Legislature(2005 - 2006)SENATE FINANCE 532
03/30/2005 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB141 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 141 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
MINUTES
SENATE FINANCE COMMITTEE
March 30, 2005
9:05 a.m.
CALL TO ORDER
Co-Chair Green convened the meeting at approximately 9:05:41 AM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Con Bunde, Vice-Chair
Senator Bert Stedman
Senator Lyman Hoffman
Also Attending: SENATOR GARY STEVENS; TERRY THURBON, Acting Chief
Administrative Law Judge, Office of Administrative Hearings,
Department of Administration; RICARD J. SOLIE, SR. Vice-Chair,
Teachers Retirement System Board; BRONK JORGENSEN, Member, Public
Employee Retirement System Board; JAMES "PAT" WELLINGTON, Member,
Public Employees Retirement System Board
Attending via Teleconference: There were no teleconference
participants.
SUMMARY INFORMATION
SB 141-PUBLIC EMPLOYEE/TEACHER RETIREMENT
The Committee heard from the bill's sponsor regarding the proposed
restructuring of the Retirement Systems' Board of Trustees.
Testimony from current Public Employees' Retirement System and the
Teachers' Retirement Systems Board members was heard. In addition,
the Department of Administration testified in regards to the Office
of Administrative Hearings. The bill was held in 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 sixth hearing for this bill in the Senate Finance
Committee.
9:08:21 AM
Co-Chair Green commented that today's discussion would concentrate
on the proposed restructuring of the Public Employees Retirement
System (PERS) Board and the Teachers Retirement System (TRS) Board.
Senator Stedman, the bill's sponsor, noted that today's discussion
would be aided by a slide presentation and a corresponding handout
titled "Retirement Security Act SB 141 Discussion Topic Board
Restructuring March 30th, 2005" [copy on file].
Senator Stedman stated that, as depicted on the flowchart on page
three of the handout, the current State retirement system consists
of two components: one being the Structural Component, which is
administered by the Department of Administration (DOA), and the
second being the Financial Component, which is administered by the
Department of Revenue (DOR). The DOA oversees the PERS and TRS
Boards; the State's actuarial consultant; and the Division of
Retirement and Benefits. As reflected on the chart, the primary
responsibilities of the PERS and TRS Boards include adopting
policies and regulations, acting as an Appeals Board, setting the
annual PERS and TRS Employer Contribution Rates, and adopting the
actuarial assumptions. A significant amount of the PERS Board's
time is consumed by its Appeals responsibilities.
Senator Stedman stated that the DOR is also oversees the Alaska
State Pension Investment Board (ASPIB), which is responsible for
establishing investment policies and managing and investing
retirement trust funds. Callan Associates, a private consultant,
provides performance comparison reports to both ASPIB and the
Department.
Senator Stedman stressed that the activities of ASPIB are "highly
related" to the PERS/TRS Boards' decisions regarding the
establishment of the Employer Contribution Rate and the adoption of
the actuarial assumptions.
Page four
· Retirement System Oversight Should Be Designed To:
· Guide and evaluate system performance
· Provide long-term strategic and financial planning
· Ensure the assets and liabilities of the systems are
balanced
· Implement formal system of checks and balances
· Work in the best interests of the state and it's public
employees
Senator Stedman read the Retirement System Oversight objectives and
impressed upon the Committee that there is currently a
$5,700,000,000 imbalance in the asset and liabilities components of
the retirement systems. Designing a system that would maintain a
balance between the assets and liabilities is critical.
Page five
Retirement Board Must Be
· Representative of all system stakeholders
· Experienced and knowledgeable in relevant financial,
accounting and investing issues
· Empowered to address systemic problems
· Impartial - include non-beneficiaries
· Independent
Senator Stedman stressed the importance of seating Board members
who "understand and comprehend" these components; they must be
"fully engaged in those areas of discussion". Impartiality and
independence "is important on virtually all boards in the private
and public sector".
Page six
SB 141 Board Restructuring is Designed to:
· Strengthen the fiduciary oversight of the entire
retirement system
· Place system assets and liabilities within the purview of
one authority
· Increase the frequency of reviewing, adopting and
reporting actuarial assumptions
· Increase employer and non-beneficiary representation on
the board
· Establish minimum professional qualifications for board
membership
· Move the quasi-judicial appeals process to the Office of
Administrative Hearings
· Empower the Commissioner of Administration to set
policies and regulations for day to day system operations
Senator Stedman declared that a lack of communication between the
PERS and TRS Boards and the willingness to place blame elsewhere
are key reasons a single Board component is being proposed in this
legislation. A lack of communication and responsibility does not
"facilitate good public process". Increasing the frequency of
reviewing actuarial assumptions would assist in allowing the system
"to recognize that it is off course … and get back on course
easier". Increasing the employer and non-beneficiary representation
on the Board would address the concern that employers "who bear the
brunt of the liability exposure", are currently under-represented
on the Board. The establishment of minimum professional
qualifications would insure that informed independent decisions are
made and would assist in moving appointments away from "the
political arena".
Senator Stedman stated that, currently, three-quarters of the
PERS/TRS Boards' time is dedicated to hearing Appeals. The
restructuring proposed in this legislation would move the Appeals
process to the Office of Administration Hearings (OAH) within the
DOA. This would allow the single Board being proposed to devote
more attention to the Employers Contribution Rate and other
policies and regulations.
