Legislature(2019 - 2020)ADAMS ROOM 519
05/15/2019 09:00 AM House FINANCE
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| SB10 | |
| SB43 | |
| HB79 | |
| SB16 | |
| HB79 | |
| SB16 | |
| Adjourn | |
| SB16 | |
| Start |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| += | SB 43 | TELECONFERENCED | |
| += | SB 10 | TELECONFERENCED | |
| += | SB 16 | TELECONFERENCED | |
| += | HB 79 | TELECONFERENCED | |
HOUSE BILL NO. 79
"An Act relating to participation of certain peace
officers and firefighters in the defined benefit and
defined contribution plans of the Public Employees'
Retirement System of Alaska; relating to eligibility
of peace officers and firefighters for medical,
disability, and death benefits; relating to liability
of the Public Employees' Retirement System of Alaska;
and providing for an effective date."
9:41:14 AM
REPRESENTATIVE CHUCK KOPP, BILL SPONSOR, indicated the
hearing was the second for HB 79 in the House Finance
Committee. He explained that the since the prior hearing he
had met with individuals from the Division of Retirement
and Benefits and the Attorney Generals office, which
resulted in a committee substitute version. He also had
received an actuary report from the state's actuary, Buck
Consultants. In addition, the states Chief Investment
Officer, Bob Mitchell, Department of Revenue, was available
to testify. He indicated that Mr. Mitchell had performed
modeling on the current effectiveness of the plan for the
peace officers and firefighters. The brief presentation
would put into perspective why HB 79 was important. He
wanted to also hear from the states actuary.
9:43:10 AM
AT EASE
9:45:23 AM
RECONVENED
HOUSE BILL NO. 79
"An Act relating to participation of certain peace
officers and firefighters in the defined benefit and
defined contribution plans of the Public Employees'
Retirement System of Alaska; relating to eligibility
of peace officers and firefighters for medical,
disability, and death benefits; relating to liability
of the Public Employees' Retirement System of Alaska;
and providing for an effective date."
Co-Chair Wilson invited Representative Kopp to the table.
10:02:10 AM
AT EASE
10:04:16 AM
RECONVENED
BOB MITCHELL, CHIEF INVESTMENT OFFICER, DEPARTMENT OF
REVENUE, began the PowerPoint Presentation titled Target
Date Fund Simulation Exercise. He explained that in July
2006, the state moved from a defined benefit plan to a
defined contribution plan. He turned to slide 2 titled
Background:
In 2017, the Department of Administration requested
that the Department of Revenue build a stochastic
model that simulates the experience of defined
contribution employees enrolled in the Alaska Target
Date Retirement Trusts.
The purpose of the model was to test the likelihood
that 30-year employees will have sufficient assets to
last 30 years into retirement.
Four cases were tested: PERS with SBS, Police/Fire
with SBS, TRS, and TRS with 6.13% deferred
compensation contributions.
In 2019, the ARMB requested an update to this
analysis at the upcoming June defined contribution
committee meeting.
Also in 2019, Representative Kopp requested an update
to this analysis, incorporating additional
occupational scenarios, including Police/Fire without
SBS, 25-Year Career Police/Fire with SBS, 25-Year
Career Police/Fire without SBS.
Mr. Mitchell delineated that he built a Monte Carlo
simulation model. The model calculated, based on the
participants income each month, what the employee and
employer contributions were and how the investments grew
over time. The department used the target date fund
simulation exercise, which took a default investment fund
based on participants age and retirement date where the
asset allocation adjusted automatically. The division built
the model and ran it 10,000 times, called trials. The
trials were ranked from the lowest terminal asset value to
the highest. He indicated that if there was a positive
number, the trial was a success. The analysis occurred in
2017.
10:08:50 AM
He moved to slide 3 titled Target Date Fund Glide Path.
He elucidated that the slide showed a graphic depiction of
the target date glide path and was what the asset
allocation would look like over time beginning 30 years
prior to retirement. He noted that it began as 90 percent
equity and 10 percent fixed income allocation that became
more conservative as retirement approached; at retirement
equity was 30 percent. He highlighted slide 4 titled
Callan 2019 Return and Risk Assumptions. The slide
contained a chart of capital market assumptions, which were
estimates of returns and their volatility and the
correlation of the performance of each of the asset
classes. The information compiled by Callan and Associates
was used as the engine of investment performance.
Mr. Mitchell outlined slide 5 titled "Assumptions."
