Legislature(2023 - 2024)ADAMS 519
01/30/2024 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Alaska Public Employees' Retirement System and Teachers' Retirement System Update | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
January 30, 2024
1:34 p.m.
1:34:02 PM
CALL TO ORDER
Co-Chair Johnson called the House Finance Committee meeting
to order at 1:34 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; Kathy Lea, Chief Pension Officer, Division
of Retirement and Benefits, Department of Administration.
PRESENT VIA TELECONFERENCE
David Kershner, Consulting Actuary, Buck Global LLC.
SUMMARY
PRESENTATION: ALASKA PUBLIC EMPLOYEES' RETIREMENT SYSTEM
AND TEACHERS' RETIREMENT SYSTEM UPDATE
Co-Chair Johnson reviewed the meeting agenda.
^PRESENTATION: ALASKA PUBLIC EMPLOYEES' RETIREMENT SYSTEM
and TEACHERS' RETIREMENT SYSTEM UPDATE
1:35:49 PM
AJAY DESAI, DIRECTOR, DIVISION OF RETIREMENT AND BENEFITS,
DEPARTMENT OF ADMINISTRATION, introduced himself.
KEVIN WORLEY, CHIEF FINANCIAL OFFICER, DIVISION OF
RETIREMENT AND BENEFITS, DEPARTMENT OF ADMINISTRATION,
introduced himself.
KATHY LEA, CHIEF PENSION OFFICER, DIVISION OF RETIREMENT
and BENEFITS, DEPARTMENT OF ADMINISTRATION, introduced
herself.
Mr. Desai introduced the PowerPoint presentation "State of
Alaska Department of Administration Division of Retirement
and Benefits Presentation to the House Finance Committee"
dated January 30, 2024 (copy on file). He began on slide 2
which included the organizational chart for the Public
Employees' Retirement System (PERS) and the Teachers'
Retirement System (TRS). He relayed that the Alaska
Retirement Management Board (ARMB) worked with the
Department of Administration's (DOA) Treasury Division and
the Department of Revenue's (DOR) Division of Retirement
and Benefits (DRB) to manage the funds for both systems.
Mr. Worley continued on slide 3 which showed statistics on
the membership of PERS and TRS as of June 30, 2023. Active
members made up about 25 percent of the PERS Defined
Benefit (DB) plans whereas about 75 percent of members were
active in the Defined Contribution (DC) plans. For TRS,
about 31 percent of DB members were active and 69 percent
of DC members were active. From the creation of the DC
plans, it took about ten years to reach an evenly split
membership between the DB and DC plans. About 50 percent of
members were part of the DB plans and about 50 percent were
part of the DC plans, with the DC membership scaling up as
the DB plans had been closed.
Representative Tomaszewski noted that Tier IV was not
listed on the slide.
Mr. Worley responded that Tier IV was also known as the DC
plan and was listed on the bottom half of the slide. He
explained that Tier I through Tier III were listed under
the DB section on the slide.
1:38:32 PM
Representative Stapp asked if DRB had considered looking at
employees active in Tier III who had not vested but still
had the option to return to the program and vest into it.
He understood there was a group of employees that did not
vest in the retirement system. He asked if there was an
estimate of the number of Tier III employees who had not
yet vested in the plan.
Mr. Desai responded that the concept was also known as the
Metcalfe case, which had been brought forth a few years
prior. There was a law passed in 2010 that mandated any
members in the DB priority tiers who cashed out of the
system and returned to state employment later would be
hired under the DC plan. The Metcalfe case reversed the law
and made it possible for employees to buy back into the
same tier if they returned to state employment. He
clarified that any members who left employment under Tier I
through Tier III for PERS or Tier I and Tier II for TRS
could return to the same tier if the employee was rehired.
Representative Stapp asked if there was an estimate as to
how many employees could potentially return to employment
and resume benefits under the same DB tier.
Mr. Desai responded that there were about 86,000 impacted
members.
1:41:43 PM
Representative Josephson thought it was important for the
committee to know how many employees had actually returned
to state employment and vested back into the system.
Mr. Desai replied that he would return to the committee
with the information on how many employees had returned. He
would also provide the number of employees that decided to
convert to a DB plan from a DC plan.
Co-Chair Johnson suggested that they set a date for the
follow up. She asked if Mr. Desai could provide the
information by the following week.
Mr. Desai responded in the affirmative.
Representative Hannan understood that the 86,000 figure
referred to the members who had cashed out of the system.
She asked if the 5,554 inactive but vested members shown on
the chart on slide 3 were included in the 86,000 figure.
Mr. Desai responded that the 5,554 figure referred to the
inactive but vested members who had not withdrawn from the
system. The members were still part of the system and were
therefore not included in the 86,000 figure.
Representative Hannan asked if the 5,554 inactive but
vested members would be added to the 86,000 members who had
cashed out but could return for a total of over 91,000
impacted members.
