Legislature(2023 - 2024)ADAMS 519
02/15/2023 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Overview: Funding Status of Alaska Public Employees' Retirement System and Teachers' Retirement System | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
February 15, 2023
1:33 p.m.
1:33:45 PM
CALL TO ORDER
Co-Chair Johnson called the House Finance Committee meeting
to order at 1:33 p.m.
MEMBERS PRESENT
Representative Bryce Edgmon, Co-Chair
Representative Neal Foster, Co-Chair
Representative DeLena Johnson, Co-Chair
Representative Julie Coulombe
Representative Mike Cronk
Representative Alyse Galvin
Representative Sara Hannan
Representative Andy Josephson
Representative Dan Ortiz
Representative Will Stapp
Representative Frank Tomaszewski
MEMBERS ABSENT
None
ALSO PRESENT
Ajay Desai, Director, Division of Retirement and Benefits,
Department of Administration; Kevin Worley, Chief Financial
Officer, Division of Retirement and Benefits, Department of
Administration; Betsy Wood, Chief Health Administrator,
Division of Retirement and Benefits, Department of
Administration; Pam Leary, Director, Treasury Division,
Department of Revenue; Bob Williams, Chair, Alaska
Retirement Management Board; Alysia Jones, Liaison Officer,
Alaska Retirement Management Board.
SUMMARY
OVERVIEW: FUNDING STATUS OF ALASKA PUBLIC EMPLOYEES'
RETIREMENT SYSTEM AND TEACHERS' RETIREMENT SYSTEM
Co-Chair Johnson reviewed the meeting agenda.
^OVERVIEW: FUNDING STATUS OF ALASKA PUBLIC EMPLOYEES'
RETIREMENT SYSTEM AND TEACHERS' RETIREMENT SYSTEM
1:35:20 PM
PAM LEARY, DIRECTOR, TREASURY DIVISION, DEPARTMENT OF
REVENUE, introduced herself and the PowerPoint presentation
"Alaska Retirement Board Overview" dated February 15, 2023
(copy on file). She continued to slide 2 and relayed that
she would be presenting on the background and mission of
the Alaska Retirement Management Board (ARMB), its
organizational structure, board duties and statutes, and
offer an overview of the board's meetings and decision
making process.
Ms. Leary continued to slide 3 and detailed the background
of the ARMB board. The board was established by the
legislature on October 1, 2005, as a fiduciary of the
assets of the state's retirement systems. It replaced the
Alaska State Pension Investment Board (ASPIB) which had
been created by the legislature in 1992. The board's
primary mission was to serve as a trustee of the assets of
the state retirement systems. There were 14 defined benefit
funds that were categorized within the four main systems:
Public Employees' Retirement Trust Funds (PERS), Teachers'
Retirement Trust Funds (TRS), Judicial Retirement Trust
Fund (JRS), and National Guard and Naval Militia Retirement
Trust Fund (NGNMR). There were also four participant-
directed funds, including the PERS defined contribution
plan, the TERS contribution plan, the state supplemental
benefit system, and the deferred compensation plan. She
turned the presentation over to her colleague.
1:37:15 PM
BOB WILLIAMS, CHAIR, ALASKA RETIREMENT MANAGEMENT BOARD,
shared that he was an educator in the Mat-Su Valley for
close to 30 years. He continued on slide 4 which detailed
the composition of the board. He explained that there were
nine members total, consisting of the commissioners of
Administration and Revenue and seven members appointed by
the governor: two PERS members, two TRS members, one
finance officer, and two public members. There was a
nomination process for the PERS and TRS seats in which the
bargaining units would submit a list of four nominees to
the governor for consideration. For PERS, the nominating
entity was the Alaska American Foundation of Labor and
Congress of Industrial Organizations (AFL-CIO) and the TRS
seat nominations were submitted by the Alaska chapter of
the National Education Association (NEA). The finance
officer seat and public seats followed the standard boards
and commissions application process. All trustees other
than the commissioners served staggered four-year terms
with potential for reappointment. He advanced to slide 5,
which included a list of the current board members.
Co-Chair Johnson welcomed Mr. Williams and noted she
recognized him from Palmer.
Representative Hannan commented that not only was Mr.
Williams a teacher in Palmer, but he was a former Alaska
Teacher of the Year and National Teacher of the Year. She
shared that he was a renowned and revered teacher.
Co-Chair Johnson added that Mr. Williams' family was also
accomplished and she could spend the entire meeting talking
about them.
Mr. Williams explained that he was the Alaska Teacher of
the Year in 2009 and although he was not the National
Teacher of the Year, he was inducted into the National
Teachers Hall of Fame and also received an award for
excellence in mathematics teaching.
Mr. Williams turned the presentation back over to Ms.
Leary.
1:40:56 PM
Ms. Leary continued on slide 6, which detailed the
organizational structure of ARMB. The board was established
within the Department of Revenue (DOR), but it also worked
with the Department of Administration (DOA) and the
Division of Retirement and Benefits (DRB). The assets were
managed under the treasury division, which supplied staff
to the board. The liabilities were handled by DRB.
