is called "the five-
year itch." Currently, the state is losing 48 percent of the
teachers in the first five years. He pointed out that if the
legislature gives them the option of leaving at five years and
taking everything with them, teachers would have the ability to
move to the Lower 48 and find a defined benefit plan "where they
can have a guaranteed retirement." He said he thinks that would
exacerbate the already existing supply and demand issue. He
recommended considering the factors that have resulted in the
past service cost and trying to limit future liability.
MR. HARVEY listed three factors to consider: updating the
mortality rate in a timely manner, dealing with health care
costs, and addressing "the Christmas tree effect." He explained
that the Christmas tree is the retirement system. Once it's
built, there is a continual lobbying of legislators to add
ornaments to the tree, for example, a RIP, an ad hoc PRPA, or a
shorter investment period for any particular group of employees.
He stated his appreciation that Chair Seaton has pointed out
that it is not the fault of employees that the benefits system
is in the shape it's in. He said he thinks the statement should
be made up front when there's no ability to put any more
ornaments on the tree.
10:31:12 AM
MR. HARVEY stated, "I do think that what you're attempting to do
is not have to be dependent upon actuaries and not have to be
dependent upon the strong will of legislators to say no. And I
would suggest that what we have to do is find some place in the
middle where we can have a guarantee that allows employees to
retire in dignity because they do have a predictability for
themselves, and at the same time have a far greater
predictability in the system."
10:31:56 AM
CHAIR SEATON reiterated that the legislators are the only ones
who create the changes to the system and it is "an extremely
hard process." He said, "That is one of the beauties of a DC
program is it takes our ability to make changes in that system -
that aren't funded - away." Chair Seaton said an employee could
retire under the committee's plan with 30 years of service.
Until the age of 60, the person pays the premiums. After the
age of 60, a subsidy is paid, which can be up to 90 percent,
until Medicare eligible age.
10:34:26 AM
MR. HARVEY asked Chair Seaton to confirm that a person 22 years
of age who retired after 30 years, at 52 years of age, would
have the ability to draw retirement and pay fully for medical
insurance, and then, when that person reached age 60, the state
would pay 90 percent of whatever the premium would be.
10:35:08 AM
CHAIR SEATON said that's correct, up to the age of 65 when the
person's Medicare kicks in and the premium amount would be less.
He mentioned an audit that says, based on an assumed inflation
rate of 3.5 percent; the reasonable range for wage growth would
be between 3.75 and 4.5 [percent]. He said the Mercer
assumption fits within that range. He explained, "So, what
they're looking at is 1.5 percent per year above inflation."
10:36:20 AM
MR. HARVEY suggested looking at the actual versus the actuarial
projection for the past decade. If wages in the public school
sector didn't increase by the 3.75 to 4.5 percent, then enough
contributions were not being collected, because the employees
weren't making enough money to make those contributions.
10:36:52 AM
CHAIR SEATON noted, for example, that in fiscal year 2006 (FY
06) the projected salary total is $532 million, and it increases
to $1.439 billion in 25 years.
10:37:32 AM
SAM TRIVETTE, President, Retired Public Employees of Alaska
(RPEA), testifying on behalf of RPEA, told the committee that he
has personally worked in PERS for 33 years in corrections and
law enforcement. In his four years as president he has attended
almost all the PERS and TRS meetings, and many of the ASPIB
meetings around the state. He stated that he feels extremely
good about the people working on the boards, as well as the
staff and investment people affiliated with ASPIB. He said he
agrees with the committee's efforts not to point fingers. He
said, "At the hearings this week, both the actuaries were
questioned in detail about any decisions that the PERS and TRS
Boards have made that have been contrary to there
recommendations, and there were none in the last decade, at
least." He added, "And the same with the investment board
people."
MR. TRIVETTE concurred with the committee's having identified
that many of the current problems with the system have to do
with liability. He said the PERS and TRS Boards have been
spending considerable time "trying to work on containing the
cost on the liability side." He said another thing the
committee correctly identified is that there have been some real
problems with some of the information given to the decision
makers by the actuaries. He said the actuaries admit that.
10:40:54 AM
MR. TRIVETTE reported that the PERS and TRS Boards were so
concerned about this issue a number of years ago that they
actually hired a second actuarial firm to do an analysis of the
information that the boards were getting from the primary
actuarial firm, and they turned up some significant problems.
Part of the problem is that the actuary has done a poor job at
looking at bills coming before the legislature and determining,
actuarially, what it's really going to cost. There were bills
passed that cost a lot more than what the legislature was told
they would cost, which caused a liability. Mr. Trivette said
there's a political component, too: both the State of Alaska,
as well as municipalities, have put a lot of pressure on the
system to downplay the potential costs in order to get bills
passed. He offered examples of some of the bills.
