Legislature(2005 - 2006)
04/18/2006 08:32 AM House W&M
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| Alaska Retirement Management Board Presentation - Recommendations to the Legislature | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
^ALASKA RETIREMENT MANAGEMENT BOARD PRESENTATION -
RECOMMENDATIONS TO THE LEGISLATURE
[Includes brief mention of SB 141, HB 278, HB 492, HB 238, HB
375, SB 247, and HB 475.]
8:33:08 AM
CHAIR WEYHRAUCH announced that the only order of business would
be a report presented by the Alaska Retirement Management Board
(ARMB) with recommendations to the legislature for addressing
the unfunded liability of the Public Employees' Retirement
System (PERS) and the Teachers' Retirement System (TRS).
8:34:38 AM
GAIL SCHUBERT, Chair, Alaska Retirement Management Board (ARMB),
began by providing the committee with a brief overview, noting
that the ARMB was established in October 2005 as a result of the
passage of SB 141. She highlighted that one of the important
provisions of SB 141 directed the ARMB to prepare a report to
the legislature with short-term and long-term recommendations to
address the unfunded liability of PERS and TRS. She relayed
that many of the recommendations made in the report, presented
in January 2006, are already underway in the Division of
Retirement and Benefits, Department of Administration (DOA).
She explained that the legislature was informed that it is the
ARMB's goal to identify funding strategies to fully fund the
retirement obligations to the state's public employees "with
minimal impact to the services to the residents of Alaska." She
reminded the committee of the March 2006 presentation it heard
from the board's actuary at which time it was relayed that the
combined unfunded liability of PERS and TRS has grown to $6.9
billion. She opined that the process of "digging out [of debt]
will not be pleasant," however, "delaying action will only make
things worse." She requested that Gary Bader, with Department
of Revenue (DOR), provide the committee with background
information on the process that led to the recommendations,
followed by a detailed explanation of those recommendations
given by Larry Semmens, a member of the ARMB.
8:37:25 AM
GARY BADER, Chief Investment Officer, Treasury Division,
Department of Revenue (DOR), informed the committee that a slide
presentation was prepared to provide background information on
those strategies considered [in addressing the debt of the state
retirement systems]: large dollar strategies, incremental
strategies, investment returns, and extending the amortization
period. Regarding the use of pension obligation bonds as one
possible large dollar strategy, he said that although the ARMB
currently has no recommendation on this strategy, it has not
been ruled out.
CHAIR WEYHRAUCH interjected to question the meaning of slide 4
which read:
HB 278 does not authorize any debt instruments to be
issued. The state or a municipality would need to
take a separate action to utilize this new ability of
the Municipal Bond Bank Authority.
MR. BADER confirmed that should HB 278 pass, it would provide a
new ability of the Municipal Bond Bank Authority. However, he
clarified that although it could be an option for a political
subdivision, the ARMB is not proposing it as a strategy for
addressing the unfunded liability. In further response to Chair
Weyhrauch, he stated his understanding that the authorization of
any debt instruments would [first] require action by the
Municipal Bond Bank Authority. He then noted a second large
dollar strategy considered by the ARMB: the deposit of a large
natural resource asset of natural gas leases as proposed in HB
492. He said that constitutional, valuation, and cash flow
issues with this legislation would need to be addressed before
this could be considered a viable solution. Regarding possible
incremental strategies, he relayed that the Past Service Cost
Offset Account (PSCOA), as proposed in HB 238, is a possible
means of providing a systematic, long-term solution to assist
communities and employers with their growing unfunded liability
payments by cutting the cost of contributions approximately 56
percent over a 25-year amortization period. He briefly conveyed
other possible incremental strategies as proposed in HB 375, HB
376, and SB 247. In noting that the rates set by ARMB for this
year, incremented by 5 percent, still does not match the
actuarial computed rate required to fully fund the system in 25
years, he explained that SB 247 would bridge the gap between
these rates through means of an underfunded liability relief
account.
MR. BADER then addressed investment returns as shown in the
chart on slide 8. He highlighted that the state is now
experiencing higher rates of return: approximately 15 percent
in fiscal year 2004 (FY 04), 8.95 percent in FY 05, and 14.44
percent calculated through December [2006]. He explained that
the table shown on slide 9 entitled, "Extend Amortization
Period," is designed to show what the required supplemental
contributions would be according to the different amortization
periods and employer contribution rates selected and keeping the
normal cost rate and the average member contribution rates
constant.
