Legislature(2013 - 2014)FBX LIO Rm 308

11/01/2013 09:00 AM Senate FINANCE


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09:00:24 AM Start
09:00:39 AM Presentations: Unfunded Liability for Public Employees' Retirement System (pers) and Teachers' Retirement System (trs)
02:20:47 PM Department of Health and Social Services Fy 14 Budget Overview and Fy 15 Budget Preview
03:07:00 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ 9:00 a.m. - 12:00 p.m. TELECONFERENCED
Unfunded Liability for Public Employees'
Retirement System (PERS) and Teachers'
Retirement System (TRS)
Presentations by:
Alaska Retirement Management Board
Legislative Finance Division
Department of Administration
Department of Revenue
1:30 p.m. - 4:30 p.m.
FY14 Budget Overview and FY15 Budget Preview:
William Streur, Commissioner
Department of Health and Social Services
                 SENATE FINANCE COMMITTEE                                                                                       
         FAIRBANKS LEGISLATIVE INFORMATION OFFICE                                                                               
                     November 1, 2013                                                                                           
                         9:00 a.m.                                                                                              
                                                                                                                                
Note: The following meeting convened in the Fairbanks                                                                           
Legislative Information Office and was teleconferenced and                                                                      
recorded in Juneau.                                                                                                             
                                                                                                                                
9:00:24 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Kelly  called the  Senate Finance Committee  meeting                                                                   
to order at 9:00 a.m.                                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Pete Kelly, Co-Chair                                                                                                    
Senator Kevin Meyer, Co-Chair                                                                                                   
Senator Anna Fairclough, Vice-Chair                                                                                             
Senator Click Bishop                                                                                                            
Senator Mike Dunleavy                                                                                                           
Senator Lyman Hoffman                                                                                                           
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Senator Donny Olson; Fred Sturman, Self, Kenai.                                                                                 
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Kristin  Erchinger,  Member,   Alaska  Retirement  Management                                                                   
Board;  Robert Grove,  Retired  Public  Employees of  Alaska;                                                                   
Ron  Johnson, Retired  Public  Employees  of Alaska;  Charles                                                                   
Gallagher,  Chair,   Retired  Public  Employees   of  Alaska;                                                                   
Michael   Barnhill,   Deputy  Commissioner,   Department   of                                                                   
Administration;    Angela   Rodell,   Acting    Commissioner,                                                                   
Department   of  Revenue;   Gary   Bader,  Chief   Investment                                                                   
Officer,  Treasury  Division,  Department of  Revenue;  David                                                                   
Teal,   Director,   Legislative   Finance   Division;   James                                                                   
Armstrong,  Staff, Senator  Co-Chair  Meyer; William  Streur,                                                                   
Commissioner,  Department  of  Health  and  Social  Services;                                                                   
Senator Charlie Huggins.                                                                                                        
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
Unfunded Liability  for Public  Employees' Retirement  System                                                                   
(PERS) and Teachers' Retirement System (TRS) Presentations:                                                                     
                                                                                                                                
     Alaska Retirement Management Board                                                                                         
     Department of Administration                                                                                               
     Legislative Finance Division                                                                                               
     Department of Revenue                                                                                                      
                                                                                                                                
FY 14 Budget Overview and FY 15 Budget Preview:                                                                                 
                                                                                                                                
     Department of Health and Social Services                                                                                   
                                                                                                                                
9:00:39 AM                                                                                                                    
                                                                                                                                
^PRESENTATIONS:  UNFUNDED  LIABILITY  FOR  PUBLIC  EMPLOYEES'                                                                 
RETIREMENT  SYSTEM  (PERS) AND  TEACHERS'  RETIREMENT  SYSTEM                                                                 
(TRS)                                                                                                                         
                                                                                                                                
9:00:52 AM                                                                                                                    
                                                                                                                                
KRISTIN  ERCHINGER,  MEMBER,   ALASKA  RETIREMENT  MANAGEMENT                                                                   
BOARD, testified  that the board had researched  and educated                                                                   
itself  about the  issue  of  unfunded liability.  The  board                                                                   
wished  to convey  the  information  to the  legislature  for                                                                   
decision  making  purposes.  She   initiated  the  PowerPoint                                                                   
presentation  titled  "Alaska  Retirement  Management  Board"                                                                   
dated November  1, 2013 (copy  on file). She noted  that some                                                                   
slides   would   be  skipped   in   the  morning,   but   the                                                                   
presentation was  available in member's packets  and on BASIS                                                                   
for the public.                                                                                                                 
                                                                                                                                
Ms.  Erchinger   began  with  slide  1:   "Alaska  Retirement                                                                   
Management Board (ARMB)."                                                                                                       
                                                                                                                                
   · Role of the Alaska Retirement Management Board                                                                             
   · ARMB Actions(and Limitations) to Address Unfunded                                                                          
     Liability                                                                                                                  
   · Funding Request                                                                                                            
   · Outcomes of Anchorage Stakeholder Workshop                                                                                 
                                                                                                                                
Ms. Erchinger recognized  that the unfunded liability  of the                                                                   
retirement  system   was  astronomical  with   a  significant                                                                   
effect  on  the state.  The  actions  taken  by ARMB  on  the                                                                   
unfunded  liability  strained  the  state  budget  making  it                                                                   
difficult for competing stakeholders. Stakeholders were                                                                         
poled at a recent meeting to attempt to craft a solution of                                                                     
least financial impact for Alaska.                                                                                              
                                                                                                                                
9:04:03 AM                                                                                                                    
                                                                                                                                
Ms. Erchinger continued with slide 2: "Role of ARMB."                                                                           
                                                                                                                                
     Alaska Retirement Management Board (2005 - present)                                                                        
   1. Manage/invest assets to  meet  liabilities and  pension                                                                   
     obligations of the systems, plan, program and trusts.                                                                      
   2. Set employer contribution rates                                                                                           
   3. Greater duty  w/respect   to  pension  liabilities  and                                                                   
     obligations                                                                                                                
   4. Recommend to budget-setting and appropriations  arms of                                                                   
     gov't, but cannot appropriate or submit a budget                                                                           
   5. Adopt investment  policies   for  each  of  the  Funds;                                                                   
     approve investment options for DC plans after                                                                              
     consulting with Plan Administrator.                                                                                        
                                                                                                                                
Ms. Erchinger continued with slide 3: "Role of ARMB."                                                                           
                                                                                                                                
   6.  Approve investment objectives for DB Plans                                                                               
   7.  Annual actuarial   evaluation  to   determine  assets,                                                                   
     accrued liabilities, funding ratios and certify                                                                            
     appropriate contribution rate for normal cost and                                                                          
     liquidating past service liability                                                                                         
   8. Annually report  to  Governor,  legislature,  employers                                                                   
     valuation of trust fund assets and liabilities and                                                                         
     other statistical data to understand system                                                                                
   9. Quarterly  report   of    investment   performance   to                                                                   
     Legislative Budget and Audit                                                                                               
   10.    Contract  for  services  to execute  boards  powers                                                                   
     and duties                                                                                                                 
                                                                                                                                
Ms. Erchinger discussed slide 5: "Limited Ability to Impact                                                                     
Unfunded Liability."                                                                                                            
                                                                                                                                
     ARMB Responsibilities:                                                                                                     
        · Determine    asset   allocation   and    investment                                                                   
          objectives                                                                                                            
        · Determine amortization methodology                                                                                    
        · Set investment return assumption                                                                                      
        · Set employer contribution rates                                                                                       
        · Provide input on actuarial assumptions                                                                                
                                                                                                                                
9:06:37 AM                                                                                                                    
                                                                                                                                
Ms.  Erchinger noted  that a  typical pension  system had  70                                                                   
percent  of   paid-out  benefits   derived  from   investment                                                                   
earnings. To  the extent that  ARMB had sufficient  assets in                                                                   
the  retirement  plan, future  benefits  would  be paid,  but                                                                   
without  the money  upfront,  investment  earnings would  not                                                                   
provide   the  necessary   benefit   payments.  The   benefit                                                                   
payments would instead  come from the state  and employers in                                                                   
the system.  She stressed  the importance  of up-front  money                                                                   
available  in  the  system  to  drive  the  earnings  to  pay                                                                   
pension benefits.                                                                                                               
                                                                                                                                
9:08:42 AM                                                                                                                    
                                                                                                                                
Ms.  Erchinger  stated  that  the  level  percentage  of  pay                                                                   
method held  that as the  covered payroll grew,  the mortgage                                                                   
payments grew over  time. The board recognized  that the plan                                                                   
was contrary  to Alaska's likely  reduction in  oil revenues.                                                                   
A levelized  mortgage payment would  allow a closer  match to                                                                   
the future state revenue.                                                                                                       
                                                                                                                                
Ms.  Erchinger added  that ARMB  set  the investment  returns                                                                   
assumption and employer contribution rates.                                                                                     
                                                                                                                                
9:09:34 AM                                                                                                                    
                                                                                                                                
Ms.  Erchinger noted  that actuarial  assumptions were  often                                                                   
seen  as untrustworthy  and  as  the  cause of  the  unfunded                                                                   
liability. She argued  that other factors contributed  to the                                                                   
state's unfunded  liability. She  discussed a change  in plan                                                                   
benefits  in recognition  of  the tremendous  liability.  She                                                                   
agreed  that actuarial  assumptions  played a  large role  in                                                                   
the  unfunded  liability  of  the  state's  system,  but  she                                                                   
stressed  that the  assumptions  provided the  best tool  for                                                                   
the board.                                                                                                                      
                                                                                                                                
Ms. Erchinger  noted that the  board had been  criticized for                                                                   
not doing  enough to  solve the  unfunded liability  problem.                                                                   
She  explained that  the board  could  not appropriate  funds                                                                   
and  submit budgets  to affect  the  unfunded liability.  She                                                                   
stated that the  board supported pension obligation  bonds as                                                                   
a tool,  but she  could not  authorize issuance  of bonds  or                                                                   
any type of loan between state funds.                                                                                           
                                                                                                                                
9:11:34 AM                                                                                                                    
                                                                                                                                
Ms.  Erchinger  stressed that  the  board  wished  to open  a                                                                   
dialog with  the legislature.  She noted the  board's support                                                                   
of   direct   appropriations    by   requests   through   the                                                                   
legislature  into the  PERS and  TRS system.  She noted  that                                                                   
the  money  would  earn interest  to  pay  pension  benefits,                                                                   
reducing  the need for  future contributions  from the  state                                                                   
in the  future. The  board supported  the use  of the  use of                                                                   
pension  obligation   bonds  as   a  partial  and   potential                                                                   
solution  to address the  unfunded liability.  She noted  the                                                                   
reduction of  the earnings assumption  rate in the  plan from                                                                   
8.25  percent  to  8  percent.  She noted  a  change  in  the                                                                   
amortization  payment to flatten  the mortgage payments  over                                                                   
time.                                                                                                                           
                                                                                                                                
Slide  7:  "Where  We  Have  Been."   The  Alaska  Retirement                                                                   
Management Board evaluated 40 potential scenarios in 2011.                                                                      
                                                                                                                                
     Recommended:                                                                                                               
        · 25-year or 30-year amortization                                                                                       
        · Lump-sum contributions with continued State                                                                           
          assistance                                                                                                            
        · Change to level dollar amortization                                                                                   
     Rejected:                                                                                                                  
        · Lump-sum contributions with no further State                                                                          
          assistance >22 percent                                                                                                
        · Cost-shifting from the State to municipalities                                                                        
          and vice-versa                                                                                                        
        · Requiring assets outside trust fund be used to                                                                        
          set rates                                                                                                             
        · Extending amortization if significantly higher                                                                        
          costs than status quo                                                                                                 
                                                                                                                                
Ms.  Erchinger  mentioned  that  in 2011,  the  ARMB  reduced                                                                   
their  earnings   assumption  from   8.25  percent   to  8.00                                                                   
percent. The  return was believed  to be consistent  with the                                                                   
asset allocations.  The risks  and rewards of  the allocation                                                                   
were  balanced  to  achieve  the  target  return.  She  noted                                                                   
increased  difficulty achieving  the target  return with  the                                                                   
oncoming liquidity  problem. With insufficient  assets to pay                                                                   
benefits,  the state must  draw down  their assets  affecting                                                                   
the  ability  for  long-term   investment.  The  decision  to                                                                   
reduce the investment  earnings assumption from  8.25 percent                                                                   
to  8.00 percent  impacted the  funded  ratio because  future                                                                   
assets  will be lower  as a  result of  the lower  investment                                                                   
return.                                                                                                                         
                                                                                                                                
9:13:53 AM                                                                                                                    
                                                                                                                                
Ms. Erchinger moved  to slide 8: "Impact of  Reduced Earnings                                                                   
Assumption."                                                                                                                    
                                                                                                                                
   · Reduced earnings assumption 8.25 percent to 8.00                                                                           
     percent                                                                                                                    
  · 3.12 inflation assumption = 4.88 percent real return                                                                        
   · Return is consistent with asset allocation                                                                                 
   · Reduces funded ratio due to lower assumed future                                                                           
     assets                                                                                                                     
   · Increased ER rate by 1.53 percent PERS; 1.88 percent                                                                       
     TRS (2012)                                                                                                                 
                                                                                                                                
Ms.  Erchinger highlighted  the investment  returns on  slide                                                                   
9.  The slide  intended  to display  the  board's ability  to                                                                   
meet the  8 percent return  assumption. The returns  were net                                                                   
of fees,  resulting from  the investment  fees minus  the the                                                                   
cost of running ARMB and the retirements system.                                                                                
                                                                                                                                
Senator  Bishop asked  how  close the  actuarial  assumptions                                                                   
predicted the returns displayed in slide 9.                                                                                     
                                                                                                                                
Ms. Erchinger replied  that a later presentation  would offer                                                                   
the  requested information.  She  noted that  in the  20-year                                                                   
term  the assumption  was just  under the  8 percent  return,                                                                   
while the 30-year was greater.                                                                                                  
                                                                                                                                
Co-Chair  Meyer  wondered  about  the  asset  allocation.  He                                                                   
asked about the equity/bond ratio.                                                                                              
                                                                                                                                
Ms.  Erchinger responded  that  ARMB was  highly invested  in                                                                   
equities    that   were    split    between   domestic    and                                                                   
international. She  mentioned that the board had  lowered its                                                                   
allocation  in  recent  months   to  fixed  income  with  the                                                                   
anticipation  of  increasing   interest  rates.  As  interest                                                                   
rates  rise, the  values  of fixed-income  investments  fall.                                                                   
The  board  strived to  move  out  of fixed-income  and  into                                                                   
equities.  She  discussed the  investment  in  infrastructure                                                                   
such as  farmlands, timber  and real  estate providing  long-                                                                   
lived assets with a higher return.                                                                                              
                                                                                                                                
Co-Chair Meyer appreciated  the information and  was happy to                                                                   
see that  the board was investing  in a manner  comparable to                                                                   
the Permanent Fund Board.                                                                                                       
                                                                                                                                
9:17:00 AM                                                                                                                    
                                                                                                                                
Ms. Erchinger  referenced  slide 10: "Impact  of change  from                                                                   
Level Percent of Pay to Level Dollar Amortization."                                                                             
                                                                                                                                
   · Reduces overall contributions by nearly $2 Billion                                                                         
   · Reduces State Assistance by $1.26 Billion                                                                                  
   · Reduces overall State payments by $1.64 Billion*                                                                           
   · Reduces Muni payments by $285 Million                                                                                      
   · Level Percentage of Pay delays contributions to future                                                                     
   · Level Dollar results in higher contributions in early                                                                      
     years, reduced contributions later                                                                                         
   · Increased contributions rates for PERS by 7.21 percent                                                                     
     of pay and for TRS by 13.07 percent of pay                                                                                 
   · Since 2006, Level Dollar would have added $6.23                                                                            
     Million addtl to PERS; $351 Million addtl to TRS                                                                           
                                                                                                                                
   *Includes State Assistance and State payments as an                                                                          
   employer                                                                                                                     
                                                                                                                                
9:19:10 AM                                                                                                                    
                                                                                                                                
Ms.  Erchinger   discussed  slide   12:  "Why  change   Level                                                                   
Percentage  of Pay  to Level  Dollar." The  graph's red  line                                                                   
depicted  the  new  method  for  state  assistance  payments.                                                                   
While  the  levels  would increase  in  the  short-term,  the                                                                   
later years  would see  the reduction  of the required  state                                                                   
contribution.  The  blue  glide   path  depicted  the  former                                                                   
amortization method,  which over time increased  the payments                                                                   
required by the state.                                                                                                          
                                                                                                                                
Ms. Erchinger  continued discussing  slide 12 and  noted that                                                                   
the  blue path  projected state-assistance  payments of  22.6                                                                   
percent by  FY 29 of general  fund unrestricted  revenue. The                                                                   
red line  predicted a maximum  percentage of 18.7  percent in                                                                   
FY 19. The  general fund unrestricted revenues  resulted from                                                                   
the  historical  number  via the  2012  Fall  Revenue  Source                                                                   
Book.                                                                                                                           
                                                                                                                                
9:21:32 AM                                                                                                                    
                                                                                                                                
Ms. Erchinger stated  that the forecasted revenues  came from                                                                   
the  spring 2013  Revenue Forecast  adjusted  by fiscal  note                                                                   
for SB  21. The level dollar  forecast assumed  no additional                                                                   
oil production.  Slide  13 depicted the  same information  in                                                                   
numeric format.                                                                                                                 
                                                                                                                                
                                                                                                                                
9:22:02 AM                                                                                                                    
                                                                                                                                
Ms.  Erchinger referred  to  slide 14:  "Projected  Actuarial                                                                   
Results Revised."                                                                                                               
                                                                                                                                