Mr. Desai responded that the 5,554 inactive but vested
members were not subject to the Metcalfe ruling. The case
only impacted members who had left the plan and wanted to
reinvest.
Co-Chair Johnson thought that the presentation would
generate many questions. She might set some benchmarks if
the committee was getting behind schedule.
1:45:20 PM
Mr. Worley continued on slide 4, which included information
on the returns for PERS and TRS for FY 22 and FY 23. The
assumed actuarial earnings rate for both PERS and TRS for
both years was 7.25 percent. The actual rate of return for
the assets was negative 6 percent for both accounts in FY
22 and a positive 7.6 percent in FY 23. The division also
evaluated the actuarial value of assets which was based on
smoothing over a five-year period. For funding purposes,
the division used the actuarial value of assets because
returns could vary dramatically from year-to-year.
Representative Stapp asked how the 7.25 rate was
determined.
Mr. Worley replied that the rate was approved by ARMB and
the actuarial assumptions were reviewed every four years.
Two actuaries worked on determining the rates: the first
actuary worked for both DOR and DRB, and the review actuary
worked for ARMB only. The board worked with an investment
advisor and 7.25 was settled on after the final evaluation.
Representative Stapp asked if the rate of return was
revised upwards or downwards after the last review process.
Mr. Worley responded that the rate was reduced from 7.38
percent to 7.25 percent.
Mr. Worley advanced to slide 5. There was a DB pension
trust and a DB health care trust. The slide was just for
informational purposes and he did not want to spend a
substantial amount of time on it to avoid any confusion.
Mr. Worley continued on slide 6, which detailed the funded
status for the DB pension trust for both PERS and TRS. The
June 2023 valuation report was presently being drafted and
the division would be going over the reports in March of
2024. The actuarial accrued liability for 2023 based on the
actuarial value of assets (AVA) was 67 percent funded for
PERS and 76.8 percent funded for TRS. The funding had been
relatively flat for the last few years for a variety of
reasons; for example, the valuation report for June of 2021
was 7.38 percent and the reports for 2022 and 2023 were
valued at 7.25 percent, which would cause the liability to
increase. He reiterated that the 30 percent rate of return
in 2021 was an anomaly. He highlighted lines A through D on
the slide which were the most important line items when
considering the budget. There was a slight increase in
unfunded liability from FY 22 to FY 23 partly because the
liabilities had increased, health care costs had increased,
and inflation had increased. Assets did not increase as
much as liabilities.
1:52:07 PM
Representative Josephson recalled that around 2013, the
legislature spread $3 billion between PERS and TRS in an
attempt to refinance the system and decrease the outlay
from around $700 million to less than $350 million. He
asked if the attempted refinancing had been a factor in the
pace at which the unfunded liability was being retired.
Mr. Worley replied that the event occurred in FY 15. He
indicated that the division had graphs that showed the
impact of the contributions that he could distribute to the
committee. The refinancing began the 25-year amortization
payoff of the liability. The board modified the single
layer 25-year amortization and it became a layered
amortization. He explained that 2018 became the first layer
and every subsequent year became an additional 25-year
period.
Representative Stapp clarified that the funds had positive
performance in the prior year because most of the DB had an
inflationary adjustment due to high inflationary pressure
at the federal level, which caused capital outflows to
increase. He asked if it would be fair to say that unfunded
liability had increased because the state had to pay more
money in adjustments.
Mr. Worley responded that inflation was high for the post-
retirement pension adjustment.
Ms. Lea responded that the post-retirement pension
adjustment was calculated based on age. Individuals under
the age of 65 received an adjustment that was 50 percent of
the increase and individuals over 65 received an adjustment
that was 75 percent of the increase.
Mr. Worley added that if the actual figures were higher
than the figures projected by the actuaries, liabilities
would increase and would become an actuarial loss to the
plan.
1:55:52 PM
Mr. Worley continued on slide 7 which detailed the funded
status of the PERS and TRS health care trust from FY 21
through FY 23. He reiterated that the information for FY 23
was still in draft mode. The red numbers on the slide
referred to the areas in which the accounts were
overfunded. He relayed that PERS was about 130 percent
funded in FY 23 and TRS was about 135 percent funded.
Health care inflation was slightly higher than the
actuaries had expected, which increased the accrued
liability.
Representative Josephson noted that one of the concerns in
2006 when DB plans closed was the cost of health care. He
relayed that the concern remained due to the limitations of
health reimbursable savings accounts. He asked why the
health care portion of the trust was robust and overfunded.
He stated that legislators were "steering away" from
reforming the health care portion of the trust. He asked
why health care benefits were not more generous given the
returns.
Mr. Worley noted that the health care trust was underfunded
in the early 2000s. The division had to split an amount of
money between a pension and a health care trust in around
2008. He explained that the division looked at ways to
improve cost containment within the health care trust in
around 2015 and one of the strategies was the Employer
Group Waiver Program (EGWP). The division was able to join
EGWP which reduced the cost of health care for retirees.
