Legislature(2005 - 2006)SENATE FINANCE 532
03/31/2005 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 31, 2005
9:07 a.m.
CALL TO ORDER
Co-Chair Green convened the meeting at approximately 9:07:09 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; SENATOR BEN STEVENS; TERRY
THURBON, Acting Chief Administrative Law Judge, Office of
Administrative Hearings, Department of Administration; JOE BEEDLE,
Vice President for Finance, University of Alaska; GEORGE SULLIVAN,
Chair, Public Employees' Retirement Board; RICHARD J SOLIE, SR.,
Vice Chair, Teachers' Retirement Board; TRACI CARPENTER, Staff to
Co-Chair Green; MELANIE MILLHORN, Director, Division of Retirement
and Benefits, Department of Administration; KATHLEEN STRASBAUGH,
Assistant Attorney General, Labor and State Affairs Section, Civil
Division, Department of Law;
Attending via Teleconference: From Fairbanks: JIM JOHNSEN, Vice
President for Faculty and Staff Relations, University of Alaska
SUMMARY INFORMATION
SB 141-PUBLIC EMPLOYEE/TEACHER RETIREMENT
The Committee heard testimony from the Office of Administrative
Hearings, Department of Administration; the University of Alaska;
and Board Members of the Teachers Retirement System and the Public
Employees' Retirement System. 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 seventh hearing for this bill in the Senate Finance
Committee.
Co-Chair Green informed the Committee that the role, functions and
responsibilities of the Administrative Law Judge and the Office of
Administrative Hearings in the appeals process would be further
clarified.
TERRY THURBON, Acting Chief Administrative Law Judge, Office of
Administrative Hearings, Department of Administration stated that
the Office, which was created by SB 203 during the Twenty-Fourth
Alaska State Legislature, became operational in July 2004. SB 141
would specify that the Public Employees Retirement System (PERS)
and the Teachers Retirement System (TRS) would be administered by
the Department of Administration, and, in addition, would specify
that rather than PERS/TRS appeals being heard by a PERS/TRS Board,
appeals would be heard by the Office of Administrative Hearings,
also located within the Department of Administration. This has
resulted in the perception that the appellants would not receive a
fair hearing, as the appeal would be heard by an entity in the same
Department as the entity that made the decision. The law that
created the Office is multi-faceted with the mandate that it be an
independent hearing office. The Office must be housed somewhere,
and therefore it was placed in the Department of Administration in
the same sense that the Alaska Public Offices Commission, the
Office of Public Advocacy, and the Public Defender Agency are.
"There is no department consisting of independent agencies in State
government"; and organizationally, they must be placed somewhere.
Appreciation for being placed in the Department of Administration
was voiced, as the Office has been provided great accounting and
other support from the Department's Division of Administrative
Services.
Ms. Thurbon stressed that even though the Office is placed within
the Department of Administration, "decisionally, the Office of
Administrative Hearings is independent". Laws that have been
established to clarify this include conditions pertaining to the
appointment and duties of the Chief Administrative Law Judge
(CALJ). The CALJ is appointed by the Governor, subject to
confirmation by the Legislature, for a five-year term and could be
dismissed "only for good cause". These conditions provide the CALJ
insulation from the perception that the CALJ might be subject to
pressure. The CALJ extends this insulation to the Administrative
Law Judges whom the Chief hires and supervises. The CALJ also
oversees peer review and ensures that there is consistency in
decision-making. There is "a barrier between the Department in
which the Office is organizationally housed and the actual decision
making function".
Ms. Thurbon commented that another important aspect is that the
Office provides a central appeals panel in that individual hearing
officers were removed from the Department of Administration, the
Department of Revenue, and the Department of Commerce, Community
and Economic Development and physically placed in one locale,
independent of any other agency. This removes any inadvertent
interaction with other agencies and members of the public.
Ms. Thurbon noted that the Office has been charged with the
development of a code, or Cannon, of Hearing Officer Conduct.
Included in these Cannons are such things as the obligation to
decide cases independently, impartially, and fairly. One of the
specific statutory goals of the Office is "to increase the public
party's perception of the fairness in administrative adjudication".
She stressed that while presentations or forums assist in getting
the message out, the public's perception of fairness must be
reinforced "one hearing at a time". This fairness issue must be
shown in correspondence, in discussions leading up to the hearing,
the presentation the ALJ makes at the beginning of the hearing, in
the decisions that are levied, and other interactions. The public
perception has improved in the short period of time that the Office
has been in operation. The Office has issued approximately 150
decisions since January 2005 with only one request for
reconsideration and approximately three requests for clarification
on decisions. She noted that, when possible, she conducts a survey
of participants regarding "their sense of how the hearing was
handled" and she recounted some of those discussions. Efforts are
made to issue non-judgmental and clear decisions that would be
"well received by all the audiences that have to read them". She
reiterated that the public perception issue would be addressed one
case at a time.
Co-Chair Green voiced appreciation for "the thorough explanation".
AT EASE: 9:18:34 AM / 9:19 AM
Co-Chair Green noted that the University would now present
information regarding its Optional Retirement Program (ORP).
JOE BEEDLE, Vice President for Finance, University of Alaska,
informed the Committee that he would be presenting proposed
Statutory changes to the ORP, the University's defined contribution
plan (DCP). The University (UA) has been studying the consequences
and the expenses associated with the acceleration of employer
contribution rates to its benefit plans and have determined that
the status quo UA retirement and health care and other benefit
expenses are projected to grow at a compounded rate of 19-percent
through the year 2008; these expenses would exceed the revenue
capabilities of the UA. The University's Board of Regents and the
University president, Mark Hamilton, have furthered "research
efforts" to modify the University's retirement plans consistent
with current Statutes.
Mr. Beedle shared that the UA base salary in 2004 amounted to
approximately $246 million; the base salary with growth and nominal
salary adjustments would increase to $291 million or 4.3 percent
compounded growth through the year 2008. UA benefit expenses would
increase from $74 million to $148 million during that timeframe,
were no changes made. The 2004 all-inclusive benefit amounted to
30-percent; for example, an employee earning $1,000 would receive
the equivalent of $1,300 were benefits factored in. In 2008, the
benefits' rate would equate to 54-percent were the status quo to
continue. "Something must be done".
Mr. Beedle noted that at a March 17, 2005 meeting with the Board of
Regents, President Hamilton communicated the desire that "rapid
action" to address this situation occur. The University has the
ability to make changes that other public entities do not have.
Significant adjustments, such as "Best Practice Behavior" by its
employees, have been made to the UA health care plan that should
produce rewards by lowering the costs of the current plan. The next
step would be to address the long-range cost issue.
Mr. Beedle stated that from the year 2005 through 2008, cumulative
health care and retirement benefits would experience an increase of
$99.5 million. The Board and UA management are supportive of
expanding the UA's ORP Defined Contribution Plan, which operates
"exactly as a 401(K) plan". It does not provide health care
benefits during retirement. During the time of "the oil price
collapse" in 1986 and 1987, UA was successful in getting
Legislative approval allowing it to create its Defined Contribution
Plan or ORP.
Mr. Beedle recounted that, at the time, UA was experiencing
difficulty in recruiting personnel; specifically research
scientists. Such people are typically employed under Term
Employment Contracts rather than tenure employment positions. As
such, their employment arrangement might range from a five to eight
year term and would not qualify them to vest in PERS/TRS or receive
tenure status at UA. Thus the idea of the portable benefits
provided in a Defined Contribution Plan was attractive … "and it
worked". Today, more than 750 people, or 25-percent of UA salaries,
are, at their option, "voluntarily" employed under the DCP that
allows the employee to manage for their own retirement. The UA ORP
plan is restricted to full-time faculty and executives. Currently,
90-percent of the employees enrolled in ORP are faculty.
Mr. Beedle recalled that, initially, ORP "used an index rate that,
in hindsight, was less than perfect". It was based on a three-year
moving average of the TRS rate. UA is advocating changing this
formula to correspond with Legislative action that would provide
all public employees options that differ from those being offered
today. In hindsight, the desire would have been to change the index
rate to one "that is sufficient at the market to attract and retain
top quality employees". "In hindsight, no one knew the disparity in
the unfunded liability would occur".
Mr. Beedle continued that were Legislative action regarding a new
Tier for PERS and TRS not imminent, UA is proposing that it be
allowed to expand ORP to allow, "or perhaps require", new employees
to consider health care benefits in their retirement.
09:27:50 AM
Mr. Beedle noted that President Hamilton and the Board of Regents
support modifying the ORP Statute, AS 14.40 Article 5, in order to
expand the plan.
