Legislature(2005 - 2006)SENATE FINANCE 532
03/16/2005 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB141 | |
| HB1 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 141 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| = | HB 1 | ||
MINUTES
SENATE FINANCE COMMITTEE
March 16, 2005
9:16 a.m.
CALL TO ORDER
Co-Chair Green convened the meeting at approximately 9:16:48 AM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Con Bunde, Vice Chair
Senator Fred Dyson
Senator Bert Stedman
Senator Donny Olson
Senator Lyman Hoffman
Also Attending: SENATOR JOHNNY ELLIS; SENATOR GARY STEVENS;
REPRESENTATIVE PAUL SEATON; MILES BAKER, Staff to Senator Stedman
Attending via Teleconference: There were no teleconference
participants.
SUMMARY INFORMATION
SB 141-PUBLIC EMPLOYEE/TEACHER RETIREMENT
The Committee heard from the sponsor and the bill was held in
Committee.
HB 1-INCREASE AMT OF BASE STUDENT ALLOCATION
The Committee adopted a committee substitute and the bill was
reported from Committee.
SENATE BILL NO. 141
"An Act relating to the teachers' and public employees'
retirement systems and creating defined contribution and
health reimbursement plans for members of the teachers'
retirement system and the public employees' retirement system
who are first hired after July 1, 2005; establishing the
Alaska Retirement Management Board to replace the Alaska State
Pension Investment Board, the Alaska Teachers' Retirement
Board, and the Public Employees' Retirement Board; adding
appeals of the decisions of the administrator of the teachers'
and public employees' retirement systems to the jurisdiction
of the office of administrative hearings; and providing for an
effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Green commented on the significant effort invested in
preparing this legislation.
Senator Stedman stated this bill proposes a reconstruction of the
retirement system for the state of Alaska. Over the past couple
years, difficulties with the existing system have become apparent.
Because of the complex mathematical models involved, it is
difficult to determine the actual liability of the retirement fund.
Senator Stedman noted his presentation would be given in two parts
utilizing a handout titled, "Retirement Security Act, SB 141, March
16, 2005" [copy on file]. The portion addressed at this meeting
would focus on the past and current situation. The next meeting
would address the specific proposals of SB 141.
9:20:29 AM
Page 2
Presentation Outline
· How a retirement system works
· What is the current status of Alaska's system?
· What went wrong?
· SB 141 Overview
· SB 141 Walk-through (March 17, 2005)
· Appendices
Senator Stedman overviewed the presentation.
9:20:47 AM
Page 4
How a retirement system works
[Flow chart containing three interrelated components of a
Secure and Sustainable Retirement System:
· Funding Policies-Determine how new monies come into the
system
· Investment Policies-Determine how the money in the system
is invested
· Benefits Policies-Determine the retirement, medical and
death benefits offered to members]
All Three System Components Must be Working in Balance
Senator Stedman noted that the responsibility of the investment
policy is to ensure that benefit policy liabilities are met. It is
the responsibility of the funding policy to ensure that adequate
revenue is collected. The system works in balance over years,
although some fluctuation in overvalue and undervalue is expected.
Each area must be aware of the activities of the other two areas
since the actions of each area impact all areas. For example, when
the legislature changes the benefit policy, the other two policies
are affected as well.
9:22:18 AM
Page 5
How a retirement system works
[Drawing of a fuel barrel labeled Net System Assets, and pipes
depicting the following:
Driven by Funding Policies
Employer Contributions- input to the fuel can
Member Contributions- input to the fuel can
Driven by Investment Policies
Investment Gains - input to the fuel can
Investment Losses - output from the fuel can
Driven by Benefits Policies
Admin & Investment Expenses - output from the fuel
can
Benefits & Refunds Paid - output from the fuel can]
Net System Assets Must Be Sufficient to Pay Future Benefits
Senator Stedman remarked the intent is that the fuel can reservoir
never run dry. He qualified that for the purpose of this
presentation he would refer to the State of Alaska as the employer,
noting that municipalities and school districts are also employers
in the retirement systems. Currently different groups control the
three policies, Funding, Investment and Benefit. He questioned the
abilities of these entities to communicate with each other.