There was a slide later on in the presentation that
discussed the program in more detail. The program was
paramount in the transformation of the trust from
underfunded to overfunded.
2:00:20 PM
Mr. Desai continued on slide 8 which showed the funded
ratio for the PERS pension and health care. The blue bar on
the graph on the slide showed the funded ratio of the
pension and the orange bar showed the funded ratio of
health care. The orange bar was over 100 percent and the
blue bar was around 67 percent in 2023.
Mr. Desai moved to slide 9, which showed the funded ratio
for TRS pension and health care. The green bar on the graph
on the slide showed the funded ratio of the pension and the
orange bar showed the funded ratio of health care.
Mr. Desai advanced to slide 10, which showed similar
information as slide 8 and 9 but the information was
combined at a system level. The blue bar represented the
funded ratio for PERS and the green bar represented the
funded ratio for TRS. If the systems were to be combined,
PERS would be funded at 85.5 percent and TRS would be
funded at 91.2 percent for 2023.
Mr. Worley emphasized that the slide was intended for
informational purposes only and the two trusts could not be
combined.
Mr. Desai moved to slide 11 which showed the correlation
between actual rate of return and funded ratio. The table
showed how the funded ratio was impacted when there were
negative returns compared to expected rates of return.
Specifically for the earlier years starting in 2000, the
discrepancy between expected returns and actual returns was
more extreme. In 2008, the expected return was about 8.25
percent under PERS and the actual rate of return was
negative 3.13 percent. He indicated that PERS was funded at
69.5 percent in 2008 but in 2009, the number dropped to
61.8 percent. He reiterated that the funded ratio was
directly impacted when the expected returns were not met.
He highlighted that the 30-year average rate of return was
7.55 percent and 7.6 percent for TRS.
Representative Stapp remarked that the actual rate of
return in 2023 was 100 basis points off from 2000. He asked
why all of the revisions were trending down. He asked what
it was about the methodology that was causing the decline.
2:06:01 PM
DAVID KERSHNER, CONSULTING ACTUARY, BUCK GLOBAL LLC, (via
teleconference), responded that the 7.25 assumed actuarial
earnings rate was the long-term expected rate of return and
was set every four years through an experience study in
which Buck evaluated all of the assumptions. The rate was
set based on forward-looking expectations in terms of
equity returns, bond yields, and the asset allocation set
by DOR in collaboration with ARMB. The combination of asset
allocation and the general decline in forward-looking
expected returns, particularly for equity, contributed to
the decline in the expected return assumption.
Representative Stapp understood that expectations had been
declining for over 20 years. He thought that if
expectations were routinely being exceeded by performance,
the expectations should be revised upwards. He thought that
the expectations were consistently excessively generous.
Mr. Kershner responded that the decline had happened but it
was not intentional. The rate was simply based on the
changing environment and future expected returns had been
declining over the last ten years, which was the reason for
the declining rate.
Mr. Worley added that similar plans across the nation were
all in decline.
2:09:20 PM
Mr. Desai advanced to slide 12 which detailed the unfunded
actuarial liability for PERS. The blue bars referring to
the pension were above zero and the orange bars referring
to health care were below zero in 2023. There was unfunded
liability for the pension system within PERS and the orange
bar being below zero was encouraging.
Mr. Desai continued to slide 13, which detailed the
unfunded actuarial liability for TRS. The green bars
referring to the pension were above zero and the orange
bars referring to health care were below zero in 2023.
Mr. Desai moved to slide 14, which combined pension and
health care plans within PERS and TRS for informational
purposes only. He highlighted that the total unfunded
liability in 2013 was at about $12.4 billion, $1 billion of
which was under PERS and $2 billion was under TRS. The
unfunded liability decreased dramatically from 2013 to
2015.
Mr. Desai advanced to slide 15, which showed the history of
the additional state contributions, which totaled to about
$8.35 billion as of 2024. Any difference between the TRS
and PERS contributions were paid by the state as an
additional contribution.
2:12:38 PM
Representative Josephson understood that the amortization
reform came from HB 119 in 2015. He noted that it was
agreed upon that a person would pay off a 15-year mortgage
on a house faster than a 30-year mortgage. He asked if the
state was following the opposite strategy for the
amortization. He wondered if the state would pay more due
to the reform and asked what the impact of the reform was
on retiring the DB plan.
Mr. Desai responded that in 2014, the target to fund both
systems by 2039 was established in statute. The cost was
used to determine the "stretch out" of the numbers. The
future contributions could be reduced if present day
contributions were increased.
Mr. Desai continued on slide 16 which detailed the
additional state contributions that were projected based on
the most recent valuation. From 2025 up until 2039, DRB
expected that there would be about $4.4 billion in
additional contributions. The systems were expected to be
fully funded by 2039.
2:15:10 PM
Representative Stapp asked if a 2.5 percent inflationary
target was assumed in the actuarial analysis through 2039.
Mr. Kershner responded in the affirmative and clarified
that Buck's long-term inflation assumption was 2.5 percent.
