Legislature(2013 - 2014)SENATE FINANCE 532
04/12/2014 10:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB193 | |
| SB209 | |
| SB141 | |
| SB209 | |
| SB220 | |
| HCR15 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 220 | TELECONFERENCED | |
| + | SB 209 | TELECONFERENCED | |
| + | SB 193 | TELECONFERENCED | |
| + | SB 141 | TELECONFERENCED | |
| += | HB 32 | TELECONFERENCED | |
| += | HCR 15 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE BILL NO. 220
"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."
Co-Chair Kelly noted that the committee was hearing the
bill for the first time.
ANGELA RODELL, COMMISSIONER, DEPARTMENT OF REVENUE, pointed
to a PowerPoint presentation titled "PERS/TRS Funding
Solution" dated April 2014 (copy on file). She stressed
that pension funding, and its associated liability was a
concern for many years. She stated that she had evaluated
the history, and shared that there had been several Arm
Board meetings that addressed the severity and urgency of
the unfunded liability.
MICHAEL BARNHILL, DEPUTY COMMISSIONER, DEPARTMENT OF
ADMINISTRATION, pointed to slide 3, which outlined the
organization of the state's pension system. He stated that
the far left showed the DOR Treasury Division, the middle
showed the Alaska Retirement Management Board, and the
right showed the Department of Administration (DOA). He
moved to slide 4. He announced there were currently 27,000
active employees and close to 42,000 retirees. He looked at
slide 5 titled "Benefits." The state was currently paying
out $1 billion in benefits. All told the state was looking
at over $130 billion in benefit payments over the next 70
years. He stressed that the unfunded liablity was
approximately $11.9 billion
5:25:43 PM
Mr. Barnhill looked at the basic actuarial formula on slide
6. He stated that hopefully the amount would equal the
benefits. He stated that it was 7.5 percent for teachers,
and the amount typically did not change, but it had changed
in the past. He remarked that TRS had gone from 12 percent
to over 70 percent. He pointed to a variety of actuarial
assumptions. He turned to slide 7 titled "Events":
2002 - Milliman actuarial audit; dotcom collapse
2003 - FY 2002 valuations released with revised
assumptions. $4.1 billion unfunded liability
2005 - SB 141 enacted: DB plans closed; DC plans
created; PERB/TRB/ASPIB sunset; ARM Board created
2007 - ARM Board files suit against Mercer for
actuarial negligence; SB 123 enacted: PERS cost share
2008 - SB 125 enacted; employer contribution rates
capped; state assistance begins; Great Recession
begins
2009 - PERS/ TRS investment loss: 20.5 percent
2010 - Mercer litigation settled for $500 million, net
$403 million; other states begin to cut defined
benefits, change plans
2012 - Arm Board adopts level dollar amortization ;
$11.9 billion unfunded liablity
2013 - 12.5 percent investment gain; recession over
question
5:31:39 PM
Co-Chair Meyer queried what kind of cash infusion it would
take to get to the 80 percent. Mr. Barnhill answered that
if the $3 billion was funded the 80 percent would not quite
be reached. He looked at the actuarial letter, which
outlined the date as to which it would be met.
Co-Chair Meyer asked if it was easier to reach 80 percent
if there was a focus on only one approach. Mr. Barnhill
replied that it was difficult to say, when the discussion
was regarding appropriating billions of dollars from the
Constitutional Budget Reserve (CBR). He stressed that TRS
had a $4.7 billion unfunded liability, so if that was
funded more that PERS, the question was whether TRS could
reach the 80 percent mark quicker than TRS. He felt that
approach was possible, because it was a smaller unfunded
liability. He added that, with the governor's proposal,
PERS would reach the 80 percent level in 2025 and TRS would
reach the 80 percent level in 2027.
Co-Chair Meyer agreed that TRS would be easier to reach 80
percent, but felt that the PERS was a shared responsibility
with 60 percent from the state at 40 percent from the
municipalities. Mr. Barnhill agreed that it was a shared
responsibility. He remarked that there could be some
additional cost sharing between the state of Alaska
employers and the municipal employer, but the question was
regarding the best method to share the responsibility.
