Legislature(2007 - 2008)SENATE FINANCE 532
03/19/2007 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB125 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 125 | TELECONFERENCED | |
| + | TELECONFERENCED |
MINUTES
SENATE FINANCE COMMITTEE
March 19, 2007
9:06 a.m.
CALL TO ORDER
Co-Chair Bert Stedman convened the meeting at approximately
9:06:02 AM.
PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Charlie Huggins, Vice Chair
Senator Kim Elton
Senator Donny Olson
Senator Joe Thomas
Also Attending: ANNETTE KREITZER, Commissioner, Department of
Administration; MELANIE MILLHORN, Director, Division of
Retirement and Benefits, Department of Administration;
Attending via Teleconference: There were no teleconference
participants.
SUMMARY INFORMATION
SB 125-PERS CONTRIBUTIONS; UNFUNDED LIABILITY
The Committee heard from the Department of Administration. The
bill was held in Committee.
9:07:21 AM
SENATE BILL NO. 125
"An Act relating to the accounting and payment of
contributions under the defined benefit plan of the Public
Employees' Retirement System of Alaska, to calculations of
contributions under that defined benefit plan, and to
participation in, and termination of and amendments to
participation in, that defined benefit plan; making
conforming amendments; and providing for an effective
date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Stedman reminded of accounting issues of the Public
Employees Retirement System (PERS) and the Teachers Retirement
System (TRS) discussed the previous week and of "challenges" to
these systems that were learned. This bill, in addition to SB
123 relating to technical corrections to the Tier IV plan, would
address those challenges.
9:09:35 AM
ANNETTE KREITZER, Commissioner, Department of Administration,
introduced Ms. Millhorn.
9:09:51 AM
MELANIE MILLHORN, Director, Division of Retirement and Benefits,
Department of Administration, gave an opening statement as
follows.
This presentation will be comprised of two parts: (1)
overview of SB 125 PERS Cost Share Bill and (2) financial
proposal to address unfunded liability for PERS and TRS,
which will be presented by Commissioner Kreitzer.
On March 13, 2007, you received a presentation from
Charlene Morrison, Chief Financial Officer and Commissioner
Kreitzer.
During the presentation it was explained that PERS Plan is
an agent multiple employer plan, which means that the
assets are pooled for all PERS employers and they share the
administrative expenses.
Currently, in accordance with statute, each PERS employer
has its own individual employer contribution rate that it
pays to the PERS Plan. The employer contribution rates vary
from between 14.48% to 185% of covered payroll. There are
160 employers that participate in the PERS Plan, the State
being the largest employer.
The presentation on March 13, 2007, formed the backdrop for
our discussion this morning. The information provided to
you involved the concerns raised about the accounting
associated with the PERS Plan at the employer level. It is
important to note, this matter does not impact the
economics at the plan level.
Governor Palin has introduced SB 125 as a proposed solution
to address the concerns raised by moving forward and
establishing the PERS Plan as a COST SHARE PLAN.
SB 125 is molded after the TRS Plan, which is a cost share
plan established by the legislature in 1955. All TRS
employers pay one uniform rate. There are 58 employers that
participate in the TRS plan.
Under SB 125 there will be no assignment of liabilities and
assets by individual employer. Instead all employers will
share in the liabilities and the assets - hence the name
"Cost Share Plan".
This bill will establish one uniform employer contribution
rate for PERS employers, with the exception that the State
of Alaska will pay a higher contribution rate.
9:12:18 AM
Ms. Millhorn gave a PowerPoint presentation titled, "Senate Bill
125 Overview, PERS Cost - Share Bill" [copy on file].
9:12:37 AM
Page 2
Purpose of Cost-Share Bill
· Assigns the state 65% of the unfunded liability at
6/30/2006 (estimated $3.6 billion of $5.5 billion
total)
· Employers would pay uniform rate (31.86%-FY 08),
except state would pay higher rate (47.92%-FY 08)
· All employers share cost (benefits, administration and
investment)
· Simplifies administration of plan
Ms. Millhorn read this information into the record. The Cost-
Share method would simplify administration of the retirement
program because it would eliminate the need to account for
assets and liabilities at the employer level.
9:13:34 AM
Page 3
Section 1 - AS 39.35.100
· Repeals prior language on separate employer accounts
· Eliminates Retiree Reserve Account
· States how pension benefits will be paid
o Employee account exhausted first
o Plan funds benefits after employee account
exhausted
Ms. Millhorn stated that this legislation would create "one
integrated system" of accounting for all employers. Existing
statutory language provides for separate accounts for each
employer. Issues surrounding the Retiree Reserve Account would
be eliminated, as it would be no longer necessary.
Ms. Millhorn explained that pension benefits would first be paid
from the employee contribution account. When the employee
account is exhausted, the plan would fund future benefits. The
new system would provide that the plan "as a whole" would be
responsible for funding benefits after an employee's account is
depleted. This "aligns" with a cost share plan design.
9:14:38 AM
Page 4
Section 2 - AS 39.35.115
· Adds two subsections
o (d) joint contributory plan
o (e) allocates excess assets at plan termination
Reason
· Clarifies who contributes
· Section (e) required by IRS
Ms. Millhorn noted that the TRS Plan also employs a joint
contribution methodology. This bill would clarify that both
employees and employers submit mandatory contributions to the
PERS Plan. This bill would also provide that upon termination of
the plan, if all liabilities of the plan have been satisfied,
any excess assets revert to the employers as determined by the
administrator, subject to approval by the federal Internal
Revenue Service (IRS). Termination occurs when a member employer
opts to discontinue participation in the plan.
