SENATE BILL NO. 187 "An Act creating the pension reserve fund; changing the manner in which employer contributions to the Public Employees' Retirement System of Alaska are calculated; repealing a requirement that the state make certain contributions, in addition to employer contributions, to pay the past service liabilities of the Public Employees' Retirement System of Alaska; preventing certain transfers to the Public Employees' Retirement System of Alaska from causing reductions in damage awards for wrongful or negligent conduct of third parties; adding to the duties of the Alaska Retirement Management Board; and providing for an effective date. 9:04:03 AM TIM GRUSSENDORF, STAFF, SENATOR LYMAN HOFFMAN, stated that the main purpose of the bill was to establish a plan to eliminate the unfunded liability in the Public Employees Retirement System (PERS), without paying hundreds of millions of dollars in annual state assistance to the trust fund. He explained that in FY08 the state took action to address the concerns of other political subdivisions of the state-managed PERS system. He noted that 60 percent of the unfunded liability was for state employees, but the other 40 percent was political subdivisions. He continued that in FY 08 a shared cost system had been adopted as a solution to the subdivision concerns; setting the employer contribution rates at 22 percent of payroll, and shifting the cost and excess of the percentage to the state. He relayed that the actions had not reduced the total cost of PERS, but had provided state financial assistance to the political subdivisions. He listed the events that had put the state in the position of having to make escalated annual contributions to the trust fund in order to keep the fund assets in-line with the accrued liabilities: · the stock market crash · the rising cost of healthcare · the extended life expectancy of the covered population · the lowering of the future investment expectations of the fund by the Alaska Retirement Benefit Board Mr. Grussendorf stated that the combination of events had put the state assistance costs, the costs above 22 percent, at an escalating, unsustainable rate. He explained that state assistance to the PERS system had grown from $108 million in FY 10; to $165 million in FY11, $242 million in FY12, and $307 million in FY13. He reiterated that the cost of state assistance was projected to escalate; reaching a peak of $533 million annually before turning downward near FY30. He illuminated that the legislation would create a separate reserve account that would supplement the PERS trust fund as needed to insure that the unfunded liability ratio was maintained at no less than 50 percent. He said that a $2 billion infusion of funds was projected to save the state $7.3 billion in annual payments over a 20 year period. He furthered that the plan would bring the PERS trust fund back on track and would allow the state to recover its original $2 billion investment. 9:08:09 AM Mr. Grussendorf cited the sectional analysis (copy on file). He explained that Section 1 prevented money transfers from the proposed pension reserve fund, to the PERS system, from causing reductions in potential damage awards for wrongful or negligent conduct of third parties. He furthered that Section 2 added management of a proposed pension reserve fund to the primary mission of the Alaska Retirement Management Board (ARMB). 9:08:39 AM Mr. Grussendorf continued that Section 3 added duties related to the management of the proposed pension reserve fund to the existing duties of the ARMB, which included making annual comparisons of the value of the assets of the PERS system and the value of the combined assets of the proposed pension reserve fund and the total liabilities of the PERS system. He explained that Section 4 established a pension reserve fund, allowed appropriations to the fund, and required money appropriated to the fund be spent on the past service liability of PERS or returned to the general fund. 9:09:06 AM Mr. Grussendorf elaborated that Section 5 allowed the ARMB to determine the percentage rate that employer contributions to the PERS system were based on. He furthered that Section 6 added the requirement that; notwithstanding subsection (i), proposed in section 7 of the bill, the annual employer contribution rate may not be less than the rate sufficient to cover payment of employer contributions required for both the defined contribution plan of the PERS system and for the teachers' and public employees' health reimbursement arrangement plan trust fund, as required by the defined benefit plan of the PERS system. 9:09:45 AM Mr. Grussendorf discussed Section 7, which required that the rate used to calculate employer contributions under Section 5 of the bill may not exceed 22 percent when the assets of PERS and the pension reserve fund, combined, are equal to or greater than 60 percent of the total of that system's liabilities. 9:10:08 AM Mr. Grussendorf explained that Section 8 eliminated a reference to AS 39.35.280, in connection to retiree medical benefits, because AS 39.35.280 would be repealed by section 9 of the bill. 9:10:19 AM Mr. Grussendorf concluded that Section 9 repealed AS 39.25.280, a law that required the state to annually contribute money to the past service liability of the PERS system in addition to the contributions the state made to the system as an employer. He added that Section 10 would establish an effective date of June 30, 2012. 9:10:55 AM Senator Olson asked how the state acquiring $7.2 billion three years after the initial $2 billion deposit into the fund had been calculated. Mr. Grussendorf deferred the question to the director of legislative finance. He added that modeling had been done by Buck Consultants that would be presented to the committee. 9:11:38 AM DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION, introduced the slide, "Cost of State Assistance to PERS -- with and without a $2 Billion Deposit." He stated that the annual cost depicted on the graph appeared as a small and fairly flat line because the annual costs were in the $100's of millions, while the scale of the graph was in billions. He stated that as the $100's of millions in contributions accumulated, the graph reflected the total cost as it grew over time. He relayed that through FY12 the state had contributed approximately $1 billion to the PERS trust. The graph illustrated that a one-time FY13 contribution of $2 billion would allow the state to avoid $2 billion in annual contributions by FY18, while maintaining an employer contribution rate no higher than 22 percent. He shared that the content of the graph had been determined by using a model produced by the actuarial company Buck Consultants. He added that the company was working on modifications to the model that would allow the state to work with the trigger mechanisms built into the legislation. 