Representative Stapp asked if it could be more expensive if
actual performance was in opposition to the 2.5 percent
inflationary adjustment.
Mr. Kershner responded in the affirmative. The 25-year
amortization of the unfunded liability that was established
in 2014 was modified slightly by ARMB in 2018. Rather than
having one single "mortgage," there were currently a number
of "little mortgages" which were all funded over 25 years.
When there was high inflation that had increased the
liability beyond what was expected because the assumption
was 2.5 percent, the losses to the plan were funded in the
future over the course of 25 years.
Mr. Worley added that in FY 25, the projected $59.1 million
in additional state contributions to PERS and $125.3
million to TRS were presently in the operating bill.
Co-Chair Johnson asked how the additional contribution in
2015 changed the payments into the fund.
Mr. Worley responded that there was $3 billion in
additional contributions in 2015: $1 billion in PERS and $2
billion to TRS. The contribution reset the amortization
period and began the 25-year time frame over again, changed
the goal for the accounts to be fully funded to 2039, and
changed the methodology through which the plans were
funded. Prior to the $3 billion infusion, the funding was
based on a "level dollar" contribution, which was to
increase up to $1 billion per year between the two systems.
After the infusion, the funding was set to be a level
percentage of pay and the actuary would compute an employer
contribution rate and apply it against the payrolls during
the fiscal year.
2:19:04 PM
Co-Chair Johnson asked if the change would be executed in
the same manner if it were to happen today. She asked how
the particulars were determined.
Mr. Worley asked for clarification on which particulars Co-
Chair Johnson would like to know more about.
Co-Chair Johnson relayed that she understood how the
contributions were determined. She would follow up with her
question outside of the meeting.
Mr. Worley would be happy to provide a response.
Representative Coulombe asked Mr. Worley to speak to the
meaning of "without health care normal cost contributions"
stated at the bottom of slide 16. She asked if it meant
that the chart on the slide would remain without
contributions.
Mr. Desai responded in the affirmative and added that the
following slide would provide more detail.
Mr. Worley added that the schedule assumed that there would
be zero contributions to health care due to overfunding.
2:21:47 PM
Representative Galvin referred to slide 7 and noted that
all of the funds were listed at 125 percent funded in 2021.
She asked what the industry standard was and what the goal
of the department was.
Mr. Desai responded that the goal was to be funded at 100
percent and remain at 100 percent. The goal for the state
to be funded at 100 percent by 2039. Plans funded at 90
percent and above were considered healthy and plans funded
at 80 percent were considered to be in the "green zone."
Representative Galvin explained that she was referring to
the health care portion specifically. She understood that
the goal was to be funded at 100 percent by 2039 but health
care was overfunded. She was not sure what the industry
standard was and wondered if it was normal for a health
care plan to be overfunded.
Mr. Worley replied that one of the things to consider when
speaking about health care was the issue of the cost of
claims. The claims in 2023 were higher than expected and
the high price decreased the level of overfunding. The EGWP
costs were also decreasing and revenue was expected to be
lower than it had been in recent years. He reiterated that
ARMB was in the process of determining when money should be
reallocated to the health care trust through normal cost
contributions.
2:26:38 PM
Representative Stapp thought that the idea that health care
was overfunded came from a naïve understanding of the
volatility of claims accounts. He relayed that Premera
BlueCross BlueShield was the largest individual insurer in
the state and it recently suffered a $26 million
operational loss on its claims alone. He remarked that from
an actuarial standpoint, health care was difficult to
predict, cost drivers were increasing, and access was
challenging. He argued that although health care might be
overfunded in the current day, it could be underfunded
tomorrow.
Co-Chair Johnson asked if Representative Stapp had a
question.
Representative Stapp relayed that he had a comment. He
wanted to speak to the volatility of attempting to amortize
health care claims, especially as the population grew
older. He did not think anyone at Premera would have
predicted a $26 million actuarial loss due to the
unpredictability of health care.
Mr. Worley added that the division looked at the cost of
health care claims on an annual basis. There were slides
later in the presentation that discussed the projected
increase in claims costs over the next 50 years.
Representative Hannan presumed that dental and behavioral
health benefits were within the health care benefits. She
asked whether ARMB could adjust which benefits were
available or if the available benefits were set by a
different entity. She indicated that suicide rates had
increased in older Alaskans, but behavioral health benefits
were limited.
Mr. Desai responded that the division worked with Buck
Global consultants as well as the Retiree Health Plan
Advisory Board (RHPAB) to study health care benefits and it
was responsible for the benefit structure.
Representative Hannan noted that the dental benefit was not
as generous as the health care benefit, but there was a
strong link between dental health and cardiac health. She
asked if the limited benefit could be addressed by allowing
increased dental screenings to identify potential cardiac
risks and lower the cost of cardiac claims. She wondered if
consultants conducted similar work as in her example about
the dental benefit.