9:15:23 AM
Page 5
Establishes Cost-Share Plan
Section 5 - AS 39.35.255
· Defines required employer contribution rate
· Defines how rate is applied
· Specifies minimum contribution rate
· Sets timing for contribution payment
· Defines contribution level for rehired retirees
· Defines normal cost and past service rates
Section 19
· Cost-share effective date July 1, 2007
Ms. Millhorn explained that employers would be required to
contribute to the plan an amount representing the employer rate
as approved by the Alaska Retirement Management Board (ARM). The
employer rate is calculated as the normal cost rate plus the
past service rate. The rate would be applied to the total of
"all PERS salaries" for the employees that participate in the
system. The employer rate could be no less than the normal cost
rate, a requirement established with the passage of SB 141
relating to changes to the retirement system by the 24th
Legislature. Contributions must be remitted within 15 days of
the close of the employer's pay period, under the provisions of
this bill. Past service contributions for retirees rehired under
the Retiree Return Program would be paid at the same level that
the employer is paying for active employees. Language in current
statute for past service rate is based on an individual
employer; new language for past service rate would align with
cost share plan design, which would be "uniformly determined for
all employers and applicable to each employer."
9:16:50 AM
Page 6
Section 6 - AS 39.35.260
· Requires rate to be calculated annually
· Requires participating employers to budget for
contributions
Ms. Millhorn informed that this would change the annual
calculation of the employer rate from a separate employer rate
to one uniform employer rate.
9:17:19 AM
Page 7
Section 7 - AS 39.35.260
· Adds subsection (b)
o Assigns 65% of unfunded liability to state at
6/30/2006
o Remaining 35% of unfunded liability to other PERS
employers
o Stipulates rate conditions
Ms. Millhorn outlined this information. The State's portion of
the unfunded liability of $5.5 billion would be $3.6 billion and
the remaining employers' portion would be $1.9 billion.
Ms. Millhorn remarked, "Once the rate for the State of Alaska,
as calculated in this subsection, is within one percentage point
of the rate for all other PERS employers, a separate rate for
the State" would no longer be calculated.
9:18:19 AM
Page 8
Section 9 - AS 39.35.610(b)
o Provides for intercept in event employer does not make
timely contributions
Ms. Millhorn pointed out this language would add a new section
to statute. It would allow the administrator of the PERS Plan to
"intercept the amount of contributions and interest due from an
employer" in the event that an employer fails to make timely
payment contributions. It would also allow the administrator to
claim delinquent contributions and interest "from any agency of
the State or political subdivision that has funds in its
possession of the employer that are to be distributed to the
employer that are not restricted by statute or appropriation to
a specific purpose." This would provide a method for collection
of overdue contributions and to prevent one employer "in
default" from adversely affecting the rate "shared by all
employers in the plan."
9:18:56 AM
Page 9
Section 10 - AS 39.35.615
o Addresses voluntary termination provisions and allows
employer to terminate from plan
o Prevents amendments to participation agreement under
cost-share design
Ms. Millhorn stated that two sections of the bill address
termination. Section 10 would allow an employer to voluntarily
terminate from the plan. It would also "remove the ability" of
an employer to amend its participation agreement. Under the
current plan, an individual employer funds any related costs as
a result of amendments to its participation agreement. However,
with a cost share plan, amendments by one employer have the
potential to create liability to all of the employers
participating in the plan.
9:20:09 AM
Page 10
Section 11 - AS 39.35.615(g)
o Sets timeframe for termination cost payment
o Payment plan or lump sum
o Allows for intercept of funds
o Provides for refund of excess assets, if any
o Allows for employer to join DCR [Defined Contribution]
Plan if termination cost paid in full
Section 11 - AS 39.35.615(h)
o Requires employer pay termination costs
Ms. Millhorn explained that these provisions would require an
employer terminating from the plan to pay the termination costs
within 60 days of their assessment. This could be paid in
increments or in full, and funds allocated to the employer from
other State agencies could be "intercepted" as payment for
delinquent termination costs. Refund of excess assets would be
made to the employer if those assets exceed the termination
costs and if in compliance with IRS regulations. An employer
could rejoin the plan at a future date once termination costs
were paid in full.
9:20:25 AM
Page 11
Section 12 - AS 39.35.620(i)
o Sets timeframe for involuntary termination cost
payment
o Payment plan or Lump sum
o Allows for intercept of funds
o Provides for refund of excess assets, if any
o Allows for employer to join DCR Plan if paid in full
Section 12 - AS 39.35.620(j)
o Requires employers under involuntary termination to
pay termination costs
Ms. Millhorn announced that this pertains to an employer's
involuntary termination from the plan and because she described
the provisions of Sections 10 and 11, she would not repeat the
same information.
9:21:32 AM
Page 12
Section 13 - AS 39.35.650
o Clarifies employer refund conditions
o Plan's termination
o Employer's termination, if assets exceed
liabilities
Reason
o Clarification of statute
o Codify existing practice
o Comply with IRS Code
Ms. Millhorn noted the refund could only be made if the assets
exceed liabilities at the time of termination.
9:22:26 AM
Page 13
Section 15
o Transition
o Provides for notification to employer of employee
groups covered under participation agreement
ƒ90-day time limit for amendments
o Past service credit not allowed during transition
Section 18
o Immediate effective date for employer notification
Ms. Millhorn explained that Section 15 would provide for the
administrator to notify every employer in the defined benefit
plan of the departments, groups, or other classifications of
employees the employer currently covered under their
participation agreement. Employers would have 90 days from
receipt of the notification to request an amendment to their
participation to either add or delete covered groups. Once the
90 days elapsed, employers would no longer be allowed to amend
their agreement in this manner.
9:23:56 AM
Page 14
Section 16
o Transition
o Provides for adoption of regulations
Section 18
o Immediate effective date to promulgate
Section 17
o Reviser's Instructions
o Change headings
ƒAS 39.35.615 (voluntary termination)
ƒAS 39.35.620 (involuntary termination)
Ms. Millhorn outlined these provisions.
9:24:33 AM
Page 15
Cost-Share Legislation
o Redesign PERS, DB plan - align with TRS
o All employers share cost/income of plan
(benefits, administration, investment)
o Uniform, less volatile, contribution rate
o Resolves accounting issues
o ARMB supports concept - Resolution 2007-04
o AML [Alaska Municipal League] supports concept
o Plan administration simplified
o Introduced by Governor as proposed solution
Ms. Millhorn read this information to "summarize and recap" the
presentation.
