Legislature(2005 - 2006)SENATE FINANCE 532

03/16/2005 09:00 AM FINANCE


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

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