     ARMB  requested  actuaries  revise  Table  of  Projected                                                                   
     Actuarial    Results   purporting    to   show    System                                                                   
     overfunding (surplus)  in excess of $3 Billion  by 2072,                                                                   
     as misleading.*                                                                                                            
                                                                                                                                
Ms. Erchinger discussed slide 15: "Where we have Been."                                                                         
                                                                                                                                
     The Alaska Retirement Management Board evaluated 40                                                                        
     potential scenarios in 2011.                                                                                               
                                                                                                                                
     Recommended:                                                                                                               
        · 25-year or 30-year amortization                                                                                       
        · Lump-sum contributions with continued State                                                                           
          assistance                                                                                                            
        · Change to level dollar amortization                                                                                   
     Rejected                                                                                                                   
        · Lump-sum contributions with no further State                                                                          
          assistance >22 percent                                                                                                
        · Cost-shifting from State to municipalities and                                                                        
          vice-versa                                                                                                            
        · Requiring assets outside trust fund be used to                                                                        
          set rates                                                                                                             
        · Extending amortization if significantly higher                                                                        
          costs than status quo                                                                                                 
                                                                                                                                
9:25:14 AM                                                                                                                    
                                                                                                                                
Senator Hoffman  asked if  the $28  billion was reflected  in                                                                   
the chart.                                                                                                                      
                                                                                                                                
Ms.  Erchinger responded  no.  Slide 13  reflected the  state                                                                   
assistance payment.                                                                                                             
                                                                                                                                
Ms.  Erchinger   explained  that   the  most  costly   option                                                                   
included the  elimination of state assistance.  She furthered                                                                   
that  the  solution  provided  by the  board  was  the  least                                                                   
costly for  the long run.   Less expensive solutions  require                                                                   
greater state  contributions up-front. She related  the issue                                                                   
to SB  187 and the  added cost  of approximately  $11 billion                                                                   
in the  legislation's  proposed scenario.  Since the  board's                                                                   
plan would  extinguish the  entire debt  by $28 billion,  the                                                                   
legislation proved too expensive for the state.                                                                                 
                                                                                                                                
Senator  Hoffman   asked  if   the  state  would   have  been                                                                   
reimbursed all contributions under SB 187.                                                                                      
                                                                                                                                
Ms. Erchinger  replied that the  lines highlighted in  SB 187                                                                   
that  the status  quo showed  that  the municipalities'  cost                                                                   
would be  $3.6 billion  today and would  rise to  $10 billion                                                                   
under SB  187. The  cost would  shift from  the state  to the                                                                   
municipalities.  With  SB  187,   state  assistance  payments                                                                   
would be eliminated.                                                                                                            
                                                                                                                                
9:28:25 AM                                                                                                                    
                                                                                                                                
Ms.  Erchinger   offered  to   provide  the  committee   with                                                                   
additional  information  from   the  actuaries  to  help  the                                                                   
committee  further research  the  issue.  She suggested  that                                                                   
the  legislature  guide ARMB  regarding  the  level of  state                                                                   
assistance  payments that  could  be feasibly  financed.  She                                                                   
wanted to  know the  amount of  payment that the  legislature                                                                   
would be willing  to make and how it would  change over time.                                                                   
She also wished  to know the level of up-front  cash infusion                                                                   
possible.  With  the  information,   the  board  could  begin                                                                   
running scenarios to meet the target.                                                                                           
                                                                                                                                
Ms.  Erchinger continued  that the  assumptions would  change                                                                   
as a  result of  the legislature's  input. She supposed  that                                                                   
the  amortization  period  might  require  an  extension  and                                                                   
different  options  could  be  considered.  Without  the  key                                                                   
information,  the  target  and   solution  are  difficult  to                                                                   
acquire.                                                                                                                        
                                                                                                                                
9:30:05 AM                                                                                                                    
                                                                                                                                
Ms.  Erchinger   discussed  slide   23:  "State   Assistance:                                                                   
Baseline  vs.  $2B  injection."   She  noted  that  ARMB  had                                                                   
submitted  a request for  funding to  the legislature  at the                                                                   
end of  the legislative  session for  a $2 billion  injection                                                                   
into the  system to be  spread over  4 years. The  outcome of                                                                   
the  meeting  with  the  stakeholders  yielded  the  question                                                                   
about  spreading  the  money  out  over  4  years.  Slide  23                                                                   
provided  further  information  to the  committee  about  the                                                                   
request.                                                                                                                        
                                                                                                                                
Ms. Erchinger  continued with  slide 23.  She noted  that the                                                                   
red  bar depicted  the  state  assistance payments  with  the                                                                   
state contributing  $500 million  per year  for 4 years  in a                                                                   
row. After 4  years, the red glide path reduced  the required                                                                   
state assistance  payments over time. When oil  revenues were                                                                   
expected to  be much  lower, the impact  on the  state budget                                                                   
would be  reduced by  $322 million per  year on  average. She                                                                   
stressed  that   any  contribution  today  would   limit  the                                                                   
contributions required in the future.                                                                                           
                                                                                                                                
Senator  Hoffman asked  if the  interest rate  assumed was  8                                                                   
percent.                                                                                                                        
                                                                                                                                
Ms. Erchinger concurred.                                                                                                        
                                                                                                                                
9:32:29 AM                                                                                                                    
                                                                                                                                
Ms. Erchinger discussed slide 29: "Primary Outcomes."                                                                           
                                                                                                                                
   · Borrow from ourselves                                                                                                      
        o Mitigates risks of borrowing from capital markets                                                                     
        o Provides guaranteed return to reserves                                                                                
        o Prefer to borrow from CBR since SBR earnings are                                                                      
          swept into GF                                                                                                         
        o State's bond rating not adversely affected if we                                                                      
          borrow from ourselves                                                                                                 
        o Demonstrates that Alaska has a plan to address                                                                        
          U/L                                                                                                                   
        o Leverages significant reserves without consuming                                                                      
          them                                                                                                                  
   · Direct appropriation                                                                                                       
        o Prefer a single lump-sum rather than spread over                                                                      
          multiple years                                                                                                        
   · Pension Obligation Bonds as a partial solution                                                                             
                                                                                                                                
   Majority agreed on the need for substantial injection                                                                        
   into system now.                                                                                                             
                                                                                                                                
9:35:28 AM                                                                                                                    
                                                                                                                                
Vice-Chair  Fairclough asked about  other retirement  systems                                                                   
managed by  the ARMB.  She noted  that the state  contributed                                                                   
to  the  other  retirement systems.  She  requested  a  brief                                                                   
synopsis of the status of the systems.                                                                                          
                                                                                                                                
Ms.  Erchinger   deferred  the  question  to   another  board                                                                   
member.                                                                                                                         
                                                                                                                                
Vice-Chair  Fairclough  wondered  about  the  possibility  of                                                                   
over-funding one of the pension programs.                                                                                       
                                                                                                                                
9:36:24 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:38:52 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
ROBERT  GROVE, RETIRED  PUBLIC EMPLOYEES  OF ALASKA,  thanked                                                                   
the  committee  for  addressing  the issues.  He  noted  much                                                                   
confusion  among current  and  potential retirees  throughout                                                                   
the state regarding  the unfunded liability. He  also thanked                                                                   
ARMB and the  information provided by the  board. He recalled                                                                   
his   previous   position   with   Alaska   Housing   Finance                                                                   
Corporation  (AHFC).  He  believed   that  the  problem  with                                                                   
Alaska's retirement  system was  repairable and  he suggested                                                                   
a comparison  of Alaska with other  states in the  nation. He                                                                   
stated that  Alaska had options  to solve the  problem unlike                                                                   
other states who delayed action on similar issues.                                                                              
                                                                                                                                
9:41:34 AM                                                                                                                    
                                                                                                                                
RON  JOHNSON, RETIRED  PUBLIC  EMPLOYEES  OF ALASKA,  thanked                                                                   
the committee  for their  attention to  the issue.  He echoed                                                                   
the opinion  of ARMB  regarding the  transition to  the level                                                                   
dollar  or  up-front  cash infusion.  He  worried  about  the                                                                   
future retirees and  their solvency. He preferred  not to see                                                                   
a  vote  to  access  the  Permanent  Fund  to  bail  out  the                                                                   
retirement  fund. He preferred  a use  of budget reserves  to                                                                   
reduce the total  payments over time. He commented  about the                                                                   
earnings assumptions.  He mentioned  that the public  pension                                                                   
funds saw  good returns  in the last  10 years.  He supported                                                                   
the idea  of a cash infusion  or level dollar to  the current                                                                   
pay-down.                                                                                                                       
                                                                                                                                
9:44:53 AM                                                                                                                    
                                                                                                                                
CHARLES  GALLAGHER,   CHAIR,  RETIRED  PUBLIC   EMPLOYEES  OF                                                                   
ALASKA, stated  that Alaska had  progressed with the  work on                                                                   
this very important  issue. He expressed gratitude  that ARMB                                                                   
and  the  legislature  were  addressing   the  situation.  He                                                                   
agreed with  the testimony provided  by ARMB. He  stated that                                                                   
multiple meetings  occurred in  Fairbanks over the  summer to                                                                   
address the unfunded liability problem.                                                                                         
                                                                                                                                
9:47:05 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:48:12 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
MICHAEL   BARNHILL,   DEPUTY  COMMISSIONER,   DEPARTMENT   OF                                                                   
ADMINISTRATION,  provided  a PowerPoint  presentation  titled                                                                   
"Public   Employee   Retirement    System   (PERS)   Teachers                                                                   
Retirement  System (TRS)  Fall 2013 Update  (copy on  file)."                                                                   
He  noted  the  intention  of  the  slides  to  produce  both                                                                   
introductory information as well as an update.                                                                                  
                                                                                                                                
Mr.  Barnhill stated  that  the  governor believed  that  the                                                                   
unfunded liability  presented a  very serious problem  to the                                                                   
state.                                                                                                                          
                                                                                                                                
9:50:07 AM                                                                                                                    
                                                                                                                                
Mr. Barnhill  communicated that  the administration  believed                                                                   
in  the moral  obligation to  ensure that  all benefits  were                                                                   
paid when  due. He stressed  the importance of  the long-term                                                                   
nature of  the commitments necessary  and the need  to ensure                                                                   
that  the commitments  were  kept through  2070  or 2080.  He                                                                   
offered  gratitude  to  the legislature  and  the  assistance                                                                   
provided on behalf of school districts and municipalities.                                                                      
                                                                                                                                
9:51:45 AM                                                                                                                    
                                                                                                                                
Mr.  Barnhill  added  that  Alaska  had  a  unique  situation                                                                   
regarding  state   funding  of  school   district  retirement                                                                   
systems.  He  added  that  approximately  159  municipalities                                                                   
participated  in PERS.  He noted that  the state  legislature                                                                   
had  appropriated  $609 million  since  2008  to the  state's                                                                   
retirement systems.  He stated that municipalities  must also                                                                   
pay their obligations in a timely fashion.                                                                                      
                                                                                                                                
9:52:14 AM                                                                                                                    
                                                                                                                                
Mr.  Barnhill  stated  that  the   administration  agreed  to                                                                   
consider the lump-sum solution presented by Ms. Erchinger.                                                                      
                                                                                                                                
Mr.  Barnhill  discussed  slide   2:  "PERS/TRS  Basic  Facts                                                                   
Organization."  He  explained  that three  entities  had  key                                                                   
roles  in the  function  of the  state's  pension system.  He                                                                   
began  with  Department  of  Revenue   and  the  Division  of                                                                   
Treasury,  which was  charged with  acting as  staff to  ARMB                                                                   
and  managing  the  trust  funds  for  each  of  the  state's                                                                   
pension  systems. The  division  managed a  great variety  of                                                                   
assets. The fiduciary  of the assets was ARMB.  The board was                                                                   
created  in 2005  during the  closure of  the Alaska  defined                                                                   
benefit system  to new entrants in  FY 07 and the  closure of                                                                   
the previous boards.                                                                                                            
                                                                                                                                
Mr. Barnhill  explained that  his department, the  Department                                                                   
of  Administration   (DOA)  was   statutorily  charged   with                                                                   
administering  the liability  side of  the state's  equation.                                                                   
He  elaborated that  DOA calculated  and  issued the  pension                                                                   
checks,  processed  retirement  health  claims,  worked  with                                                                   
actuaries   on  various   projections   to   help  with   the                                                                   
administration  of the  system.  He noted  that many  pension                                                                   
systems  had   a  different  organization.  He   referred  to                                                                   
California    and    their    state's    retirement    system                                                                   
organization.                                                                                                                   
                                                                                                                                
9:55:10 AM                                                                                                                    
                                                                                                                                
Mr.  Barnhill  discussed  slide   3:  "PERS/TRS  Basic  Facts                                                                   
Membership"  and the  active  employees.  He highlighted  the                                                                   
36,300 active  employees in  PERS. Since  the closure  of the                                                                   
defined benefit system  in 2006, the number of  people in the                                                                   
defined  contribution  system had  risen  steadily. He  added                                                                   
that approximately  40 percent of the payroll  was now active                                                                   
in  the  defined  contribution  system.  He  added  that  the                                                                   
increase  was  less pronounced  in  TRS  with 35  percent  of                                                                   
active  teachers  in  the  defined  contribution  system.  He                                                                   
noted that the  state had approximately 41,000  retirees with                                                                   
anticipation of  numbers greater than  60,000 in the  next 20                                                                   
years.                                                                                                                          
                                                                                                                                
9:56:59 AM                                                                                                                    
                                                                                                                                
Mr.  Barnhill  discussed  slide   4:  "PERS/TRS  Basic  Facts                                                                   
Defined Benefits."                                                                                                              
                                                                                                                                
     Defined Benefit Pension: fixed benefit amount from                                                                         
     date of retirement to death.                                                                                               
                                                                                                                                
     Contributions + Investment Earnings = Benefits +                                                                           
     Expenses                                                                                                                   
                                                                                                                                
     If All actuarial assumptions are accurate                                                                                  
                                                                                                                                
     Actuarial Assumptions:                                                                                                     
                                                                                                                                
          Inflation,  Investment Return,  Mortality, Date  of                                                                   
          Retirement,  Cost  of Healthcare,  Payroll  Growth,                                                                   
          Disability,  Spouse Age, Dependent  Children, COLA,                                                                   
          Plan Expenses, Turnover                                                                                               
                                                                                                                                
          Inaccurate Projections lead to Unfunded Liability                                                                     
                                                                                                                                
          Employer Takes the Risk                                                                                               
                                                                                                                                
10:00:29 AM                                                                                                                   
                                                                                                                                
Mr. Barnhill  stated that  multiple actuaries  were hired  by                                                                   
the state to make a series of actuarial assumptions.                                                                            
                                                                                                                                
Mr.  Barnhill  discussed  slide   5:  "PERS/TRS  Basic  Facts                                                                   
Contributions  - Employee." Contributions  were derived  from                                                                   
two different  populations, the employees and  employers. The                                                                   
employee  contributions   for  PERS  and  TRS   were  set  in                                                                   
statute. He  stated that police  and fire employees  paid 7.5                                                                   
percent  from  their  paychecks  every  payroll  period.  The                                                                   
other employees  in PERS paid  6.75 percent and  TRS employee                                                                   
contribution   rate  was  8.65   percent  for  the   teachers                                                                   
retirement trust.  He explained  that the amounts  were fixed                                                                   
in Alaska  because of a  section of the state's  constitution                                                                   
known as  the diminishment  clause, which prohibits  changing                                                                   
features of  the defined benefit  system once an  employee is                                                                   
hired. The  Supreme Court  maintained  that benefits  vest on                                                                   
the date of hire.                                                                                                               
                                                                                                                                
10:03:08 AM                                                                                                                   
                                                                                                                                
Mr.  Barnhill  discussed  slide   6:  "PERS/TRS  Basic  Facts                                                                   
Contributions   -  Employer."   He  repeated   that  if   the                                                                   
actuarial assumptions  fell short, the employer  must make up                                                                   
the  difference  through  employer   contribution  rates.  He                                                                   
stated  that  the  red line  depicted  the  TRS  contribution                                                                   
rate,  while  the blue  line  represented  PERS  contribution                                                                   
rate.  He pointed  out  that  rates had  grown  substantially                                                                   
since 2005.  The ARMB developed  a defined contribution  rate                                                                   
of 40  percent for the  employer in  PERS and 66  percent for                                                                   
TRS.                                                                                                                            
                                                                                                                                
Mr. Barnhill  stated that  the rate increase  was due  to the                                                                   
inaccuracy  of  the  actuarial  assumptions.  He  noted  that                                                                   
actuarial assumptions  set in the 1990s were  too low. Health                                                                   
care  cost   growth  was   increasing   in  the  late   1990s                                                                   
contributing  and   were  not  reflected  in   the  actuarial                                                                   
calculations.  The board  brought a suit  against its  former                                                                   
actuary Mercer  for actuarial  negligence, which  was settled                                                                   
for a sum of approximately $500 million.                                                                                        
                                                                                                                                
10:05:56 AM                                                                                                                   
                                                                                                                                
Mr. Barnhill recalled  the 1999-2001 time period  of economic                                                                   
recession  brought on by  the dotcom  collapse in  the equity                                                                   
market.  Subsequently, other  investment losses  in the  2009                                                                   
time period were  weathered. The 8.25 percent  rate of return                                                                   
was an investment  assumption that had not  been realized and                                                                   
contributed  to   the  increases  in  employer   contribution                                                                   
rates.                                                                                                                          
                                                                                                                                
Mr. Barnhill  referred  again to  slide 6  and the green  and                                                                   
purple lines. He  noted that those lines depicted  the result                                                                   
of relief  from the high  contribution rates through  a bill,                                                                   
SB 125  enacted in 2008.  The bill capped  the rates  paid by                                                                   
the employers  for  TRS at 12.56  percent  for PERS at  22.00                                                                   
percent of payroll.                                                                                                             
                                                                                                                                
