Legislature(2021 - 2022)ADAMS 519
02/07/2022 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: State Debt and Credit Rating | |
| Presentation: Pers/trs Update | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
February 7, 2022
1:33 p.m.
1:33:27 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 1:33 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Kelly Merrick, Co-Chair
Representative Dan Ortiz, Vice-Chair
Representative Ben Carpenter
Representative Bryce Edgmon
Representative DeLena Johnson
Representative Andy Josephson
Representative Bart LeBon (via teleconference)
Representative Sara Rasmussen (via teleconference)
Representative Adam Wool
MEMBERS ABSENT
Representative Steve Thompson
ALSO PRESENT
Deven Mitchell, Executive Director, Alaska Municipal Bond
Bank Authority, Department of Revenue; Ajay Desai,
Director, Division of Retirement and Benefits, Department
of Administration; Kevin Worley, Chief Financial Officer,
Department of Administration.
PRESENT VIA TELECONFERENCE
Emily Ricci, Chief Health Administrator, Division of
Retirement and Benefits, Department of Administration.
SUMMARY
PRESENTATION: STATE DEBT and CREDIT RATING
PRESENTATION: PERS/TRS UPDATE
Co-Chair Foster reviewed the meeting agenda.
^PRESENTATION: STATE DEBT and CREDIT RATING
1:34:57 PM
DEVEN MITCHELL, EXECUTIVE DIRECTOR, ALASKA MUNICIPAL BOND
BANK AUTHORITY, DEPARTMENT OF REVENUE, provided a
PowerPoint presentation titled "February 2022 Credit Review
and State Debt Summary" (copy on file). He discussed the
credit rating agencies on slide 2 and noted that the state
had credit ratings from Moodys, Standard and Poor, and
Fitch of Aa3/AA-/A+. He noted that the state had obtained
the highest credit rating in 2010, and there had been a
series of downgrades in the states credit since 2016.
Compared to other states, Alaska was in the bottom
quartile. He qualified that the state still had a strong
credit rating, and it had not impacted the state
significantly in the instances when it had issued debt.
Mr. Mitchell moved to slide 3 and discussed why credit
ratings were relevant. He discussed the differences in
credit ratings as shown on the chart on the bottom right of
the slide. He explained that when bonds were sold there
were maturities in each year. He discussed increasing
interest rates in market over the previous year and
previous month. The rates did not rise symmetrically across
the yield curve. The rates would have variation, and the
current market had increases greater at the short end of
the curve compared to the long end of the curve. He
commented that future predicting was difficult and
typically wrong, but the consensus was that rates would go
up over the next several years. He discussed potential rate
increases in terms of basis points and percentages and
commented that the previous year was the first year with a
material increase in interest rates.
1:39:42 PM
Mr. Mitchell moved to slide 4 and discussed challenges with
credit ratings. He thought the biggest challenge with the
states credit rating was the ongoing fiscal imbalance by
generating less revenue than there had been need for
appropriation. He mentioned the percent of market value
(POMV) transfer from the Permanent Fund and the ongoing
discussion regarding its use. He mentioned the states 10-
year plan reflecting a surplus in the current and following
fiscal year, and the fact that there were arguments that
the surplus might be from one-time revenues. He considered
that there was still a surplus and reflected that it had
been over 10 years since the state had a surplus or
projected a surplus. There were still deficits forecast for
2024 through 2029 based on the fall Revenue Sources Book
(RSB).
Mr. Mitchell mentioned reductions in state spending, a
projection of balanced budget, an improved oil price
environment, and significant improvement in the funding
ratios for Public Employees' Retirement System (PERS) and
Teachers' Retirement System (TRS). He highlighted that
actuarily at the end of the fiscal year, the retirement
systems were 85.5 and 92.5 percent funded, which was
extraordinary considering the 50 percent to 60 percent
funding levels in 2013.
Representative Josephson looked at the 85.5 and 92.5
percent funding ratios for PERS and TRS. He noted that a
person the previous week had given a funding ratio of 76
percent. He asked for detail on the difference.
Mr. Mitchell answered that the Division of Retirement and
Benefits would have more detail. He relayed that as of June
30, 2019, PERS was funded at 78.4 and TRS at 85.9. The
previous year PERS was funded at 76.9 and TRS was funded at
84.7. There had been improvements in subsequent years and
taking out some of the actuarial analysis and looking at
the information in isolation, the funding ratios improved
even more due to a smoothing process for balances with the
trust. He thought the ratios were even better than what was
stated in the presentation.
1:44:19 PM
Representative Edgmon stated that some of the best analyses
of the state's fiscal situation had come from the writings
of the three credit rating agencies. He looked at the
bottom of slide 4 related to the perception that the
majority of operating revenues and the state's economy were
primarily reliant on petroleum development. He wondered why
there would be a perception that the majority of the
states operating revenue came from oil revenues when 65
percent of the states funding for government operations
came from earnings of the Permanent Fund. He asked for more
detail.
