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." 11:45:23 AM Co-Chair Meyer MOVED to ADOPT SCSHB 385(FIN), Work Draft, 28-LSGH2241\U (Wayne, 4/17/14). There being NO OBJECTION, it was so ordered. 11:46:05 AM JAMES ARMSTRONG, STAFF, SENATOR KEVIN MEYER, discussed the committee substitute sectional analysis (copy on file): Section 1. This section amends the Teachers' Retirement System (TRS) state assistance statute (AS 14.25.085). This statute was enacted in 2008 by SB 125, and currently provides that the state shall appropriate the amount sufficient to fully pay the total past service liability for the year at the employer contribution rate adopted by the Alaska Retirement Management Board (ARMB). In practice, this means that the State appropriates the amount that reflects the difference between the TRS employer contribute ion rate cap of 12.56 percent and the actuarial contribution rate to the TRS trust funds. In FY14, this amount was approximately $317mm. Section 1 amends AS 14.25.085 to implement the Governor's proposal. Under the Governor's proposal, $1.1 billion would be appropriated from the constitutional budget reserve to the TRS trust fund, and then from FY16 - FY36, an annual flat payment of $343mm would be appropriated as state assistance. According to Buck Consultants, the Governor's plan would convert the actuarial approach for TRS from an actuarial ratemaking paradigm to a fixed contribution paradigm. In a ratemaking paradigm, each year the actuary calculates what contribution rate is necessary to pay down the accumulated past service liability. In Alaska, this has resulted in highly volatile employer contribution rates that over the past decade have ranged from 12 percent to over 70 percent. In a fixed contribution paradigm, the rate volatility is eliminated. Instead the annual contribution is fixed. In the case of TRS, the annual contribution is fixed at $343mm. What can change each year, however, is the term of the amortization. Under the Governor's plan, the initial amortization term is 21 years -fixed payments of $343mm through FY36. In the event of actuarial losses, the actuary may advise that the amortization term needs to be extended. So if there is a market downturn that results in investment losses in FY18, the actuary may advise that the amortization term must be extended to FY43 in order to fully amortize the TRS unfunded liability. Conversely, actuarial gains could result in a shortening of the amortization term of less than 21 years. Under the Governor's plan, the length of the amortization term necessary to pay down the unfunded liability will be evaluated each year. There could be cases where the actuarial loss over a particular period is sufficiently profound that payment of $343mm over any length of amortization term is insufficient to fully pay off the unfunded liability. In such case, the actuary will assign a date on which the TRS trust fund will exhaust its funds unless the $343mm annual payment amount is increased. The actuaries call this date the "cross-over" point. The last new sentence of the amendment to AS 14.25.085 is intended to address situations where a cross-over point is reached. It provides that the state will appropriate an additional fixed amount sufficient to amortize the unfunded liability over a period consistent with actuarial standards. Section 2. This section implements the same amendment as does section 1, for the Public Employees' Retirement System (PERS) state assistance statute, AS 39.35.280. A benefit to making this amendment in the PERS context, is that a fixed contribution paradigm aligns the respective interests of all PERS employers. PERS employers all share in the actuarial gains, through having a shorter amortization schedule, and share in actuarial losses, through having a longer amortization schedule. Under the current version of AS 39.35.280, PERS municipal employers are largely indifferent to the impact of market downturns that create new unfunded liability because their rate does not change, and the State absorbs 100 percent of the impact of any new unfunded liability. The Governor's proposal cost shares such new unfunded liability in a fair way by extending the amortization term, so that PERS employers pay at the 22 percent capped contribution rate for a longer period of time. Section 3. This section makes the bill contingent on the enactment of constitutional budget reserve fund appropriations to TRS in the amount of $1.1 billion, and to PERS in the amount of $1.9 billion. Section 4. Establishes the effective date of this act as July 1, 2014. Co-Chair Kelly queried the details of the legislation. DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION, looked at a collection of graphs titled "Cumulative Costs of Options to Eliminate PERS and TRS Unfunded Liability" dated 4/19/2014 (copy on file). He explained that the first graph represented the total PERS and TRS. He stated that the fine dashed line represented the fiscal impact of the legislation, which was $1 billion for PERS and $2 billion for TRS at a level percent. He stated that in 2015 there would be a $3 billion cash infusion. He remarked that the line started at $3 billion and showed its increased cumulative costs with added state assistance each year, with a total cost of approximately $10 billion in state assistance through 2040. The second graph represented the PERS system only, with a $1 billion starting point and a total cost of approximately $4 billion. He stressed that there was a discount of 3 percent, which was roughly the anticipated rate of inflation. The third graph was for TRS starting at $2 billion cash infusion and increases to a total cost of just over $6 billion by 2040. The numbers represent what was used to generate the graph. 