Legislature(2019 - 2020)SENATE FINANCE 532
01/30/2019 09:00 AM Senate FINANCE
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| Audio | Topic |
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| Start | |
| Presentation: Pers/trs Update | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
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 |