9:25:38 AM
Commissioner Kreitzer testified from her written notes as
follows.
For the last two years and coming into this year, rate
relief for PERS/TRS employers has been a focus of the
Legislature. With the introduction of SB 125, we hope to
broaden the discussion to include other options.
At a minimum, the cost-share bill does the things Ms.
Millhorn outlined for you in her presentation:
It resolves the issue of separate accounting for employer
contributions; It will address the issue that was raised
about members who work for more than one employer and have
liabilities assigned to the different employers based on
service and not on salary - employers do not believe this
is equitable. This will no longer be a concern by
implementing a cost-share plan.
There are some pieces of this bill that could be
contentious.
· The bill as written, requires municipalities to choose
employees to be covered in the plan. They have 90
days from the effective date of this bill to do that.
It removes some of the flexibility they now enjoy.
But, like TRS, a PERS cost-share plan means that costs
are shared among employers and we've tried to level
the playing field for all municipalities.
· Unlike the Alaska Municipal League plan - which
advocated the State pick up 85% of the unfunded
liability; or HB179, which advocates an 80/20 split
and a 5% employee contribution; SB 125 is Governor
Palin's discussion document for looking at the whole
picture of PERS/TRS funding. Moving to a PERS cost-
share plan allows all employers to pay one rate, which
encompasses 35% of the $5.5 billion unfunded
liability. That will bring rates down, and it will
save local governments money in their FY08 budgets.
· If a local government abdicates its responsibility to
pay its costs, SB 125 allows the State to intercept
any State funds bound for that community. This may
sound drastic, but as the ultimate deep pocket, the
State should have the flexibility to use this tool if
it fits the situation.
· Making a local government pay for a termination study
will save the plan from folks who just want us to run
numbers. Every time we do that, everyone else in the
plan pays for it. We raise it here as a policy issue.
That's all that's in the bill, but as I said the last time
I was here before you, we've tried to look at the situation
holistically. Instead of rate relief every year, can we
take a longer range view, still impact the State and local
governments' FY08 budgets in a positive way, and pay down
the unfunded liability so it doesn't continue to grow?
You'll have the technical fix bill before you tomorrow,
which allows us to calculate the employer rate across the
entire wage base. That change won't have much impact for
several years, until there are more employees in the
defined contribution plan - but, it will help keep the rate
lower. Employers will contribute the same; the rate will
simply appear lower.
So let's talk about what happens if the State:
o adopts this cost-share plan,
o is allocated 65% of the unfunded liability,
o holds harmless employers who would in FY08 have to pay
more,
o and if the State were to pay down 30% of the unfunded
liability through pension obligation bonds
In addition:
o the State puts $500.0 million toward extinguishing the
TRS liability and takes the risk for $2.0 billion in
pension obligation bonds.
9:30:02 AM
Commissioner Kreitzer overviewed "Cost Share Exhibits" [copy on
file.] She intended to demonstrate to the Committee the "thought
process" in developing this legislation. As concerns and issues
were raised, the Committee could understand how the proposed
plan was reached.
Exhibit 1
Estimated PERS Contributions
Level $ Amortization - Change to Cost Share-
Before 65/35 and POBs
Winners and Losers - FY 08 Base
[Five page spreadsheet listing every participating employer
and corresponding figures for Gross Salaries Estimated FY
08 (FY 07 gross salaries plus 3%); FY 08 Board Requested
Rate; FY 08 Estimated Contribution-Original; Average Rate -
05 valuation with level $ amortization; FY 08 Estimated
Contribution - Straight Cost Share; Loser FY 08 cost share
> FY 08 original; and Winner FY 08 cost share < FY 08
original.]
Commissioner Kreitzer reported that if the PERS plan converted
to a "pure" cost share plan in which the State and all employers
paid the same percentage in contributions, the State would
"save" $36 million, $25 million of which would be general funds.
However, such savings would cost all other employers
approximately $52 million. She did not anticipate this would
receive popular support. The contribution rate for all
employers, including the State, would be 39.76 percent.
9:31:02 AM
Exhibit 2a
Estimated PERS Contributions
Level $ Amortization- Cost Share 65% SOA- $1.7B in POB
Winners FY 08 Base
[Two page spreadsheet listing those employers whose
contribution rates would decrease from the FY 08 ARM Board
Requested Rate. Information for each includes Gross
Salaries Estimated FY 08 (FY 07 gross salaries plus 3%); FY
08 Estimated Contribution; Average Rate (FY 05 valuation);
Cost Share Contributions in FY 08; and Winners - FY 08 cost
share < original FY 08.]
Commissioner Kreitzer stated that this spreadsheet shows "who
the winners would be" under the proposed cost-share plan in
which the State accepts 65 percent of the liability. The
contribution rate requested by the ARM Board for these employers
would be higher than the Average Rate of 31.86 percent proposed
for FY 08 in the cost share legislation.
9:31:36 AM
Exhibit 2b
Estimated PERS Contributions
Level $ Amortization- Cost Share 65% SOA- $1.7B in POB
Losers FY 08 Base
[Three page spreadsheet listing those employers whose
contribution rates would increase. Information for each
includes Gross Salaries Estimated FY 08 (FY 07 gross
salaries plus 3%); FY 08 Estimated Contribution; Average
Rate (FY 05 valuation); Cost Share Contributions in FY 08;
and Losers - FY 08 cost share > original FY 08.]
Commissioner Kreitzer explained this spreadsheet shows those
employers with ARM Board requested rates for FY 08 that are
lower than the proposed Average Rate. The rate for the State of
Alaska would increase from 44.01 percent to 47.92 percent under
the provision in which the State would accept 65 percent of the
liability.
