Legislature(2011 - 2012)SENATE FINANCE 532
02/08/2012 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB187 | |
| SB171 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 187 | TELECONFERENCED | |
| + | SB 171 | TELECONFERENCED | |
| + | TELECONFERENCED |
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).
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 187 retirement fund sectional summary.pdf |
SFIN 2/8/2012 9:00:00 AM |
SB 187 |
| SB 187 sponsor statement.pdf |
SFIN 2/8/2012 9:00:00 AM |
SB 187 |
| SB187 020712 PERS savings.pdf |
SFIN 2/8/2012 9:00:00 AM |
SB 187 |
| SB187 020712 PERS Actuarial Data.pdf |
SFIN 2/8/2012 9:00:00 AM |
SB 187 |
| SB187 020712 reserves.pdf |
SFIN 2/8/2012 9:00:00 AM |
SB 187 |
| SB 171 dropout rate chart.pdf |
SFIN 2/8/2012 9:00:00 AM |
SB 171 |
| SB 171 JSD Support.pdf |
SFIN 2/8/2012 9:00:00 AM |
SB 171 |
| SB 171 report from Alaska Council of School Administrators.pdf |
SFIN 2/8/2012 9:00:00 AM |
SB 171 |
| SB 171 letter from haines.pdf |
SFIN 2/8/2012 9:00:00 AM |
SB 171 |
| SB 171 sample of district budgets.pdf |
SFIN 2/8/2012 9:00:00 AM |
SB 171 |
| SB 171 shares of per pupil spending.pdf |
SFIN 2/8/2012 9:00:00 AM |
SB 171 |
| SB 171 spending per student by state.pdf |
SFIN 2/8/2012 9:00:00 AM |
SB 171 |
| SB 171 sponsor statement.pdf |
SFIN 2/8/2012 9:00:00 AM |
SB 171 |
| SB 171 State snapshot reports.pdf |
SFIN 2/8/2012 9:00:00 AM |
SB 171 |
| SB 171 Support Comeau.doc |
SFIN 2/8/2012 9:00:00 AM |
SB 171 |
| SB 171 support emails 1.pdf |
SFIN 2/8/2012 9:00:00 AM |
SB 171 |
| SB 171 support emails 2.pdf |
SFIN 2/8/2012 9:00:00 AM |
SB 171 |