Legislature(2003 - 2004)
01/22/2004 02:26 PM House FIN
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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 22, 2004
2:26 PM
TAPE HFC 04 - 11, Side A
CALL TO ORDER
Co-Chair Williams called the House Finance Committee meeting
to order at 2:26 P.M.
MEMBERS PRESENT
Representative John Harris, Co-Chair
Representative Bill Williams, Co-Chair
Representative Kevin Meyer, Vice-Chair
Representative Mike Chenault
Representative Eric Croft
Representative Hugh Fate
Representative Richard Foster
Representative Mike Hawker
Representative Reggie Joule
Representative Carl Moses
Representative Bill Stoltze
MEMBERS ABSENT
None
ALSO PRESENT
Melanie Millhorn, Director, Division of Retirement and
Benefits, Department of Administration; Anselm Staack,
Chief Financial Officer, Department of Administration; Ray
Matiashowski, Deputy Commissioner, Department of
Administration.
PRESENT VIA TELECONFERENCE
Robert Reynolds, Actuarial Consultant, Mercer
GENERAL SUBJECT(S):
The following overview was taken in log note format. Tapes
and handouts will be on file with the House Finance
Committee through the 23rd Legislative Session, contact 465-
2156. After the 23rd Legislative Session they will be
available through the Legislative Library at 465-3808.
OVERVIEW: Increased Costs of PERS AND TRS
LOG SPEAKER DISCUSSION
TAPE HFC 04 - 11
SIDE A
000 Co-Chair Harris Convened the House Finance Committee
meeting at 2:26 p.m.
Increased Costs of PERS and TRS
103 MELANIE MILLHORN, Introduced the other speakers including
DIRECTOR, RETIREMENT Mr. Reynolds, an actuarial consultant for
and BENEFITS, Mercer. Explained that an actuarial does
DEPARTMENT OF projections based on cost.
ADMINISTRATION
205 ROBERT REYNOLDS, Clarified that an actuarial is an
ACTUARIAL economic forecaster in specific
CONSULTANT, MERCER circumstances.
407 Ms. Millhorn Referred to "Public Employees' Retirement
System; Teachers' Retirement System"
publication (copy on file.) Explained
that the discussion would cover the
funding status and the two primary
factors driving it: the increase in
health costs and the loss of investment
earnings. Discussion would also center on
FY 01 through FY 05 Employer Rates, and
Employer Contribution Rates from FY 98
through FY 04. A subcommittee has been
formed to address possible tier redesign:
Tier IV for PERS and Tier III for TRS.
0548 Ms. Millhorn Referred to the 8-page White Paper (copy
on file) summarizing major concerns.
Explained that both PERS and TRS are
defined benefit plans for the State.
656 Ms. Millhorn Referred to equation on "Background,"
page 2.
750 Co-Chair Harris Asked the percentage of administrative
expenses.
804 Ms. Millhorn Replied that administrative expenses
appear on page 2 of 8.
4059 Co-Chair Harris Asked if there is a maximum that can be
spent on administrative costs. Ms.
Millhorn replied no. Alaskais currently
at 1.2% for PERS and 0.8% for TRS.
830 Representative Croft Asked if those figures are close to the
national average.
842 Ms. Millhorn Offered to research the question.
911 Ms. Millhorn Referred to page 3 and explained "over
time" is defined as a 25-year
amortization schedule for PERS and TRS,
which by statute can go up to 40 years.
The FY 05 Employer Rates are the result
of the most recent evaluation for PERS
and TRS on June 30, 2002. The Employer
Rate setting is two years ahead based on
evaluation reporting due to the budgeting
process. This is standard for most public
pension plans.
1003 Representative Croft Noted that there have been dramatic
changes in the stock market since 2002
and asked the effect of the Employer Rate
being only as current as June 2002.
1018 Ms. Millhorn Responded that the June 30, 2003 rate is
expected in March 2004 to set rates for
FY 06. The specific time period lags two
years. Agreed with Representative Croft
that there is "smoothing," and said that
Mr. Reynolds could address the actuarial
assumption.
