Legislature(2005 - 2006)HOUSE FINANCE 519
01/19/2005 01:30 PM House FINANCE
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
January 19, 2005
1:34 p.m.
CALL TO ORDER
Co-Chair Meyer called the House Finance Committee meeting to
order at 1:34:25 PM.
MEMBERS PRESENT
Representative Mike Chenault, Co-Chair
Representative Kevin Meyer, Co-Chair
Representative Bill Stoltze, Vice-Chair
Representative Eric Croft
Representative Richard Foster
Representative Mike Hawker
Representative Jim Holm
Representative Reggie Joule
Representative Mike Kelly
Representative Bruce Weyhrauch
MEMBERS ABSENT
Representative Carl Moses
ALSO PRESENT
Representative David Guttenberg, Representative Peggy
Wilson, Representative Paul Seaton, Representative Mark
Neuman, Melanie Millhorn, Director, Division of Retirement
and Benefits, Department of Administration; Kevin Brooks,
Deputy Commissioner, Department of Administration; Ray
Matiashowski, Commissioner, Department of Administration;
Louanne Christian, Committee Assistant, House Finance
Committee.
PRESENT VIA TELECONFERENCE
Robert Reynolds, Actuarial Consultant, Mercer Human Resource
Consulting; Bob Reynolds, Mercer Human Resource Consulting
GENERAL SUBJECT(S):
OVERVIEW - PERS AND TERS
The following overview was taken in log note format. Tapes
and handouts will be on file with the House Finance
Committee through the 24th Legislative Session, contact 465-
6814. After the 24th Legislative Session they will be
available through the Legislative Library at 465-3808.
TIME SPEAKER DISCUSSION
1:35:47 PM LOUANNE Provided logistical information for
CHRISTIAN, committee members.
COMMITTEE
ASSISTANT,
HOUSE FINANCE
COMMITTEE
1:44:18 PM MELANIE Provided a handout: Overview of PERS -
MILLHORN, TRS (copy on file). She introduced
DIRECTOR, funding, investment, and benefits
DIVISION OF policies on page 1 of the handout. She
RETIREMENT AND referred to page 2 as a summary of
BENEFITS, public employees' and teachers'
DEPARTMENT OF earnings, actuarial rates, health
ADMINISTRATION costs, employer rates, and funding
ratios. She pointed out that the
investment return target and calculated
rate were not achieved in PERS, which
resulted in a cumulative loss and
significant medical costs. . She
explained the funding ratio and pre-
funding of the medical component.
1:51:39 PM Ms. Millhorn Discussed TRS actual investment return
losses and clarified how health care
costs added to the cost of the system.
She compared the funding ratio with and
without medical benefits costs.
1:53:13 PM Ms. Millhorn Reviewed page 3, the Government
Accounting Standard Board (GASB) ruling
for public sector plans.
1:54:16 PM Co-Chair Meyer In response to a question by Co-Chair
Meyer, Ms. Millhorn stated that Alaska
is in compliance with GASB, as are
Ohio, Michigan, and Kentucky, which
also account for liability on an
accrual basis and pre-fund. She agreed
that this system is superior to most
states.
1:55:04 PM ROBERT Noted that pages 4-7 are an attempt to
REYNOLDS, define the effects of six factors on
ACTUARIAL the funded status of TRS and PERS. He
CONSULTANT, explained that comparing assets and
MERCER HUMAN liabilities derives the funded ratio.
RESOURCE He pointed to the decline in the funded
CONSULTING status during the last three years.
2:00:20 PM Representative Asked how House Bill 242 affected the
Croft funded status. Ms. Millhorn responded
that the two components of House Bill
242, retiree return and enhanced
medical benefits, affected the funded
status. Representative Croft compared
the graphs on pages 4 and 5 to the
behavior of the stock market and
suggested that non-health assumption
changes may be creating problems. He
requested more information about them.
2:02:54 PM Mr. Reynolds Agreed with Representative Croft that
the stock market cannot be influenced,
but that investment earnings can be
made based on predictions. He referred
to page 6, which depicts the changes in
funded status of PERS and TRS due to
assets and liabilities, noting that
assets underperformed by a negligible
amount. He pointed out that the graph
at the bottom of page 6 breaks down the
liabilities even further.