Ms. Leary began with the bottom row of the assets section
of the organizational chart, which showed the key advisors
who worked with the board. The first advisor was the
external auditor, which was Klynveld Peat Marwick Goerdeler
(KPMG). She relayed that KPMG was the auditor for the
treasury division and DRB and was responsible for measuring
and validating financial statements and managing the plan.
The auditor worked with the audit committee in outlining
the annual audit plan.
Ms. Leary continued to the next entity, which was the
investment consultant. She indicated that Callan served as
the performance measurement and advisory for the board and
provided objective and third party advice on investment
management. Callan currently served as both the general
consultant and real assets consultant. She continued to the
Investment Advisory Council (IAC), which was responsible
for reviewing investments made by the board and making
recommendations concerning the board's investment policies,
investment strategies, and investment procedures. Per
statute, the council was permitted to have three to five
members and there were currently three.
Ms. Leary continued on to explain the review actuary, whose
role was to review and certify the results of all actuarial
assumptions prepared by the primary actuary, which was
currently Buck Consultants. The audit actuary was an
independent auditor of the state's actuary. The work of the
audit actuary occurred not less than once every four years.
Ms. Leary moved to the liabilities under DRB. She
reiterated that under DRB, the external auditor was KPMG
and the primary actuary was Buck. The board coordinated
with DRB to conduct an annual actuarial evaluation of each
retirement system, which included analyses of system
assets, proving liabilities, and determining funding
ratios. The entities also collaborated on the experience
analysis of the retirement system which occurred not less
than once every four years. The third-party administrators
such as health care providers would be discussed later in
the presentation.
1:44:57 PM
Ms. Leary advanced to slide 7, which was a list of the key
advisors to the board. She continued to slide 8, which
summarized the duties of the board. The first duty was to
establish investment policies, which was important because
it allowed the board to seek its long-term total return
while balancing risk balances, cash flows, and liquidities.
The board also established its asset allocation annually
based on a review of items like the capital markets and
time horizons. Providing investment options was important
for defined contribution plans as participants were
responsible for their own investment decisions. She
explained that ARMB also sought to provide participants
with an array of investment choices across a range of asset
classes, risk levels, and investment strategies to enable
participants to create portfolios that addressed their
individual needs. The board also had control procedures in
place to monitor compliance with investment policies and
objectives in order to oversee the performance of the
plans.
Ms. Leary shared that Callan provided the board with a
quarterly performance report including information on rates
of return, assets, sub-asset classes, total investments of
the fund during the past quarter as well as one-year,
three-year, and five-year periods. Callan also provided
performance comparisons to benchmarks and performance to
other similar entities. The board collaborated with the
plan administrator to hold an annual actuarial evaluation
of each retirement system, determine system assets, accrued
liabilities, and funding ratios, and to certify to the
appropriate budgetary authority of each employer in the
system. The reports were prepared annually by the primary
actuary and reviewed and analyzed by the review actuary.
Finally, the board would annually certify to each employer
in the system the contribution rates for normal costs for
liquidating any past service liability.
Ms. Leary moved to slide 9, which listed the statutes that
correlated with the board's duties. She thought that most
of the committee members would already be aware of the
statutes. She highlighted as especially important the duty
to manage and invest assets in a manner that was sufficient
to meet the liabilities and pension obligations of the
systems. The duty was found under AS 37.10.210. She added
that AS 37.10.071 included another important duty, which
was to apply the Prudent Investor Rule (PIR) and act in the
sole financial best interest of the beneficiaries.
Ms. Leary moved to slide 10, which expanded upon the PIR
and the statutes that governed it. Under the rule, the
fiduciaries should consider the purposes and requirements
of the trust, ensure that the risk and return objectives
were reasonably suited to the trust, evaluate investment
decisions in the context of the portfolio as a whole,
diversify, delegate prudently, and incur reasonable and
appropriate costs. She turned the presentation over to her
colleague.
1:49:14 PM
ALYSIA JONES, LIAISON OFFICER, ALASKA RETIREMENT MANAGEMENT
BOARD, offered some of her work history. She had been with
the board for about two and a half years. She continued on
slide 11 of the presentation, which was an overview of the
ARMB meetings. The board met quarterly to accomplish its
fiduciary responsibilities and meetings were typically two
days in length and included presentations from the key
advisors, staff members, legal counsel, committee chairs,
and investment managers.
Co-Chair Johnson suggested that Ms. Jones summarize her
notes rather than reading the notes verbatim.
Representative Josephson proposed that the key features of
each paragraph be addressed.
Ms. Jones continued on slide 11. There were processes that
occurred during actuarial valuations that governed the
review of the draft reports and the final adoption. There
were also updates at every meeting on performance
measurements and there were a variety of focuses on
specific types of assets. She explained that DRB would
cover experience analysis. She added that there were some
items that happened annually and some that occurred every
few years, which she considered to be checks and balances.
She noted that special meetings could be called in between
scheduled meetings to address pressing business.