09:28:22 AM
Mr. Beedle pointed out that proposed expansion language has been
provided to members in a handout titled "Proposed Amendments for
the ORP Statute" [copy on file] with the request that consideration
be provided for either including the language in SB 141 or separate
legislation. UA would be appreciative of any assistance in this
matter.
Co-Chair Green asked whether the aforementioned handout's language
is in draft or final form.
Mr. Beedle understood the language to be in final form. He
reiterated the desire to have separate legislation address this UA
request were SB 141 to not advance this Session.
JIM JOHNSEN, Vice President for Faculty and Staff Relations,
University of Alaska, testified via teleconference from Fairbanks
and spoke to the University's situation in context of what is
occurring in the State overall. "Public employer retirement costs
are skyrocketing due to low earnings, retirement fund investments,
historically low contribution rates, and retiree health costs".
09:30:49 AM
Mr. Johnsen communicated that while UA is willing to work with the
Legislature on the initiatives being considered, its primary
interest "is in retaining its ability to recruit and retain top
quality faculty and staff from across the country". Currently UA
provides three retirement plans and options to benefit eligible
employees: PERS, TRS, and the ORP. Factoring in inflation and cost
projections and were the current trend to continue, UA's total
retirement cost of payroll for employer/employee contributions in
FY 07 would exceed 34-percent for TRS, 37-percent for PERS, and 29-
percent for ORP.
09:32:29 AM
Mr. Johnsen noted that in addition, all benefit eligible UA
employees participate in a separate DCP pension plan to which the
UA contributes 7.65-percent of salary, up to $42,000. This is
similar to the State's Supplemental Benefit System (SBS) program
with the exception that the UA program has an annual limit of
$42,000 of salary.
Mr. Johnsen stated that in the context of health cost increases, UA
projects over the next three years, FY 05 through FY 08, retirement
cost increases of approximately $40 million and health cost
increases of approximately $22 million. UA is familiar with the
Legislature's and PERS/TRS Boards' efforts to contain these costs.
09:35:53 AM
Mr. Johnsen stressed that in administering its retirement plan, UA
actively makes efforts to maintain UA's competitive status with
other universities and corporations for top quality faculty and
staff. UA believes that a retirement plan must provide "a
responsible level of retirement benefits, must mitigate the affects
of rising costs either through modifying benefits for future
employees and/or increased Legislative funding and/or increased
employee funding". The UA must "stay in front of efforts" to
contain benefit costs as demonstrated by its actions in developing
the ORP in the 1980s as well as the establishment of the limit on
the UA's pension plan contributions. Furthermore, UA has determined
that any changes to the plans must include input from the affected
faculty and staff. That process has begun. In addition, UA is
supportive of increasing the role of the defined contribution
concept, primarily due to its portability and cost effectiveness.
Mr. Johnsen, acknowledging that the State's Constitution prohibits
the diminishment of a retirement benefit, communicated that the
question has arisen regarding whether ORP has the same
Constitutional status as PERS and TRS. UA's position is that "it
does enjoy that same status" in that its plan holders should also
be protected from diminished benefits. On the basis of a recent
Legislative Council opinion, the UA has determined that either "the
Legislature or the UA could modify the ORP plan in terms of
eligibility for the program as well as future contribution rates".
Mr. Johnsen reiterated that faculty, all of whom are covered by
collective bargaining agreements, account for 90-percent of the ORP
plan participants. Changes could be made to the PERS/TRS plans
without negotiations with collective bargaining units. The UA
believes that ORP should also "be insulated from the collective
bargaining requirement". According to a 2004 survey [copy not
provided] conducted by the College and University Personnel
Association, current UA contribution rates are generous. The
combined employer/employee median national contribution rate is
currently 14-percent: currently the PERS rate is 17.33-percent; the
TRS rate is 24.65-percent; and ORP is at 21-percent. Were the
current trends to continue, UA staff benefit rates for faculty
would increase to more than 50-percent. This rise in cost, unless
paid by the State, reduced by plan changes, or addressed by an
increase in employee contribution shares, would result in a
reduction of programs and services. Higher benefit rates would also
impair the UA faculty's ability to compete on a nationwide basis
for research grants.
Mr. Johnsen reiterated that while UA would support Legislative
efforts to contain costs, it must maintain its ability to recruit
and retain quality faculty and staff. Changes to the ORP law are
being sought. He read the aforementioned "Proposed Amendments for
the ORP Statute" handout as follows.
The major proposed changes would allow the University the
flexibility to:
· Include a health plan, if needed;
· Expand the potential pool of plan participants to include
all employees (currently only faculty and
administrators);
· Give a one-time second opportunity for employees who
previously rejected ORP to join the ORP;
· Require new employees to participate in the University
Optional Retirement Plan; and
· Include lump sum payments or other types of plan
distributions as long as the plan complies with federal
law for a qualifying program.
The proposed changes would also provide these clarifications:
· That like PERS/TRS, ORP is not a subject of bargaining
under PERA, and
· That the University may create new tiers.
09:39:36 AM
Mr. Johnsen stated that since its inception, the ORP plan has been
"very positive": it is portable" and has immediate vesting. Those
features have provided UA the opportunity "to recruit more
effectively" on a national basis. The fact that ORP vesting is not
dependent on retiring from UA removes the incentive for an employee
to remain at the UA "solely for the purpose of vesting". The plan's
lack of a health benefit has enabled the UA to avoid a long-term
health cost liability which otherwise would have amounted to
approximately $87 million.
Mr. Johnsen shared, however, that there is concern among some
faculty members that ORP does not include a retiree medical
benefit. The opportunity provided by ORP to select among several
professional managers with a multitude of investment options
provides employees choices in regards to the management of their
own retirement accounts. In addition, the fact that UA manages "the
account means that the program could be overseen by the Board of
Regents … and plan changes could be managed through the
consultative process that is inherent in higher education".
09:41:11 AM
Mr. Johnsen commented that UA is supportive of ORP and wishes "to
enhance it in the years to come".
Senator Hoffman, referencing the importance UA has placed upon
being able to recruit and retain employees as well as its
statements that the benefits of the defined contribution plan are
portability and contain costs, asked regarding the experience UA
has had in retaining employees.
Mr. Johnsen responded that the goal is to establish retirement
benefits, health care benefits, and compensation at levels that
"don't drive" an employee's decision. In other words, the goal is
to instead drive the employment decision by allowing the employee
to focus on their research, their teaching, or their administrative
tasks. The majority of the universities in the country have defined
contribution plans similar to ORP; therefore, UA is able "to even
the playing field" with the ORP plan and allow the faculty member's
decision to stay to be based on academics or programmatic grounds
rather than on what type of retirement program are provided.
Senator Hoffman asked regarding the retention record of those
enrolled in ORP since the 1980s.
Mr. Johnsen expressed that the retention has been "very, very good.
The University turnover rate is quite low". Many academics come to
Alaska with the intent to stay for a few years and instead decide
this is home and remain. UA's ability to recruit and retain at this
point is strong.
Senator Bunde disclosed for the record that both he and his wife
are Tier I recipients. He also shared that he has heard from the
public that a change from the current retirement system would
affect recruitment and retention efforts. Tier II or Tier III
employees are as excellent a teacher as those in the Tiers before
them and "it is likely" that employees in a new tier would also be
excellent teachers. "The notion" that a change in the retirement
system would leave the State "with the dregs at the bottom of the
employment barrel … is not representative of the talent pool we
have" in the State. Private sector employers who offer DCP would
argue that their businesses have been able to attract good
employees.
09:46:08 AM
Senator Stedman asked whether the Board of Regents could change the
methodology utilized for determining UA's employer contribution
rate, which currently is the total of both the Normal Rate and the
Past Service Cost. The Past Service Cost is the unfunded liability
component. The current methodology is in part a contributor to the
projection that the UA contribution rate would increase to 50-
percent, which, were it to occur, would result in "an extensive
list of applicants for employment".
Mr. Beedle agreed and replied that this is an opportunity for the
UA to modify the current index, which is based on a three-year TRS
rate. The rate itself is the TRS Board's annual recognized rate
that is subject to the five-percent increase or decrease limit per
year. This rate "is artificially lower than the necessary rate so
that people have a chance to absorb and plan". The UA would desire
more clarity in Statute regarding whether the ORP rate and the plan
are subject to collective bargaining.
Senator Stedman understood therefore that UA is utilizing the
"Total Rate or the combination of the Normal Cost and the Past
Service Cost. Clearly, tying the rate into the Past Service Cost
would be a problematic situation that needs to be resolved for the
University".
