Legislature(2021 - 2022)ADAMS 519
04/21/2022 09:00 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB220 | |
| Consideration: Governor's Appointees: Alaska Mental Health Trust Authority | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 220 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 220
"An Act relating to the Public Employees' Retirement
System of Alaska and the teachers' retirement system;
providing certain employees an opportunity to choose
between the defined benefit and defined contribution
plans of the Public Employees' Retirement System of
Alaska and the teachers' retirement system; and
providing for an effective date."
9:17:52 AM
Co-Chair Merrick indicated the committee had last heard the
bill on April 14, 2002, and the meeting was the bill's
third hearing. There were 2 amendments before the
committee.
REPRESENTATIVE GRIER HOPKINS, STAFF, indicated there were
two amendments. One amendment was a technical fix to a
drafting error. The actuaries at Cheiron would be providing
a short presentation to answer Representative LeBon's
questions and request for a Monte Carlo analysis of the
risks and rewards of HB 220. They would also review the
potential cost changes if Vice-Chair Ortiz's amendment was
adopted. He was happy to answer any questions of members.
9:19:03 AM
AT EASE
9:19:42 AM
RECONVENED
Co-Chair Merrick indicated there were several new slides
for review by Cheiron. She invited Mr. Kalawarski to begin.
GENE KALAWARSKI, CEO AND PRINCIPAL CONSULTING ACTUARY,
CHEIRON, INC. (via teleconference), began to review the
additional slide deck dated, April 21, 2022 (copy on
file)[There is no formal title to the presentation]. He
began on slide 0 reviewing the impact of the original
version of HB 220. The slide was a reprint of what Buck had
in its March 24, 2022 presentation which, in the bottom
right corner, showed that the original HB 220 had a cost
impact of just under $230 million.
Mr. Kalawarski continued to slide 1: "Breakdown of
Increased Costs." He relayed that in the prior week he
showed that $229.8 million consisted of 2 parts: pension
and health. The information could be seen on the left
portion of the bar graph. He had also presented that with
the modification of HB 220 and an 8 percent contribution
rate the cost increase dropped to $125 million.
Mr. Kalawarski advanced to slide 2 showing the breakdown of
increased costs and the effect of eliminating health
changes which would make HB 220 cost neutral. He continued
that not only would the bill be cost neutral, but it would
also result in a small cost savings to the state resulting
from the cost savings related to teachers. He would turn
the presentation over to Mr. Hardcastle to review the Monte
Carlo demonstration Representative LeBon had requested.
9:21:43 AM
PETER HARDCASTLE, ACTUARY, CHEIRON, INC. (via
teleconference), would review the following four slides.
Slide 3 described the Monte Carlo projections. A Monte
Carlo projection integrated actuarial projections with
capital market projections set by investment consultants.
It allowed for the development of a range of possible
results to show best case and worst case scenarios and a
range of outcomes in between. It also reflected the
volatility and returns that would likely be experienced by
the portfolio in which the assets were invested.
Mr. Hardcastle continued to slide 4 to review the capital
market assumptions used. In order to come up with what he
was going to test he looked at the 10-year return
expectations from a survey Horizon Actuarial undertook each
year. The latest survey was from August 2021 and looked at
capital market expectations from over thirty investment
consultants and providers. For the current asset mix of the
systems, the 1-year expected average return was 6.82
percent, but there was a significant standard deviation of
12.73 percent in line with other systems. The chart in the
lower section of the slide showed a normal distribution
between the mean and the standard deviation. The black line
represented probabilities; the red line showed the mean of
the distribution; and the green line was the assumption of
7.38 percent. The assumption was slightly more than the
1-year expectation but well within probability.
Mr. Hardcastle turned to slide 5 and explained that a Monte
Carlo projection used random numbers to sum poll the many
possible paths for the investments of the fund. It also
ranked the paths from best to worst. The result was the
chart on the slide showing the state contributions (defined
benefits and defined contributions) to the Public
Employees' Retirement System (PERS) prior to HB 220. Green
in the chart represented low contributions and was good.
Red was bad. The line across the middle was the median
result of the projections.
9:25:07 AM
Mr. Hardcastle moved to slide 6 which was not really a
projection. He indicated the monochrome bars in the current
chart represented the range seen in the previous chart. The
Magenta line across the middle was the median result. The
colored bars with green being good and red being bad
represented the system prior to HB 220. The charts showed a
range of possible results. As time passed and with more
uncertainty, the range between the top of the bar and the
bottom of the bar widened.