Senator Stedman noted that the information presented on page seven
depicts the flow of duties and responsibilities as proposed in this
legislation. The Division of Retirement & Benefits would assume
oversight of the day-to-day operations of the retirement system and
the OAH would hear appeals. He noted that the OAH would be
testifying regarding the impact the proposed changes might incur on
them, and to that point, he surmised that the testimony would
indicate that OAH would be able to handle the workload.
Senator Stedman shared that the Alaska Retirement Management Board
(ARMB), which is the single Board being proposed, would function
within the DOR Division of Treasury. An investment advisory
council, an investment consultant, and an actuary would assist the
ARMB. A single Board would "better answer" Legislative questions
regarding such things as the Retirement Fund's liabilities, assets,
its liability/asset balance, and policy implications. Furthermore,
a "consolidated" Board could more comprehensively comment in
regards to how any future legislation might affect the retirement
system. The Board's responsibilities would include managing and
balancing the Trust's assets and liabilities; establishing
investment policies and options; setting the annual PERS/TRS
Employer Contribution Rates; and reviewing and adopting actuarial
assumptions.
Senator Stedman, in discussing the responsibilities of the ARMB,
warned that it would be "extremely dangerous" to implement a
portfolio policy that "would increase the risk exposure in the
attempt to close the $5.7 billion gap". That "is not the intent" of
this legislation. The goal would be to obtain "an asset/liability
match not an asset/liability mismatch". When determining the annual
PERS and TRS Employer Contribution Rate, "it is critically
important when you have the assets matching the liabilities, that
you don't have an entity setting contribution rates that may be
detrimental to that". Because a balanced system is the goal,
language has been "intentionally" incorporated into this
legislation to prevent the Contribution Rate from being set below
the Normal Cost Rate. Multiple boards going multiple directions
must not be tolerated. The desire is that the new Board would
review and adopt actuarial assumptions that would work with the
portfolio policy to increase the growth of assets faster than the
growth of liabilities. The reverse of this is currently being
experienced due to the escalating cost of health care.
9:24:23 AM
Senator Stedman underscored the fact that on occasion, imbalances
in the growth rates of assets and liabilities would be experienced.
The concept behind this legislation "is not to turn the system
upside down and escalate the Contribution Rates to the sky and move
the portfolio allocation to the riskier asset classes hoping that
we are going to close that $5.7 billion gap", as that would not be
"a prudent way of doing it. Nobody sitting at this table, I think,
would stand for that".
9:25:16 AM
Senator Bunde queried about what might occur were no qualified
PERS/TRS Board candidates available.
Senator Stedman voiced the understanding that the proposed
qualifying criteria for the PERS/TRS Board member positions on the
Board is "looser" than the requirements specified for the other
Board members in that they would simply be required to be a PERS or
TRS member. He reminded the Committee that under this legislation,
the OAH rather than the Board, would assume the responsibility for
the appeals process. The responsibility of meeting the liabilities
is a responsibly of the employer in that, when the system becomes
unbalanced, it is the employer rather than the employee who must
contribute a higher Contribution Rate to pay for an unfunded
liability. "If the employer has the responsibility, regardless of
asset performance, regardless of inaccurate growth assumptions or
growth rates for the future of health care, … the employers need to
be sitting at the table overseeing and calling the policy shots".
Senator Stedman informed the Committee that the ARMB would be
comprised of nine trustees: the Commissioner of the DOR; the
Commissioner of the DOA; three public members who must be Alaska
residents who are not beneficiaries of the plan; one finance
officer of a political subdivision; one finance officer of a school
district; one active or retired PERS member; and one active or
retired TRS member.
Senator Stedman announced that any amendments and ideas to further
this discussion would be welcome. "Nothing is set in concrete". The
people who shoulder the liabilities must participate in policy
decisions.
9:28:44 AM
Senator Bunde agreed, and voiced being pleased that PERS/TRS
members would have less rigorous qualifiers than other Board
members.
9:29:08 AM
Senator Hoffman asked the sponsor's view about electing, rather
than appointing, Board members; the exceptions being the
commissioners of the DOA and the DOR.
9:29:24 AM
Senator Stedman preferred seating members via the appointment
process. While acknowledging that there has been testimony in
support of electing the PERS/TRS members by their fellowships, he
suggested that a better approach would be for the organizations to
develop a list from which the Governor could appoint.
Senator Hoffman asked whether the appointees must be confirmed by
the Legislature.
Senator Stedman understood that no Legislative confirmation is
required.
Co-Chair Green likened the proposed appointment process to that
currently in place for the Permanent Fund Investment Board of
Directors.
Senator Stedman specified that Board members could serve for three-
three year terms and, after a one-year hiatus, could be re-
appointed. It has also been suggested that the Commissioner of the
Department of Health and Social Services be included as a Board
member due to the fact that health care cost issues have such
impacts. While modifications to the proposed Board membership
should be discussed, he cautioned that significantly increasing the
size of the Board would make the process "unmanageable". "A nine-
member Board is more effective than an 18-member Board".
9:31:25 AM
Senator Bunde pointed out that the language pertaining to Board
membership, as specified in Section 40(b) on page 36, does not
differentiate the qualifications of the PERS/TRS members from those
of the other members.
