HOUSE BILL NO. 385 "An Act relating to additional state contributions to the teachers' defined benefit retirement plan and the public employees' defined benefit retirement plan; and providing for an effective date." 2:15:45 PM Co-Chair Stoltze asked the commissioner of the Department of Revenue (DOR) to discuss the bill and corresponding fiscal notes. 2:16:33 PM ANGELA RODELL, COMMISSIONER, DEPARTMENT OF REVENUE, reported that the bill incorporated the governor's plan to place $3 billion from the Constitutional Budget Reserve (CBR) into the Public Employees' Retirement System (PERS) and Teachers' Retirement System (TRS) trust funds; approximately $1.8 billion into PERS and $1.1 billion into TRS. She indicated that the bill stipulated an ongoing deposit into each of the respective funds every year; $343 million into TRS and $157 million into PERS. She commented on the sustainability of the governor's plan and alleged that it could be supported in future operating budgets, paid in full by FY 36. The governor's plan afforded the state to maintain its AAA credit rating. In 1961 Moody's Investors Service issued Alaska its first AA credit rating. At present, the state had a AAA ranking. She opined that the governor's plan placed the state in the needed financial position to address its liabilities and future contracts for major infrastructure projects including the gasline. A large cash infusion payment was required in FY 15. Yearly payments would become part of the operating budget starting in FY 16. She acknowledged that the payment amount may need to be adjusted up or down depending on actuarial and market experience. She urged the committee to support HB 385. Representative Wilson relayed her concerns about the vague language of the bill referring to a payment of "up to $500 million" rather than a specific amount. She pointed out that the state should make a yearly payment of $500 million to ensure meeting the specified timeline. 2:20:36 PM Commissioner Rodell responded that she anticipated the request would be $500 million; $343 designated in statute for TERS and $157 for PERS. She stated that in the bill the actuary was required to do performance calculations to ensure the state stayed on target with the timeline. The way the bill was currently written, the state could seek legislative approval for a larger or smaller payment amount depending on the performance of the state's trust funds. Representative Wilson clarified that the state would be adding $2.3 billion to the unfunded liability fund due to an anticipated $700 thousand not being included in the FY 14 operating budget. She also assumed that the state would be looking for $500 million out of the FY 15 operating budget. Commissioner Rodell responded affirmatively. 2:22:24 PM Vice-Chair Neuman reviewed the information from Buck Consultants, page 2 (copy on file). He referenced the funding policy and noted that the projections provided were not predictions but rather expectations supposing all of the actuarial assumptions were exactly realized including an 8 percent investment rate of return in each year from 2014 through 2043. He wondered if, at any time and period, an 8 percent average rate of return had been realized. Commissioner Rodell responded that the average rate of return for the previous 28 years was just under 8 percent. In analyzing different time periods the state had varying results. For example, the rate of return over the three previous years was 11.09 percent. She reported that historically there were years of both negative and positive earnings. In 2009, the state had negative earnings in excess of almost 20 percent. Vice-Chair Neuman stated that much depended on the stock market. Commissioner Rodell agreed. 2:24:27 PM Representative Costello discussed two fiscal notes for HB 385. The first note provided for a direct appropriation to the PERS account and had a fiscal impact of $1.8 billion in FY 15 and $157 million in FY 16 through FY 20. The second note provided for a direct appropriation to the TRS account and had a fiscal impact of $1.1 billion in FY 15 and $343 million in FY 16 through FY 20. 2:27:00 PM Representative Costello mentioned that of the two plans that had been put forth during the session the current plan before the committee had a higher contribution on an annual basis and would have a substantial effect on state reserves. She wondered about the health of the reserves over the next decade. Co-Chair Stoltze clarified the reserves of the available funds for state expenditures. Commissioner Rodell qualified that Representative Costello was referring to a document dated April 12, 2014 prepared by the Legislative Finance Division, not by DOR. The plan generated a large request on the reserve funds and was not taken lightly. She pointed out that the reserves would be an important part of budget discussions over the next five to ten years. The department looked at the draw on reserves required with something other than the governor's