Legislature(2019 - 2020)SENATE FINANCE 532

01/30/2019 09:00 AM FINANCE

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Audio Topic
09:01:45 AM Start
09:03:53 AM Presentation: Pers/trs Update
10:54:41 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ - PRS/TRS Update by Ajay Desai, Director of TELECONFERENCED
Retirement & Benefits
+ - Negotiated Labor Contracts by Kate Sheehan, TELECONFERENCED
Director of Personnel & Labor Relations
                 SENATE FINANCE COMMITTEE                                                                                       
                     January 30, 2019                                                                                           
                         9:01 a.m.                                                                                              
                                                                                                                                
                                                                                                                                
9:01:45 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair  Stedman   called  the  Senate   Finance  Committee                                                                    
meeting to order at 9:01 a.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Natasha von Imhof, Co-Chair                                                                                             
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Click Bishop                                                                                                            
Senator Lyman Hoffman                                                                                                           
Senator Peter Micciche                                                                                                          
Senator Donny Olson                                                                                                             
Senator Mike Shower                                                                                                             
Senator Bill Wielechowski                                                                                                       
Senator David Wilson                                                                                                            
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Senator Cathy Giessel;  Senator Mia Costello; Representative                                                                    
Gary  Knopp; Ajay  Desai, Director,  Division of  Retirement                                                                    
and  Benefits, Department  of Administration;  Kevin Worley,                                                                    
Chief   Financial  Officer,   Division  of   Retirement  and                                                                    
Benefits,  Department of  Administration;  Kathy Lea,  Chief                                                                    
Pension  Officer,  Division   of  Retirement  and  Benefits,                                                                    
Department of Administration.                                                                                                   
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
PRESENTATION: PERS/TRS UPDATE                                                                                                   
                                                                                                                                
PRESENTATION: NEGOTIATED LABOR  CONTRACTS [was SCHEDULED but                                                                    
not HEARD.]                                                                                                                     
                                                                                                                                
Co-Chair Stedman  reviewed the  meeting agenda. He  noted it                                                                    
was  unlikely the  committee  would have  time  to hear  the                                                                    
labor contracts presentation during the current meeting.                                                                        
                                                                                                                                
^PRESENTATION: PERS/TRS UPDATE                                                                                                
                                                                                                                                
9:03:53 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  asked representatives from  the department                                                                    
to introduce  themselves and  give a  brief synopsis  of the                                                                    
subject matter.  He reminded presenters to  give definitions                                                                    
of   acronyms   to  enable   the   public   to  follow   the                                                                    
conversation.                                                                                                                   
                                                                                                                                
AJAY DESAI,  DIRECTOR, DIVISION OF RETIREMENT  AND BENEFITS,                                                                    
DEPARTMENT OF  ADMINISTRATION, introduced himself  and other                                                                    
staff from  Department of  Administration (DOA).  He thanked                                                                    
the committee for providing an  opportunity for the Division                                                                    
of Retirement  and Benefits (DRB)  to give an  annual update                                                                    
on  the  Public  Employees'  Retirement  System  (PERS)  and                                                                    
Teachers'  Retirement System  (TRS).  The presentation  also                                                                    
included additional  items based  on conversations  with the                                                                    
committee the  previous year. He  encouraged members  to ask                                                                    
questions at any time.                                                                                                          
                                                                                                                                
9:06:15 AM                                                                                                                    
                                                                                                                                
Mr. Desai began  with an organizational chart on  slide 2 of                                                                    
a presentation  titled "Public Employees'  Retirement System                                                                    
(PERS)  - Teachers'  Retirement  System  (TRS) 2019  UPDATE"                                                                    
(copy on file). The slide  illustrated how the Department of                                                                    
Revenue  (DOR)  and  DOA worked  together  with  the  Alaska                                                                    
Retirement Management  Board (ARMB).  He detailed  that ARMB                                                                    
assumed fiduciary  responsibility for assets of  the state's                                                                    
retirement  systems as  of October  2005. He  cited the  DOR                                                                    
Treasury  Division's   website  and  detailed   that  ARMB's                                                                    
primary mission  was to serve  as the trustee of  the assets                                                                    
of  the  state's  retirement systems,  Supplemental  Annuity                                                                    
Plan,  the Deferred  Compensation  program,  and the  Alaska                                                                    
Retiree Health Care Trusts.                                                                                                     
                                                                                                                                
Mr. Desai  expounded that  ARMB worked  with DRB  for annual                                                                    
actuarial   evaluation    to   determine    system   assets,                                                                    
liabilities, funding  ratios, and  to certify  to employers'                                                                    
appropriate contributions for  normal costs, and appropriate                                                                    
contributions for  past service liability. Every  four years                                                                    
ARMB   reviewed  actuarial   assumptions   based  on   study                                                                    
performed by  actuaries. Additionally, ARMB  reviewed health                                                                    
cost assumptions annually.                                                                                                      
                                                                                                                                
Co-Chair  Stedman  asked  for   Mr.  Desai  to  discuss  his                                                                    
employment background.                                                                                                          
                                                                                                                                
Mr.  Desai   shared  that  he   had  been  in   the  pension                                                                    
administration  for  32 years.  He  elaborated  that he  had                                                                    
lived  in the  U.S. for  about 32  years and  had begun  his                                                                    
career in  a bank's  pension division,  where he  had worked                                                                    
for  about five  years.  He  had moved  on  to  work in  the                                                                    
pension administration for the  Walt Disney Company where he                                                                    
had  been  exposed  to many  varieties  of  defined  benefit                                                                    
plans, defined  contribution plans,  and other. He  had then                                                                    
worked with  the Motion Picture Industry  Pension and Health                                                                    
Plans  (a Taft-Hartley  plan)  for about  14  years. He  had                                                                    
begun working for the State of Alaska in January 2017.                                                                          
                                                                                                                                
Co-Chair Stedman  observed that Mr. Desai  had a significant                                                                    
history dealing with retirement plans.                                                                                          
                                                                                                                                
Mr. Desai replied  in the affirmative and added  that he had                                                                    
worked with pension funds and  retirement funds for the past                                                                    
30 years.                                                                                                                       
                                                                                                                                
9:08:53 AM                                                                                                                    
                                                                                                                                
KEVIN   WORLEY,  CHIEF   FINANCIAL   OFFICER,  DIVISION   OF                                                                    
RETIREMENT  AND  BENEFITS,   DEPARTMENT  OF  ADMINISTRATION,                                                                    
shared  that he  had worked  for the  State of  Alaska since                                                                    
November 1990  and had  started working  for DRB  in January                                                                    
2000. He  listed his various  positions with DRB  during his                                                                    
tenure with the division.                                                                                                       
                                                                                                                                
Co-Chair  Stedman asked  who Mr.  Worley  replaced as  chief                                                                    
financial officer (CFO).                                                                                                        
                                                                                                                                
Mr. Worley  did not recall  the name of his  predecessor. He                                                                    
noted the position  had been vacant before he  had taken the                                                                    
job. He added  that he had started as CFO  with the division                                                                    
in October 2013.                                                                                                                
                                                                                                                                
Mr. Desai read from slide 4, "Chronology  PERS":                                                                                
                                                                                                                                
    January 1961: Established as a joint contributory                                                                        
     Defined Benefit (DB) plan                                                                                                  
    1975: Retiree Health Insurance with system-paid                                                                          
     premiums added                                                                                                             
    July 1986: Tier II established                                                                                           
    July 1996: Tier III established                                                                                          
  July 2006: Defined Contribution (DC) Plan established                                                                      
    July 2008: Cost Share with 22% employer contribution                                                                     
     rate                                                                                                                       
                                                                                                                                
Mr.  Desai discussed  slide  5, "Membership     PERS (as  of                                                                    
6/30/2018)":                                                                                                                    
                                                                                                                                
    157 Member Employers                                                                                                     
    3 Defined Benefit (DB) Plan Tiers                                                                                        
        o 35,139 retirees                                                                                                       
        o 5,606 terminated members entitled to future                                                                           
          benefits                                                                                                              
        o 13,611 actives (40%)                                                                                                  
        o 54,356 total DB members                                                                                               
    1 Defined Contribution (DC) Plan                                                                                         
        o 59 retirees                                                                                                           
        o 1,183 terminated members entitled to future                                                                           
          benefits                                                                                                              
        o 20,811 actives (60%)                                                                                                  
        o 22,053 total DC members                                                                                               
                                                                                                                                
     SOURCE: Division of Retirement and Benefits. June 30,                                                                      
     2018 Audited Financial Statements                                                                                          
                                                                                                                                
Co-Chair  Stedman noted  that members  may ask  questions at                                                                    
the end of  each slide. He asked for Mr.  Desai to provide a                                                                    
breakdown of the  three Defined Benefit (DB)  Plan tiers. He                                                                    
referenced  a similar  commingled plan  table for  the three                                                                    
tiers.                                                                                                                          
                                                                                                                                
9:11:54 AM                                                                                                                    
                                                                                                                                
Co-Chair von Imhof asked for  more detail on the last bullet                                                                    
point on slide 4:                                                                                                               
                                                                                                                                
     July 2008:  Cost Share  with 22%  employer contribution                                                                    
     rate                                                                                                                       
                                                                                                                                
Co-Chair  von  Imhof  elaborated  that she  was  looking  at                                                                    
framework for  a 401(k) where an  employer generally matched                                                                    
between 6  and 8 percent. She  asked how it fit  with the 22                                                                    
percent employer contribution rate.                                                                                             
                                                                                                                                
Mr. Desai  replied that prior  to 2008, the  employer's rate                                                                    
fluctuated based  on the  cost provided  by the  actuary. He                                                                    
detailed   that  employee   contributions  were   fixed  but                                                                    
employer contributions could go up  or down depending on the                                                                    
contribution  required  for the  normal  cost  as well  past                                                                    
service liability. In  2008 the decision was  made that PERS                                                                    
employers would  be capped at  a 22 percent maximum  and the                                                                    
state would  assist with the remainder  of the contributions                                                                    
annually based on the actuary figures.                                                                                          
                                                                                                                                
Co-Chair Stedman asked for an explanation of normal cost.                                                                       
                                                                                                                                
Mr.  Desai explained  that the  normal cost  was the  annual                                                                    
cost  when  participants   earned  additional  benefit.  The                                                                    
benefit was guaranteed  and needed to be put  aside based on                                                                    
the present value  of what the benefit would be  at the time                                                                    
of  retirement  for  an individual  who  would  collect  the                                                                    
benefit.  The actuary  determined the  value of  the benefit                                                                    
based  on the  [indecipherable]  rate,  which explained  the                                                                    
normal  cost, what  the cost  would be  in order  to collect                                                                    
from the employer to secure the benefit.                                                                                        
                                                                                                                                
Co-Chair  Stedman asked  for  verification  that all  future                                                                    
projections for FY  18 were accurate, the  normal cost would                                                                    
cover the  cost of the benefit  for the employee for  his or                                                                    
her lifetime.                                                                                                                   
                                                                                                                                
