Legislature(2013 - 2014)SENATE FINANCE 532
04/15/2014 01:30 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB220 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 220 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
April 15, 2014
1:40 p.m.
1:40:58 PM
CALL TO ORDER
Co-Chair Kelly called the Senate Finance Committee meeting
to order at 1:40 p.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
Senator Donny Olson
MEMBERS ABSENT
None
ALSO PRESENT
David Teal, Director, Legislative Finance Division; Deven
Mitchell, Executive Director, Alaska Municipal Bond Bank
Authority, Department of Revenue; Gary Bader, Chief
Investment Officer, Treasury Division, Department of
Revenue; Michael Barnhill, Deputy Commissioner, Department
of Administration; John Boucher, Senior Economist, Office
of Management and Budget, Office of the Governor.
SUMMARY
SB 220 PERS/TRS STATE CONTRIBUTIONS
SB 220 was HEARD and HELD in committee for
further consideration.
SENATE BILL NO. 220
"An Act relating to additional state contributions to
the teachers' defined benefit retirement plan and the
public employees' defined benefit retirement plan; and
providing for an effective date."
1:41:46 PM
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
communicated his intent to provide fiscal context to the
governor's proposal on the Public Employees' Retirement
System (PERS) and Teachers' Retirement System (TRS)
unfunded liability. He addressed a PERS and TRS "Comparing
Payment Options" spreadsheet (copy on file). The
spreadsheet included a budget with zero growth, education,
and a growth rate for Medicaid, which provided a
conservative look at spending projections. Under the base
status quo scenario the annual payments of approximately
$700 million were expected to increase to roughly $1
billion by 2024. He discussed a flat $550 [million] figure
related to the capital budget, which was currently
undetermined. He relayed that the projected deficit was
substantial. He stated that the projected deficit of $2
billion fell to under $1.5 billion and reached closer to $3
billion by the end of the forecast period.
1:44:03 PM
Mr. Teal relayed that under the projected expenditures and
revenue the state's $15 billion in reserves would vanish by
2024. He detailed that the specific situation had driven
the concern about controlling retirement costs. He
communicated that the governor's plan was a proposal to fix
the retirement systems, which included a $3 billion
infusion in FY 15; the infusion would reduce annual
payments. He elaborated that annual payments were lower,
but at the end of the payment period the reserve position
had not been significantly altered. He stated that reserves
were lower in every year until further out where under the
governor's plan they would be in a better position than
under the base scenario; however, unfortunately they were
still negative.
Mr. Teal addressed that the pay-as-you-go method was
designed to increase the life of reserves and the
flexibility of their use; the method made a difference of
approximately one year or $2 billion in the state's
reserves in 2024. The savings were sufficient to satisfy
some who were very concerned about the flexibility and life
of the state's reserves. However, he surmised that the $2
billion was insufficient to invest in the gas line, which
had been the purpose of saving the reserves. The strategy
did not work as well as the state had hoped, it moved cost
to the future, therefore costs were higher long-term.
Additionally, it was a non-standard actuarial and credit
rater's approach. He noted that the method did what it was
designed to do; however, no one had liked it.
Mr. Teal communicated that the methods acceptable to
actuaries and credit raters could not significantly improve
the state's reserve health in the near-term. The reserve
health could be improved, but not with changes to the
retirement system. Additionally, the governor's plan
focused on the long-term health of the retirement system.
He relayed that neither the governor's plan nor the pay-as-
you-go method significantly increased reserves.
1:48:26 PM
Mr. Teal shared that improvement to reserve health would
require revenue increases or expenditure reductions. For
example, an annual reduction to the capital budget of $400
million had a large impact on long-term reserve funds.
Co-Chair Kelly clarified that Mr. Teal was only providing
the capital budget as an example and was not proposing the
cuts. Mr. Teal responded in the affirmative. He elaborated
that making a reduction anywhere in the budget would work
in the same way. He believed a $150 million capital budget
would be less than required to make the state's federal
match. He surmised that it was not something the
legislature would want to do.
Mr. Teal continued that if the state became convinced that
the retirement system would use much of its reserves it may
want to shift its focus to a long-term fix instead of
preserving reserves in the short-term. For example, the
governor's plan used a $3 billion cash infusion plus an
annual payment of $500 million for nine years; the total
expenditures on retirement under the governor's plan were
$7.5 billion, which equated to half of the state's
reserves. He elaborated that in another ten years the
state's reserves would be depleted by another $5 billion if
it continued with the same plan. He stressed that the
retirement plan was capable of consuming the entire
Constitutional Budget Reserve (CBR) over the upcoming 20
years. He stated that if spending could be reduced in other
areas, the governor's plan would still leave the state with
zero reserves in the future. He discussed a long-term look
that constituted the point in time the retirement system
would be fully funded (the actual end of the retirement
system would occur in the 2070s or later). He stated that
under any acceptable actuarial method the funding ratio was
100 percent; once at 100 percent, contributions went down
to zero and the system would coast on its earnings. He
acknowledged that the scenario had its risks, but future
legislatures could address the issue in the 2030s and
beyond. He stated that there was nothing the state could do
about it at present because the models were projections and
not predictions. He stated that the models were not
accurate that far in the future.