10:08:32 AM                                                                                                                   
                                                                                                                                
Mr. Barnhill  noted that the  results of the  capped employer                                                                   
contribution    rates   included    state   assistance    for                                                                   
approximately $1.7 billion.                                                                                                     
                                                                                                                                
Mr. Barnhill  continued with slide  7: "PERS/TRS  Basic Facts                                                                   
Investment  Returns."  He  noted  that  the  past  investment                                                                   
return  assumption  adopted  by   the  Alaska  State  Pension                                                                   
Investment Board  and subsequently  by ARMB was  8.25 percent                                                                   
and  recently reduced  to 8.00  percent.  The slide  depicted                                                                   
the annualized  return scenarios for  both PERS and  TRS over                                                                   
various  time frames.  He pointed  out that  last year  was a                                                                   
great period with  earnings of 12.5 percent.  The prior years                                                                   
were less  successful.  He remarked that  the returns  listed                                                                   
on  the slide  were gross  returns  and did  not include  the                                                                   
expenses.                                                                                                                       
                                                                                                                                
10:11:59 AM                                                                                                                   
                                                                                                                                
Mr.  Barnhill   detailed  slide  8:  "PERS/TRS   Basic  Facts                                                                   
Benefits."                                                                                                                      
                                                                                                                                
     DB Benefit Amount:                                                                                                         
     Sum of multipliers X Avg. High 3(Tier 1-2) or Avg.                                                                         
     High 5 (Tier 3)                                                                                                            
          PERS Multipliers: 2 percent first 10 yrs; 2.25                                                                        
          percent second 10 years; 2.5 percent thereafter                                                                       
                                                                                                                                
          TRS Multipliers: 2 percent first 10 years; 2.5                                                                        
          percent thereafter                                                                                                    
                                                                                                                                
     Example: 30 years PERS service:                                                                                            
                                                                                                                                
          (2percent X 10) + (2.25 percent X 10) + (2.5                                                                          
          percent X 10) X $85,000=                                                                                              
                    67.5 percent X $85,000 = $57,375                                                                            
                                                                                                                                
     Note: State of Alaska employees also participate in                                                                        
     the supplemental annuity plan (SBS).                                                                                       
                                                                                                                                
Co-Chair Kelly clarified  that the 25-year look  provided the                                                                   
current assumptions.                                                                                                            
                                                                                                                                
Mr. Barnhill concurred.  He noted that the  topic encountered                                                                   
much debate. Some  economists believe that a  defined benefit                                                                   
public  employee system  should  not adopt  an interest  rate                                                                   
assumption  above a riskless  rate of  return. He  added that                                                                   
the  majority   of  pension   systems   adopted  a  rate   of                                                                   
approximately 8.00  percent. He  stated that the  adoption of                                                                   
a  lesser  rate  (4.50  percent)  would  double  the  current                                                                   
unfunded liability.                                                                                                             
                                                                                                                                
10:15:19 AM                                                                                                                   
                                                                                                                                
Mr.  Barnhill  stated  that the  majority  of  the  actuarial                                                                   
community agreed  that 8 percent was the appropriate  rate of                                                                   
return.                                                                                                                         
                                                                                                                                
Vice-Chair Fairclough  asked about the effect of  the rate of                                                                   
return on Alaska in the form of liquidity.                                                                                      
                                                                                                                                
Mr.  Barnhill  deferred  issues involving  liquidity  to  Mr.                                                                   
Bader.  He  pointed  out  that liquidity  was  an  issue  for                                                                   
Alaska as a closed system.                                                                                                      
                                                                                                                                
Mr.  Barnhill  discussed  slide   9:  "PERS/TRS  Basic  Facts                                                                   
Benefits."  He  noted  that the  chart  displayed  the  total                                                                   
benefit payouts  between 2013  and 2080.  In 2013,  the state                                                                   
would pay  $1.5 billion  in pension  and healthcare  benefits                                                                   
between PERS  and TRS. As the  number of retirees  grows, the                                                                   
amount  of benefits  would exceed  $3.5  billion annually  in                                                                   
approximately  2036.   The  total  spending  on   the  system                                                                   
between 2013 and  its closure would be $140  billion over the                                                                   
next  70 years.  He assured  that  with actuarially  required                                                                   
payments  and good assumptions,  the trust  funds would  have                                                                   
sufficient funds  to pay the necessary benefits.  He admitted                                                                   
that  future time  periods might  yield down-turn  investment                                                                   
markets allowing for new unfunded liabilities.                                                                                  
                                                                                                                                
10:19:38 AM                                                                                                                   
                                                                                                                                
Mr.  Barnhill noted  discussion  about the  development of  a                                                                   
new defined benefit  plan. Until the fiscal  structure of the                                                                   
state was  stable enough to  support a defined  benefit plan,                                                                   
the  department  opposed  the   creation  of  a  new  defined                                                                   
benefit plan.                                                                                                                   
                                                                                                                                
Mr.  Barnhill  discussed  slide  10:  "PERS/TRS  Basic  Facts                                                                   
Expenses."  He noted  that  the one-year  snapshot  indicated                                                                   
that expenses added  up to approximately 30  basis points. He                                                                   
stated  that  0.3 percent  of  the  return was  deducted  for                                                                   
expenses, which added up to $54 million.                                                                                        
                                                                                                                                
10:20:57 AM                                                                                                                   
                                                                                                                                
Mr. Barnhill  detailed  slide 11: "PERS/TRS  Events that  Led                                                                   
to C+I=B+E."                                                                                                                    
                                                                                                                                
     2002 - Milliman actuarial audit; dotcom collapse                                                                           
     2003 - FY 02 valuations released with revised                                                                              
     assumptions. $4.1B unfunded liability                                                                                      
     2005 - SB 141 enacted: Mr. Boyle plans closed; DC                                                                          
     plans created; PERB/TRB/ASPIB sunset; ARM Board                                                                            
     created                                                                                                                    
     2007 - ARM Board files suit against Mercer for                                                                             
     actuarial negligence; SB 123 enacted: PRS cost share                                                                       
                                                                                                                                
Senator Dunleavy asked  about the comment that a  return to a                                                                   
defined  benefit  system was  unsustainable.  He  asked if  a                                                                   
return was unsustainable under any scenario.                                                                                    
                                                                                                                                
Mr. Barnhill  responded no. He  stated a return to  a defined                                                                   
benefit  system was  sustainable if  the state  had a  stable                                                                   
fiscal  structure  that  could  support  sufficient  revenues                                                                   
into the indefinite future.                                                                                                     
                                                                                                                                
10:23:46 AM                                                                                                                   
                                                                                                                                
Mr. Barnhill continued with slide 11.                                                                                           
                                                                                                                                
     2008 - SB 125 enacted: employer contribution rates                                                                         
     capped; state assistance begins; Great Recession                                                                           
     begins                                                                                                                     
     2009 - PERS/TRS investment loss: (20.5%)                                                                                   
     2010 - Mercer litigation settled for $500 mm (net                                                                          
     $403mm); other states begin to cut Mr. Boyle benefits,                                                                     
     change plans;                                                                                                              
     2012 - ARMB adopts level dollar amortization; $11.9B                                                                       
     unfunded liability                                                                                                         
     2013 - 12.5 percent investment gain; recession over?                                                                       
                                                                                                                                
10:26:24 AM                                                                                                                   
                                                                                                                                
Mr.  Barnhill discussed  slide  12: "PERS/TRS  Funding  Ratio                                                                   
History  -  PERS."  The slide  displayed  the  funded  level,                                                                   
which  was a  percentage of  assets  to accrued  liabilities.                                                                   
With 100  percent the state  would have sufficient  assets to                                                                   
pay accrued  liabilities. The PRS  system was 61  percent and                                                                   
the TRS  system was in  the lower 50  percent. He  noted that                                                                   
actuaries  claimed that  80  percent funded  level  indicated                                                                   
relative health in the system.                                                                                                  
                                                                                                                                
10:27:25 AM                                                                                                                   
                                                                                                                                
Mr.  Barnhill discussed  slide  13: "PERS/TRS  Funding  Ratio                                                                   
History  -  TRS."  The  slide  showed  the  monthly  premiums                                                                   
charged  to early  retirees that  pay  for health  insurance,                                                                   
which  had  increased  by  a   compound  rate  of  9  percent                                                                   
annually  since  the  late  1970s.   He  explained  that  the                                                                   
extraordinary  increases  in   health  care  costs  were  not                                                                   
envisioned  during the  system's  inception.  He stated  that                                                                   
monthly premiums were  $57 in the 1970s, and  they have grown                                                                   
to over $1200.  The rate of growth flattened in  the last few                                                                   
years. Predictions  are for further increases  in health care                                                                   
costs resulting from the Affordable Care Act.                                                                                   
                                                                                                                                
10:28:45 AM                                                                                                                   
                                                                                                                                
Senator  Hoffman  understood  that  other  states  had  found                                                                   
modifications  that allowed  for  more  affordable plans.  He                                                                   
asked if  Mr. Barnhill would  comment on the  state's efforts                                                                   
to seek out more affordable options.                                                                                            
                                                                                                                                
Mr. Barnhill  replied that  the state's  retiree health  plan                                                                   
remained static  over the last  14 years, resulting  from the                                                                   
diminishment clause.  He mentioned  changes made in  the year                                                                   
2000  time   period.  The  changes  resulted   in  litigation                                                                   
between the state  and an advocacy group. The  Alaska Supreme                                                                   
Court  held  that  the  retiree  health  care  benefits  were                                                                   
subject   to   the  diminishment   clause.   The   retirement                                                                   
healthcare  benefits  could  be   changed  if  one  piece  of                                                                   
coverage was eliminated or reduced.                                                                                             
                                                                                                                                
10:30:50 AM                                                                                                                   
                                                                                                                                
Mr.  Barnhill   pointed   out  that  the   decision   led  to                                                                   
unfavorable results  for both the state and  the retirees. He                                                                   
mentioned that  retirees were  competing for enhancements  of                                                                   
benefits  in the  form of  preventative care,  which was  not                                                                   
provided by  the retiree plan.  Another cause of  concern was                                                                   
the lack  of coverage for dependents  to age 26, which  was a                                                                   
function  of the  Affordable  Care  Act. The  retiree  health                                                                   
plan  was  not  subject  to  the  Affordable  Care  Act,  the                                                                   
enhancement was not added.                                                                                                      
                                                                                                                                
Mr.  Barnhill continued  that the  diminishment clause  acted                                                                   
to freeze the  retiree health plan. The state  had strategies                                                                   
to improve  the coverage and  its sustainability from  a cost                                                                   
perspective.  The   department  planned  to  work   with  the                                                                   
retiree  community through  the fall  and into the  following                                                                   
year.                                                                                                                           
                                                                                                                                
Co-Chair  Kelly   asked  if   employees  contribute   to  the                                                                   
premium.                                                                                                                        
                                                                                                                                
Mr.  Barnhill responded  that  a fully  vested retiree  would                                                                   
pay nothing.                                                                                                                    
                                                                                                                                
10:32:16 AM                                                                                                                   
                                                                                                                                
Mr.  Barnhill  pointed  out  that  the  Affordable  Care  Act                                                                   
assumed  that everyone  should  contribute  a portion  toward                                                                   
the  premium of  the retiree  insurance plan.  He noted  that                                                                   
most  people  would  pay 9.5  percent  of  modified  adjusted                                                                   
gross  income. Alaska's  system  allowed  vested retirees  to                                                                   
pay  nothing.  He explained  that  the  defined  contribution                                                                   
plan  was  different   with  the  premium   share  provision.                                                                   
Depending on the  years worked, a person would  pay different                                                                   
levels of their premium.                                                                                                        
                                                                                                                                
10:33:09 AM                                                                                                                   
                                                                                                                                
Vice-chair Fairclough  asked about the Government  Accounting                                                                   
Standards  Board  GASB (number  67  and 68)  statements  that                                                                   
would  take effect.  She  understood  that the  reasons  that                                                                   
health benefits  were not  separated with  the reflection  of                                                                   
the  unfunded   liability  resulted  from   the  diminishment                                                                   
clause as interpreted by the Alaska Supreme Court.                                                                              
                                                                                                                                
Mr.  Barnhill said  that  the unfunded  liability  associated                                                                   
with  healthcare  was  evaluated  separately.  Of  the  $11.9                                                                   
billion  of  unfunded  liability,  $3.5  billion  related  to                                                                   
healthcare. He  mentioned that GASB  67 and 68  presented new                                                                   
requirements  imposed on  public pension  systems. The  bills                                                                   
required computation  of a new figure called  the net pension                                                                   
liability  utilizing a  different  and standardized  formula.                                                                   
The primary  difference  was a standard  method of  computing                                                                   
the  value  of assets  using  a  fair rather  than  actuarial                                                                   
value.                                                                                                                          
                                                                                                                                
10:35:07 AM                                                                                                                   
                                                                                                                                
Mr. Barnhill  continued  that the net  pension liability  was                                                                   
reported  on employers'  balance sheets  beginning in  FY 15.                                                                   
With  PERS and  TRS, the  department would  allocate the  net                                                                   
pension liability for various participants in the system.                                                                       
                                                                                                                                
Co-Chair Meyer understood  that other states did  not include                                                                   
healthcare costs as part of their unfunded liability.                                                                           
                                                                                                                                
Mr. Barnhill replied  that the medical piece was  not part of                                                                   
GASB  67 and  68.  Sometimes the  medical  piece referred  to                                                                   
other  post-employment benefits,  which  included health  and                                                                   
life insurance benefits.                                                                                                        
                                                                                                                                
Co-Chair  Meyer asked if  a comparison  of Alaska's  unfunded                                                                   
liability to other states provided a fair comparison.                                                                           
                                                                                                                                
Mr.  Barnhill replied  that Alaska  behaved differently  than                                                                   
other  states. For  Alaska, the  unfunded liability  includes                                                                   
all  school  districts,  municipalities  and  the  state.  He                                                                   
pointed  out that  California's  unfunded  liability did  not                                                                   
include   any    school   districts.   Alaska    reported   a                                                                   
comprehensive unfunded  liability. He noted that  some states                                                                   
were  beginning  to report  medical  unfunded  liability.  He                                                                   
stated  that most  systems  were computing  the  liabilities,                                                                   
but  were  not prefunding  them.  He  noted that  Alaska  was                                                                   
distinguished  from other  state entities  with its  practice                                                                   
of prefunding healthcare benefits since the 1970s.                                                                              
                                                                                                                                
10:38:22 AM                                                                                                                   
                                                                                                                                
Co-Chair Meyer  asked about the  states bond ratings  and the                                                                   
incorporation of medical costs.                                                                                                 
                                                                                                                                
Mr. Barnhill  could not speak  to the issue; he  deferred the                                                                   
question to Commissioner Rodell.                                                                                                
                                                                                                                                
Senator Hoffman asked  if retirees had to pay  monthly health                                                                   
care premiums for defined benefits in all tiers.                                                                                
                                                                                                                                
10:39:35 AM                                                                                                                   
                                                                                                                                
Mr. Barnhill  said he  would get back  to the committee  with                                                                   
an answer.                                                                                                                      
                                                                                                                                
Mr. Barnhill  continued with slide  15, "Balance  Sheet." The                                                                   
slide depicted  the systems in  terms of the  actuarial value                                                                   
of assets  and accrued liabilities.  He noted the  61 percent                                                                   
funded ratio for  PRS, 52 percent for TRS adding  up to $16.7                                                                   
billion in assets  and $28.6 billion in  accrued liabilities.                                                                   
The  unfunded  liability  was  listed at  $11.9  billion.  He                                                                   
noted that the  most recent treasury report  showed assets of                                                                   
$19 billion as of September 30, 2013.                                                                                           
                                                                                                                                
10:40:31 AM                                                                                                                   
                                                                                                                                
Mr. Barnhill stated  that the next two charts,  slides 16 and                                                                   
17,  illustrated   approaches   to  unfunded  liability   and                                                                   
general   fund    appropriations.   He   noted    that   both                                                                   
methodologies  depicted past state  assistance under  SB 125.                                                                   
He  explained  that  both  the level  dollar  and  the  level                                                                   
percentage  of   pay  were  displayed   in  the   slides.  He                                                                   
clarified that  level percentage  of pay was  a "back-loaded"                                                                   
methodology,   where  level  dollar   was  a   "front-loaded"                                                                   
methodology  that dropped  over time.  He reminded that  ARMB                                                                   
recently  adopted the  level dollar  methodology. The  amount                                                                   
of  money  appropriated  from  the general  fund  to  provide                                                                   
assistance would  increase by  approximately $272  million in                                                                   
FY 15.                                                                                                                          
                                                                                                                                
Mr.   Barnhill  furthered   that   both  methodologies   were                                                                   
acceptable   from   an   actuarial  point   of   view.   Both                                                                   
methodologies  ensured   that  all  payments   were  made  to                                                                   
beneficiaries  when  due.  He mentioned  strategies  used  to                                                                   
address   unfunded   liabilities.  The   various   strategies                                                                   
stemmed  from the  actuarial  formula  of contributions  plus                                                                   
investment equals  benefits plus expenses. He  noted that the                                                                   
majority  of solutions  focused  on contributions.  A  direct                                                                   
correlation  could be found  between the  length of  the term                                                                   
and the amount of the payments.                                                                                                 
                                                                                                                                
10:43:49 AM                                                                                                                   
                                                                                                                                
Vice-chair Fairclough asked about liquidity.                                                                                    
                                                                                                                                
Mr.  Barnhill  explained  that  a  debt  financing  structure                                                                   
required  payment  sooner  or  later.  Debt  servicing  costs                                                                   
would  increase   in  aggregate  over  time.   He  noted  the                                                                   
liquidity of  the trust funds  to pay benefits  and liquidity                                                                   
of  the  general  fund  to meet  requests  presented  to  the                                                                   
legislature. He  pointed out the challenge of  structuring an                                                                   
approach that  meets the requirements  of paying  benefits as                                                                   
well  as  cash flow  needs.  Additional  approaches  included                                                                   
payment into the reserve account and cash infusion.                                                                             
                                                                                                                                