Mr. Desai answered in the affirmative.                                                                                          
                                                                                                                                
Co-Chair  Stedman asked  what the  additional cost  would be                                                                    
(on top of  the normal cost) if the  estimate for healthcare                                                                    
costs  and/or  retirement   deviated  from  expectations  or                                                                    
portfolio performance.                                                                                                          
                                                                                                                                
Mr. Desai responded  that once there was  deviation from the                                                                    
assumptions  and a  shortfall  occurred, the  result was  an                                                                    
unfunded liability.  He explained that if  the contributions                                                                    
exceeded the actuarial  value of the system,  the plan would                                                                    
be considered overfunded.                                                                                                       
                                                                                                                                
9:14:56 AM                                                                                                                    
                                                                                                                                
Co-Chair  von Imhof  returned to  the last  bullet point  on                                                                    
slide 4 and asked if it  could be viewed as an inflated rate                                                                    
to  play  catch-up with  some  of  the previous  tiers.  She                                                                    
reasoned  that going  forward the  plans were  structured so                                                                    
what  went in  would be  what came  out, like  a traditional                                                                    
401(k) with a small employer  match. Whereas, the 22 percent                                                                    
employer contribution rate helped "pad" previous plans.                                                                         
                                                                                                                                
Mr. Desai  agreed. He  detailed that the  portion of  the 22                                                                    
percent  normal cost  (the annual  projection calculated  by                                                                    
the actuary)  would show the  actual amount -  anywhere from                                                                    
12  to  13  percent.  Anything above  and  beyond  was  also                                                                    
calculated  to  cover the  liability  for  the past  service                                                                    
benefits. He  referenced the 22  percent and  explained that                                                                    
typically in the past few years,  the cost ranged from 28 to                                                                    
30  percent. The  employer  contribution  rate included  the                                                                    
normal cost  plus a  portion of  the past  service liability                                                                    
benefit.  Any   remaining  cost  was  supplemented   by  the                                                                    
legislature and supported  by the governor. He  noted that a                                                                    
later slide  showed the  annual dollar  amount put  into the                                                                    
PERS and  TRS systems since  2008. He  stated that it  was a                                                                    
tremendous help to keep the plan steady and on target.                                                                          
                                                                                                                                
9:16:49 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  noted that Senator  Wilson had  joined the                                                                    
meeting.  He recalled  that  before 2008  there  was a  past                                                                    
service  cost  (the cost  for  the  unfunded liability).  He                                                                    
remarked  that  the  liability  had  been  significant.  The                                                                    
department  had a  difficult time  identifying past  service                                                                    
costs per group in the  plan (e.g. Anchorage, Juneau, Sitka,                                                                    
some hospitals,  and other).  The total  of the  normal cost                                                                    
for the  current employees, and  the unfunded  liability was                                                                    
growing  to such  magnitude, there  had  been concern  about                                                                    
cities  going  bankrupt  (Anchorage  had  been  one  of  the                                                                    
primary concerns). There had  been subsequent legislation to                                                                    
cap the  contribution at  22 percent  to keep  entities from                                                                    
going bankrupt  and causing further problems  for the state.                                                                    
He discussed the legislature's struggle  for the past decade                                                                    
to deal with the past service unfunded liability.                                                                               
                                                                                                                                
Co-Chair Stedman continued discussing  the background of the                                                                    
22  percent capped  rate of  contribution. He  explained the                                                                    
negotiated  rate of  22  percent was  high  enough that  the                                                                    
legislature   believed   it   would   keep   municipalities'                                                                    
attention,  but   not  high  enough   to  result   in  their                                                                    
insolvency. The goal was to  give municipalities the ability                                                                    
to  adjust their  budgets  to feed  the  [22 percent]  rate.                                                                    
Changes had also been made  to amortization and other issues                                                                    
to  shift the  liability  around. The  state  picked up  any                                                                    
remaining  amount above  22 percent.  He believed  Mr. Desai                                                                    
had  testified  that  the  total   cost  hovered  around  30                                                                    
percent. He asked if his statements were accurate.                                                                              
                                                                                                                                
Mr. Desai answered in the affirmative.                                                                                          
                                                                                                                                
Co-Chair Stedman  wanted to  ensure the  public was  able to                                                                    
follow the  conversation. He acknowledged the  complexity of                                                                    
the issue.                                                                                                                      
                                                                                                                                
Mr. Desai agreed.                                                                                                               
                                                                                                                                
9:20:03 AM                                                                                                                    
                                                                                                                                
Mr. Desai  turned to  slide 6, "FY  19 Contribution  Rates                                                                      
PERS":                                                                                                                          
                                                                                                                                
   Defined Benefit                                                                                                              
                                                                                                                                
   Employee:                                                                                                                    
    6.75% All Other employees                                                                                                
    7.50% Peace Officer/Firefighter                                                                                          
    9.60% School District Alternate Option                                                                                   
   Employer:                                                                                                                    
    22% Cost Share                                                                                                           
    State:                                                                                                                   
    5.58% Additional State Contribution                                                                                      
                                                                                                                                
Mr.  Desai elaborated  that the  total  cost for  FY 19  was                                                                    
27.58 percent (22 percent was  paid by the employer and 5.58                                                                    
percent was  paid by the  state). He reviewed  the righthand                                                                    
side of slide 6:                                                                                                                
                                                                                                                                
   Defined Contribution                                                                                                         
                                                                                                                                
   Employee:                                                                                                                    
    8% All Employees                                                                                                         
   Employer:                                                                                                                    
    5% Investment Account                                                                                                    
    0.94% Health Care                                                                                                        
    0.76% Occupational Death & Disability  Peace                                                                             
    Officer/Firefighter                                                                                                      
    0.26% Occupational Death & Disability  All Others                                                                        
    HRA  flat dollar, 3% of all PERS/TRS average annual                                                                      
     compensation                                                                                                               
                                                                                                                                
Mr.  Desai  expounded  on   the  HRA  [Health  Reimbursement                                                                    
Account]  and  explained  that any  surplus  outside  of  22                                                                    
percent contributed  by an employer  on behalf of  a Defined                                                                    
Contribution  (DC)  Plan  employee  went  towards  the  past                                                                    
service for the DB Plan.                                                                                                        
                                                                                                                                
9:22:02 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman asked for further explanation.                                                                                 
                                                                                                                                
Mr.  Desai  explained  that  in  2008  when  the  cost-share                                                                    
formula had  been established, the  DB Plan had  been closed                                                                    
down and the  DC Plan had been introduced.  He detailed that                                                                    
the  22 percent  remained  as a  flat employer  contribution                                                                    
rate  with  the  understanding   that  the  portion  of  the                                                                    
contributions would  go towards  DC Plan benefits,  with the                                                                    
remainder going towards the [DB  Plan] past service unfunded                                                                    
liability.                                                                                                                      
                                                                                                                                
Mr. Desai discussed slide 8, "Chronology  TRS":                                                                                 
                                                                                                                                
    March 1945: Established Defined Benefit (DB) Plan                                                                        
    1951: TRS excluded from Social Security                                                                                  
    1955: Became a joint contributory plan                                                                                   
    1966: Retiree health insurance (RHI) added                                                                               
    1975: System-paid premiums for RHI                                                                                       
    1990: Tier II established                                                                                                
    2006: Defined Contribution (DC) Plan established                                                                         
                                                                                                                                
Mr. Desai  noted that because  TRS was excluded  from Social                                                                    
Security   in  1951,   the  system   did  not   include  SBS                                                                    
[Supplemental Benefit System]. He added  that in 2006 the DC                                                                    
Plan had replaced the DB Plan [going forward].                                                                                  
                                                                                                                                
9:23:37 AM                                                                                                                    
                                                                                                                                
Co-Chair von Imhof had heard  past comments that there was a                                                                    
desire  for   teachers  to  go  back   to  receiving  Social                                                                    
Security. She  stated that Social Security  had been removed                                                                    
and she wondered  whether it was possible to  bring it back.                                                                    
She  believed  there  were individuals  who  would  like  to                                                                    
receive it.  Alternatively, she  wondered whether  there was                                                                    
something else used instead of Social Security.                                                                                 
                                                                                                                                
Mr. Desai  replied that TRS  had elected not  to participate                                                                    
in Social  Security benefits; however,  there was  an option                                                                    
to  bring it  back via  election.  He asked  a colleague  to                                                                    
elaborate.                                                                                                                      
                                                                                                                                
9:24:33 AM                                                                                                                    
                                                                                                                                
KATHY  LEA, CHIEF  PENSION OFFICER,  DIVISION OF  RETIREMENT                                                                    
AND  BENEFITS,  DEPARTMENT  OF  ADMINISTRATION,  noted  that                                                                    
teachers had  voted to be  excluded from Social  Security in                                                                    
1951.  She   detailed  the  federal  government   had  given                                                                    
employees who already had a  retirement system the option to                                                                    
choose  to  add  Social  Security  or  continue  with  their                                                                    
existing program.  Alaska's teachers  had elected  to remain                                                                    
with TRS  and had been  excluded from Social  Security since                                                                    
1951. She  confirmed that  teachers could  opt to  vote back                                                                    
into  Social  Security. She  expounded  it  would require  a                                                                    
referendum  vote  by the  teachers  in  all of  the  state's                                                                    
school districts.                                                                                                               
                                                                                                                                
Co-Chair Stedman  asked to return  to slide 6 and  asked how                                                                    
Social Security was treated within the DB Plan and SBS.                                                                         
                                                                                                                                
Ms. Lea replied that to  be eligible for SBS or Supplemental                                                                    
Benefit  Annuity System  a  person had  to  be eligible  for                                                                    
Social  Security. Up  to  about  1982, government  employers                                                                    
could choose  to remain in  Social Security or  withdraw and                                                                    
have a replacement  program. In 1980, Alaska  had decided to                                                                    
withdraw  from Social  Security  by referendum  vote of  the                                                                    
State  of  Alaska  employees  and  to  go  into  the  Alaska                                                                    
Supplemental Benefits  Annuity Plan. Approximately  22 other                                                                    
public  employers  in  Alaska   also  participated  in  SBS.                                                                    
Participants  were required  to be  government entities  and                                                                    
individual  participants  had  to  be  eligible  for  Social                                                                    
Security. Teachers  in Alaska could  not participate  in the                                                                    
SBS  program  because  they were  not  eligible  for  Social                                                                    
Security.  She explained  that employees  under the  DC Plan                                                                    
and SBS contributed to the PERS DC Plan and SBS.                                                                                
                                                                                                                                
9:27:24 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman   asked  about  firefighters   and  police                                                                    
officers.                                                                                                                       
                                                                                                                                
