Legislature(2021 - 2022)BELTZ 105 (TSBldg)
02/22/2021 01:30 PM Senate LABOR & COMMERCE
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| Audio | Topic |
|---|---|
| Start | |
| Confirmation Hearing(s) | |
| SB55 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| *+ | SB 55 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
SB 55-EMPLOYER CONTRIBUTIONS TO PERS
2:08:57 PM
CHAIR COSTELLO reconvened the meeting and announced the
consideration of SENATE BILL NO. 55, "An Act relating to
employer contributions to the Public Employees' Retirement
System of Alaska; and providing for an effective date."
She stated that the intention is to hear the introduction, take
questions and hold the bill for further consideration. She noted
who was representing the administration.
2:09:54 PM
CAROLINE SCHULTZ, Chief Policy Analyst, Office of Management and
Budget, Juneau, Alaska, stated that SB 55 excludes the State of
Alaska, as an employer, from the 22 percent cap on payroll for
the Public Employment Retirement System. She presented the
following sectional analysis on behalf of the administration:
Sec. 1: Amends AS 36.35.255(a), the statutory 22
percent cap on payroll for PERS employer
payroll contributions, to specify an
exception referenced in new subsection (i).
Sec. 2: Adds a new subsection (i) that specifies the
state as an employer shall contribute to
PERS each payroll period an amount
sufficient to:
• Pay the actuarially determined normal cost;
• Contributions required under AS 39.30.370 to
the retiree health reimbursement arrangement
plan trust fund;
• Contributions required under AS 39.35.750 to
individual retirement accounts, for retiree
major medical insurance, and for occupational
disability and death payments;
• And past service cost for members at the
actuarial contribution rate adopted by the
Alaska Retirement Management Board under AS
37.10.220.
Sec. 3: Adds new section to uncodified law allowing
the commissioner of the Department of
Administration adopt regulations to
implement secs. 1 and 2 and specifies
regulations may not take effect until July
1, 2021.
Sec. 4: Immediate effective date for sec. 3.
Sec. 5: Effective date of July 1, 2021 for secs. 1 and
2.
2:11:31 PM
MS. SCHULTZ advised that she also attached the statutory
references to the health and employer contributions.
CHAIR COSTELLO asked what problem this bill solves and if the
expectation is that the percentage will rise and fall with the
actuarial costs.
MS. SCHULTZ suggested that Mr. Steininger discuss the concepts
behind the bill.
2:12:28 PM
NEIL STEININGER, Director, Office of Management and Budget,
Office of the Governor, Juneau, Alaska, stated that the
intention of SB 55 is to reduce the general fund cost of
employee retirement by increasing the share received from
federal and other funds in order to pay those costs. To the
question about fluctuation over time, he said the actuarial rate
is determined on an annual basis so it fluctuates each year. He
advised that Mr. Barnhill would provide some history on what the
percentages have been over the last several years so the
committee can get an idea about the range of fluctuation.
2:13:31 PM
SENATOR STEVENS asked what the practical impacts might be for
retirees and new employees.
MR. STEININGER answered that there is no impact to individual
retirees or the benefits paid to retirees or employees paying
into retirement plans. The intention is only to change the way
the costs are financed. "We still intend to pay the full
actuarial liability into the pension system; it is just how
we're able to charge and get participation from federal
programs."
2:14:26 PM
SENATOR GRAY-JACKSON asked for an example of an actuarially
determined cost.
MR. STEININGER answered that for FY22, the actuarial determined
cost is 30.11 percent of state payroll. He explained that 30.11
percent is a blended rate that covers the three defined benefit
tiers and the one defined contribution tier in the PERS
retirement system.
SENATOR GRAY-JACKSON asked for an example of the individual cost
for an employee in the defined benefit tier, as opposed to the
22 percent the state is currently paying.
MR. STEININGER directed attention to the sheet in the packets
that shows the retirement contributions for an example employee
and where the costs outside of salary fall. It provides a cost
comparison between current law and the proposed law, he said.
Under current law, the retirement benefit is 22 percent of the
sample employee's $60,411 salary. Towards the bottom of the
chart is the 8.11 percent or $4,899.33 state assistance payment,
which makes up the difference between the 22 percent cap and the
actuarial liability.
The state agency the employee works for pays 22 percent or $13,
290.42 into the retirement system. The $4,899.33 state
assistance payment is outside the agency's budget. The total
actuarial retirement liability for this employee is $18,189.75.
That covers the employee's actual service cost as well as past
service costs for liabilities the state has created in the past.