10:47:28 AM                                                                                                                   
                                                                                                                                
Senator Hoffman  understood that administration  acknowledged                                                                   
the  unfunded  liability  as   critical.  He  asked  how  the                                                                   
administration viewed cash infusion.                                                                                            
                                                                                                                                
Mr. Barnhill replied  that ARMB had a stakeholder  meeting in                                                                   
August where  Karen Rehfeld,  Director, Office of  Management                                                                   
and  Budget,  Office  of  the  Governor  indicated  that  the                                                                   
administration was  willing to consider the approach  of cash                                                                   
infusion.                                                                                                                       
                                                                                                                                
Senator  Hoffman  asked about  a  time frame  for  commitment                                                                   
from the administration regarding cash infusion.                                                                                
                                                                                                                                
Mr.  Barnhill stated  that  he  could not  commit  to a  time                                                                   
frame. He  added that  the adjustment  of contribution  rates                                                                   
was  typically  a  function  of   altering  the  amortization                                                                   
method.  He stated  that  some  states had  changed  employee                                                                   
contribution  rates, but  he thought  it  unlikely in  Alaska                                                                   
because of the diminishment clause.                                                                                             
                                                                                                                                
Mr.  Barnhill discussed  investment returns.  He pointed  out                                                                   
that investment  returns could  not be manipulated  to adjust                                                                   
the  unfunded liability.  He stated  that ARMB  had an  asset                                                                   
allocation  heavily weighted  to equities  that was  adjusted                                                                   
on an annual basis.                                                                                                             
                                                                                                                                
10:49:53 AM                                                                                                                   
                                                                                                                                
Mr.  Barnhill mentioned  that  the department  addressed  the                                                                   
benefit  side of the  equation by  researching the  reduction                                                                   
of health care  costs without reducing health  care benefits.                                                                   
He  stressed   that  the   benefits  were   secured   by  the                                                                   
diminishment clause.  A new third-party  administrator, AETNA                                                                   
was procured to  replace the Health Smart. He  noted that the                                                                   
new  administrator  had  an  advantageous  discount  provider                                                                   
network,  particularly  in  the   Lower  48.  The  department                                                                   
anticipated  a cost savings  of tens  of millions  of dollars                                                                   
annually.                                                                                                                       
                                                                                                                                
Mr. Barnhill pointed  out that auditing would  enable further                                                                   
reduction  of costs. He  added that  the diminishment  clause                                                                   
prevented  further adjustment  to the  cost of the  benefits.                                                                   
He  assured  that both  the  Department  of Revenue  and  the                                                                   
Department  of  Administration  were striving  to  administer                                                                   
the system for optimal cost savings.                                                                                            
                                                                                                                                
10:52:18 AM                                                                                                                   
                                                                                                                                
Senator  Hoffman  understood   that  40  percent  of  Alaskan                                                                   
retirees lived in  the Lower 48. He wondered  how that number                                                                   
had changed over the last decade.                                                                                               
                                                                                                                                
Mr.  Barnhill replied  that  he  did not  have  the ten  year                                                                   
look-back.                                                                                                                      
                                                                                                                                
Vice-chair Fairclough  asked the percentage rate  of the cost                                                                   
of living adjustment affected.                                                                                                  
                                                                                                                                
Mr. Barnhill replied "some percentage of CPI."                                                                                  
                                                                                                                                
10:53:07 AM                                                                                                                   
AT EASE                                                                                                                         
                                                                                                                                
11:00:31 AM                                                                                                                   
RECONVENED                                                                                                                      
                                                                                                                                
ANGELA RODELL,  ACTING COMMISSIONER,  DEPARTMENT OF  REVENUE,                                                                   
provided an opening statement:                                                                                                  
                                                                                                                                
     Thank  you for the  opportunity to  make a  presentation                                                                   
     today.   We have heard  a lot about  whether or  not the                                                                   
     pension  trust funds  are  "healthy" or  whether or  not                                                                   
     they  are in  "fiscal stress".   We have  also talked  a                                                                   
     lot  about affordability.    What can  the state  afford                                                                   
     and what  are our options  going forward?  Do  we really                                                                   
     need to do  anything at this time?  The  State of Alaska                                                                   
     was upgraded  by Fitch  and Standard  & Poor's  over the                                                                   
     last two  years and we now  share triple A  ratings from                                                                   
     all three  nationally recognized  rating services.   One                                                                   
     of  the  primary  reasons  cited  by  all  three  rating                                                                   
     agencies  was   good  or  sound  financial   management.                                                                   
     Good  credit scores  for any  of us  means we  sometimes                                                                   
     have to  make hard decisions.   The legislature  and the                                                                   
     governors over  the years have taken necessary  and - at                                                                   
     times uncomfortable  - steps  towards keeping  the state                                                                   
     on sound  financial footing.   It is  no secret  that we                                                                   
     have a  volatile revenue source  which has led us  to be                                                                   
     conservative  in our  budgeting practices.   We  believe                                                                   
     in paying up  front for those things we  are required to                                                                   
     provide  -  even  going   so  far  as  to  forward  fund                                                                   
     education.   We honor our  debts, pay them off  early if                                                                   
     we can and equally importantly we honor our contracts.                                                                     
                                                                                                                                
     The   unfunded   pension   liability  or   net   pension                                                                   
     liability  is the  gap  between the  assets  we have  to                                                                   
     fund the  benefits promised  under contracts  made years                                                                   
     ago.   In  2005 the  legislature and  the governor  took                                                                   
     the  very  hard  step of  closing  the  defined  benefit                                                                   
     program so  that the state could take  direct control of                                                                   
     its   contract  obligations   by  no  longer   promising                                                                   
     benefits it  may not be  able to deliver.  The liability                                                                   
     continued  to grow  over those years  because the  costs                                                                   
     of  benefits  grew  more  than  predicted  and  expected                                                                   
     investment earnings failed to materialize.                                                                                 
                                                                                                                                
     It  is true  that  under  any level  percent  of pay  or                                                                   
     level  dollar  amortization,  liabilities will  be  paid                                                                   
     off.   So  why should  we  take any  other actions  than                                                                   
     those already  described?   Because this state  needs to                                                                   
     have  the  financial  flexibility  in  future  years  to                                                                   
     continue to  grow this state  - whether it  is investing                                                                   
     in  a  hydroelectric  project,   rebuilding  coal  fired                                                                   
     facilities or  making a major  investment in a  gas line                                                                   
     from the North  Slope.  Right now we rely  on the assets                                                                   
     in the  pension trust funds  to generate enough  cash to                                                                   
     pay each  year's benefits.   We  have designed  an asset                                                                   
     allocation  with the goal  of earning  at least 8%.   If                                                                   
     those  assets do  not generate  enough cash  to pay  all                                                                   
     the benefits,  we are  required to  sell assets  to come                                                                   
     up  with the cash  deficiency.   The unfunded  liability                                                                   
     will  grow  because we  are  unable  to achieve  8%  and                                                                   
     requests to  the general fund  will be even  higher than                                                                   
     today.   There are  very real  and tangible benefits  to                                                                   
     the  State for  addressing  this issue  now  - the  most                                                                   
     important  one maintaining  financial resources  to fund                                                                   
     future priorities.                                                                                                         
                                                                                                                                
     At  this time I  would like  to turn  to Gary  Bader and                                                                   
     have him walk  you through an analysis  we have prepared                                                                   
     which  will  demonstrate  in more  detail  our  concerns                                                                   
     about our future flexibility.                                                                                              
                                                                                                                                
GARY  BADER,  CHIEF INVESTMENT  OFFICER,  TREASURY  DIVISION,                                                                   
DEPARTMENT OF  REVENUE, explained that the  treasury division                                                                   
oversaw  approximately  $50  billion   of  state  assets.  He                                                                   
stated that approximately  $22 billion of those  state assets                                                                   
were for  ARMB, with $18 billion  of the $22 billion  for the                                                                   
defined benefit plans.                                                                                                          
                                                                                                                                
Mr.  Bader   began  the  presentation,   "Retirement  Systems                                                                   
Liquidity Analysis":                                                                                                            
                                                                                                                                
     Fund Liquidity Analysis                                                                                                    
                                                                                                                                
        · Although   there   is    a   substantial   unfunded                                                                   
          liability in both PERS and TRS, there are                                                                             
          billions of dollars to pay benefits well into the                                                                     
          future.                                                                                                               
        · Benefits payments will increase substantially in                                                                      
          the    next   decade.    Unless   addressed,    the                                                                   
          combination  of  increased   benefit  payments  and                                                                   
          insufficient  assets  in  the trusts  will  require                                                                   
          investing in more liquid assets.                                                                                      
        · Investing in more liquid assets will negatively                                                                       
          impact the rate of return of fund assets,                                                                             
          therefore increasing the unfunded liability.                                                                          
                                                                                                                                
11:06:36 AM                                                                                                                   
                                                                                                                                
Mr. Bader  explained that his  presentation's data  was based                                                                   
on  the actuarial  report prepared  by  Buck Consultants  and                                                                   
the valuation study as of June 30, 2012.                                                                                        
                                                                                                                                
Mr. Bader addressed  slide 3: "PERS Data Points,  Fiscal Year                                                                   
Ending 2014  (Projection from  Actuary)." He emphasized  that                                                                   
the  earnings   assumption  was   8  percent.  The   unfunded                                                                   
liability  would  increase  substantially  if  ARMB  were  to                                                                   
lower  its earning  assumption.  The  ultimate  purpose of  a                                                                   
retirement  system was  to pay  benefits. He  noted that  his                                                                   
references  to liquidity  were specifically  directed  to the                                                                   
methods of cash generation to pay benefits.                                                                                     
                                                                                                                                
11:07:29 AM                                                                                                                   
                                                                                                                                
Mr. Bader addressed  slide 4: "PERS Data Points,  Fiscal Year                                                                   
Ending 2014,  Without State Assistance." The  slide displayed                                                                   
the  importance  of  the annual  state  assistance  that  the                                                                   
governor and  legislature have appropriated to  PERS. Without                                                                   
state  assistance,  the  fund   would  require  another  half                                                                   
billion  dollars  of  cash  flow   from  investments  to  pay                                                                   
benefits.  Investment  returns were  not  cash. He  estimated                                                                   
that   the   current  investment   program   would   generate                                                                   
approximately  $262  million  for  PERS  this  year.  Without                                                                   
annual state  assistance, the  fund would  have to  sell some                                                                   
assets to  pay benefits,  which might  impair the  ability to                                                                   
earn the 8 percent return.                                                                                                      
                                                                                                                                
Mr.  Bader referred  to  slide 5:  "TRS  Data Points,  Fiscal                                                                   
Year Ending  2014 (Projection  from Actuary)." He  noted that                                                                   
the  circumstances with  TRS were  similar to  those of  PERS                                                                   
with an 8 percent earnings assumption.                                                                                          
                                                                                                                                
Mr. Bader  addressed slide 6:  "TRS Data Points,  Fiscal Year                                                                   
Ending 2014,  Without State  Assistance."  He noted that  TRS                                                                   
required  nearly as  much  as PERS  to  pay benefits  without                                                                   
state assistance.  For approximately $4.8 billion  of assets,                                                                   
TRS would yield  approximately $106 million, but  the need is                                                                   
$465 million.                                                                                                                   
                                                                                                                                
Mr.   Bader  discussed   slide   7:  "Growth   of   Benefits,                                                                   
PERS/TRS."  He  noted  that  ARMB  was  addressing  liquidity                                                                   
issues through  the pooling  of assets and  opportunistically                                                                   
selling  assets to  rebalance funds.  The slide  demonstrated                                                                   
how  the requirement  to pay  cash benefits  would grow  over                                                                   
the  next  nine  years.  Benefit costs  for  2013  were  $1.5                                                                   
billion with projections for 2022 of $2.5 billion                                                                               
                                                                                                                                
11:08:53 AM                                                                                                                   
                                                                                                                                
Mr.  Bader detailed  slide 8:  "Annual Cash  Yield Mr.  Boyle                                                                   
Plans."  He discussed  methods  for  generating  cash to  pay                                                                   
benefits.  He stated  that fixed  income  was ordinarily  the                                                                   
highest  yielding asset  class  but with  10-year  treasuries                                                                   
yielding  approximately   2.5  percent,  the   state's  fixed                                                                   
income return was  "anemic." He stated that  the state earned                                                                   
approximately  2.4  percent  on the  fixed  income  portfolio                                                                   
while the public  equity portfolio yielded  approximately 2.5                                                                   
percent  and real  assets earned  approximately 2.6  percent.                                                                   
He pointed out private equity with its unpredictable yield.                                                                     
                                                                                                                                
Mr.  Bader discussed  slide  9: "Ten  Year  Returns by  Asset                                                                   
Class."  The  private  equity  asset class  was  the  highest                                                                   
earning asset class,  yet it could not provide  a predictable                                                                   
cash  flow  for  benefit  payments.  A change  in  the  asset                                                                   
allocation   to  the   private  equity   asset  class   would                                                                   
significantly  impact  the  state's  ability  to  earn  an  8                                                                   
percent return.                                                                                                                 
                                                                                                                                
Mr.  Bader detailed  slide 10:  "ARMB Liquidity  Projection."                                                                   
He mentioned  the  state's pooling  of assets  as one  of the                                                                   
strategies  used   to  manage  liquidity  issues.   Slide  10                                                                   
detailed  all of  the funds  managed  by ARMB.  He noted  the                                                                   
department's daily  management of the asset allocation  of 14                                                                   
separate funds.  The funds were  divided between  the pension                                                                   
trusts  for the  separate benefit  programs.  He pointed  out                                                                   
the  slide's   column  headed   "net  contributions,"   which                                                                   
represented  the cash  in  for  all of  the  plans. By  2025,                                                                   
calculated with  state assistance,  the state will  encounter                                                                   
a negative cash  flow of $1.2 billion. The  liquidity problem                                                                   
will be  quite serious by  2025 without sufficient  assets in                                                                   
the fund  and a strategy  is not found  to gain  higher yield                                                                   
from investments.                                                                                                               
                                                                                                                                
11:11:29 AM                                                                                                                   
                                                                                                                                
Mr. Bader said  that when the legislature  passed legislation                                                                   
related  to the Permanent  Fund Dividends,  it required  that                                                                   
dividends be paid  out of realized earnings.  The program was                                                                   
designed  to avoid the  sale of  assets in  order to  pay the                                                                   
benefit or dividend.                                                                                                            
                                                                                                                                
Mr.  Bader  mentioned  other   strategies  presented  to  the                                                                   
committee that  described strategies to address  the unfunded                                                                   
liability  that  were  based   upon  an  8  percent  earnings                                                                   
assumption.  He noted  the both  the  retirement systems  and                                                                   
the  permanent   fund  earned   7.3  percent.  With   10-year                                                                   
treasuries  yielding approximately  2.5 percent, requiring  a                                                                   
substantial  portion  of  earnings  to  yield  for  dividends                                                                   
would create  challenges for the  system. He stated  that the                                                                   
current  return would make  the challenge  greater if  assets                                                                   
must be sold.                                                                                                                   
                                                                                                                                
11:13:21 AM                                                                                                                   
                                                                                                                                
Vice-chair Fairclough  asked if Mr. Bader suggested  that the                                                                   
legislature  implement a  policy  change for  ARMB making  it                                                                   
impossible  for   them  to  dip   into  the  corpus   of  the                                                                   
retirement funds.  She asked if Mr. Bader  suggested that the                                                                   
legislature base a future fiscal plan on a rate of return.                                                                      
                                                                                                                                
Mr. Bader  stated that he  was not making the  recommendation                                                                   
stated  by Vice-Chair  Fairclough. He  stressed that  without                                                                   
state assistance,  the liquidity issue may drive  events in a                                                                   
direction  that   is  contrary  to  earning   8  percent.  He                                                                   
believed that  8 percent  was possible, and  if the  goal was                                                                   
not  achieved,  the  contribution  rate  would  be  impacted,                                                                   
making  it self-correcting.  He  simply wished  to alert  the                                                                   
legislature, the  executive branch and ARMB to  problems that                                                                   
may arise.                                                                                                                      
                                                                                                                                
11:15:03 AM                                                                                                                   
                                                                                                                                
Senator  Bishop  commented  that  the history  of  the  stock                                                                   
market prior to 2008 yielded greater than 8 percent.                                                                            
                                                                                                                                
Commissioner  Rodell  agreed. She  stated  that  a method  of                                                                   
achieving the  8 percent return  was to assess the  driver of                                                                   
the  return. The  return was  driven by  the private  equity.                                                                   
The  private equity  was not  a  liquid asset  that could  be                                                                   
easily  sold. She  noted that  some assets  required a  great                                                                   
deal of  time to  sell and  recoup the  cash. She  noted that                                                                   
the first indication  of a negative difference  would be seen                                                                   
in 2020  with a difference of  $38 million. The  unwinding of                                                                   
an  alternative  investment must  occur  in 2020.  With  only                                                                   
five years to  act, the state must determine  the appropriate                                                                   
asset  allocation.   She  pointed   out  that  2020   was  an                                                                   
important year for mega-projects in the state.                                                                                  
                                                                                                                                
11:18:34 AM                                                                                                                   
                                                                                                                                
Vice-chair Fairclough asked about liquidity for payments.                                                                       
                                                                                                                                
Mr. Bader  asked if  Vice-Chair Fairclough  was referring  to                                                                   
general fund or retirement fund liquidity.                                                                                      
                                                                                                                                
Vice-Chair Fairclough  replied that she was referring  to the                                                                   
retirement fund liquidity.                                                                                                      
                                                                                                                                