Mr. Desai responded in the affirmative. He relayed that
Alaska's dental benefits were behind the rest of the
country. He reiterated that the division worked closely
with the consultants and RHPAB. He emphasized the
importance of exerting caution when considering adding or
removing benefits to ensure that the funds were actuarially
sound and adhering to statute. He noted that the division
evaluated the benefits quarterly and would be meeting with
Aetna, Buck, and ARMB in the upcoming week to craft
actuarial recommendations. The board would then make
recommendations to the commissioner of DOA and then the
benefits would be implemented. Many benefits had changed
significantly over the past six years. Health care was
presently overfunded by a high percentage, but it could
change tomorrow. In the prior year, the division had
received one single claim that was over $2 million, which
changed the cost analysis. The division was responsible for
ensuring that all retirees and individuals who were
currently active would be able to receive benefits in the
future.
2:34:02 PM
Mr. Worley added that retirees had an additional dental,
vision, and audio plan and a long-term care plan. The plans
were funded by the retirees and were not funded through the
retiree health program.
Mr. Worley continued on slide 17 which detailed the FY 25
contribution rates. The FY 25 rate was adopted by the board
in 2023. The first column in the chart under FY 25
preliminary included the rates that were initially prepared
by Buck. He relayed that Buck projected a 28.39 percent
preliminary rate for PERS and 30.62 percent for TRS. The
annual contribution that would be required through payroll
for the PERS DB health plan was $47.8 million; however, the
board determined that it would be better to have a zero
percent contribution rate to a plan that was already
overfunded. The board adopted a rate of zero percent, which
lowered the total PERS contribution rate to 26.76 percent.
Due to the zero percent contribution rate, the state saved
$47.8 million in contributions. The overall PERS request
was $59.1 million. When the board adopted the zero percent
contribution rate, it included a zero fiscal impact cost
for both PERS and TRS. Originally, $16.2 million would have
gone to the health trust but since the board adopted a zero
percent contribution rate, $0 would be going into the
trust. He emphasized that the returns on the invested
assets were 7.6 percent even though there would be no
additional funds allocated into the trust. The bottom line
was that there was a total savings of $64 million due to
the adoption of the zero percent rate.
Co-Chair Johnson asked whether the municipalities
contributed at a 22 percent rate.
Mr. Worley responded in the affirmative.
Co-Chair Johnson noted that under the TRS section, there
was an additional state contribution listed. She asked what
the purpose was of the additional state contribution.
Mr. Worley replied that the contribution was from the
school districts, which were required to pay 12.56 percent
on all eligible TRS employees. The state adopted 28.59
percent as the contribution rate for TRS and the non-state
employer contribution rate of 12.56 percent was then
subtracted from the state rate, which elicited a 16.03
percent additional state contribution rate.
Co-Chair Johnson asked if the 12.56 percent was a
negotiated rate.
Mr. Worley responded that the rate was established in
statute as the required rate for TRS employers.
Co-Chair Johnson asked why 12.56 percent was the chosen
rate.
Mr. Worley responded that he was not familiar with the
negotiations.
2:40:23 PM
Mr. Worley continued on slide 18 and reiterated that the
health care trusts were overfunded. The chart on the slide
showed the projected funding level of the health care
trusts for both PERS and TRS from FY 24 through FY 29. He
explained that Buck composed the annual actuarial
evaluation report for PERS and TRS. One of the requests
from the board was to determine what the funded status of
the trusts would be if employers continued to pay the
normal cost for health care and what the status would be if
zero percent was adopted as the contribution rate. If
employers continued to pay the normal cost, the funded
level of PERS would continue increasing from 129.6 percent
in 2024 to 179.7 percent by 2039. The board wanted to see
what the impact of a zero percent normal cost contribution
rate would be from 2024 through 2039. He relayed that PERS
would increase from 129.6 percent funded in 2024 to 170.9
percent in 2039. The increase would be due to claims costs
being paid, annual increases to health care, and the health
care trust earning a 7.25 percent return. The TRS projects
were similar with an increase from 135.5 percent funded in
2024 to 196.9 percent with a normal cost contribution and
189.2 percent without a normal cost contribution.
Representative Josephson asked what a comparable slide
would look like on the non-health care side of the ledger.
He asked if it would simply show numbers rising towards 100
percent.
Mr. Worley assumed that Representative Josephson was asking
about the pension trust. He responded that the trust would
be fully funded on the pension side by 2039 if the funding
plan in place were to be followed. The expectation was that
the trust would start at about 60 percent to 70 percent
funded and would increase to 100 percent by 2039. Some of
the viability layers would need to be paid after 2039, but
the overall goal was to reach 100 percent by 2039.
Representative Josephson agreed that there were many
variables on the health care side and that people would be
receiving health benefits after 2039. He asked what the
state did with the excess funding. He understood that
overfunded meant there was more cash in the system than was
used and he wondered what happened to the excess cash.