2:18:10 PM
SENATOR GRAY-JACKSON asked if employees would have to contribute
more than they do currently.
MR. STEININGER answered no. The bill only looks at the employer
side of the liability.
SENATOR GRAY-JACKSON asked if the "current situation will remain
whole."
MR. STEININGER confirmed that it would.
2:19:11 PM
CHAIR COSTELLO asked him to talk about the unfunded liability
and the number of members in PERS who are under defined benefit
versus defined contribution. She acknowledged that the bill does
not affect the Teachers Retirement System (TRS), but asked how
many individuals are in that system.
MR. STEININGER stated that the PERS unfunded liability is $4.8
billion and the TRS unfunded liability is just under $1.4
billion. He said he did not have the total number of PERS and
TRS employees, but perhaps Ms. Schultz had the information.
MIKE BARNHILL advised that he had the numbers.
CHAIR COSTELLO asked if there were additional questions for Mr.
Steininger.
2:20:37 PM
SENATOR STEVENS asked how the federal government would pay a
larger share.
MR. STEININGER directed attention to slide 6 and explained that
state programs pay 22 percent of payroll. It may be general fund
entirely or some federal participation. For example, a given
employee may be working on a federal public assistance program
that has a 25 percent match to a 75 percent federal share. That
employee's salary would be paid 25 percent with general funds
and 75 percent with federal monies.
He explained that the way the state bills the federal government
is based on the amount assigned to that program. The 22 percent
of payroll (the employer contribution) is the amount assigned to
programs in the state budget. That is currently capped in
statute. The additional 8.11 percent in FY21 to get to the full
actuarial amount is paid for in the state assistance or the on
behalf payment. The dark blue represents that on the right of
slide 6. That amount is paid 100 percent from general fund. SB
55 seeks to put the 8.11 percent into the amount assigned to
agency programs. Then when the Department of Health and Social
Services (DHSS) or another agency that has federal participation
negotiates its cost share with the federal government, they are
showing the full actuarial cost of that retirement system
payment.
MR. STEININGER said that once the state can show the total
amount of actuarial liability related to overhead costs for an
employee, it can be built into the cost allocation plans for
federal programs. He noted that this also applies to some other
programs that are funded with other funds through the state
budget.
MR. STEININGER said slide 7 shows the employer contribution
applied to an employee's budgeted cost. It shows up in the
actual program budget, not a separate section of the budget
where it cannot receive any federal participation.
2:24:08 PM
CHAIR COSTELLO asked if other states have a separate on-behalf-
of payment or if it is treated the way SB 55 proposes.
MR. STEININGER explained that every state treats their actuarial
liability differently but the on-behalf-of payment is unique. He
deferred to Mr. Barnhill to provide a more nuanced answer.
CHAIR COSTELLO asked Mr. Barnhill to respond to any of the
questions or go through the PowerPoint.
2:25:28 PM
MIKE BARNHILL, Deputy Commissioner, Department of Revenue,
Juneau, Alaska, reported that as of September 30, 2020 there
were 34,718 active members spread among the four tiers of the
Public Employee Retirement System (PERS). The defined benefit
Tiers I, II, and III had 10,963 employees, which is roughly 32
percent of the total membership. The remaining 23,755 active
members were in the defined contribution Tier IV. This is
roughly 68 percent of the total membership. These numbers are
updated quarterly and they show a steady migration to the
defined contribution Tier IV because defined benefit employees
are retiring.
CHAIR COSTELLO asked if he had the data for the Teachers'
Retirement System (TRS).
MR. BARNHILL said he had the data, but he wanted to clarify that
SB 55 does not apply to TRS. He recounted that as of September
30, 2020 there were 9,859 total active members in the three
tiers of TRS. The defined benefit Tiers I and II had 3,808
active members and the defined contribution Tier III had 6,051
active members.
2:29:23 PM
CHAIR COSTELLO referred to a document in the packet and asked if
there was a rationale for not including TRS employees, the
university, state corporations, and municipalities.
2:29:52 PM
MR. BARNHILL stated that the State of Alaska is the largest and
only PERS employer affected by SB 55.
SENATOR GRAY-JACKSON asked if the bill was an effort to address
the unfunded liability.
MR. BARNHILL answered no.
CHAIR COSTELLO asked him to proceed with the presentation,
weaving in any answers to questions he heard previously.