Ms.  Lea explained  that  firefighters  and police  officers                                                                    
throughout the  state differed depending on  their employer.                                                                    
She recalled  that most firefighters did  not participate in                                                                    
Social Security and therefore could  not participate in SBS.                                                                    
The ability  to get  into the  SBS Plan  had been  closed in                                                                    
1982 because  the federal Social Security  Administration no                                                                    
longer allowed entities to withdraw from Social Security.                                                                       
                                                                                                                                
Co-Chair  von Imhof  recalled Ms.  Lea's  testimony that  in                                                                    
1980,  state employees  voted to  leave Social  Security and                                                                    
join SBS, but in 1982, SBS  was no longer offered. She asked                                                                    
for verification that it had only existed for two years.                                                                        
                                                                                                                                
Ms. Lea  clarified that until  1982, the  federal government                                                                    
had  allowed entities  to withdraw  from Social  Security by                                                                    
using a  Social Security  replacement program. In  1980, the                                                                    
state had replaced Social Security  with SBS. The ability to                                                                    
withdraw from the program was  closed by the Social Security                                                                    
Administration in 1982.                                                                                                         
                                                                                                                                
Co-Chair von Imhof asked how  SBS was currently administered                                                                    
and whether  payment was  still available.  She did  not see                                                                    
the information in the presentation.                                                                                            
                                                                                                                                
Ms. Lea  replied that the  presentation focused on  PERS and                                                                    
TRS; therefore,  the information had not  been included. For                                                                    
participating  employers,  SBS  was  still  an  active  plan                                                                    
acting as  a Social  Security replacement. Employees  put in                                                                    
6.13  percent,  which  was  matched  by  the  employer.  She                                                                    
explained it was a pure defined contribution plan.                                                                              
                                                                                                                                
9:29:35 AM                                                                                                                    
                                                                                                                                
Mr.  Desai  spoke to  slide  9,  "Membership    TRS  (as  of                                                                    
6/30/2018)":                                                                                                                    
                                                                                                                                
    57 Member Employers                                                                                                      
    2 Defined Benefit (DB) Plan Tiers                                                                                        
        o 12,962 retirees                                                                                                       
        o 801 terminated members entitled to future                                                                             
          benefits                                                                                                              
        o 4,457 actives (47%)                                                                                                   
        o 18,220 total DB members                                                                                               
    1 Defined Contribution (DC) Plan                                                                                         
        o 29 retirees                                                                                                           
        o 614 terminated members entitled to future                                                                             
          benefits                                                                                                              
        o 4,937 actives (53%)                                                                                                   
        o 5,580 total DC members                                                                                                
     SOURCE: Division of Retirement and Benefits. June 30,                                                                      
     2018 Audited Financial Statements                                                                                          
                                                                                                                                
Mr. Desai  turned to slide  10, "FY 19 Contribution  Rates                                                                      
TRS":                                                                                                                           
                                                                                                                                
   Defined Benefit                                                                                                              
     Employee:                                                                                                                  
    8.65% All Employees                                                                                                      
     Employer:                                                                                                                  
    12.56% Cost Share                                                                                                        
     State:                                                                                                                     
    16.34% Additional State Contribution                                                                                     
                                                                                                                                
Mr. Desai noted that the  TRS employer contribution rate was                                                                    
capped  at 12.56  percent  compared to  the  22 percent  cap                                                                    
under PERS.  He addressed the  TRS DC Plan on  the righthand                                                                    
side of slide 10:                                                                                                               
                                                                                                                                
   Defined Contribution                                                                                                         
     Employee:                                                                                                                  
    8% All Employees                                                                                                         
     Employer:                                                                                                                  
    7% Investment Account                                                                                                    
    0.79% Health Care                                                                                                        
    0.08% Occupational Death & Disability                                                                                    
    HRA  flat dollar, 3% of all PERS/TRS average annual                                                                      
     compensation                                                                                                               
                                                                                                                                
9:31:54 AM                                                                                                                    
                                                                                                                                
Co-Chair von Imhof  asked about the 0.79  percent for health                                                                    
care as  listed on the  slide. She  asked if the  amount was                                                                    
for  Medicaid rather  than state  health  care plan  monthly                                                                    
premiums.                                                                                                                       
                                                                                                                                
Mr. Desai answered in the affirmative.                                                                                          
                                                                                                                                
Co-Chair  von   Imhof  asked   if  later   slides  addressed                                                                    
additional  contributions for  health  care. She  referenced                                                                    
Mr. Desai's earlier  testimony that the cost  of health care                                                                    
was a significant component in the actuarial calculations.                                                                      
                                                                                                                                
Mr. Desai  responded that he  was not certain  whether later                                                                    
slides included data  on health care. He  offered to provide                                                                    
greater detail at a later time.                                                                                                 
                                                                                                                                
Co-Chair Stedman  asked why the TRS  structure was different                                                                    
from PERS in terms of normal and past service costs.                                                                            
                                                                                                                                
Mr. Desai  replied there  were variations  in the  design of                                                                    
the  benefit  plan   structure,  demographics,  and  benefit                                                                    
eligibility for PERS and TRS.                                                                                                   
                                                                                                                                
Co-Chair Stedman recalled that the  TRS rate had been set at                                                                    
12.56  percent,  which he  thought  had  been close  to  the                                                                    
normal cost  at the  time. The  rate had  been set  at 12.56                                                                    
percent  with  the  state picking  up  any  remaining  costs                                                                    
because  TRS fell  back to  a  constitutional obligation  of                                                                    
education.  Consequently, the  legislature  had not  treated                                                                    
TRS like PERS  where the rate had been capped  at 22 percent                                                                    
for  municipalities  and  hospitals.  The  education  system                                                                    
under  TRS  had  been  treated  differently  based  on  that                                                                    
fundamental  reason. He  recalled  the  adjustment to  12.56                                                                    
percent had been made at the  same time as the adjustment to                                                                    
the rate  for municipalities because  of the concern  at the                                                                    
municipal level  of insolvency  and endless  litigation over                                                                    
who  was  responsible  for  what  portion  of  the  unfunded                                                                    
liability. To  alleviate the  problem, the  rate adjustments                                                                    
had been made.                                                                                                                  
                                                                                                                                
9:34:58 AM                                                                                                                    
                                                                                                                                
Co-Chair  von Imhof  asked  if  there was  a  case where  an                                                                    
employee could  be involved  in both PERS  and TRS  over the                                                                    
course of  their career.  She wondered  how DRB  handled the                                                                    
situation.                                                                                                                      
                                                                                                                                
Mr. Desai  believed there were individuals  who participated                                                                    
in both systems. He deferred to Ms. Lea for detail.                                                                             
                                                                                                                                
Ms.  Lea answered  that for  participants in  multiple plans                                                                    
there  were  statues  pertaining  to  concurrent  service  -                                                                    
service in  two plans  simultaneously - that  limited credit                                                                    
to one  system at a  time. She  detailed that when  a person                                                                    
worked  consecutively in  PERS and  TRS, it  was tracked  by                                                                    
fund.  The   two  systems   were  separate;   therefore,  an                                                                    
individual  was required  to meet  two separate  eligibility                                                                    
requirements  for  each plan.  She  clarified  that the  two                                                                    
systems were  not combined to calculate  a benefit; benefits                                                                    
were calculated based on the  rules of the given system. She                                                                    
noted  that  statute  allowed   for  a  conditional  service                                                                    
benefit, specifically  developed for  people who  had worked                                                                    
for both  systems. She  elaborated that  a person  vested in                                                                    
the PERS  system only  had to  work two years  in TRS  and a                                                                    
person vested  in TRS only had  to work one year  in PERS to                                                                    
be eligible  for a  benefit. Depending on  the rules  of the                                                                    
plan,  if a  person served  ten  years in  both plans,  they                                                                    
could  have two  retiree  health  benefit entitlements,  but                                                                    
only if they met the requirements of each plan.                                                                                 
                                                                                                                                
Ms.  Lea  furthered  that  an  individual  could  receive  a                                                                    
monetary  monthly benefit  from  one  under the  conditional                                                                    
services  benefit only  if  they were  vested  in the  other                                                                    
plan.  The provision  had  been  introduced principally  for                                                                    
teachers,  many  of  whom started  employment  as  aides  in                                                                    
schools or in  other positions (who had  substantial time in                                                                    
PERS, but were  not vested, prior to shifting  to TRS). When                                                                    
the  law had  been introduced  years earlier,  the goal  had                                                                    
been to take  care of people who could end  up serving eight                                                                    
or nine years for a government  entity, but not be vested in                                                                    
either plan.                                                                                                                    
                                                                                                                                
9:38:18 AM                                                                                                                    
                                                                                                                                
Senator  Micciche asked  for verification  that most  of the                                                                    
rules  mentioned by  Ms. Lea  were Internal  Revenue Service                                                                    
(IRS) based.                                                                                                                    
                                                                                                                                
Ms. Lea  responded that there was  a basis in IRS  rules for                                                                    
providing a reasonable  vesting period in order  to obtain a                                                                    
benefit. She detailed  it was one of the  factors taken into                                                                    
consideration for individuals  who were not able  to vest in                                                                    
either  plan but  had  an accumulated  amount  of time  that                                                                    
would otherwise vest them.                                                                                                      
                                                                                                                                
Senator Micciche  thought it  seemed that  when the  DC Plan                                                                    
had been  established in 2006  it would have been  a logical                                                                    
time  to reevaluate  the question  of  membership in  Social                                                                    
Security.  He  wondered if  a  discussion  had taken  place.                                                                    
Alternatively,  he wondered  if Ms.  Lea believed  employees                                                                    
had been  so secure  in their previous  DB program  that the                                                                    
discussion had been missed.                                                                                                     
                                                                                                                                
Ms. Lea  thought conversations in  2006 had been  focused on                                                                    
addressing  the  unfunded  liability. She  did  not  believe                                                                    
Social   Security  participation   had   entered  into   the                                                                    
discussion much, if at all.                                                                                                     
                                                                                                                                
Co-Chair Stedman agreed with Ms.  Lea and shared that he had                                                                    
been centrally  involved in establishing  the DC  Plan under                                                                    
SB  141. He  remarked that  a Social  Security offset  was a                                                                    
common question for many people  who worked under the Social                                                                    
Security  rules and  then  came in  under  other rules  that                                                                    
effect  Social Security  or retirement  rules. He  asked Ms.                                                                    
Lea to provide detail on the Social Security offset.                                                                            
                                                                                                                                
Ms.  Lea  replied that  she  was  not  an expert  on  Social                                                                    
Security rules, but she could  provide basic rules about the                                                                    
offset. She  explained there was  two kinds of  offsets. The                                                                    
first  was  for  individuals  and was  called  the  windfall                                                                    
elimination  provision.  The  second was  for  survivors  of                                                                    
individuals  who would  have been  subject  to the  windfall                                                                    
elimination provision and was  called the government pension                                                                    
offset. The basic  rule of thumb was if a  person had served                                                                    
the  required  30 years  in  Social  Security there  was  no                                                                    
offset to  a Social Security  benefit. However, if  a person                                                                    
had worked for an entity  that did not participate in Social                                                                    
Security  and paid  no  Social Security  tax,  there was  an                                                                    
offset  to the  benefit received  from Social  Security. She                                                                    
added   that  the   rules  were   by  the   Social  Security                                                                    
Administration, not the state.                                                                                                  
                                                                                                                                