9:24:55 AM
Co-Chair Wilken asked if the barrel depicted in the drawing
represents the same fund that is currently under-funded.
Senator Stedman affirmed and indicated he would provide further
explanation.
9:25:17 AM
Page 7
What is the [status] of Alaska's system?
[Drawing of fuel barrel labeled with data specific to the
Alaska system based on 2003 Actuarial Valuation. The barrel
lists $11.4 billion Net System Assets (Combined PERS & TRS
Actuarial Asset Values) and $16.4 billion Assets Needed to
Meet Accrued Liabilities, with a difference of $5.0 billion.
Pipes attached to the barrel are labeled as follows.
Employer Contributions: $162.1 million
Member Contributions: $167.9 million
Investment Results: $373.1 million
Admin & Investment Expenses: -$32.6 million
Benefits & Refunds Paid: -$778.3 million
PERS & TRS Have A Combined $5.0 Billion Unfunded Liability
Senator Stedman noted the Public Employees Retirement System (PERS)
and the Teachers Retirement System (TRS) are combined in this
demonstration. Individual data is available for each system.
Senator Stedman noted this depiction includes benefits due in
different years. If payout of all benefits were required
immediately, the funds would be $5 billion short.
Senator Stedman commented that this information could be viewed as
a glass half empty or half full. He stressed however that the
situation is not to the extent as to "cripple or derail" the
State's fiscal position. The State is able to meet the benefit
obligations for retired and future retired employees.
9:28:45 AM
Senator Dyson clarified that $16.4 billion is the amount of assets
required if all the benefits were paid out.
Senator Stedman affirmed that if the plan were "shut down" and a
targeted earnings rate of 8.25 percent were achieved, $16.4 billion
would be needed to meet all obligations.
Senator Dyson clarified that if the system "cashed out" every
member immediately, more than $16.4 would be required.
9:29:43 AM
Senator Bunde understood the intent to fund future medical
expenses, the amounts being uncertain. He asked if this method is
common or whether other plans fund actual expenses, rather than
attempt to project accrued liabilities. He asked if the State
should consider this option.
Senator Stedman appreciated the observation. Alaska is one of four
states that pre-fund medical benefits. Although the unfunded
liability position is undesirable, Alaska is in a better situation
than most states. Other states have substantially greater
challenges. The Alaska system should not be in its current
situation because medical benefits are pre-funded, however, the
situation could be significantly worse. Alaska employees should not
be concerned that their benefits would not be paid.
9:32:08 AM
Senator Bunde indicated a preference to have the funds available,
rather than delay action on addressing the situation. He spoke to
the "incredible speed" of medical advancements and subsequent cost
increases. Pre-funding medical funding is a "moving and very
difficult target" to match. The medical benefits could never be
pre-funded with certainty, as the amount is approximate and changes
frequently.
Senator Stedman agreed the amounts are not "cast in stone". It is
easier to ascertain the amount of the plan's assets than project
the liabilities. The estimate of the liability is approximately
$6.4 billion depending on the timing of the calculation. This
matter would be addressed further as the risk level is considered.
9:33:44 AM
Senator Olson noted the $110 million difference between input and
outflow and asked how long this has been occurring.
Senator Stedman replied that negative flow demonstrated on the
barrel drawing represents FY 03. He expected the difference for FY
04 to be a positive flow due to the improved performance of the
fund portfolio. Market fluctuations would cause years with more
cash paid from the system than deposited into it, although more
years would realize positive cash flow. He stressed that "the
driver that pays the benefits" helps the employer and employee
contributions, but the major driver is the fund portfolio. The
earnings of the asset base would pay the majority of the funds paid
out in benefits.