Mr. Mitchell answered that the claim about oil revenue was
also a frustration of DOR, and DOR had discussed the matter
with the rating agencies. He related that the ratings
agencies defaulted by historical practice, and things
happened generally happened slowly in the ratings agency
world. He thought the state was a unique, and that it was
necessary to say the same thing over and over again.
Representative Edgmon thought it would stand to reason that
when talking about the three largest credit ratings
agencies in the world, that the fact the state spent down
its savings and Constitutional Budget Reserve (CBR) would
be of concern.
Mr. Mitchell thought that when agencies considered the
state, the agencies recognized that there was more than the
CBR available. He recognized that there were political
challenges with the use of the CBR. He thought the CBRs
depletion was a significant factor in downgrading the
states credit rating.
1:47:42 PM
Representative Carpenter stated that the bullet point
identified by Representative Edgmon was also confusing to
him. He thought the concept of operating revenues and the
state economy were largely disconnected. He asked how many
states had two-thirds of their operating revenues from
investment.
Mr. Mitchell answered, "None."
Representative Carpenter considered that the system did not
work for Alaska since the state did not fit into the
mold. He stated that the states biggest long-term
challenge was not oil. He thought it indicated there was a
disconnect with the ratings agencies and Alaska's
particular situation.
Mr. Mitchell agreed that it was challenging for the state
to conform to the criteria the ratings agencies had
established. He detailed that post-housing crisis there had
been a lot of regulatory oversight and congressional
interest in the rating process. When agencies looked at the
state, they wanted a score for the economy. Alaska's
economy was small and did not meet a certain threshold. He
thought Moodys had a minimum size to achieve an AAA credit
rating for economy, which was something like $75 billion.
He noted that the states GDP fluctuated greatly with the
price of oil, and typically did not hit that number unless
the price of oil was up to $150/bbl. He articulated that it
was a struggle to show the state had a diverse economy that
was not completely reliant on oil as it may have been in
the past.
1:51:02 PM
Representative Carpenter asked for the connection between a
percent of market value (POMV) draw of $3 billion to $5
billion and the health of the states economy, especially
considering that $3 billion to $5 billion might be spent
completely on state revenue.
Mr. Mitchell answered that he, along with others from DOR
had made the argument that what Representative Carpenter
had described was one of the strengths of the state, in
that there was revenue derived by the economy used to fund
state government and provide cash payments to state
residents. He commented that there was no other state like
that.
Representative Carpenter stated that Moody's was not as
concerned with the states spending as much as the size and
health of the economy. He pondered how Moodys and other
agencies viewed the Permanent Fund earnings helping state
government but not the economy if the interest of the
agencies was on the economy.
Mr. Mitchell answered that the Permanent Fund was but one
component looked at by agencies. He elaborated that the
agencies did take the states reserve position into
consideration. He discussed the credit given for the facets
of the states economy and reiterated the difficulty of
getting Alaska to conform to the rating systems and
matrices used by rating agencies. He continued that it was
difficult when there was credit strength coming from a
different structure than other states may have.
Representative Rasmussen referenced the reductions to the
CBR. She asked why the ratings did not reflect the growth
in the Permanent Fund.
Mr. Mitchell responded that the Earnings Reserve Account
(ERA) of the Permanent fund was reflected as an available
reserve compared to years when the ERA had a much smaller
balance and the CBR balance was much higher to show the
liquidity position of the state compared to previous years.
He commented that there was a lot of policy and politics
that revolved around the use of reserves, which the
agencies were also aware of and took into account. He noted
that at one point the state did not even get credit for the
ERA, and it had been viewed as off the table in the past
and had only been available for PFDs. He commented that
passage of legislation and the use of the Permanent Fund
earnings through the POMV transfer in part for state
government was what had stabilized the credit rating of the
state during the slide between 2016 and 2020.
Representative Rasmussen found it surprising that Alaska
would not have a higher position as a state with
substantial reserves. She estimated that Alaska was likely
in the top 25 percent of other states in terms of an annual
budget and amount in reserves. She understood the impact of
federal policy and thought a conversation with the federal
delegation was warranted.
1:56:53 PM
Representative Wool thought slide 4 was very informative
and candid. He thought the legislature regularly discussed
the challenges listed on the slide. He looked at the bullet
point at the bottom of slide 4 that indicated Alaska's
economy was narrow and relatively small and commented that
oil was a smaller part of the states economy than it used
to be. He asked if there was any discussion by credit
agencies or others that related to the states gross
domestic product (GDP) growing without its revenue growing.
Mr. Mitchell replied that the department brought up the
fact that the state had the ability to tax its economy for
revenue generation, and it was a credit strength. He
considered how the agencies considered the state's economy,
and explained the agencies continued to use standards that
Alaska did not conform to well. He mentioned Department of
Labor and Workforce Development statistics on employment
and commented that there was a diverse pie chart depicting
types of employment. He commented that the portion of
employment attributed to oil and gas was relatively small
at 3 percent, but it generated revenue that spun into other
sectors.