9:31:54 AM
Exhibit 3
Estimated PERS Contributions
Level $ Amortization-Cost Share-65% SOA-$1.7B in POB
Winners/Losers FY 07 as Base
Hold Harmless
Listing includes political subdivisions and school
districts that have received rate relief in the past.
[Four page spreadsheet listing employers whose contribution
rates would increase from their FY 07 rate and the
corresponding figures for Gross Salaries, Estimated FY 07
(FY 06 plus 3%); Gross Salaries, Estimated FY 08 (FY 07
plus 3%); FY 07 Adjusted Contribution Rate; FY 08 Board
Requested Rate; Average Rate (FY 05 valuation); Cost Share
Contributions in FY 08; Losers FY 08 cost share > FY 07;
Winners FY 08 cost share < FY 07. The State of Alaska is
not included in this list, nor are several other
employers.]
Commissioner Kreitzer directed attention to the total amount
listed in the Losers column of $82 million, which is the
increase from FY 07 to FY 08 for all employers. This amount
would be necessary to hold harmless the employers.
9:32:29 AM
Exhibit 4
[Spreadsheet containing the following information with
dollars listed in millions:
PERS
Contributions estimated in FY 07 (all sources)
$354.8
FY 08 Legislation and operating budget
SB 52/HB 97 Education Bill
Rate relief for school districts
PERS/TRS contributions $ 37.0 GF
SB 50/HB 95 Budget Bill
PERS Municipal and Political Sub Division
Rate relief $ 77.5 GF
Governor's Budget Amendments
PERS Payroll Base Correction (line 25) $ 0.6 GF
PERS Non-School Dist. ER rate increase
Relief (line 26) $ 0.2 GF
PERS School Dist. Payroll Base Correction
(line 27) $ 0.1 GF
SOA and University PERS increase
(In operating budget for executive
and legislative branches) $163.8 GF
Total Increase in FY 08 Governor's Budget $279.1 GF
Non-GF increases - Governor's Budget $ 62.0
Non-GF increases for other employers $ 2.1
PERS/TRS Estimated Costs (all sources) $698.1
TRS
Contributions estimated in FY 07 (all sources)
$164.3
FY 08 Legislation and operating budget
SB 52/HB 97 Education Bill
Rate relief for school districts
PERS/TRS contributions $170.5 GF
TRS Non-School Dist ER rate increase
Relief (line 29) $ 0.5 GF
TRS School Dist. Payroll Base Correction
(line 28) $ 1.7 GF
Transfer TRS increase funding from
agencies to TRS DB plan:
Education and Early Development
(line 22 and 30) $ 1.0 GF
Labor and Workforce Development
(line 23) $ 0.4 GF
University of Alaska (line 24) $ 13.3 GF
Total Increase in FY 08 Governor's Budget $187.4 GF
PERS/TRS Estimated Costs (all sources) $351.7
CSHB 97 amend TRS rate to normal cost
Not reflected in operating budget $ 78.0 GF
Commissioner Kreitzer shared that this exhibit was intended to
show "what everybody is paying". Most discussion would focus on
how the cost share plan proposed in this legislation would
affect budgets.
9:33:17 AM
Co-Chair Stedman interrupted to request more detail be provided
on the aforementioned and forthcoming exhibits.
9:34:01 AM
Exhibit 1
Commissioner Kreitzer further explained this spreadsheet. She
noted the FY 08 Board Requested rate for the State of Alaska
would be 44.01 percent and the contribution would be $373
million. If a pure cost share plan were adopted, the
contribution rate for all employers would be 39.76 percent and
the contribution amount for the State would be $337 million,
saving $36 million. This data is listed for each employer.
9:34:49 AM
Co-Chair Stedman asked if the contribution rates include both
normal costs and past service costs. He noted that the gross
salary calculation for FY 08 was a three percent increase to FY
07 gross salary.
9:35:14 AM
Commissioner Kreitzer deferred to Ms. Millhorn.
9:35:25 AM
Ms. Millhorn explained that the normal cost, which pertains to
the current expense, "in this particular case" is 14.48 percent.
This is a consolidated normal cost for all PERS employers. Many
of the FY 08 ARM Board requested rates are higher because past
service costs are included. Past service costs are the costs of
the unfunded liability. The requested rate of 44.01 percent for
the State of Alaska is comprised of 14.48 percent in normal
costs and the remainder in past service costs. Past service cost
is the unfunded liability amortized over 25 years. The normal
cost rate of 14.48 percent could be subtracted from the Board
requested rate for each employer to determine its past service
cost.
9:36:25 AM
Co-Chair Stedman understood that the contribution rate would be
14.48 percent for those employers with no unfunded liability.
Ms. Millhorn affirmed.
9:36:49 AM
Senator Huggins deduced that those employers listed on the
spreadsheet with a Board requested rate of 14.48 percent had no
past service cost.
9:37:06 AM
Ms. Millhorn clarified that a provision included in the changes
to the retirement system enacted through SB 144 in 2005,
established a "floor" that would not allow employers'
contribution rates be less than the normal cost. Therefore, the
actual normal cost for some employers could be less than 14.48
percent.
9:37:39 AM
Co-Chair Stedman pointed out that several employers had a
surplus and that those were mainly smaller communities, such as
the City of Koyuk. He requested a listing of all communities
with a surplus. The Committee would later discuss debt dilution
and consideration for those communities with any surplus versus
those with significant surplus.
9:39:38 AM
Co-Chair Hoffman understood that the Alaska Municipal League had
supported the concept of a cost share plan. He asked if the
Administration intended to present the details of the proposal
contained in this bill to the League and whether input would be
considered.
9:40:04 AM
Commissioner Kreitzer answered that yes, the proposal would be
detailed to the League. She acknowledged that not all employers
would support the plan.
9:40:28 AM
Co-Chair Hoffman commented that the number of "losers" is more
than the number of "winners". He anticipated the position of
support could change.