Ms. Jones continued on slide 12, which was an overview of
the board's committees. There were currently four standing
committees which were not authorized to act on behalf of
the board, but provided in-depth reviews, research, and
recommendations to the board. The slide showed the key
roles of each committee, which were the audit committee,
the defined contribution plan committee, the actuarial
committee, and the operations committee.
Ms. Jones moved to slide 13, which was a high-level
overview of the board's decision making process. She
indicated that the process was a multi-phase approach
involving input from key advisors, interested parties, and
plan members. The input would then be funneled to the
appropriate committee for consideration and the committee
might request additional information or perspectives. The
committee would ultimately make a recommendation to the
board.
1:54:10 PM
Ms. Leary concluded the presentation on slide 14. She noted
there were many resources on the treasury's website and the
board's website. There was an appendix on slide 16 which
showed an example of the amount of time it took to consider
all of the variables in the valuations.
Co-Chair Edgmon noted that he had recently gone to a
national conference and attended a seminar on pensions. He
thought it provided interesting information on the way in
which each state managed its pension program. It seemed to
him that there were many variables in terms of analysis and
daily oversight within the board. He noted there was a
debate on defined benefits plans and whether it was a smart
investment for the state. The central message from the
seminar was that a state needed to closely monitor its
defined benefit plan if it elected to offer the plan.
Adjustments would constantly need to be made due to
fluctuations in the market. He asked whether the tools
needed to manage a defined benefit plan were already in
existence in the state. He understood the state was already
closely monitoring its accounts. He wondered if the board
already had the ability to oversee a defined benefits plan
if it were to be created.
Mr. Williams responded that defined benefits plans were in
place in the past and managed by the board. There was some
new interest in the plans and DRB was managing the
potential transition process. He was confident that the
board, DOR, and DRB could accommodate any changes and
manage the assets that the entities were bound to as
fiduciaries.
1:58:12 PM
Representative Josephson noted that in 2022, the
legislature appropriated about $125 million to the board.
He asked how the figure was determined and whether it was
based on the meetings of prior years.
Mr. Williams responded that the upcoming presentation by
DRB would offer more information on the question. The
presentation would show a history of the state's
contributions and projections for future contributions.
Representative Josephson asked if Mr. Williams was
empowered to distribute monies between health accounts and
retirement accounts.
Mr. Williams responded that in 2006, the health and pension
accounts were separated. The board could not pull money
from one account and put it in the other.
Representative Josephson noted that the health portion of
the trust was significantly overfunded. He understood that
the legislature as a whole was in disbelief that the trust
could be overfunded, and it insisted upon giving resources
to the board despite resources not being requested. He
thought that the health trust was damaged in 2006 and there
was caution around medical defined benefit plans. It was an
accepted fact amongst the legislature that medical plans
were generally underfunded. He asked how the board arrived
at the 130 percent funded figure.
Mr. Williams responded that he had a copy of the board's
meeting packet from October 11, 2022, which was available
on the board's website. He explained that the packet
described some of the medical plan funding issues. In 2013,
the trust funds for PERS were funded at 70 percent and TRS
accounts were 60 percent funded. He had been asked before
how the plans were now funded at over 100 percent. The
board had conducted experience studies and the costs were
different than expected. As an example, there was a new
prescription contract that reduced costs. In 2020, the
plans were funded at 113 percent for PERS and 121 percent
for TRS. The board had zeroed out the costs in 2021 and
2022 after examining the projections and noting that the
accounts were scheduled to be overfunded. He understood
that there had been a recent loss of about 6 percent.
Despite losses, the models all predicted that the plans
would be overfunded.
2:04:32 PM
Representative Ortiz asked for more details about a lawsuit
involving Mercer, the board's former actuary.
Mr. Williams responded that Mercer gave the board false
numbers and lied about doing so in fear of losing the
contract. He relayed that Mercer was required to pay a $500
million settlement. When he joined the board in 2017, he
was confused about the seemingly redundant actuarial
process; however, he understood the reasoning after he
learned about the Mercer situation.
Representative Ortiz asked if he understood correctly that
the main motivation for moving away from defined benefits
plans was a flawed actuarial process.
Mr. Williams responded that there were a number of
contributing factors. If health care costs were higher than
the board's assumptions and if the returns were lower than
the board's 7.25 percent target, then the plan would be
impacted. He was not comfortable providing all of the
rationale behind the change and deferred to Ms. Leary.
Ms. Leary agreed that the Mercer case was impactful. She
did not know the correlation between the case and the
evolution of the defined benefit plans to the defined
contribution plans.
Representative Josephson noted that Ms. Leary's
presentation reported that the average payout of PERS and
TRS was 9 percent over the past 38 years, which delighted
him. He understood that the upcoming presentation reported
that the returns were closer to 7.8 percent over 30 years.
He asked if the discrepancy was important.
Ms. Leary responded that it was important. There were
higher interest rates in the earlier years of the plan and
the plans therefore enjoyed higher returns during the
period.
Mr. Williams added that past performance did not
necessarily predict future performance. Future returns
might not be the same as in the past thirty years. The
board's goal was to examine the available information and
make the best estimate possible.
2:10:23 PM
Representative Galvin noted that Mr. Williams had relayed
there was uncertainty in future predictions. She wondered
if future predictions could be more positive than
anticipated.