Mr. Mitchell thought there was an ongoing struggle to
ensure that the rating agencies were as informed as
possible and that the state conformed to the extent
possible to the rating agencies' standards. He thought the
biggest issue was why the state was not recognized as much
for the strengths it had. He thought part of the issue was
the lack of a fiscal plan. He mentioned past special
sessions and difficult budget processes, which was reviewed
by the credit agencies.
2:00:22 PM
Representative Wool mentioned the states large savings
account mentioned by Representative Rasmussen, drawing 5
percent as the state's major revenue source and not knowing
the future of oil, he considered that the Permanent Fund
could function as a retirement plan for the state for
hundreds of years. He thought the fund was not functioning
as a savings account. He stated that it was not desirable
to dip into a retirement account, but rather have it gain
value.
Representative LeBon asked for comment on the governor's
proposed general obligation (GO) bond that would require
voter approval in November. He asked if the payment on the
bonds would take priority over all other spending if they
passed.
Mr. Mitchell answered that GO bonds were a full faith
credit pledge by the state and would have the highest
constitutional requirement for payment, and would be paid
with or without appropriation.
Representative LeBon stated that the committee had been
told recently that the reason for the GO bond was because
of investment earnings from the Permanent Fund (which he
thought one could say were directly connected to repayment
of the bonds) were earning much more than what the state
would be paying on the bonds. He suggested considering the
investment earnings of the Permanent Fund had priority over
all other spending if the voters approved the GO bond. He
considered that access to the earnings was the equivalent
of a CD or savings secured loan at a bank, which had an
ensured repayment. He wondered if the state's interest rate
on a GO bond pledge would improve because of the near
guarantee of repayment.
Mr. Mitchell thought Representative LeBon made great points
in reference to the potential of purchasing bonds of the
state. He continued that the state could not make a direct
linkage between a fund other than a bona fide reserve on a
revenue bond issue, which had a finite size allowance,
otherwise the bonds would not be tax exempt. He cited that
the Permanent Fund was operating independently and putting
out investment returns, and then there was the bond issue
being considered. He surmised that the committee should be
sophisticated enough to look at the issue holistically,
while understanding that there was a revenue stream derived
from investment income and there was an allowance to use
tax-exempt debt at the same time. He added that one did not
want a bright line drawn between the two.
2:04:50 PM
Representative LeBon surmised that voter approved GO bonds
would be as close to a guarantee of repayment as possible.
Representative Johnson commented on the markets desire for
stability. She commented that the perception became the
reality whether or not it was the fact, Alaska not being
able to get the word out of what was true and who it is.
She mentioned a bipartisan working group that had tried to
put forward a plan. She had seen a February 5 Market Watch
opinion piece about money trouble with Alaskas oil fund.
She believed the headline was damaging to perception. She
noted that the governor had put forward a handful of bills
and believed that the bills addressed things on the slide
such as bridge funding. She stated that one of the things
legislators did not always hear was about the context of
what the states financial big picture looked like. She
would appreciate talking about the situation in terms of
reality.
2:08:14 PM
Mr. Mitchell moved to slide 5, Alaska's Most Pressing
Credit Rating Challenge, which showed a table including
historical revenues and spending, as well as state savings
accounts and POMV transfers. He highlighted the Historical
General Purpose UGF Revenue column and made note of the
decline from nearly $7 billion in 2013 to a low of $1.3
billion in 2017. He noted that all of the years (2013 to
2022) showed a deficit reflected in red in the
Unrestricted Surplus / (Deficit) column. He reminded that
2022 was a year where the deficit was flat, which he
intended to highlight the next time he met with ratings
analysts, regardless of how the situation was achieved. He
pointed out the change in net position in the last column
that showed that every year the UGF revenue was in deficit,
but not every year was there a loss in net position because
of restricted revenues. He explained that the state had
created a structure that was conservative at its core, and
as a result more than half the time there was not a deficit
even when the budgetary outcome reflected a deficit.
2:10:00 PM
Mr. Mitchell offered to skim over some slides that had to
do with outstanding debt. He turned to slide 7 and
discussed the state debt obligation process. He highlighted
than any debt of the state had to be authorized by law, and
in some instances by the constitution, and in others (such
as GO bonds) by the voters. He noted that there was not a
lot of flexibility in state debt and referenced a Supreme
Court decision from 2020 that limited the ability to borrow
other than for a real property, GO bond projects, and
revenue bond structures.
Mr. Mitchell noted that there were very few revenue bond
structures because of the prohibition against dedication of
state revenues. He mentioned the University, the airport
system, and some federal items that were exceptions. He
mentioned state reimbursement programs such as The School
Debt Reimbursement Program, the Transportation And Energy
Reimbursement Program, which had been partially funded in
recent years. He offered that from a credit perspective, it
was a positive for the state even while negative at the
local level as the costs were picked up by local taxpayers.