plan and concluded there was more value in maintaining reserves and putting the requests into the trust funds. She reported that in ten years the state reserves would be exhausted. She opined there would be significant discussion about the state's spending priorities over the following 5 to 10 years. She believed that the governor's plan would put the state in a sound financial position from a financial reporting and rating standpoint even if the reserves were at low levels. She indicated that the state would have a much better revenue picture in two or three years. She opined that the document would guide the legislature. She emphasized that the document did not indicate the state would need to tap into the permanent fund. Co-Chair Stoltze stated that it had been the legislative intent to provide a deposit into the pension fund. He believed that the efforts of the Legislative Finance Division to come up with a plan had been mischaracterized. 2:32:13 PM Representative Holmes stated her appreciation for the deliberative process that had taken place over the previous few weeks. She reiterated that both plans required a cash infusion of at least $3 billion up front. She clarified that the current plan the committee was evaluating consisted of $3 billion the first year and $500 million per year split between PERS and TRS through 2035. A partial payment covering the remaining balance was to be paid in 2036. Representative Holmes also acknowledged that payments could potentially be adjusted up or down, which would increase or decrease the payment time frame. She mentioned that the state was to meet with its actuaries on a regular basis, adjusting things as needed, in order to avoid an additional unfunded liability. 2:34:40 PM Commissioner Rodell concurred with Representative Holmes' review of the bill. She agreed that it was crucial to have the actuary continue to do progress assessments into the future. Representative Gara defended the plan proposed by David Teal and complimented him on a job well done. He acknowledged that Mr. Teal did the legislature a great service. The department gave the legislature its latest revenue source book indicating that within 10 years there would be a reduction in oil production down to below 300 thousand barrels per day and that excess money would not be available to the state. Mr. Teal's approach allowed some flexibility. The state satisfied its bond raters by paying a lump sum of $3 billion in 2014 in the current form of the bill. He asked the commissioner if she thought the bond raters cared whether the remaining debt was paid over 19 years, 20 years, or 24 years, for example, as long as the state made a substantial payment upfront to show its commitment to paying off its debt. He asked how the time frame affected the ratings. 2:37:53 PM Commissioner Rodell replied that the bond raters cared about the length of time and that a faster payoff was optimal. She stated that the commitment grew larger and more expensive with a longer wait. There was a balance between having budget flexibility without over burdening the state with additional debt. Representative Gara relayed that up to $500 million meant that the amount could be less than $500 million. He asked why "up to" was used versus identifying a specific number. Commissioner Rodell replied that the recommendation was given because earnings could be such that the funding ratio required a lesser appropriation. She knew from the Buck Consultants' letter, there would be some portion to finish the funding in 2036, potentially less than the $500 million. She added that another contribution could be solicited. 2:40:44 PM Co-Chair Austerman discussed the total liability of $11.9 billion as the combination of PERS and TRS. He asked what percentage of the total liability went to PERS and what percentage went to TRS. Commissioner Rodell replied that approximately two-thirds or $8 billion went to PERS and one-third or $4 billion went to TRS. Co-Chair Austerman asked about who was responsible for the $8 billion PERS unfunded liability. He commented that it was not all the state's responsibility. He went on to say that approximately 42 percent of the liability belonged to the municipalities. He furthered that of the 42 percent paid by the municipalities 22 percent of their payroll went towards PERS where they were carrying. He wanted to make sure that it was placed on record that the extra 20 percent that the municipalities had as a liability, was actually being paid for by the state. The state was not requesting a change. Commissioner Rodell concurred. 2:43:38 PM Representative Munoz MOVED to REPORT HB 385 out of committee with individual recommendations and the accompanying fiscal notes. There being no objection it was so ordered. HB 385 was REPORTED out of committee with a "do pass" recommendation and with two new fiscal notes from the State Assistance to Retirement Funds for the Office of Management and Budget. 2:44:12 PM AT EASE 2:50:49 PM RECONVENED