Mr.   Bader  explained   that  the   retirement  funds   were                                                                   
addressing  liquidity  for  payments  and  the  2.17  percent                                                                   
could  be  increased. He  stated  that  he was  studying  the                                                                   
issue  for   ARMB  to  research   a  method  to   change  the                                                                   
allocation for a  higher yield without impairing  the ability                                                                   
to  earn 8  percent or  more.  He noted  that endowments  and                                                                   
foundations were  required to yield  5 percent per  year, but                                                                   
he  acknowledged that  they took  more risks  than the  state                                                                   
was accustomed to taking.                                                                                                       
                                                                                                                                
Co-Chair Kelly asked about the quoted 2.7 percent.                                                                              
                                                                                                                                
Mr. Bader replied that 2.17 percent was the current yield.                                                                      
                                                                                                                                
11:22:36 AM                                                                                                                   
                                                                                                                                
FRED  STURMAN,  SELF,  KENAI,  (via  teleconference),  stated                                                                   
that  he had  been concerned  about  PERS and  TERS for  some                                                                   
time now.  He believed that  outsourcing jobs was  a possible                                                                   
solution. He suggested  that privatizing the DMV  was another                                                                   
possible  solution. He  thought that  the change might  lower                                                                   
the number  of people  counting  on the system.  He shared  a                                                                   
personal experience with Social Security benefits.                                                                              
                                                                                                                                
11:23:09 AM                                                                                                                   
                                                                                                                                
Vice-chair  Fairclough  asked   about  pension  payments  and                                                                   
privatization.  She  understood   that  when  positions  were                                                                   
eliminated,  the state  contribution  continued. She  queried                                                                   
the administration's position on the issue.                                                                                     
                                                                                                                                
Mr.  Barnhill  responded  that   when  a  municipal  employer                                                                   
eliminated  a   class  department,   the  change   would  not                                                                   
necessarily trigger  a termination  study unless  it included                                                                   
a class  of positions  or departments.  He mentioned  pending                                                                   
legislation,  HB   152  that  adjusted  the   conduction  and                                                                   
triggering  of termination  studies.  He  stated the  primary                                                                   
concern was  to create  a solution that  did not  shift costs                                                                   
from municipalities  to the  state. He  pointed out  that the                                                                   
state   provided    substantial   amounts   of    relief   to                                                                   
municipalities.  He   suggested  adjusting  the   cap  of  22                                                                   
percent.                                                                                                                        
                                                                                                                                
Co-Chair Kelly  introduced David Teal, Director,  Legislative                                                                   
Finance Division  and explained that he requested  a personal                                                                   
opinion from Mr. Teal when soliciting the presentation.                                                                         
                                                                                                                                
11:26:56 AM                                                                                                                   
                                                                                                                                
DAVID   TEAL,   DIRECTOR,   LEGISLATIVE   FINANCE   DIVISION,                                                                   
believed  that the retirement  system  would be an  important                                                                   
topic  of the  next legislative  session.  He introduced  the                                                                   
presentation, "A  Discussion of Retirement System  in Alaska"                                                                   
(copy on  file). He stated  that he was comfortable  offering                                                                   
his   personal  opinion   and  would   clarify  the   factual                                                                   
information   in  his  presentation.   He  opined   that  the                                                                   
upcoming  session would  address the  retirement systems  and                                                                   
the   Senate   Finance   Committee    meeting   provided   an                                                                   
opportunity to  inform legislators  about the very  important                                                                   
issue.  He   noted  that  an   earlier  meeting   focused  on                                                                   
background.                                                                                                                     
                                                                                                                                
Mr.  Teal  posed  the question  on  slide  2:  "Are  Alaska's                                                                   
Public Employee Retirement Systems Healthy?"                                                                                    
                                                                                                                                
     If not, what can be done about it?                                                                                         
                                                                                                                                
Mr. Teal  stated that the answer  to the question was  no. He                                                                   
planned  to   talk  about   actuarial  concepts   and  policy                                                                   
guidelines with a focus on PERS.                                                                                                
                                                                                                                                
11:30:52 AM                                                                                                                   
                                                                                                                                
Mr.  Teal discussed  slide 2:  "System Health  refers to  the                                                                   
likelihood  that  the promised  benefits  will  be paid  when                                                                   
due."                                                                                                                           
                                                                                                                                
   · Defined Contribution (DC) Plans                                                                                            
        o No promised benefit level                                                                                             
        o so not measure of health required                                                                                     
   · Defined Benefits (Mr. Boyle) Plans                                                                                         
        o Promised benefits (pensions)                                                                                          
        o So it is critical to track and maintain system                                                                        
          health                                                                                                                
                                                                                                                                
Mr.  Teal  moved to  slide  4:  "Measuring  the Health  of  a                                                                   
Retirement System:"                                                                                                             
                                                                                                                                
    1. Funding Ratio = Assets/Liabilities.                                                                                      
    2. Unfunded Liability--just a dollar amount; not a                                                                          
      relative measure.                                                                                                         
    3. Are employers paying the actuarially required                                                                            
      contribution (ARC)?                                                                                                       
    4. Are the contributions causing financial stress?                                                                          
                                                                                                                                
11:34:05 AM                                                                                                                   
                                                                                                                                
Mr.  Teal stated  that most  retirement  systems had  funding                                                                   
ratios greater than 100 percent through the 1990s.                                                                              
                                                                                                                                
Mr. Teal  discussed the  graph on slide  5: "PERS  Assets and                                                                   
Liabilities."  The graph  showed  assets  and liabilities  in                                                                   
the  funding ratio  beginning  in 2002.  He  stated that  the                                                                   
assets and liabilities  were closely matched for  a number of                                                                   
years. He  pointed out  the gap occurring  in 2005.  He noted                                                                   
that the  graph's dark  line represented  assets, the  dotted                                                                   
line represented  liabilities and  the blue line  represented                                                                   
the funding ratio.  He did not have concern  about the upward                                                                   
trend  in  liability  because   it  was  common  for  defined                                                                   
benefit systems.  He stressed  that investments  must perform                                                                   
as expected for the system to function optimally.                                                                               
                                                                                                                                
Mr. Teal  acknowledged that  the systems  were healthy  for a                                                                   
long  time, which  begged  the  question about  the  system's                                                                   
current  lack of health.  He stated  that unfunded  liability                                                                   
was   a   consequence   of   assumptions   that   failed   to                                                                   
materialize.                                                                                                                    
                                                                                                                                
11:38:06 AM                                                                                                                   
                                                                                                                                
Mr. Teal furthered  that the defining attribute  of a defined                                                                   
benefit  plan was  that the employer  bears  the risk  of the                                                                   
system  health. Unfunded  liability  was  the consequence  of                                                                   
risk  becoming reality.  He  agreed  with Mr.  Barnhill  that                                                                   
liability   was  a   moving  target.   If  any   circumstance                                                                   
increased  benefits to  a greater  than  expected value,  the                                                                   
funding ratio  declined and  unfunded liability  appeared. He                                                                   
noted  that  the Mercer  case  was  an example  of  utilizing                                                                   
outdated   assumptions.   With   the   adoption   of   better                                                                   
assumptions, the accrued liability increased.                                                                                   
                                                                                                                                
Mr. Teal  continued that  when benefits followed  assumption,                                                                   
assets sometimes  failed to  keep pace  with the increase  in                                                                   
benefits. He  noted that approximately  one-half of  the $2.5                                                                   
billion liability  in 2005 was  attributable to  the increase                                                                   
in  liabilities and  the decline  of assets.  He stated  that                                                                   
retirement  systems   were  designed  to  fill   an  unfunded                                                                   
liability   gap  over   a   25-year  period   through   small                                                                   
adjustments  to the  contribution  rate. Actuaries  calculate                                                                   
the  expected benefits.  Assets  must  increase  by the  same                                                                   
amount as the change in accrued liability.                                                                                      
                                                                                                                                
11:41:06 AM                                                                                                                   
                                                                                                                                
Mr. Teal  turned to  slide 8:  "How Volatility of  Investment                                                                   
Returns  Affects   Unfunded  Liability."   The  excel   sheet                                                                   
provided a  simple model. The  example used both  liabilities                                                                   
and  assets  starting  at  $12   billion,  with  an  unfunded                                                                   
liability of zero.                                                                                                              
                                                                                                                                
11:44:23 AM                                                                                                                   
                                                                                                                                
Mr. Teal  manipulated the Excel  spreadsheet as  he testified                                                                   
in  an effort  to educate  the committee  about the  system's                                                                   
variables,   while  exhibiting   a   variety  of   potentials                                                                   
outcomes.                                                                                                                       
                                                                                                                                
11:48:11 AM                                                                                                                   
                                                                                                                                
Mr. Teal made more Excel projections. He spoke to Slide 10:                                                                     
                                                                                                                                
     1. Earnings are volatile and unpredictable.                                                                                
     2. Small variations can be addressed by smoothing,                                                                         
        amortization and good fortune.                                                                                          
     3. When variations are small, unfunded liability is a                                                                      
        soft liability that can be repaid with earnings                                                                         
        (rather than contributions).                                                                                            
                                                                                                                                
11:49:51 AM                                                                                                                   
                                                                                                                                
Vice-chair  Fairclough asked  if the  state had realized  the                                                                   
losses and sold something off to make up the difference.                                                                        
                                                                                                                                
Mr. Teal  replied that  the PFD  did not pay  out as  much as                                                                   
the  retirement  system each  year.  The PFD  paid  dividends                                                                   
while  the retirement  system paid  benefits. Although  there                                                                   
was a  recovery of  assets, it  had not  been sufficient.  He                                                                   
relayed  that  the assets  were  not  a  large but  that  the                                                                   
liabilities  continued  to  grow.   The  permanent  fund  was                                                                   
viewed differently.                                                                                                             
                                                                                                                                
11:51:46 AM                                                                                                                   
                                                                                                                                
Vice-chair  Fairclough  asked about  5-year  averages if  the                                                                   
system were closed out.                                                                                                         
                                                                                                                                
Mr. Teal  stated that if the  system had not been  closed out                                                                   
the liability would  have grown further. He  pointed to slide                                                                   
9 and noted  that assets were not lost without  recovery. The                                                                   
assets  did recover,  but  liabilities  were growing  faster.                                                                   
The  level  analyzed was  a  ratio  as  opposed to  a  dollar                                                                   
amount.                                                                                                                         
                                                                                                                                
11:53:47 AM                                                                                                                   
                                                                                                                                
Mr. Teal resumed discussion of Slide 10:                                                                                        
                                                                                                                                
     4. The road to recovery from large losses can be very                                                                      
        long-so long that the system may appear to be                                                                           
        broken.                                                                                                                 
     5. The system is unlikely to stay broken in the long-                                                                      
        run.                                                                                                                    
     6. If you pay what you owe, the system will fix itself.                                                                    
     7. As time passes, assumptions are replaced with                                                                           
        reality.                                                                                                                
                                                                                                                                
Mr. Teal  furthered that the  third measure of  system health                                                                   
was  paying off  debt. The  system  would fix  itself if  the                                                                   
debt  was paid.  Paying the  debt exhibits  to credit  raters                                                                   
the  willingness to  pay other  liabilities including  bonds.                                                                   
The   choice  of   assumptions   allowed  complex   decisions                                                                   
regarding how much to pay toward liabilities.                                                                                   
                                                                                                                                
Mr. Teal  explained that  Alaska was one  of the  only states                                                                   
to  include  healthcare  costs  in  unfunded  liability.  The                                                                   
difference  encouraged the  perception  that Alaska's  system                                                                   
was less healthy.                                                                                                               
                                                                                                                                
11:56:16 AM                                                                                                                   
                                                                                                                                
Mr. Teal opined  that the state ought to concern  itself with                                                                   
the  problem  of  unfunded  liability   rather  than  compare                                                                   
itself to other states with similar issues.                                                                                     
                                                                                                                                
Mr. Teal pointed to slide 12, "Arm Board Proposals."                                                                            
                                                                                                                                
   · Cash infusion of $1 billion to PERS and $1 billion to                                                                      
     TRS.                                                                                                                       
   · Adopt the level dollar amortization method in order to                                                                     
     accelerate contributions.                                                                                                  
                                                                                                                                
Mr.  Teal  elaborated  that  both  proposals  were  aimed  at                                                                   
improving  system health.  He  noted that  the cash  infusion                                                                   
would  immediately increase  assets, which  would reduce  the                                                                   
unfunded  liability  and  increase   the  funding  ratio.  He                                                                   
pointed out  that the cash  infusion proposal was  similar to                                                                   
another  rejected proposal  two years  ago. He  noted that  a                                                                   
change in the amortization method was more complex.                                                                             
                                                                                                                                
Mr.  Teal mentioned  a  method  of open  amortization,  which                                                                   
referred to  a method that  added any new unfunded  liability                                                                   
to the existing  unfunded liability and amortized  it over 25                                                                   
years. He  compared open amortization  to refinancing  a home                                                                   
annually.  He pointed  out that  with  the open  amortization                                                                   
method,  the   state  would  never   pay  off   the  unfunded                                                                   
liability.  The  gap would  be  constantly shifted  into  the                                                                   
future in hopes that future earning would close the gap.                                                                        
                                                                                                                                
12:00:11 PM                                                                                                                   
                                                                                                                                
Mr. Teal stated  that soft liability referred  to the ability                                                                   
of future  earnings to fill the  gap, as opposed  to treating                                                                   
the  liability like  the death  that  it is.  He pointed  out                                                                   
that  Illinois treated  their  unfunded liability  as a  soft                                                                   
liability.  Illinois  assumed   that  the  contribution  rate                                                                   
would  remain the  same,  while  future earnings  filled  the                                                                   
gap.  He indicated  that the  solution  was unsuccessful  for                                                                   
Illinois.  Fortunately,  the proposal  of  open liability  or                                                                   
amortization  was  not  discussed   in  Alaska.  Alaska  used                                                                   
closed amortization  with a  fixed 25  year period.  With the                                                                   
closed  method,  any unfunded  liability  created  in a  year                                                                   
would  become  a   new  debt  with  a  new   25-year  payment                                                                   
schedule.                                                                                                                       
                                                                                                                                
Mr. Teal reviewed slide 13, "Amortization Methods":                                                                             
                                                                                                                                
   · Level percent of pay amortization applies a constant                                                                       
     contribution rate over the amortization period. Use of                                                                     
     this method is near universal and is currently used in                                                                     
     Alaska.                                                                                                                    
   · Level dollar amortization splits unfunded liability                                                                        
     into equal  payments over the amortization  period, much                                                                   
     as for a  standard home mortgage. Relative  to the level                                                                   
     percent   method,   payments   to   eliminate   unfunded                                                                   
     liability  will  be  higher  in  the  early  years,  and                                                                   
     contribution  rates required  to  generate level  dollar                                                                   
     payments  will  decline  over time.  Because  the  level                                                                   
     dollar method  has larger  payments in the  early years,                                                                   
     it is sometimes referred to as "front loading."                                                                            
                                                                                                                                
Mr.  Teal added  that both  methods  eliminated the  unfunded                                                                   
liability  at  the  end  of  the  amortization  period.  Both                                                                   
methods  were acceptable  under GASB  rules. He  acknowledged                                                                   
that  ARMB  had  debated  changing  level  percent  to  level                                                                   
dollar with a  final recommendation made for  2015. He opined                                                                   
that  the  recommendation   was  consistent  with   the  ARMB                                                                   
philosophy  that  a  funding ratio  should  be  increased  as                                                                   
rapidly as  possible. Without  the assets,  there is  no base                                                                   
to  balance the  system with  earnings. The  state could  not                                                                   
survive on 8  percent earnings with low assets.  Both methods                                                                   
achieved the same result, using different paths.                                                                                
                                                                                                                                
Mr. Teal discussed  slide 14: "The ARMB  Proposals: Questions                                                                   
to Consider."                                                                                                                   
                                                                                                                                
   1. Are the proposals necessary?                                                                                              
   2. Does the path to full funding matter?                                                                                     
   3. Are the proposals affordable?                                                                                             
                                                                                                                                
Co-Chair Kelly [undecipherable].                                                                                                
                                                                                                                                
Mr. Teal used  a mortgage example in his response.  He stated                                                                   
that  level dollar  compared to  a  standard mortgage.  Level                                                                   
percent  of  pay  was  compared   to  an  adjustable  payment                                                                   
system,  where  payments  would accomplish  a  percentage  of                                                                   
pay.  For the  state, a  constant level  of payroll  achieved                                                                   
lower  payments  in  the  early  years,  where  the  payments                                                                   
increased with payroll.                                                                                                         
                                                                                                                                
12:04:57 PM                                                                                                                   
                                                                                                                                
Mr. Teal continued  to answer the question.  He stressed that                                                                   
no action  was necessary.  The state  was on  a path  to full                                                                   
funding  as   determined  by   standard  accepted   actuarial                                                                   
methods. He  saw no  imperative to  deviate from the  current                                                                   
path.                                                                                                                           
                                                                                                                                
Mr.  Teal noted  that  the  recovery from  investment  losses                                                                   
could stretch  over long  periods of  time. The state's  loss                                                                   
of  greater than  20 percent  in  assets over  2008 and  2009                                                                   
ensured that  the path to recovery  would be long.  He argued                                                                   
that a  move to level  dollar was  an overreaction.  He asked                                                                   
if the  path mattered. He assumed  that the path  mattered to                                                                   
ARMB  since the  change  to level  dollar  was proposed.  The                                                                   
changes  were recommended  in  the  hope of  large  financial                                                                   
savings to the state.                                                                                                           
                                                                                                                                