The state was able to diminish its spending by not funding
the program and the local obligation bonds for the
projects. He mentioned the retirement systems and that the
state was obligated to constitutionally or statutorily pay
through the payment structure.
2:13:24 PM
Representative Rasmussen asked if the legislature taking up
legislation to look at ending the moratorium on ending bond
debt reimbursement would negatively impact on the credit
rating.
Mr. Mitchell did not believe it would have a negative
impact. He expanded on the question. He suggested that
there would be a different way the state could participate
in funding of schools rather than through a reimbursement
program. He pointed out that the municipalities had
shouldered a burden recently, and he thought it made more
sense if the state funded its portion and the
municipalities funded their portion. He mentioned that in
the communities of Dillingham and Haines, he had been
concerned when he had heard the program would not be funded
because they had large projects to provide for local
education and the state was not providing payments. He
continued that when there was a limited budget sometimes
there was not opportunity to raise the extra funds. He
suggested that the legislature do a deep dive on how
education was funded if a moratorium were considered.
Representative Rasmussen clarified that she was not
referring to the existing bond debt. She was asking about
legislation that would put a moratorium on bond debt
reimbursement so that the state would not take on
additional bond debt agreements with local communities. She
wondered if a policy decision was made to end a moratorium
and incur more bond debt if it would be a negative impact
to the state's credit rating.
Mr. Mitchell did not believe there would be a negative
credit reaction. He thought the way the program was
structured, it presented challenges for municipalities when
it was subject to not being funded at the whim of the
legislature.
Representative LeBon asked about oil gas tax credits. He
wondered if credit markets looked negatively at the state
if it was not in compliance with paying the obligation.
Mr. Mitchell answered that the payment or nonpayment of the
credits had not been a significant point of discussion for
rating analysts. There was a combination of items that
diminished the faith of investors in the state, and he
thought the credits could be included. He thought the
matter was similar to the School Debt Reimbursement Program
in that it did not have a direct impact on the state's
credit. He commented on the faith of repayment of a loan.
He stated the topic of the tax credits was one more thing
the state could be asked about.
2:18:15 PM
Mr. Mitchell moved to a table on slide 8, showing the total
debt in Alaska on June 30, 2021. The table came from an
annual publication produced in January of each year called
the Alaska Public Debt Books, which summarized state
commitments on a priority basis. The top priority was GO
bonds, followed by guaranteed debt and the Alaska Housing
Finance Corporation (AHFC) Veterans Mortgage Program. He
listed state-supported debt, which was subject to
appropriation. The debt was limited to real property
investments, the largest of which was Goose Creek
Correctional Facility. He mentioned state-supported
municipal debt, which was also classified as subject to
appropriation. The states portion of the GO bonds of
municipalities was $561 million, which was the portion the
state would pay debt service on under the program
parameters. The state reimbursement of capital projects had
$19 million outstanding.
Mr. Mitchell mentioned the pension systems and expected the
numbers to diminish based on investment performance in the
past year. He mentioned state moral obligation debt with
the Alaska Municipal Bond Bank, which lent to
municipalities. He mentioned that Representative LeBon had
a bill pertaining to the Alaska Municipal Bond Bank. He
mentioned state revenue debt and that there was limited
opportunity for revenue bonds, with $319.4 million
outstanding currently. He mentioned multiple refinancings
to ensure Anchorage remained as competitive a cargo hub as
possible.
2:21:42 PM
Representative Wool asked for a definition of moral
obligation in the current context.
Mr. Mitchell answered that moral obligation was a term
recognized by financial markets and the municipal
marketplace, which meant in a statutory construct one was
required to create a reserve fund, which was typically one
years worth of debt service on bonds. The sufficiency of
the funds must be reported to the legislative body, and in
the event of a deficiency in the reserve there was an
expectation or moral obligation that the legislature would
replenish the reserve. There had not ever been a request
for a replenishment, so it was an untested moral
obligation.
Representative Wool asked for verification that it did not
mean that the debt was morally more valid than employee
retirement or school bond debt, but rather was the
construct of the reserve fund.
Mr. Mitchell agreed. He mentioned that there were social
bonds that were getting closer to altruism. He addressed
slide 9, which was a continuation of the table on slide 8
and the total debt in the state. He noted that the
University had a surprisingly close linkage with the state.
The University had to obtain permission from the
legislature if it wanted to issue most debt. He noted that
the information could be seen in the rating agency reports,
including some of the impacts due to reductions in state
support. He discussed state agency debt, primarily from
AHFC, which was the largest issuer of debt in the state.