2:08:44 PM Mr. Reynolds In response to a question by
Representative Croft, clarified how
health assumption changes and non-
health assumption changes differ
between TRS and PERS. Mr. Reynolds
explained that the primary difference
in the health assumption between TRS
and PRS is the health fund change rate,
which is a rate used to predict health
cost increases. In 2000, a study
suggested that the rate used to project
health costs needed to be increased.
He explained that the same assumptions
were used for TRS and PERS, which
resulted in a greater effect on the
PERS system due to larger medical costs
to that system. He related that non-
health assumptions are retirement
rates, salary increase rates,
termination rates and mortality rates,
which are studied every five years. He
said that the combined effect of those
assumptions is different for the two
systems because the study is based on
actual system experience.
Representative Croft summarized page 6
by saying that rising health care costs
and assumptions have had a much bigger
impact on PERS/TRS than the stock
market. Mr. Reynolds agreed.
2:12:58 PM Ms. Millhorn Turned to page 8 to show various tier
levels and corresponding medical
benefits. She pointed out that page 9
contains historical medical insurance
information.
2:14:22 PM Co-Chair Meyer Inquired if today there would be only
enough money to pay for 72 percent of
all retirees if everyone retired at
once. Ms. Millhorn said yes, but added
that the funding ratio is adequate,
especially considering that medical
costs are pre-funded. Mr. Reynolds
elaborated on the financial
implications of such a scenario. He
agreed that, relative to other systems,
the funding ratio looks good. He
provided historical funding information
and future projections.
2:17:40 PM REPRESENTATIVE Referred to page 2 and asked for an
PAUL SEATON explanation regarding the differences
found in PERS and TRS in board adopted
rates and non-medical benefits.
2:18:46 PM Mr. Reynolds Answered that the calculated rate is
based on the funded status, which is
higher for PERS than TRS.
Representative Seaton questioned the
higher rate of non-medical benefits in
PERS. Mr. Reynolds pointed out that
the calculated rate is based on the
funded ratio for total benefits, which
includes medical.
2:22:14 PM REPRESENTATIVE Wondered if PERS is limited to 5
PEGGY WILSON percent. Ms. Millhorn replied that it
is. Representative Wilson asked if
that number should be changed. Ms.
Millhorn explained the pros and cons of
changing the regulations. In response
to a question by Representative Wilson,
Ms. Millhorn explained the consequence
of incurred liability.
2:25:59 PM Representative Emphasized that funding state
Kelly retirement systems remains a problem.
Ms. Millhorn agreed.
2:27:03 PM Ms. Millhorn Referred to page 9 as the historical
premium costs of retiree medical
insurance. She stated that the
Division is concerned about rising
medical costs and is looking at
measures, such as positive enrollment
that can be taken.
2:30:50 PM Ms. Millhorn Noted that a letter went out in
September 2004 regarding coverage of
dependants and proof of enrollment in
college. She explained that there are
cost issues such as this that the
department is addressing.
Additionally, there is an initiative
between the board and the Division
regarding the cost of prescription
drugs and a movement toward the use of
generic drugs representing a million
dollar savings to the plan.
2:32:26 PM Ms. Millhorn Spoke to the 5-year contract with AETNA
where an agreement on administrative
fees was reached. She related that a
negotiated network guarantee with Aetna
would provide savings to the State of
Alaska.
2:34:52 PM Vice-Chair Commented on pressure to add new
Stoltze coverage to health insurance. He
requested accurate and full-cost fiscal
notes.
2:35:46 PM RAY Responded that the Department is
MATIASHOWSKI, concerned regarding the funding status.
COMMISSIONER, He spoke of the time necessary to grind
DEPARTMENT OF through the assumptions.
ADMINISTRATION
2:36:54 PM Ms. Millhorn Referenced page 10, which provides a
10-year comparison of expenses by type.
She pointed out that costs are rising
at a fast rate with the exception of a
reduction in administrative expenses in
2004. She noted that the authorized
budget for 2004 was $11.4 million, and
the expended budget was $10.2 million.