Mr. Williams responded that the prior two years had
illustrated the unpredictable nature of the returns and had
ranged from 30 percent returns to negative 6 percent
returns. The challenge was how to predict an average.
Representative Cronk highlighted that the returns could
also be negative.
Mr. Williams responded that during the years 2000 through
2009 there were relatively flat returns although the board
had predicted around a 7 percent return rate for the
decade. He agreed that there were times when the market
varied greatly from the predictions.
Co-Chair Johnson thanked the presenters.
Co-Chair Johnson noted that the next item on the agenda was
an overview from the DRB.
2:14:24 PM
AJAY DESAI, DIRECTOR, DIVISION OF RETIREMENT AND BENEFITS,
DEPARTMENT OF ADMINISTRATION, introduced himself and the
PowerPoint presentation, "State of Alaska; Department of
Administration, Division of Retirement and Benefits;
Presentation to the House Finance Committee," dated
February 15, 2023 (copy on file). He introduced his
colleagues.
Mr. Desai continued to slide 2, which showed the
organizational structure of PERS and TRS. It illustrated
the way in which the Department of Revenue (DOR) and the
Department of Administration (DOA) worked in collaboration
with ARMB. The board's primary mission was to serve as a
trustee of the assets of the state's retirement systems,
annuity plans, deferred compensation plans, and the retiree
trust. He advanced to slide 3 which showed the membership
under both the defined benefit and defined contribution
plans. There were about 104,000 members under both systems.
He relayed that about 27 percent of active members were
under defined benefit plans and about 73 percent of active
members were under defined contribution plans.
Representative Hannan asked about the members referred to
as "inactive vested" on slide 3. She understood that the
members were not currently working for the state but had
left money invested in state plans.
Mr. Desai responded in the affirmative.
Representative Hannan asked if there was data that showed
how many people participated in the defined contribution
plan and then left state employment and withdrew their
money from state plans.
Mr. Desai replied that he would supply the information.
Representative Hannan commented that it did not seem that
there were many employees currently working. She was
interested in seeing the data on individuals who had left
state employment.
2:18:57 PM
Representative Ortiz asked about the Tier I category for
TRS. He asked what would cause a person to be part of the
25 inactive and vested Tier 1 employees. He wondered if the
employees were not drawing benefits for a particular
reason.
Mr. Desai responded that Representative Ortiz was correct.
There were 25 Tier I employees who had left the system but
still could access benefits. There were 131 members still
active under Tier I. It was possible that the 25 employees
had retired prior to retirement age and would therefore
receive a reduced benefits. He suggested that the employees
might be waiting to reach retirement age to claim the
benefits.
2:20:16 PM
KEVIN WORLEY, CHIEF FINANCIAL OFFICER, DIVISION OF
RETIREMENT AND BENEFITS, DEPARTMENT OF ADMINISTRATION,
continued to slide 4, which showed the rates of returns,
the returns on assets, and the impacts on the division's
evaluation reports. The division's actuary, Buck Global,
worked with the board's actuary to determine the actuarial
rate of return. The determination was made every four years
based on an experience study reviewed by the board's
actuary. There had been a reduction in the assumed
actuarial earnings rate over the prior four years from 7.38
percent to 7.25 percent. The data for 2022 was listed as
"draft" on the slide because the numbers had yet to be
finalized. He shared that the data was scheduled to be
finalized by June of 2023. Based on the fair market value
of the assets, the PERS and TRS account values had
experienced a 30 percent gain in 2021 and a negative 6
percent loss in 2022. The slide also showed the actuarial
value of assets based on a five-year smoothing method of
recognizing investment gains and losses that were not
subject to the short-term fluctuations of the market. The
five-year rate of return was 11.6 percent in 2021 and 8.7
percent in 2022.
Co-Chair Johnson asked how the 2023 percentages were
faring.
Mr. Worley had to defer the question.
Co-Chair Johnson suggested that Mr. Worley provide the
numbers at a later date.
Representative Hannan asked if the data on the chart was
based on the calendar year or the fiscal year.
Mr. Worley responded that the numbers were based on the
fiscal year.
Mr. Worley continued on slide 5 which depicted the
valuation results in 2020 and 2021 and the draft results
for 2022. The total for the PERS defined benefit plan was
79.3 percent in 2020, 85.5 percent in 2021, and 87.7
percent in 2022. The total for the TRS defined benefit plan
was 86.6 percent in 2020, 92.6 percent in 2021, and 93.1
percent in 2022. He understood it was counterintuitive
considering the negative 6 percent drop in 2021 to 2022;
however, he reminded the committee that the numbers were
derived using a smoothing method as opposed to using the
fair value of assets. The fair values of the assets were
also represented on the chart and the "wild swings" were
apparent in the numbers. He emphasized that DRB was trying
to minimize the short term swings by using the actuarial
value of assets.
2:26:17 PM
Representative Josephson asked if there was a term called
the "green zone" for performances above 80 percent.