Mr. Mitchell continued that the Municipality of Anchorage
was the second largest issuer of debt, and the Alaska
Municipal Bond Bank was the third largest issuer of debt
over the previous five years. He mentioned funding loans
with long-term bonds, state capital project bonds issued
for capital projects in the state, and bonds for a National
Oceanic and Atmospheric Administration (NOAA) program
without moral obligation for the state. He mentioned the
Alaska Railroad and the Northern Tobacco Securitization
Corporation, listed under State Agency Debt on the slide.
He continued to list State Agency Collateralized or
Insured Debt, including AHFC, the largest issuer with
mortgage programs, as well as the Alaska Industrial
Development and Export Authority (AIDEA), which had power
revenue bonds.
Representative Josephson asked about when Mr. Mitchell
discussed the capacity to take on new debt and what was
fiduciarily responsible and what was not. He asked about
the state capital project bonds, and whether they went into
the calculus.
2:26:24 PM
Mr. Mitchell replied in the negative and noted that the
state capital project bonds were supported by program
receipts. There was an almost zero likelihood that the
state would feel obligated to pay in an event of fiscal
failure. He listed the GO bonds, state-guaranteed or state
supported debt, or state moral obligation debt as items
that would have some awareness when thinking about debt
capacity.
Representative Josephson surmised they were looking more at
slide 8 rather than 9.
Mr. Mitchell agreed that slide 8 had a greater correlation
to the states ability to finance.
Representative Edgmon was intrigued to know the City of
Anchorage was the second largest issuer of debt in the
state. He asked for detail.
Mr. Mitchell replied that Anchorage was the largest most
sophisticated community in the state. He detailed that the
city was operating in a fashion that might be more similar
to a community in the Lower 48 and taking advantage of
paying for projects with tax exempt bond proceeds and
paying the debt over time with taxes of facility users. He
considered that the city had a ballot proposition almost
every year, and the debt could be for school projects;
recreational projects; or water, sewer, and electric
infrastructure.
2:29:16 PM
Representative Edgmon stated it was interesting that if
there was a more sizeable capital budget there would be
less of a need to bond in Anchorage.
Mr. Mitchell answered, "Most likely, yes."
Mr. Mitchell turned to slide 11 and discussed a publication
called the Debt Affordability Analysis, which was
statutorily required. He recalled that former House Finance
Committee Co-Chair Representative Mike Hawker had sponsored
the legislation to require the publication, which conformed
to information that debt rating agencies liked to see. The
agencies liked to see a discussion of what was affordable
as well to ensure there were standards for providing
guidance to elected officials. The book discussed credit
ratings.
Mr. Mitchell discussed the primary analysis that was
undertaken in the publication, because Alaska did not lend
itself well to a debt per capita analysis. The state had a
relatively small population compared to a relatively high-
income level as a state, when comparing revenue generation
to population. There were other states that used
percentages of revenue to determine capacity, and for
Alaska the state's debt paid from the General Fund should
not exceed 4 percent. He mentioned volatility in oil price,
and that the projection for the current fiscal year would
line up at 3.2 percent. There had been improved revenue
projections since the fall forecast that could adjust the
number slightly higher. The number rose to 7 percent when
combined with other items the state supported like the
School Debt Reimbursement Program.
Mr. Mitchell noted that the Debt Affordability Analysis
book also identified currently authorized, but unissued
debt. The book discussed refinancing parameters and short-
term debt. The book took into account some of the issues
surrounding the POMV, and the POMV transfer was considered
UGF revenue. He thought a clearer path of how the POMV
revenue would be split between PFDs and the state budget
would be beneficial in determining capacity. He referenced
PERS and TRS funding, which dwarfed the rest of state debt
and would be addressed in a later slide.
2:34:18 PM
Representative Edgmon returned to the topic of a GO bond
measure. He asked if the legislature could only authorize
for specific projects, or could it authorize a set amount
to go with federal funding for infrastructure that could
come to the state in the following four or five years.
Mr. Mitchell directed the question to the Department of Law
or Legislative Legal Services because it was a legal
matter. He had seen local GO bond propositions that were
broader, and mentioned the Northwest Arctic Borough, which
had organized in part to provide better opportunities for
education facilities. The borough had passed a $100 million
GO bond authorization for school facilities, and the
allocation of the bonds had been done by the assembly over
the years as projects came up in various communities.
Representative Edgmon noted a news article that indicated
that the state had only had approximately 18 bonds in
total. He asked if the bond bank had been granted
legislative authorization in the past but not executed the
authorization.
Mr. Mitchell replied that he was assuming Representative
Edgmon was referencing the GO Bonds for the State of
Alaska. He noted there had been instances where projects
had not issued bonds due to other funding coming through.
He referenced a 2008 transportation act, $150 million of
which was essentially funded through a General Fund
appropriation two years later, so the bonds were never
issued. The GO Bonds were essentially a contract with
voters. He thought the matter had been challenged in court
and believed that the administration could not fail to do
projects that had been authorized for funding with approved
GO bonds.
2:37:48 PM
Mr. Mitchell turned to slide 12 that showed the authorized
bonding authority and outstanding obligations of the state.