Mr. Worley responded that the money belonged to the system
and the health care trust. The division had examined the 0
percent contribution rate to avoid adding money to a fund
that was already overfunded. He emphasized that the
division could not promise benefits and then pull back the
benefits at a later date as the benefits would contribute
to liability. The division expected that EGWP would have a
negative impact on the trust. He reiterated that the money
had to stay in the trust and could not be used elsewhere.
2:45:57 PM
Mr. Desai continued to slide 19 which showed the FY 25
contribution rates for DB plans. The first column showed
the employee contribution under PERS. Peace officers and
firefighters received a 7.5 percent contribution rate,
school district alternative option employees received a 9.6
percent rate, and all other PERS employees received a 6.75
rate. Employer contributions would be at 22 percent and
were capped in statute; however, the total required
contribution for FY 25 was 26.76 percent, which meant there
was a discrepancy between the capped rate and the required
rate. The difference of 4.76 percent represented the
additional state contribution. The total employee
contributions for TRS were 8.65, the employer rate was
16.03, and the total required contribution was 28.59,
making additional state contributions 16.03 percent.
Mr. Desai advanced to slide 20 which showed similar
information for the FY 25 contribution rates for DC plans.
The employee contributions were 8 percent for both PERS and
TRS, employer contributions were 5 percent for PERS and 7
percent for TRS, the health care retiree major medical plan
contributions were 0.83 percent for PERS and 0.68 percent
for TRS, peace officer or firefighter occupational death
and disability contributions for PERS were 0.69 percent and
not applicable for TRS, and all other occupational death
and disability contributions were 0.24 percent for PERS and
0.08 percent for TRS. The Health Reimbursement Account
(HRA) under PERS was calculated as a flat dollar amount on
an annual basis and was 3 percent of all PERS and TRS
average annual compensation rates. After all contributions
on behalf of the employee were made, 8 percent was
allocated to the DB account balance for PERS and TRS
employees. The remaining employer contribution was 22
percent for PERS and 12.56 for TRS and went to DB plans as
unfunded liability.
Representative Stapp understood that excess contributions
would go to unfunded liability for TRS. He asked how equity
was built in retirement accounts with a 12.56 contribution
rate. He asked what the standard salary percentage was in
terms of monetization.
Mr. Desai responded that the rule of thumb was that a
retiree should have at least two-thirds of their most
recent salary upon retirement. When an employee took home a
paycheck, there were many contributions taken from the
check such as health care and taxes. The real paycheck came
out to be about two-thirds of an actual salary. He
indicated that the two-thirds number was rounded up to 70
percent today. When looking at retirement income compared
to most recent salary, there should be an equivalent of
nearly 70 percent.
2:52:04 PM
Representative Stapp asked if the division could meet its
goals with a 7 percent employer match.
Mr. Desai responded that the division conducted a study in
the prior year comparing the benefits based on a 7 percent
employer match. He explained that the results depended on
how the funds were invested and how long the funds were
invested. The success of the DC plan was based upon the
length of time the money was kept in the plan. If an
employee were to cash out immediately after retirement, the
money received would be less than if the employee were to
wait for the money to increase in value due to compound
interest.
Representative Stapp thought there was a missing piece. He
asked for more detail on the Supplemental Benefits Annuity
(SBS) plan which he understood was supported by PERS.
Ms. Lea responded that there were four types of
supplemental plans in the state. The SBS plan was for state
employees and participating political subdivisions. The
plan was a 6.1 match from both the employee and the
employer. Another plan was the Deferred Compensation Plan
(DCP) which was for state employees and included employee
contributions. The plan had the capability of including an
employer match, but presently only had employee
contributions. There were also 403(b) plans, which were
plans for teachers and were similar to a 401k. There were
also some employers participating in social security. She
remarked that funding retirement traditionally looked like
a "three legged stool" as included a retirement portion, a
supplemental savings portion, and a social security or
social security replacement portion.
2:55:08 PM
Representative Josephson asked for a description of the way
in which the excess contribution for younger workers made
on behalf of political subdivisions was calculated. He
thought that the state would calculate it based on the head
count of all employees. He understood that even the younger
employees in DB plans were contributing to a DB liability.
If all money was competing with all other money,
opportunities for economic growth within a DC plan would be
hampered by the fact that the younger cohort would be
contributing to the unfunded liability. He wondered if the
system was placing the burden of the previous liability on
the younger cohort.
Ms. Lea replied that when the DC plan was created, the
total unfunded liability was considered. She relayed that
the rates varied from employer to employer depending on the
number of participants and the number of retirees. The past
actions of some employers made for higher liability for
some and lower for others. The negotiations resulted in
employers paying 22 percent on both DB and DC plans because
it was a flat and budgeable rate. Employers paid an amount
above what was necessary for DC employees. She emphasized
that DC employees would not shoulder any of the unfunded
liability, but the employer would continue to pay the debt
that had accrued on the DB plans.