Senator Stedman responded that the language would be reviewed.
9:32:01 AM
Co-Chair Wilken affirmed that the ARMB appointment process would
resemble that of the Alaska Permanent Fund Board. Continuing, he
inquired to the compensation for ARMB members.
Co-Chair Green remarked that Board member compensation is specified
in the bill at the current per diem rate of $150 per day.
Co-Chair Wilken understood that Board members would be entitled to
the per diem rate in addition to regular travel compensation.
Senator Stedman stressed that the responsibilities of the ARMB are
substantial, and a stipend would assist in attracting quality
individuals. While there would be "some prestige" associated with
being a member of such a Board, the responsibilities would be
challenging, as the Board would be responsible for the retirement
funds for the people of the State of Alaska; children to senior
citizens.
Co-Chair Green informed that Board member compensation is addressed
in Section 43 beginning on line 20, page 40 of the bill.
Senator Stedman stated that, at this time, Ms. Thurbon with the
Office of Administrative Hearings would be presenting her
testimony.
TERRY THURBON, Acting Chief Administrative Law Judge, Office of
Administrative Hearings, Department of Administration, affirmed
that the OAH would be able to assume the responsibilities
associated with PERS/TRS appeals, as such types of hearings are not
dissimilar to the types of hearings the OAH currently conducts.
Furthermore, as a result of recently enacted legislation, as of
July 1, 2005, the OAH would be assuming responsibility for a broad
range of appeals including complex Department of Commerce,
Community and Economic Development Division of Occupational
Licensing cases; Permanent Fund cases; Child Support Cases; and a
variety other cases. She assured that the OAH would be capable of
conducting PERS/TRS hearings.
Ms. Thurbon specified that the OAH essentially addresses three
categories of cases: direct appeals, mandatory referrals, and
discretionary referrals. The latter are cases that agencies are not
required to submit to the OAH but do so in order to take advantage
of the services OAH provides. OAH conducts discretionary appeals
according to the agency's procedural manner. Direct appeals include
such things as tax appeals. Currently, the bulk of OAH's current
jurisdiction, or case docket, is in the mandatory referral
category. "Those appeals are subject to some very specific
procedures" that were adopted in SB 203 in 2004. Its provisions,
which become effective July 1, 2005, include a time efficiency
process specifying a case timeframe of approximately 165 days.
Ms. Thurbon characterized the PERS/TRS appeals cases as being a
hybrid of the current three case categories. They would be a direct
appeal in the sense they would come directly to OAH. OAH would be
the final decision maker, and any appeal of its rulings would be to
the State Superior Court. The PERS/TRS appeals cases would be
subject to the efficiency procedures cited in SB 203. There is no
reason current OAH procedures could not be applied to the PERS/TRS
cases.
9:37:49 AM
Senator Bunde, inquiring about the expected PERS/TRS appeals
caseload, asked whether additional OAH staff might be required.
Ms. Thurbon affirmed that there would be an impact on
Administrative Law Judge (ALJ) staff time. Whether it would require
new hires or a shifting of staff caseloads is unclear at this time.
Were the caseload to reach "critical mass", staff might be added.
Oftentimes, non-permanent positions or an ALJ contract is
established in order to address the situation. Moving the PERS/TRS
appeals to the OAH would increase ALJ caseloads, particularly in
the initial transition phase, as she understood that there is
currently a backlog of PERS/TRS matters that have not been
presented to the current PERS/TRS Boards. An increase of one ALJ
position might be required the first year and a three-quarter time
position might be required thereafter. An increase in
administrative support staff should not be required.
Co-Chair Green asked whether the OAH has any concerns or
suggestions regarding language in the bill.
Ms. Thurbon responded that, while further study of the bill would
be conducted, the bill's language is not "troubling". Procedures
could be fine-tuned to align provisions with current Office
procedures or authority such as requiring an ALJ to have a certain
level of expertise in a specific area.
Co-Chair Green requested that OAH suggestions be provided to her
and Senator Stedman's offices.
There being no further Committee questions, Co-Chair Green thanked
Ms. Thurbon for her testimony.
Senator Stedman concluded his remarks about the proposed ARMB and
voiced appreciation to the OAH for the testimony and for working
with his office on this legislation.
AT EASE 9:42:15 AM / 9:43:11 AM
Senator Stedman qualified that the bill would continue to be a work
in progress, as Committee Members' and others' questions and
concerns are addressed. A new committee substitute would be
developed and distributed. The entirety of information that has
been collected in the development of this bill is available to
interested parties.
Co-Chair Green announced that public testimony would commence.
9:44:49 AM
RICARD J. SOLIE, SR. Vice-Chair, Teachers Retirement System Board,
shared that his background includes being a retired Economics
Professor, Economics Department Head, and Acting Dean of School of
Management at the University of Alaska. He was initially appointed
to the TRS Board in 2003 and reappointed to a full term in 2004. He
served on the PERS/TRS Boards' four-member Tier Review
subcommittee.
Co-Chair Green asked Mr. Solie to share his perspective on the
subject at hand.