9:34:52 AM
Senator Olson asked if Senator Stedman supported elimination of
pre-funding medical benefits.
Senator Stedman answered no. Alaska is "on the right track" by pre-
funding medical benefits, despite occasional hardship in estimating
costs. Alaska is in a better situation than other states that do
not pre-fund medical benefits.
9:35:15 AM
Co-Chair Green requested members hold questions to the next
hearing.
Senator Bunde asked Senator Stedman to reemphasize that those
currently in the system would not lose their retirement benefits.
Senator Stedman affirmed current and retired employees "are not at
risk at all".
Senator Bunde received an email from a public employee that read
"This afternoon I was notified by an employee association
representative that the legislature is about to vote tomorrow on SB
141 that would without consent, take cash from my paycheck, reduce
my retirement income and reduce retirement health benefits I've
already paid for with my labor." Senator Bunde asserted that
misinformation is being distributed.
Co-Chair Green had heard the same.
9:37:43 AM
Page 8
What is the [status] of Alaska's system?
[Line graph showing Historical PERS & TRS Funding Ratios for
each year from 1975 through 2003. The PERS ratio is 72.8
percent and the TRS ratio is 64.3 percent for 2003. Other
information reads:
1975 System Population
Active: 19,998
Retire: 1,734
2004 System Population
Active: 43,300
Retire: 28,279
Terminated (Vested) 6,689
Terminated (Non-Vested) 14,606]
Senator Stedman noted the desired target is assets and liabilities
in the same amount. He overviewed this graph.
9:39:24 AM
Page 10
What went wrong?
[Line graph showing Combined PERS & TRS Actuarial Valuations
(2003): Accrued Liabilities, Actuarial Value Assets, and
Market Value Assets for the years 1994 through 2003. The data
for 2003 is as follows.
Accrued Liabilities: $16,397,262
Actuarial Value Assets* 11,439,566
Market Value Assets: 10,994,074
*Asset Market Value is adjusted by the actuary in an
effort to bring more order and predictability to the
employer contribution rate and to smooth out year to year
market fluctuations. Prior to 2002, Mercer used a
"corridor method". Beginning in 2002 they switched to a
5-year "smoothing method".]
We Have Been Understating Our Liabilities For the Past Several
Years
Senator Stedman noted this graph details the valuations beginning
in 1994, well before the current situation developed. Economic
growth in the capital markets occurred in the late 1990s and assets
had "the opportunity to participate in". An adjustment was made in
2002 that substantially adjusted the calculation of the assets.
This was done to avoid an impression of substantially over-funded
in the timeline of the retirement plan during the "bubble" in the
equity market, which would provide an artificial representation of
the funding ratio.
Senator Stedman informed that an actuarial audit was done in FY 02
and adjustments were made as a result. The liabilities
substantially increased in FY 02 and reached $16 billion in FY 03.
9:41:26 AM
Page 11
What went wrong?
[Line graph showing Accrued Liabilities, Actuarial Value
Assets, and Market Value Assets for the years 1994 through
2003. The years 1996 through 2002 are highlighted "What
happened in the last several years?"]
Clearly Something Changed Since 2000.
Senator Stedman pointed out that the calculations of liabilities
contained in reports issued to the legislature before the year 2002
were inaccurate and too low. The impression was given that the
assets appeared to be at a high value, when in reality, the
liabilities were understated. This practice continued for several
years and lead to erroneous decisions by the boards involved in
managing the retirement system, which exaggerated the problem.
After the audit was released in 2002 and adjustments were made, the
liabilities increased greatly and at the same time the equity
markets "were having their difficulty" and the portfolio decreased
in value and a widening of the unfunded liability began.
9:42:38 AM
Page 11
Same as above with the addition of a line showing multiple
years of compounded errors.
Senator Stedman informed that actuarial analysis is difficult and
time consuming with the "numbers constantly in motion". However,
"when the rubber hits the road, we need an accurate number."