Mr. Worley replied that the topic would be covered in a
subsequent slide. He noted that the presentation was
combined and included information on both the health care
and the pension accounts. The division conducted a funding
calculation for pensions separate from the calculation for
health care.
Representative Coulombe asked Mr. Worley to provide a
definition of line C of the chart: "unfunded actuarial
accrued liability based on actuarial value of assets."
Mr. Worley explained that the actuarial accrued liability
was the liability for pension and for health care. It
considered all future streams of payments for all eligible
parties as well as present value up to June 30, 2022. The
actuarial value of assets referred to the five-year
smoothed asset value in which gains and losses over a five-
year period were incorporated into the data. The difference
between what the division owed as compared to what was
readily available to pay for benefits was referred to as
the unfunded liability. He would go through some additional
modeling scenarios over the next few slides.
Mr. Desai added that as an example, the actuarial accrued
liability for PERS was about $22 billion; however, if all
plans were to be shut down at once, the division would need
to materialize $22 billion to pay out all benefits.
Currently, there was a shortfall of about $2.8 billion. The
unfunded liability was the shortfall that would occur if
the accounts were immediately shut down.
Co-Chair Johnson asked where the information was on slide
5.
Mr. Desai responded that it was under the PERS table and
the 2022 draft numbers. The actuarial accrued liability was
about $22.7 billion but with the shortfall, the actuarial
value of assets was about $19.9 billion. Each year, the
purpose of the valuation was to determine the health of the
plans and to project when the plans would be 100 percent
funded. He relayed that both plans were projected to be
funded at 100 percent by 2039.
2:31:11 PM
Representative Josephson asked if the $22.75 billion
actuarial accrued liability for PERS in 2022 was already
"booked." He understood that the money was bound to grow;
even if it grew poorly, it would still grow at 5 percent.
He assumed that the inevitable growth was not reflected on
the chart.
Mr. Desai responded that if all accounts were immediately
frozen and the plans were shut down, the division would not
be able to pay out the entirety of the benefits because
there was a $2.8 billion shortfall.
Co-Chair Johnson asked what information was represented by
line F of the chart [unfunded actuarial accrued liability
based on fair value of assets].
Mr. Desai responded that line F represented the liability
based on market value rather than actuarial value. He
relayed that the actuarial value used the five-year
smoothing method.
Representative Cronk asked for the meaning of two acronyms
that appeared on the slide: "AVA" and "FVA."
Mr. Worley responded that AVA was the actuarial value of
assets and FVA was the fair value of assets.
Representative Hannan understood that the $22.75 billion
liability would be required if every member received 100
percent of the benefits owed. She commented that many
beneficiaries passed away prior to drawing 100 percent of
their benefits. She asked what percentage was considered a
healthy funding ratio considering that most individuals
would not draw 100 percent of the benefits.
Mr. Desai responded that the state plans were governed by
state statutes. Whether private or public sector, the
target was to fund plans at 100 percent. The guidelines for
the health of a plan were set by the state for PERS and
TRS. There was also a federal guideline that stated that
any plan funded at 80 percent and above was considered to
be within the green zone. If a plan fell below a particular
funding threshold, it would be considered to be within the
red zone and the governing body would be required to submit
a report with a proposed strategy to bring the plan back
into a healthy zone.
Co-Chair Johnson asked if there was a reason why the
numbers for PERS and TRS were different.
Mr. Worley continued that in 2015, $1 billion was invested
into PERS and $2 billion was invested into TRS. He
explained that there were additional graphs later on in the
presentation that would go into the differences in detail.
2:38:42 PM
Mr. Worley continued to slide 6 and explained that pensions
were funded separately from health care. The actuaries
presented separate rates for each trust in an annual report
to ARMB. Although the rate often appeared as one number, it
was broken out between the pension and health care trusts.
He highlighted line D on the chart, which showed the funded
ratio based on actuarial value of assets. The PERS account
was funded at 63.6 percent and increased to 68.1 percent in
2022, and TRS was at 75 percent in 2020 and increased to
78.2 percent in 2022. He reiterated that the rates were
based on the funding, the funding patterns, and the
actuarial assumptions. Line C was the unfunded actuarial
liability. Of the $2.8 billion unfunded liability in 2022,
$5.1 billion was the actual unfunded liability for the PERS
pension plan and $1.7 billion was the actual unfunded
liability for TRS. He reiterated that health care was
overfunded which could be seen on the next slide.
Representative Coulombe asked if the pension alone was
withdrawn, would the account be in the yellow zone.
Mr. Worley responded that the funding percentage at a
particular point in time was one of the factors examined
when determining the funded status of a plan. The division
continued to fund the plans based on what the board asked
for annually. Although there were some concerns when
looking at the funding level percentage, other factors
indicated that the division was moving in the right
direction.
Representative Cronk appreciated Co-Chair Edgmon's earlier
comments on pensions. He valued the work of DRB but without
the infusion of cash from the state, the system would be
"backwards."
2:43:23 PM
Representative Ortiz asked why the $3 billion cash
infusions [in 2014 from HB 119] were needed at the
particular time it was.