Mr. Solie stated that while he had developed written comments
titled "Draft Outline of Major Points For Testimony Before Alaska
Legislature, March 29-31, 2005" [copy on file], he would limit his
remarks to the issue of Board Re-Structuring, as that is the topic
of today's hearing. He also understood that other PERS/TRS Board
Members had recently shared their thoughts on the reorganization of
the retirement system. In developing his remarks, he had placed the
reorganization of the Boards in third place behind other subjects
that he held stronger opinions about. In general, he viewed the
effort to increase the professionalism of Board Members and the
emphasis placed on allowing more input from the public sector as
"positive factors". Nonetheless, he questioned the balance of the
proposed Board make-up because the PERS and TRS Boards, as
currently structured, are trustees of the funds into which the
members have contributed. Those funds, which represent the
retirement for these individuals, are "an extremely important thing
for them and, as a consequence, I feel that majority representation
on the part of persons in those systems is not inappropriate".
Continuing, however, he opined that it is also "not inappropriate
to have public representation of individuals who are not part of
the system" nor is it inappropriate to have employer representation
on the Board. There should be, however, "significant" PERS/TRS
member representation on the Board.
9:49:43 AM
Mr. Solie voiced "some concern" regarding the proposed appeals
process in that, in his experience as a member of a National Panel
of Arbitrators, American Arbitration Association; in most instances
an arbitrator hears cases as a single arbitrator, similar to the
OAH process. An arbitrator often presides over cases in which they
have general rather than "specific expertise". Typically, they
would not preside over a case involving their peer group. The "one
significant difference" between arbitration and the proposed
appeals hearing is that the arbitrator is selected by and agreed
upon by both sides of the issue. In such a process, "the arbitrator
has a basis for trust". This would not be the case as proposed in
this legislation, as the OAH is housed within the DOA and "would be
hearing appeals of issues that had been decided by the Department
of Administration". This is "a real concern … that process would
lack confidence" by the individual appellants. This could result in
there being "a damaging affect on morale".
Mr. Solie communicated that the TRS Board does not address as many
appeals as the PERS Board, whose appeals primarily consist of
disability issues. "Disability issues are not nearly as significant
on the teachers' side due to the nature of their work". Initially,
he had expected the TRS Board to be sympathetic to members'
appeals; however, he found that the Board was "very rigorous in
their judgments" and in most cases he was involved with, the TRS
Board sided on the part of the Administration. He understood that
this was similarly the case on the PERS side.
9:53:04 AM
Mr. Solie stressed that the PERS/TRS appeals process, as currently
structured, "is a jury of peers". That concept "has a hollowed
place in our society". Changing this process should not be done
"lightly".
Mr. Solie spoke to the proposed changes in the financial structure
of the system by stating that he is "especially concerned about the
idea of the matching of assets and liabilities". "On the surface",
it might be appealing; however, he questioned whether it would
prove to be so upon more in-depth analysis. The determination of
benefit levels is a significant factor in determining Fund
liabilities. The current PERS/TRS Boards "essentially have no
authority" in this regard, and he understood that this
responsibility would also not be assigned to the new "Super Board".
Mr. Solie declared that the Legislature has the primary
responsibility for determining retirement benefit plan provisions.
Health care determinations are a combination of administrative or
Legislative decisions rather than being Board directed. The Board
could develop recommendations and has, over time, compiled
significant cost-saving recommendations. "The role of the Boards in
determining benefit levels is minimal". In contrast, the Boards
have been very involved in reviewing actuarial assumptions and
monitoring actuarial performances. "There have been some problems
with this in the past". The hope is that that aspect would improve;
however, he was unsure whether the creation of a Super Board would
improve that, as this would be an additional burden "on top of an
already heavy responsibility in terms of the investment of the
funds". While he declared that he is "very impressed with the
boards as they are now constituted", requiring stronger Board
member experience might be a positive factor in regards to their
monitoring responsibility.
9:57:32 AM
Mr. Solie voiced being uncertain as to how the new Super Board
could improve the matching of the liabilities to the assets; but
the new Board member experience criteria might provide some
benefits in this regard. The other "critical component" in matching
assets and liabilities is the rate of return. An increase or
decrease in the assumed rate of return has "a tremendous impact on
the estimated actuarial liabilities". There would be no impact on
the value of future liabilities. He voiced concern that the Super
Board might, in an effort to match future assets to high
liabilities, raise the discount rate on the asset side. This action
would serve to reduce liabilities and increase asset projections.
This would solve a lot of problems; however, increasing the
discount rate in order to meet the liabilities, would serve to
increase the risk involved in the portfolio. Placing this
responsibility on the Super Board "would be very, very dangerous".
10:00:04 AM
Co-Chair Green, noting that the Committee had previously addressed
this issue, asked Senator Stedman to further expand on possible
solutions regarding the issue of matching liabilities to assets.
She understood that assuming higher risks was not part of that
process.
Senator Stedman stated that numerous portfolio strategy options
could be applied in regards to the discount rate issue and the
issue of matching liabilities to assets. One option would be to
identify a total rate of return with a targeted rate. The targeted
rate currently is 8.25 percent.
Senator Stedman remarked that implementation of "front-end
accounting" by increasing the targeted rate of return, for example,
from 8.25 percent to 9.25 percent, to address the $5.7 billion
under-funding should not be considered as doing so would shift the
portfolio into riskier asset classes; would increase volatility;
and would subject "the overall liability/asset mismatch to more
variability". Were the Super Board or the ASPIB Board to decide
policy to that effect, there would be considerable objection from
the people who would have that liability exposure. In this case,
that would be the State.