9:41:24 AM                                                                                                                    
                                                                                                                                
Mr.  Desai  showed slide  12,  "Balance  Sheet    PERS/TRS,"                                                                    
which showed the funding ratios  under both PERS and TRS for                                                                    
the funding years  2016 and 2017. He noted that  in 2016 the                                                                    
PERS  funding ratio  had been  77.1 percent;  the ratio  had                                                                    
decreased  slightly in  2017 to  76.7  percent. He  reported                                                                    
that as of 2017 the  unfunded PERS liability was nearly $5.1                                                                    
billion. Under TRS, the unfunded  liability in 2017 was $1.8                                                                    
billion with a funding ratio of 82 percent.                                                                                     
                                                                                                                                
Co-Chair Stedman asked for a  definition of actuarial value.                                                                    
Additionally, he requested the market value for 2017.                                                                           
                                                                                                                                
Mr. Worley responded that the  actuarial value of assets was                                                                    
typically different  than the fair  market value  of assets.                                                                    
He explained that  the fair market value of  assets was what                                                                    
the assets could  be sold for on  June 30 at the  end of the                                                                    
fiscal year.  The actuarial  value of  assets was  the asset                                                                    
value of investment  gains and losses smoothed  over a five-                                                                    
year  period. For  example,  if  in year  one  there was  an                                                                    
actuarial gain over  the system's 8 percent  rate of return,                                                                    
the  gains would  be  divided  by 5  and  smoothed into  the                                                                    
actuarial value of  assets. The same process  would occur in                                                                    
year  two.  He  elaborated  that rather  than  taking  large                                                                    
losses in one  year, the gains and losses  were smoothed out                                                                    
over a five-year period.                                                                                                        
                                                                                                                                
Co-Chair Stedman remarked that  when markets were advancing,                                                                    
the market  value should be  higher, conversely,  the market                                                                    
value  should  be lower  in  declining  markets. Mr.  Worley                                                                    
agreed.                                                                                                                         
                                                                                                                                
Co-Chair Stedman  asked if Mr.  Worley had a  rough estimate                                                                    
of the  asset value on  June 30,  2017. Mr. Worley  asked if                                                                    
Co-Chair Stedman was referring to the market value.                                                                             
                                                                                                                                
Co-Chair  Stedman replied  in  the  affirmative. Mr.  Worley                                                                    
agreed to provide the information at a later date.                                                                              
                                                                                                                                
Co-Chair Stedman wanted  to keep an eye on  the market value                                                                    
and  actuarial value.  He was  particularly concerned  about                                                                    
the spread.                                                                                                                     
                                                                                                                                
Mr.  Worley  replied  that  he  would  follow  up  with  the                                                                    
information.                                                                                                                    
                                                                                                                                
Co-Chair Stedman observed that  the [PERS] funding ratio had                                                                    
decreased from 77.1 percent in  2016 to 76.7 percent in 2017                                                                    
and the  unfunded liability had increased  from $4.9 billion                                                                    
in 2016 to  slightly over $5 billion in 2017  (slide 12). He                                                                    
asked if  the division had  identified what was  causing the                                                                    
change.                                                                                                                         
                                                                                                                                
9:45:34 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  noted the  committee  could  look to  the                                                                    
actuarial analysis report if needed.                                                                                            
                                                                                                                                
Mr. Worley  explained there  were a  number of  factors that                                                                    
impacted  the  accrued  liabilities.  Large  items  such  as                                                                    
healthcare  had the  biggest impact.  He offered  to provide                                                                    
written information to the committee.                                                                                           
                                                                                                                                
Co-Chair Stedman asked for the  information for 2016 through                                                                    
2018. He  understood there  was a  substantial delay  in the                                                                    
actuarial  process. He  requested  historical  figures in  a                                                                    
table format. He remarked that  the information was included                                                                    
in  the   actuarial  analysis   received  annually   by  the                                                                    
legislature; however,  he commented that due  to the dryness                                                                    
of  the subject  matter, very  few legislators  reviewed the                                                                    
information.  He  thought  a   table  format  would  aid  in                                                                    
understanding of cost factors  including the mortality table                                                                    
year,  investment   returns,  healthcare   projections,  and                                                                    
other.                                                                                                                          
                                                                                                                                
9:47:05 AM                                                                                                                    
                                                                                                                                
Senator Micciche  asked for verification that  the actuarial                                                                    
value was smoothed over a  five-year period, but the accrued                                                                    
liabilities were an annual actual figure.                                                                                       
                                                                                                                                
Mr. Worley agreed.                                                                                                              
                                                                                                                                
Senator Micciche  asked for  verification that  if actuarial                                                                    
value remained constant, the  higher the accrued liabilities                                                                    
meant the higher the unfunded liability.                                                                                        
                                                                                                                                
Mr. Worley replied in the affirmative.                                                                                          
                                                                                                                                
Senator Micciche  asked if the  expectation was  for accrued                                                                    
liabilities to increase or fluctuate.                                                                                           
                                                                                                                                
Mr. Worley responded that  accrued liabilities fluctuated on                                                                    
actuarial  assumptions.   The  mortality  tables   had  been                                                                    
recently  changed  to  increase  the number  of  years  that                                                                    
members were  alive, which impacted  the number  of payments                                                                    
the state would continue to  make to a retiree. For example,                                                                    
an  older mortality  table may  show a  person living  to 82                                                                    
years of age  compared to a newer mortality  table showing a                                                                    
person may live to 84 years of age.                                                                                             
                                                                                                                                
Co-Chair  Stedman  stated  that the  information  should  be                                                                    
included  in  the  table  the  division  would  provide  the                                                                    
committee.  He asked  for inclusion  of actuarial  value and                                                                    
market  value of  assets. He  reported  the committee  would                                                                    
take a  historical look at the  factors to try to  erode the                                                                    
unfunded liability  the legislature had been  working on for                                                                    
quite some time.                                                                                                                
                                                                                                                                
9:49:46 AM                                                                                                                    
                                                                                                                                
Senator Shower  asked if the  numbers on slide  12 reflected                                                                    
the total unfunded liability facing the state.                                                                                  
                                                                                                                                
Mr.  Worley responded  there were  two  additional DB  Plans                                                                    
including  the  Judicial  Retirement System  (JRS)  and  the                                                                    
National   Guard  and   Naval   Militia  Retirement   System                                                                    
(NGNMRS). He  offered to provide the  additional information                                                                    
to the committee.                                                                                                               
                                                                                                                                
Co-Chair Stedman  noted JRS  had been  fully funded  once or                                                                    
twice -  he thought the funding  had been vetoed one  of the                                                                    
times. He believed the JRS  system had an unfunded liability                                                                    
again. He  asked the department  to include  the information                                                                    
in the  requested tables.  He asked for  a break-out  of the                                                                    
information, including  a small PERS group  that had existed                                                                    
for a short time (the group needed $65 million or so).                                                                          
                                                                                                                                
9:51:04 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:51:08 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair  Stedman  clarified  that   he  was  referencing  a                                                                    
retirement  system that  was not  currently in  place -  the                                                                    
plan had closed several decades back.                                                                                           
                                                                                                                                
Senator  Shower  asked  how  the  unfunded  liability  would                                                                    
impact the Tier IV system.                                                                                                      
                                                                                                                                
Co-Chair Stedman  noted that the  department would  get back                                                                    
to  the committee.  He asked  Senator Shower  to repeat  the                                                                    
question.                                                                                                                       
                                                                                                                                
Senator  Shower asked  if the  unfunded  liability would  be                                                                    
impacted by the Tier IV system.                                                                                                 
                                                                                                                                
Mr.  Desai responded  that the  unfunded liability  included                                                                    
the DC and DB Plans for PERS and TRS [slide 12].                                                                                
                                                                                                                                
Co-Chair  Stedman  asked  how  a DC  plan  had  an  unfunded                                                                    
liability.                                                                                                                      
                                                                                                                                
Mr.  Worley  replied  that  they   were  talking  about  two                                                                    
different plans.  Under the DC  Plan an amount went  into an                                                                    
individual's  account. He  explained that  because the  rate                                                                    
for DC and DB members was the  same - 22 percent - the total                                                                    
of the  inputs for  a DC member  meeting the  employer match                                                                    
(the  contribution  for  insurance  -  Health  Reimbursement                                                                    
Account)  was slightly  different because  the DC  plan used                                                                    
the  22 percent  and  multiplied it  by  a member's  salary.                                                                    
After all of the DC buckets  were paid out of the 22 percent                                                                    
there  was usually  a small  amount of  money left  over per                                                                    
employee. He explained  that the leftover money  was used to                                                                    
pay the  unfunded liability  on the DB  Plan. He  noted that                                                                    
Mr. Desai  had mentioned earlier there  were carryover funds                                                                    
from  DC members  to pay  the unfunded  liability on  the DB                                                                    
Plan as established in 2006.                                                                                                    
                                                                                                                                
Co-Chair Stedman  clarified that the  DC member did  not pay                                                                    
the  unfunded liability.  He underscored  that the  unfunded                                                                    
liability was the solely the  responsibility of the employer                                                                    
(backed  up  by the  state  constitution  and the  Permanent                                                                    
Fund).                                                                                                                          
                                                                                                                                
Mr. Worley answered in the affirmative.                                                                                         
                                                                                                                                
Co-Chair Stedman  noted the issue  was a point  of confusion                                                                    
for the public.                                                                                                                 
                                                                                                                                
9:55:01 AM                                                                                                                    
                                                                                                                                
Mr. Desai  moved to  slide 13 showing  a table  titled "ARMB                                                                    
Long-Term Returns  through June 30, 2018,"  which showed the                                                                    
long-term  rate  of  returns  for the  past  34  years.  The                                                                    
returns for  the previous  year were  9.61 percent  for PERS                                                                    
and 9.62 percent  for TRS. The three-year  returns were 7.37                                                                    
percent for  PERS and 7.38  percent for TRS with  an average                                                                    
of 7.38 percent.  He advanced to the  30-year average return                                                                    
of 8.18  percent and 34-year  average return  (including the                                                                    
current year) of 9.14 percent.                                                                                                  
                                                                                                                                
Senator  Bishop asked  if  both funds  [PERS  and TRS]  were                                                                    
invested the same.                                                                                                              
                                                                                                                                
Mr. Desai responded  that because the funds  were managed by                                                                    
ARMB under DOR, he did not have the details.                                                                                    
                                                                                                                                
Senator Bishop observed that TRS had outperformed PERS.                                                                         
                                                                                                                                
Co-Chair  Stedman believed  the  committee  would hear  from                                                                    
ARMB  and  would  receive an  actuarial  analysis  from  the                                                                    
actuary at a future meeting.                                                                                                    
                                                                                                                                