He noted that there were no authorized but unissued bonds.
There had been nearly 70 GO bond issuances despite the
relatively small number of issuances. He cited that there
was currently a fairly mature debt portfolio outstanding
for the state, with relatively rapid repayment underway as
bonds had been outstanding for some time. He discussed bond
repayment structures, with increasing annual payments for a
period and then a declining amount a year or two after
issuance. He cited that GO bonds were repaying at a rate of
$40 million or $50 million over each of the next ten years.
He read from the slide:
Annual principal repayments over the next five years
are:
? GO bonds $40 to $50 million
? Lease bonds $14 to $20 million
? SDRP approximately $60 million
Mr. Mitchell moved to slide 13, Current General Fund
Annual Payment Obligation. He noted that there was
declining debt service every year after 2023, and there had
been a peak in outstanding obligations in 2018. The largest
component of the obligation was the School Debt
Reimbursement Program, which was declining rapidly.
Mr. Mitchell relayed that the final chart on the bottom of
the slide was intended to show the overwhelming impact of
the PERS/TRS special funding situation. He cited that in
2017 there was $220 million, which was difficult to see in
the chart on the bottom compared to the PERS/TRS funding.
He hoped there would be some improvement as there was
smoothing if the state did not have negative 30 percent
year and could benefit from a reduction in annual payments.
He thought the PERS/TRS being near fully funded was the
strongest credit story to tell in the state in a long time.
2:42:08 PM
Mr. Mitchell continued to review slide 13. He discussed
contemplation of whether the TRS/PERS was nearly enough to
pay the obligations. He thought the funding was an amazing
accomplishment for the state.
Representative Carpenter asked for a comparison between Mr.
Mitchell's last statement that PERS/TRS were near fully
funded and the perception from the previous slide and the
comparative large pension liability.
Mr. Mitchell reiterated that the PERS/TRS funding was the
most powerful credit story the state had at present. He
detailed that the size of the unfunded liability at $4
billion was an extraordinary liability relative to the size
of the state's population. He continued that because of
above-average investment performance that was not eroded by
future experience the state was able to satisfy the
liability.
Representative Josephson asked about the $110 million item
from the last calendar year on slide 12.
Mr. Mitchell answered that the item was the final issuance
of the 2012 transportation act, which showed how long it
took to build horizontal construction projects. He
commented on the time frame of issuing the final portion of
the authority.
Representative Josephson asked if whatever the state
purchased with the funds was known in 2012 or if there was
legislative input. He asked who had decided how the money
was spent.
Mr. Mitchell answered that it had been a GO bond approved
by the legislature 2012 and ratified by the voters in
November of 2012. The projects were all established but had
taken a long time.
Co-Chair Foster thanked Mr. Mitchell for the presentation.
^PRESENTATION: PERS/TRS UPDATE
2:45:45 PM
AJAY DESAI, DIRECTOR, DIVISION OF RETIREMENT AND BENEFITS,
DEPARTMENT OF ADMINISTRATION, provided a PowerPoint
presentation titled "State of Alaska Department of
Administration Presentation to House Finance Committee,"
dated February 7, 2022 (copy on file). He had been with the
department since January 2017 and brought about 34 years of
experience.
He began on slide 2 showing a flow chart of how the
Department of Revenue (DOR) and the Department of
Administration (DOA) worked with the Alaska Retirement
Management (ARM) Board. He cited that under Alaska statute,
the boards primary mission was to serve as the trustee of
the asset of the states retirement systems, the states
supplemental annuity plan, different compensation pans, and
the Alaska Retiree Healthcare Trust. He turned to slide 3
and highlighted membership in the defined benefit and
defined contribution plans as of June 30, 2021. He noted
that active members under the defined benefit plan were at
31 percent compared to 69 percent defined contribution plan
members.
Mr. Desai turned to slide 4 and discussed the Employer
Group Waiver Plan (EGWP) subsidy. The program was initiated
in 2019 with the estimated subsidy for between $40 million
to $60 million. He cited that in 2019 the state received
about $49.5 million, in 2020 the state received $58.3
million, and in 2021 the amount was approximately $64.4
million.
Mr. Desai addressed slide 5, Additional State
Contributions Projected, which showed a table that used
information presented to the ARM Board at its October 2021
meeting.
2:50:32 PM
Mr. Desai advanced to slide 6, PERS and TRS Health Care
Trusts, with a table that showed the funded levels of PERS
and TRS with and without normal cost contributions.
Representative Josephson asked what NC stood for on slide
6.
Mr. Desai answered, normal costs.
Mr. Desai looked at slide 7, Additional State
Contributions History, which showed a table. He noted
that the state contributions between 2006 and 2022 added up
to about $8.1 billion.
Representative Josephson asked for verification that
normal cost was cost that was not attributable to the
unfunded liability problem, but rather expected cost of the
plan.