Mr. Barnhill moved to slides 9 and 10 that included
different ways to pay down the unfunded liability. Until
2012, the ARM Board had methodologies to amortize the
unfunded liability over a 25-year period at a level
percentage of pay. This means that the payments on the
unfunded liability will increase at the same rate as
payroll. He stated that the trend of the payments from FY
15 through the FY 20s, the payments will increase. He
remarked that there was a concern that the approach would
be more expensive over time, so the ARM Board had examined
dozens of scenarios to find an affordable and appropriate
way to address the unfunded liability. He stated that slide
10 showed that the ARM Board created a level-dollar
amortization, which provided for level payments over time.
This formula was identical to a house mortgage formula. He
noted that the payments would increase from $630 million in
FY 14 to $975 million in FY 15, then crest over $1 billion
in in FY 16, and slowly decrease after that. He stated that
the ARM Board's recommendation caused some concern, because
of the affordability of the cash infusion. Reconciliation
must be met between the current needs and the future needs.
The governor weighed man approaches to strike the future
and current needs.
GARY BADER, CHIEF INVESTMENT OFFICER, TREASURY DIVISION,
DEPARTMENT OF REVENUE, introduced himself.
5:38:48 PM
AT EASE
5:39:14 PM
RECONVENED
Co-Chair Kelly asked to leave the investments out of the
presentation, because that topic had been discussed at a
previous meeting.
Commissioner Rodell moved to slide 16, "Problem: $11.9
Billion Retirement System Unfunded Liability."
The Public Employees Retirement System (PERS) and
Teachers' Retirement System (TRS) combined unfunded
liability is $11.9 billion
State Assistance payments to PERS and TRS rise from
$629 million in FY2014 to over $1 billion per year
Funding State Assistance solely through the operating
budget crowds out funding for other vital public
services
Rating agencies express concern with the increasing
liability
Commissioner Rodell highlighted slide 17, "Proposal: $3
Billion Investment in Trust Funds."
Invest a total of $3 billion in the Retirement Trusts
in FY 15:
$1.12 billion - Teachers' Retirement Fund
$1.88 billion - Public Employees' Retirement Fund
Funding source: The CBR
Includes state assistance payments for FY 15
Beginning FY 16, State Assistance payments would be
fixed at $500 million annually:
$157 million - Public Employees' Retirement
System (PERS)
$343 million - TRS
State assistance projected until FY 36; length of time
depends on actuarial gains or losses experienced
Commissioner Rodell looked at slide 19, "Governor's
Proposal." She noted that the governor proposed a one-time
cash infusion, so the annual payments into the 2030s would
remain at $500 million per year.
5:42:50 PM
Senator Bishop thanked the department for the presentation.
He asked about the number one credit concern raised by
ratings agencies. He wondered if the ratings agencies would
provide something to the state showing that its credit was
okay if the infusion was made. Commissioner Rodell replied
that the ratings agencies issued reports. The department
would report on the action taken by the legislature,
expected to see something over the course of the year.
Vice-Chair Fairclough asked about the two components
related to the ratings agencies. Commissioner Rodell
answered that each of the ratings agencies had its own
criteria. Debt counted for an additional 20 percent and
also included pension debt.
Senator Dunleavy had heard that if a certain approach was
used the accumulated debt included bonds, the unfunded
liability, and other potential liabilities. Commissioner
Rodell replied that agencies had noted strengths and
challenges in their reports. She announced that the
unfunded liability was listed as a credit concern for the
state.
Senator Dunleavy wondered what about the proposed approach
was made it the best option. Commissioner Rodell responded
that the approach recognized that additional contributions
were necessary and that a lump sum was not enough to make
the trust funds healthy, but amortized the debt over 25
years and put the state in a better place 5 years from now.
5:51:21 PM
Senator Dunleavy asked what the department would say about
putting another $2 billion or other into the fund.