9:57:02 AM                                                                                                                    
                                                                                                                                
Mr. Desai  discussed slide  14, "Actual  Rate of  Return and                                                                    
Funding Ratio  - PERS,"  which showed a  table based  on the                                                                    
committee's action  items from the previous  year. The table                                                                    
showed how the unfunded ratio  related to the rate of return                                                                    
from  1996 to  2018. He  explained that  1996 was  the first                                                                    
year the  plan exceeded  100 percent  at 105.8  percent. The                                                                    
expected rate  of return had  been 8 percent and  the actual                                                                    
return had  been 13.79 percent.  The returns had  been close                                                                    
to  5.79 percent  more than  anticipated and  the trend  had                                                                    
continued for the next five years [1996 through 2000].                                                                          
                                                                                                                                
Mr. Desai pointed  out that there had been  some issues with                                                                    
the  actuarial  firm  regarding  transparency  and  how  the                                                                    
values had been determined.  He elaborated that contribution                                                                    
rates  set  for employers  during  those  periods were  much                                                                    
lower  than recent  rates. He  explained  the situation  had                                                                    
created issues  beginning in 2001  and 2002 when  the funded                                                                    
ratio had started  declining. He expounded that  in 2001 the                                                                    
funded ratio  had been 100.9  percent, the expected  rate of                                                                    
return  had been  8.25 percent,  and the  actual return  had                                                                    
been [negative]  5.25 percent. In 2002,  the expected return                                                                    
had  been  8.25  percent  and the  actual  return  had  been                                                                    
negative  5.48  percent.  He  continued  that  in  2003  the                                                                    
expected return had been 8.25  percent and the actual return                                                                    
had  been   3.67  percent.  The   poor  returns   created  a                                                                    
substantial impact on top of  the actuarial assumptions that                                                                    
had  been inaccurate.  He explained  a substantial  unfunded                                                                    
liability  had  been  created beginning  in  2002  that  had                                                                    
dropped the funded ratio to 75 percent.                                                                                         
                                                                                                                                
9:59:24 AM                                                                                                                    
                                                                                                                                
Mr.  Desai  noted  that  a later  slide  would  address  the                                                                    
downfall  of the  funding  ratio, the  real  costs, and  the                                                                    
reason the  ratio was declining. He  explained the important                                                                    
issue was  whether benefits had been  increased suddenly. He                                                                    
detailed  that typically,  when the  funding ratio  exceeded                                                                    
100 percent, most of the  plans tended to increase benefits,                                                                    
which increased  the liability. He  furthered that  down the                                                                    
road  when  the  market  declined,  the  unfunded  liability                                                                    
automatically   increased  substantially   because  of   the                                                                    
increase in  benefits. However,  the scenario  that occurred                                                                    
in the early 2000s had  been different. He detailed that the                                                                    
PERS and  TRS benefit  had not  really increased  during the                                                                    
given time  period, but the  actuary had suggested  to lower                                                                    
the  employer contribution  rate. He  furthered that  it had                                                                    
been a  perfect storm - after  2001 and 2002 the  market had                                                                    
declined.   Alaska  was   not  the   only  state   that  had                                                                    
experienced a large gap and  unfunded liability - many other                                                                    
U.S. plans had been part of the situation.                                                                                      
                                                                                                                                
Mr. Desai  elaborated that slide 14  showed historically how                                                                    
the funded ratio  had decreased from 100 percent  down to 75                                                                    
percent  [in 2002].  The  funded ratio  had  been down  ever                                                                    
since. He  detailed that in  2009 the actual rate  of return                                                                    
took  another  big  hit  at   negative  20.49  percent.  The                                                                    
subsequent year  had seen  a 11.39  percent rate  of return;                                                                    
therefore, it  had not been  that hard to recoup  and return                                                                    
to a  stable condition.  However, at  that point,  the state                                                                    
had developed  a cost-share  mechanism to  further stabilize                                                                    
the retirement system.                                                                                                          
                                                                                                                                
10:01:45 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman  cautioned members to take  the early years                                                                    
(before 2001 and  2002) with a grain of salt.  He noted that                                                                    
when the system had been  reworked in the 2004 timeframe the                                                                    
legislature  had   not  gone  back  to   have  the  analysis                                                                    
restated. He  explained that  the analysis  at the  time had                                                                    
been erroneous and  the numbers were wrong.  He relayed that                                                                    
when  the legislature  had fixed  the  numbers in  2004/2005                                                                    
they had  believed the system had  already been underfunded.                                                                    
He explained  there had been  issues and  litigation against                                                                    
the actuary and  the state had prevailed  with a substantial                                                                    
settlement.  The legislature  had acted  to have  additional                                                                    
actuarial study  conducted to check  the actuarial  work and                                                                    
avoid   incorrect  data   in  the   future.  He   asked  for                                                                    
verification that the safeguard was still in place.                                                                             
                                                                                                                                
Mr. Worley answered in the affirmative.                                                                                         
                                                                                                                                
Co-Chair Stedman  acknowledged the safeguard  was expensive,                                                                    
but worth the price given  past history of turbulence caused                                                                    
to  lawmakers  and  beneficiaries.   He  remarked  that  any                                                                    
liability  accumulated  from  misestimating  the  future  to                                                                    
incompetence  was  backed  up  by  the  state  treasury.  He                                                                    
explained  that  benefits  were guaranteed  by  the  state's                                                                    
constitution, if there was a  problem it had to be addressed                                                                    
by the  legislature, not beneficiaries. The  legislature had                                                                    
opted to take extra precaution  after the results at the end                                                                    
of 1999.                                                                                                                        
                                                                                                                                
10:04:24 AM                                                                                                                   
                                                                                                                                
Co-Chair von Imhof observed that  slide 14 showed that drops                                                                    
in the  market affected the  funding ratio in 2001  and 2002                                                                    
and  again in  2008 and  2009. She  noted that  the recovery                                                                    
period was lengthy,  which she found alarming.  She asked if                                                                    
other states  assumed 100  percent of  the liability  or had                                                                    
some  type of  sharing. She  thought it  was more  academic,                                                                    
because  Alaska's  constitution  indicated the  state  would                                                                    
bear   the  full   responsibility.   She   hoped  that   the                                                                    
presentation  or  related  conversations would  address  the                                                                    
fact that  market volatility impacted the  funded liability.                                                                    
She was interested  in potential ways to  address the issue.                                                                    
She  questioned  whether there  needed  to  be another  cash                                                                    
infusion    (as    had    occurred   under    the    Parnell                                                                    
Administration),   or   different  actuarials.   She   found                                                                    
continuing without  a plan and the  potential for increasing                                                                    
liabilities worrisome.                                                                                                          
                                                                                                                                
Co-Chair  Stedman   asked  the  department   whether  Callan                                                                    
Associates (Callan) was still the state's consultant.                                                                           
                                                                                                                                
Mr. Worley  replied that Callan  was the  investment advisor                                                                    
for ARMB.                                                                                                                       
                                                                                                                                
Co-Chair Stedman noted that the  legislature would be asking                                                                    
Callan  to provide  an analysis  in chart  form to  show its                                                                    
projections for  various years.  He explained  the committee                                                                    
would  see  the  state  never recouped.  He  noted  targeted                                                                    
values were  up on the  right of the  chart and down  on the                                                                    
left.  He relayed  the committee  would have  the discussion                                                                    
with ARMB and Callan.                                                                                                           
                                                                                                                                
10:07:18 AM                                                                                                                   
                                                                                                                                
Senator Bishop added that there  had been municipalities and                                                                    
borough  governments that  did not  believe the  [actuarial]                                                                    
numbers but  had made the  contribution even when  the state                                                                    
had told them  no contribution was necessary.  He lauded the                                                                    
boroughs  for contributing  and noted  the problem  could be                                                                    
worse  if   those  contributions  had  not   been  made.  He                                                                    
contemplated what the unfunded  liability would look like if                                                                    
the  legislature  had  not  made the  cash  infusion  of  $3                                                                    
billion. He did  not believe the unfunded  liability was too                                                                    
terrible at present, given what  the state had been through.                                                                    
He  envisioned  the legislature  may  need  to make  another                                                                    
large  deposit  [towards  the  unfunded  liability]  because                                                                    
without  the past  cash infusion,  the legislature  would be                                                                    
faced with  owing over $1  billion annually in  General Fund                                                                    
(GF) spend.                                                                                                                     
                                                                                                                                
Co-Chair  Stedman  reiterated that  he  would  ask ARMB  and                                                                    
Callan to bring the analysis to the committee.                                                                                  
                                                                                                                                
Senator  Micciche   noted  there  had  been   a  substantial                                                                    
reduction in the funded ratio  for PERS and TRS between 2001                                                                    
and 2002.  He wondered  what had occurred  to result  in the                                                                    
substantial  drop.   He  considered  the  market   loss  and                                                                    
reasoned it  alone did not  explain the reduction  in funded                                                                    
ratios of close to 25 percent.                                                                                                  
                                                                                                                                
Co-Chair Stedman  replied the [actuarial] analysis  had been                                                                    
erroneous for previous years, which  had triggered a rewrite                                                                    
in SB  141. There had  been discussion about going  back and                                                                    
restating  the previous  numbers, which  had been  erroneous                                                                    
for  PERS  and  TRS.  Additionally, there  were  the  market                                                                    
results. He offered to share historical data in his office.                                                                     
                                                                                                                                
Senator  Micciche surmised  the five  years following  [2001                                                                    
and 2002]  reflected the realization the  unfunded liability                                                                    
would increase, hence the change to a DC system in 2006.                                                                        
                                                                                                                                
Co-Chair  Stedman stated  that the  time the  Senate Finance                                                                    
Committee  had been  chaired by  former Senator  Lyda Green.                                                                    
Senator Green had shared her  concern with him, and they had                                                                    
collaborated on a  solution to the problem.  They had worked                                                                    
to determine  what had  gone wrong  and to  identify whether                                                                    
the  information was  erroneous.  The  legislature had  gone                                                                    
through  a process  to define  and rectify  the problem.  He                                                                    
recalled that at  the time, the legislature  did not believe                                                                    
the liability would  climb as high as it  ultimately did. He                                                                    
thought the  liability had peaked  at about $12  billion and                                                                    
the legislature  had expected it  to peak around  $8 billion                                                                    
or  $9  billion  from  somewhere   around  $6  billion.  The                                                                    
committee had  spent long hours  working to get a  handle on                                                                    
the situation.  He noted that  Senator Green  had ultimately                                                                    
become Senate President.                                                                                                        
                                                                                                                                
10:11:49 AM                                                                                                                   
                                                                                                                                
Senator Shower  referenced discussion  about returning  to a                                                                    
DB system for  certain groups or the entire  state. He asked                                                                    
to see  how the change  would impact the chart.  He remarked                                                                    
that most  private sector companies  had moved away  from DB                                                                    
plans  because the  unfunded  liabilities were  debilitating                                                                    
(it was economically implausible  for companies to keep that                                                                    
much  cash on  hand). He  wondered how  going back  to a  DB                                                                    
system would impact the state.                                                                                                  
                                                                                                                                