10:02:14 AM
Senator Stedman objected to following a policy course that would
increase the targeted rate as a means through which to balance
assets and liabilities. Other mechanisms should be discussed in the
future to address that issue. Absent the current situation and were
the assets and liabilities to match, strategies and policies could
be implemented to control the risk exposure of a liability/asset
mismatch. One challenge that must be recognized is the growth
assumptions in health care. He recalled that several decades
earlier, a "classic asset/liability mismatch" in the savings and
loan industry demolished the industry, and the federal government
became involved. The outcome of that situation was that the savings
and loan industry was absorbed within the banking system.
Senator Stedman agreed "100-percent" that increasing the discount
rate would be the incorrect approach to addressing the
asset/liability imbalance. The Legislature, as stewards of the
State, should require a Board to justify its targeted rate. His
concern with the present situation is that ASPIB transmits a target
rate to the actuary. Then the actuary via the PERS/TRS Boards
provides the rate to Mercer Financial Consultants, who manages the
discount rate. To his understanding, "the discount rate is not
necessarily set by the actuary". But rather, the ASPIB Board, as a
result of the asset allocation they impose, determines the rate.
This allocation is currently approximately 30-percent bonds a
substantial amount of equities, and real estate holdings. The
perfect scenario would be to "tie in" the growth of the assets and
the liabilities going forward. The unfunded liability should be
addressed separately. "There's absolutely no intent to take the $11
billion portfolio and start pouring high octane fuel in it, hoping
we can close the gap … that would be an unacceptable way of solving
the problem".
10:05:23 AM
Senator Stedman declared that the efforts should concentrate on
shorter financial projection timeframes. One or two year
projections are "more probable" than twenty-year financial
forecasts. "Our obligation here is to meet the" State's immediate
cash flow demands. Incremental increases in the Employer
Contribution Rate are affecting school districts and cities' cash
flow. The $11 billion "portfolio can run for years without any
infusion of capital". The immediate cash flow issue is the short-
term struggle. The long-term objective is to balance the assets and
liabilities to further assist in solving the unfunded liability.
10:06:31 AM
Co-Chair Green recalled that, the previous year, the Legislature
had requested the Boards to provide recommendations through which
to address the unfunded liability in addition to the request that a
Tier Redesign be undertaken. The recommendations could have
included such things as a cash infusion to the Retirement Fund from
the State, pension bonds, and other types of financing. In
addition, the Administration was addressing the issue by
contemplating changes in the benefits or medical plan or plan
deductibles with the caveat that the no benefits of the plan could
be diminished. The Administration's efforts might or might not
require legislation. To date, no recommendations have been
forthcoming from the Boards.
Co-Chair Green declared that the same request would be asked of the
proposed Board. The Legislature requires this advice, as they,
rather than being members of the Board, are "the appropriators".
The advice of "a very professional Board" that reviews the
contribution rates and the investments could provide "possible
solutions" to the issues. That, rather than re-configuring rates
and percentages, allocations, investment strategies, was the point
of the discussion pertaining to assets verses liabilities.
10:08:47 AM
Mr. Solie specified that no such Legislative request had been
received by the Boards. Had the Board been aware of the request,
they would have responded. He voiced disappointment, as a member of
the Tier Review Subcommittee, that the Subcommittee's tier
recommendation not been approved.
Co-Chair Green remarked that the Legislature was disappointed as
well.
Mr. Solie voiced the understanding "that the only thing" that the
Tier Review Subcommittee "had been requested to do was to pass our
recommendations onto the Administration which would then funnel
them to the Legislature". The Board was unaware that the desires of
the Legislature more extensive.
10:09:46 AM
Co-Chair Green remarked that the Legislature's request for the
Boards' recommendations had occurred in the same conversation as
the request regarding a tier review.
10:09:49 AM
Senator Stedman recalled that during the Board meeting in which the
Tier Subcommittee had presented its' recommendations about the
proposed hybrid and defined contribution plans, one of the Board
members had commented, "why bother, the Legislature is going to do
it anyway". Therefore, he questioned the Boards' efforts.
Co-Chair Green expressed that while the purpose of today's hearing
is not to put the testifier or anyone "on the spot", "there is a
great deal of frustration" on the part of the Legislature. The
Legislature does not have the expertise to solve the situation and
would welcome recommendations, suggestions, or concerns about the
issue. The bill's sponsor would be willing to listen and attempt to
incorporate ideas into the legislation. Rather than harboring "ill-
will", the Legislature is just "frustrated" that no one has stepped
forward to take responsibility for the situation. "Somebody
somewhere messed up". Regardless of whether blame could be placed
on the actuary, the consultant, the Boards, or the Legislature,
there is a $5.7 billion shortfall that must be addressed. It could
be "guaranteed" that, "change is coming".
10:11:32 AM
Mr. Solie commented that while there might "have been some mess-
ups, some of the key things that happened could not have been
reasonably anticipated". The Boards had "very little control" over
the compilation of events that has been referred to as the "perfect
storm".