9:43:48 AM
Page 12
What went wrong?
[Bar graph showing PERS/TRS Projected system Liabilities
($Millions) for the years 1994 through 2003. This information
differentiates: Forecasting error and 2003 Proj. Liability,
and the error percentage between the two amounts.]
Why Have Liabilities Grown at 9.27 % vs. A Projected Growth of
5.60%?
Senator Stedman outlined this graph. The liability of the fund in
FY 03 is $16.4 billion, which is approximately one-third of the
fund total. These are "huge spreads" and the variance must be
minimized regarding expected liabilities actual liabilities.
9:45:00 AM
Page 13
What went wrong?
· Inaccurate assumptions
· Historical understatement of system liabilities
· Rising health costs
· 3-yr bear market
· Declining interest rates
· Unfavorable demographic changes
· Timing of the recognition of market losses
· Artificially low contribution rates in good times
· Legislation that has increased benefits
· Awarding of Post Pension Retirement Adjustments
A Combination of Factors Created Our Present Situation
Senator Stedman explained that inaccurate assumptions made during
the 1990s led to the historical understatement of liabilities.
Senator Stedman commented that the legislature had insufficient and
inaccurate information when decisions were made to increase
benefits.
9:46:14 AM
Page 14
What went wrong?
[Bar graph showing Factors Contributing to PERS Employer Rate
Increase* (% of Cumulative 1998 to 2003 Rate Increase
Attributed to Each Factor) as follows:
Actuarial Loss (Increased Employer Rate)
Assumption Changes -34.19%
Investment Experience -11.62%**
Health Experience -11.28%
Demographic Experience -8.89%
Asset Valuation Method -4.42%**
Contri Shortfall Due to
2 Year Calculated Rate -3.37%
102% Funding Ratio
Adjustments -2.02%
Ad hoc PRPA -1.56%
System Benefit Changes -0.64%
Actuarial Gain (Decreased Employer Rate)
Salary Experience 6.47%
Past Service Amortization
Change 15.52%
*PERS Employer Rate increased 18.3% form 7.36% in 1998 to
25.63% in 2003
**Total Asset Side Impact of 16.04%
A Combination of Factors Created Our Present Situation
Senator Stedman explained this graph includes all factors involved
in the increased employer contribution rate utilizing an absolute
value to total 100 percent. The most significant factor was
Assumption Changes. Investment Experience and Health Experience
also contributed. Some of the health care assumption changes were
imbedded in the Assumption Changes factor. A more detailed
breakdown of each factor is available. Clearly, one factor is not
solely responsible for the situation
9:48:20 AM
Page 15
What went wrong?
[Flow chart showing three interrelated components noted as
Difficult to Control System Drivers:
· Funding Drivers
o Retiree Medical Costs
o Mortality Rates
o Retirement/Turnover Rates
o Past Service Liabilities
· Investment Drivers
o Inflation
o Market Performance
o Economic Performance
o Risk Tolerance
· Benefit Drivers
o New Legislation
o Salary Increases
o Recruitment & Retention Goals
o Age of Workforce
o COLAs
The center of the flow chart lists the following:
· Constraints
o Statutory Provisions
o Alaska Constitution
o System Cash Requirements
o Federal Regulations
o Bargaining Agreements
o Size of Asset Pool]
Financial & Economic Drivers are Hard To Predict and Difficult
to Control
Senator Stedman opined, "Therein lies the risk that we face." He
overviewed the items in the three drivers and the main constraints.
Page 16
What went wrong?
[Flow chart showing three interrelated components noted as
Difficult to Manageable System Drivers:
· Funding Drivers
o Targeted Funding Ratio
o Employer Contribution Rates
o Actuarial Assumptions
· Investment Drivers
o Asset Allocation Policy
o Asset/Liability Equation
o Investment Expenses
· Benefit Drivers
o New Legislation
o Waivers & Appeals
o Normal System Costs
The center of the flow chart lists the following:
· Manageable Controls
o Retirement Boards
o Statutory Provisions
o Plan Provisions
o Existing Tiers
o Department Regulations
o Management Structure
Senator Stedman highlighted the drivers and the controls. He noted
the factors are interdependent. These factors must be more closely
monitored to control liability exposure.