9:40:42 AM
Commissioner Kreitzer responded that, as demonstrated in Exhibit
3, some of the employers could be "made whole" at a cost to the
State of $82 million. She compared this amount to the $115
million proposed for rate relief currently under consideration
in the FY 08 budget.
9:41:01 AM
Co-Chair Hoffman agreed, but countered that the $82 million
appropriation is only proposed for one year in this legislation.
9:41:13 AM
Commissioner Kreitzer informed that she had requested the
Division of Retirement and Benefits to develop a plan to address
the "out years".
9:41:29 AM
Ms. Millhorn continued outlining Exhibit 1, explaining the Gross
Salary estimate for FY 08. The FY 08 Board Requested Rate
includes the "level dollar amortization" and is applied to the
Gross Salary estimate to determine the FY 08 contribution
amount.
9:42:31 AM
Ms. Millhorn stated that the consolidated cost rate for all 186
employers would be 39.76 percent under a pure cost share system.
Those amounts are listed for each employer in the next column.
The last two columns list the increase or decrease respectively
of each employer's contribution.
9:43:16 AM
Co-Chair Stedman remarked that the decreased amounts are not a
savings on the liability, but rather is a "budgetary issue" in
which the "cash flow call on the general fund" is reduced. The
liability would remain.
9:43:39 AM
Ms. Millhorn affirmed that the pure cost share scenario
reflected in this exhibit would not change the unfunded
liability.
9:44:00 AM
Commissioner Kreitzer noted that $25 million of the $36 million
State of Alaska "savings" is general fund. This proposal should
be presented "holistically" because it involves multiple
aspects.
9:44:28 AM
Co-Chair Hoffman asked whether the employee contribution rates
would increase, as they would benefit from the retirement
system.
9:44:55 AM
Ms. Millhorn responded that the contribution rate for employees
would remain unchanged. These rates are established in statute
as 7.75 percent for most public employees and 7.5 percent for
peace officers.
9:45:18 AM
Co-Chair Hoffman asked whether the Administration had determined
that employees should not contribute to the increases.
9:45:40 AM
Ms. Millhorn explained that the Alaska Constitution prohibits
increases to existing employee contribution rates.
9:46:13 AM
Senator Elton asked the number of State and University of Alaska
employees in comparison to employees of other members.
9:46:34 AM
Ms. Millhorn reported 33,000 active employees were currently
enrolled in PERS, with approximately 14,500 of those State
employees. She did not know the number of University employees
enrolled in PERS.
9:46:58 AM
Co-Chair Stedman requested a table categorizing State and
University employees and employees of other members delineated
by headcount and by liability.
9:48:16 AM
Exhibits 2a and 2b
Commissioner Kreitzer stated that these spreadsheets show the
impact of the cost sharing method and the proposed pension bond
issuance for each employer. These figures are not intended to be
exact, but rather provide a generalized overview.
9:51:14 AM
Exhibit 3
Commissioner Kreitzer noted that this spreadsheet follows the
same format as the previous exhibits with the exception that it
compares FY 07 to the proposal for FY 08.
9:52:24 AM
Co-Chair Stedman ordered the matter of pension obligation bonds
be deferred for possible consideration as separate legislation.
9:53:09 AM
Commissioner Kreitzer referenced the fourth and final page of
Exhibit 3, which lists the total increases between FY 07 and FY
08.
9:53:50 AM
Exhibit 4
Commissioner Kreitzer shared that this information was intended
to assist in facilitating discussions on proposed changes in
relation to the current status of the FY 08 operating budget
legislation. The Department was "still trying to get a better
figure" of the impact to the State and this table identifies the
general fund costs. The information would continue to be updated
to include all costs plus any additional items requested by the
Committee.
Commissioner Kreitzer detailed the information on Exhibit 4.
9:58:01 AM
Commissioner Kreitzer qualified that as this information was
being prepared, the House Finance Committee proposed a change to
the TRS normal cost rate and thus the notation on the table.
9:58:24 AM
Exhibit 5a
PERS Cost Share
2005 Valuation Rate - Level Dollar Amortization
SOA takes 65% of 6/30/2005 Unfunded and issues $1.7 billion
in POBs
[Spreadsheet and flowchart combination detailing the
Increase of FY 08 contribution amounts per ARMB set rates
from FY 07 contribution amounts per ARMB set rates; Cost
Share-05 Valuation rate-SOA takes 65%-$1.7B POB, Cost Share
contributions less original FY 08 contributions, and Relief
to Employers whose cost share rate (31.86%)> orig FY 07
rate for two unspecified categories of Political
Subdivisions, two unspecified categories of School
Districts, SE Regional Resource Ctr and Spec Educ Service
Agency. Also detailed are Original, Amend and Amended
amounts associated with Legislation: SB 50 - Poli subs-
Budget Bill, and SB 52 Education Bill. Impact on SOA from
OMB (excluding University) is listed as Post vacancy for
General Fund, Fed, Other and Total Funding Source. These
figures are totaled as follows.
Relief to Employers whose cost share rate
(31.86%)> orig FY 07 rate $82,233,141
GF increase over orig 08 budget (per OMB) 25,095,400
Rate from 44.01% to 47.92%
GF savings for University in 08 (per OMB) (2,542,600)
Rate from 33.75% to 31.86%
Total GF cost - revised 104,785,941
GF in SB 52 and SB 50 amended 115,409,583
GF added cost (savings) from proposal (10,623,642)
A notation reads as follows.
Assumptions:
PERS goes to a cost share
State picks up 65% of 6/30/2005 unfunded liability
$1.7 billion in POBs are issued 6/30/2007]
Commissioner Kreitzer detailed this information. She remarked
that $150 million is currently included in the proposed FY 08
operating budget for "rate relief". Of that amount, $78 million
is intended for political subdivisions and would be appropriated
in SB 50 and the remaining $38 million for school districts, the
Southeast Regional Resource Center (SERRC) and the Special
Education Service Agency appropriated in SB 52.