Mr.  Teal  noted  that  ARMB did  not  discount  future  cash                                                                   
flows. The  savings projected  by ARMB  were attributable  to                                                                   
the earnings  made on  the higher  balances. A cash  infusion                                                                   
would allow  higher earnings.  Higher earnings allowed  lower                                                                   
contributions,   which  would  lower   the  need   for  state                                                                   
assistance.   He  pointed  out   that  the  higher   balances                                                                   
available  to the retirement  systems  were generated  by the                                                                   
state. The  state would  forgo the  earnings that  they would                                                                   
have  earned on  the money  without  a cash  infusion to  the                                                                   
retirement  system.  A  cash infusion  would  not  provide  a                                                                   
savings to the state.                                                                                                           
                                                                                                                                
12:08:16 PM                                                                                                                   
                                                                                                                                
Mr.  Teal referred  to  slide  15: "Annual  State  Assistance                                                                   
Savings  from $2  Billion  Cash  Injection (vs.  Status  Quo)                                                                   
(PERS Only). He  stated that the information  provided on the                                                                   
spreadsheet  agreed  with  slide  25  of  "Alaska  Retirement                                                                   
Management  Board"  dated November  1,  2013 (copy  on  file)                                                                   
presented  earlier  by  Ms.  Erchinger.  He  noted  that  the                                                                   
cumulative  savings over  the baseline  scenario with  a cash                                                                   
infusion   allowed  the  necessary   savings  assuming   that                                                                   
today's  dollar  was comparable  to  one  in the  future.  He                                                                   
argued  that  a   decline  in  state  contribution   did  not                                                                   
necessarily  equal  state  savings.   The  state  would  most                                                                   
likely see earnings  on the money if it was not  used for the                                                                   
cash infusion.                                                                                                                  
                                                                                                                                
Mr.  Teal noted  that applying  a  discount rate  was a  more                                                                   
typical  method  of addressing  similar  cash  flows. If  the                                                                   
state  earned money  on the  balances, the  cash infusion  to                                                                   
the  retirement  system  would   cost  the  state  more  than                                                                   
allowing  the  money  to  continue  earning  in  its  current                                                                   
scenario. He suggested  that if earnings were  greater than 2                                                                   
percent, the state might reconsider the cash infusion.                                                                          
                                                                                                                                
Senator Hoffman asked [undecipherable] 8 percent.                                                                               
                                                                                                                                
Mr.  Teal  replied  that  an  8  percent  return  was  highly                                                                   
unlikely.   He  projected  earnings   of  approximately   3-4                                                                   
percent.                                                                                                                        
                                                                                                                                
Co-Chair Kelly suggested a reserve account.                                                                                     
                                                                                                                                
Mr. Teal  replied that the  question about a  reserve account                                                                   
was  debatable.  He  pointed out  slide  16:  "Measuring  the                                                                   
Health of a Retirement System."                                                                                                 
                                                                                                                                
   1. Funding Ratio = Assets/Liabilities.                                                                                       
   2. Unfunded Liability --just a dollar amount; not a                                                                          
     relative measure.                                                                                                          
   3. Are  employers   paying    the   actuarially   required                                                                   
     contribution (ARC)?                                                                                                        
   4. Are contributions causing financial stress?                                                                               
                                                                                                                                
Mr.  Teal   highlighted  number   four:  "Are   contributions                                                                   
causing   financial    stress?"   He   believed    that   the                                                                   
affordability  of the chosen  path was  a crucial  measure of                                                                   
system  health.  Former  chairs   of  finance  chose  not  to                                                                   
address  the issue  due to  thinking  that high  contribution                                                                   
rates  were  best made  when  the  state could  afford  them.                                                                   
Reductions of costs  were best anticipated for  times without                                                                   
budget surpluses.  He stressed that  the day of  deficits had                                                                   
arrived  for   Alaska.  He  noted   the  timeliness   of  the                                                                   
committee meeting.                                                                                                              
                                                                                                                                
12:13:32 PM                                                                                                                   
                                                                                                                                
Mr.  Teal  shared  that  he  attended   the  recent  National                                                                   
Conference of  State Legislatures  (NCSL) pension  task force                                                                   
meeting  and  he  was  informed  that he  was  not  alone  in                                                                   
believing  that fiscal  stress  was an  important measure  of                                                                   
system  health. The  task force  addressed  the concern  that                                                                   
the  many  figures available  for  detailing  pension  system                                                                   
data  that might  prove  concerning  to legislators  and  the                                                                   
public.   Until  2013,   the   GASB  rules   were  used   for                                                                   
accounting,  rating   and  for  funding.  He   noted  current                                                                   
calculations  for  books,  bonds  and  budget.  The  separate                                                                   
calculations   were  more  easily   understood  when   viewed                                                                   
individually.                                                                                                                   
                                                                                                                                
Mr.   Teal   acknowledged  that   accountants,   raters   and                                                                   
legislators used  the data for  different purposes.  He noted                                                                   
the  lack  of  significant  change   in  the  computation  of                                                                   
unfunded  liability. He  noted  that the  amount of  unfunded                                                                   
liability would  be reported even when payments  were timely.                                                                   
Every  municipality  would  now  be required  to  report  its                                                                   
share  of  pension  liability.  The rating  agencies  used  a                                                                   
common set of assumptions with the goal of comparability.                                                                       
                                                                                                                                
12:17:30 PM                                                                                                                   
                                                                                                                                
Mr. Teal elaborated  that rating agencies utilized  a uniform                                                                   
set  a rules,  which was  different from  the state's  unique                                                                   
amortization   methods.   By   using   a   uniform   set   of                                                                   
assumptions,   comparability    was   made   available.   The                                                                   
assumptions  used   were  often  more  conservative   than  8                                                                   
percent. The  numbers calculated by  the rater would  imply a                                                                   
less healthy  system for  Alaska. The  numbers calculated  by                                                                   
the raters  with a  number of  downgrades for  municipalities                                                                   
and the  state were  not intended  for use  in accounting  or                                                                   
funding.                                                                                                                        
                                                                                                                                
Mr. Teal  opined that GASB rules  were confusing, as  they no                                                                   
longer offered guidance  regarding funding. In  the past, the                                                                   
rules  informed  about  the computation  of  the  Actuarially                                                                   
Required Contribution  (ARC). An  adequate funding  level was                                                                   
no  longer offered  in  the process;  the  state must  merely                                                                   
provide  a number  on  their  financial statement.  With  the                                                                   
lack of  funding guidance, the  task force offered  advice to                                                                   
legislatures   to   put  guidelines   in   statute.   Another                                                                   
recommendation   was  to   provide  a   description  of   the                                                                   
computation  of  the annually  required  contribution  level.                                                                   
The plan  should be exhibited  in statute while  bringing the                                                                   
system to full funding.                                                                                                         
                                                                                                                                
Mr. Teal detailed  slide 19: "Advice from a  National Pension                                                                   
Funding Task Force."                                                                                                            
                                                                                                                                
    · Put   funding   guidelines    in   statute;    Describe                                                                   
      computation    of    the     ARC    (Annual    Required                                                                   
      Contribution). Show the plan to bring the system to                                                                       
      full funding.                                                                                                             
    · The numeric approach offers sound guidance, but the                                                                       
      funding ratio and other actuarial measures are not                                                                        
      the most important measure of system health. What                                                                         
      really matters is what is affordable.                                                                                     
                                                                                                                                
Mr.  Teal   stated  that  the   current  funding   ratio  was                                                                   
identical to  that in the past  few years, but the  health of                                                                   
the  system  deteriorated  substantially  because  the  state                                                                   
treasury  could  no  longer  afford   the  current  plan.  He                                                                   
clarified that the statement was his opinion.                                                                                   
                                                                                                                                
12:21:43 PM                                                                                                                   
                                                                                                                                
Mr. Teal  discussed the graph  on slide 20:  "Comparing Three                                                                   
Cost Drivers  to Available Revenue  ($ millions)."  He stated                                                                   
that  the  three  drivers  (K-12,   Medicaid  and  Retirement                                                                   
Assistance)  took  50  percent of  the  unrestricted  general                                                                   
fund revenue. If  the three drivers increase  as projected by                                                                   
2022,  the percentage  will be  closer to  94 percent  of the                                                                   
state's  revenue  stream  leaving   virtually  no  money  for                                                                   
agency operations or capital budget.                                                                                            
                                                                                                                                
Mr. Teal detailed  slide 21: "What Other States  have Done to                                                                   
Improve Retirement System Health."                                                                                              
                                                                                                                                
   1. Increase Assets                                                                                                           
        a. Increase employee contributions                                                                                      
   2. Reduce Benefits                                                                                                           
        a. Raise the retirement age                                                                                             
        b. Increase service requirements                                                                                        
        c. Reduce post-retirement adjustments                                                                                   
        d. Adopt hybrid plans                                                                                                   
                                                                                                                                
Mr. Teal  believed that  Alaska was  not behind other  states                                                                   
in  its  planning  because  it  closed  the  defined  benefit                                                                   
system  at the first  signs of  distress.  When the plan  was                                                                   
closed  to new entrants,  a radical  change  was seen  in the                                                                   
liability curve.  He referenced the graph on  slide 23: "PERS                                                                   
Accrued Liability."                                                                                                             
                                                                                                                                
Senator Dunleavy  asked if a  successful hybrid  system might                                                                   
be developed.                                                                                                                   
                                                                                                                                
Mr.  Teal replied  in  the affirmative.  He  opined that  the                                                                   
issue  could  be  vetted  this  session.  He  understood  the                                                                   
benefit of a pension  to retirees versus a lump  sum of cash.                                                                   
He believed  that a  hybrid system  could greatly  reduce the                                                                   
employer risk  while increasing  the comfort of  retirees. He                                                                   
stated  that  he  had  not  seen  an  effective  hybrid  plan                                                                   
derived in other states.                                                                                                        
                                                                                                                                
12:26:33 PM                                                                                                                   
                                                                                                                                
Mr. Teal  believed the downward  curve displayed on  slide 23                                                                   
allowed the  state to move  away from the standard  actuarial                                                                   
approaches  in   which  assets  chase  the   liability  curve                                                                   
upward.  He stated  that  the  goal was  to  end  up with  no                                                                   
assets when benefits were completely paid.                                                                                      
                                                                                                                                
Mr. Teal  addressed the  National Task Force  recommendations                                                                   
on pension funding policies on slide 24:                                                                                        
                                                                                                                                
   1. Be based on actuarially determined contribution rates-                                                                    
     and the calculation of rates should be in statute so                                                                       
     the    plan   is   clear    to   employees,    retirees,                                                                   
     administrators, boards, and legislators.                                                                                   
                                                                                                                                
   2. Collect a consistent percentage of payroll-use the                                                                        
     Level Percent of Pay amortization method.                                                                                  
                                                                                                                                
   3. Be disciplined-to ensure that promised benefits can be                                                                    
     paid (i.e., pay the ARC).                                                                                                  
                                                                                                                                
   4. Maintain intergenerational equity (i.e., the cost of                                                                      
     benefits should be paid by the generation of taxpayers                                                                     
     that were served by the employees who earned those                                                                         
     benefits).                                                                                                                 
                                                                                                                                
   5. Require clear reporting to show how and when plans                                                                        
     will be fully funded and the progress toward that                                                                          
     goal.                                                                                                                      
                                                                                                                                
Mr. Teal  compared Alaska's revenue  stream to a  person with                                                                   
a mortgage  losing their  job and  getting another  that paid                                                                   
20  percent  less than  the  first.  He acknowledged  that  a                                                                   
person in  that position  would not  be expected to  increase                                                                   
their  mortgage  payment. He  opined  that the  person  would                                                                   
probably refinance their mortgage to lower the payments.                                                                        
                                                                                                                                
Mr. Teal  opined that  the level  dollar method  was fine  if                                                                   
the discount rate  was low and the payments  were affordable.                                                                   
He  opined  that  the  method  was not  in  common  use,  not                                                                   
recommended  and he found  it to  be an  odd response  to the                                                                   
fiscal stress that the state was experiencing.                                                                                  
                                                                                                                                
Mr. Teal elaborated  further on intergenerational  equity. He                                                                   
opined  that  intergenerational   equity  was  impossible  to                                                                   
achieve.  He noted  that  ARMB rejected  any  plan that  that                                                                   
failed to pay  the unfunded liability by the  early 2030s. At                                                                   
that point,  defined benefit employees  would no longer  be a                                                                   
significant  portion of  the workforce.  He  agreed with  the                                                                   
payment of  normal costs as  they accrued. He  defined normal                                                                   
costs   as  those   that  were   expected   for  a   person's                                                                   
retirement.                                                                                                                     
                                                                                                                                
Mr. Teal  stressed that unfunded  liability was not  a normal                                                                   
cost  and  could  not  be  paid  in  a  way  that  maintained                                                                   
intergenerational  equity.  He   provided  an  example  of  a                                                                   
person retiring  in 2004  when unfunded  liability was  zero.                                                                   
If  the system  lost money,  unfunded  liability was  created                                                                   
and the  contribution rates would  rise. The  next generation                                                                   
would  have  to  pay  for  the   cost  attributable  for  the                                                                   
previous generation of employees.                                                                                               
                                                                                                                                
12:32:22 PM                                                                                                                   
                                                                                                                                
Mr. Teal  pointed out that an  employer took the risk  of all                                                                   
losses  in  a  defined  benefit   system  and  must  pay  the                                                                   
unfunded  liability.  He explained  that  unfunded  liability                                                                   
would  be paid off  in the  early 2030s  according to  Buck's                                                                   
Actuarial  model  on  slide  25:  "PERS  Assets  and  Accrued                                                                   
Liability."  The  liability  would   be  paid  at  that  time                                                                   
because  the  existing  unfunded  liability  would  be  fully                                                                   
amortized. The  model never developed new  unfunded liability                                                                   
because earnings remain consistent at 8 percent.                                                                                
                                                                                                                                
Mr.  Teal  begged the  question,  what  would happen  if  the                                                                   
earnings were  less than 8 percent.  The answer was  that new                                                                   
unfunded   liability  would  open   in  unpredictable   ways.                                                                   
Contributions  would  require  increases  to  compensate.  He                                                                   
suggested  that   contributions  could  and   probably  would                                                                   
continue  after the  last  defined benefit  employee  retired                                                                   
unless earnings were outstanding.                                                                                               
                                                                                                                                
12:35:16 PM                                                                                                                   
                                                                                                                                
Mr.    Teal    concluded    that     the    obsession    with                                                                   
intergenerational  equity  could  lead to  overly  restricted                                                                   
policy   decisions.   He   opined   that   the   concept   of                                                                   
intergenerational   equity   did   not  apply   to   unfunded                                                                   
liability.   Defined  contribution   plans  more   accurately                                                                   
displayed intergenerational equity.                                                                                             
                                                                                                                                
Mr. Teal  noted that ARMB had  a policy denying  the shifting                                                                   
of  costs  between  the  state  and  the  municipalities.  He                                                                   
argued  that ARMB  proposals did  indeed  shift those  costs.                                                                   
Adopting  level  dollar  amortization,  which  increased  the                                                                   
contribution rate  above 22 percent,  the state will  pay 100                                                                   
percent   of  the  amount   above  22   percent.  Rates   for                                                                   
municipalities would remain the same.                                                                                           
                                                                                                                                
Senator  Dunleavy  pointed  out   that  Regional  Educational                                                                   
Attendance Area (REAA) funding was 100 percent state money.                                                                     
                                                                                                                                
Mr.  Teal  replied  in  the  affirmative.   He  relayed  that                                                                   
anytime  state  contributions   increased  without  non-state                                                                   
employer's  contribution increases,  the  costs were  shifted                                                                   
to  the  state.   The  state  clearly  paid   more  than  the                                                                   
municipalities.                                                                                                                 
                                                                                                                                
12:38:02 PM                                                                                                                   
                                                                                                                                
Mr.  Teal addressed  slide 26:  "What  is the  Goal and  What                                                                   
Options Might Achieve it?"                                                                                                      
                                                                                                                                
     Goal: a healthy system - meaning a system with a plan                                                                      
     to eliminate unfunded liability in a reasonable time                                                                       
     at an affordable cost.                                                                                                     
                                                                                                                                
Mr.  Teal  stated  his opposition  to  sideboards  that  were                                                                   
ignored. He did  not object to a cash infusion.  He preferred                                                                   
to focus  on the  goal of  a healthy  system. He pointed  out                                                                   
that  reamortizing  the  state  liability  would  reduce  the                                                                   
state  cost,  but  would  not  save  money,  similar  to  the                                                                   
refinancing  of a home  mortgage. He noted  that a  change of                                                                   
the assumptions used  in the model would only  create further                                                                   
number games.  He stressed  that reality  mattered more  than                                                                   
the  model. If  the  model was  not  the best  reflection  of                                                                   
expectations, it was unreliable as a planning tool.                                                                             
                                                                                                                                
Mr.  Teal suggested  that elimination  of  health care  costs                                                                   
from  the   unfunded  liability   calculations  was   another                                                                   
potential  solution.  He argued  that  since  the costs  were                                                                   
real, there  was no point in  basing policy decisions  on the                                                                   
incomplete  data.  He wondered  how  the state  could  reduce                                                                   
state  assistance  payments while  maintaining  the  employer                                                                   
contribution rate  at 22 percent and paying  off the unfunded                                                                   
liability in a reasonable time frame.                                                                                           
                                                                                                                                
Mr.  Teal  referenced  slide 27:  "PERS  Assets  and  Accrued                                                                   
Liability."  He  predicted  that   unfunded  liability  would                                                                   
vanish  in  the  2030s  because  past  service  contributions                                                                   
would  vanish.  He noted  that  there  would be  few  defined                                                                   
benefit   employees  working   and  accumulating   additional                                                                   
benefits.  Without   contributions,  the  asset   curve  also                                                                   
declined with  earnings as the  only source of  asset growth.                                                                   
The  accrued liability  would also  decline because  retirees                                                                   
would  reach   their  life  expectancy.  When   the  earnings                                                                   
accelerate, the balance grows and the model is skewed.                                                                          
                                                                                                                                