Mr. Teal addressed a line graph titled "Cumulative Costs of
Options to Eliminate TRS Unfunded liability ($ millions)."
He relayed that under the base scenario the state would
make annual state assistance payments; the costs were
cumulative. He remarked that the graph for PERS looked
similar. He shared that under the base scenario the cost of
paying off the unfunded TRS liability was approximately
$8.5 billion. Under the governor's plan the slope was lower
(as indicated on the graph in blue); at some point around
2023 the base and governor's scenarios crossed where the
scenarios had spent approximately the same amount of money.
Subsequent to the plans' crossover the governor's proposal
became less expensive in the long-term and saved
approximately $500 million. He discussed that cheaper
retirement costs meant lower deficits in the future. He
provided further remarks specific to the graph. He noted
the graph's focus on long-term cost.
1:55:14 PM
Mr. Teal continued to address the graph. He asked whether
flexibility was needed in state reserves if it was
committed to paying retirement and to a healthy retirement
system. He noted that holding money in reserves such as the
CBR did not really help. He stressed that it did not matter
whether the reserves had been used for a cash infusion or
annual payments; the same amount would be used by 2024 in
either scenario. He remarked that his statements were
applicable to any actuarially acceptable plans. The graph
included the pay-as-you-go scenario. The option achieved
its purpose of spending less in the early years through
2024. The state would pay for using the method because in
the long-term it would keep paying; in the very long-term
the plan switched from being the cheapest to the most
expensive. He reiterated that the plan's purpose was to
preserve reserves; it did not really work to use the method
unless the state considered $2 billion as working. He
reminded the committee that the $2 billion in savings would
have been consumed faster under the pay-as-you-go plan.
Mr. Teal noted that every other actuarial acceptable plans
had things in common. Each of the plans crossed the
baseline scenario around 2023 or 2024; under any of the
scenarios the total annual cost plus a cash infusion was
about the same. He continued that there was an area that
every plan would "rotate around." He elaborated that a plan
that was higher in the early years would be lower in the
later years. He referenced the actuary Buck Consultants
that had relayed there was always a choice to pay upfront
or to pay more at a later time. He stated that paying more
upfront could significantly reduce the state's total costs.
1:58:21 PM
Mr. Teal calculated changes in the graph for the committee.
He discussed undiscounted dollars. He stated that with a
discount of 8 percent, which is what the state claimed it
would earn, all of the plans would cost approximately $4.5
billion in the long-term. He noted that the cost should not
be a surprise because it was what the state owed in
unfunded liability. He observed that every plan had to pay
off the benefits; it was just a matter of when the state
chose to pay them.
Mr. Teal altered the graph's discount rate to match the
rate of inflation and noted that it did not look
significantly different than a non-discounted rate. Under a
zero rate the graph lines were further apart and easier to
read. He explained that all of the plans were within about
$500 million at the 2023/2024 crossover point. He addressed
a level percent of pay method. He shared that the method
was slightly cheaper in the early years than other options
using a $2 billion cash infusion; however, in later years
the cost was identical to the governor's plan. Under a 30-
year amortization the payments would be extended
significantly. Payments went flat in the early 2030s under
the base scenario, the mid-2030s under the governor's plan;
the 30-year amortization would extend payments out beyond
2040. The level-dollar method added a little more money in
early years and reduced total costs. The dotted red line
showed a $3 billion cash infusion with an annual fixed
payment of $151 million; the method would cost slightly
less than other $3 billion cash infusion plans. The level
percent method would cost slightly less; level dollar would
cost the state $5.5 billion at present instead of $8.5
billion to pay off the unfunded liability.
2:02:32 PM
Mr. Teal addressed the state's commitment to funding the
retirement system. He questioned why the state would choose
any method but the cheapest one if it was committed to
paying the benefits. He addressed reasons the state may not
pick the cheapest option. First, the state did not want to
pay off the entire unfunded liability; it could pay $4
billion, which would be a flat line. However, the state may
end up with more money than it needed if it earned over the
required 8 percent. He stated that there was no reason to
immediately achieve a system that was 100 percent healthy.
Second, reserves outside the retirement system had a clear
and definite purpose, which allowed the state to reduce
spending gradually. He detailed that the funds would not be
retrievable once they were infused into the retirement
account. He elaborated, that under the scenario, in the
event of a lack of reserves, the legislature may be forced
to take actions in the operating or capital budgets, the
Permanent Fund Dividend, or to enact taxes. Third, raters
looked at unfunded liability and reserves. He did not know
which was more important; according to raters each item was
worth approximately 10 percent of the state's credit
rating.
Mr. Teal discussed the governor's fixed payment proposal
that was "a bit nonstandard" (not in the sense that it was
actuarial unsound; it did pay the unfunded liability and
was a method used by California). However, bond raters had
their own models; some explanation would be needed about
the state's use of the non-standard method. He discussed
varying cash infusion amounts and relayed that the more
cash put in upfront meant costs would be cheaper in the
long run. However, the issue needed to be balanced against
the state's need for reserves. He stated that the existing
law did not need to be changed, it currently worked well;
however, he suggested that the legislature change the law.