Commissioner Kreitzer then addressed the impacts of transition
to a cost share plan. The cost share utilizing the FY 05
valuation rate with the State assuming 65 percent of the
unfunded liability plus the issuance of $1.7 billion in pension
obligation bonds for political subdivisions would be $136
million and $79 million for school districts, SERRC and the
Special Education Service Agency. The cost share contribution in
the aforementioned circumstance less the currently proposed FY
08 State rate relief contributions would result in a savings of
$23 million for political subdivisions and $10 million for the
school district, SERRC and the Special Education Service Agency.
Commissioner Kreitzer continued outlining the cost to provide
relief to those employers that would have an increased
contribution rate under the cost share plan. That amount would
be $54,816,392 for political subdivisions and $27,416,749 for
school districts, SERRC and the Special Education Service
Agency. The total cost to hold harmless employers for FY 08
would be $82,233,141 and is reflected in Exhibit 3 on page 14 of
the handout.
Commissioner Kreitzer subtracted the $150 million already
included in the proposed budget for FY 08 from the total hold
harmless cost to achieve a savings of $10 million.
Commissioner Kreitzer clarified that these figures only pertain
to the PERS system and do not include the TRS system.
10:01:40 AM
Exhibit 5b
Estimated TRS Contributions With Level Dollar Amortization
$0.5 billion in cash, $2 billion in POBs
[Spreadsheet listing the school districts that participate
in TRS, the Department of Education and Early Development,
SERRC, the Special Education Service Agency and the
University of Alaska and the corresponding FY 07
Contribution Rate, FY 07 Estimated Contribution, FY 08
Board Adopted Rate, FY 08 Estimated Contribution, Total FY
08 increase over FY 07, FY 08 Rate after $0.5B deposit and
$2B POB, FY 08 Contributions after $0.5B deposit and $2B
POB, and FY 08 Contributions after $0.5B deposit and $2B
POB in excess of original FY 08 Contribution.]
Commissioner Kreitzer reiterated that the previous exhibit
pertained to PERS. This exhibit demonstrates the impact to
employers of a $.5 billion State appropriation and the issuance
of $2 billion in pension obligation bonds specific to TRS. She
understood this is not included in the legislation before the
Committee, but that it demonstrates the Administration plan to
address retirement system funding issues.
Commissioner Kreitzer cautioned that pension obligation bonds
"are not without risk". The most important "selling point" if
the legislature were to decide to issue these bonds would be the
benefit to the unfunded liability. The combined savings of such
issuance over 25 years would total $4 billion for both PERS and
TRS.
10:03:29 AM
Commissioner Kreitzer understood the difficulty in addressing
future needs with a limited amount of funding available.
10:03:36 AM
Exhibit 7a
State of Alaska
Public Employees' Retirement System
Employers who used SB 46 Rate Relief to pay down unfunded
liability
Fiscal Year 2006
[Table listing those employers that utilized all or a
portion of the State allocation intended to offset the
contribution rate increase for the purpose of paying down
that employers' unfunded liability. The amount of the
appropriation and the amount applied to the unfunded
liability for each employer are listed as follows.
Aleutians East Borough $50,537
Municipality of Anchorage
Appropriation: $6,615,843
Amount applied to unfunded liability: 748,094
Bristol Bay Borough 70,944
City of Cordova 3,419
Denali Borough 29,484
City of Fairbanks 305,784
City of Galena 68,486
City of Kachemak 3,068
Ketchikan Gateway Borough 206,307
City of Ketchikan 415,937
City of Kodiak 293,700
Kodiak Island Borough 113,667
Lake and Peninsula Borough 32,811
City of North Pole 107,535
City of Palmer 132,967
City of Petersburg 198,490
City of Quinhagak 1,552
City of Seward 192,943
City of Soldotna 139,473
City of Tanana 11,285
City of Unalakleet 13,698
City of Valdez 255,619
City and Borough of Yakutat 22,773
Total applied to unfunded liability $3,517,055
A notation reads as follows:
In FY 05 the City of Soldotna paid an additional
contribution of $1 million to PERS to pay down their
unfunded liability. Payment was made on March 10, 2005.]
Exhibit 7b
State of Alaska
Public Employees' Retirement System
Employers who used SB 231 Rate Relief to pay down unfunded
liability
Fiscal Year 2007
[Table listing those employers that utilized all or a
portion of the State allocation intended to offset the
contribution rate increase for the purpose of paying down
that employers' unfunded liability. The amount of the
appropriation and the amount applied to the unfunded
liability for each employer are listed as follows.
Aleutians East Borough $33,915
City of Bethel
Appropriation: $282,716
Amount applied to unfunded liability: 275,716
City of Cordova 112,553
City of Egegik 2,830
City of Fairbanks 333,653
City of Huslia 5,215
Kenai Peninsula Borough 702,515
City of Ketchikan 400,460
Kodiak Island Borough 118,047
City of Kodiak 314,368
City of Palmer 154,333
City of Petersburg 206,671
City of Saxman 5,637
City of Seward 186,026
City of Soldotna 136,756
Total applied to unfunded liability $2,988,695
A notation reads as follows.
The following employers have not used their relief balances
or requested it be used to pay down their unfunded
liability. Any balance remaining at 6/30/07 will be used to
pay down their unfunded liability. The Division last
reminded employers of these balances and their options on
2/20/07.
City of Akutan $16,941
City of Allakaket 3,056
City of Atka 4,628
City of Barrow 47,355
Denali Borough 7,889
City of Fort Yukon 24,209
City of Galena 69,984
City of Homer 248,456
City of Hoonah 35,299
City of Hooper Bay 1,576
City of Kachemak 1,193
City of Kaltag 870
Ketchikan Gateway Borough 214,696
City of King Cove 50,001
City of Klawock 31,917
City of Koyuk 1,664
Lake and Peninsula Borough 19,656
City of Mountain Village 1,786
City of Nenana 12,244
City of Noorvik 12,352
Northwest Arctic Borough 44,779
City of Pelican 7,657
City of Quinhagak 1,920
City of Saint Paul 74,829
City of Sand Point 38,396
City of Seldovia 2,405
City of Skagway 89,301
City of Tanana 7,302
City of Thorne Bay 10,435
City of Unalakleet 11,157
City of Unalaska 520,772
Total $1,640,725
A notation reads as follows.