Mr. Worley would follow up with the information. He
understood that it was partially based on the way in which
the board was moving forward with the additional state
contribution using a new funding pattern. It would have
resulted in about $1 billion in additional contributions
being deposited into the plan. There was a discussion
between the administration and the legislature on the use
of the funds which resulted in a change in the way in which
the actuarial evaluations would be prepared.
Representative Ortiz understood that there was a different
funding pattern following the $3 billion contribution. He
asked if the change related to the need of the $3 billion.
He wondered why the state needed such a significant cash
infusion in the first place. There was a general concern
that if the state got into defined benefits plans again,
the same problems would occur. He asked why the state
needed the funds at the time.
Mr. Worley responded that the $3 billion contribution
occurred about 10 years after the defined benefit plan had
closed. The funding pattern at the time was called level
dollars, which meant that a level dollar would be
contributed to the plan each fiscal year. At the time, the
dollar amount was just short of $1 billion. The $3 billion
contribution also caused a change in statute that changed
the funding pattern to one based on pay. The change in
funding pattern resulted in less money than the state was
required to contribute at the time.
Representative Ortiz asked Co-Chair Johnson if the issue
would be addressed later on. It seemed to him that the
legislature needed to be educated on the concerns about
returning to a defined benefit plan.
Co-Chair Johnson noted that it was a big issue and it might
be something that the legislature continued to work on. She
had a high level of personal familiarity with the history
of the plan and was not always certain what was common
knowledge amongst other legislators. She wanted to allow
time for committee members to get their questions answered.
She suggested that the testifiers return to the committee
at a later date if there were still remaining questions.
2:50:10 PM
Mr. Worley continued on slide 7 which detailed the defined
benefit health care trust fund. The unfunded accrued
liability for both PERS and TRS for 2022 was in overfunded
status. He relayed that PERS was funded at 134.9 percent
and TRS was funded at 140.7 percent.
Mr. Desai continued on slide 8, which showed the funded
ratio for PERS broken down by the pension and health care
systems. The chart showed the funding ratios over time for
both pension and health care from 2006 through 2022. He
advanced to slide 9 which showed the same information for
TRS. He advanced to slide 10 which showed the combined PERS
and TRS funded ratios from 2001 through 2022. In 2010, the
funding percentages had dropped significantly, but the
percentages dramatically increased by 2014 and had
continued to increase. In 2022, PERS was funded at 87.7
percent and TRS was funded at 93.1 percent.
Mr. Desai moved to slide 11 depicting the correlation
between the actual rate of return and the funded ratio. The
chart showed how funding patterns played out from the years
2000 through 2022. In 2001, the expected return was about
8.25 percent, but the actual rate of return was negative
5.37 percent for PERS and negative 5.44 percent for TRS.
The impact of the discrepancy could be seen in the
following years. The PERS and TRS accounts also saw
negative returns in 2022; however, there were significantly
higher rates of return in 2021. Due to the five-year
smoothing process, the funding ratios were able to remain
roughly the same.
2:55:12 PM
Mr. Desai moved to slide 12, which showed a breakdown of
the unfunded actuarial liability for PERS. The blue color
showed the unfunded liability for the PERS pension system
and the orange color showed the unfunded liability for the
PERS health care system. On the slide, positive dollar
amounts meant a poor outcome and negative amounts meant a
positive outcome because a smaller amount of unfunded
liability was advantageous. He moved to slide 13 and
explained that it showed the same information for TRS.
Mr. Desai moved to slide 14 which showed the unfunded
actuarial liability for PERS and TRS combined. There was a
significantly lower unfunded liability in recent years
which would help the plans hit 100 percent funding by the
year 2039.
Mr. Desai advanced to slide 15 which depicted the
additional state contributions historically from 2006 up
until 2022. The state had made contributions exceeding the
22 percent goal for PERS and 12.56 percent for TRS. The
total state contribution from 2006 until 2002 was $8.2
billion. He highlighted that $1 billion went into PERS in
2015 and $2 billion went into TRS, which added up to the
aforementioned $3 billion cash infusion.
Mr. Desai continued to slide 16 which described the
projected state contributions from 2024 through 2039 based
on the most recent valuation. In order to meet the goal of
100 percent funding by 2039, the state would continue
contributing to both systems an amount that would add up to
$4.1 billion in total. He briefly returned to slide 15 and
explained that the $124 million was the amount that the
state would contribute to both plans combined in 2023.
Representative Cronk asked if the state funding was over
and above what the state was required to contribute.
Mr. Desai responded in the affirmative. The cost share
statute established in 2008 stated that PERS employers
would contribute up to 22 percent; however, SB 55 was
passed a few years prior and the state was now contributing
at an actuarial rate rather than at 22 percent. Other
employers still paid at 22 percent, but the state came in
to close the gap in contributions. The state paid its own
employers at the actuarial rate determined by the actuary
in the particular valuation year.
3:00:24 PM
Mr. Worley continued on slide 17. He explained that in
September of 2022, ARMB adopted the FY 24 rates in order to
use the rates in computations for the state budget as well
as for the adoption of the additional state contributions.