He detailed that the change followed the advice of National
Conference of State Legislatures (NCSL) experts and other
national experts that advised putting the actuarial method
and plan into statute because in the absence of
Governmental Accounting Standards Board (GASB) funding
guidance there was no plan to follow. He elaborated that
putting the plan in statute would allow the state to
determine whether it was following the plan and paying off
the unfunded liability in the expected manner. He explained
that the actuarial method (level dollar or level percent)
could be put in the amortization term; the real decisions
would come down to fiscal notes, and the method and term of
amortization.
2:07:15 PM
Mr. Teal addressed fiscal notes. He discussed that TRS was
in worse shape than PERS; its funding ratio was
approximately 53 percent, which was in the "danger zone" in
terms of anyone comparing the health of retirement systems.
For each $1 billion contributed to TRS, the funding ratio
would increase by approximately 10 points. He detailed that
a $1 billion cash infusion would increase the number to 63
percent, whereas $2 billion would increase the figure to 73
percent. A $3 billion infusion would bring the figure up to
80 percent, which was out of the danger zone; however, 70
percent was not bad. He communicated that because TRS was a
single-payer it was a better investment than PERS. He
explained that the state would pay for TRS either through
the school districts or via state assistance; no one else
made TRS contributions.
Mr. Teal relayed that PERS was currently at a 63 percent
funding ratio; however, it was a bigger system and had a
larger unfunded liability. He elaborated that an infusion
of $1 billion would increase the ratio to 68 percent; a $2
billion infusion would be required to obtain a ratio above
70 percent. He addressed that a portion of the cash
essentially constituted revenue sharing or municipal
assistance. He advised the committee to consider that
municipalities would have balance sheet issues because of
GASB rules; municipalities were required to report their
unfunded liability on their balance sheets, which would
make some municipalities look "pretty horrible" in terms of
their financial standing. In order to pay off enough of the
PERS liability the state would need to contribute several
billion dollars. He was surprised by data he had received
that would turn off state assistance sooner than he had
thought; however, the unfunded liability would not be
reduced any sooner (the rate would drop to 22 percent due
to cash infusions). He expounded that the state would not
have to pay, but the unfunded liability would still exist
for the municipalities and the state.
Vice-Chair Fairclough asked about the necessary cash
infusion for PERS and TRS to reach the 22 percent figure.
Mr. Teal responded that a $3 billion cash infusion would
cut state assistance to zero after 2018.
Vice-Chair Fairclough asked if the infusion would be
directly into PERS. Mr. Teal replied in the affirmative. He
detailed that if the state made a cash payment of $2
billion, state assistance would continue through 2038,
which was more what he would expect. Based on the
information he believed a $3 billion infusion into PERS
would be more than the state would want to contribute; $2
billion would be fine, but more than $1.5 billion may not
be necessary, which would achieve a funding ratio in the
mid-70 percent range.
Co-Chair Kelly asked for verification that an infusion of
$1.5 billion to PERS and $2 billion into TRS would put the
retirement system in the healthy zone from an outside
investor perspective. Mr. Teal replied in the affirmative.
He elaborated that a $3 billion cash infusion split
slightly heavier towards TRS would work fine. Exactly how
much the state wanted to infuse depended on its view of the
tradeoff; it could pay more upfront or pay more later. He
stated that the same tradeoff was achieved on the state's
choice of assumptions (i.e. level dollar, fixed payment, or
level percent of pay); the tradeoff was not as critical,
but it was the payoff between paying upfront versus paying
later. He stated that it was not possible to wish the debt
away. There were only two ways to eliminate the unfunded
liability: 1) to pay it off; or 2) through a good
investment climate that would allow the state to partially
earn its way out of the system. He recommended not going
above 80 percent with a cash infusion because the amount
would provide the state with enough assets to help earn its
way out without danger of going too high or the need for a
reserve account on the side.
2:13:57 PM
Vice-Chair Fairclough agreed with most of Mr. Teal's
presentation. She asked for verification that the state
would receive the best bang the state would get for its
buck was about 10 percent.
Co-Chair Kelly asked for clarification on the ratio under
discussion. Mr. Teal replied that he was referring to the
credit raters' criteria and not a ratio. Earlier in the
year the Department of Revenue (DOR) had provided data to
the committee listing the criteria. He explained that the
health of the state's retirement systems accounted for
approximately 10 percent, which was the most significant
black mark on its credit rating. Other items, including
reserves (e.g. CBR) accounted for another 10 percent of the
state's rating. He noted that the state had a "huge" CBR
balance and guessed that the raters would view the state as
being in great shape if it was not facing the large
deficits. He detailed that credit raters looked at a number
of things. He could not say whether it was better to switch
reserves from the CBR to the retirement system; the items
were given approximately the same weight by credit raters.
He added that there were some rough rules of thumb for
retirement systems; a system was in the danger zone if it
was under 60 percent funded, whereas a system that was over
80 percent funded was not considered in danger of going
broke. Raters liked to see a ratio of 100 percent, but
understood that the ratio depended on economic conditions.
There were not many systems funded close to 100 percent due
to market losses.