Mr. Solie agreed with Senator Stedman's remarks regarding the
review of the actuarial assumptions. The Boards should have
reviewed the assumptions "more closely"; specifically the health
care trends, as, in retrospect, it appears that the actuary erred
in that regard. He noted out that "the Boards refused to adopt the
assumptions embodied" in a recent actuarial report, primarily out
of concern that the situation might be continuing. As an aside, he
voiced support for the recent health care trend methodology change
that separates pharmaceutical and medical trend information. The
Boards had "significant concerns about the rate of decline" in
those trends as proposed by the actuary. However, the actuarial
repeatedly justified the rates being lowered by their belief that
the current level could not be sustained "indefinitely";
continuance of the rates at the current levels would negatively
impact the Gross Domestic Product (GDP). While he agreed that the
rate levels could not continue indefinitely, no one has "any idea
of what level the economy is going to absorb" or how long they
might decline. "The statement was made to the actuary" that the
rates should not be dropped until the system undergoes structural
changes that would provide confidence that the rates would
eventually lower. "The Boards are taking a harder look" at
assumptions, particularly those pertaining to health care. The
actuaries were charged with re-evaluating this area, and in
addition, a request was made that the Administration to have an
independent review of the trends by such entities at Aetna
Insurance Company. These trends are "critical" and absent reliable
information, similar situations would reoccur. In summary, errors
did occur, and while some events were unanticipated, a better
review must be priority.
Co-Chair Green voiced appreciation for Mr. Solie's work on the Tier
Review Subcommittee.
10:15:11 AM
Senator Stedman voiced appreciation for the Board's questioning of
the actuarial assumptions, particularly those supporting a downward
trend in health care expenses. Additional years of underestimating
the Fund's liabilities could not be tolerated.
Mr. Solie warned that incorporating insufficient trend lines into
the current actuarial report would serve to increase the unfunded
liabilities. "Reality" must be reflected.
Co-Chair Green agreed.
10:16:22 AM
Mr. Solie reiterated that his comments to this point were
spontaneous, as his prepared testimony was intended to address
other matters. He noted that his aforementioned written commentary
was purposely written in generic form, as he was uncertain as to
which Legislative body he would be testifying. He also noted that
even though the Member Contributions section of his notes contained
two subsections, he would not be presenting the subsection titled
"B. Equal sharing of contributions for 'Past Unfunded Liabilities'"
as that issue is not relevant to this legislation.
Mr. Solie voiced being "philosophically in agreement with the idea
of equal sharing of Normal Costs". Were the recommendations of the
Tier Review Subcommittee reviewed, it would be noted that the
recommendations of the Subcommittee, "included employee costs that
were as great or greater than those of the employer for the Normal
Costs". While he agreed with the concept, there is concern that
applying it to existing employees might present some "serious"
problems, including judicial challenges.
Mr. Solie voiced concern that, as stated in his written comments
under Member Contributions A.2., "the five percent per year
increase is a very stiff increase for an individual employee. That
probably wouldn't come into play; however, if the equal sharing was
limited to 'Normal Cost'" as, per this legislation, the maximum
increase an existing employee would be required to contribute is
approximately three percent. While he would not delve into the
Section on "Past Unfunded Liabilities, he has "serious concerns".
In response to a question from Co-Chair Green, he clarified that
his concern in regards to "Past Unfunded Liabilities" focuses on
employees being required to contribute an equal share to Past
Unfunded Liabilities. He reiterated that, while this concern is not
an issue at this hearing, as that obligation is not incorporated
into this legislation, he would have serious concerns had it been
addressed or considered at a later time.
10:20:02 AM
Mr. Solie voiced his "great concern" about implementing a 100-
percent Defined Contribution (DC) plan and, to that point, he
reviewed the "Introduction of a 100% DC Plan to Replace the
Existing DB Plan" section of his written comments as follows.
Introduction of a 100% DC Plan to Replace the Existing DB
Plan.
A. First of all, let me say that I am not opposed to the
general concept of DC plans or of privatized retirement
plans. I strongly believe in individual responsibility and
in the advantages of personal ownership of private
equities.
B. I am sure that all of you are aware that, although the
Tier Committee did forward to the full boards an
Alternative 2 which was 100% DC, the committee was
unanimous in opposing its adoption.
C. I personally pressed for a hybrid plan that included both
a 1% DB and a DC component. Although some of the committee
members undoubtedly had misgivings about it, there was a
clear recognition of the serious problem facing the State
of Alaska with respect to the retirement plans, and
consequently the Tier Committee voted unanimously to
support the hybrid plan.
D. There are several reasons for the committee's and my
personal opposition to a 100% DC plan.
1. A key factor is that in Alaska most of the teachers in
this state are not covered by Social Security. Thus, they
lack the floor of retirement benefits that is available to
private sector employees and to public sector employees in
most other states. The 1% DB plan that the Tier Committee
proposed would provide such a floor.
10:22:30 AM
Co-Chair Green asked whether any school district in the State would
have the authority to develop its own employee retirement plan.
Mr. Solie affirmed that they would.
Co-Chair Green declared therefore that, "it is not the State's
purview to say this is the only plan" that a school district would
have available to them. Each district could develop a plan that
would be appropriate for its employees.
Co-Chair Green, after determining that Mr. Solie would be available
to speak to the Committee at a later date, asked that, at this
time, other persons in the room be provided the opportunity to
testify before the Committee.
Senator Stedman informed the Committee that "the floor issue",
which is a legitimate concern in regards to the 100% DC plan, had
been a topic of discussion during the drafting of the bill. It was
concluded that this concern could be partially or in whole
"mitigated by offering a fixed rate option" in the investment
selections.