Mr. Kalawarski added that the gold row at the bottom of the
slide showed what was being modeled in the Monte Carlo in
the colored bars: a return of 6.82 percent; a standard
deviation of 12.3 percent; asset smoothing at 5 percent;
zero people electing defined contributions; and the
contribution contributions rates for safety and the others.
The gray row showed the exact same statistics with the same
provisions being compared.
Mr. Kalawarski moved to slide 7 which showed HB 220 as
modified with an 8 percent member contribution rate. He
pointed to the magenta and black hashed lines. In the post
HB 220 Monte Carlo projection the expectation was lower and
became about equal at the end of the period. However, the
distribution was lower in the first 3 years. He relayed
that 90 percent of the time results would fall within the
same color. HB 220 also had a range of 8 percent to 12
percent of member contributions.
Mr. Kalawarski continued to slide 8 which reflected a
member contribution rate of 9 percent. The comparisons were
even more favorable. The black hash marks were always lower
than the Magenta hash marks. With the exception of the last
year, the top of the bars were less than the top of the
black and gray bars.
Mr. Kalawarski turned to slide 9 which showed a 10 percent
membership rate. He pointed out the difference became
larger as the contribution rates increased. The dynamic
could be seen on slide 10 (showing 11 percent) and slide 11
(showing 12 percent). There were several different risk
tools that could be applied if results fell into the bad
areas. Member contributions could be lowered. He concluded
the presentation and was available for questions.
Co-Chair Merrick thanked the presenters.
Representative Wool wondered if the height of the bar and
the different percentage probabilities had to do with the
return on stock market investments.
Mr. Kalawarski replied that Representative Wool was
correct. Poor returns appeared in red and strong returns
were represented in green or light gray.
Co-Chair Merrick invited Mr. Desai to review the fiscal
note.
AJAY DESAI, DIRECTOR, DIVISION OF RETIREMENT & BENEFITS,
DEPARTMENT OF ADMINISTRATION, deferred to Mr. Worley to
review the fiscal note.
9:31:41 AM
At EASE
9:31:58 AM
RECONVENED
Co-Chair Merrick invited Mr. Puckett to review the fiscal
note.
JIM PUCKETT, RETIREMENT AND BENEFITS, DEPARTMENT OF
ADMINISTRATION (via teleconference), was locating his
notes.
9:33:04 AM
AT EASE
9:33:57 AM
RECONVENNED
Co-Chair Merrick indicated that Representative Wool,
Representative Thompson, and Representative Carpenter had
joined the meeting.
Mr. Puckett reviewed the fiscal note by the Department of
Administration, component code PPvWg. The vast majority of
expense would occur in the first fiscal year in the amount
of $1.5 million. In order to administer the conversion of
employees moving from their original tier to the new tier,
temporary information technology (IT) assistance was needed
to do some programming of the IT platform and was explained
in the fiscal note narrative. The division would need to
hire 9 non-permanent positions consisting of 5 Technician
II positions, 3 Accountant III positions, and 1 Publication
Technician position. The division would also have commodity
expenses. The division would have to produce significant
education materials for the affected members of PERS and
TRS. Some of the Senior Benefit Counselors would have to
travel to work one-on-one with some interested members. He
spoke of the fiduciary responsibility to ensure that the
affected membership understood the consequences of their
decisions and whether they would make the conversion. He
was available for questions.
Co-Chair Merrick indicated the committee would take up 2
amendments.
9:37:01 AM
Vice-Chair Ortiz MOVED to ADOPT Amendment 1, 32-LS0717\B.1
(Klein, 4/19/22) (copy on file):
Page 9, line 11, following "2006,":
Insert "retired directly from the plan,"
Page 14, line 29, through page 15, line 5:
Delete all material.
Renumber the following bill sections accordingly.
Page 31, line 27, following "2006,":
Insert "retired directly from the plan,"
Page 37, line 28, through page 38, line 6:
Delete all material.
Renumber the following bill sections accordingly.
Page 41, lines 7 - 8:
Delete "sec. 79"
Insert "sec. 77"
Page 41, line 16:
Delete "sec. 79"
Insert "sec. 77"
Page 41, line 23:
Delete "sec. 79"
Insert "sec. 77"
Page 43, line 25:
Delete "secs. 29 and 30"
Insert "secs. 28 and 29"
Page 43, line 30:
Delete "secs. 1 - 28 and 31 - 80"
Insert "secs. 1 - 27 and 30 - 78"
Page 44, line 5:
Delete "Section 81"
Insert "Section 79"
Page 44, line 6:
Delete "sec. 82"
Insert "sec. 80"
Co-Chair Merrick OBJECTED for discussion.