2:16:49 PM
Vice-Chair Fairclough referred to a presentation by the
administration earlier in the week. She thought the
administration had relayed that debt counted for 20 percent
of the rating agencies calculations and that 30 percent of
the state's AAA rating was related to the state's reserves
and no tax. She was trying to reconcile the figures with
Mr. Teal's information. She was interested in the impact.
2:18:36 PM
AT EASE
2:22:41 PM
RECONVENED
Vice-Chair Fairclough reiterated her prior question related
to criteria used to review the state's bond rating at a
national level.
DEVEN MITCHELL, EXECUTIVE DIRECTOR, ALASKA MUNICIPAL BOND
BANK AUTHORITY, DEPARTMENT OF REVENUE, responded that the
three independent rating agencies that reviewed the state's
credit each had different evaluation criteria. He did not
know all of the criteria. He referred to a prior
presentation he had provided to the committee where he had
cited Standard and Poor's; 20 percent of its weighting
applied to debt including both pension liability and other
government obligations. He believed the criteria provided
to the committee by DOR Commissioner Angela Rodell applied
to a different rating agency (potentially Moody's).
Measurement of financial strength was made up by a
combination of a number of factors including unfunded
liability, debt, and fiscal practices.
Vice-Chair Fairclough asked for verification that the state
was taking a conservative approach in its financial
analysis related to the 20 percent. She surmised the
information provided by DOR earlier in the week provided a
range between rating agencies (i.e. 20 and 30 percent) and
did not include the numbers together.
Mr. Mitchell answered in the affirmative; 20 percent fell
under one scenario and 30 percent fell under another [Note:
the answer to Vice-Chair Fairclough's question was modified
during the meeting at 2:31:53 pm].
2:26:21 PM
Senator Bishop thanked Mr. Mitchell and remarked that his
testimony matched prior testimony from DOR.
Vice-Chair Fairclough spoke to the state's consideration of
the unfunded liability and balancing a cash infusion and
reserves. She asked Mr. Teal and the administration to
address the Alaska Retirement Management Board (ARMB)
returns and PERS/TRS accounts compared to the CBR. She
wondered where the money would serve Alaskans the best.
GARY BADER, CHIEF INVESTMENT OFFICER, TREASURY DIVISION
DEPARTMENT OF REVENUE, stated that no one knew for certain
what the future holds, but historical analysis had been
done on a blended rate of the CBR (rates of return of the
main and sub accounts). Analysis showed that over long
periods of time, PERS and TRS along with other long-term
funds such as the Alaska Permanent Fund outperformed the
blended rate of return; therefore, the department believed
the money was better placed in the long-term PERS/TRS
accounts than in the CBR. He relayed that the CBR
subaccount had a better rate of return than the blended
rate; however, because of the necessary liquidity of CBR
investments, the department still believed that over the
long-term the money was better placed in PERS/TRS.
Mr. Teal agreed with Mr. Bader's explanation.
2:29:18 PM
AT EASE
2:31:53 PM
RECONVENED
Co-Chair Kelly asked Vice-Chair Fairclough to discuss her
question and answer that had occurred during the recent at
ease.
Vice-Chair Fairclough restated her prior question related
to criteria used to evaluate the state's credit rating. She
asked if the impact was 20 percent or if it went up to 50
percent. She stated that 50 percent of the health of
Alaska's credit rating was in play related to examples
provided during the meeting. She stated that the figures
were based 10 percent on revenues, 10 percent on balance
reserves, 10 percent on liquidity, 10 percent on bond debt,
and 10 percent on adjusted net pension liabilities, which
totaled 50 percent. She observed that movement inside the
50 percent was a balancing issue. She clarified that
individual factors could be up to 50 percent of the state's
credit rating.
Co-Chair Kelly observed that each one of the components
were also individually weighted. Vice-Chair Fairclough
agreed.
Mr. Mitchell agreed. He had misunderstood the previous
question and thought the conversation had been about
comparing one rating agency's analytic process to another
rating agency process. He believed that the amount was at
least [50 percent]. He stated that Alaska had a somewhat
unique credit that did not always fit in the box used for
cross comparison of credits. Subsequently, some of the
state's strongest criteria overbalanced slightly.
2:34:50 PM
Co-Chair Kelly asked the administration to provide any
further remarks on the discussion.
MICHAEL BARNHILL, DEPUTY COMMISSIONER, DEPARTMENT OF
ADMINISTRATION, appreciated Mr. Teal's presentation. He
observed that the presentation had highlighted a number of
factors that the administration spent significant time on
during the crafting of the governor's proposal. He believed
one of the most pertinent factors was the affordability to
the state's General Fund in the near, mid, and long-term.
He communicated that some proposals were more affordable in
the long-term while others were more affordable in the
short-term. He remarked that the curves tended to converge
in later years. He stated that it was important to balance
and look separately at the short, mid, and long-term. He
elaborated that the state needed to focus on the all-in
costs to the state.