12:43:14 PM                                                                                                                   
                                                                                                                                
Mr.  Teal stated  that the  only  option to  place assets  at                                                                   
zero  when liabilities  fall to  zero  was to  earn less.  He                                                                   
could see the  potential modeled in slide 27.  He argued that                                                                   
the information  raised  concerns about  the ability  to meet                                                                   
the  future needs  of Alaskans  and  sustain spending,  which                                                                   
proved that the state was experiencing financial stress.                                                                        
                                                                                                                                
Mr. Teal  acknowledged  that he  did not trust  a model  that                                                                   
looked  60  years   into  the  future.  He   stated  that  as                                                                   
contributions  fell to  zero, the  liabilities would  decline                                                                   
leading to liquidity  issues. He advocated for  the inclusion                                                                   
of the  information (lower interest  earnings) in  the model.                                                                   
He   opined  that   the   state   would  not   benefit   from                                                                   
contributions falling  to zero. Contributions  were the risk-                                                                   
based costs  and intergenerational  equity was not  an issue.                                                                   
He  pointed out  that  a 1  percent contribution  rate  would                                                                   
generate  $100  million  per   year.  The  maintenance  of  a                                                                   
contribution rate would address the liquidity needs.                                                                            
                                                                                                                                
Mr. Teal  advocated for focus  on the near term.  He wondered                                                                   
why  the state  would  choose  to build  its  assets so  high                                                                   
rather than holding  them at $15 billion. If the  goal was to                                                                   
have zero assets  when the liability curve  reached zero, the                                                                   
safest option  was to hold rates  at 22 percent  to eliminate                                                                   
future state contribution rates.                                                                                                
                                                                                                                                
Mr.  Teal  recalled his  efforts  in  SB 187.  He  referenced                                                                   
slide 28: "Recommendation:  Reconsider an Approach  like that                                                                   
in SB 187."                                                                                                                     
                                                                                                                                
   · A cash infusion sufficient to maintain system health                                                                       
    while capping employer contributions at 22 percent.                                                                         
   · No more state assistance - saving approximately $500                                                                       
     million annually for 15 years.                                                                                             
                                                                                                                                
12:48:42 PM                                                                                                                   
                                                                                                                                
Mr.  Teal  clarified that  a  cash  infusion system  did  not                                                                   
dictate capping  employer contributions.  He believed  that a                                                                   
cash  infusion should  be  accompanied  by lower  rates.  The                                                                   
adoption  of  level  dollar  leads   to  the  rate  increase.                                                                   
Eliminating state  assistance was  not essential to  the cash                                                                   
infusion  plan.  He  acknowledged  that  the  issue  of  cash                                                                   
infusion  led  to many  different  details  encompassing  the                                                                   
comprehensive package of retirement funding.                                                                                    
                                                                                                                                
Mr.  Teal   concluded   that  action   on  funding  was   not                                                                   
imperative.  He opined  that  addressing  the computation  of                                                                   
the ARC  in a plan  in statute was  the minimum need  for the                                                                   
legislature   regarding  the   retirement   system.  If   the                                                                   
legislature,  governor  and  ARMB   agreed  on  an  approach,                                                                   
success was  likely. He  stressed that  paying less  than the                                                                   
required ARC  would be  a mistake as  would paying  more than                                                                   
the state could afford.                                                                                                         
                                                                                                                                
12:51:31 PM                                                                                                                   
                                                                                                                                
Co-Chair  Kelly thanked  Mr. Teal  for  the presentation.  He                                                                   
stated that  a similar presentation  would be  offered during                                                                   
session.                                                                                                                        
                                                                                                                                
Vice-Chair  Fairclough asked  about  the new  GASB rules  and                                                                   
the  mandates  for  municipalities.   She  wondered  if  bond                                                                   
ratings would reflect poorly on Alaska.                                                                                         
                                                                                                                                
Mr. Teal replied  that he had spoken with the  raters and was                                                                   
assured  that  the  reserve  situation  in  Alaska  was  well                                                                   
understood.  Municipalities  had   been  saved  from  literal                                                                   
bankruptcy  by  the  state. The  unfunded  liability  had  no                                                                   
required  payment time.  The unfunded  liability  was a  lump                                                                   
sum  for  future  predictions.  He stated  that  bond  raters                                                                   
wished to  see a  plan, hence  the task force  recommendation                                                                   
that a plan be stated in statute.                                                                                               
                                                                                                                                
12:54:24 PM                                                                                                                   
RECESSED                                                                                                                        
                                                                                                                                
2:20:46 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
^DEPARTMENT  OF  HEALTH  AND SOCIAL  SERVICES  FY  14  BUDGET                                                                 
OVERVIEW AND FY 15 BUDGET PREVIEW                                                                                             
                                                                                                                                
2:20:47 PM                                                                                                                    
                                                                                                                                
Co-Chair Meyer discussed the schedule for the afternoon.                                                                        
                                                                                                                                
JAMES  ARMSTRONG,  STAFF,  SENATOR  CO-CHAIR  MEYER,  relayed                                                                   
that Senator Kelly  and Senator Fred Dyson had  sent a letter                                                                   
to  Commissioner  William  Streur  regarding  potential  cost                                                                   
saving  measures   the  Department   of  Health   and  Social                                                                   
Services (DHSS)  was looking to  implement related  to public                                                                   
assistance  and  Medicaid  programs.  Committee  members  had                                                                   
received a copy  of the commissioner's response  dated August                                                                   
13,  2013  (copy  on file).  He  detailed  that  three  other                                                                   
offices were  working on a  response letter, which  should be                                                                   
finalized  in the next  10 days  or so.  He relayed  that the                                                                   
commissioner  had  provided Medicaid  and  public  assistance                                                                   
backup,  but given time  limitations the  meeting would  only                                                                   
focus on the Medicaid components.                                                                                               
                                                                                                                                
2:22:16 PM                                                                                                                    
                                                                                                                                
WILLIAM  STREUR,  COMMISSIONER,   DEPARTMENT  OF  HEALTH  AND                                                                   
SOCIAL  SERVICES, communicated  his  intention  to provide  a                                                                   
high level  overview related to  Medicaid. He  discussed that                                                                   
there were  many moving  pieces related  restrictions  on the                                                                   
expired  federal  American  Recovery   and  Reinvestment  Act                                                                   
(ARRA)  funding  and  to  the  federal  Affordable  Care  Act                                                                   
(ACA).                                                                                                                          
                                                                                                                                
2:23:34 PM                                                                                                                    
                                                                                                                                
Commission  Streur  highlighted   that  controlling  Medicaid                                                                   
spending  in  the state  came  down  to four  variables.  The                                                                   
department  was  currently  looking  at $21  million  to  $22                                                                   
million   in   cost  savings   resulting   from   implemented                                                                   
measures. He  hoped to come close  to doubling the  figure in                                                                   
the upcoming year.  He stated that $45 million out  of a $1.6                                                                   
billion  budget was  not large,  but it  was a  way to  begin                                                                   
detailing  some   of  the  department's  functions.   He  was                                                                   
hopeful that DHSS  could take aggressive actions  to increase                                                                   
the amount substantially  in the coming year.  He intended to                                                                   
discuss  future plans  and cost  control. He  relayed that  a                                                                   
significant portion  of funding  for the Affordable  Care Act                                                                   
was rooted in fraud control.                                                                                                    
                                                                                                                                
Commissioner   Streur  communicated   that  Medicaid   was  a                                                                   
service for low  income patients. He noted  that occasionally                                                                   
he  received   calls  about   Medicare;  he  clarified   that                                                                   
Medicare was a  federal program for individuals  over the age                                                                   
of  65.  He  provided  a  handout   titled  "Attachment  2  -                                                                   
Medicaid" (copy on  file). He relayed that  Alaska joined the                                                                   
Medicaid  program in 1972  and any  actions required  federal                                                                   
approval.  The department  had  been  required  to submit  an                                                                   
initial state plan;  any amendments were made  to the initial                                                                   
plan. He detailed  that Medicaid programs were  spread across                                                                   
various  DHSS divisions  including the  Office of  Children's                                                                   
Services,  and the  Divisions  of Behavioral  Health,  Senior                                                                   
and  Disability  Services, Healthcare  Services,  and  Public                                                                   
Assistance  (responsible  for   authorizing  and  identifying                                                                   
eligible  recipients).  The  Division   of  Juvenile  Justice                                                                   
recipients  would  be  moved   under  Medicaid  in  the  near                                                                   
future.  Juvenile   justice  residents  were   not  currently                                                                   
eligible for  Medicaid because  the residency was  considered                                                                   
incarceration.  The state  could use  state general  funds to                                                                   
pay for the  residents at a Medicaid fee scale;  currently it                                                                   
paid 95  percent of "street" rate.  He noted that  the change                                                                   
would bring substantial savings.                                                                                                
                                                                                                                                
2:26:45 PM                                                                                                                    
                                                                                                                                
Commissioner  Streur  relayed  that  pages  8 and  9  of  the                                                                   
handout illustrated  Medicaid spending from 1991  to 2012. He                                                                   
did not  intend to  cover the  changes in  depth due  to time                                                                   
limitations. He  noted that ARRA  funding occurred  from 2008                                                                   
to  2012;   spending  had  been   variable.  He   pointed  to                                                                   
Legislative  Finance  Division  charts  depicting  department                                                                   
spending  by division  on page  11.  He noted  that the  data                                                                   
shown was confusing  given that Medicaid spending  across the                                                                   
five  divisions  was shown;  however,  the spending  was  not                                                                   
shown for  the individual divisions.  He was working  to show                                                                   
Medicaid's  impact in  each of  the divisions  as opposed  to                                                                   
Medicaid on its own.                                                                                                            
                                                                                                                                
Commissioner Streur  discussed four ways to  control Medicaid                                                                   
spending on page 13:                                                                                                            
                                                                                                                                
     · Controlling eligibility                                                                                                  
     · Controlling covered services                                                                                             
     · Controlling what we pay for those services or                                                                            
        products                                                                                                                
     · Controlling how much or how often recipients access                                                                      
        those services by controlling utilization                                                                               
                                                                                                                                
Commissioner   Streur   addressed   the   first   method   of                                                                   
controlling   Medicaid  spending:   controlling   eligibility                                                                   
(pages  13  and  14). He  discussed  that  a  maintenance-of-                                                                   
effort requirement  was  placed on states  when ARRA  funding                                                                   
was provided. The  requirement had been extended  to 2014 for                                                                   
adults and 2019  for children [through ACA].  He communicated                                                                   
that largely  the state was  not able to control  eligibility                                                                   
because  much of  the program  was  federally mandated  (e.g.                                                                   
the  percentage   of  poverty  level,  people   covered,  and                                                                   
other). He elaborated  that there had been an  attempt in ACA                                                                   
to  make Medicaid  coverage  for all  individuals  up to  138                                                                   
percent  of poverty level;  currently  individuals up  to 100                                                                   
percent  of poverty  level were  covered in  Alaska with  the                                                                   
exception of  certain groups.  Pregnant women, children,  and                                                                   
some families were  covered up to a certain  level; childless                                                                   
adults  without a  disability under  the age  of 65 were  not                                                                   
covered.  He explained  that  ACA  would extend  coverage  to                                                                   
everyone under  138 percent of  poverty level. He  provided a                                                                   
cost savings  measure example;  currently pregnant  women and                                                                   
breast and  cervical cancer patients  were covered up  to 175                                                                   
percent  of  poverty  level.   The  state  could  reduce  the                                                                   
coverage to 100  percent or 138 percent of  poverty level and                                                                   
put the  individuals in  the ACA  Health Benefit Exchange  to                                                                   
purchase  insurance  on their  own.  He emphasized  that  the                                                                   
scenario was nothing  more than an example and  was not meant                                                                   
as a  recommendation. The  change would  save $22  million in                                                                   
general fund  spending. He noted  the importance  of weighing                                                                   
the benefits and disadvantages of potential changes.                                                                            
                                                                                                                                
2:31:14 PM                                                                                                                    
                                                                                                                                
Commissioner   Streur  stated   that   under  ACA,   Medicaid                                                                   
eligibility  would be done  using a  Modified Adjusted  Gross                                                                   
Income  (MAGI).   The  shift  removed  some   of  the  income                                                                   
"disregards"  (items  not  considered  as income)  that  were                                                                   
previously allowed  and increased the eligibility  level. The                                                                   
department  expected to see  some increase  in the  number of                                                                   
individuals eligible for Medicaid.                                                                                              
                                                                                                                                
Commissioner Streur  directed attention to the  second method                                                                   
of  controlling   Medicaid   spending:  controlling   covered                                                                   
services  (page  14). He  had  gone  back  and forth  on  the                                                                   
method given  that approximately  half  of the services  paid                                                                   
for in Alaska  were optional. He noted that  page 14 included                                                                   
a list  of mandatory and  optional Medicaid services.  He had                                                                   
the  ability  to  reduce  some   of  the  optional  services;                                                                   
however,  he  likened  healthcare  to a  balloon  that  would                                                                   
bulge  in  other  areas  if pushed  in  somewhere  else.  For                                                                   
example,  he wondered how  the removal  of prescription  drug                                                                   
coverage  would  it impact  emergency  room  and  physicians'                                                                   
office  visits,   and  individuals  with  chronic   or  acute                                                                   
conditions.  He  discussed  home  health  services  and  that                                                                   
waiver   programs   served  over   2,500   individuals   with                                                                   
conditions  that made them  eligible for  nursing home  level                                                                   
of  care; the  state would  have to  pay for  a $100,000  per                                                                   
year nursing  home bed if home  health services could  not be                                                                   
provided for a cost of $25,000 to $40,000 per year.                                                                             
                                                                                                                                
Commissioner  Streur stated  that  when  looking at  optional                                                                   
benefits the state  currently had it was difficult  to take a                                                                   
look at what it  did not want to do. Other  optional services                                                                   
included  dental  coverage  and  patient  transportation.  He                                                                   
discussed  the  major  impact  that  removing  transportation                                                                   
coverage  would have on  Medicaid recipients  given that  the                                                                   
state  transported  many individuals  for  medical  services,                                                                   
particularly   from    rural   Alaska.   He    relayed   that                                                                   
transportation costs  would total $80 million  in the current                                                                   
year.  He  communicated  that  it was  not  feasible  to  cut                                                                   
transportation  unless the  state chose  to make  substantial                                                                   
investments in  rural areas to  increase the  specialty level                                                                   
of care.                                                                                                                        
                                                                                                                                
2:34:26 PM                                                                                                                    
                                                                                                                                
Co-Chair  Meyer  asked  for  clarification  on  the  cost  of                                                                   
transportation  in  the  current  year.  Commissioner  Streur                                                                   
responded that  transportation for Medicaid  recipients would                                                                   
cost  $80  million  in  the  current   year.  Co-Chair  Meyer                                                                   
remarked  that  the  number  was   significant.  Commissioner                                                                   
Streur agreed.                                                                                                                  
                                                                                                                                
Commissioner   Streur   relayed   that  going   forward   the                                                                   
department  would  look  at  ways  to  reduce  transportation                                                                   
costs.  The department  had  been  working closely  with  the                                                                   
Alaska   Native   Tribal   Health   Consortium   (ANTHC)   on                                                                   
telemedicine   efforts,   which    he   believed   would   be                                                                   
successful. He  shared that ANTHC  had found that  40 percent                                                                   
of  the   telemedicine  cases   had  avoided   transportation                                                                   
services  (i.e. airplane  transportation).  He stressed  that                                                                   
telemedicine   services   needed   to   be   increased;   the                                                                   
department was working to enhance the capabilities.                                                                             
                                                                                                                                
Vice-Chair  Fairclough inquired  whether  broadband would  be                                                                   
related   to  telemedicine   access   for  communities.   She                                                                   
wondered  whether ANTHC  had solved  the issue.  Commissioner                                                                   
Streur replied  that the  tribal partners  had stepped  up in                                                                   
terms  of broadband  capabilities.  The  issue  had not  been                                                                   
solved,  but progress  had  been made.  He  commented on  the                                                                   
Yukon-Kuskokwim Health  Corporation's ability  to communicate                                                                   
with  Anchorage and  state offices.  He  summarized that  the                                                                   
area may  or may not need  more development depending  on the                                                                   
interface between the department and the entities.                                                                              
                                                                                                                                
2:37:00 PM                                                                                                                    
                                                                                                                                
Vice-Chair   Fairclough   noted   that  the   Department   of                                                                   
Education   and   Early   Development    (DEED)   legislative                                                                   
subcommittee had  been told that  DEED was currently  working                                                                   
on  and reviewing  a  broadband  study.  She wondered  if  it                                                                   
would include  existing gaps  for the  legislature to  take a                                                                   
look at.                                                                                                                        
                                                                                                                                
Commissioner   Streur   spoke   to  the   third   method   of                                                                   
controlling  Medicaid  spending:   controlling  what  we  pay                                                                   
providers to  deliver those services  or products  (page 15).                                                                   
He relayed that  the effort to control payments  to providers                                                                   
was  "wildly   unpopular"  at   present.  He  detailed   that                                                                   
controlling rates  in Alaska was  complex due to  the state's                                                                   
large  size  and its  range  in  unique services  varying  in                                                                   
rural  and   urban  areas.  He   communicated  that   it  was                                                                   
necessary   for  the  department   to   look  at  the   issue                                                                   
constantly.  He  emphasized  that Medicaid  rates  in  Alaska                                                                   
were  approximately 140  percent of  Medicare rates  compared                                                                   
to  the Lower  48 where  Medicaid  rates were  66 percent  of                                                                   
Medicare rates.                                                                                                                 
                                                                                                                                
Vice-Chair  Fairclough   asked  for  verification   that  the                                                                   
Medicaid  rates  were  144  percent   of  Medicare  rates  in                                                                   
Alaska.  Commissioner Streur  clarified that  the figure  was                                                                   
140 percent.                                                                                                                    
                                                                                                                                