9:50:34 AM
Page 17
What went wrong?
[Drawing of fuel barrel titled "PERS/TRS Control & Oversight"
containing Net System Assets. Pipes attached to the barrel are
as follows:
Input:
Employer Contributions - PERS & TRS Boards
Member Contributions - Tier Structure & Statutes
Investment Gains - ASPIB
Outflow:
Investment Losses - ASPIB
Admin & Investment Expenses - ASPIB & Div of
Retirement/Benefits
Benefits & Refunds Paid - Tier Structure, Legislature &
Statutes
Responsibility & Oversight is Fragmented Among Different
Entities
Senator Stedman remarked that different groups are "watching the
gauges and adjusting the valves" of the PERS/TRS Control &
Oversight fuel barrel, and these groups do not communicate with
each other effectively. When the legislature asks a group questions
about the operation and status of the fund, it does not receive
answers, but rather it told that the responsibility lies with
another group.
9:51:48 AM
Page 18
What went wrong?
[Flow chart showing the interrelation between Funding Policies
and Investment Policies; and the cancelled interrelation
between these policies and Benefits Policies. Notations
indicate: Higher Employer and Employee Contributions Alone
Can't Solve Our Problem; and, Investment Returns Alone Can't
Solve Our Problem. The center of the flow chart reads:
Unfunded Liability PERS $2.9 billion, TRS $2.1 billion.]
Current Funding & Investment Policies Can't Support Our
Benefits Policy
Senator Stedman noted the "breakdown" of the system and lack of
fluency. Rather than allow the current dysfunction to continue,
policy decisions should be corrected now and the unfunded liability
addressed afterward.
9:52:47 AM
Page 19
Important Conclusions
· System assets and liabilities must be jointly
managed
· System volatility needs to be reduced
· Cost predictability and controls must be improved
· Employer contribution rates must be stabilized
· Sources of new liability must be eliminated
· Liability growth must be contained
· Existing liability must be reduced
Senator Stedman overviewed these items.
Senator Stedman attributed system volatility in part to the
existence of separate boards overseeing the plan. SB 141 proposes
one board to manage the entire system. This entity would be
responsible for achieving balance and controlling volatility.
9:54:33 AM
Page 20
SB 141 Overview
Senator Stedman stated that the aforementioned information
generated the proposed Retirement Security Act.
9:54:43 AM
Page 21
SB 141 Overview
The Retirement Security Act will
· Strengthen Management & Fiduciary Oversight
· Improve Our Ability to Predict and Control Costs
· Constrain the Growth of the Unfunded Liability
· Provide Near Term Financial Relief to Employers
· Pave the Way For Developing a Long-Term Financial Fix
While still maintaining our principle objectives of
· Ensuring the Solvency of Alaska's Retirement System
· Maintaining the Attractiveness of Public Sector
Employment
· Recruiting and Retaining Talent
RSA Improves the Long-term Health and Security of Our
Retirement System
Senator Stedman commented on the challenge to address the problems
with the system. He was determined to retain good employees as well
as attract new quality employees. Competition for these employees
is not only within Alaska, but includes the entire Pacific
Northwest. Parody is also necessary between existing and new
employees. Employees performing the same job should not be
compensated differently. This is detrimental for moral.