SENATOR GARY STEVENS commented regarding the portability verses
stability issue that Senator Hoffman raised, in that school
districts have characterized this as a "double-edged sword" in that
there are both pros and cons in the situation. To that point, he
asked the UA to differentiate the advantages and disadvantages of
changing from a system that provides stability to one that provides
portability.
Mr. Beedle stated that while it is a double-edged sword, there are
opportunities provided by employee turnover. UA has experienced
approximately a ten percent annual turnover. This might exceed that
experienced by the State "as represented by salaries". The
opportunity to attract new people, as the UA expands and begins new
and different programs, is a benefit. The cost of training new
employees is a disincentive. While people might be attracted to UA
because of the portability factor, they tend to stay due to other
attributes of the University. "The current momentum, the current
success, the current growth, the current competitiveness", quality
improvements, and good and consistent leadership the school is
experiencing, together with the portable defined contribution plan,
tend to enhance recruitment efforts rather than being "a
disincentive" to those people who have chosen to remain.
09:51:32 AM
Mr. Johnsen addressed "the pros and cons" of DCP by commenting that
the Plan is more "market sensitive" than a DBP. The DCP allows the
employee to make more decisions regarding their retirement fund
investments. The downside to that is that the employee might not be
as competent in making those decisions, as would a large
institutional fund. "There is also concern about the lack of a
medical benefit in the ORP or other Defined Contribution Plans".
This concern is being increasingly heard from faculty members, and
UA is investigating the possibility of incorporating health savings
accounts into the ORP.
09:52:49 AM
Senator Hoffman noted that the projected increases in benefit
expenses provided by Mr. Johnsen did not correspond with those
provided by Mr. Beedle.
09:54:35 AM
Mr. Beedle clarified that his references were for the years 2004
through 2008 whereas Mr. Johnsen had referenced the years 2005
through 2008. Also included in Mr. Beedle's benefit totals
references were retirement, pension, health and any other benefit
that UA employees receive, including tuition waivers.
Co-Chair Green asked for verification that the amendment proposals
being referenced were included in the "Proposed Amendments for the
ORP Statute" handout.
Mr. Beedle concurred and noted that the changes proposed for AS
14.40 Article 5 would allow UA to make the changes outlined by Mr.
Johnsen.
Co-Chair Green asked whether UA would be available to respond to
questions were these proposals included in the forthcoming
committee substitute.
Mr. Beedle replied in the affirmative.
09:56:48 AM
Mr. Beedle summarized that it is not uncommon amongst both private
and public universities nationwide to have a DCP that might be
"slightly different than some government entities". UA should be
viewed more like a State corporation than a State agency due to the
fact that "62-percent of its revenue is generated from the
University and approximately 38-percent will come from general
funds". UA has an entrepreneurial component in terms of revenue
generation and unlike a State agency, it is not limited to
receiving State general funds "to accommodate their retirement
program", as the UA would anticipate "the majority of the costs to
be passed onto programs and revenue sources outside of the
University". Funding the program in this manner was anticipated
when the ORP program was initiated in the 1980s.
Mr. Beedle noted that while salaries amount to less than ten
percent of the total expenditures of the Alaska Industrial
Development & Export Authority (AIDEA), the Alaska Housing Finance
Corporation (AHFC), and the Alaska Railroad, UA salaries amount "to
60 percent of the cost of operating the university". This is the
reason for "the sense of urgency as the University would otherwise"
be "challenged to bear this cost through other than just State
sources". Therefore, UA is requesting assistance with "the tools"
through which to address the issue.
Co-Chair Green informed Members that the University's request would
be considered as an amendment to SB 141.
10:00:13 AM
Senator Hoffman asked for further clarification regarding the
University's recommendation that current PERS/TRS members be given
an additional one-time opportunity to participate in the ORT
program. The understanding is that this recommendation would not
serve to eliminate PERS/TRS.
Mr. Johnsen responded that the proposal would allow one "additional
opportunity to people who had the option in the past and who
instead of choosing ORP", selected PERS or TRS. These people would
be provided another opportunity to participate in ORP. Another
recommendation is that the Board of Regents would be able to
consider requiring all new employees to participate in ORP. "The
legislation, as drafted, would provide" that ability to the Board
of Regents.
Senator Hoffman understood therefore that the Board of Regents
rather than the Legislature would make this determination.
Mr. Johnsen affirmed.
10:00:49 AM
Senator G. Stevens asked how the situation would be addressed were
a person, at retirement, to have spent half their career in TRS and
the other half in PERS.
Mr. Beedle responded that the answer would depend on which Tier the
employee was in and where they were in regards to vesting and other
retirement qualifications. Upon retirement, they would be entitled
to their benefits, which would have been "collectively invested and
managed through the Retirement Board's investment efforts". In a
DCP, the employee would be provided information that would describe
their responsibility, their risk, and the personal responsibility
they would be assuming. Choices would be made regarding who would
manage those funds for their retirement. "There is nothing to say
that the University won't include some vesting schedule" in the
future; the modifications being proposed would allow for that.
Mr. Beedle expressed that there would be two separate investment
options to existing members: the current PERS/TRS or the ORP. The
Board of Regents would be able to consider the option of allowing
those participating in SBS to rollover, to the extent allowable,
portions of their SBS into ORP.
Co-Chair Green thanked the University for the presentation.
GEORGE SULLIVAN, Chair, Public Employees Retirement System (PERS)
Board, informed the Committee that he is an 83-year resident of the
State.
Co-Chair Green interjected to acknowledge that today was Mr.
Sullivan's eighty-third birthday. [Applause]
Mr. Sullivan stated that other PERS/TRS Board members; specifically
Dr. Richard Solie, Sr. and Kerry Jarrell, who had recently
testified before the Committee, were tasked with addressing the
bill's specifics. He, on the other hand, would be reviewing "the
hemorrhaging" of the systems. The present plan and the indebtedness
issue would continue for quite some time due to the fact there
would still be Tier I, II, and III members. Nonetheless, legal
changes to some areas of the system could help the situation.
Mr. Sullivan shared several areas of concern including: while an
Attorney Generals Office letter has since been written to prohibit
the practice, the Anchorage School District last year provided
retiring principals a $10,000 bonus that were factored into their
retirement pension calculations; and Anchorage police and fire
employees with seniority have the authority "under a union contract
to get all the overtime, especially in their last three years …
which pumps up their retirement". In addition, there have been
situations in which employees were absorbed into a labor group,
which resulted in additional liabilities to the system.
Co-Chair Green understood that the issue of bonuses for departing
members is addressed in the legislation. There is also Legislative
interest in addressing the high three years issue. Alternative
suggestions might include calculating the retirement on an average
of the entire working career or a longer span of time.
Mr. Sullivan understood that language in the bill would address the
high-three year base salary issue.
Co-Chair Green clarified that, to date, this issue has not been
addressed in the bill. However, it is an issue of interest. Another
issue of concern is how to address "the proliferation of … low
salaried elected people who after a minimum number of months and
years are fully vested in the health plan". Efforts should be made
to ensure "that there is legitimate participate" by these people to
insure "that they would contribute enough" to the system which
would provide them a lifetime of health benefits after retirement.
Mr. Sullivan acknowledged that this was a factor in some people's
participation in elected positions. However, this is a component of
the system: "Nobody' at fault, and everybody's at fault" from the
Boards, to the Legislature, to the Actuary and others. "But
everybody is very sincere in wanting to get it corrected".
Mr. Sullivan suggested that some of the amendments that have
occurred over the years in the Tiers plans should be eliminated.
"Many little things" have incurred expenses to the programs.
10:10:31 AM
Mr. Sullivan voiced pleasure that, from July 1, 2004 through
February 2005, the Investment Fund earned one billion dollars.
Mr. Sullivan asked that consideration be provided to retaining the
two separate PERS and TRS Boards. Members of those Boards have made
great contributions. The current appeals process could be likened
to a jury by one's peers.
Co-Chair Green noted that current Board members could apply for
appointment to the new board. Many are "fully qualified and have
good experience". The "reconfiguration of the system" would provide
"one point of responsibility, authority, power and fiduciary", in
addition to being the sole source of information provided to the
Legislature and others.
Mr. Sullivan reviewed the work entailed for Board members and
proclaimed that the members of the new board "would be very, very
busy".
10:13:25 AM
Senator Stedman noted that the issue of modifying a particular
employee group is addressed in the bill in that "those types of
changes are to be run through the actuary" so that the Legislature
could more fully comprehend the financial impact of the decision.