Commissioner  Streur communicated  that the  state paid  very                                                                   
well.  He discussed  that in  the  past he  had attempted  to                                                                   
move the  state to a cost-based  system. He opined  that many                                                                   
of the  payment systems  had not  been rational;  it had  not                                                                   
been  possible to  determine  that  the state  was  receiving                                                                   
good  value  for what  it  paid.  He discussed  conducting  a                                                                   
balance  against  the  Medicare rate,  nursing  homes  versus                                                                   
assisted  living facilities,  or  comparing  Alaska to  other                                                                   
states.  The  department   was  looking  at  the   issue.  He                                                                   
believed the  cost-based rate  was a  great way to  determine                                                                   
what it  truly cost to provide  care. The question  about how                                                                   
much profit  should be  made had  been a robust  conversation                                                                   
over the past several months.                                                                                                   
                                                                                                                                
2:40:15 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Fairclough asked  whether the  66 percent  figure                                                                   
related to  Medicaid and Medicare  rates in the Lower  48 was                                                                   
an average. She  wondered whether a comparison  had been made                                                                   
between Alaska  other geographically  similar states  such as                                                                   
Montana  or Wyoming.  Commissioner  Streur  responded in  the                                                                   
affirmative.  He explained that  in the  Lower 48  on average                                                                   
Medicaid  rates were  66 percent  of  Medicare rates.  Alaska                                                                   
was the  second highest paying  state (some would  argue that                                                                   
Alaska was  the highest  paying state).  He believed  Wyoming                                                                   
was the closest comparison to Alaska in terms of payments.                                                                      
                                                                                                                                
Vice-Chair Fairclough  wondered which state paid  the highest                                                                   
Medicaid  rates.  Commissioner  Streur  believed  it  was  an                                                                   
eastern  state.   Co-Chair  Meyer   noted  that   DHSS  staff                                                                   
communicated  that  the  state paying  the  highest  Medicaid                                                                   
rates was Massachusetts.                                                                                                        
                                                                                                                                
Co-Chair  Meyer referred  to the term  "medical tourism."  He                                                                   
wondered  if  the  term  was  used  in  Alaska  to  refer  to                                                                   
insurance  companies   encouraging  individuals   to  receive                                                                   
medical  procedures  out  of  state  due  to  high  costs  in                                                                   
Alaska.                                                                                                                         
                                                                                                                                
Commissioner   Streur  responded   in  the  affirmative.   He                                                                   
detailed  that there  were  substantial  rate differences  in                                                                   
medical procedures  such as hip,  knee, and heart  surgeries.                                                                   
Specialty  services were much  higher in  Alaska than  in the                                                                   
Lower  48.  He  added  a  Medicaid  recipient  could  receive                                                                   
services  in the  state of  Washington  for approximately  60                                                                   
percent of  the cost in  Alaska; however, the  preference was                                                                   
to keep individuals close to home.                                                                                              
                                                                                                                                
Co-Chair  Meyer  acknowledged  the importance  of  supporting                                                                   
in-state business,  but understood the need to  negotiate the                                                                   
large cost differences.                                                                                                         
                                                                                                                                
Commissioner   Streur   continued   to   discuss   that   the                                                                   
department was moving  all providers to a  cost-based system,                                                                   
or if Medicare  rates were available, to a  Medicare adjusted                                                                   
rate  (page   15).  Providers   would   be  paid  a   certain                                                                   
percentage above  the Medicare  rate; as Medicare  fluctuated                                                                   
the  payments  to  providers would  fluctuate  as  well  (the                                                                   
process  was  currently  used with  physician  services).  He                                                                   
relayed  that each provider  community  had its own  advocacy                                                                   
group; the  groups were vocal  and were actively  involved in                                                                   
any DHSS  regulation promulgation  process. He had  worked to                                                                   
open the  regulation hearing process  as much as  possible to                                                                   
allow for public  comment. He had not yet  received clearance                                                                   
to  hold open  working  groups  with providers.  He  remarked                                                                   
that he  almost had to remove  a regulation off the  table to                                                                   
have the  ability to meet with  groups on the  regulation. He                                                                   
continued to  work with  the Department of  Law to  have some                                                                   
give and take on the issue.                                                                                                     
                                                                                                                                
2:44:30 PM                                                                                                                    
                                                                                                                                
Commissioner  Streur shared  that DHSS  continued to  partner                                                                   
with provider  groups to  learn about  their suggestions  and                                                                   
hot  button  issues.  The  department  also  looked  at  best                                                                   
practices  in  other  states  and  pricing  models  in  other                                                                   
states.  Additionally, DHSS  considered acuity  as it  looked                                                                   
at home  and community-based  services, assisted  living home                                                                   
services,  and  behavioral  health services;  an  acuity  mix                                                                   
made it much easier to price the cost of care.                                                                                  
                                                                                                                                
Senator  Hoffman  relayed  that  the prior  year  the  Senate                                                                   
Finance Committee  had initiated  the assisted living  center                                                                   
in  Anchorage that  saved tens  of millions  of dollars  over                                                                   
decades.  He  wondered  whether   a  similar  center  was  in                                                                   
consideration for  Fairbanks or if ANTHC was  considering the                                                                   
idea. Commissioner  Streur did not know where  ANTHC stood on                                                                   
the issue.  The state  was still  working on determining  how                                                                   
to get the value out of the center in Anchorage.                                                                                
                                                                                                                                
Commissioner     Streur    discussed    needed     technology                                                                   
improvements.  He  addressed  the importance  of  having  the                                                                   
ability to send  an ultrasound from a  village electronically                                                                   
to a  larger community  saved on  transportation cost  or the                                                                   
ability to transport  a pregnant mother via  plane to prevent                                                                   
a more significant  issue with an unborn child.  He addressed                                                                   
the  need  to increase  care  to  tribal members  within  the                                                                   
tribal  health  system;  approximately  40 percent  of  money                                                                   
paid  by Medicaid  for tribal  health  members was  delivered                                                                   
within the tribal  health system, which meant  that the state                                                                   
only received  50 percent reimbursement.  He would  meet with                                                                   
tribal   health  directors   to  discuss   working  to   make                                                                   
improvements.  He  relayed  that   the  primary  reason  that                                                                   
services  could not  be  provided in  the  communities was  a                                                                   
lack of  depth in  providers. The  department was  working on                                                                   
items such  as how  to increase  capacity and on  specialties                                                                   
that  would  have  sufficient   utilization  to  justify  the                                                                   
expense.                                                                                                                        
                                                                                                                                
2:48:28 PM                                                                                                                    
                                                                                                                                
Commissioner   Streur   addressed   the  fourth   method   of                                                                   
controlling   Medicaid  spending:   controlling   utilization                                                                   
(page  16). He  believed that  utilization was  the area  the                                                                   
department  had the  greatest capability  of controlling.  He                                                                   
communicated that  the state did  not do enough  in measuring                                                                   
and  assessing utilization;  therefore, the  state had  begun                                                                   
to  contract   with  outside   entities  to  increase   prior                                                                   
authorizations. He  discussed that prior  authorizations were                                                                   
challenging  for  physicians and  other  providers;  however,                                                                   
the private system  had used prior authorizations  for years.                                                                   
The department was  beginning to examine where  savings could                                                                   
be  found  in services  delivered.  He  provided  a  personal                                                                   
example  related to  duplicated x-ray  services. He  remarked                                                                   
that  when  a  provider  had  invested  in  technology,  they                                                                   
wanted  to be able  to pay  for it.  He stated  that "in  the                                                                   
private sector  to do  good you  have to do  well and  in the                                                                   
public sector  to do well you  have to do good."  He believed                                                                   
there was  tremendous opportunity  with prior  authorization,                                                                   
retrospective review,  and other. He continued  to speak with                                                                   
the Alaska  State Medical  Association and Alaska  Physicians                                                                   
and  Surgeons on  joining DHSS  in the  efforts. He  stressed                                                                   
that  the  groups had  been  very  involved  in some  of  the                                                                   
savings efforts.                                                                                                                
                                                                                                                                
2:51:12 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Fairclough inquired  if DHSS  had the ability  to                                                                   
track  some  of  the  cost  drivers.   She  wondered  whether                                                                   
technology  upgrades   had  been  implemented.   Commissioner                                                                   
Streur   replied  that   the  data  warehouse   was   up  and                                                                   
operational  and provided  DHSS  tracking  capability and  to                                                                   
benchmark  providers  against  each other.  For  example,  he                                                                   
could  compare procedure  codes  between  gastroenterologists                                                                   
to   determine   outliers,   best    practices,   and   where                                                                   
underutilization may occur.                                                                                                     
                                                                                                                                
Vice-Chair  Fairclough shared  that she  had recently  broken                                                                   
her  wrist  and  had  been  referred  to  a  specialist.  She                                                                   
explained that the  initial doctor had taken  an x-ray, which                                                                   
was used by  the specialist. She was misdiagnosed  and had to                                                                   
return to the  specialist a month later where  a second x-ray                                                                   
was  done. The  specialist relayed  that  the original  x-ray                                                                   
had  not had  sufficient clarity.  She  wondered whether  the                                                                   
department  would be able  to track  similar situations  when                                                                   
patients  needed a  second x-ray  because the  first one  was                                                                   
not sufficient.                                                                                                                 
                                                                                                                                
Commissioner  Streur replied  that  the  department would  be                                                                   
able to  track the situations.  The department could  look to                                                                   
follow-on   therapies   occurring   that  may   result   from                                                                   
misdiagnosis  or  misinterpretation  of  an  x-ray  or  other                                                                   
radiology. The  system was in  the early stages and  had gone                                                                   
into operation  recently, but  the capabilities  were already                                                                   
significant. The  issue related to quality of  care, which he                                                                   
planned  to  discuss.  He relayed  that  the  new  management                                                                   
information  system had  gone live  on October  1, 2013.  The                                                                   
department  was paying  claims,  but it  was still  receiving                                                                   
too  many  rejections  in  the  claims  process;  the  system                                                                   
continued  to  be tweaked  and  would  provide  significantly                                                                   
increased capabilities from the previous antiquated system.                                                                     
                                                                                                                                
2:55:08 PM                                                                                                                    
                                                                                                                                
Commissioner Streur  relayed that DHSS continuously  reviewed                                                                   
other states' best  practices and was beginning  to implement                                                                   
some  changes   to  its   capabilities.   He  spoke   to  the                                                                   
department's  current cost  control initiatives  on pages  16                                                                   
through  20. He  discussed that  DHSS  was on  track to  save                                                                   
$4.5  million in  the current  year  in care  management/case                                                                   
management of  high utilizers of  the emergency room  and in-                                                                   
patient  hospital  stays.  Savings came  from  management  of                                                                   
patients  including establishing  a  primary care  physician,                                                                   
looking  at  chronic  conditions,  and  determining  ways  to                                                                   
address  drug-seeking  behavior.   He  highlighted  that  the                                                                   
department had  saved $7.5 million  with the  substitution of                                                                   
generic  medication  in  the  past  year;  savings  had  been                                                                   
achieved by working  with the physicians and  prescribers. He                                                                   
elaborated that at  one point the use of  generic medications                                                                   
had  been  at  80 percent;  however,  that  figure  had  been                                                                   
slipping  back.  He  added  that  every  1  percent  increase                                                                   
represented approximately $800,000 in savings.                                                                                  
                                                                                                                                
Commissioner  Streur  briefly  mentioned  that DHSS  had  not                                                                   
priced  out  psychiatric  medication  limits  (page  17).  He                                                                   
addressed that  the department  was working on  strengthening                                                                   
third-party   insurance  recovery.   He  detailed   that  the                                                                   
department  was working  to  recoup money  (from  third-party                                                                   
insurance) spent  by Medicaid on patient care  that insurance                                                                   
should have paid for.                                                                                                           
                                                                                                                                
2:58:34 PM                                                                                                                    
                                                                                                                                
Commissioner Streur  spoke to Medicaid  fraud on page  24. He                                                                   
communicated  that  changes  and   the  assistance  DHSS  was                                                                   
receiving from the  Department of Law Medicaid  Fraud Control                                                                   
Unit  were remarkable.  He discussed  increased  prosecutions                                                                   
of  individuals  who  had been  inappropriately  billing  for                                                                   
services;   the  prosecutions   continued  to  increase.   He                                                                   
detailed  that 29 individuals  had been  prosecuted a  couple                                                                   
of months  earlier. Efforts to  identify "low  hanging fruit"                                                                   
fraud  continued. He  provided  an example  of an  individual                                                                   
billing  Medicaid for personal  care  services when  they had                                                                   
actually been  out of  the country for  a month.  He stressed                                                                   
that  the  costs  added  up  to   hundreds  of  thousands  of                                                                   
dollars. Another  example involved  a nurse practitioner  who                                                                   
had lost  their license  but continued  to bill Medicaid.  He                                                                   
believed erroneous  billing was  the largest challenge  (page                                                                   
25).  Erroneous   billing  included   billing  at   a  higher                                                                   
procedure  code than necessary,  billing  for a service  that                                                                   
was   misinterpreted   as   a  higher   level   service,   no                                                                   
documentation,  billing for delivered  service when  patients                                                                   
did not  show for  an appointment, and  other. He  noted that                                                                   
the erroneous billing  examples did not constitute  fraud. As                                                                   
of August  2013 the Medicaid  Fraud Control Unit  had charged                                                                   
53 cases  with 13  convictions over the  past six  months. He                                                                   
noted  that he was  less concerned  about  the number  in the                                                                   
prosecution  and more  concerned about  people receiving  the                                                                   
message to  be more  careful. He  shared that many  providers                                                                   
had joined  the department  in  the attempt  to bill for  the                                                                   
right  care,  right  service,   right  time,  and  the  right                                                                   
person.                                                                                                                         
                                                                                                                                
3:01:30 PM                                                                                                                    
                                                                                                                                
Senator   Dunleavy   inquired  whether   providers   received                                                                   
notification  on   fraud  convictions.  Commissioner   Streur                                                                   
replied  in the affirmative.  The information  was shared  by                                                                   
the respective  division and a  press release  was published.                                                                   
He  added  that  the media  picked  up  on  the  publications                                                                   
quickly.                                                                                                                        
                                                                                                                                
Senator  Dunleavy asked  when  a decision  would  be made  on                                                                   
Medicaid  expansion.  Commissioner  Streur replied  that  the                                                                   
governor had  indicated that  a decision  would be  made when                                                                   
he released  the budget on December  11, 2013. He  planned to                                                                   
meet with  the governor  in the upcoming  week to  provide an                                                                   
update and a  report analysis. He stressed  the importance of                                                                   
making  the  right  decision.  He  pointed  to  disparity  in                                                                   
available  data.  He stressed  that  significant  variability                                                                   
existed in the  numbers provided on the general  fund cost of                                                                   
Medicaid  expansion (such  as $90 million  or $240  million).                                                                   
He  discussed  that   one  study  had  shown   that  Medicaid                                                                   
expansion  would save the  state $67  million; combined  with                                                                   
the  expected $90  million general  fund cost  the total  was                                                                   
only $23  million. He remarked that  it was not a  big effort                                                                   
to add  insurance for 40,000  additional individuals  for $23                                                                   
million, but  the cost could end  up being much  higher (e.g.                                                                   
$304 million).                                                                                                                  
                                                                                                                                
3:05:04 PM                                                                                                                    
                                                                                                                                
Senator Dunleavy  remarked that some individuals  would argue                                                                   
that  the  Obama  administration   had  missed  the  mark  in                                                                   
getting  it right  with its  roll-out of  the new  healthcare                                                                   
plan.  He discussed  the implementation  of large  government                                                                   
programs  that  had  specific  goals; once  the  program  was                                                                   
accepted the  system was  stuck with it.  He noted  that some                                                                   
would  contend  that  a federal  takeover  of  education  had                                                                   
taken place.                                                                                                                    
                                                                                                                                
Co-Chair Meyer  asked whether Commissioner Streur  could tell                                                                   
the  committee anything  about  its budget  for the  upcoming                                                                   
fiscal  year. He  noted that  the DHSS  budget combined  with                                                                   
the  Department of  Education  and Early  Development  budget                                                                   
accounted for two-thirds of the state's operating budget.                                                                       
                                                                                                                                
Commissioner  Streur expressed  reluctance  to respond  given                                                                   
that  the  DHSS  budget  had not  been  cleared  through  the                                                                   
governor.  He   believed  Medicaid  would  increase   in  the                                                                   
upcoming year after  two relatively flat years.  The data had                                                                   
not  been   fully  vetted  as   the  entire  impact   of  the                                                                   
Affordable Care Act was not yet known.                                                                                          
                                                                                                                                
Co-Chair  Meyer looked  forward  to seeing  the  department's                                                                   
budget on December 11, 2013.                                                                                                    
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
3:07:00 PM                                                                                                                    
                                                                                                                                
The meeting was adjourned at 3:07 p.m.                                                                                          
                                                                                                                                

Document Name Date/Time Subjects
Attachment 2 - Medicaid.pdf SFIN 11/1/2013 9:00:00 AM
H&SS Budget Overview
Nov 01 Meeting Comm Streur - Senator Kelly 081313.pdf SFIN 11/1/2013 9:00:00 AM
H&SS Budget Overview
RetirementSystemPresentation - Barnhill - Nov 01 2013.pdf SFIN 11/1/2013 9:00:00 AM
PERS and TERS
110113 Erchinger Senate Finance Committee Presentation.pdf SFIN 11/1/2013 9:00:00 AM
PERS and TERS
110113 Revised Senate Finance Presentation - Hall.pdf SFIN 11/1/2013 9:00:00 AM
PERS and TERS
110113 LFD Presentation to SFC.pdf SFIN 11/1/2013 9:00:00 AM
PERS and TERS