Representative Josephson commented that there were two
contesting theories: either the previous legacy plans were
burdensome and underfunded, or DB opportunities for the
younger cohort involved a loss of opportunity because
government funding was burdened by the previous plan. He
thought that it seemed as though the "sins of the past" had
been placed on future generations.
Ms. Lea agreed that it was in a sense what happened because
the debt was accrued and was owed by employers. The state
agreed to pay a portion of the debt on the behalf of the
employers, but the debt impacted the ability of the
employer to direct funds in other areas. The population in
every participating city in the state felt the impacts of
the debt.
3:00:17 PM
Representative Stapp understood that in the event that the
unfunded liability was paid off, the 22 percent employer
contribution would be allocated to an employee's DC plan.
He asked if he was correct in his understanding.
Mr. Desai responded in the negative.
Representative Stapp asked what happened to the employer
contribution if the unfunded liability was paid off.
Mr. Desai replied that if the 22 percent cap was not in
place, the actuarial contribution rate for the DB plan
would be 26.76, as seen on slide 19. The remainder of the
entire cost was derived by subtracting the 22 percent cap
from 26.76 percent and would be funded by the employer. A
portion of the money from the 22 percent cap was allocated
to the unfunded liability. If the 22 percent cap was not in
place, the DC plan would be offered in place of the cap and
there would be no additional contribution if there was no
unfunded liability. Since there was an unfunded liability
in the DB plan, the employer would be responsible for
paying the debts. The employer would pay up to 22 percent
and the remainder of the money was paid by the additional
state contributions. When the plans were fully funded in
2039 and there was no more unfunded liability, the cap
would no longer be in place and the actuarial rate would
drop from 12.6 percent to around 12 percent. As long as the
expected returns were met, the plans would be 100 percent
funded and all promises would be met and an unfunded
benefit could be paid. He agreed that it was confusing. Due
to the cost share plan that was established in 2008, the
state was taking responsibility for paying the debts. The
benefits under DC plans would be independently going to the
marketplace and the returns were independent from DB plans.
3:03:45 PM
Representative Hannan asked Ms. Lea how many subdivision
units or individuals in the state were eligible for social
security. She was aware that TRS employees were not
eligible and most state employees also were not eligible.
She wondered how many employees in the public pension
sector in the state were eligible.
Ms. Lea would follow up with the information. Out of all
participating employers in PERS, there were 75 that did not
have social security or SBS.
Representative Hannan asked how many total employers were
in PERS.
Ms. Lea responded that there were 150.
3:05:06 PM
Mr. Desai moved to slide 21 and detailed a review chart of
contribution rates of PERS and TRS. The blue line on the
PERS chart showed the history of the employer rate capped
at 22 percent and the orange line showed the actuarial
rate. The gap between 22 percent and the actuarial rate was
the amount paid by the state. The state had paid about $8.4
billion towards the unfunded liability. The blue line on
the TRS chart represented a 12.56 percent cap, the orange
line represented the actuarial rate, and the gap between
the two was the state contribution. The state as an
employer started paying the entire actuarial cost for PERS
a few years prior, therefore the gap on the chart was only
applicable to non-state employees.
Mr. Desai continued on slide 22 which included a graph
showing the projected pension benefit recipients. There
were an estimated 54,600 in 2025: 40,000 from PERS and
14,000 from TRS. In 2023, the total number of recipients
was projected to peak at 58,000.
Mr. Desai continued on slide 23, which showed similar
information as slide 22 but it represented the projected
pension benefits payments in dollars. In 2025, the payment
was projected to be $1.7 billion: $1.1 billion to PERS and
$600 million to TRS. The payment was projected to peak in
2037 with the payment totaling $2.1 billion.
Mr. Desai continued to slide 24 and explained that the
AlaskaCare EGWP was a group Medicare Part D prescription
drug plan option. The plan provided a direct subsidy and
was considered when calculating the Other Post-Employment
Benefits (OPEB) liability under both the Governmental
Accounting Standards Board (GASB) and the Financial
Accounting Standards Board (FASB) accounting schemes. The
implementation of EGWP reduced health care liabilities by
about $959 million, which resulted in lower projected
liabilities, lower projected contribution rates, and lower
projected additional state contributions. He relayed that
it had proved to be far more successful than the previous
option, the Retiree Drug Subsidy (RDS).
Mr. Desai advanced to slide 25 which showed the annual
savings from the EGWP subsidy. The original annual savings
estimate in 2020 was about $60 million with a net of $40
million, which meant that the department would be saving
about $20 million from RDS. In 2021 through 2023, the
estimated savings amount was increasing, with a total of
$60 million in savings estimated in 2023.
3:09:57 PM
Representative Stapp asked if Mr. Desai had considered
looking at cost projections pending some changes in
legislation. He noted that there was currently proposed
legislation in the state that would make significant
changes to prescription drugs.
Mr. Worley replied that it was part of the actuarial
process. He relayed that Buck's health actuary was
responsible for looking at the cost projections while
considering potential changes such as the passage of new
legislation. He assured Representative Stapp that DRB was
examining the potential impact of the changes to subsidies
at the division's next meeting.