A blend of Callan's 2019 10-year & long-term capital
market assumptions were used. 10-year assumptions
were assumed during the first 10 years, were scaled
linearly to the long-term assumptions during the next
10 years, and the long-term assumptions were assumed
thereafter. Callan's generic fixed income assumption
was used in place of the specific fixed income mix
employed by the target date funds.
Inflation was set at 2.25%/year, with employee
salaries assumed to grow at 2.75%/year. Initial
consumption in retirement was set at 70% of earnings
at retirement. Consumption was assumed to grow with
inflation thereafter.
10,000 trials were used for each simulation. The
trials were rank-ordered, and the simulations that
represented the 25th-, 50th-and 75th-percentiles of
the distribution of outcomes are displayed.
A summary of the scenarios examined can be found in
the table below.
Mr. Mitchell explained that given the model focused on
replacement income, the model results was not overly
sensitive to the salary assumption.
10:10:38 AM
Vice-Chair Ortiz asked how important the accuracy of the
2.5 percent estimated inflation rate was and its impact.
Mr. Mitchell answered that 2.5 percent had been chosen
because it was the inflation number used by Callan. He
delineated that the rate was important because it made the
model internally consistent. He expected that if inflation
was materially different, asset class performance would
move in a similar direction over a long period of time. The
actual number should not overly impact the results.
Co-Chair Wilson cited the 2.75 percent salary assumption
amount and wondered whether it reflected the contractual
amount or were the steps incurred over the years. Mr.
Mitchell explained that the 2.75 percent was the number
discussed with the Division of Retirement and Benefits and
was not connected to salary schedules. He noted that given
that retirement consumption was a percentage of final
salary, if changes were made over time it would not be
directionally different than what was experienced. He
stated that the definition of success was a percentage of
final salary. He did not think there would be a very
different result using different numbers.
Co-Chair Wilson surmised that unlike the prior tiers, the
outcome was accumulated over years and was not based on the
earnings of the participants top 3 or 4 years. Mr. Mitchell
responded that she was correct.
10:13:27 AM
Representative Carpenter suggested that if a random number
was used such as 2.75 percent and an employee's salary was
much higher than what their rate had been over their
lifetime of employment, a spike in liability would occur at
the time of retirement. He deduced the 2.75 percent was not
reflective of what would happen at retirement for the
employee.
Co-Chair Wilson asked Mr. Mitchell if Representative
Carpenter's statement was accurate.
Mr. Mitchell responded in the affirmative. He indicated
that a model was simplification of reality. He provided an
example of an employee with compensation higher than the
assumption over the several years of employment. The
question became whether the 70 percent was still a relevant
number of the much higher income. He voiced that a model
had difficulty with the scenarios. The utility of a model
was to provide a directional sense of the effectiveness of
the program.
Representative Carpenter ascertained that that the plan
incentivized maximizing earnings in the final years before
retirement in order to gain the most amount out of
retirement. He thought it was counterproductive when
forecasting costs and risks from the state's perspective.
10:15:39 AM
Representative Kopp did not believe Representative
Carpenter was correct. He clarified that the model was
based on Tier 4 and compared it to what a new program would
look like. He suggested that the new model would disallow
the spiking that occurred in Tier 4. The model was designed
to prevent income spiking because it was spread out over a
longer time period and had to be averaged. Representative
Carpenter was only referring to the slide and information
presented to the committee presently. He wanted to point
out the fallacy to the thinking.
Mr. Mitchell pointed to the table at the bottom of slide 5.
He noted that the table reflected the information requested
by Representative Kopp. He pointed out that for each case
the information portrayed the level of employee and
employer contribution as a percentage of the participants
salary that was summed on the bottom line. He viewed the
data as a reference to determine the percent of salary that
was invested for retirement ranging from 25 percent to 13
percent.
10:18:00 AM
Mr. Mitchell moved to slide 6 titled Illustration of
Simulated Outcomes. The slide showed the simulated initial
retirement balance and the balances over time for 250
cases. He pointed to the very high cases and viewed them as
unrealistic. He offered that for that reason he ranked
the outcomes at the fiftieth percentile, the twenty-fifth
percentile, and seventy-fifth percentile as guiding data.
10:19:02 AM
Mr. Mitchell addressed slide 7 titled Results. The graph
reflected a PERS and SBS retirement 30-year retirement. The
participant had an estimated $1.86 million in retirement
assets, which grew to about $2.5 million over 30 years and
was the median case. The lower green line showed the
twenty-fifth percentile and the higher green line
represented the seventy-fifth percentile. He noted that not
all the trial outcomes were successful. The amount of
contribution based on percentage of income and the number
of years were the variables of all the plans.