Senator Stedman also commented that in this yearlong review of this
issue, it should be noted that Mr. Sullivan's appointment to and
chairmanship of the Board was considered "a positive".
Mr. Sullivan stated that when he joined the Board, two matters were
particularly disconcerting: one was a summer 2003 letter from the
Municipality of Anchorage asking that the Employer Contribution
rate "be leveled off" rather than decreased, as it was anticipated
that the next year's contribution rate would significantly
increase. The decision to lower the contribution rate was the
suggestion of the actuarial. In addition, in April 2005, the Boards
would be determining the Contribution rates for FY 07 based on June
30, 2004 figures. "That's horrible" as no business could be
successfully run utilizing aging data. Unfortunately, no solution
to resolving this scenario has been determined.
Co-Chair Green communicated that she had asked that same question:
how are private enterprises able to derive "more current
information for making decisions" and make immediate changes to
address the problem.
Mr. Sullivan stated that, otherwise, they would go bankrupt.
Senator Hoffman, noting that the TRS Board consists of fewer
members than the PERS Board, suggested that the proposed make-up of
the new "super board" be revised in order to provide fairer
representation of those boards.
10:19:14 AM
RICHARD SOLIE SR., Vice-Chair, Teachers Retirement System Board,
addressed the Committee to continue his previous day's
presentation.
Senator Stedman commented that Dr. Solie has been working with his
staff to address several areas of concern.
10:20:34 AM
Dr. Solie recalled the previous' days discussion regarding "the
social security (SS) floor that exists" for private and some public
sector employees. This SS floor does not exist for teachers who
have worked their entire professional career in that field and thus
have not contributed to SS. This is "a significant concern" on his
part.
Dr. Solie reminded that the PERS/TRS Boards' Tier Review
Subcommittee had conducted a employer/employee survey in which
employers cited concerns about two elements: reducing overall costs
to include the Past Service unfunded liability and to "share"
rather than "shift" the risk totally to the employees". While the
Subcommittee could not address the unfunded liability issue,
potential tier revisions might "at least help in the ability to
deal with that".
Dr. Solie stated that the plan [Alternative 1] recommended by the
Subcommittee "was carefully crafted to address these two elements:
…a significant shifting of the risk to the employees" as well as a
reduction in costs. He reviewed the employer and employee
contribution rate components of the Subcommittee's Alternative 1
tier redesign recommendation for TERS and PERS. Overall, in regards
to both the medical and pension components the Subcommittee's
proposal would equate to approximately a 39-percent reduction in
Normal Cost for PERS and approximately a 30-percent reduction for
TRS. In addition, the Subcommittee recommended that the employer
would pay an amount less than or equal to that of the employee. A
PERS employee would pay ten percent and the employer would pay
8.75-percent. Each would pay eight-percent in TRS. He spoke in
support of the concept of equal sharing of Normal Cost.
Dr. Solie voiced some concern about SB 141's 100-percent DCP
proposal. The Subcommittee "had voted unanimously against the 100-
percent DC plan" even though it was presented to the full PERS/TRS
Boards as Alternative 2. In contrast, Alternative 1, which was a
blend of a Defined Contribution Plan and a Defined Benefit Plan,
preferred to as either the Blended Plan or the Hybrid Plan, had
unanimous Subcommittee support. However, many of the full PERS/TRS
Board members did not support Alternative 1 due to the inclusion of
"any element of a DC plan". He reiterated that he is supportive of
the Hybrid Plan concept. While most public plans are currently DC
plans, there is growing movement toward Hybrid plans. "It would
behoove Alaska not to get too far out in front of the other
employers" with whom we compete nationwide, particularly in regards
to teachers as recruitment in that arena is already experiencing
difficulties.
10:27:30 AM
Co-Chair Wilken asked for further information regarding the Hybrid
Plan, specifically language in subsection (C) on page three of Dr.
Solie's written testimony [copy on file] that reads, "(C). I
personally pressed for a hybrid plan that included both a 1% DB and
a DC component…"
10:28:03 AM
Dr. Solie explained that Alternative 1 proposed a one-percent
Defined Contribution (DC) component rather than the two-percent
multiplier utilized in the current plan.
In response to a question from Co-Chair Wilken, Dr. Solie replied
that the one or two-percent applies to the percentage of base
salary. Currently "that salary is based on the high three years.
That engenders all kinds of problems". Currently an employee with
20-years of service would receive 40-percent of his or her
retirement base salary. A longer-term employee could receive as
much as 2.5-percent of their retirement base salary.
Dr. Solie stressed that the Alternative 1 proposal would have
implemented a multiplier of one-percent of base salary. The base
salary would be based on the employee's career average as opposed
to being based on the employee's high three years. Under
Alternative 1, a 20-year employee would receive 20-percent of their
retirement base salary. The calculation would be indexed on the
Anchorage Consumer Price Index (CPI), and the resulting base salary
would be "very close" to the base salary calculated in the current
manner. The high three years would not be an issue were it not "for
the distortions that occur…" It should be noted that the
Alternative 1 base salary formula would have been "significantly
lower" than the current formula were the Anchorage CPI not utilized
in the calculation.
Dr. Solie expressed that the problem inherent with the current high
three-year base "is that there is a logical tendency for people to
load up those last years" through such things as overtime and
working in areas that have high cost of living allowances. It has
been reported that, "some employees have doubled their average pay
in their last three years by loading on overtime". The Division of
Retirement and Benefits requested an Attorney General's letter to
address the issue of bonuses that have been provided to encourage
people to retire, being included in the base salary calculation. A
variety of things "have been used to ramp up those high three
years". Under the current plan, a $10,000 pay increase in a 25-year
employee's final year, would increase the annual retirement benefit
by $1,750. Other examples were provided. While a $10,000 increase
in the final year would also affect the benefit calculation
proposed in Alternative 1, the base salary would be calculated on a
career average.
10:36:42 AM
Co-Chair Wilken understood therefore that a blended plan would have
two components: the percentage of base salary monthly pension
component and the new defined contribution system component, which
would be the 401(K) style component.
10:37:27 AM
Dr. Solie agreed and further expressed that the important element
is the fact that the DB component would factor the retirement base
salary differently than the current plan. Overall, most public
entities are offering 100-percent DB plans, many are offering
hybrid or blended plans, "and very few are total DC".
Dr. Solie noted that studies indicate that individually managed
plans experience "significantly lower rates of return" than pooled
accounts and that some people are utilizing "their retirement funds
for purposes other retirement". While this is a concern, he has
chosen not to focus on this during this presentation. However, on
the risk side, it should be noted that "individual investors face
risks that are significantly greater than those for a pooled fund"
for several reasons: first of all " the volatility of the funds is
such that there is a significant possibility that the individual's
planned retirement will coincide with a down market". While an
employee might decide at that time to delay retirement, a long term
down market would "pose serious problems". In contrast, since only
a small percent of employees in a pooled fund might retire each
year, "the pooled fund can balance or level that off over a long
period of time". Therefore, "an individual investor would be in
much more severe risk" than a person in a pooled fund.
Dr. Solie stated that another risk is referred to as the "longevity
risk or longevity factor". In a total DC plan, even were an
individual prudent in handling their finances and had achieved a
reasonable rate of return, the fact that people are living longer
could present a problem in that they might run out of money before
they die. This would not be a problem in a pooled fund because
individuals who outliving the life expectancy would be balanced by
those who do not. While it has been suggested that the individual
investor could purchase an annuity, there is a problem in that an
annuity is subject to the interest at the time it was drawn, and,
were this to coincide with a down market, the individual would
experience a low interest rate. This would result "in a low level
of annuity". In contrast, a pooled fund would be able to spread
interest rate levels over a long period of time.
10:42:13 AM
Dr. Solie reiterated his support for a hybrid plan that would
encompass elements of both a DC and a DB plan.
Co-Chair Green asked for clarification regarding whether the
blended DB/DC plan "would allow for cost sharing between the
employee and the employer".
Dr. Solie replied that in TRS, the employee would pay ten percent
and the employer would pay 8.75 percent of the total cost. The
split would be eight percent employee and eight percent employer in
PERS. He understood that, according to law, the employee's
contribution could not be directed toward the health plan. The
proposed Health Reimbursement Account (HRA) would be a 100-percent
employer paid fund. It should be noted that the employee risk and
cost was increased in Alternative 1 while the employer risk and
cost was decreased. The ability of an employee to access the
retirement fund would be directly related to their retiring from
the system. In other words, were an employee to leave the plan
prior to retirement age, they would be ineligible for retirement
benefits. "This is a significant factor". It would also be a
significant factor in retaining employees. In addition, how the
plan coordinates with Medicaid would be redesigned. In the current
plan, once an employee reaches Medicaid eligibility, there is
essentially no co-pay even though "the plan suggests" otherwise. He
reviewed how the current plans coordinate with the Medicaid
eligible expense" levels in that the plans calculations typically
result in there being no co-pay on the part of the member.