Mr. Desai answered that the normal cost was typically
defined as the benefit that was accrued during the previous
plan year, and what it would take to fund the plan in the
future.
Mr. Desai moved to slide 8 titled "Investment Experience":
The actuarial value of assets was reinitialized to
equal fair value as of June 30, 2014 with the
$3Billion infusion from HB 119.
Beginning in FY15, the valuation method recognizes 20%
of the investment gain or loss each year for a period
of five years ("Smoothing").
Mr. Desai addressed recalled that in 2014 and 2015, there
was $1 billion funded to PERS and $2 Billion for TRS. The
table on the bottom of the slide showed the current earning
rate assumption at 7.38 percent. He explained that with the
excellent work by the ARM Board and DOR, the last two
columns reflected 30 percent for PERS and 30.1 percent for
TRS.
Mr. Desai advanced to slide 9, Funded Status Valuation
Results, showing the funded status for PERS and TRS. For
comparison purposes, the table showed 2019 and 2020, as
well as 2021 draft numbers that were unpublished but
presented to the ARM Board. He cited that in 2021 the
Unfunded Actuarial Accrued Liability based on fair value of
assets was $579 million under PERS and negative $537 under
TRS.
Mr. Desai turned to slide 10, Funded Status Pension,
and discussed the funded status of the pension. He noted
that as of 2021, PERS was funded at 67.9 percent, and TRS
was funded at 79.0 percent. He noted that the same numbers
based on fair value of assets would be 77.3 percent under
PERS and 90 percent under TRS.
Mr. Desai explained that slide 11, Funded Status
HealthCare showed the funded status for the defined
benefit healthcare. He noted that all the numbers in red
represented the old funding under the health plans, which
had increased 125.2 percent under PERS as of 2021, and
134.2 percent for TRS. Similarly, the same numbers based on
the fair value of assets would be 142.7 percent for PERS
and 152.8 percent for TRS.
2:54:54 PM
Representative Josephson assumed medical costs in the
defined benefit healthcare program were devastating the
states ability to sustainably fund the program. He thought
the committee was being told that the program was now
overfunded. He asked how it had happened.
Mr. Desai deferred to a colleague.
EMILY RICCI, CHIEF HEALTH ADMINISTRATOR, DIVISION OF
RETIREMENT AND BENEFITS, DEPARTMENT OF ADMINISTRATION (via
teleconference), explained that she could speak to a couple
of reasons why things had changed rather dramatically since
2006 and the present. She relayed that some of the issue
was related to plan management and thought the division had
been consistently focusing on trying to identify ways to
leverage volume to achieve better pricing. She mentioned
rebidding contracts, third party administrators, and
getting better value out of networks, which provided better
pricing for the same services.
Ms. Ricci continued and referenced slide 5, and thought one
the largest changes was the implantation of the Medicare
Part D EGWP. With the EGWP being implemented in 2019, the
state moved into overfunded status in the PERS and TRS
plans as it related to the health plan. She mentioned that
it was difficult to find opportunities where members
benefits were held harmless or improved and the state
achieved significant financial savings through the addition
of federal subsidies. She deferred to the chief financial
officer to discuss how some of the remarkable investments
from the treasury team had helped changed the liability
status of the health plan.
2:57:48 PM
KEVIN WORLEY, CHIEF FINANCIAL OFFICER, DEPARTMENT OF
ADMINISTRATION, elaborated that in the most recent fiscal
year there were 30 percent returns. Additionally, the new
prescription drug third-party administrator helped the
health trust and provided significant benefit in FY 20. He
continued that the biggest driver was the 30 percent
return. There was a 12 percent increase from FY 20 to FY 20
for PERS and 13 percent for TRS.
Representative LeBon looked at the actuarial value of
assets versus the fair value of assets on slide 11. He
asked for an explanation of the difference between the with
actuarial value of assets numbers and fair value of assets
numbers.
Mr. Worley answered that the actuarial value of assets was
a smoothed five-year average. The division looked at
investment gains and assets, smoothed the numbers over a
five-year period while recognizing 20 percent of the gain
or loss to account for volatility. He continued that fair
value of assets represented the value of assets if they
were immediately liquidated and turned to cash while
accounting for any debts at the time.
3:00:46 PM
Mr. Desai turned to slide 12 and discussed the historical
rate of return and funded ratio. He looked at the expected
rate of return for 2021 that was 7.3 percent, but the
cutoff date was showed a rate of return of 27.62. He
remarked that the TRS side showed a slightly higher rate of
return at 27.65.
Vice-Chair Ortiz looked at the year 2000 where the funded
ratio had been 95 percent followed by a significant drop
down to as low as 52 percent. He asked for the reason for
the drop.
Mr. Desai answered there were multiple reasons. He pointed
out that during those years there was a certain
questionable number, which was actually an actuarial error.
Mr. Worley answered that the healthcare costs were
undervalued, so once that error was discovered the
expectation saw a significant reduction.