11:51:07 AM Co-Chair Kelly asked for explanation of the fiscal notes. Mr. Teal replied that the TRS was $1 billion, and the source of the money was the Constitutional Budget Reserve (CBR). Because the CBR required a three-quarter vote, it would not be attached to Section 2 of the operating budget bill, rather it would be added to the Language Section. He stated that 2016-2020 showed reductions from the base, where the base had a level percent of pay under the current scenario. There would be a reduction of roughly 200 million per year from the current scenario under the legislation. The TRS fiscal note had $2 billion cash infusion from the CBR, and had savings of approximately $200 million per year in the out years. 11:52:34 AM AT EASE 11:53:38 AM RECONVENED 11:53:43 AM Senator Hoffman remarked that there were conversations in previous committees that looked at the funding level of 70 percent. He queried the percentage impact of PERS and TRS. Co-Chair Kelly replied that the legislation would put TRS beyond 70 percent immediately, and deferred to Mr. Armstrong. Mr. Armstrong pointed to the two new fiscal notes. He looked at page two, and referred to the funding ratios. He stated that the infusion would bring PERS to 68.8 percent by FY17, and would exceed 70 percent in FY18. The $2 billion infusion in TRS would bring it up 20 percent in one year. He noted that the following year had a cumulative increase of over 70 percent. Vice-Chair Fairclough discussed a conceptual amendment. She stated that there were some previous numbers that showed potential of the fund in the out years retaining a balance that should belong to the state, because the state was providing the initial cash infusion. She remarked that the current TRS funding ratio was 52.1 percent. The action before the committee would increase the number by 17 percent, and would be brought to 73 percent. She felt the funding could level, if given the right statements over time. Vice-Chair Fairclough MOVED to ADOPT Conceptual Amendment 1, 28-GH224\A.1, Wayne, 4/13/14 (copy on file). Page 1, line 2, following the second occurrence of "plan: Insert "and to excess assets of those plans on termination of the plans" Page 2, following line 6: "Sec. 2. AS 14.25.181(b) is amended to read: (b) If, upon termination of the plan, all liabilities are satisfied, any excess assets shall be deposited in the general fund, [REVERT TO THE EMPLOYERS AS DETERMINED BY THE ADMINISTRATOR] subject to the approval of the termination by the Internal Revenue Service. Sec.3. AS 39.35.115(e) is amended to read: (e) If, upon termination of the plan, all liabilities are satisfied, any excess assets shall be deposited in the general funds [REVERT TO THE EMPLOYERS AS DETERMINED BY THE ADMINISTRATOR], subject to the approval of the termination by the Internal Revenue Service." Renumber the following bill sections accordingly. Page 2, line 25: Delete "This Act is" Insert "Sections 1 and 4 of the Act are" Page 2, line 29: Delete all material and insert: "Sec 6. If secs. 1 and 4 of the Act take effect, they take effect on the effective date of the appropriations described in sec. 5 of the Act or July 1, 1014, whichever is later. Sec. 7. Except as provided in sex. 6 of the Act, this Act takes effect July 1, 2014." Co-Chair Meyer OBJECTED for discussion. Vice-Chair Fairclough explained the conceptual amendment. 11:58:00 AM Co-Chair Kelly announced that the conceptual amendment would ensure that the excess money be cycled back into the general fund. Vice-Chair Fairclough felt that the Department of Law needed to review the language in the conceptual amendment. Co-Chair Meyer REMOVED his objection. There being NO further OBJECTION, Conceptual Amendment 1 was adopted. 11:59:33 AM AT EASE 12:01:19 PM RECONVENED 12:01:46 PM ANGELA RODELL, COMMISSIONER, DEPARTMENT OF REVENUE, (DOR) shared that she had no concerns with the proposed changes or the amendment that was adopted. 12:03:15 PM Vice-Chair Fairclough stressed the importance of the legislation. She commended the efforts of the governor and the committee's effort on the legislation. Co-Chair Kelly appreciated Vice-Chair Fairclough's gratefulness. Co-Chair Kelly remarked that the Buck Consultants memo should travel with the bill. Co-Chair Meyer stressed that the unfunded liability included medical liability, and hoped that the bond raters would take note of the enormous cash infusion. He stressed that $3 billion was a substantial amount of money. Co-Chair Kelly remarked that the committee must be prudent, but felt that the legislation did not address the issue of the state's reserves. Co-Chair Meyer MOVED to REPORT SCSHB 385(FIN) out of committee with individual recommendations, Letter from Buck Consultants and the accompanying fiscal note(s). There being NO OBJECTION, it was so ordered. SCSHB 385(FIN) was REPORTED out of committee with a "do pass" recommendation and with two new fiscal impact notes from the Senate Finance Committee and the Governor. 12:17:15 PM AT EASE 12:17:50 PM RECONVENED