2:38:15 PM Representative Questioned the relationship between the
Holm percentage of increase in employees and
dollars. Ms. Millhorn responded that
the information was contained in the
Valuation Report.
2:38:57 PM Ms. Millhorn Related that page 11 indicates the 10-
year comparison of expenses by type for
TRS.
2:39:33 PM Representative Asked about the difference in refunds
Wilson between PERS and TRS. Ms. Millhorn
commented that the employer's
contribution to the refund account is
not depicted, only the employee's
withdrawal from the system.
2:40:28 PM Ms. Millhorn Explained that page 12 summarizes the
critical areas between PERS & TRS, the
investment return, and actual return
since 1987. She pointed out that the
middle category demonstrates medical
costs. She noted that the mortality
table was changed in 2002, which added
2.8 years of benefits to each
recipient. She summarized by saying
that people are living longer and costs
are increasing.
2:41:55 PM Ms. Millhorn Highlighted the graph on page 12, PERS
and TRS calculated rates and what the
boards adopted.
2:42:33 PM Representative Commented about the medical cost
Croft estimates shown on page 9.
2:43:33 PM Representative Suggested that over the last twelve
Croft years the price has escalated by 12
percent.
2:43:58 PM Mr. Reynolds Interjected that the assumption is that
the cost will increase at 12 percent.
He explained that a scale of rates is
used to arrive at the long-term
assumption.
2:45:46 PM Representative Clarified that 12 percent is the
Croft starting rate and it would decrease.
Mr. Reynolds agreed.
2:46:09 PM Representative Thought that the 10-year average could
Croft be termed a prediction of a problem.
Mr. Reynolds agreed.
2:46:51 PM Representative Asked how much an 11.5 percent rate
Croft would affect the magnitude of the
current trend rate. Mr. Reynolds
thought that it could bring costs down.
2:47:31 PM Ms. Millhorn Explained that page 13 highlights the 5
percent increase by category from FY06
through FY09. She emphasized that the
increases are additive.
2:48:29 PM Representative Noted that school districts are
Wilson different from the university because
the university has a defined
contribution plan. She asked how
changing defined benefit plans to
defined contribution plans would affect
the proposed scenario. Ms. Millhorn
said that that has been considered,
recognizing that the unfunded liability
must be paid off at the same time. She
added that information is available
regarding the effect on the state over
a 25-year period.
2:50:17 PM Representative Referenced page 12 and asked about the
Seaton consequences of not adopting the 1994
liability until 2002. He wondered how
the trend of waiting is affecting the
state.
2:51:15 PM Mr. Reynolds Clarified that the 1994 mortality table
was adopted in 2000 as a result of a
periodic assumption study, which is
done every five years. He explained
that the effect of that table was about
a five percent decline in funded
status. He pointed out that there is a
newer table now, the effect of which
remains to be seen.
2:54:10 PM Representative Suggested it would not make a
Seaton difference in the current list of
savings for PERS and TRS, as they are
growing at the maximum rate of
contribution. Mr. Reynolds agreed.
2:54:52 PM Mr. Reynolds In response to a question from
Representative Croft, reported that the
calculated rate is a function of the
funded status of the systems. He
clarified that looking forward 25-
years, the rate required to stay at 100
percent over that time period was
considerably lower.
2:55:59 PM Representative Asked Mr. Reynolds if he would figure
Croft the rates at 10 percent, instead of 12
percent on medical, and 8.5 percent,
instead of 8.25 percent on the
investment return. Mr. Reynolds
replied that the Division could address
that concern, incorporating the purview
of the boards.
2:56:39 PM Representative Asked about impact scenarios.
Kelly
2:57:23 PM Mr. Reynolds Explained that page 18 outlined the
actuarial projections and the effect of
economic scenarios. He listed the key
assumptions behind the graphs on page
19, which highlight three different
scenarios and how that would affect
contribution rates.
3:00:49 PM Mr. Reynolds Continued, noting an increase of 5
percent for the next several years. He
pointed out that a lag is indicated in
attempting to achieve the calculated
rate.