1148 ANSELM STAACK, E x p l a i n e d t h a t for FY 03, the amount of
CHIEF FINANCIAL earnings was 3.7% for the entire fund,
OFFICER, DEPARTMENT compared to the actuarial assumed rate of
OF ADMINISTRATION 8.25%.
1321 Representative Croft Referred to page 1, Defined Benefits,
that describes an early cash-out with the
employee receiving only employee
contributions and fixed interest.
Observed that employee early cash-outs
leave a lot of money in the system.
1407 Mr. Staack Responded that the only way to get an
actuarial gain from early cash-outs is if
the member doesn't take his benefit.
Explained that if a member cashes out
their account early and takes the
employee contributions and 4.5% interest
earnings by statute, it is only 20-30% of
the actual value of their benefit.
1507 Representative Croft Asserted that it would be in the fund's
interest, not the individual's, though
not many people cash out early.
1528 Mr. Reynolds Explained that if a member leaves before
vesting, he forfeits the employer
contributions made on his behalf during
that time period; therefore, the fund
becomes more solvent if people leave
before becoming vested. Assumptions are
made when doing valuations about the rate
at which people leave, but for the system
to become more solvent, people would need
to leave at a greater rate than is
currently assumed. In TRS, the
assumption is that 10% will leave during
the first year.
Mr. Reynolds pointed out that the
majority of the systems liabilities are
not attributable to unvested members, but
rather to retired members, surviving
spouses, terminated members who are
already vested, and active members who
are already vested. He said that even if
all non-vested liabilities were
eliminated, the systems still wouldn't be
100% funded because non-vested members
represent a small portion.
1712 Representative Croft Asked what would happen if a vested
member cashed out his contributions.
1727 Mr. Staack Replied that the vested member would
receive only the contributions and the
earnings on those contributions; the fund
retains the rest. Mr. Staack stated that
cashing out happens more often than one
might think.
1834 Representative Croft Asked if there has ever been an incentive
encouraging members to cash out before
becoming vested.
1901 Mr. Reynolds Replied that there has not, and added
that there would be legal constraints.
In single employer corporate plans, for
example, the employer can't discriminate
or take an action in order to prevent an
employee from becoming vested.
1947 Representative Croft Commented that another way to make the
fund solvent would be to create a bigger
pool of people.
2010 Ms. Millhorn Explained that the fund looks at a 25-
year period, with stock market
performance playing a large role. The
objective over time is to regain the
funding status at the targeted rate.
2114 Ms. Millhorn Noted that the next valuation report will
be completed by the end of March 2004.
The PERS, TRS, and Alaska State Pension
Investment Board will discuss the results
of the valuation report of June 30, 2003
and adopt the actuarial assumptions
underlying the Employer Rates. In April
2004, PERS and TRS will meet separately
to determine the Employer Rates for FY
06.
2215 Ms. Millhorn Referred to page 4, "System Funding
Goals," and discussed the four points.
2325 Vice-Chair Meyer Asked how Alaska compares to other state
pension systems and targeted funding
ratios.
2402 Mr. Reynolds Responded that it is difficult to compare
PERS and TRS with other systems because
PERS and TRS fund to a much higher
target, including pre-funding retiree
medical benefits whereas most systems
treat medical benefits as a pay-as-you-go
expense. The funding ratios of Alaska
compare well with other states, as
neither the highest nor the lowest.
2500 Representative Asked Mr. Reynolds the risks of setting a
Hawker funding ratio of less than 100% with a
covered employee base that is stable or
declining over time.
2557 Mr. Reynolds Explained that with a less than 100%
funding target over a 25-year median
period, the funding of the systems would
pass beyond the current workforce to a
future generation. With a declining
workforce, the state would accept the
risk of not being able to ever fully fund
the systems.
2812 Ms. Millhorn Referred to page 5, "Data, Assumptions
and Methods" and pointed out that all
reports are available online with the
Division of Retirement & Benefits.
The current issues challenging the
systems are the financial market
performance and the rising cost of
medical care, page 6.