8:47:07 AM
MR. BADER, in response to Chair Weyhrauch, provided an example
of one possible scenario: an employer rate of 21 percent,
during a 30-year amortization period with a 6.84 percent average
member contribution rate would result in the state having to
supply another $150 million to the system in order to be fully
funded in 30 years. "So the 21 percent by itself isn't enough.
It would require an additional increment," he said.
CHAIR WEYHRAUCH inquired as to whether "dealing with the
amortization period" requires a legislative or administrative
action.
MR. BADER explained that currently the amortization period is
determined by the ARMB. He noted that one of the sections in HB
475 proposes to "essentially set the amortization rate at 30
years" and that should the legislature want to adopt a 40-year
amortization period, it would be in conflict with the timeframe
proposed in HB 475. In further response to Chair Weyhrauch, he
confirmed that any one of the funding scenarios shown in the
table on slide 9 would require some [supplemental contribution]
from either the legislature or the employers. He opined "that
this is a useful table in terms of shaping the size of the
problem" and providing an array of options. He highlighted that
the table in slide 10 aims to provide a similar array of options
for TRS. He then informed the committee of some of the
suggestions made to improve the financial health of the plans:
offer no enhancements to PERS and TRS benefits for at least two
years; to index the health deductible in the new plan; and to
create a new retirement health plan for new members.
CHAIR WEYHRAUCH, regarding the mention of a two-year period of
no enhancements to the plans, questioned whether this was an
adequate amount of time. He suggested that perhaps it actually
should be "an indefinite no enhancement."
MR. BADER said he agreed and stated his belief that ARMB did not
want to be too presumptuous with what it considers to be a
prerogative of the legislature.
CHAIR WEYHRAUCH opined that the "legislature needs to get [its]
mind around the problem" which could extend far beyond a two-
year period unless [the state] substantially appropriates funds.
MR. BADER again said he agreed. He then returned to addressing
the recommendations made by the ARMB and confirmed the
observation made by Chair Weyhrauch that some of these
recommendations and issues are currently being addressed by the
executive branch and therefore do not require involvement by the
legislature at this time.
8:53:21 AM
REPRESENTATIVE DAVID GUTTENBERG, Alaska State Legislature,
inquired as to whether the ARMB has "worked on any estimates
[on] incremental changes to either the preferred provider
programs ... or the negotiated drug prices we do."
MR. BADER explained that the ARMB has not specifically done this
and deferred to the Division of Retirement and Benefits which
has. He relayed that the ARMB has largely focused on the
financial aspects and not the programmatic ones. He then
concluded his presentation by listing the ARMB goals: full
funding within 30 years; no severe disruption in public
services; the state's participation in the solutions; rewarding
accelerated contributions from employers; ensuring equitable
state support; and minimizing the supplanting of federal funds
and other non-general fund costs. "So given these objectives,
the board went about crafting a number of possible solutions,"
he said, which would be addressed by Mr. Semmens.
8:55:58 AM
LARRY SEMMENS, Board Member, Alaska Retirement Management Board
(ARMB), directed the committee's attention to page 13 of the
report in their packets dated April 14, 2006, entitled, "Alaska
Retirement Management Board - Final Report to the Legislature"
and paraphrased the following introduction:
The board acknowledges that it is late in the
legislative session for consideration of additional
appropriation legislation, and appreciates the
endeavors of legislators, committees, and staff to
address the unfunded liability. However, it is in the
best interest of the retirement systems for the
legislature to address the under funding of the
systems in both the fiscal year 2007 and 2008 budget
process, or the unfunded liability will very likely
grow larger. The board offers the following
recommendations, listed by priority for action by the
legislature. These recommendations, both short- and
long-term, address employer concerns with escalating
contribution rates and the growing actuarial shortfall
of the retirement systems.
MR. SEMMENS explained that "Priority 1" establishes a past
service retirement liability account for both PERS and TRS. He
then listed the particulars for the PERS fund: an account is
established; a method to annually calculate a specific amount to
be included in the governor's budget is provided; is applicable
to political subdivisions and school district employer members
of PERS; provides incentives for employers to pay down their
unfunded liability; and anticipates that the ARMB would set the
employer contribution rate at the actuarially required rate. He
noted that for the FY 07 budget, the ARMB set the rate five
points above the prior year rate - not the actuarially required
rate - which means the system will be underfunded unless further
contributions are made. He further clarified that if the system
is to be fully funded, this requires the employers pay the lower
of the average past service cost rate or their own past service
cost rate less 5 percent. This means, he said, that the most
the state would contribute to an employer, is the average past
service rate of all employers. He explained that incentives
would be included for those employers that paid in excess during
the fiscal year three years earlier.