Co-Chair Stedman  thought the question may  be best directed                                                                    
to  the actuary.  He  detailed that  the  question could  be                                                                    
addressed  during the  committee's  conversation with  ARMB.                                                                    
They would  consider what the  expectations would  have been                                                                    
and the  impact of  the additional $3  billion contribution.                                                                    
He recalled  the $3 billion  was substantially  less because                                                                    
it  took the  normal  year's contribution  plus around  $1.5                                                                    
billion extra.  He communicated the  committee would  see an                                                                    
analysis  of the  extra contribution.  He  clarified the  $3                                                                    
billion had  included the normal  contribution for  the year                                                                    
as well. The  committee would also ponder  whether there was                                                                    
any ability,  interest, or benefit of  making another equity                                                                    
infusion.  He thought  it was  important  to understand  the                                                                    
information  in the  event the  legislature  wanted to  make                                                                    
another cash infusion in the current year or in five years.                                                                     
                                                                                                                                
Mr. Desai advanced  to slide 15, "Actual Rate  of Return and                                                                    
Funding Ratio - PERS," which showed  a line graph as well as                                                                    
a data  table that depicted  a visual representation  of the                                                                    
information on slide  14. The orange line on the  top of the                                                                    
graph  represented  the funded  ratio  and  the purple  line                                                                    
reflected the actual rate of return.                                                                                            
                                                                                                                                
10:14:21 AM                                                                                                                   
                                                                                                                                
Mr.  Desai moved  to slide  16, "Actual  Rate of  Return and                                                                    
Funding  Ratio -  TRS," which  showed  a data  table of  TRS                                                                    
information starting in  1996. He detailed that  in 1999 TRS                                                                    
had been  funded at approximately 102  percent. He cautioned                                                                    
that the information  may be erroneous. Similar  to the PERS                                                                    
system, the  TRS plan experienced  negative returns  in 2001                                                                    
and  2002 instead  of the  actuarial earnings  rate of  8.25                                                                    
percent.  The  negative  returns   had  contributed  to  the                                                                    
unfunded liability.                                                                                                             
                                                                                                                                
Co-Chair  Stedman  asked about  funded  ratios  and at  what                                                                    
point the legislature should be concerned.                                                                                      
                                                                                                                                
Mr. Desai replied that in  his administration of past plans,                                                                    
he  had  observed  that  when   funded  ratios  exceeded  90                                                                    
percent, employers  may begin to  contribute less  to single                                                                    
employer  plans. However,  in a  Taft Hartley  plan, he  had                                                                    
seen an increase in the  benefit rates. He explained it kept                                                                    
the ratio level  and kept it from exceeding  100 percent. He                                                                    
explained  that  when plans  were  100  percent funded,  one                                                                    
option was to  increase a benefit. The biggest  risk was not                                                                    
knowing  how  the  returns   would  support  the  additional                                                                    
benefits in  the future. He  stated that  when a plan  hit a                                                                    
funded rate  of 90  percent he  had witnessed  board meeting                                                                    
discussions  about  considering  the next  strategy  if  the                                                                    
funding ratio went up to 100 percent.                                                                                           
                                                                                                                                
Co-Chair Stedman  surmised that  the state should  be fairly                                                                    
comfortable at a  funded ratio of about 90  percent, while a                                                                    
ratio of 50 percent should  set off alarm bells. He reasoned                                                                    
the state should not set a  funded ratio goal of 100 percent                                                                    
and once it got to 90 percent there should be a discussion.                                                                     
                                                                                                                                
Mr. Desai confirmed that was  his experience with all of the                                                                    
past  plans  he had  administered  in  15 major  plans  with                                                                    
different companies.                                                                                                            
                                                                                                                                
10:17:20 AM                                                                                                                   
                                                                                                                                
Senator Micciche asked for Mr.  Desai's opinion on the lower                                                                    
threshold. He  asked if  the alarm bell  was ringing  at the                                                                    
current funded ratio.                                                                                                           
                                                                                                                                
Mr. Desai  answered that  for the  private sector  under IRS                                                                    
and  ERISA  [Employee  Retirement Income  Security  Act],  a                                                                    
funded  ratio  of  80  percent   or  higher  was  considered                                                                    
healthy. If  the funded ratio  went below 80  percent, ERISA                                                                    
recommended  the plan  introduce strategy  to show  when and                                                                    
how the plan would return  and maintain an 80 percent level.                                                                    
The entities  had established a color  zone including green,                                                                    
red, and yellow.  He concluded that depending  on the funded                                                                    
ratio, treatment would be different.                                                                                            
                                                                                                                                
Co-Chair Stedman asked for an explanation of ERISA.                                                                             
                                                                                                                                
Mr. Desai  replied that ERISA stood  for Employee Retirement                                                                    
Income Security Act of 1974.                                                                                                    
                                                                                                                                
Senator Bishop remarked on Mr.  Desai's lengthy work history                                                                    
with Taft Hartley  plans and his familiarity  with ERISA. He                                                                    
believed  there was  a  point  in time  in  which ERISA  had                                                                    
stipulated that Taft Hartley plans  could not be overfunded.                                                                    
He asked for the accuracy of his statement.                                                                                     
                                                                                                                                
Mr. Desai  concurred, but he had  not seen [indecipherable].                                                                    
He  explained  that  concern often  increased  substantially                                                                    
when a plan was funded at close to 100 percent.                                                                                 
                                                                                                                                
Senator Bishop remarked that in  the past the government had                                                                    
specified  plans could  not be  overfunded; therefore,  plan                                                                    
participants received a bump on  their years of service even                                                                    
though  they had  not worked  or contributed.  He elaborated                                                                    
that there  were plan  years in the  1990s, until  ERISA had                                                                    
changed the law,  where plan members received a  bump due to                                                                    
federal law.  He continued that  poor market  performance in                                                                    
2000 and  2009 had resulted  in underfunded plans.  He added                                                                    
that he  had never  heard of  having too  much money  in the                                                                    
bank.                                                                                                                           
                                                                                                                                
10:20:28 AM                                                                                                                   
                                                                                                                                
Mr. Desai turned briefly to  slide 17 titled "Actual Rate of                                                                    
Return and  Funding Ratio  - TRS,"  which provided  a visual                                                                    
look at the data on slide 16.                                                                                                   
                                                                                                                                
Mr. Desai read from slide 18, "Actuarial Experience Study":                                                                     
                                                                                                                                
     Experience Study Process                                                                                                   
                                                                                                                                
     Alaska Statute  37.10.220(a)(9) requires  an experience                                                                    
     study  be  conducted at  least  once  every four  years                                                                    
     (healthcare assumptions  are reviewed annually  as part                                                                    
     of actuarial valuations)                                                                                                   
         The experience study compares current assumptions                                                                   
          with actual plan experience                                                                                           
             o Last study: Performed in 2014. Covered                                                                           
               experience for the 4-year period July 1,                                                                         
               2009 through June 30, 2013.                                                                                      
                  square4 New assumptions adopted by the ARMB                                                                   
                    were effective beginning with the June                                                                      
                   30, 2014 valuations.                                                                                         
         Current study: Covers experience for the 4-year                                                                     
          period July 1, 2013 through June 30, 2017.                                                                            
             o New assumptions (and methods) adopted by the                                                                     
               ARMB will be effective beginning with the                                                                        
               June 30, 2018 valuations (which will be used                                                                     
               to set FY21 contributions).                                                                                      
                                                                                                                                
10:22:06 AM                                                                                                                   
                                                                                                                                
Mr. Desai read from slide  19, "Actuarial Experience Study -                                                                    
Experience Study Process (Continued)":                                                                                          
                                                                                                                                
     Economic Assumptions                                                                                                       
         Investment Return                                                                                                   
         Inflation                                                                                                           
         Salary Increases                                                                                                    
         Payroll Growth                                                                                                      
     Demographic Assumptions                                                                                                    
         Mortality                                                                                                           
         Retirement                                                                                                          
         Disability                                                                                                          
         Withdrawal (termination of employment)                                                                              
     Funding Methods                                                                                                            
         Healthcare Normal Cost and Actuarial Accrued                                                                        
          Liability                                                                                                             
       Administrative Expense Load to Normal Cost                                                                            
         Amortization of   Unfunded   Actuarial   Accrued                                                                    
          Liability (UAAL)                                                                                                      
                                                                                                                                
Mr. Desai explained a change  recommended by the actuary was                                                                    
based on a study of the  past four years. He elaborated that                                                                    
through the process, the actuary  would be able to recommend                                                                    
new  rates  to  ARMB  and the  future  assumptions  for  the                                                                    
official valuations of the next four years.                                                                                     
                                                                                                                                
10:23:02 AM                                                                                                                   
                                                                                                                                
Mr. Desai turned to slide 20, "Actuarial Experience Study                                                                       
 - Recent History":                                                                                                             
                                                                                                                                
     2009 (Eff 6/30/2010 Valuation)                                                                                             
         Investment Return                                                                                                   
          8.25% to 8.0%                                                                                                         
         Inflation                                                                                                           
          3.5% to 3.12%                                                                                                         
         Payroll Growth                                                                                                      
          4.0% to 3.62%                                                                                                         
                                                                                                                                
     2013 (Eff 6/30/2014 Valuation)                                                                                             
         Investment Return                                                                                                   
          Stayed at 8.0%                                                                                                        
         Inflation                                                                                                           
          Stayed at 3.12%                                                                                                       
         Payroll Growth                                                                                                      
          Stayed at 3.62%                                                                                                       
                                                                                                                                
     2017(Eff 6/30/2018 Valuation)                                                                                              
         Investment Return                                                                                                   
          8.0% to 7.38%                                                                                                         
         Inflation                                                                                                           
          3.12% to 2.5%                                                                                                         
         Payroll Growth                                                                                                      
          3.62% to 2.75%                                                                                                        
                                                                                                                                
10:24:28 AM                                                                                                                   
                                                                                                                                
Co-Chair von  Imhof believed Callan  was also an  advisor to                                                                    
the Alaska  Permanent Fund Corporation (APFC).  She remarked                                                                    
that a  6.25 percent return  was used for modeling  based on                                                                    
Callan's recommendation for the  Permanent Fund, while slide                                                                    
20  showed  an  investment  return  of  8  percent  to  7.38                                                                    
percent. She  wondered why the recommendation  [for PERS and                                                                    
TRS] was higher than the  return used for the Permanent Fund                                                                    
when the  same investment  advisor made  recommendations for                                                                    
both entities. She asked about the difference.                                                                                  
                                                                                                                                