9:57:48 AM
Page 22
SB 141 Overview
SB 141 - Key Elements:
· Establishes a Defined Contribution (DC) Plan, Retiree
Medical Benefit and Health Reimbursement arrangement for
new employees
· Replaces the existing boards (PERS, TRS, ASPIB) with a
new 9-member Alaska Retirement Management Board (ARMB)
· Establishes ARMB's role to balance system assets with
liabilities
· Transfers the quasi-judicial responsibility for hearing
appeals to the Office of Administrative Hearings
· Transfers to the Commissioner of Administration
responsibility for hearing appeals to the Office of
Administrative Hearings
· Transfers to the Commissioner of Administration
responsibility for adopting system regulations and
reviewing requests
· Sets the actuarially computed Normal Cost Rate as the
floor for annual employer contribution rates
Senator Stedman indicated he would go into more detail on the key
elements in future hearings on this bill. The defined contribution
plan would be significantly different from the current defined
benefit system. The retiree medical benefit plan would be changed
and a health reimbursement arrangement would be offered for new
employees to assist with insurance deductibles and health care
costs.
Senator Stedman characterized the replacement of the existing
boards as the most important element of this legislation. One
entity would oversee both assets and liabilities and communicate
with the legislature. This would eliminate "buck passing".
Senator Stedman stated that the balance of assets and liabilities
by the ARMB would be a different process than current practice. If
assets and liabilities were balanced, most of the existing concerns
of funding shortfalls would diminish.
Senator Stedman continued that the appeals process is currently a
function of the PERS and TRS boards.
Senator Stedman defined the actuarially computed Normal Cost Rate
as the "annual contribution for today's benefits being accrued".
10:01:09 AM
Senator Stedman commented that the current system is operated as a
fractional organization with different groups overseeing and
controlling different aspects of the plan. A consolidation must be
undertaken and one group must be in control of the entity.
Senator Stedman informed that significant detail information would
be presented later.
Co-Chair Green ordered the bill HELD in Committee.
AT EASE 10:02:53 AM/10:12:00 AM
Co-Chair Green made an announcement regarding congressional action
relating to the Arctic National Wildlife Refuge.
10:12:35 AM
CS FOR HOUSE BILL NO. 1(HES)
"An Act relating to the base student allocation used in the
formula for state funding of public education; and providing
for an effective date."
This was the second hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken moved for adoption of SCS CS HB 1, 24-LS0001\S as a
working document.
Senator Hoffman objected for an explanation of the changes.
Co-Chair Wilken explained that the total effect of the committee
substitute adds $70 million to the education foundation funding
formula. This amount is divided into $32 million for the classroom
and $38 million for Public Employees Retirement System (PERS) and
Teachers Retirement System (TRS) expenses. The $32 million is
contingent on the passage of HB 1. The $38 million provision is
contingent upon passage of a retirement reform bill, perhaps in the
form of SB 141.
Co-Chair Wilken calculated passage of this legislation would result
in a funding increase of $343 per student.
Co-Chair Green remarked on the need to reform the PERS and TRS,
which is a priority. This is part of the effort to assist school
districts, boroughs, etc. in funding education.
Senator Hoffman asked the consequences for this legislation if SB
141 does not pass.
Senator Hoffman pointed out that the fiscal note amount is
different that that stated by Co-Chair Wilken. The fiscal note
indicates the total funding per student would be $4,733 rather than
$4,919.
10:15:00 AM
Co-Chair Wilken clarified that the increase of $32 million would
increase the per student allocation by $157 totaling $4,733. If
PERS and TRS reform is passed the per student allocation would be
increased an additional $186 to be $4,919. The total of the
committee substitute is the same as the bill passed by the House of
Representatives.
Senator Hoffman removed his objection and the committee substitute
was ADOPTED as a working document.
Co-Chair Wilken offered a motion to report SCS CS HB 1, 24-LS0001\S
from Committee with individual recommendations and a new fiscal
note.
There was no objection and SCS CS HB 1 (FIN) MOVED from Committee
with a fiscal note prepared by the Senate Finance Committee dated
3/16/05 for the Department of Education and Early Development in
the amount of $32,018,600.
ADJOURNMENT
Co-Chair Green adjourned the meeting at 10:16 AM
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