All other employers who received rate relief are using
that relief to offset required contributions.
Commissioner Kreitzer suggested that the Committee's discussions
could include consideration of these employers and the amount
they would be required to contribute.
10:04:11 AM
Co-Chair Stedman requested further explanation of the two
exhibits.
10:04:18 AM
Commissioner Kreitzer deferred to Ms. Millhorn.
10:04:36 AM
Ms. Millhorn stated that Exhibit 7a is a list of those employers
that specifically applied to their portion of the unfunded
liability, the five percent rate relief appropriated to all
employers in FY 06. She exclaimed, "They are our heroes." She
highlighted the City of Soldotna that applied their rate relief
appropriation plus an additional $1 million.
10:05:39 AM
Ms. Millhorn then explained that Exhibit 7b included a list of
those employers that specifically did the same in FY 07. A
second list shows those employers that had not specified that
their rate relief appropriation be applied to their portion of
the unfunded liability, but had not expended those funds either.
If those employers take no affirmative action in expending the
funds or directing the Department to apply the funds to the
unfunded liability, those assets would eventually be
automatically applied to their unfunded liability balance.
10:06:56 AM
Co-Chair Stedman commented that the additional appropriation by
the City of Soldotna must have impacted its general fund and the
delivery of goods and services. The Committee must devise a
method in which to acknowledge these actions to ensure fairness.
10:07:31 AM
Commissioner Kreitzer anticipated this issue would receive
further discussion. The proposed cost sharing plan would result
in a $10 billion savings, which could be utilized to accommodate
these situations.
10:07:54 AM
Co-Chair Stedman asked whether the City of Soldotna was the only
employer to contribute funds in addition to the State rate
relief appropriation.
Commissioner Kreitzer and Ms. Millhorn indicated in the
affirmative.
10:08:17 AM
Co-Chair Stedman continued that the matter of addressing debt
dilution and compensating for employers that paid down their
portion of the liability should be resolved in as fair a manner
as possible.
10:08:57 AM
Commissioner Kreitzer continued her testimony as follows.
What we're proposing is a longer-term solution, rather than
a fix that artificially lowers the employer contribution
rate, but doesn't really impact the unfunded liability. To
me, that's like paying only the interest on a credit card,
instead of paying down the principal. Pension obligation
bonds are not without risk. The Committee will hear from
Department of Revenue representatives, if it chooses, about
the risks and potential rewards. As part of our analysis
of this approach, we've worked with our actuaries to come
to the $4.0 billion savings achieved by paying off the
unfunded liability sooner rather than later.
In closing Mr. Chairman - I want to be sure to be clear on
the record - Governor Palin comes from a municipal
background, as you all know. Her concern is that we don't
unduly burden local governments. We don't believe, when
taken as a whole, this package does that. But, we're here
to work with you, with the Legislature to craft a long-term
solution. There will be some give and take in any
solution, but we look forward to continuing the
conversation.
10:10:01 AM
Co-Chair Stedman reiterated his intent to focus on the cost
share issue and "clean up" of the provisions of the changes to
the retirement system implemented by SB 141 and to not commingle
the issue of pension obligation bonds. Once the liability was
"cornered in the room" the discussion could continue to finding
a solution.
10:11:03 AM
Senator Elton pointed out that Exhibits 1 through 5 showed the
average rate based on the FY 05 valuation. However, the
provisions of Section 7 of the bill utilized the FY 06 valuation
as the base. He questioned the discrepancy.
10:12:02 AM
Ms. Millhorn gave the following response.
Section 7, the allocation of the 65 percent is as of June
30, 2006. That's the projected. That includes the
experience study. So that looks at the assignment of 65
percent of the liability to the State of Alaska of
approximately $3.5 or $3.6 billion compared to the
valuation. The valuation as of June 30th of 2005, the State
of Alaska is at 57 percent and its $2.5 billion. So this
contemplates that that's the projected amount for the
valuation for June 30th of 2006, which is the higher amount
at 65 percent.
10:12:54 AM
Senator Elton again asked why if the FY 05 valuation was
utilized in the legislation, the FY 06 valuation was utilized in
the exhibits. He asked if the exhibits were amended to reflect
the valuation of June 30, 2006 whether the calculated amounts
would change.
10:13:26 AM
Ms. Millhorn answered that completed valuations for June 30,
2006 were not finalized. The ARM Board has adopted the employer
contribution rates based on the June 30, 2005 valuations. The
provisions of Section 7 of the bill would assign a portion of
the unfunded liability to the State based on the last available
valuation from 2005. The Division's chief financial officer has
collaborated with the actuary to devise the projected valuation
of the unfunded liability. This amount of $8.6 billion has been
discussed in this Committee and is based on the experience
study. The unfunded liability of PERS is $5.5 billion and "under
the valuation" the amount is $4.4 billion.
10:14:36 AM
Co-Chair Stedman asked the date the valuation as of June 30,
2006 would be available.
10:14:46 AM
Ms. Millhorn replied that the projected completion date is June
2007.
10:14:51 AM
Commissioner Kreitzer interjected that the intent of utilizing
the projected 2006 valuation data was to "take the known and be
able to run these scenarios and then take the worst case
scenario, which we know is coming, and put it in the bill." The
information contained in the exhibits is "the best we can give
you right now to understand the impact of what we're proposing."
10:15:13 AM
Senator Elton asked why the known valuations from June 30, 2005
were not utilized in the legislation.
10:15:45 AM
Commissioner Kreitzer answered that the older valuation data
could be utilized; however, the intent is to not "ignore" that
the unfunded liability is continuing to increase.