Vice-Chair Ortiz asked Mr. Mitchell to define what it meant
to be unsuccessful. Mr. Mitchell responded that success was
defined as a participant consuming at 70 percent of their
final income that grew with inflation over a 30 year
period.
Vice-Chair Ortiz asked whether "unsuccessful" meant the
money ran out. Mr. Mitchell replied in the affirmative.
10:21:38 AM
Mr. Mitchell described slide 7 that showed the total
contributions at 25 percent. He moved to slide 8 that
depicted the 30-Year Police/Fire Plan with SBS. He
explained that the success rate was similar, but the dollar
figures were slightly different. Directionally it was the
same from a success perspective. He discussed slide 9 that
showed the 30-Year Police/Fire Plan without SBS. He
recalled that PRS plus SBS comprised 25 percent and SBS
represented 12 percent of the amount. The slide depicted
the contributions at 13 percent resulting in the assets
being depleted over time in the median case depicted by the
dark blue line. He added that even the 75th percentile
showed a declining trend.
Co-Chair Wilson was concerned that if a new tier was
introduced what guaranteed that the state would not end up
with a huge unfunded liability. She mentioned concerns with
negative effects on bonding if the state implemented a new
tier. Mr. Mitchell thought it would be better to direct her
question to the ARM board and the states actuary. The key
distinction of the defined benefit plan was that the risk
for paying the benefits rested with the employers. The risk
in the defined contribution plan was born by the employees.
There was no additional unfunded liability as a result of
the defined contribution component. He deferred to the
actuary for detailed data.
10:25:10 AM
Co-Chair Wilson understood that the state placed a certain
amount of funds to offset the prior Tiers liability. She
asked if the obligation was the same with the proposed
plan. Mr. Mitchell could not directly speak to the
question. He offered that the proposed plan contained an
assessment on employers that was a function of total
payroll, which was comprised of defined benefit and defined
contribution employees and was an assessment on the
employer and the total number of employees. He noted that
the defined contribution employees were not subsidizing the
defined benefit employees.
Representative Knopp wondered what aspects had the
potential to negatively impact the model. He asked if age
or the number of participants were risk factors in terms
of success.
10:26:49 AM
Representative Kopp responded that the current presentation
only looked at the effects of Tier 4 and depicted that over
time the result was only slightly better than a retirement
based solely on Social Security. He advised that the
state's actuary could comment on the proposed new tier and
any risk for unfunded liability. He indicated that the
presentation was focused on the current Tier 4 and how it
impacted the class of employees. He was not proposing to
open the proposed plan to other employees. The bill
proposed the new plan for a small number of employees. He
furthered that the plan was a hybrid and had a lot of
parallels with the defined contribution plan that kept the
liability with the employees and contained self-correcting
levers to ensure the fund would not go unfunded.
10:28:32 AM
Vice-Chair Ortiz asked what slide 9 showed. Mr. Mitchell
observed that the assets were insufficient at retirement to
sustain a participant for 30 years.
Co-Chair Wilson asked how the investments were chosen. Mr.
Mitchell responded that the default plan was used, and
different investments would provide different outcomes.
Representative LeBon asked how self-correcting levers
would protect the state with the proposed plan and how had
they failed the state in Tiers 1 to 3.
10:29:57 AM
Representative Kopp replied that in the proposed bill used
annual true-ups to determine whether the employee
contributions should increase, and the employer
contributions could change. In addition, the post-pension
retirement adjustments and COLA would be eliminated if the
actuary showed that the plan was not maintaining a high
funding standard. He noted that the elements were totally
new and had never been implemented in any plan. He recalled
earlier testimony from Washington state with a very similar
program that was currently funded at 110 percent.
Representative LeBon asked whether the employee bore the
brunt of the obligation to self-corrected the plan.
10:31:27 AM
KENT TRUITT, STAFF, REPRESENTATIVE CHUCK KOPP, responded
that the employer contribution was a variable lever. He
indicated that if the ARM board found that the plan was
accruing liability, they would have the ability to increase
the employer contribution. Currently, the total employer
contribution was 22 percent. In the proposed CS [not
introduced] the total employer contribution was 22 percent
and about 13 percent went to the plan, while the remainder
went to the unfunded liability of the prior unfunded tiers.
Mr. Mitchell continued to slide 10. The slide showed TERS
for Tier 4 with similar conclusions as the prior slide but
at approximately 15 percent (versus 13 percent in prior
slide) of the total contributions.