Mr. Barnhill spoke to budget certainty and relayed that a
switch to a fixed contribution system under the governor's
proposal created at least near-term budget certainty in the
fixed payment, which was important. The issue was
particularly important as the state looked at using the
next five years as a transition time towards a potential
gas pipeline investment. Additionally, the plan
acceptability to stakeholders was also important. There was
a significant array of stakeholders (almost every Alaskan
was a stakeholder in some way). He discussed that the
relative acceptability of the various proposals fell far
short for some stakeholders. The state was looking for a
proposal that was more than marginally acceptable to most
stakeholders; the administration believed the governor's
plan fell under this category. Finally, the state was
looking at the various risks to beneficiaries that the
various proposals presented. The administration believed
the governor's plan decreased risks to beneficiaries in
some fashion, which was important to beneficiaries and
balancing stakeholder interests. He acknowledged that all
of the plan proposals had pros and cons; ultimately the
administration was looking for a fair and acceptable
balance.
2:38:17 PM
AT EASE
2:40:02 PM
RECONVENED
JOHN BOUCHER, SENIOR ECONOMIST, OFFICE OF MANAGEMENT AND
BUDGET, OFFICE OF THE GOVERNOR, thanked the committee and
Mr. Teal for their work on the issue. He remarked that Mr.
Teal had highlighted some of the challenges the state faced
for the next ten years. He did not want to give the
committee the impression that the administration was
unaware of the problems and that it would happily spend its
way out of reserves for the next ten years. He pointed out
that the administration had demonstrated over the last ten
years that it was serious about curbing the operating
budget. The administration was working to address some of
the large issues including the retirement system and
Medicaid spending. The administration appreciated that the
issue was a balancing act and looked forward to working in
partnership with the legislature during deliberations. He
thanked the committee for its work.
Vice-Chair Fairclough remarked that the chairman had been
good about having "kitchen cabinet" conversations on big
issues. She noted that Mr. Teal had pointed to some
considerations. She wondered what 20 to 30 years meant to
local municipalities versus the State of Alaska. She
discussed Mr. Teal's presentation to the committee on the
level dollar method (to frontload the system). She
addressed where the state would start if it could not fund
$11.9 billion at present. She surmised that 70 percent was
the first step. She was interested in hearing all
perspectives. She remarked that when the unfunded liability
was spread to local communities some would experience
significant debt.
Co-Chair Kelly asked Mr. Teal to address what the options
looked like with level percent of pay versus level dollar
and 25 versus 30 years.
2:44:50 PM
Mr. Teal replied that the concepts were not easily grasped
and addressed the line graph titled "Cumulative Costs of
Options to Eliminate TRS Unfunded liability ($ millions).
He spoke to a $2 billion cash infusion and level percent of
pay (green dashed line). The line started lower and crossed
over with all of the other options around 2023/2024; beyond
that point level percent of pay meant that cost increased
as payroll increased over time. He explained that because
the option cost less upfront, it ended up costing more in
the long-run. Amortizing over 30 years was slightly more
expensive upfront than level percent of pay, but it
extended the payments for a longer timeframe. He elaborated
that the cost would continue to climb (similar to pay-as-
you-go). He advised that it was a tradeoff between near and
long-term.
Mr. Teal used a home mortgage as an example and explained
that a person preferring a 15-year mortgage would choose
the level dollar method because it paid the debt off
faster. Level dollar was more like a mortgage; a constant
amount was paid, which was similar to the governor's plan
that would pay a fixed $343 million per year. He pointed
out that level dollar would have a 25-year amortization
with a cash infusion of $2 billion and an annual cost of
approximately $196 million, which would extend payments by
two years and would vary slightly as opposed to the
governor's fixed payment plan.
Mr. Teal relayed that as with a home mortgage, the higher
the down payment the lower the down payments; additionally,
a 30-year mortgage would have lower payments, but would
cost more in the end. He communicated that the three
"levers" included how much cash would be put down upfront,
what the desired annual payment would be, and the desired
length of time for making payments. He discussed the
balancing act and considering whether the preference was
flexible reserves or having reserves tied up in retirement.
He stated that tying them up in retirement was great
because the system would be healthier and interest earnings
were 8 percent instead of 4 percent. However, he asked how
healthy the system had to be. He elaborated that credit
raters would rate the health of the system based on the
retirement system funding percentage; if the system was
funded at 100 percent the ratings agencies may give the
state 10 points, whereas, if the system was funded at 80
percent the agencies may give the state 9 points (towards
their rating scale). He noted that the point system was not
directly proportional. He communicated that if the
retirement system was below 50 percent funded, the state's
credit rating would be downgraded for an unhealthy system.
Mr. Teal referred back to his presentation and relayed that
level percent of pay started out with lower payments, but
as payroll climbed, the option became more expensive than
level dollar. He stated that it was a choice of methods and
the methods made a difference. With level percent of pay
and a $2 billion cash infusion the state would pay $8
billion. With the level dollar amortization method the
state would pay $6.8 billion.
2:50:29 PM
Co-Chair Kelly noted that the second option was fine if
there were no other goals in mind; however, the state did
have other goals. He observed that the state would not make
substantial gain anywhere by 2024; however, it could hold
on to some of the money longer within the window, which was
the only reason he liked level percent of pay better than
the level dollar method. He did not want the cash infusion
to be "massive." He believed the state should bring the
retirement system up into the healthy range (somewhere in
the 70 percent range). Additionally, he liked weighting the
funding heavier towards TRS because the state was
responsible for all of the payments. He liked level percent
of pay because it provided some flexibility between the
present day and 2024 where the state was trying to get more
revenue.