The first column on the slide was a preliminary prediction
presented to the board. The preliminary cost for PERS
totally payroll in FY 24 was 2.14 percent for the normal
cost of the defined benefit pension plan, 16.33 percent for
the past service cost, 2.5 percent for the normal cost of
the defined benefit health plan, and 6.63 percent for the
summary of the defined contributions. The total rate
presented to the board was 27.6 percent.
Mr. Worley continued that in FY 23, the board adopted a 0
percent contribution rate for the health care trust for the
first time due to overfunding. The choice came about during
a discussion regarding the National Guard, which was also
overfunded. There were some conflicts in statute that might
have prevented the 0 percent contribution rate. The board's
attorney gave a presentation to the board to inform it that
it would need to adopt a reasonable rate for contributions
and for the plans. The fiduciaries examined the funded
status of the health care trust and created models based on
making the normal cost contribution annually through 2039.
Mr. Worley continued to slide 18 to show the funded levels
of the health care trusts. If the board adopted a normal
contribution rate, funding levels would be over 100 percent
from 2023 through 2039. The funding levels for PERS were
trending towards 200 percent, which would mean that there
were twice as many assets than were needed to pay for
liabilities. The board therefore decided to implement a 0
percent contribution rate. The slide showed modeling of
projected percentages without the normal cost contributions
[0 percent], which showed a trend toward 192.4 percent by
2039. He emphasized that even without a normal cost
contribution, the trust was nowhere near dipping below 100
percent funding. He relayed that the same rationale applied
to TRS and it would also be funded far over 100 percent.
3:06:43 PM
Representative Josephson asked for more information on the
$8.2 billion in total state contributions on slide 15. He
thought that the figure was not inclusive of additional
state contributions, but instead was included as part of
the regular 22 percent rate for non-state employer
contributions as identified on slide 17. He asked if his
understanding was correct.
Mr. Worley asked for clarification.
Representative Josephson asked if the $8.2 billion figure
on slide 15 was the same as the additional state
contributions detailed on slide 17.
Mr. Worley responded that it was the same idea, however the
rates on slide 17 only referred to FY 24. The predictions
were often different than what the board actually
requested.
Representative Josephson asked about the $60.9 million PERS
contribution on slide 17 that the board had indicated was
unnecessary. He asked whether the state could intervene and
decide to fund the PERS accounts more generously. He
wondered if the board could still ask for $60.9 million for
PERS despite not needing it.
Mr. Worley responded in the negative. The board could not
ask for the funding because it adopted a particular
contribution rate to which it was required to adhere. Since
the pension and health care trusts were separated, the
rates would also be separated. The board could not divert
money from the health care side to pension side.
Mr. Desai commented on the difference between the
information on slide 15 and on slide 17. He noted that on
slide 16, the projected PERS and TERS additional state
contributions for 2024 [$37.94 million and $98.76 million
respectively] were the same as the numbers on slide 17
regarding additional state contributions for 2024. He added
that the legislative body was permitted to provide
additional funding for PERS and TRS if it saw fit.
3:12:40 PM
Co-Chair Edgmon noted the end of the allotted meeting time
was drawing near and there were many slides left in the
presentation.
Mr. Desai continued on slide 19 detailing FY 24
contribution rates for defined benefit plans. He noted that
standard PERS employees were contributing at 6.75 percent,
peace officers and firefighters were contributing at 7.5
percent, and school districts were contributing at 9.6
percent. He added that all TRS employees were contributing
8.65 percent towards the plan. Employer rates were 22
percent under PRS and 12.56 percent under TRS. He concluded
that the actuarial rate for 2023 was 25.10 percent for PERS
and 25.52 percent for TRS. The gap of 3.1 percent between
the 22 percent employer rate and the 25.52 actuarial rate
was the additional state contribution for non-state
employees.
Mr. Desai moved to slide 20 and explained the FY 24
contribution rates for defined contribution plans. There
was a 5 percent employer contribution rate for PERS, a 7
percent employer contribution raate for TRS, and an 8
percent employee contribution rate for both PERS and TRS.
He added that 1 percent of PERS contributions went to
health care and the retiree major medical plan while about
0.82 percent of TRS contributions went to health care. The
Health Reimbursement Account (HRA) received a flat dollar
amount from both PERS and TRS based on 3 percent of all
PERS and TRS employees' average annual compensation. The
remaining employer contributions went towards the defined
benefit plans.
3:15:10 PM
Representative Josephson asked for confirmation if a person
were to retire at age 50 and be fully vested with the
defined contribution plan, the individual would have to
find insurance for 15 years [to reach retirement age of 65]
in order to simultaneously remain on the state plan and be
eligible for Medicare.
Mr. Desai responded in the affirmative.
Representative Josephson asked whether the 3 percent HRA
contribution might provide about three years' worth of
payment premiums. He understood that there would be a 12-
year gap during which the 50-year old retiree in his
example would have no health insurance as the HRA would
only cover three years.
Mr. Desai responded that the intent was that if a
participant retired before the age of 55 and Medicaid
eligibility, the HRA contributions premiums would be held
over to pay the premiums for the gap in coverage. If the
gap continued, any remaining balance in the HRA would be
available for the participant for future years. If there
was a shortfall, the participant would have to come up with
the payment on their own.