10:16:05 AM
Co-Chair Stedman spoke to the issue of the two-year "lag time"
in securing valuation figures. At the end of the fiscal year,
studies are conducted and upon completion are forwarded to the
ARM Board for use in setting employer contribution rates. The
ARM Board is attempting to accelerate this process. This delay
is partially the cause of the current situation involving the
significant unfunded liability.
10:17:00 AM
Senator Elton stressed the difficulty for municipal governments
to budget for their contribution before the amount was known. He
analogized this to "shooting in the dark".
10:17:32 AM
Co-Chair Stedman intended to conduct a "sensitivity analysis" to
compare the proposed assumption of 65 percent of the unfunded
liability by the State and 35 percent by the other employers, to
other ratios, including 60:40 and 70:30.
10:18:10 AM
Co-Chair Hoffman asked if the proposed contribution rates would
apply to both defined benefits and defined contribution
employees.
10:18:28 AM
Ms. Millhorn replied that this legislation would apply to the
defined benefit plan. This bill does include a provision that
would include the defined contribution plan "for purposes of
liquidating the past service liability."
10:18:52 AM
Co-Chair Hoffman asked the estimated savings that would be
achieved over time through attrition, as no new employees would
be added to the defined benefit plan.
10:19:05 AM
Ms. Millhorn explained that "in this case" the "payroll amount
will be spread over both the DB [defined benefit] and the DCR
[defined contribution]" according to a calculation based on the
amount necessary to "liquidate" the unfunded liability. This
would stabilize the rate and the amount received into the
retirement system. If the payroll rate were used only for the DB
members, that rate would have to increase. However, the
contribution rate to the DCR members would not "really change".
10:20:26 AM
Co-Chair Stedman directed attention to Section 10, which would
"remove the ability of the employer to amend the participation
agreement and allow only for termination of the plan." He
commented on the "surprise" to most communities, that the
calculation performed by the actuary would be higher if that
employer chose to terminate from participation in the PERS plan.
He gave the community of Ruby as an example.
10:21:06 AM
Ms. Millhorn responded that in the event an employer terminated
its participation agreement, each employee is given the right to
"vest or refund out of the plan". The termination costs would be
based on the individual election of the employees of that
employer. She gave an example of a "small employer" with 25
employees, in which several of those employees had less than
five years of service and elected to refund from the system. In
this instance, the termination cost would be lowered. If
however, those individuals elect to vest in the system, the
employer costs would be higher. The primary factor impacting the
termination rate is the associated medical costs, which could
make a "huge difference" to the employer. The actual amount
would be based on the number of years each employee had served.
10:22:46 AM
Co-Chair Hoffman asked if a transition period would be provided
to allow employers to remain in the plan or terminate from
participation.
10:23:06 AM
Ms. Millhorn replied that employers would have the ability to
voluntarily terminate from the plan at any future date. However,
an employer that terminated would be required to pay the
termination costs, which would include the analysis of the costs
for those employees who elected to vest in the plan.
10:23:37 AM
Co-Chair Hoffman asked if the termination costs would also be
levied on those employers characterized in the exhibits as
"losers" who would experience increased contribution rates for
remaining in the plan. He contended that differentiation should
be made on this matter between the "winners" and the "losers".
10:23:57 AM
Commissioner Kreitzer expressed wiliness to continue to discuss
these options. A significant factor would be how the final
legislation accommodates for winners and losers.
10:24:25 AM
Senator Olson asked the number of communities currently in this
"dilemma" in attempting to reduce their budget and "caught in
this situation".
10:24:45 AM
Commissioner Kreitzer answered that the Department has
determined that if the PERS system were converted to a pure cost
share plan, those communities listed in Exhibit 2b as losers
could face this situation. However, the Administration's
proposal would be to make those employers whole for FY 08 and to
develop a method that would "smooth out" for future years. She
intended to speak to the Alaska Municipal League on this issue.
10:25:40 AM
Senator Olson asked if about any "relief in sight" that could be
provided to those employers charged termination costs for
terminating participation in the PERS plan as a result of the
changes made in this legislation.
10:26:07 AM
Commissioner Kreitzer had not reviewed the matter to determine
the number of communities that could chose to terminate for
existing reasons versus those that could terminate as a result
of the adoption of a cost share plan. She would report on her
findings.
10:26:29 AM
Co-Chair Stedman identified the issue of the impact to those
communities with a surplus or a "small liability". "Pinpointing"
the exact "asset liability spread" of all employers would be
difficult.
10:27:11 AM
Senator Elton referred to earlier testimony stating that this
proposal is similar to the transition of the TRS system to a
cost share plan. He asked if any provisions in this legislation
were unique to the PERS system and not identical to the TRS cost
share plan.
10:27:36 AM
Commissioner Kreitzer answered that Senator Huggins had posed a
similar question and had requested the Department to provide a
comparison of the elements of TRS to the proposed PERS plan. She
asked if this would be sufficient to Senator Elton's needs.
10:27:56 AM
Senator Elton affirmed.
10:28:11 AM
Co-Chair Stedman announced that public comment on this
legislation would be forthcoming. Additional discussion would be
held on issues raised at this hearing; however, pension
obligation bonds would not be considered as part of the debate.
10:28:58 AM
Senator Huggins cautioned against release of insufficient or
incorrect information to the public. This occurred with the
passage of SB 141 and resulted in misunderstanding of the
implications of that change to the retirement systems. He
advised the Administration to be "up front" with all aspects of
the process relating to the current proposal.
10:29:27 AM
Commissioner Kreitzer expressed intent to "stay out in front" of
any misinformation, noting the Department would post all
exhibits and data on its website in one attempt to accomplish
this.
10:30:04 AM
Co-Chair Stedman encouraged those wanting to testify on this
bill to contact his office for scheduling purposes.
AT EASE 10:30:19 AM / 10:30:38 AM
ADJOURNMENT
Co-Chair Bert Stedman adjourned the meeting at 10:31:14 AM
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