10:24:28 AM
Senator Bunde stated that there could be a remedy in regards to the
issue of someone who qualifies for Social Security (SS), in
addition to being a TRS member. He, and other teachers he is aware
of, had worked in the private sector and as such would qualify for
SS.
Co-Chair Green informed that the discussion with Mr. Solie would
continue during the March 31, 2005 Committee hearing.
BRONK JORGENSEN, Member, Public Employees' Retirement System Board,
agreed with the majority of the Mr. Solie's comments. He noted that
in the year since his appointment to the PERS Board, he has "been
impressed with the workings of the PERS, TRS, and ASPIB Boards" who
spend considerable time reviewing the volumes of data that
pertinent to their responsibilities. He disclosed that he is self-
employed and has no vested interest in PERS. As a member of the
Tier Design Review Subcommittee he voted in support of Alternative
1, which is the hybrid plan. It had been his understanding that the
Legislature was going to forward that plan. He also agreed with
Senator Stedman that the Board should have provided recommendations
to the Legislature. Alternative 1 was a good plan for all concerned
parties: "employees, employers, and all Alaskans since everyone is
affected". However, one of the reasons for Board hesitancy was the
belief that other options might be available to address the under
funding issue generated by "huge medical costs" and "abuses and
loopholes
Mr. Jorgensen clarified that the majority of the Board's efforts
during his tenure have concentrated on Appeals. Appeals are the
result of disagreements between employees and employees and
employers. He affirmed that Mr. Solie's assertion that the PERS
Board addresses more Appeals than the TRS Board due to disability
factors, and there being a larger number of PERS members. Were the
Board's Appeals ruling to be unacceptable to either the
administrator or the appellant, it could be appealed to the Alaska
Court System. This would also be an option in this legislation. The
parties involved in the current Appeals process view it as "fair
and reasonable" and most appellants are satisfied with the decision
of the Board, even were the ruling not in their favor. Few cases
advance to the Court and of those few are overturned. He estimated
that the Board rules in favor of the appellant fifty percent of the
time and for the Administration fifty percent of the time.
10:28:13 AM
Mr. Jorgensen opined that were the Appeals process to shift to the
OAH as proposed in this legislation, the State would incur
additional legal and court expenses. While the majority of PERS and
TRS members are satisfied with the Board's decisions in the current
appeals process, it is doubtful that they would be happy with the
OAH decisions. "It would be viewed as the same decision coming from
the current Administrator" and as a result, more appeals would be
taken to the Court System.
Mr. Jorgensen echoed the concerns regarding the March 2005 Mercer
Financial Consultants actuarial assumptions report. Changes must be
made, and while he was unsure of the answer, discussions could
include the hiring of a new actuarial firm or re-evaluating the
current arrangement with Mercer. He voiced appreciation for the
discussions that have occurred, as the issues are complex.
JAMES "PAT" WELLINGTON, Member, Public Employees Retirement System
Board, stated that he, a retired State Trooper, has been an elected
member of the Board for 27 years and, in addition, has been an
elected member of the ASPIB Board since its inception in 1992. His
election record speaks favorably about his service. He allowed
however that most PERS Members are "probably" unaware of the duties
of the Board since non-Board member attendance at Board meetings is
small since the meetings "are not really that exciting".
10:30:35 AM
Mr. Wellington proclaimed that the Boards essentially underwent "a
complete restructuring" a few years earlier when the Administration
changed. Governor Frank Murkowski replaced the three appointed
members of the PERS Board, and while he "did a fine job in picking"
the new appointees, the Board members they replaced were also
"decent" people with good backgrounds. Governor Murkowski has
appointed the majority of the five-member TRS Board. The eight-
members of the ASPIB Board consist of two elected PERS members, two
elected TRS members, the Commissioner of Revenue who is was a
Governor appointee, and two new Governor appointees. One seated
member was re-appointed by the Governor, and one member who was
appointed by the previous Administration remains on the Board.
"Basically", the Boards "have started over within the last year and
a half". To that point, he questioned "the rationale … of starting
over a second time".
Mr. Wellington, mentioning that the three Boards had recently held
a joint meeting as required by State Statute, declared that the
Boards "step up to the plate" and address their assigned
responsibilities. The Boards "work well" and have never done "any
finger pointing" "or stepping aside and hiding to blame somebody
else for what's going on". The figures provided by the actuarial
consultant, "who is under contract to the Department of
Administration Division of Retirement and Benefits", have been
questioned for a number of years, "but unfortunately, the actuary
has all the computers and machines and do the work; the Division of
Retirement and Benefits" devotes a lot of time to reviewing "those
documents and assumptions and how they got to where they did". The
PERS/TRS Boards are provided approximately one day to review the
assumptions. The Boards have repeated asked Department's
administration whether they "are comfortable after your staff
review that these assumptions are correct". "For the most part, the
answer is 'yes'". While the Boards ask questions, they do not have
the time or the technical expertise to conduct a more thorough
review and rely heavily on the Division of Retirement & Benefits
"technical expertise to evaluate these reports".