Mr. Teal responded that regardless of the method used, the
state was always allowed to put in more money if it chose.
Senator Bishop referred to Mr. Teal's testimony that NCSL
recommended putting the payment plan in statute. He wanted
to keep the state's bond rating health. He discussed
testimony from Mr. Teal, the administration, and others on
reasons to keep the system healthy. He agreed that money
applied to the retirement system would not be lost on
Alaska's economy. He stressed that the money would be spent
in-state, which would keep the state's economy turning.
2:53:42 PM
Co-Chair Kelly thought it was important to discuss the
impact of GASB changes on municipalities. He asked Mr.
Barnhill to address the subject. He discussed the committee
discussion on a $2 billion cash infusion and paying more
into TRS than PERS. He understood that the governor
preferred another route. He asked about impacts to
municipalities.
Mr. Barnhill replied that GASB had adopted two GASB
statements. He detailed that GASB 67 became effective in FY
14 and required all public pension plans with multiple
employers to allocate the unfunded liability or net pension
liability amongst the employers. In FY 15, all public
employers who participate in a pension plan would be
required to include the allocated net pension liability on
their balance sheets.
Co-Chair Kelly asked for verification that the
municipalities would be required to carry the unfunded
liability on their books even if the state was carrying a
portion. He asked for verification that the state would
also be required to carry the liability on its books. Mr.
Barnhill responded that there was a special funding
situation. He elaborated that in a special funding
situation where a third party paid on behalf of a
participating employer and the third party entity was
"legally responsible" for the underlying obligation, then
the third party was supposed to pick up the payments
attributable to the net pension liability and include the
liability on its books. He noted that there was an open
question under GASB 68 whether the State of Alaska fell
into the category of legally responsible. In FY 15 the
employer contribution rate would be 44 percent; the
employer contribution rate cap was 22 percent. Therefore,
under the current methodolgy the state would pay the
difference between 44 and 22 percent. He elaborated that if
the state fell into the category of legally responsible it
would pick up the net pension liability attributable to the
22 percent payment and would include it on its books.
2:56:39 PM
Co-Chair Kelly asked if municipalities would be
subsequently relieved of the obligation. Mr. Barnhill
replied that the municipalities would be relieved of
putting the liability on their books in the given year. He
added that it was open question; in Alaska there was a
prohibition against dedicated funds; therefore, the
Department of Law (DOL) had informally advised that the
statute providing for the funding was not enforceable (it
was subject to appropriation). He equated the situation to
a person's parents making a mortgage payment on their
behalf for a five-year period (without signing the note).
The question became whether the payment on the person's
behalf made the parents obligors under the note. He stated
that legally the parents would not be responsible. The
administration had been informed that GASB intended for
entities like the state to pick up the special funding on
their books. He did not believe lawyers and accountants had
been fully engaged on the drafting of the GASB statement.
He believed there was a plausible argument that the state
was not legally responsible for the payments. He concluded
that it remained an item of discussion within the
administration with DOL.
Co-Chair Kelly asked about the impact on municipalities
where nothing had changed, but they were required to carry
the liability on their books. Mr. Barnhill clarified that
GASB 67 and 68 only applied to pension liability, not to
health liability. Of the $11.9 billion unfunded liability
about $3.8 billion was health liability. Additionally, GASB
rules did not allow actuarial smoothing; therefore, market
value of assets would be used.
Co-Chair Kelly asked for an explanation of actuarial
smoothing. Mr. Barnhill replied that actuaries put 20
percent of any gains and losses into the actuarial value of
assets and smoothed the gains and losses over a five-year
time period. He added that under the GASB method all of the
gains and losses were reflected in the year they occurred;
therefore, it was a more volatile asset figure.
2:59:40 PM
Co-Chair Kelly asked what happened to municipalities
picking up the pension obligation. Mr. Barnhill used
Anchorage as an example. Factoring in the amount the
municipality contributed to PERS and the amount of its
payroll (Anchorage's payroll divided by total payroll), the
city was at approximately 8 percent. Therefore, 8 percent
of the total PERS pension liability would be allocated to
Anchorage for inclusion on its balance sheet.
Co-Chair Kelly asked what would happen next. Mr. Barnhill
answered that Anchorage had multiple balance sheets (i.e.
utilities and various funds); he did not know how it would
allocate the liability amongst its balance sheets.
Co-Chair Kelly remarked that the GASB rule impact was the
immediate consequence if the state was considering
weighting a cash infusion to TRS. He wondered about the
actual financial implications other than "wailing and
gnashing of teeth." He asked what checks would be written
as a result.
Mr. Barnhill replied that there had been wailing and
gnashing of teeth because the prospect of taking a
meaningful percentage of the significant unfunded liability
was not a welcome one for any of the municipalities. He
addressed allocating between PERS and TRS. His
understanding was that the requirement would apply with TRS
as well; many municipalities consolidated their school
district balance sheets on the municipality balance sheet.
Presumably, those municipalities may be indifferent on
whether funding was weighted to TRS or PERS.