MR. SEMMENS then listed the particulars for the TRS fund on page
14 of the report: establish a past service liability account;
provide a method to calculate a specific amount to be included
in the governor's budget; applicable to all TRS employers; and,
as with the PERS fund, anticipates that the ARMB would set the
employer contribution rate at the actuarially required rate
which exceeds 42 percent this year. The difference between TRS
and PERS, he noted, is that with the former, the calculated
amount for distribution would be based on 85 percent of the
total eligible payroll that the employer reported to [DOR]
during the fiscal year three years earlier, in order to capture
the full cost of those federally funded programs that school
districts have.
MR. SEMMENS went on to explain "Priority 2" on page 14 of the
report. He highlighted that in 2005, the legislature
appropriated approximately $17 million of "PERS aid" to
municipalities. He informed the committee that the ARMB
recommends an appropriation be made this year as well yet
require the employers share the increasing PERS costs with the
state, 50:50, with a 5 percent increase. He expressed his
belief that municipal employers "would very much appreciate the
legislature repeating the PERS aid program that was done for FY
06." He then explained that "Priority 3" recommends "the
legislature appropriate funds to meet the actuarially required
amount to fully fund the system this year." He clarified that
the intent of this priority is not to have the assets equal the
liabilities but rather focuses on the point that should the
legislature or employers not contribute the amounts required by
the ARMB's rates, then the system will most likely fall further
behind. More specifically, he identified that the actuarially
required amount for PERS is $461 million and [yet] the projected
actual contribution, using the adjusted employer rates, is $351
million - a difference of $110 million. With TRS, he noted that
the actuarially required amount is $261 million, and [yet] the
actual projected contribution is $163 million - a difference of
$98 million. He reiterated that it is the ARMB's recommendation
that the state provide funding for [these differences]. He
concluded, "We understand these are large numbers, that this is
late in the session, but we feel that it is important for us to
communicate to you the magnitude of the shortfall."
9:05:38 AM
CHAIR WEYHRAUCH conveyed some of the comments he has heard
[regarding the unfunded liability] such as, "Well, we don't have
to pay this now, so it's really not a big problem; it's a future
problem."
MR. SEMMENS said that whereas this is an accurate statement, the
problem remains if the debt is not paid now. He compared it to
a home mortgage: if the debt is paid early, much will be saved
in not paying interest for the life of the loan.
CHAIR WEYHRAUCH provided an example of another comment made by
some [legislators] who feel the issue is not a concern for them
because so few of their constituents are in professions which
PERS and TRS benefit: teachers and government employees.
MR. SEMMENS said this is incorrect, that "it does not benefit
teachers or public employees because those benefits are
guaranteed by the state constitution." He opined, "What this
really benefits is the people of Alaska by reducing the amount
of money that they would pay over time." He expressed his
belief that this time of surplus is an ideal time to pay off the
debt and will save Alaskans money. In further response to Chair
Weyhrauch, he said that public services would soon be affected
[by the debt] and that services and taxes will be affected with
any increase to employers' PERS rates. He further clarified
that whereas the retirement reform passed last year does impact
the growth of future liabilities, it does not pay off the
unfunded liability of the past. Regarding the belief held by
some that should [oil tax] legislation be adopted, it will
[sufficiently] address the unfunded liability of PERS and TRS,
he opined that it might make it easier, however, funding the
systems has to be done at the levels recommended by the ARMB -
"$150 million a year."
REPRESENTATIVE DAVID GUTTENBERG, Alaska State Legislature,
inquired as to whether the passage of SB 141 has either affected
the loss of employees from or into the system, and whether new
liabilities have resulted from this.
MR. SEMMENS remarked that should there be no new employees
coming into the system, it would have the effect of raising the
rates that each public employer would be required to pay.
However, he said he did not expect the numbers to decline as a
result of SB 141. He opined that "the fix in HB 475, would make
it clear that the payroll upon which the past service liability
rate would apply, is on the total employee base, including Tier
IV and all prior years."