3:01:33 PM Mr. Reynolds Related that pages 20 & 21 show the
analogous information for TRS, with
page 20 indicating assumptions on the
actuarial projections and the effect of
economic scenarios. He described page
21 as TRS actuarial projections and the
effect of economic scenarios on the
contribution rates.
3:02:48 PM Representative Asked if the 7-12 percent contribution
Croft rates, which have existed in the past,
are now going to be 33-50 percent. Mr.
Reynolds spoke to the changes in the
proposed contribution rates. He
explained that the intention is to get
to 100 percent funded status after 25-
years.
3:03:51 PM Mr. Reynolds Commented that the charts on pages 22 &
23 were developed to predict what
effect a new tier might have on
contribution rates in the future. He
pointed out that additional information
is available from the Division
regarding that benefit level. Page 22
indicates the stress on future
contributions with the rate increasing
and then declining after a 30-year
increase. Also indicated are the
impacts on the rates in the future,
resulting in a 7 percent decrease. He
concluded that it would take many years
to realize the full savings and would
affect only new membership.
3:06:48 PM Mr. Reynolds Indicated that page 23 shows the same
information for the PERS system.
3:07:40 PM Representative Suggested that in order to determine
Kelly the full cost, the employee
contribution should be included. Mr.
Reynolds agreed, pointing out that the
material is available on the Division's
website.
3:08:39 PM Ms. Millhorn Addressed the various employee
contribution rates. She pointed out
that a survey showed that employers
wanted to see employees bear a larger
burden for benefits.
3:09:27 PM Representative Summarized that down the line it would
Wilson ease the state's burden but place a
higher burden on the employee. Ms.
Millhorn noted that some of the risk
would be shifted to the employee. She
repeated that more information is
available online.
3:12:17 PM Ms. Millhorn Provided timelines for PERS & TRS and
concluded the presentation on the PERS
and TRS proposed system.
3:13:28 PM Ms. Millhorn In response to a question by
Representative Seaton, explained that
the graph on page 23 shows what it
takes to pay for the normal costs of
existing benefits and unfunded
liabilities, so that by 2029 there is a
return to normal cost rates. She
explained past service cost and a
proposal to look at an 8 percent cost
rate with a vastly reduced risk.
3:15:56 PM Mr. Reynolds Noted that the quick answer is somewhat
arbitrary, but is based on amortization
methods and time periods. He emphasized
that the methodology has been arrived
at by due process. He explained
various amortization periods and
methods.
3:18:21 PM Representative Asked about the calculation method.
Seaton Mr. Reynolds replied that the method is
similar to a mortgage.
3:19:50 PM Representative Questioned whether it is the
Holm Administration or Legislature's
problem, given that the board has not
voted for a tier 4. Commissioner
Matiashowski answered that it is
unknown right now; there are no silver
bullets, and there are limited options.
He added that he couldn't say today who
would introduce legislation.
3:21:45 PM Representative Asked for Commissioner Matiashowski
Holm thoughts on a defined contribution plan
versus a defined benefits plan.
Commissioner Matiashowski replied that
the pension plan is set in statute as a
benefit for PERS. Ms. Millhorn
referred to a 1978 attorney general's
opinion that addressed the retirement
policy. Representative Holm brought up
the fact that municipalities have taken
a hit, and he asked if the would be
addressing this concern. Commissioner
Matiashowski replied that the
Governor's budget proposal included a 5
percent increase over the next 2 years
for municipalities and school
districts.
3:25:25 PM Representative Observed how little impact a new tier
Croft has on solving the problems of the
retirement systems. He pointed out
costs incurred when decreasing
retirement benefits for teachers.
3:26:43 PM Commissioner Agreed with Representative Croft, but
Matiashowski pointed out that a defined benefits
plan burdens the employer exclusively
with any investment risk, whereas
contributions would be lower in the
future under a defined contributions
plan if the entire employee population
becomes covered. He termed it
"significant" that the employee has all
the risk.
3:28:16 PM Representative Asked if the comparison of alternative
Kelly 1 and alternative 2 only applies to
tier 4. Ms. Millhorn replied that it
does.
ADJOURNMENT
The meeting was adjourned at 3:30 PM
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