2930 Ms. Millhorn Referred to pages 6-7, Employer Rates in
FY 04 and FY 05 and reviewed the average
employer contribution rate.
3129 Representative Croft Asked if it is a unified pool with every
employer having a different rate.
3141 Ms. Millhorn Responded that is correct.
3150 Representative Croft Asked about the advantage and legality of
pooling.
3221 Mr. Reynolds Replied that in the TRS system each
employer shares in the experience of the
whole system. By not pooling the employer
rates, the employer assumes the liability
for granted past service.
3327 Representative Asked if there was a change in methods or
Hawker actuarial assumptions between FY 04 and
FY 05.
3423 Mr. Reynolds Responded that the primary drivers for
the change in the rates for PERS and TRS
were the investment performance and the
increases in healthcare costs. These led
to revising some assumptions and methods.
3634 Mr. Reynolds Continued, that it takes several years to
recognize a trend and draw conclusions,
and it's normal for investment experience
to be down in any one year.
3736 Representative Asked if Mr. Reynolds could offer any
Stoltze cautionary advice on the retirement
legislation.
3758 RAY MATIASHOWSKI, Stated that the department would evaluate
DEPUTY COMMISSIONER, bills on a case- by- case basis. He
DEPARTMENT OF observed that they are in an "under
ADMINISTRATION funding" status. He anticipated that the
market would return to the pre-1990
rates. Alaska is one of the few states
that pre-funds medical liabilities.
3950 Representative Croft Asked the result of funding a target of
less than 100%, for example a target of
98%.
4012 Mr. Reynolds Responded that the target of 98% would
not have a large effect on calculating
the contribution rate. He cautioned
that, over time, 100% should be the
target; he advised to avoid adopting
rates significantly below the calculated
contribution rates for extended periods
of time.
4209 Representative Croft Noted that the up market was smoothed but
now the down market is not, and he
questioned the result.
4245 Mr. Reynolds Disagreed with Representative Croft's
conclusion. He pointed out that there
were three significant down years, where
it made sense not to continue to smooth.
He maintained that they would smooth down
years in the future. He clarified that
for the FY 05 evaluation based on FY 02,
market results were not smoothed because
it was felt that it was better to
recognize what had occurred.
4416 Representative Croft Noted that big market years were
smoothed, but that the FY 05 was taken
straight. He questioned what would have
occurred if it were smoothed.
4526 Mr. Reynolds Observed that the first two years were
good and the next three were extremely
bad; if they had smoothed, the valuation
would have been low. The expectation is
that with an absence of poor performance
the rates would be higher.
4633 Representative Croft Referred to smoothing assumptions.
TAPE CHANGE HFC 04-
11, SIDE B
4551 Ms. Millhorn Spoke to the result of early retirement
in education.
4521 Vice-Chair Meyer Questioned if the stock market is the
best place to invest.
4452 Ms. Millhorn Could not respond to the issue.
4432 Vice-Chair Meyer Stressed the difficulty of budgeting for
school districts when funding levels are
unknown.
4400 Ms. Millhorn Spoke to the PERS results and noted that
without the medical portion, 143.7% was
funded in FY 04. The PERS is funded at
120.9% in FY 05 without medical expenses.
She continued to review the TRS rates
over time. For FY 05, Mercer's
recommendation was that the employer rate
be at 35.57%. The Board adopted a 16 %
rate. There is not a cap on TRS.
4153 Ms. Millhorn For FY 05, TRS is at 68.2% with total
benefits.
4113 Ms. Millhorn Reviewed employer rates and savings
contained in "Employer Savings FY 98-FY
04." The rate was 12.8% in FY 98. There
was almost $360 million in savings from
FY 96 - FY 05.
3923 Ms. Millhorn Reviewed the estimated change in employer
contributions for FY 05 (copy on file.)
3757 Ms. Millhorn Discussed retiree medical insurance cost
increases. The monthly premium in 1977
was $34.75. In December 2003, the cost of
the monthly premium was $720.00. There
has been a large amount of volatility.
Health costs for PERS are approximately
30%; TRS is approximately 20%.