Alternative 1 would change the plan's calculation formula in that
"the co-pays and deductibles would be the same for Medicaid
eligible members as they are for the pre-Medicaid eligible members
so that there is a true 20-percent co-pay".
Co-Chair Green asked for further explanation.
Mr. Solie exampled that was $600 of a $1,000 medical bill
recognized as Medicaid eligible, the doctor could not legally hold
the patient liable for the difference. Therefore, Alternative 1
would specify that 20-percent of the $600 would be the employee's
co-pay. This would serve two purposes: it would reduce the cost of
the plan and, more importantly, would encourage the employee to
monitor those costs. The current calculation does not provide any
incentive to the employee to review charges or refrain from going
to the doctor, as "it doesn't cost them a dime". The HRA would also
provide an additional incentive "as it takes money that is in the
individual's health savings account as it is akin to spending the
employee's own money". Placing responsibilities on the individual
in this manner would provide the incentive to carefully monitor
expenses.
10:49:52 AM
Co-Chair Green understood therefore that in the aforementioned
$1,000 medical scenario, in which Medicaid recognized $600 as being
the legitimate charge, Medical would pay $480, the employee would
pay $120, and the secondary carrier would pay nothing.
Dr. Solie concurred. There are some things that Medicaid would not
cover and in those instances the present plan would address them.
Nonetheless, the co-pay would be expected.
10:50:43 AM
Senator Bunde understood that the unfunded liability being
experienced is the result of there being a DB plan. To that point,
he asked whether the State would continue to experience under-
funding as long as there was a DB component active in the system.
10:52:13 AM
Senator Stedman hypothetically stated that were the State to
implement the hybrid plan, the improvements provided in the DB
portion of the plan would assist in lessening the unfunded
liability "were a similar mess to occur" in the future. It could be
better managed. There are different costs associated with each of
the existing tiers.
Senator Bunde surmised therefore that the opportunity for the
liability to grow would continue to exist, proportionate to the
ratio between the DC and the DB.
Senator Stedman concurred.
Dr. Solie added, for prospective, that the Normal Cost associated
for Alternative 1, was five-percent; the current average for TRS is
13.9-percent; its 12.33 for Tier 2. The exposure would be
significantly less with the one percent of base salary proposed in
Alternative 1. Furthermore, while the actuary had no mechanism
through which to calculate this, the career average salary would
significantly reduce some of the abuses that have occurred.
Dr. Solie hoped that "the future boards would be more conscious of
monitoring the assumptions". "Added care" would be applied in that
regard. "Some of what is being proposed in this bill would
certainly facilitate and encourage that". Some of the "build-up"
resulting from "unrealistic assumptions extending for an
unrealistic period of time … would be eliminated in the future".
This is a separate issue than the investment returns.
10:55:34 AM
Co-Chair Wilken clarified that a Medicare eligible person would be
required to pay a Medicare premium expense each month.
Dr. Solie concurred that, "there are costs there". Medicare premium
would be increasing this year.
Co-Chair Wilken asked whether there was any significance associated
with the one-percent of base salary recommendation.
Dr. Solie replied that rather than being proposed for discussion,
the one-percent of base calculation "was a specific
recommendation". The Subcommittee reviewed several scenarios and
determined that generally Alternative 1 "compared very favorably
with the existing plan in terms of the retirement benefits that it
would produce at the end. It is more favorable for males than for
females", as DCP favor males due to their shorter life expectancy,
and were a male to buy an annuity plan, he would receive a higher
annuity than a female. In one scenario calculation, it amounted to
a ten-percent difference. Alternative 1 "performed well with
reasonable assumptions". He reviewed some of the scenarios that
were calculated. Costs would be higher in a 100-percent DCP as
sufficient additional money must be deposited into the plan to
account for the fact that the employee would generally earns less
than what would be earned by pooled plans. Therefore the employer
must provide the employee "more to make up for that lower than
expected rate of return". Nonetheless, while a 100-percent DCP
might be more expensive in that regard, "it would have less risk".
Alternative 1 had a reduction in costs and "a spreading of risk…"
Senator Stedman revisited the scenario in which an employee who was
100-percent vested in equities faced a downturn in the market at
the time of retirement. He opined that being 100-percent in
equities at that stage of their life "would probably not be the
appropriate situation for the vast majority of people as they end
their earnings careers". However, the risk assumed by an individual
when they select their allocations would not be as well conducted,
as it would be were it being professionally managed.
Dr. Solie responded that the rate of return could be 6.73-percent
for a self-conducted plan verses an 8.25 return otherwise. It would
"be roughly 1.5-percent" lower.
11:00:34 AM
Senator Stedman voiced that "generally speaking" that might be true
for individual investors. He shared that how people have chosen to
allocate their investments through SBS has not been evaluated in
regards to what percent of stocks verses bonds people have chosen.
One option, the Alaska Balance Fund, is 60-percent stocks and 40-
percent bonds. From the employer standpoint, were the employee to
choose to be "completely risk adverse", the question is should "the
employer escalate his contributions to make up for that". Some
spread between stocks and bonds should be the goal through which to
achieve sufficient returns.
11:01:48 AM
Senator Stedman stated in regards to the person who retires and
buys an annuity, that annuity is not inflation proofed.
Dr. Solie concurred and noted that he had inadvertently omitted to
specify that in his earlier comments.
Senator Stedman continued that inflation would erode the annuity
"substantially" were one to have longevity.
Senator Stedman acknowledged that substantial improvements were
presented in the DB portion of the hybrid, or Alternative 1
proposal developed by the Tier Review Subcommittee.
Senator Stedman noted that in moving forward with the DCP proposed
in SB 141, the attempt is to provide fixed rate investment
selections for the risk adverse as well as a blend of stock/bond
and equity selections for others. Many of the issues raised by Dr.
Solie are being recognized and addressed. In addition, he voiced
appreciation for the interest in cost control expressed by Mr.
Sullivan and Dr. Solie.
Senator Hoffman asked whether the one-percent of base salary
proposed in the hybrid plan increased after the 20-year mark, as is
the case with the current plan. The two-percent of base salary
increases upward to 2.5 percent of base salary for years served
after the 20-year mark.
Dr. Solie responded that there would be no increase; it would be a
flat one-percent regardless.
Senator Hoffman asked whether an increase might serve as an
incentive to retaining employees.
11:05:25 AM
Dr. Solie informed the Committee that once a person has worked 20
years, the requirement that they must retire from the plan in order
to receive the health benefits would be an incentive to stay, in
itself. From the position of cost, the flat one-percent of base
salary would incur additional cost savings.
Dr. Solie disclosed that, while it was not formally proposed due to
there being the possibility of legal challenges, the Tier Review
Subcommittee had determined that, were Alternative 1 furthered, the
SBS that is currently available to a number of State employees,
could be eliminated. Alternative 1 would have been "a comprehensive
plan in and of itself" and the SBS would not be necessary. Its
elimination would result "in a huge savings". Furthermore, there
are currently "some inequities", as the SBS is not offered to all
State employees. While the Subcommittee chose not to further the
elimination of SBS, the Legislature would have the resources to
examine this option. There was strong support for eliminating the
SBS in both the Subcommittee and the PERS/TRS Boards in general.
Dr. Solie concluded his remarks.
RECESS TO THE CALL OF THE CHAIR 11:08:07 AM /4:38:23 PM
4:38:29 PM
Discussion Topic: Medical benefits program for defined contribution
plan members.
4:39:15 PM
TRACI CARPENTER, Staff to Co-Chair Green, referenced a handout
titled, "Retirement Security Act, SB 141, Discussion Topic: Medical
Benefits Program for DC Plan Members, March 31st, 2005" [copy on
file].
4:39:21 PM
Page 3
Eligibility for medical benefits ("Retirement")
· A member is eligible for medical benefits when
o The member has been an active member for at least a
year; and
o Meets the requisite age and/or service requirements
of
ΠAge 65 with 10 years of service; or
Π25 years of service for peace
officers/firefighters; 30 years of service for
all others
· The surviving spouse of an eligible member is also
eligible for medical benefits
Ms. Carpenter stated the intent of this presentation is to
reemphasize information from previous discussions and address some
possible changes to the legislation. She read the information of
this page.