9:11:40 AM
CHAIR WEYHRAUCH confirmed that Martin Pihl, next to testify, was
appointed by the governor to the ARMB, represented the private
sector, was retired from work with his own private pension plan,
and has never been a public employee. He then asked Mr. Pihl
for his opinion on the status of PERS and TRS and on the
recommendations made by the ARMB.
9:12:12 AM
MARTIN PIHL, Member, Alaska Retirement Management Board (ARMB),
expressed his belief that the debt would be handled quite
differently if it were "corporate America." He opined that
although misled by actuaries, the state is responsible for the
current status of the pension plans and that benefits were
established without realizing the price tag. Furthermore, he
offered his belief that addressing the debt should not be
delayed, that [the state] has a cash flow problem, and that he
likes "the idea of a possible fix through a few gas wells."
CHAIR WEYHRAUCH stated his agreement with Mr. Pihl on the
possibility of using future gas assets to help fund the systems
as being a good idea.
REPRESENTATIVE GRUENBERG asked Mr. Pihl to clarify his comment
regarding the state being mislead by actuaries.
MR. PIHL stated his understanding that the legislature was told
[by the actuaries] that an increase to benefits could be done
without increasing contribution rates. He opined that "you
don't get to $6.9 billion without a combination of a lot of
mistakes" and that "actuarial work using national data for
Alaska doesn't work."
REPRESENTATIVE GRUENBERG expressed his concern regarding
statutes of limitations.
CHAIR WEYHRAUCH said that with no representation present from
the attorney general's office, he would defer this topic to
legal counsel.
9:18:08 AM
REPRESENTATIVE GUTTENBERG expressed his thanks to the ARMB for
its work on the report. He opined that there were both "good
and bad" results from passage of SB 141. In noting that the
ARMB's recommendations largely address financial ways to address
the debt, he expressed his wish that the board take a more
aggressive stand on addressing rising healthcare costs. "It's
out of control and it's completely inconsistent," he opined.
MR. SEMMENS informed the committee that the ARMB does have a
health committee which is looking at ways to control healthcare
costs.
CHAIR WEYHRAUCH expressed his belief that healthcare cost
management "is probably the biggest problem associated with most
of these national problems, not just Alaska's, so we're going to
have to deal with that in a global manner." He then asked the
ARMB to relay which of its recommendation the board feels the
state should address first.
MR. SEMMENS informed the committee that the top priority is
articulated in "Priority 1," the long-term solutions. In
response to Chair Weyhrauch, he confirmed that this priority
recommends establishing past-service liability accounts as well
as a "method for funding them and getting those dollars in the
next [FY 08] budget cycle."
CHAIR WEYHRAUCH sought confirmation of his understanding that
the top priority not only recommends establishing the accounts
but also involves appropriating money.
MR. SEMMENS said this is correct and deferred to Mr. Bader for
more detail.
MR. BADER clarified that although this first priority addresses
establishing the mechanism, the funding would not begin until
the 2008 budget.
CHAIR WEYHRAUCH asked Commissioner Corbus whether there was any
creative way to fund the liability without general fund
appropriation or through taxes.
9:23:50 AM
WILLIAM A. CORBUS, Commissioner, Department of Revenue (DOR),
offered his understanding that there was no such mechanism.
CHAIR WEYHRAUCH inquired as to whether there was any "specific
pool of money" that could be accessed to address the
appropriation issue.
COMMISSIONER CORBUS said he was not aware of any and opined that
"the appropriate place is the general fund."
REPRESENTATIVE GRUENBERG called the committee's attention to the
proposed legislation in "Appendix 1" and "Appendix 2" of the
ARMB report. He said he would like to make a conceptual motion
that would "get the ball rolling" in this committee to introduce
similar legislation.
CHAIR WEYHRAUCH clarified that as special committee, there are
no existing rules permitting the House Special Committee on Ways
and Means to introduce legislation. He said this could be done
through a standing committee.
9:25:48 AM
SAM TRIVETTE, Vice Chair, Alaska Retirement Management Board
(ARMB), relayed that he did participate in the work of the ARMB
and opined that [the report] offers the best effort at this
time. He shared that "unfortunately [the ARMB] found out in
[its] latest actuarial report, there were other mistakes made by
the previous actuary that just came to light last month ... and
[will attempt to ensure] that it doesn't happen again."
MS. SCHUBERT expressed thanks on behalf of the ARMB for the
[legislature's] input in the process of solving the [unfunded
liability of PERS and TRS].
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