Mr. Desai  replied that the  Permanent Fund was  more liquid                                                                    
than   the   retirement   systems,  which   were   long-term                                                                    
investments. He  remarked that the  focus on  the investment                                                                    
may be different depending on  the expectation. He continued                                                                    
that employees  typically worked from  20 to 30  years prior                                                                    
to collecting  a benefit. He  explained there was  a lengthy                                                                    
time   period  before   a  benefit   was  realized   when  a                                                                    
participant received  a contribution from the  employer. The                                                                    
strategies and  focus of the two  different investments were                                                                    
different. He  shared that  Callan had been  one of  the key                                                                    
players to  encourage ARMB to  go through the  analysis with                                                                    
an actuary.                                                                                                                     
                                                                                                                                
10:26:20 AM                                                                                                                   
                                                                                                                                
Senator Shower asked for a definition of payroll growth.                                                                        
                                                                                                                                
Mr.  Desai  replied  that payroll  growth  assumptions  were                                                                    
based  on   the  current  population.  The   rates  included                                                                    
employee and  employer income contributions coming  into the                                                                    
system.  The   7.38  percent  investment  return   rate  was                                                                    
projected  for the  long-term.  He  explained that  employer                                                                    
contributions  came through  the payroll.  Depending on  the                                                                    
participants actively contributing in  the plan, the payroll                                                                    
growth played  a key  role regarding  expected contributions                                                                    
in the future.                                                                                                                  
                                                                                                                                
Co-Chair Stedman  added that when  the actuary  presented to                                                                    
the committee,  future budget  impacts would  be considered.                                                                    
Additionally, the  actuary would  address the  past, payroll                                                                    
growth, and future expectations.                                                                                                
                                                                                                                                
10:27:53 AM                                                                                                                   
                                                                                                                                
Senator  Micciche  considered  the  unfunded  PERS  and  TRS                                                                    
liability of 77  and 82 percent respectively  [slides 14 and                                                                    
16]. He asked where the  healthcare cost factor was included                                                                    
in  the  actuarial  experience study.  He  wondered  if  the                                                                    
number was included in inflation or elsewhere.                                                                                  
                                                                                                                                
Mr. Desai replied  that the information was  not included in                                                                    
the presentation, but he would follow up with the data.                                                                         
                                                                                                                                
Co-Chair  Stedman referenced  Co-Chair von  Imhof's question                                                                    
about expected rates  of return. He relayed  that during the                                                                    
years  Callan had  used  an 8.25  percent  expected rate  of                                                                    
return, the  committee had  repeatedly vocalized  its belief                                                                    
the rate  was too high.  He recalled that the  committee had                                                                    
tried for years  to get Callan to adjust  the rate downward.                                                                    
He  observed  the  presentation showed  the  rate  had  been                                                                    
adjusted down to 8 percent.  He believed the committee would                                                                    
have the  conversation with Callan  when they  addressed the                                                                    
committee in  the future. Additionally, the  committee would                                                                    
ask  Callan  to  breakout   healthcare  versus  pension.  He                                                                    
remarked there  was an  asset allocation  difference between                                                                    
APFC and  ARMB in  regard to  expectations of  inflation and                                                                    
especially the  rate of return.  He reported there  would be                                                                    
forthcoming  discussions  on  the   issue  with  Callan.  He                                                                    
explained  there was  a difference  in  risk profile,  which                                                                    
related to the return and allocation difference.                                                                                
                                                                                                                                
10:30:09 AM                                                                                                                   
                                                                                                                                
Mr. Desai reviewed slide 21, "Benefit Formula":                                                                                 
                                                                                                                                
     Defined Benefit Pension:                                                                                                   
     Fixed benefit amount from date of retirement to death                                                                      
     Contributions + Investment Earnings = Benefits +                                                                           
     Expenses                                                                                                                   
                                                                                                                                
     IF:                                                                                                                        
     Actuarial assumptions are accurate. Funded ratio                                                                           
     remains at target of 100%                                                                                                  
                                                                                                                                
     IF NOT:                                                                                                                    
     Unfunded   liability  is   created,  if   benefits  and                                                                    
     expenses are greater  than contributions and investment                                                                    
     earnings.   Funding   excess   if   contributions   and                                                                    
     investment earnings are greater than benefits and                                                                          
     expenses.                                                                                                                  
                                                                                                                                
Mr.   Desai   addressed    slide   22,   "Additional   State                                                                    
Contributions -  PERS /  TRS." He  pointed out  that between                                                                    
2008  and  2019  the   Senate  Finance  Committee  allocated                                                                    
approximately $7.2  billion into  the PERS and  TRS systems.                                                                    
He highlighted  that the $3  billion cash infusion  into the                                                                    
systems in  2015 had helped  keep the funded ratio  close to                                                                    
80 percent. He noted that 80 percent was the healthy level.                                                                     
                                                                                                                                
Co-Chair   Stedman   asked   for   verification   that   the                                                                    
legislature  had added  $7.2 billion  above the  normal cost                                                                    
into  the   retirement  plan  to  deal   with  the  unfunded                                                                    
liability and that there was more to come.                                                                                      
                                                                                                                                
Mr. Desai answered in the affirmative.                                                                                          
                                                                                                                                
10:32:15 AM                                                                                                                   
                                                                                                                                
Mr. Desai  looked to slide  23, "Projected  Additional State                                                                    
Contributions   PERS  / TRS." The table used  results from a                                                                    
recent study (the final data  for the 2018 valuation was not                                                                    
yet  complete) to  show  projections  from additional  state                                                                    
contributions to  PERS and  TRS from  2020 through  2039. He                                                                    
pointed to  the last column and  detailed that approximately                                                                    
$9.1 billion more  would be contributed to the  PERS and TRS                                                                    
systems.                                                                                                                        
                                                                                                                                
Senator Shower  asked whether the  $9.1 billion on  slide 23                                                                    
included the  roughly $7 billion  shown on a  previous slide                                                                    
[slide  22]. Alternatively,  he wondered  if the  figure was                                                                    
separate from FY 20 going forward.                                                                                              
                                                                                                                                
Mr. Desai  answered that the  data on slide 23  was separate                                                                    
and  looked at  FY  20  to FY  39.  The  slide included  the                                                                    
targeted  dollar values  suggested  by the  actuary for  the                                                                    
systems to be funded at 100 percent.                                                                                            
                                                                                                                                
Senator  Shower asked  for  verification  that the  unfunded                                                                    
liabilities could  potentially be up  to $16 billion  to $17                                                                    
billion  through  FY  39  (when  factoring  in  the  current                                                                    
liability).                                                                                                                     
                                                                                                                                
Mr. Desai  responded that the  unfunded liability was  not a                                                                    
direct   number   coinciding   with  the   number   in   the                                                                    
presentation.  He  explained that  the  data  [on slide  23]                                                                    
reflected  something  above  22   percent  and  above  12.56                                                                    
percent (for  PERS and TRS respectively)  paid by employers.                                                                    
The  state paid  the  additional  contributions towards  the                                                                    
unfunded liability.                                                                                                             
                                                                                                                                
Co-Chair  Stedman  stated there  was  $9.2  billion more  to                                                                    
retire the  unfunded liability. Additionally, there  was the                                                                    
recurring annual expenditures of its employees.                                                                                 
                                                                                                                                
10:34:23 AM                                                                                                                   
                                                                                                                                
Co-Chair von  Imhof noted that the  annual payment increased                                                                    
from $263.3 million  in FY 19 (slide 22) to  $300 million in                                                                    
FY 20, and $423 million in  FY 21 (slide 23) before leveling                                                                    
out. She  asked for  detail on  the substantial  increase of                                                                    
$123 million from FY 20 to FY 21.                                                                                               
                                                                                                                                
Mr. Desai  explained that the  data used a  recent actuarial                                                                    
study  submitted to  ARMB. He  elaborated that  the rate  of                                                                    
return had changed from 8  percent to 7.38 percent with many                                                                    
[actuarial] assumptions adopted by  ARMB. Slide 23 reflected                                                                    
the impact  of the  study beginning in  FY 21.  He clarified                                                                    
that the study would not result  in an increase in the FY 20                                                                    
contributions.                                                                                                                  
                                                                                                                                
Co-Chair  von Imhof  remarked on  decreasing the  rate by  8                                                                    
percent  to 7.25  [7.38] percent  and noted  that the  state                                                                    
picked up the balance to keep  the plan funded. She asked if                                                                    
Mr.  Desai  had  testified  that the  state  picked  up  the                                                                    
balance to  keep the plan  100 percent funded or  80 percent                                                                    
funded.                                                                                                                         
                                                                                                                                
Mr. Desai replied, "100 percent funded."                                                                                        
                                                                                                                                
Co-Chair  von Imhof  asked  what the  totals  [on slide  23]                                                                    
would be if the funded level was maintained at 80 percent.                                                                      
                                                                                                                                
Mr.  Desai  replied  that the  funded  ratio  was  currently                                                                    
approximately 77  percent for PERS  and 82 percent  for TRS.                                                                    
He pointed out that TRS  was already funded over 80 percent.                                                                    
He explained  that the  dollar value would  be much  less to                                                                    
keep the fund funded at  80 percent. He elaborated that PERS                                                                    
and  TRS  were closed  plans  with  no new  participants  or                                                                    
contributing  going  forward. He  detailed  that  in 2014  a                                                                    
decision  had been  made to  fully fund  the plans  by 2040.                                                                    
Consequently,   the  schedule   [on  slide   23]  had   been                                                                    
established to project what it  would cost to fund the plans                                                                    
at  100  percent.  He  noted that  PERS  and  TRS  [employer                                                                    
contribution  rates] were  capped  at 22  percent and  12.56                                                                    
percent respectively.                                                                                                           
                                                                                                                                
10:37:14 AM                                                                                                                   
AT EASE                                                                                                                         
                                                                                                                                
10:40:26 AM                                                                                                                   
RECONVENED                                                                                                                      
                                                                                                                                
Mr. Desai  continued to address  slide 23, which  showed the                                                                    
[projected  additional  state contribution]  annual  payment                                                                    
schedule [for  FY 20 to  FY 39] totaling  approximately $9.1                                                                    
billion.  He referenced  an earlier  question about  whether                                                                    
the  slide  represented  the  true  unfunded  liability.  He                                                                    
detailed  that  the  slide  did  not  reflect  the  unfunded                                                                    
liability but showed  a present value. He  explained that if                                                                    
the state paid  off the liability at the  present value, the                                                                    
payment [on  slide 23]  would likely  go away.  He furthered                                                                    
that the  value could be much  lower than the data  shown on                                                                    
slide 23 because  the table went out to FY  39; if the money                                                                    
was paid upfront, the value would be much less.                                                                                 
                                                                                                                                
Co-Chair  Stedman  asked  for verification  that  Mr.  Desai                                                                    
meant the liability at present value.                                                                                           
                                                                                                                                
Mr. Desai agreed.                                                                                                               
                                                                                                                                