MR. TRIVETTE said he knows there have been comments made in the
Senate regarding a problem with the lack of communication
between PERS, TRS, and ASPIB. He reported that those three
groups do meet together regularly; they sit at the same table
and carefully discuss the issues. He said, "They spend a ...
huge amount of time in committees fine tuning ... the
investments."
10:43:31 AM
MR. TRIVETTE said the PERS and TRS Boards are almost one in the
same, except that their populations are quite different. The
teachers' benefits are somewhat different than the public
employees' benefits; they come from separate laws that were
enacted at different times. The actual pension check for PERS
retirees tends to be considerably lower than it is for teachers,
while the PERS members, as a larger group, spend more money on
health care. He noted that appeals are also another important
part of the board process. The boards consistently encourage
input from the membership and work together to try to contain
and reduce costs.
MR. TRIVETTE indicated that the use of generic drugs over the
more expensive brand name drugs has increased from the mid-30
percent range to over 40 percent. He noted that at a meeting
last Tuesday, there was a list of initiatives that the PERS and
TRS Boards are working on with Aetna, the Division of Retirement
& Benefits, and "with us"; each initiative could result in
millions of dollars in savings to the system in the next fiscal
year. He noted that some of the people serving on the boards
have been there at least 20 years. He echoed Mr. Harvey's idea
of listening to recent past members; they know the history and
are willing to work with the legislature. He stated that it's
clear to him that the committee doesn't hold most of the
misconceptions that he has heard coming from the other body
regarding how the boards operate. He said, "I very much think
that you need to be applauded for walking into this with an open
mind."
10:47:55 AM
MR. TRIVETTE noted that, currently in some municipalities, some
of the labor agreements allow senior staff "to get any
overtime." He added, "In some decisions, of course, there's [a]
significant amount of overtime." He offered his understanding
that under existing law, any overtime those staff members get is
part of their base pay for purposes of calculating retirement
and benefits. He said the question is whether or not that is
fair. He also guaranteed that that was never part of the
actuary's calculations.
10:49:02 AM
CHAIR SEATON said that can't be changed for existing employees,
but the committee is looking to change that in a new tier. In
the new tier, people will be growing their own retirement pool;
the sooner they make more money, the better it will be.
10:50:14 AM
MR. TRIVETTE noted that skyrocketing medical costs are a
national problem. He said a Medicare prescription drug bill
made it illegal for the federal government to negotiate the cost
of prescription drugs. He posited that that is bizarre, "with
this being probably one of the areas in which the costs will be
going up the highest." He continued as follows:
Our federal government now said, "No, you can't do
that." Now, certain agencies, like the Veterans
Administration and others have been able to do this
for years, and they show that the cost savings are
immense.
10:51:35 AM
CHAIR SEATON responded that he agrees, but "we can't control
them." He said, "The big thing that we don't have included in
here at all is the requirement of the federal law that the
states ... reimburse the federal government for the prescription
drug benefit. And I don't think anybody has even looked at that
yet as to what the cost of the state is, because this is a
federal benefit. But there's a little provision in there that
says, 'Oh and now state ..., even if you're not in the program
you have to reimburse us for this multibillion dollar program
that we created ...."
10:52:30 AM
MR. TRIVETTE noted, "They did look at the kickback that the
state would get by maintaining a health plan under the
prescription drug plan." He indicated that additional medical
payments are being paid to Alaska physicians right now "under
that same bill," but that is supposed to sunset by 12/31/05.
The actuaries, he noted, believe that that will be continued
rather than sunset; therefore, "those additional costs ... are
offsetting the money we would get from the feds, in terms of the
28 percent for maintaining our health insurance plan." He said
this is an area that legislators and citizens should pay
attention to.
MR. TRIVETTE, in response to a request made by Chair Seaton,
noted that the boards would be meeting the next day, and he said
he would forward the committee's draft and let the members know
that "if they have any suggestions on the medical side" to bring
them to Chair Seaton's attention. He offered more examples of
cost saving ideas.
10:55:36 AM
CHAIR SEATON invited people to submit comments to the committee.
He ascertained that no other testimony was forthcoming. He
noted that next Saturday there would be a House State Affairs
Standing Committee meeting regarding PERS/TRS. He directed
attention across the room to show a chart [the size of a
standard door] that shows the past service cost for every PERS
employer and school district. He said, "So this is the amount
per year, through these 25 years, for every ... employer that
would be paid through the offset account." He indicated that
his staff would provide that chart online as an Excel
spreadsheet.
ADJOURNMENT
There being no further business before the committee, the House
State Affairs Standing Committee meeting was adjourned at
10:57:45 AM.
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