Representative Josephson thought that the HRA was wonderful
for a few years, but it was not a reliable source for
health care coverage for a retiree.
Mr. Desai responded that the model was adopted in 2006 when
the legislature closed the defined benefit plans and opened
up defined contribution plans. The existing model under
defined benefits was changed and a new model was crafted.
It was under the purview of the legislature to change any
mechanism related to the contribution rate.
3:19:32 PM
Mr. Desai continued to slide 22 which included a graph
depicting the projected pension benefit for recipients in
2024. Between PERS and TRS, about 54,000 retirees would
receive monthly pension payments in 2024. By 2029, the
number would increase to about 58,000. The numbers would
decline in the years following as it was a closed system.
Mr. Desai moved to slide 23, which showed the same
information as slide 22 but included the dollar value. The
pension payout in 2024 would be about $1.6 billion. The
highest projected payment would be $2.1 billion in 2037,
then the numbers would begin to decline.
Mr. Desai advanced to slide 24 which detailed the
AlaskaCare employer group waiver plan (EGWP). He explained
that an EGWP was a group Medicare Part D prescription drug
plan option and provided a direct subsidy which allowed it
to be considered when calculating other post-employment
benefits. The implementation of EGWP in 2018 reduced health
care liabilities by $959 million, which resulted in lower
projected liabilities, lower projected contribution rates,
and lower projected additional state contributions [$711
million for PERS, $248 million for TRS].
Mr. Desai continued on slide 25 which showed that the total
amount of savings due to the implementation of EGWP was
$49.5 million in 2019, $58.3 million in 2020, and $64.4
million in 2021, and an estimated $75.7 million for 2022.
Mr. Worley continued on slide 26 and explained that DRB
looked at the health care cost trends rates annually. To
project future trends, the division would take the current
year's costs and increase the costs by 7 percent. The chart
on the slide showed the projections through 2050.
Mr. Desai continued to slide 27 and detailed the process to
determine the contribution rates of the employers. The
process began with examining the 2021 valuation,
liabilities, and assets while taking into consideration the
actual rate of return to make predictions for the 2022
assets and the projected rate of return. With this
information, the FY 24 employer contributions and
additional state contributions could be determined. He
noted that the remainder of the slide showed the timeline
for determinations for the future years.
3:25:41 PM
Representative Tomaszewski highlighted the 7.79 percent
PERS returns and 7.84 percent TRS returns from 2000 through
2022 listed on slide 11. He asked if the returns included
the $8 billion in additional contributions from the state.
Mr. Desai responded that the first column on the slide
showed the assumed actuarial earnings rate starting in
2000. He noted that the rate was 8.25 in 2000, changed to 8
percent in 2011, changed again in 2019 to 7.38 percent, and
finally changed to 7.25 percent in 2022. The blue and green
columns on the slide showed the funding ratios for PERS and
TRS, which did have an effect on the cash infusion from the
state. Both systems experienced dramatic changes when there
were additional state contributions.
Representative Tomaszewski asked if Mr. Desai could supply
information on what the actual rate of return would have
been without the $8 billion contribution. He noticed that
the additional projected contributions on slide 16 were
without "health care normal cost contributions." He
wondered if the health care contributions were not needed
because health care was already overfunded.
Mr. Desai responded that slide 16 showed the projections of
additional state contributions based strictly on the
precise point in time in which the valuation was done. The
chart showed that even without the normal health care cost
contributions, both systems would be well-funded; however,
funding levels could change in the following year based on
future funding valuations.
Representative Tomaszewski asked if the state would need
extra contributions for health care.
Mr. Desai responded that based on the projections, it
appeared that the state would not need extra contributions
for health care.
Representative Josephson asked where the state stood on
plan solvency as compared to other states.
Mr. Worley responded he only had data based on pension
plans as there was no cumulative data for health care.
There was a 2021 survey in which PERS was ranked 86 out of
129 respondents and TRS was ranked 101 of 129. The ranking
was based on based on actuarial accrued assets. Based on
the unfunded liability for the pension plan, PERS was
ranked 64 of 129 and TRS was 31 of 129. Based on the funded
ratio, PERS was ranked 89 of 129 and TRS was ranked 58. He
noted that the survey occurred after a lucrative year and
more updated information would be released later in the
year.
Representative Hannan commented that one of Mr. Williams'
teaching strategies was to ask each student to keep a green
cup on their desk if they understood the concept of the
lesson and replace it with a red cup if they no longer
understood the lesson. She assumed that the majority of
committee members would have red cups on their desks if
they were students of Mr. Williams.
Co-Chair Johnson reviewed the meeting agenda for the
following day.
ADJOURNMENT
3:33:09 PM
The meeting was adjourned at 3:33 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| DOA_PERS_TRS_Overview_HFC-2023_Final-02142023.pdf |
HFIN 2/15/2023 1:30:00 PM |
|
| ARMB_Presentation-HFIN_2023.02.15.pdf |
HFIN 2/15/2023 1:30:00 PM |
DOA/ARMB HFIN 021523 |