Vice-Chair Ortiz asked for more information about the two
factors.
Mr. Worley replied that annually the division had an
actuarial valuation report completed by the consultants. He
stated that there were various economic impacts on the
results, including the dot com bust and the great
recession.
3:06:29 PM
Vice-Chair Ortiz stated that obviously things had
significantly improved since that time. The governor's
budget had said they were okay with not doing a
contribution for PERS/TRS, which would be a savings to the
budget. He asked if there was potential the actuarial
analysis could be wrong and the decision to not put funding
into the liability could be problematic.
Mr. Worley highlighted what had changed since 2000, and
remarked that that the actuarial recommendations and
analyses had not occurred due to the economic impacts over
the last 20 years.
Vice-Chair Ortiz stated his understanding there were
certain safeguards in place at present that would make the
outcome in 2022 less likely. He asked what the numbers
would look like if there were a large market correction.
Mr. Desai responded that that the fair market value number
would decrease significantly
3:11:08 PM
Representative Johnson asked wondered why the market
changes did not line up with the actuarial issue.
Mr. Worley reiterated that there were significant impacts
on the actuarial forecasts, which were due to points of
economic downturns, and therefore beyond anyones control.
He furthered that he believed Vice-Chair Ortiz was
referring to the healthcare cost only component that had
been discussed in the public. He returned to slide 6, and
pointed to FY 21. He remarked on the roughly $68 million on
the PERS side and $25 million on the TRS side. The numbers
represented a small amount, they continued to remain over
100 percent for both systems.
3:17:26 PM
Vice-Chair Ortiz asked if the term unfunded liability was
separate from overfunding of healthcare costs.
Mr. Worley pointed to slide 9 showing the combined costs of
the liabilities. He turned to slide 10 showing the pension
funds were underfunded, and stressed that they could not
move money between trust funds. The issue constantly facing
the pension fund side was that it did not have the numbers
the healthcare side had.
3:20:25 PM
Vice-Chair Ortiz understood that money could not be moved
around once it was in one fund. He asked that because
healthcare did not need funds in the current year, he asked
if the money that would have gone to the healthcare side to
the pension side unfunded liability.
Mr. Worley answered that because of the way the rates were
set and adopted, by the board adopting a zero cost rate it
reduced the effective contribution rate for employers.
Representative Carpenter asked if there were negative
consequences to overfunding the healthcare portion of the
pensions.
Mr. Worley did not believe there were any issues for
overfunding the healthcare. The issue arose if there was
overall overfunding of the entire pension.
Representative Josephson asked for verification that Mr.
Worley believed that overfunding the pension was a problem,
and he asked if there should be a change to provide greater
flexibility.
Mr. Worley deferred to ARMB legal counsel for discussion.
Representative Josephson asked if it had to do with
diminution of each trust.
3:25:49 PM
Mr. Desai advanced to slide 13 and referred unfunded
actuarial liability for PERS and TRS. He reviewed an
employer's pension and additional state contributions
projection on slide 15. The pension assumed the 7.38
percent for 2022 to determine the 2023 rate. He turned to
slide 16 and discussed FY 23 contribution rates for the
defined benefit plans. He looked at slide 17 and discussed
the FY 23 contribution rates for the defined contribution
plans.
3:30:37 PM
Mr. Desai moved to a history of contribution rates on slide
18. He discussed projected pension benefit recipients on
slide 19. He stated that the blue line reflected PERS and
green reflected TRS. He shared that slide 20 showed the
projected pension benefits payment.
Mr. Desai turned to health care cost trend rates on slide
21. He shared that moving forward, the rate would remain at
4.5 percent.
Representative LeBon looked at a summary of PERS and TRS
participants on slide 3. He recalled that Tier I terminated
in the early 1980s. He wondered whether 655 state employees
were still working under the Tier I program.
Mr. Desai agreed. He reported that Tier I ended in 1986 and
that there were still 655 active employees under the tier.
Representative LeBon stressed if a defined benefit program
was rolled out, the state would be paying benefits out into
the next century. He reiterated that it would be a major
financial obligation to the state to return to a defined
benefit program.
3:35:12 PM
Representative Carpenter looked at slide 21 and asked where
the assessment had come from - he saw that the source was
Buck.
Representative Edgmon thanked the presenters for the
presentation. He agreed with Representative LeBon's
comments. But he also pointed out the cost of not having a
defined benefits plan resulted in a retention and
recruitment issue, which was also a major cost to the
state.
Co-Chair Merrick reviewed the schedule for the following
day.
ADJOURNMENT
3:39:16 PM
The meeting was adjourned at 3:39 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HFIN - DOR State Debt 2022 2-7-22 FINAL.pdf |
HFIN 2/7/2022 1:30:00 PM |
|
| HFIN - DOA PERS-TRS Overview - 02062022.pdf |
HFIN 2/7/2022 1:30:00 PM |