4:40:21 PM
Page 4
Proposed change to eligibility
· Remove the requirement for a member to "retire directly
from the system"
o Concept originated in tier redesign initiative
o Purpose: recruitment management tool for hiring
managers who might be aware of a person's history
in the retirement system
o Suggest this is a management decision and should
not be legislated
Ms. Carpenter noted that Dr. Solie had addressed this issue in his
testimony. The concern related to hiring managers who may by
unaware that an individual had only a short amount of time before
becoming vested; and that individual retiring as soon as the
eligibility requirement is met. However, it was determined to be
more appropriate as a management decision rather than a statutory
provision.
4:41:42 PM
Co-Chair Green requested clarification of the eligibility for
medical benefits upon retirement as shown on page 3 of the handout.
4:42:00 PM
Ms. Carpenter explained that a Public Employees Retirement System
(PERS) member must be employed for at least 12 months before
becoming eligible for retirement upon reaching retirement age.
4:42:23 PM
Senator Hoffman clarified that an employee aged 64 or older when
hired must work for twelve months before becoming eligible to
retire, regardless of whether that person has reached the age of
65.
Ms. Carpenter affirmed.
4:42:39 PM
Co-Chair Green understood that this employee would not necessarily
receive "a lifetime" of full benefits.
Ms. Carpenter agreed and explained that the employee must reach the
age of 65 to be eligible for the medical coverage in conjunction
with Medicare; however the employee is also required to have ten
years of service to qualify.
4:43:13 PM
Page 5
Proposed changes to election of benefits
· Add a deferral election of medical benefits to date
specified
· Member must make irrevocable decision of coverage by age
70 1/2 or termination of employment, whichever is later
· Clarify that participation in the retiree major medical
insurance plan is not required to participate in health
reimbursement arrangement
Ms. Carpenter explained this provision would allow a retired
employee to defer participation in the medical insurance plan until
a later date. This would be applicable in situations in which that
employee may be receiving health benefits through another employer,
through a spouse's participation in a health plan, etc. This could
be addressed through regulation rather than statute.
4:44:12 PM
MELANIE MILLHORN, Director, Division of Retirement and Benefits,
Department of Administration, informed that the Division of
Retirement and Benefits has authority to adopt regulations and in
this case would do so to ensure that individuals could defer
participation. This provision would likely include a stipulation
that the individual provide proof of other insurance coverage to
demonstrate no gap in coverage to avoid allowing a member to "pre-
select", which could result in increased costs to the plan.
Co-Chair Green clarified that an employee would not be required to
receive the medical benefits immediately upon retirement from the
system.
Ms. Millhorn affirmed, so long as the member could prove they had
other medical coverage with no lapse in coverage.
4:45:54 PM
Ms. Carpenter listed the second portion of the proposed changes
shown on page 5, which provides that participation in the major
medical plan is not a requirement to participate in the Health
Reimbursement Arrangement (HRA). This option might appeal to
individuals in good health, individuals with a spouse who has
medical coverage, etc. The HRA could be used to fund out-of-pocket
medical expenses.
4:46:37 PM
Co-Chair Green asked if the employer solely funds the HRA program.
Ms. Carpenter answered yes.
Co-Chair Green understood the employee benefits in the HRA are not
transferable or portable.
Ms. Carpenter again affirmed.
4:46:56 PM
Co-Chair Wilken asked why a member would defer their medical
benefits.
4:47:04 PM
Ms. Carpenter exampled young person entering the system at age 25
who worked 30 years until the age of 55 then retired. Under the
current language of the bill, this individual would be required at
the time of retirement to pay a monthly premium for the health
benefits. The individual could prefer to not participate, due to
good health or access to other insurance through a spouse, etc.
Co-Chair Wilken asked for further explanation.
Ms. Carpenter explained that the employer would contribute to the
health benefit costs once the individual has reached the age of 65
or becomes Medicare eligible.
4:47:54 PM
Senator Hoffman asked how this proposal differs from the existing
benefit system.
4:48:02 PM
Ms. Millhorn described the medical plan currently in statute. Upon
retirement, a qualified individual receives a pension benefit,
which includes a medical benefit. She gave as an example a tier I
employee who retires at age 55 and receives a pension benefit as
well as a medical benefit for themselves and their dependants.
4:48:54 PM
Co-Chair Green understood the Division has implemented changes to
the retired medical benefits program in recent years that have
resulted in some savings. She asked what legislative changes would
further enable the Division to reduce expenses, and what proposed
statutory changes would hamper that effort.
4:50:04 PM
Ms. Millhorn detailed the current process in which health
evaluation committees comprised of PERS and Teachers Retirement
System (TRS) members, as well as the Department, make
recommendations to the commissioner of the Department of
Administration. Commissioner Matiashowski has issued a mandate to
identify and consider potential cost savings. The commissioner has
the authority to implement certain changes to the system. This
process provides flexibility to implement changes in a timely
manner. If statutory amendments were required, the amount of time
required could negate some of the potential savings.
4:51:39 PM
Co-Chair Green stressed the importance that the statutory changes
proposed in this legislation not become too restrictive to the
Department.
Co-Chair Green knew of changes to the plan involving greater use of
generic drugs and a requirement that beneficiaries submit proof of
eligibility. She asked about other efforts.
4:52:13 PM
Ms. Millhorn told of the preferred provider provision enacted in
the year 2003. This stipulates that active members who receive
hospital treatment in the Anchorage area must receive that
treatment at Providence Medical Center. Before this requirement was
enacted, 80 percent of the Anchorage resident members had already
received any hospital care at that facility. This provision results
in a cost savings of $1.5 million. The intent is to implement this
provision for the retiree medical plan as well.
Ms. Millhorn told of another major initiative implemented for the
first time. This involves an "open enrollment plan" and would
require proof of eligibility for dependants, such as marriage
licenses. This would be implemented in July 2005 for active members
and in January 2006 for retiree members. An auditor predicted this
would reduce the number of dependants receiving benefits by 15
percent and would save $4 million annually for the active member
plan and $16 million annually for the retiree plan.
4:54:18 PM
Co-Chair Green directed the Division to inform the Committee of any
matters that should be legislated or not legislated to facilitate
further cost savings. She exampled a requirement for the use of
generic brand drugs. She had understood the Division already has
the authority to implement such a requirement.
4:54:55 PM
Ms. Millhorn affirmed the Division has this authority. She agreed
that flexibility to implement cost reductions is beneficial.
4:55:06 PM
Page 6
What are the medical benefits?
· Access to the retiree major medical plan and the health
reimbursement arrangement (HRA)
· "Access" to the major medical plan means a person may not
be denied coverage except for failure to pay the required
premium
· Coverage of an eligible member includes the member,
member's spouse, and member's dependent children
· Coverage of a surviving spouse includes the surviving
spouse and dependent children of surviving spouse
Ms. Carpenter overviewed the information on this page.
4:55:50 PM
Page 7
Proposed change to coverage
· Change language to cover only "the dependent children of
the eligible member who are dependent on the surviving
spouse"
· Prevents coverage of second family dependents that had no
relation to the member
· Keeps plan qualified under federal regulations
26 U.S.C. 152 defines a dependent child as: a son, daughter,
stepson, stepdaughter, eligible foster child, or adopted child
who lives with the member, is less than age 19 (less than age
24 if a student), and has not provided more than one-half of
their own support during the year
Ms. Carpenter explained that this provision was excluded from the
bill due to a drafting oversight.
4:56:29 PM
Co-Chair Green assumed that benefits provided to persons who are
not dependents of the member would constitute income that must be
claimed on federal income tax filings.
Ms. Carpenter affirmed that this practice would be out of
compliance with federal tax regulations.
4:56:53 PM
Page 8
Major medical plan premiums
· "Early retirees" are members and surviving spouses who
meet the service requirements for eligibility but are not
eligible for Medicare
o Pays one of the full monthly group premiums for
coverage (retiree only, retiree + spouse, retiree +
family, retiree + children)
· Medicare eligible (currently age 65) members and
surviving spouses pay a portion based on the member's
years of service
o 30% for 10-14 years
o 25% for 15-19 years
o 20% for 20-24 years
o 15% for 25-29 years
o 10% for 30+ years
Ms. Carpenter overviewed this information
Co-Chair Green noted that this plan would not have one rate for
every retiree.
Ms. Carpenter affirmed.
4:57:41 PM
Ms. Carpenter continued that the premium amount would be less for
Medicare eligible benefits than the premium for pre-Medicare
benefits.