Commissioner Rodell answered that DOR would examine what
the ongoing obligation would be for an additional $2
billion. She remarked that $3 billion was chosen, because
there was a consideration for other needs from the
reserves.
Co-Chair Meyer referred to Vice-chair Fairclough's earlier
question. He surmised that the cash infusion would be a
good option, if oil revenue would be increasing.
Commissioner Rodell believed it was the challenge the state
was faced with related to the revenue forecast. The concern
was not something that would continue to have support
especially with a closed system. There was no reason to
believe that it would not. She stressed that the liability
was inching up instead of down, which was why the concern
remained.
Co-Chair Meyer would appreciate acknowledgement from the
ratings agencies on how the action would impact the state's
credit rating. He asked if the bill locked the state into
annual payments of $500 million. Commissioner Rodell
replied that the bill did not lock the legislature into the
amount, it only recognized a fixed amount.
Co-Chair Meyer wondered how it differed from the pay as you
go plan. Commissioner Rodell answered that the pay as you
go method did not allow for the one-time appropriation. The
bill recognized the actuarial recommendation and the
commitment to an annual payment.
Co-Chair Meyer asked about the $700 million payment.
Commissioner Rodell answered that the bill included the
amount.
Co-Chair Kelly did not see vast differences between the
approaches to justify the bond rating improvement. He
wondered if Commissioner Rodell had ever worked for a bond
rating agency. Commissioner Rodell replied that she had
never worked for a bond rating agency.
Co-Chair Kelly never heard the case beyond bond raters on
why the state should not use the pay as you go method.
5:57:55 PM
Vice-Chair Fairclough pointed to slide 18 of the
presentation. She queried the effect on the state's
partners with the accumulation of the 38 percent and the
extension on the flat payments. She wondered how the flat
payments would impact the municipalities. She specifically
wondered if there was an analysis of the additional
employer contributions that would be required at a local
level to support the proposal. Mr. Barnhill replied that
those payments had been calculated, and agreed to provide
that information. He stated that the Buck letter outlined
the specifics of those payments.
Vice-Chair Fairclough clarified that she was interested in
specific costs to communities. She believed that Anchorage
was in the $200 million range.
Co-Chair Kelly asked the presenters to stay on track.
6:02:10 PM
Vice-Chair Fairclough wondered about an allocation to
PERS/TRS, and stated that David Teal, Director, Legislative
Finance Division had stated that the unfunded liability was
100 percent the state's responsibility. She wondered why
the specific mix had been chosen. Mr. Barnhill answered
that there were a variety of reasons and ways to slice and
dice the issue. He stressed that the PERS unfunded
liability was greater than TRS.
Vice-Chair Fairclough looked at the unfunded liability
ratio, and remarked that the unfunded liability was higher
in the TRS system. She remarked that 80 percent was a good
target, but the lower rates would affect the ratio. She
wondered why the ratio was not examined as well as the
dollars.
Co-Chair Kelly asked if 60 percent was the minimum funding
for TRS. Mr. Barnhill replied that he would like to get
above 60 percent. He furthered that exploring ratios was a
legitimate concern, and he was willing to engage in that
conversation.
Co-Chair Meyer referred to the bill language "subject to
appropriation." He was attempting to determine what a bond
rater may consider. He felt that the proposal may not
appropriate the amount. Commissioner Rodell replied that
the language was to recognize the constitutional
requirement that future legislatures could not be bound.
Co-Chair Meyer asked if the language would give the bond
raters cause for concern. Commissioner Rodell replied that
DOR had made avenues available to adjust the amount. She
stressed that the focus what on not locking in to something
the state could not sustain.
Co-Chair Meyer pointed to an issue that had not been
addressed. He believed Alaska was one of four states that
counted its medical benefits in the unfunded liability. He
wondered if the state received credit for counting it in
the unfunded liability. Commissioner Rodell replied in the
affirmative.
SB 220 was HEARD and HELD in committee for further
consideration.