3631 Ms. Millhorn Noted that the investment experience is a
major factor. The total investment loss
was 5.25% in FY 01; FY 03 was a 3.67%
gain.
3634 Ms. Millhorn If the investment earnings are less than
the 8.25% actuarial earning rate, the
plan's targeted funding ratio is
significantly impacted.
3454 Ms. Millhorn Reviewed the PERS employer rate change
for the last five years. She observed
that there are a number of variables that
impact the recommendations (copy on
file.)
3406 Ms. Millhorn Reviewed the TRS employer rate change for
the last five years. The TRS rate has
been more stable than has PERS.
3332 Mr. Reynolds In response to a question by
Representative Croft, Mr. Reynolds
explained that the assumption is that the
premium will increase at the assumed
rate. The previous years are compared to
the assumed rate. Adjustments are only
made if there is a significant deviation.
In FY 02, the decision was made to use
the actual premium due to the amount of
variation.
3133 Representative Croft Concluded that the rate had settled down
to 10%.
3111 Mr. Reynolds Agreed, but added that recent experience
shows greater than 10%. Increases
escalated in the late 1990's and beyond.
He emphasized the difficulty of
estimating health care costs. The
assumption is that health care will
increase at a rate of about 12% over the
next three years.
2943 Representative Observed that changes have manifested in
Hawker the most recent evaluation process. He
questioned where the decision to reflect
changes is made.
2855 Mr. Reynolds Explained that actuaries have
professional standards, but that the TRS
and PERS Boards have the authority to
adopt the recommendations. The Board can
modify the recommendations during two
steps in the process.
2738 Representative Noted that contributions numbers were
Hawker stable until the last year. He questioned
if recommendations were not followed this
past year.
2698 Mr. Reynolds Explained that calculated rates were not
substantially different from the adopted
rates.
2622 Representative Observed the change made between FY 01
Hawker and FY 02 from 6.77 to 24.9.
2533 Mr. Reynolds Clarified that the medical and investment
experiences occurred in FY 02.
2455 Mr. Reynolds Reviewed a summary of benefits paid by
PERS, page 13 (copy on file.) The COLA
was collapsed into the service area in
1997. There was $451 million paid out in
PERS benefits. She gave examples of
payout ratios.
2234 Ms. Millhorn Continued to review the PERS chart (copy
on file.) She noted that there was an
early retirement option (RIP) from 1997 -
1999.
2137 Ms. Millhorn Observed that a newsletter would be sent
to members to solicit input regarding
tier redesign.
1951 Representative Questioned if input would be solicited
Hawker from non-state employees.
1816 Ms. Millhorn Stated that they would be open to more
input; however, there is no intent to
actively solicit recommendations outside
of the employee base.
1725 Ms. Millhorn Observed that there are only 8 of 123
health care pension plans that pre-fund
health care. Many plans only report
liabilities on a one-year plan.
1554 Representative Croft Questioned the effect of not pre-funding.
1528 Mr. Reynolds Observed that the calculated contribution
rate would be reduced from 25% to 10% -
12% if pre-funding of medical benefit
were eliminated for PERS. The same effect
would occur in TRS. If medical benefits
had not been pre-funded there would be
fewer assets in the system. The system is
where it is today due to the practice of
pre-funding medical benefits in the past.
1315 Mr. Matiashowski In response to a question by
Representative Stoltze, noted that there
have been two committees formed to look
at redesigning the TRS and PERS systems.
1212 Ms. Millhorn Noted that the survey was created to
start a dialog about the variables
involved in redesigning the tiers.
1142 Mr. Reynolds In response to a question by
Representative Hawker, observed that
states that do not pre-fund are paying
for medical expenses as they occur, from
general revenues. These states are not
looking very far into the future to
assess their ability to meet that
obligation.
954 Representative Observed that the risk is exposure to a
Hawker more volatile situation.
929 Mr. Reynolds Agreed, and added that large-scale
demographic changes, such as the retiring
"baby boomer" population, could result in
exposure.
ADJOURNMENT The meeting was adjourned at 3:54 PM.
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