2:31:14 PM
MR. BARNHILL directed attention to the graph of the historical
PERS/TRS unfunded liability on slide 3 and the document in the
packets labeled, "SB 55: Employer Contributions to PERS." He
prefaced his comments by explaining that a defined benefit
retirement system defines the benefit by formula and sets it in
statute. In this system, investment managers invest the combined
contributions from employees and employers. The intention is
that the money from the contributions and investment earnings
will pay 100 percent of the defined benefits when they come due.
However, investment losses and inaccurate actuarial predictions
sometimes result in shortfalls, which are the unfunded
liability.
He pointed out the dramatic increase of PERS/TRS liability that
rose from zero in 2000 to more than $12 billion by 2013. It
starts to decline the next year and the unfunded liability in
2020 is roughly $6.2 billion. He said he would talk about a
couple of reasons the liability went up and why it went down and
he would give a couple of examples of how the legislature
addressed the issue.
MR. BARNHILL stated that the increase in the liability from 2000
to 2010 can be attributed to investment losses in 2000 and 2001
due to the dotcom bust; investment losses in 2009 due to the
great financial recession; and actuarial malpractice. He said
all public retirement systems in the country experienced similar
investment losses but Alaska was unique in having to wrestle
with actuarial malpractice over that same time.
He advised that the legislature did three primary things to
address the increasing unfunded liability. First, it enacted
Senate Bill 141 in 2005 that closed the defined benefit plan to
new employees and created a defined contribution plan for new
employees. In the new plan, the amount of the contribution is
fixed in statute and the employee invests those contributions.
In this plan, the employee bears the risk.
MR. BARNHILL explained that as the unfunded liability increased,
employer contributions skyrocketed and municipalities and school
districts faced insolvency. For perspective, employer
contribution rates in the 1990s were 10 percent or less for PERS
and about 12 percent for TRS, but rates tripled and quintupled
from 2000-2010. The legislature addressed the issue by enacting
Senate Bill 125 in 2008 that capped the employer contribution
rate at 22 percent of payroll for PERS and 12.56 percent for
TRS.
2:39:28 PM
MR. BARNHILL advised that prior to 2008, all employers paid
their contributions by building it into the personal services
line. With the advent of Senate Bill 125 in 2008, employers only
built the 22 percent into the personal services line, but the
actuaries continued to compute the actual actuarial contribution
rate. He directed attention to slide 4 that shows the history of
the actuarial contribution rate. He explained that the blue
horizontal line is the 22 percent cap rate and the orange that
moves up and down is the actuarial rate for 2008 through the
present. The spread between the two lines is what the State of
Alaska made up for PERS through state assistance, which is only
unrestricted general funds. Starting in 2008 the state lost the
ability to bill the entirety of the actuarial rate to all of the
funding sources that make up how the personal services line is
funded.
Responding to Senator Stevens' earlier question about why this
wasn't done earlier, he said the issue was discussed when Senate
Bill 125 was enacted in 2008 and he recalled seeing a
spreadsheet in 2011 that showed what the state was losing by not
billing for the State of Alaska to all its funding sources.
2:40:54 PM
SENATOR STEVENS asked if passing SB 55 would affect
municipalities' payments in any way.
MR. BARNHILL answered no; SB 55 does not change the amount the
state will pay PERS for State of Alaska liabilities, just the
way that it is done. Instead of paying the employer contribution
in two ways, the state assistance on behalf of the State of
Alaska will be collapsed into the personal services line, which
is the way it was paid in all years up to 2006.
2:42:51 PM
SENATOR GRAY-JACKSON asked for the ultimate goal of this
legislation.
MR. BARNHILL replied the ultimate goal is to pay for State of
Alaska PERS employer contributions with the full array of
funding sources used to pay the personal services line.
2:44:01 PM
MS. SCHULTZ added nuance stating that the goal is to continue to
make the full appropriation for the unfunded liability and the
full retirement contribution. The reason for paying the entire
employer contribution through the personal services line is that
it will save approximately $30 million in unrestricted general
funds from the state budget in the first year. The savings are
expected to increase in future years.
CHAIR COSTELLO offered her understanding that this is moving
entries on the ledger to capture more federal assistance and
increase transparency about the actual costs. Acknowledging that
the bill does not address the unfunded liability, she asked if
the administration had a position on the advantage of trying to
pay down that liability.
2:45:52 PM
MR. BARNHILL referred to slide 3 and explained that the unfunded
liability dropped from a little over $12 billion to just over $6
billion in the second decade of the century for three primary
reasons: substantial investment gains; the legislature paid down
the liability with $3 billion from the Constitutional Budget
Reserve in 2014; and the health costs decreased substantially.