Vice-Chair Ortiz explained that the purpose of the
amendment was to make the legislation a pure pension, cost
neutral bill. Adopting the amendment would reduce the
fiscal impact of the bill removing the $125 million
attributed to healthcare costs. By keeping healthcare
status quo eliminating the provision from HB 220, a person
would not need to retire from public employment to access
healthcare. A person would need to retire at age 65 at
which time they would become eligible for Medicare or they
could pay a monthly premium until they were eligible. He
reiterated the amendment would make the bill a "pension
only" bill. He deferred to the bill sponsor who could
further elaborate on the impacts of the adoption of
Amendment 1.
Representative Hopkins relayed that the goal of the
amendment was to keep healthcare status quo through the way
a person accessed the system. HB 220 would not change the
structure of the system, just how a person would access it.
The amendment made the bill cost neutral. He referred to
slide 1 of the Cheiron presentation. He noted that the left
bar reflect $104 million, the amount the state would have
to pay in additional pension payments. The action taken in
the committee substitute in the prior week, eliminated the
need for the $104 million because the employee contribution
rate was increased to between 8 percent and 12 percent. The
amendment by Vice-Chair Ortiz looked to eliminate the $125
million cost for healthcare. If the legislature made the
change, it would eliminate the need for additional payments
by the state. Employees who switched to the defined
benefits system would have to pay the required amount in
order to have earlier access to healthcare. He offered that
Betsy Woods from the Division of Retirement and Benefits
was in the room and available for questions.
9:40:34 AM
Representative Wool suggested the healthcare benefit in
HB 220 was being stripped from the bill. He asked if it
only applied to someone retiring prior to age 60 and who
was not eligible for Medicare until age 65. He wondered if
the healthcare benefit was to fill the gap between age 60
to 65.
Representative Hopkins indicated that without HB 220 in
place, a person leaving state employment at age 60 would
have to pay a monthly premium until they reached age 65 to
access the healthcare currently available in the defined
contribution system. The state put aside 1.5 percent of the
average salary of state employees into a health
reimbursement account (HRA) for the individual. The funds
in the HRA could be used for medical payments or to pay the
monthly premium. Originally, HB 220 proposed not requiring
employees to pay the monthly premium. The current version
of the bill would keep the healthcare benefits status quo.
Representative Wool provided a hypothetical scenario.
Representative Hopkins replied that the 1.5 percent that
the state put away for defined contribution employees (in
an HRA) could be used towards the gap premium until a
person turned 65. It could also be used for other eligible
medical costs.
Representative Wool provided another hypothetical scenario
to ensure that he understood the bill correctly.
Representative Hopkins replied that it was status quo.
Representative Josephson was aware of 3 percent, yet
Representative Hopkins mentioned 1.5 percent.
Representative Hopkins appreciated the correction. It was 3
percent from the state.
Representative Josephson asked if the HRA would have the
lifespan of an employee's wage which might last a few
years. He wondered if the employee would have to pay out of
pocket for the remainder of the gap period or find other
healthcare. He asked if he was correct.
Representative Hopkins responded in the affirmative. It was
not a requirement that a person opt for the state medical
plan. It would be the choice of the employee. For example
of their spouse had a healthcare plan, they would not have
to opt in.
9:44:58 AM
Representative Josephson indicated that if a person could
manage the payments until they were 65, they would qualify
in perpetuity for secondary insurance after Medicare.
Representative Grier responded that Representative
Josephson was correct.
Representative Wool asked what a person's benefits would be
once they reached age 65 if they had not paid the gap
payments from the time they left state service to the time
they turned 65. He asked if there was any difference in
benefits if a person jumped out at age 55 and jumped back
in at age 65.
Representative Hopkins replied that there would be a
difference. The person would not have access to the medigap
coverage if they left the system and did not make the
monthly premium.
Co-Chair Merrick asked how the healthcare portion of the
plan contributed to the unfunded liability when the state
switched to a defined contribution plan. She asked how much
of the problem was due to the costs of healthcare.
Representative Hopkins clarified if Co-Chair Merrick was
referring to 2006 when the plan was implemented. He would
have to do some research regarding the presentations to the
legislature at the time. He noted that it was a hefty
portion of the problem. The concern was that healthcare
costs could escalate out of control. By eliminating the
promise of medical coverage to retirees, the pension was
nearly 100 percent funded presently.