Vice-Chair Ortiz conveyed that teachers no longer
participated in Social Security. Mr. Mitchell understood
that many members of the TRS opted out of Social Security
and did not participate in SBS, but most state employees
had access to SBS. Vice-Chair Ortiz noted that the term
opt out presumed that a teacher had a choice, but
teachers did not have the option to choose Social Security.
Co-Chair Wilson relayed that Vice-Chair Ortiz's statement
was accurate.
Representative Kopp had worked for a municipality for many
years that offered neither SBS nor Social Security. He
added that many municipalities operated in the same manner.
10:35:38 AM
Co-Chair Wilson provided an example of a teacher working in
the summer and receiving Social Security. Mr. Mitchell
responded that the analysis did not take other employment
into consideration. Co-Chair Wilson wanted more information
regarding how outside employment would affect the plan.
Representative Knopp asked if most of the public employees
had bargaining units. He wondered if they participated in
retirement plans through the bargaining units.
Representative Kopp responded that all bargaining units
were different, it depended on the municipality.
Representative Knopp wondered the extent of who qualified
for the proposed plan. Representative Kopp responded that
volunteer firefighters would not be included in the plan.
epresentative Knopp asked about militia members.
Representative Kopp responded that militia members did not
fall under the definition of a peace officer.
Representative LeBon asked whether a participant in a
defined contribution plan who subsequently secured
employment accruing social security could receive both
benefits. He relayed his own experience where he was
entitled to both benefits. Representative Kopp responded in
the affirmative. He added that it was difficult to maintain
outside employment as a police officer and at retirement
age many police and firefighters had limitations due to
disabilities that limited other job opportunities.
Mr. Mitchell moved to slide 11 that graphically depicted
30-Year TRS + 6.13% Deferred Compensation teachers with a
deferred compensation amount that the employee would
otherwise pay if they participated in SBS. He relayed that
there was a match with SBS from 15 percent to 21 percent.
The outcome was materially better than slide 10 without
SBS.
10:42:12 AM
Mr. Mitchell reported that the following slides portrayed a
variation; working 25 years with or without SBS. He briefly
continued to slide 12 that graphically depicted 25-Year
Police/Fire + SBS and slide 13 illustrating 25-Year
Police/Fire w/o SBS. He noted that the shorter career and
lower contribution as a percentage of income demonstrated
unsuccessful outcomes. He emphasized that length of career
and contribution rate as a percentage of income were the
largest factors in the success of the plan.
Co-Chair Wilson asked where the 25 years came from.
Representative Kopp responded that Tier 3 with 25 years of
continuous service entitled the participant to full
retirement including medical benefits. Co-Chair Wilson
asked whether it was realistic to expect that most police
officers would make it to 25 years of employment.
Representative Kopp replied that 25 years could be a hard
lift for some officers. However, the cost of the plan had
to remain manageable and affordable.
10:45:33 AM
Vice-Chair Johnston asked if retirement was 25 years or the
age 55 to receive the medical benefits in tier 3 and tier
4. Representative Kopp answered that 20 years of work
qualified tier 2 for full retirement benefits and the tier
3 qualifier was 25 years or age 60.
Mr. Mitchell returned to slide 13 and highlighted that in
plans where a relatively low proportion of the participants
compensation was invested for retirement the probability
that their assets would last for 30 years after retirement
was below 50 percent.
10:47:39 AM
Mr. Mitchell turned to slide 14 titled Probability of
Success:
30-Year PERS + SBS = 69%
30-Year Police/Fire + SBS = 69%
30-Year Police/Fire w/o SBS = 22%
30-Year TRS w/o SBS = 31%
30-Year TRS + 6.13% Deferred Comp. = 56%
25-Year Police/Fire + SBS = 43%
25-Year Police/Fire w/o SBS = 6%
Success = retirement assets surviving 30 years into
retirement, assuming initial consumption level of 70%
of final take-home pay, increasing with inflation.
Representative Josephson referred to the top 2 bullets on
the slide. He surmised that the employee would not be able
to draw down their plan in order to achieve the results.
Mr. Mitchell answered in the affirmative. He added that
adjustments were not made for personal circumstances.
10:49:39 AM
Representative Carpenter asked why 70 percent of final take-
home pay was used in the model. Mr. Mitchell indicated the
number had been provided by the Division of Retirement and
Benefits as a reasonable goal.
HB 79 was HEARD and HELD in committee for further
consideration.