Co-Chair Green asked if a member who worked at least 30 years would
pay only ten percent of the premium.
Ms. Carpenter affirmed.
4:58:19 PM
Page 9
Major Medical premiums cost example
· FY 2004 Medicare projected claim cost: $2,667
· Defined health benefit contribution % based on length of
service of the member
Member's Years of Service: 10-14
Annual Employee Contribution: 30% $800
Annual Employer Contribution: 70% $1,867
Member's Years of Service: 15-19
Annual Employee Contribution: 25% $667
Annual Employer Contribution: 75% $2,000
Member's Years of Service: 20-24
Annual Employee Contribution: 20% $533
Annual Employer Contribution: 80% $2,134
Member's Years of Service: 25-29
Annual Employee Contribution: 15% $400
Annual Employer Contribution: 85% $2,267
Member's Years of Service: 30+
Annual Employee Contribution: 10% $267
Annual Employer Contribution: 90% $2,400
Ms. Carpenter noted this information was calculated based on
information provided by Mercer Consulting, Inc.
4:58:42 PM
Senator G. Stevens, referring to the provision stipulating
qualifying dependents, asked if adopted children would qualify.
Ms. Carpenter replied that this provision would include these
dependants so long as the dependant is an adopted child of the
member.
4:59:12 PM
Page 10
Employer contribution for major medical coverage
· Employer pays 3.75% of employee compensation into a
health trust fund
o Current bill language calls for deposit into active
group life and health insurance trust fund
o A legal opinion is presently being sought on
accounting methods vs. true separation of assets
o Anticipated that language will have to be changed
in some way
· Employer contribution was projected based on the tier
redesign initiative which contains separate rates for TRS
(3.75%) and PERS (3.5%)
Ms. Carpenter overviewed the information on this page. The language
in the bill regarding deposit of employer contributions into one
trust fund may not be allowable. Although it may be desirable to
pool these funds; however the exclusive benefit rules governing
each may prevent this practice.
5:00:24 PM
Senator Bunde pointed out that if these funds could not be pooled
in the formation of the new tier, the fund would start from zero.
He asked how monies would be immediately generated to pay benefits
for tier 4 members.
5:00:51 PM
Ms. Carpenter responded that the members of the new tier system
would not be eligible for benefits for ten years.
5:01:09 PM
Senator Hoffman asked the status of funds invested in the trust
accounts for an employee who works nine years then terminates from
the system.
5:01:19 PM
Ms. Carpenter replied that those funds would remain in the health
trust fund, as those funds are designated for the exclusive benefit
of the plan. It is anticipated that if an individual returned to
work, their account would be reactivated and interest would accrue.
5:01:52 PM
Senator Hoffman remarked that a percentage of these employees would
never return and asked if the funds contributed on their behalf
would remain in the trust account.
5:02:07 PM
Ms. Carpenter affirmed. The bill has no provision to address these
funds, and therefore the funds would continue to be held in the
trust account in perpetuity.
5:02:25 PM
Senator Hoffman clarified that the benefits would only be received
upon retirement and to those members who worked at least ten years
for a participating employer.
Ms. Carpenter affirmed.
5:02:43 PM
Co-Chair Green asked if the Committee was awaiting legal advice on
the matter of employer contributions to the health reimbursement
arrangement (HRA) account for employees who do not become vested.
Ms. Carpenter answered that legal counsel is being sought on the
trust fund issue and whether contributions must be made to separate
funds. The issue Senator Hoffman spoke to was the status of funds
contributed by employers to the health reimbursement account on
behalf of employees who leave the system before working ten years
and becoming vested.
5:03:37 PM
Ms. Carpenter announced that the current employer contribution rate
of 3.75 percent was derived from the tier redesign initiative and
is used for both PERS and TRS members through this legislation for
ease of comparison. Because the employer does not share medical
benefit costs with the employee until the employee reaches the age
of 65 or becomes Medicare eligible, Mercer Consulting was asked the
impact of this. The consultant reported that the projection for
medical normal costs is reduced by approximately two percent. The
new medical cost rate for TRS is therefore projected to be 1.5
percent and 1.4 percent for PERS, which is demonstrated on Page 11.
5:04:36 PM
Page 11
Rationale for cost sharing only after Medicare
· 25 states have a normal retirement age of 65, including
o Arizona, Idaho, Nevada and Washington
· 75% of the retiree medical costs for the AlaskaCare Plan
are from normal retirement age until members are Medicare
eligible
· Eliminating the cost sharing between ages 60 and 65
reduces the medical normal cost rates to 1.5% (TRS) and
1.4% (PERS)
Ms. Carpenter stated this is the rationale for choosing this method
of cost share program. She overviewed the remainder of the
information on this page. During the five-year period between the
normal retirement age of 60 and the age of Medicare eligibility of
65, the plan incurs 75 percent of its costs.
5:05:28 PM
Senator G. Stevens asked if this is because retirees beyond the age
of 65 are covered by federal insurance.
Ms. Millhorn answered yes, that when a member reaches the age of
65, the Alaska plan coordinates with Medicare for coverage. This
results in significant cost savings for post age 65 members
compared to pre age 65 members. Pre age 65 members, regardless of
their tier, incur 75 percent of the costs. In the year 2004, the
total medical claims costs for the retiree program was $225
million, with only 25 percent being paid for post age 65 members.
5:06:33 PM
Senator Bunde remarked that although this may provide a good
medical plan, many members might be unable to locate a physician
willing to accept Medicare payment. He asked if members must
participate in the Medicare program to receive benefits through the
State plan. He suggested this proposal would result in "selling
them a service they can't use."
Co-Chair Green replied that participating in Medicare is not an
option.
Senator Bunde noted that people over the age of 65 have the option
of continuing to work, in which case they would not be required to
enroll in Medicare.
Co-Chair Green agreed.
5:07:34 PM
Page 12
Medical costs
· Every 1% of base payroll = $21.6 million
[Spreadsheet showing Medical Normal Cost Rates as follows:
PERS
Total FY 06 Estimated Base Payroll: $1,587,594,875
Current DB Plans: 8.68%
Medical Cost in Dollars: $137,803,235
Tier Redesign Initiative: 3.5 %
Medical Cost in Dollars: $55,565,821
SB 141 (implied): 1.4%
Medical Cost in Dollars: $22,226,328
TRS
Total FY 06 Estimated Base Payroll: $573,410,095
Current DB Plans: 9.07%
Medical Cost in Dollars: $52,008,296
Tier Redesign Initiative: 3.75%
Medical Cost in Dollars: $21,502,879
SB 141 (implied): 1.5%
Medical Cost in Dollars: $8,601,151
Total Annual Medical
Current DB Plans: $189,811,531
Tier Redesign Initiative: $77,068,699
SB 141 (implied): $30,827,480
Total Payroll: $2,161,004,970
Savings:
Tier Redesign Initiative: $112,742,832
SB 141 (implied): $158,984,051
Ms. Carpenter explained this is a demonstration of the medical
costs.
5:08:29 PM
Senator Hoffman savings because changing from prepaid medical
program to the proposed program.
Ms. Carpenter correct. This legislation would provide that members
pay a "great deal more of the cost" in that they would pay the
insurance premium from the date of employment termination until
they reach the age of eligibility for Medicare.
5:09:08 PM
Senator Bunde asked if a member retires after 30 years of service
at the age of 55 whether that member would receive no insurance
until they reach the age of 65.
Ms. Carpenter replied that the member would be eligible to
participate in the plan and pay the plan premium.
Senator Bunde asked if the member would be required to pay $400 as
indicated on page 9.
Ms. Carpenter corrected that the information of page 9 pertains to
individuals eligible for Medicare. The premium is considerably
higher for pre Medicare eligible individuals. Those individuals
would bear the full cost of the premium. She estimated the premium
at approximately $800 current dollar value.
5:10:15 PM
Senator Bunde stated that a member who retires at age 55, who seeks
medical coverage would be required to pay $800 per month for ten
years.
Ms. Carpenter answered this is correct; however, the member could
utilize funds from their HRA account to offset the premium costs.
5:10:45 PM
Senator Bunde asked if the health reimbursement arrangement is
solely the responsibility of the employee or if the employer
matches contributions.
Ms. Carpenter replied that the HRA involves employer contribution
only. She stated that the current version of the bill provides that
one percent of the average employer group salary is contributed by
the employer into the fund.
5:11:14 PM
Co-Chair Green pointed out that in the years after a person has
retired and before becoming eligible for Medicare, the ability to
purchase health insurance is a significant issue. This proposal
guarantees that members could participate in a health insurance
plan.