Senator  Wilson  referenced  an  earlier  statement  that  a                                                                    
healthy fund  was funded  at about 80  percent and  that the                                                                    
state should aim  for [a funded ratio of]  about 90 percent.                                                                    
He asked  if the  department could  provide a  chart showing                                                                    
the liability  if it  was funded  at the  80 and  90 percent                                                                    
levels.                                                                                                                         
                                                                                                                                
Co-Chair Stedman  thought the  questions would  be addressed                                                                    
by the  actuary, and that there  would be a range  (e.g. 80,                                                                    
85, 90, and 95 percent) provided.                                                                                               
                                                                                                                                
Mr.  Desai  replied that  the  schedule  [on slide  23]  was                                                                    
published as part of the  valuation report. He detailed that                                                                    
the 2017  report was  on the  department website  and showed                                                                    
the  detailed schedule  for PERS  (page  50 or  55) and  TRS                                                                    
(page  44). He  noted that  the department  would provide  a                                                                    
more readable chart in a future presentation.                                                                                   
                                                                                                                                
10:42:34 AM                                                                                                                   
                                                                                                                                
Senator Micciche  referenced slide  23 and believed  much of                                                                    
the increase  of projected state contributions  was based on                                                                    
the investment return assumptions  decreasing from 8 percent                                                                    
to 7.38 percent. He pointed  out that the payments were made                                                                    
on  a  five-year average  for  actuals.  He appreciated  the                                                                    
conservatism but wondered  if it was possible  the data sent                                                                    
off  an  unnecessary  alarm simply  because  the  investment                                                                    
return expectations had been reduced.                                                                                           
                                                                                                                                
Mr. Desai  replied that  the 7.38 percent  was based  on the                                                                    
last  four-year study.  The result  showed  that the  dollar                                                                    
value to be  paid by the state would be  much higher than it                                                                    
had been  previously. However, he  believed that  every four                                                                    
years  the study  would likely  bring different  results. He                                                                    
continued that  depending on the  true market return  in the                                                                    
future,  the value  [shown on  slide 23]  could increase  or                                                                    
decrease. He  noted that compared  to the last  valuation in                                                                    
2017,  the  number  had  increased   about  $1  billion.  He                                                                    
clarified  that  the  reduction  to  7.38  percent  did  not                                                                    
necessarily  directly increase  the  value by  $1 billion  -                                                                    
many other assumptions had gone  into the study as well that                                                                    
impacted the value.                                                                                                             
                                                                                                                                
Mr.  Desai   reviewed  slide   24,  "Unfunded   Liability                                                                       
PERS/TRS." The  slide showed a  bar chart with a  data table                                                                    
at  the bottom  (red  represented TRS  and blue  represented                                                                    
PERS). The  total unfunded liability  as of 2017  was nearly                                                                    
$6.8 billion.                                                                                                                   
                                                                                                                                
Co-Chair  Stedman remarked  that  the figure  was about  the                                                                    
same  as  the 2005  liability.  Mr.  Desai answered  in  the                                                                    
affirmative.                                                                                                                    
                                                                                                                                
10:45:10 AM                                                                                                                   
                                                                                                                                
Mr. Desai  advanced to  slide 25,  "UPDATED Funding  Ratio -                                                                    
PERS/TRS 2017 Results (in thousands)."  He remarked that the                                                                    
numbers  for  2018  were  not yet  available  and  would  be                                                                    
finalized sometime in June. The  total funded ratio was 76.7                                                                    
percent for PERS and 82 percent for TRS.                                                                                        
                                                                                                                                
Co-Chair Stedman highlighted that  in 2017 the PERS unfunded                                                                    
ratio was  66.7 percent.  He observed that  healthcare under                                                                    
TRS was 100  percent. He remarked that not all  PERS and TRS                                                                    
categories  equally shared  the liability.  He asked  if the                                                                    
state  focus on  bringing areas  that were  funded below  80                                                                    
percent up to the 80 percent mark.                                                                                              
                                                                                                                                
Mr.  Worley  replied that  the  healthcare  plans were  much                                                                    
better funded through  efforts made by DRB  (e.g. by looking                                                                    
at  different ways  to contain  health costs).  He suggested                                                                    
that if the state was looking  to fund something at a higher                                                                    
level, the pension category was a  good area to focus on. He                                                                    
reported that  the pension  was 66  percent funded  for PERS                                                                    
and 75  percent for  TRS. The additional  state contribution                                                                    
provided by  the legislature several years  earlier had been                                                                    
aimed   at  bolstering   the  DB   pension  as   opposed  to                                                                    
healthcare. The  division had been  seeing results  from its                                                                    
actuarial studies that the health  plans were getting better                                                                    
funded much more quickly than  expected (based on efforts by                                                                    
the administration to contain health costs).                                                                                    
                                                                                                                                
10:47:24 AM                                                                                                                   
                                                                                                                                
Mr. Desai briefly highlighted slide  26, "PERS Funding Ratio                                                                    
History  (Based  on  Valuation Assets),"  which  showed  the                                                                    
funded  ratio  from 1979  through  2017  and slide  27  "TRS                                                                    
Funding Ratio  History (Based  on Valuation  Assets)," which                                                                    
showed the same information for TRS.                                                                                            
                                                                                                                                
Mr. Desai  advanced to slide 28,  "PERS Contribution Rates,"                                                                    
which   showed   the   difference   between   the   employer                                                                    
contribution  rate  (shown  in  blue)  and  the  actuarially                                                                    
determined  rate  (shown in  red).  He  noted that  employer                                                                    
contribution  rates were  flat  at 22  percent beginning  in                                                                    
2008  going forward.  The difference  between the  two rates                                                                    
showed the additional state  contribution. Slide 29 included                                                                    
the same chart for the TRS system.                                                                                              
                                                                                                                                
Mr. Desai  turned to slide  30 titled  "Projected Retirement                                                                    
Population Growth."  The slide  showed a chart  depicting at                                                                    
what point  the number of  retirees under the plan  would be                                                                    
highest. He elucidated that somewhere  around 2027 the state                                                                    
would  reach  a  peak  of about  58,000  retirees  based  on                                                                    
estimates of service  and age. Once the peak  was reached it                                                                    
was predicted to begin declining.                                                                                               
                                                                                                                                
Mr.  Desai  moved  to  slide 31,  "Basic  Facts     PERS/TRS                                                                    
Benefits,"  which  showed  a   chart  depicting  the  annual                                                                    
benefit  payouts.  Somewhere  in 2039  the  state's  benefit                                                                    
payments  would peak  and begin  declining. He  believed the                                                                    
last benefits were projected to be received in 2116.                                                                            
                                                                                                                                
10:49:49 AM                                                                                                                   
                                                                                                                                
Mr.  Desai  looked  at  slide   32,  "Expenses     PERS  (in                                                                    
thousands),"  which  showed  a  line  graph  depicting  PERS                                                                    
expenses paid including pension  benefits (paid as a retiree                                                                    
check)   health   claims,   administrative   expenses,   and                                                                    
investment expenses.  He explained  that the chart  showed a                                                                    
trend as it  increased and correlated to the  chart on slide                                                                    
31.  The slide  depicted  what  the cost  had  been in  1996                                                                    
through 2018.                                                                                                                   
                                                                                                                                
Co-Chair Stedman  asked for an  explanation of a  steep drop                                                                    
in  healthcare expenses  in 2008.  He  asked facetiously  if                                                                    
everyone had stopped smoking that year.                                                                                         
                                                                                                                                
Mr. Worley  explained the reason  for the drop.  He detailed                                                                    
that previous to  2008, the health plans had  paid a premium                                                                    
health insurance to a  separately established retiree health                                                                    
fund.  He   elaborated  that  the   health  fund   had  been                                                                    
responsible for paying health claims  for all PERS, TRS, and                                                                    
JRS  retirement system  members. He  added there  were other                                                                    
reasons  individuals  would  be covered  by  the  retirement                                                                    
systems. In  order to comply  with Internal Revenue  Code in                                                                    
2007 the  systems had gone through  organizational recreated                                                                    
health trusts.  He expounded that  the health  trusts, which                                                                    
were  now   reported  as  part  of   the  audited  financial                                                                    
statements and actuarial reports,  paid the claims. In 2008,                                                                    
the  former retiree  health fund  transferred  money to  the                                                                    
PERS, TRS,  and JRS systems established  health care trusts;                                                                    
however, the  state still  had money  in the  retiree health                                                                    
fund and continued  to pay claims through  about March 2008.                                                                    
After that point, the health care trust paid the claims.                                                                        
                                                                                                                                
Co-Chair  Stedman  asked  Mr.  Worley to  get  back  to  the                                                                    
committee with  further detail regarding the  anomaly in the                                                                    
chart.                                                                                                                          
                                                                                                                                
10:52:36 AM                                                                                                                   
                                                                                                                                
Mr. Desai  briefly highlighted slide  33 titled  "Expenses                                                                      
TRS (in  thousands)," which showed the  same information for                                                                    
TRS.  He  noted  that  the  presentation  also  included  an                                                                    
appendix  based  on  a  request   in  a  previous  committee                                                                    
meeting.  The additional  slides included  information about                                                                    
PFD eligibility and how the  cost of living allowance (COLA)                                                                    
was paid.                                                                                                                       
                                                                                                                                
Co-Chair  Stedman stated  that the  final slides  [slides 35                                                                    
through  37]  would  be   rolled  into  future  presentation                                                                    
materials when the committee heard  from ARMB and Callan. He                                                                    
remarked  it  was  nice  to   see  that  80  percent  was  a                                                                    
reasonable target  and the systems  on average  were getting                                                                    
close to  that number.  The committee  would look  at future                                                                    
cashflow  constraints  and  would consider  various  targets                                                                    
(e.g.  80,  85,  90,  and  100  percent).  He  reported  the                                                                    
committee  would  have the  discussions  with  ARMB and  its                                                                    
consultants  to come  up with  a solution  to reach  a fully                                                                    
benefitted plan and survive cash flow constraints.                                                                              
                                                                                                                                
Co-Chair  Stedman discussed  the  agenda  for the  following                                                                    
day.                                                                                                                            
                                                                                                                                
ADJOURNMENT                                                                                                                   
10:54:41 AM                                                                                                                   
                                                                                                                                
The meeting was adjourned at 10:54 a.m.                                                                                         
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
013019 DOA Labor Contracts Presentation SFin.pdf SFIN 1/30/2019 9:00:00 AM
Labor Contracts
013019 Actuarial-method-flyer.pdf SFIN 1/30/2019 9:00:00 AM
PERS/TRS
013019 Termination-studies-flyer - Copy.pdf SFIN 1/30/2019 9:00:00 AM
PERS/TRS
013019 COLA Brochure.pdf SFIN 1/30/2019 9:00:00 AM
PERS/TRS
013019 COLA Application Form.pdf SFIN 1/30/2019 9:00:00 AM
PERS/TRS
013019 DOA PERS TRS Overview S FIN .pdf SFIN 1/30/2019 9:00:00 AM
PERS/TRS