10:34:47 AM
Mr. Wellington stated that while the Boards have been available,
they have "never been invited" to testify before any Legislative
Committee. Members are here today because "we have on our own,
sought out" and reviewed the information. Members are not informed
about pending legislation and must conduct research themselves. He
read from an email [copy not provided] he had sent to the Director
of the Division of Retirement & Benefits in February 2005, as
follows: "Just as a point of interest, it would seem to me that the
Legislative committees might be interested in knowing first hand
why the Boards voted the way they did on Tier III for TRS and IV
for PERS. Therefore it would be reasonable for you to offer
testimony and comments from the respective Board chairs. Right now
the Legislative committees are only hearing the viewpoint of the
Division". No response to that e-mail was received. The Boards
would welcome the opportunity to discuss issues.
Mr. Wellington stated that the tier work conducted by the Tier
Review Subcommittee was excellent; however, they "strayed" from
their "single task" of developing a defined contribution program as
requested by the Administration, and developed a "hybrid" program.
The Administration did not ask them to address the cost over-run
that exists in the Retirement Plan. When the Subcommittee began
discussing a hybrid system, the Administration "summarily told
'That's not your charge.' Your charge is to come up with one thing
and one thing only'".
Mr. Wellington continued that he and other Board members felt that
other issues, such as health care, were driving the overrun of the
Fund. Therefore the Subcommittee deemed it prudent to conduct an
overview of the entire system and determine what components might
be addressed in the short term, mid-term, or long -term. The health
care component could be addressed in the short term while the
defined contribution program was long-term. The cities today are
not going to see any relief in this area for a number of years.
Nonetheless, no opportunity was provided in which the Boards could
sit down and determine what could be done collectively to view the
entire system. The Boards' Health Committee has looked at options
to reduce health costs. One of the things discussed with the
Administration was that of educating PERS/TRS members about the use
of generic drugs. The increased use of generic drugs has been "very
cost effective" and has saved the Retirement System millions of
dollars.
Mr. Wellington disclosed that the Boards have asked the Division of
Retirement and Benefits to provide more cost saving suggestions,
and as recently as September, 2004, discussions occurred regarding
using the Fund's $80 million dollar Trust Account to pay off claims
as they were submitted. He asked the Administrator and her staff to
work with Department of Revenue staff to determine whether any of
the Trust Account funds could be invested in a different manner to
provide more revenue. No response was received and he had again
made the request at a recent Board meeting. Following that, Alyce
Hanley, a PERS Board Member, had asked the status of the Board's
request to Aetna Insurance Company about cost saving measures. The
Board declared that it "wanted some answers" about such things as
cost savings and developed a follow-up schedule.
Mr. Wellington stressed that, while others might disagree, simply
replacing Board members "is not the answer".
Mr. Wellington noted that the PERS Board has an upcoming scheduled
meeting to address Appeals, and he did not support the proposal to
move Appeals to the OAH. The current process provides more
fairness. The Board "has no problem saying no if the facts warrant
it".
10:40:18 AM
Senator Stedman stressed that there is no intent in this
legislation "to deal with personalities on the Boards". No
analytical work in this regard was conducted; the focus of the work
delved into the structural working relationship between the Boards.
"That is where the breakdown is". Even were Board members replaced,
without a structural change occurring, the Funds would be "in the
same position we have today". He acknowledged that the Boards have
worked hard for many years.
Senator Stedman asked how much time the Boards were able to devote
to reviewing the most recent Mercer actuarial report.
Mr. Wellington responded that the Board reviewed the material for
approximately half a day.
Senator Stedman asked whether it was true that the presentation was
rushed and was not finished.
Mr. Wellington thought otherwise, and stated that the Boards
provide whatever time is deemed necessary to the presentation.
Senator Stedman understood that the Board devotes approximately 80-
percent of its meeting time to addressing Appeals.
Mr. Wellington agreed.
Senator Stedman stated therefore the PERS/TRS Boards could be more
appropriately characterized as an Appeals board.
Mr. Wellington pointed out that the Board addresses the work it is
presented and that "a large percentage" of the work is in the form
of Appeals.
Senator Stedman asked the percentage of Appeals the Board upholds
or overturns.
Mr. Wellington understood that the Board's ratio is 50/50. The
important thing is that after the Board provides its opinion,
either side could appeal to the Superior Court. "Sometimes the
State has and sometimes the appellant has". The most important
thing to note is that the Board's decision is rarely overturned by
the Superior Court. On occasion, the Court has asked the Board to
re-evaluate a point of law on a specific "narrow" issue. The record
of the Board is excellent.
Co-Chair Green clarified that the ALJ is appointed by the Governor
and must be confirmed by the Legislature. It would not matter
whether the ALJ was housed in the Department of Law, the Department
of Administration, the Department of Health and Social Services, or
the Department of Transportation and Public Facilities. "They are
simply housed in the Department of Administration. They are not in
the line of authority of the Department of Administration". It has
been implied three times that this is a conflict … that is just an
unfounded very, very unfortunate accusation". This type of comment
is not welcome again.
Mr. Wellington interjected that he had not implied any wrongdoing.
Co-Chair Green reiterated that no further comment implying "any
conflict with a judicial system that is set up" would be tolerated.
The ALJ is appointed by the Governor and confirmed by the
Legislature, "and that is the line of authority".
The bill was HELD in Committee.
ADJOURNMENT
Co-Chair Green adjourned the meeting at 10:44 AM.
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