5:11:53 PM
Senator G. Stevens questioned Senator Bunde's earlier comment
asking for clarification that if a member retires and becomes
eligible for Medicare benefits, the impact is less to the State
system; however, if that person continues to work for a
participating employer, a "drain" is made to the system.
Ms. Carpenter clarified that if a member continues to work for a
participating employer, that member is covered as an active
employee.
Senator G. Stevens asked if this applies to active employees age 65
and over.
5:12:54 PM
Senator Bunde clarified his earlier statement, saying that the
Medicare program is comprised of two components, one relating to
catastrophic insurance coverage, and the other a more general
health care coverage. At the age of 65, an individual is required
to "take" the catastrophic coverage but is not required to enroll
in the other service at a cost of $50 per month if that individual
has other insurance coverage.
5:13:24 PM
Senator G. Stevens commented that the practice of members continue
to work and not enroll in the extended Medicare benefits is a cost
to the State system.
5:13:30 PM
Co-Chair Wilken asked how long the funds in the health
reimbursement agreement account would last for a member who worked
30 years, retired at age 55 and paid the approximately $800 monthly
premium for continued health coverage.
Ms. Carpenter replied that the amount of members' HRA account would
be at the age of retirement is still being calculated. She
estimated the amount to be $25,000 ore more, dependant upon the
rate of return and the employer average wage group growth from year
to year. Presently, the legislation contains a provision limiting
the annual contribution to no more than $500. This would limit the
growth of the funds, because within five to seven years, this $500
limit would be reached.
5:15:03 PM
Senator Hoffman asked if no past service rate would be imposed to
recover medical costs.
5:15:18 PM
Ms. Carpenter answered, no.
5:15:20 PM
Senator Hoffman asked if the past service rate would only be
imposed for the retirement program.
Ms. Carpenter explained that no past service cost is included in
this plan, "just by the nature of it being a defined contribution
plan."
5:15:40 PM
Senator Hoffman referenced testimony citing the losses of $5.7
billion have been directly attributed to medical costs. This is the
State's responsibility, but asked why no past costs are included in
the proposed plan.
5:16:28 PM
Senator Stedman replied that under the current tier structure, the
employer and employee makes contributions and make an estimated
contribution rate that is intended to pay the benefits of the
future. If the estimations are insufficient, the deficit
accumulates as a past service cost.
5:17:11 PM
Senator Bunde calculated that a retired member at age 55 could
utilize funds from their HRA account to approximately three to four
years of the premium for health insurance coverage. An option for
the member would be to subsidize those payments from other sources
and spread the HRA account over a longer period.
Ms. Carpenter agreed based on the estimate figures she provided.
She stressed there would be no requirement to pay these premiums
with funds from the HRA, a member could utilize other funding
sources available to them and chose to utilize the HRA funds for
other medical expenses.
Senator Bunde predicted that age 62 would become a standard
retirement age.
5:18:28 PM
Ms. Millhorn commented that SB 141 "does an excellent job at
redesigning the medical plan." Testimony, as well as Division
research has indicated that a primary driver associated with the
underfunded status is the medical portion of the plan. Many states
have increased the retirement age to 65 years, therefore reducing
their medical costs. This proposal includes the "element of
consumer driven health care attached to it". This shares
responsibility for these costs with the employee, thus providing
incentive for employees to give consideration to costs for health
services. She pointed out that when purchasing a new vehicle,
consumers research the options and the costs of vehicles in making
a purchasing decision. This is not done for health care services.
This bill would change this practice.
5:20:07 PM
Senator Bunde mentioned a formula to determine whether an
individual is able to retire, using the age multiplied by the
number of years worked and other factors. She asked if the witness
knew this formula.
5:20:31 PM
Ms. Millhorn indicated she would research the matter.
5:20:47 PM
Senator Bunde suggested this would be helpful for comparative
purposes.
5:20:58 PM
Ms. Carpenter asked if Senator Bunde was referencing a "rule"
whereby retirement is dependent upon a combination of age plus
service equaling a set number. She had information regarding this
calculation for every state.
Senator Bunde noted that age 55 is a young age to retire, and
wanted comparison information of other states.
5:21:44 PM
Senator Stedman requested an explanation of how the State would
finance its portion of the premium, which could assist in answering
Senator Hoffman's question.
5:22:17 PM
Ms. Carpenter detailed the cost-sharing plan implemented once a
member reaches the age of 65 or becomes Medicare eligible. Based on
the number of years a member worked for a participating employer,
the member would pay a maximum of 30 percent of the insurance
premium after becoming Medicare eligible. The employer would pay
the remaining amount of 70 percent or less for employees with fewer
years of service.
Senator Stedman asked where the employer would secure funds for its
portion of the cost sharing.
Ms. Carpenter replied these funds would be paid from the retiree
health trust. Currently, employers contribute 3.75 percent of each
employee's salary to the retirement trust, although it is estimated
that only 1.5 percent would be required for medical benefits, based
on information provided by Mercer Consultants, Inc., as well as
data garnered from the existing medical plan. The proposed
retirement management board would manage the health trust.
5:23:55 PM
Senator Stedman asked if management of the health trust account
would involve an actuary analysis process to calculate the
necessary contribution rates to fund the benefit liability.
5:24:15 PM
Ms. Carpenter replied this would occur due to requirements for
actuarial evaluation stipulated in the bill; however, the current
language establishes the employer contribution rate.
5:24:44 PM
Senator Stedman stated that if health care costs accelerated higher
than anticipated, a situation could occur in which the health trust
would have an unfunded liability. In this event, the legislature
could amend statute to increase employer contribution rates.
Ms. Carpenter affirmed.
Senator Stedman noted this is a "difference in the magnitude, but
the concept is the same."
5:25:29 PM
Senator Hoffman asked how health care benefits are paid for current
retiree members.
5:25:40 PM
Ms. Carpenter replied that the monthly premium amounts for
insurance for current members are transferred from the PERS or TRS
trust funds into the retiree health trust account.
Senator Hoffman asked if funds for both current and future
employees would be held in the same retiree health trust.
Ms. Carpenter answered this is not the intent, as legal constraints
likely would prohibit the pooling of funds in this manner.
5:26:34 PM
Kathleen Strasbaugh spoke out of range of the microphone.
5:26:50 PM
Ms. Millhorn informed that the Division has many initiatives
underway. A pending lawsuit pertaining to medical costs is
challenging current practice. The Alaska Supreme Court issued a
decision in the year 2003.
5:27:27 PM
KATHLEEN STRASBAUGH, Assistant Attorney General, Labor and State
Affairs Section, Civil Division, Department of Law, testified that
the Division of Retirement and Benefits made changes to the retiree
health plan in 1999 and 2000 intending to be balanced in increased
benefits and detriments. The changes affected out-of-pocket
expenditures, maximum lifetime benefits, issuance of drugs, stop-
loss provisions, travel requirements and coordination of benefits
with the Medicare program.
Ms. Strasbaugh informed that the National Education Association,
the American Federation of State, County and Municipal Employees,
and another retiree affiliated organizations filed a class action
suit challenge these changes on the grounds they constitute a
diminishment of benefits. The Alaska Superior Court found, on
summary judgment, that the changes did violate constitutional
provisions. This decision was made without production of
significant evidence and without a "trial-type proceeding".
Ms. Strasbaugh continued that the Alaska Supreme Court accepted the
case on petition from the State for review to settle the
constitution question. The Supreme Court held that while the
constitutional provision does apply to health benefits and
therefore benefits and detriments must be offset, but also that
this determination must be made on a group basis, rather than
individual perception allowing members to "pick and choose". The
case was considered to have prevailed because the summary judgment
was not reversed.
Ms. Strasbaugh listed next task is to evaluate the events of 1999
and 2000 to determine whether the benefits and detriments are
actually balanced. Both parties would likely file motions or a
trial would be held on this issue. No stay was issued, but
inspection of any proposed change to ensure that any impacts would
be offset by benefits to members, would be appropriate.
5:30:44 PM
Co-Chair Green asked if the witness new the timeframe in which this
matter would be resolved.
5:30:51 PM
Ms. Strasbaugh did not. A trial order has not been issued and the
parties have been exchanging information and holding depositions of
experts. This work is yet to be completed.
5:31:20 PM
Co-Chair Green announced that amendments would be introduced and
would be included in discussion.
Co-Chair Green ordered the bill HELD in Committee.
ADJOURNMENT
Co-Chair Green adjourned the meeting at 05:32 PM
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