9:14:26 AM Co-Chair Hoffman asked if the calculation of $5.3 billion included the repayment of $2 billion. Mr. Teal replied in the negative. He clarified for the committee that the bill allowed for recovery of money in the long-term. He said that because of the large unfunded liability the state currently faced, too much money was being contributed to a closed system. He added that normal actuarial methods would cause over contribution to the fund. He explained that the bill backed away from that model and allowed the state to recover the $2 billion in later years. 9:15:52 AM Mr. Teal discussed the slide, "Projected Reserve Balances." The graph illustrated that the reserve balances would drop by $2 billion with the deposit, but because the state was not making annual contributions the reserve balance would recover and end up being higher than it would if annual payments were to continue to be made. He observed that the balance would drop down given the numbers for projected oil revenue and expenditures. 9:16:50 AM Mr. Teal turned to the chart, "PERS Actuarial Projection -- with $2 billion Deposit to a Reserve Fund in FY13 (Buck Model)." 9:17:34 AM AT EASE 9:17:35 AM RECONVENED 9:18:00 AM Mr. Teal relayed that the chart showed the assets and liabilities of the fund. He stated that the goal was to match assets to liabilities. He explained that liabilities continued to increase in an open system; because the state had closed the system, as the last person under defined benefits retired, the curve would turn downward. He asserted that the concept embodied in the legislation was that the state did not need to follow standard actuarial methods, which would have the state chase the ever extending liability curve, and instead join the curve as it declined. He detailed that the bill would put $2 billion into the reserve fund, which raised the funding ratio. He explained that the funding ratio was the ratio of assets to liabilities. He said that a 100 percent funded system meant that the assets and liabilities were equal, and the lower the number, the worse off the system. He stated that the current PERS funding liability was at 62 percent, the deposit would push it up towards 70 percent where it would hover and decrease back to 65 percent before it began to recover and went up to full funding. He noted that according to the graph where assets and liability were equal the state was at 100 percent funded. He highlighted that the chart illustrated the rate at which employers paid. He remarked that the rate was currently capped at 22 percent, and would remain at 22 percent until the funding ratio began to climb. He said that when the ratio began to climb the rate would fall towards the normal cost of the system and the state would begin to recover excess money from the fund. He likened the legislation to a very long-term loan to the retirement system. 9:20:41 AM Mr. Teal offered that the logical progression was simply that the bill established a reserve fund because money contributed directly to the PERS trust fund could never be withdrawn. He said that putting the money into a reserve fund would keep it from being locked-up. 9:21:11 AM Mr. Teal explained that the bill would establish transfer mechanisms. The first mechanism would be a 50 percent trigger that would ensure that money would move from the reserve account to the trust fund proper in order to maintain a 50 percent funding ratio. He admitted that the 50 percent number was arbitrary and that some could consider it too low, but that the model worked fine at 50 percent. He stated that the second transfer mechanism, at 95 percent, would allow the state to recover the loans. Once the fund was healthy enough to have a funding ratio of 95 percent, money would begin to flow back to the general fund. He relayed that the third trigger, at 60 percent, included the trust fund plus the reserve account and divided by liability. He communicated that the trigger was designed to prevent future legislatures from raiding the fund. 9:24:11 AM Co-Chair Hoffman referred to the chart, "Cost of State Assistance to PERS -- with and without a $2 Billion Deposit." He wondered if the 40 percent liability would be directly attributed to municipalities. Mr. Teal responded that the ratio of 60:40 was the current standing. He said it could be argued that the state should not bear the responsibility to put up the entire $2 billion to keep rates at 22 percent, and that municipalities should put up their 40 percent. Under that scenario the state would contribute $1.2 billion and the municipalities would have to come up with $800 million. He did not believe that municipalities would be able to come up with the funds. He furthered that it was a bonus to municipalities that they did not have to produce a share of the unfunded liability; however, they were continuing to pay a portion of the unfunded liability because they continued to pay the 22 percent rate, half of which was a contribution to past service costs. He stressed that the state was not absorbing the entire amount, but a large portion. 9:26:18 AM Co-Chair Stedman stated that the committee would delve into further detail upon the next hearing of the legislation. 9:26:34 AM Senator Ellis thanked Mr. Teal for working with his office on the legislation, particularly on the reserve fund concept. 9:27:09 AM Senator Thomas asked whether conclusions and recommendations from the ARMB were reflected in the bill. Mr. Teal responded that the board had examined the option presented in the bill. He did not believe that the board supported, nor understood, the legislation. He thought that the board should be questioned directly. He noted that the board had reviewed a number of options, and that those options would be before the committee in the coming weeks. 9:27:45 AM Co-Chair Stedman added that the board would be before the committee in the future. 9:28:21 AM SB 187 was HEARD and HELD in committee for further consideration. Co-Chair Stedman observed the fiscal note: NEW FN (DOR).