3:10:54 PM
Mr. Worley continued on slide 26 which detailed one of the
actuarial assumptions applied to health care costs. The
slide included a chart tracking the health care cost trend
rates. The division had projected different cost increments
from FY 23 through FY 50. Different cost increments were
projected for beneficiaries under the age of 65 and those
over the age of 65. The actuaries used the chart when
projecting costs in the future and projected liability on a
specific date. The most recent valuation was on June 30,
2023, and the chart would be used to project cost trends.
The costs were examined annually, but not necessarily
changed annually.
Co-Chair Johnson understood that past errors due to the
state's past actuary were responsible for the unfunded
liability. She asked for more details on the process.
Mr. Desai directed attention to slide 11 which showed the
correlation between the insurance in the marketplace and
the actual funded ratio. One of the most important factors
in determining unfunded liability was demographic, which
was projected every four years to determine whether there
were any significant changes. He emphasized that
demographic assumptions were usually highly accurate. He
explained that the one variable it was not possible to
control was the changes between the economy 30 years ago
and the economy in the present day. The global economy
impacted everything and not just the pension plans. The
division expected a return of 7.25 for PERS in 2022 but
received a negative 4.08 percent return, which meant there
was a loss of approximately 11.5 percent. The uncertainty
in the marketplace impacted the DB plans significantly. He
added that the market was also more global than it was 30
years prior.
3:15:54 PM
Mr. Desai advanced to slide 27 which showed the process
timeline to determine employer contributions and additional
state contributions. The actuary used the 2022 valuations,
2023 assets with the actual rate of return, and 2024 assets
with the projected rate of return of 7.25 percent to
determine the FY 24 employer contributions and additional
state contributions. He concluded the presentation.
Representative Josephson remarked that the report released
by ARMB in October of 2023 stated that the board would
recommend a closure of the Empower Retirement System, which
was the state's account manager. He noted that there was an
individual present in the capitol building who led the
closure effort in the current year. He asked what the
current status was of the SBS Empower funds.
Mr. Desai replied that Callan conducted a specific study on
the Empower management. He relayed that the management of
the accounts was only successful when the participants were
providing the information that allowed the manager to see
the complete picture of the participants' portfolio. He
explained that Empower was not offering options and all of
the funds were managed by ARMB, but Empower provided the
services. The study by Callan showed that due to the lack
of information provided to Empower, the management of the
accounts was not as successful as it could have been. The
division worked with the board on its decision to shut down
fund management by Empower for new participants and ensure
that it was common knowledge that the management accounts
would be successful despite the fact that the fees were
being paid. He argued that Empower did not have access to
enough information to manage accounts successfully. There
was revised software in process that would allow the
account portfolio to be managed according to the
expectations recommended by Callan.
Mr. Desai continued that the division was working with the
existing populations to educate individuals on the
situation. Participants were being told how successful the
management of the account could be if the participants
provided more information to Empower. The division thought
that if the behavior of the participants was corrected, the
account management service could be offered in the future
and would be much more accurate. If the management services
were not offered, DB plan participants would need to manage
their own retirement plans and retain a financial advisor.
He thought that the cost of seeking independent management
would be higher than the fees associated with Empower. The
fees represented the average fees compared to other
companies and vendors offering similar services. The
division would continue to alter and manage the services
that were offered and would also rebuild services and find
new services. He emphasized that the management account was
part of the services that were offered by Empower based on
the request by the division.
3:21:49 PM
Representative Stapp commented that he often heard that
teachers and state workers would not have access to social
security. He asked what the process would be for a TRS
participant in the state to obtain social security
benefits.
Ms. Lea responded that the process would first need to be
initiated by the employer. Once the request to participate
was made, there would then need to be a vote by the
employees. There were two ways to conduct the vote: by
majority vote or by a divided vote. If there was a majority
vote and social security passed, all of the employees would
participate in social security. If it was a divided vote,
those who wanted to join social security would begin
participation but those who did not want to join would
continue without social security coverage. Once an employee
left the job, any replacement employee would be
automatically enrolled into social security.
Representative Stapp asked for clarification that the
school district would need to ask employees if the
employees wanted to participate in social security benefits
and request a vote. The employees could then determine
individually if they would like to participate in social
security.
Ms. Lea responded that if an employer decided to pursue
social security, the state's social security administrator
would discuss the particulars with the employer. One of the
things that would need to be considered particularly for
teachers would be the Windfall Elimination Provision, which
would offset retirement benefits from social security by
any other earned benefits with an entity that did not offer
social security.
3:24:27 PM
Co-Chair Johnson reviewed the agenda for the following
day's meeting.
ADJOURNMENT
3:24:56 PM
The meeting was adjourned at 3:24 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 0_DOA_PERS_TRS_Overview_HFC-2024_FINAL-01292024.pdf |
HFIN 1/30/2024 1:30:00 PM |