He said he could not speak to the administration's position on
paying down the unfunded liability but the position of all
administrations in the last ten years has consistently been to
keep up with PERS/TRS liabilities and to contribute extra when
possible. He pointed out that the funding for the retirement
systems has improved from close to 50 percent to 80 percent
today, and that the state is keeping up with the annual payments
the actuary recommends.
2:49:21 PM
SENATOR STEVENS asked him to reassure PERS and TRS retirees that
their PERS and TRS retirements are not in jeopardy.
2:50:36 PM
MR. BARNHILL stated that the Alaska retirement systems are 80
percent funded and an actuarial plan is in place to achieve full
funding in 2039 or 2040. The state has a legal security for the
benefits supported under the plans per the anti-diminishment
clause in the Alaska Constitution. He emphasized that people
should not be concerned about the security of the plans.
2:52:20 PM
SENATOR STEVENS said, "What I hear you saying Mr. Barnhill is
that there really is no way the state can avoid paying the state
retirement that both PERS and TRS employees are now receiving."
MR. BARNHILL replied, "Never say never. Right now, we're in a
great place and we just need to have discipline. I don't know
what the next 20 years hold, but I think as long as we continue
the path that we're on we will make the payments when due."
SENATOR GRAY-JACKSON asked if there was any way that SB 55 would
affect the unfunded liability.
MR. BARNHILL replied he believes the actuaries will ultimately
show a zero actuarial impact.
2:54:48 PM
SENATOR GRAY-JACKSON said his response was why she asked the
question.
CHAIR COSTELLO encouraged the members to submit any further
questions to her office and she would forward them to the
administration for a written response.
She asked what effect an early retirement bill might have.
MR. BARNHILL explained that the actuaries compute the accrued
liability on an employee-by-employee basis. For employees who
take advantage of an early retirement plan (RIP) early in the
actuarial model, not enough has been collected from that
employee to fund their retirement, which creates an unfunded
liability. That is not the case for employees who retire later
in the actuarial model, but the general experience of RIP plans
is that the retiring employee goes back to work so it costs the
state and the employer more in the long run.
CHAIR COSTELLO asked how the state addresses retirees who are
collecting retirement and return to work, also known as "double
dipping."
MR. BARNHILL replied the systems do not permit double dipping
but the legislature has allowed, in certain instances, certain
types of positions to double dip. His belief, he said, is that
all those exemptions have expired. He added that the bigger
issue is that the retired employee returns at their higher
salary so the reduction in active personal services cost is not
realized.
CHAIR COSTELLO observed that the legislature has reasons for
rehiring retired individuals, and suggested the legislature
consider a rehire exemption for nurses during the ongoing COVID-
19 pandemic instead of bringing nurses to Alaska from out of
state.
3:00:12 PM
CHAIR COSTELLO thanked the presenters and held SB 55 for further
consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SLAC GOV Appointee ABC Dana Walukiewicz.pdf |
SL&C 2/22/2021 1:30:00 PM |
SLAC GOV APPOINTEE ABC DANA WALUKIEWICZ |
| SLAC GOV Appointee ABC Diane Thompson.pdf |
SL&C 2/22/2021 1:30:00 PM |
SLAC GOV APPOINTEE ABC DIANE THOMPSON |
| SLAC GOV Appointee ABC John Cox.pdf |
SL&C 2/22/2021 1:30:00 PM |
SLAC GOV APPOINTEE ABC JOHN COX |
| SB 55 v. A.pdf |
SL&C 2/22/2021 1:30:00 PM |
SB 55 |
| SB 55 Transmittal Letter.pdf |
SFIN 3/11/2021 9:00:00 AM SL&C 2/22/2021 1:30:00 PM |
SB 55 |
| SB 55 v. A Sectional Analysis.pdf |
SL&C 2/22/2021 1:30:00 PM |
SB 55 |
| SB 55 OMB Presentation 2.22.21.pdf |
SL&C 2/22/2021 1:30:00 PM |
SB 55 |
| SB 55 PERS Contributions One Pager.pdf |
SL&C 2/22/2021 1:30:00 PM |
SB 55 |
| SB 55 Retirement Contribution Examples.pdf |
SL&C 2/22/2021 1:30:00 PM |
SB 55 |
| SB 55 PERS History.pdf |
SL&C 2/22/2021 1:30:00 PM |
SB 55 |
| SB 55 v. A Fiscal Note 1.pdf |
SL&C 2/22/2021 1:30:00 PM |
SB 55 |
| SB 55 v. A Fiscal Note 2.pdf |
SL&C 2/22/2021 1:30:00 PM |
SB 55 |