Co-Chair Merrick spoke with a couple of former legislators
who were present when the defined contributions plan was
crafted who expressed concerns with the healthcare portion
of HB 220.
Representative Wool asked about the time span as it related
to the $125 million.
Representative Hopkins responded that it would be over the
following 6 years.
Vice-Chair Ortiz urged support of the amendment.
Co-Chair Merrick WITHDREW the OBJECTION.
There being NO OBJECTION, it was so ordered. Amendment 1
was ADOPTED.
9:48:39 AM
Co-Chair Merrick MOVED to ADOPT Amendment 2, 32-LS0717\B.2
(Klein, 04/19/22) (copy on file):
Page 4, line 8:
Delete "before"
Insert "on or after"
Co-Chair Foster OBJECTED for discussion.
Co-Chair Merrick indicated the amendment was a technical
change. She asked Representative Hopkins to review the
amendment.
Representative Hopkins explained the amendment was the
result of a drafting error discovered late in the prior
week as the actuaries were going through the new committee
substitute in version B. They discovered there was a typo
on page 4, line 8. Before the amendment, the bill stated
that anyone hired before July 1, 2006 - the date the new
defined contributions system went into place. The bill's
pension system would only impact employees who were hired
after 2006 at the time the change went into place. The
amendment was simply switching the word "before" to "on or
after" to ensure the plan only applied to those employees
hired into the defined contributions system.
Co-Chair Foster WITHDREW the OBJECTION.
There being NO OBJECTION, it was so ordered. Amendment 2
was ADOPTED.
Representative Wool thanked the bill sponsor for bringing
the legislation forward. Another member who was not at the
meeting presently had mentioned the risk involved in
adopting a defined benefit plan. However, Alaska was the
only state in the entire nation that did not offer a
defined benefit plan for teachers and other public
employees. He suggested there was more risk in not adopting
the plan in HB 220. The state had felt the impacts of
recruitment and retention difficulties. He thought the bill
would be helpful. He would have liked to see health
coverage offered but understood trying to avoid additional
costs to the state. He suggested the issue could be
addressed at a later date.
Representative Josephson thanked the bill sponsor for his
work.
Co-Chair Foster MOVED to report CSHB 220(FIN) out of
Committee with individual recommendations and the
accompanying fiscal note.
Representative Carpenter OBJECTED.
A roll call vote was taken on the motion.
IN FAVOR: Josephson, Ortiz, Wool, Edgmon, Foster, Merrick
OPPOSED: Thompson, Carpenter
The MOTION PASSED (6/2).
CSHB 220 (FIN) was REPORTED out of committee with five "do
pass" recommendations, two "do not pass" recommendations,
and with one "no recommendation" recommendation and with
one new fiscal impact note by the Department of
Administration.
9:52:26 AM
AT EASE
9:53:13 AM
RECONVENED
^CONSIDERATION: GOVERNOR'S APPOINTEES: ALASKA MENTAL HEALTH
TRUST AUTHORITY
9:53:17 AM
Co-Chair Merrick brought up consideration of the Governor's
appointees for the Alaska Mental Health Trust Authority.
Her office communicated with members and determined the
committee did not have concerns with the governor's
appointees referred to the House Finance Committee for
consideration. She invited Co-Chair Foster to make a
motion.
Co-Chair Foster MOVED that the House Finance Committee had
reviewed the qualifications of the governor's appointees
and recommended that the following names be forwarded to
the joint session for consideration: Alaska Mental Health
Trust Authority Board of Trustees, Kevin Fimon and Agnes
Moran. The action did not reflect an intention by any
member to vote for or against the individuals during any
further session for the purpose of confirmation.
There being NO OBJECTION, it was so ordered.
9:54:08 AM
AT EASE
9:54:53 AM
RECONVENED
Co-Chair Merrick reviewed the agenda for the afternoon
meeting.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 220 Amendment 1. Ortiz 041922.pdf |
HFIN 4/21/2022 9:00:00 AM |
HB 220 |
| HB 220 Public Testimony Rec'd by 042022.pdf |
HFIN 4/21/2022 9:00:00 AM |
HB 220 |
| HB 220 Amendment 2. Merrick 042122.pdf |
HFIN 4/21/2022 9:00:00 AM |
HB 220 |
| HB220 - Cheiron Presentation New Additional Slides 4.21.2022.pdf |
HFIN 4/21/2022 9:00:00 AM |
HB 220 |
| HB 220 Public Testimony Rec'd by 042122.pdf |
HFIN 4/21/2022 9:00:00 AM |
HB 220 |