Co-Chair Kelly directed the question to Mr. Teal for
further detail. He was interested to know the impact on
municipalities required to carry the liability on their
balance sheets. He stated that no one was anticipating that
the state would not pay the check. He wondered what would
happen to the municipality in actual "check writing
consequences."
Mr. Teal answered that there would be very little impact in
terms of check writing costs. However, the change would
impact the municipalities' credit rating, which could be a
big issue.
Co-Chair Kelly observed that the issue would result in
check writing costs later on.
Mr. Teal agreed. He added that each employer could be
allocated a share of the liability. For example, if
Anchorage's share was 8 percent, it would be allocated $657
million of the liability; it would carry approximately 60
percent of the figure on its balance sheet because nearly
40 percent would be healthcare cost. He communicated that
the state's law allowed any employer (e.g. the Municipality
of Anchorage) to make and credit an extra payment to its
own account. He elaborated that the municipality could pay
down its unfunded liability to reduce its rate in the
future. However, he could not imagine that occurring given
the state's payments on behalf of municipalities and the
cash flow of municipalities.
3:04:14 PM
Mr. Teal continued to address Co-Chair Kelly's question. He
stated that there were few (if any) municipalities that
could come up with the funds to pay off their unfunded
liability. For example, Juneau could not come up with $132
million to pay off its unfunded liability any more than
Anchorage could come up with $650 million. He detailed that
the state's share of the $8 billion liability was about $4
billion and the University of Alaska's share was
approximately $500 million. He stated that PERS was also
big in school districts; since the state paid school
district PERS as part of the state formula it was actually
responsible for an additional 15 percent of the liability.
He relayed that only 22 percent of the unfunded liability
would fall to municipalities; however, those numbers were
"crushing." He noted that carrying the money on their books
did not mean municipalities would have to write larger
payroll checks or pay more money in contributions to the
state, but if they borrowed money, their credit rating
would be downgraded and borrowing at low costs would not be
possible unless they used the Alaska Municipal Bond Bank,
which used different credit.
Senator Bishop referred to GASB rules 67 and 68. He
discussed the 22 and 44 percent responsibilities. He
wondered if the state should wait to take action until the
GASB rules were implemented. He surmised that the state
could end up having a larger PERS liability than the
municipalities.
Co-Chair Kelly asked for verification that the state
already carried the liability on its balance sheet. He
asked for confirmation that the state's balance sheet could
not get worse under the scenario described by Senator
Bishop.
Mr. Barnhill did not believe that anyone had carried the
actual unfunded liability on their balance sheet; no one
wanted to do it. He stated that any deposit to the PERS
Trust Fund would serve to reduce the total unfunded
liability, which would reduce the amount allocated to
municipal balance sheets regardless of any special funding.
3:07:45 PM
Senator Bishop focused on the ratings agencies and the
state's credit rating. He wanted to ensure that in two
years' time the state would not determine it should have
made a larger cash infusion due to GASB 67 or 68.
Mr. Teal addressed the possibility of GASB impacting the
state in unexpected ways. He noted if the state paid $2
billion towards PERS (one quarter of the total liability),
it would reduce Anchorage's share by one quarter
(approximately $150 million, except that health was
included). He stated that if GASB made a decision that made
municipalities look bad the state could make another cash
infusion of $1 billion in the following year or two. He
believed that the current proposals did not represent a
complete payoff of the unfunded liability. He did not
believe a complete payoff was a good approach. He referred
to the administration's testimony that the goal was finding
a "sweet spot"; a balance between paying the liability off
upfront, helping municipalities, maintaining reserves, and
a healthy retirement system. There was also a balance
between paying more upfront or more later on. He observed
that all of the decisions meant the legislature would have
a difficult fiscal note. He referred to a bill a few years
earlier that would have addressed the liability; some had
recommended paying down the liability upfront in order to
avoid dealing with it during a time of fiscal deficit.
3:10:53 PM
Mr. Teal relayed that the bill had not moved forward.
Subsequently, the issue had not gone away and had become
increasingly difficult due to deficits. However, the
responsibility of the debt was not relieved by the
situation and it did not change the balance point.
Vice-Chair Fairclough referred to Mr. Teal's testimony that
a 50 percent funded retirement plan would be downgraded and
considered unhealthy. She stated that TRS was currently
funded at 52.1 percent. She agreed that the plan absolutely
needed a cash infusion. She addressed the level dollar
method versus a level percent method. She believed Mr. Teal
had communicated that level dollar would frontload the
system and let the cash work over time, whereas level
percent would meet the state's actuarial obligations. She
asked if her remarks were accurate.
Mr. Teal agreed.
Vice-Chair Fairclough spoke to the difference between level
dollar and level percent methods. She used an example of
paying interest on a personal credit card as level percent
and making payment on principal as level dollar. She
reasoned that credit card debt would be paid off faster if
payments were not limited to the interest owed.
Mr. Teal agreed. He elaborated that even under the level
percent method the debt would be paid off. He referred to a
spreadsheet titled "TRS Options: Undiscounted Annual State
Assistance"; the spreadsheet included a $2 billion cash
infusion and columns for level percent of pay and level
dollar. The state would pay less with level percent in the
early years ($170 million versus $220 million), but in the
long-term more money would be paid for a longer period of
time. He stated that the level dollar method would cost the
state $6.8 billion whereas, level percent would cost $7.9
billion. He added that the different method would not make
the payments easier.
3:14:58 PM
Vice-Chair Fairclough wondered if the time period was 20,
25, or 30-years. She noted that financing a car over a
longer period would make payments easier to make, but more
would be paid in the long-term.
Mr. Teal replied that the spreadsheet included two columns
with a 25-year amortization. The column on the right used a
30-year amortization; the payments were lower, but payments
ended in 2042 instead of 2036. The cost was $7.2 billion,
which fell roughly in between the other two methods.
Vice-Chair Fairclough wondered whether the current payment
plan had been started on a 20, 25, or 30-year period. Mr.
Teal answered that the current plan used a 25-year period.
He added that the law allowed for a period of up to 30
years.
Vice-Chair Fairclough compared the possible solutions to
refinancing debt, which would be carried for a longer
period of time or shortening debt to the 20-year time
period to pay it off in a reasonable timeframe. She was
concerned about how paying the debt off in a longer
timeframe would negatively impact municipalities. She
reasoned an extension could cost municipalities hundreds of
millions of dollars. She asked if her analysis was fair.
Mr. Teal responded in the affirmative.
3:17:35 PM
Co-Chair Kelly agreed with remarks made by Vice-Chair
Fairclough. However, he noted that the state did not
currently have reliable revenue or income. The state did
not know what the future would hold, which was vastly
different than the average household. He reasoned that the
decision to make longer or shorter credit card payments
would be balanced with the need to save reserves for items
like a new car, college education, healthcare, and other.
He did not know the state had the luxury to save money for
the distant long-term when it had goals of building a gas
line to access new revenues. He looked at the 20-year
versus 30-year payments.
Mr. Teal replied that in 2021 the payment would be $198
million for a 20-year plan versus $182 million for the 30-
year plan. The cost continued at $196 million under the 25-
year plan [beginning in 2024] and $180 million under the
30-year plan [beginning in 2024]. He reiterated that annual
payments were reduced under the longer-term plan, but
ultimately the longer plan would be more expensive.
Co-Chair Kelly referred to the 25-year versus 30-year
comparisons. He was interested in the level dollar versus
the level percent methods shown on the spreadsheet.
Mr. Teal addressed the level percent of pay column on the
spreadsheet, which started out paying $170 million versus
the $230 million for level dollar; payments changed to $198
million and $196 million respectively by 2024. In later
years level percent of pay increased to $250 million, while
level dollar remained at $195 million. He detailed that in
the future level percent would cost the state $100 million
more annually and payments would be made two years longer.
3:21:23 PM
Senator Hoffman observed that the spreadsheet Mr. Teal was
speaking to was limited to TRS. Mr. Teal replied in the
affirmative.
Senator Hoffman referred to $1 billion payments under level
dollar for 2018. He observed that under level percent of
pay the payments were $800 million. He noted the $200
million difference. He observed that the graphs provided by
LFD all differed depending on the scenario. He wondered
where the state would be financially and its ability to
build the gas line. He believed the decision to choose
level dollar versus level percent needed to take into
account the state's ability to build the gas line with its
cash calls in 2024. He reasoned the state would need the
gas line revenue out past 2024 in order to meet the
obligations between 2024 and 2032. He concluded that
somewhere the state had to put the needed cash calls into a
schedule to determine where the state was headed.
Co-Chair Kelly agreed. However, he observed that it was
difficult to make reserve solutions in dealing with the
PERS/TRS model. He reasoned it had to be spending or
revenue. He surmised that none of the unfunded liability
scenarios were positive.
Senator Dunleavy discussed the level percent versus level
dollars methods. He wondered which scenario worked better
under an increasing inflation rate over 10 to 20 years. He
asked when inflation was an ally.
Mr. Barnhill replied that it depended on an estimation of
how the investment markets were correlated to inflation.
For example, he would double down on level dollar if a
hyperinflation environment was resulting in booming equity
markets. He stated that the situation was sometimes, but
not always, the case.
3:25:57 PM
Mr. Teal agreed with Mr. Barnhill. He added that pensions
were essentially fixed cost; with inflation the pensions
eroded. He remarked on the difficulty of the question. He
explained that benefits increased with salary increases,
which meant pension liabilities would climb with inflation.
However, the scenario was offset if market returns also
increased with inflation. He reasoned that the numbers
could be included in a model; however, the outcome was
determined completely by assumptions. He could not
determine whether high inflation would be a help or
hindrance; it would have an impact in many ways.
Vice-Chair Fairclough believed the level dollar method was
the best for the people of Alaska in the [retirement]
system. She did not believe making a decision based on a
large project was the right focus. She observed that the
market would do what it did; if the state had a good
project, it would have the ability to borrow at a low rate.
She believed many investors would be at the table to
purchase the bonds. She emphasized that the state had $1
billion on the table in the decision.
3:27:54 PM
AT EASE
3:29:17 PM
RECONVENED
Co-Chair Meyer discussed the agenda for the following day.
SB 220 was HEARD and HELD in committee for further
consideration.
ADJOURNMENT
3:30:34 PM
The meeting was adjourned at 3:30 p.m.