Legislature(2025 - 2026)ADAMS 519
01/29/2025 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Overview: Funding Status Pers and Trs | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
HOUSE FINANCE COMMITTEE
January 29, 2025
1:34 p.m.
1:34:30 PM
CALL TO ORDER
Co-Chair Josephson called the House Finance Committee
meeting to order at 1:34 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Andy Josephson, Co-Chair
Representative Calvin Schrage, Co-Chair
Representative Jamie Allard
Representative Jeremy Bynum
Representative Alyse Galvin
Representative Sara Hannan
Representative Nellie Unangiq Jimmie
Representative DeLena Johnson
Representative Will Stapp
Representative Frank Tomaszewski
MEMBERS ABSENT
None
ALSO PRESENT
Kathy Lea, Director, Division of Retirement and Benefits,
Department of Administration; Christopher Novell, Chief
Financial Officer, Division of Retirement and Benefits,
Department of Administration.
PRESENT VIA TELECONFERENCE
David Kershner, Actuary, Arthur J. Gallagher and Company,
South Carolina; Steve Ramos, Chief Health Administrator,
Division of Retirement and Benefits, Department of
Administration.
SUMMARY
OVERVIEW: FUNDING STATUS PERS AND TRS
Co-Chair Josephson reviewed the meeting agenda.
^OVERVIEW: FUNDING STATUS PERS AND TRS
Co-Chair Josephson reminded members that the committee had
heard a previous presentation by the Alaska Gasline
Development Corporation (AGDC)[on January 28, 2025, at 1:52
p.m.]. He noted that every year, there were statewide items
that were not specifically agency-funded, and there were
issues with past service costs, which related to Tier I
through Tier III of the Public Employees' Retirement System
(PERS) and the Teacher's Retirement System (TRS). He
reminded the committee that there was a large appropriation
around nine years ago when the state was in a better
financial position.
1:37:21 PM
KATHY LEA, DIRECTOR, DIVISION OF RETIREMENT AND BENEFITS,
DEPARTMENT OF ADMINISTRATION, introduced herself and
explained that she had worked with the Division of
Retirement and Benefits (DRB) for 33 years.
CHRISTOPHER NOVELL, CHIEF FINANCIAL OFFICER, DIVISION OF
RETIREMENT AND BENEFITS, DEPARTMENT OF ADMINISTRATION,
introduced himself. He had recently taken over as CFO of
DRB and noted that other testifiers were available online
for questions.
Mr. Novell introduced the PowerPoint presentation "State of
Alaska Department of Administration; Division of Retirement
and Benefits; Presentation to the House Finance Committee"
dated January 29, 2025 (copy on file). He proceeded to
slide 3 which displayed the membership count of PERS and
TRS as of June 30, 2024. He provided a breakdown by tier
and employment status and explained that 22 percent of PERS
participants were enrolled in the defined benefit (DB)
plans [Tiers I through III), while 78 percent were in the
defined contribution (DC) plan (Tier IV). Similarly, TRS
had a 77 percent to 23 percent split between the DB and DC
plans. He noted that the DB tier had been closed in 2006
and it was expected that the membership split would
continue to shift toward the DC plan over time.
Mr. Novell moved to slide 4 which illustrated the
investment experience and the actuarial rates of return
expected to be earned by the plans. He pointed out that the
2024 valuation was still in draft form and would be
officially submitted to the Alaska Retirement Management
Board (ARMB) on March 11, 2025. The assumed actuarial rate
of return remained at 7.25 percent for both PERS and TRS
for the third consecutive year. Based on the fair market
value of assets, PERS and TRS had returns of 8.8 percent
and 8.9 percent, respectively. The draft valuation of
assets showed an 8 percent return for both systems, using a
five-year smoothing method to mitigate volatility. The
assumptions were reviewed every four years and were
submitted to ARMB.
1:42:22 PM
Mr. Novell proceeded to slide 5 and the funded status of
the pensions. He stated that the PERS pension liability for
2024 stood at $17 billion in draft form and the actuarial
valuation of assets was $11.6 billion, resulting in an
unfunded liability of $5.5 billion, or 68 percent unfunded
[this statement was later corrected]. He clarified that
when using the fair market value of assets, the unfunded
liability was similarly calculated at 67.7 percent.
Notably, the unfunded liability ratio had remained
consistent for the past three years for both PERS and TRS.
Representative Hannan noted that that the slide showed the
funded ratio at 68 percent for PERS and questioned whether
it was the unfunded ratio that Mr. Novell had referred to.
Mr. Novell replied that he misspoke, and the 68 percent was
indeed the funded ratio, not the unfunded ratio, as
reflected on the slide.
Mr. Novell continued to slide 6 which showed the funded
status of health care. He explained that the health care
system presented a different scenario, with positive
figures in columns C and F indicating that the 2024 funding
ratio was 143 percent for PERS and 150 percent for TRS. The
slide showed that the health care system was overfunded.
Co-Chair Josephson asked about the health care funding,
recalling that there had been significant concerns about
health care funding when the DB program was closed in 2006.
He noted that some reform proposals to bring back
traditional pensions typically avoided adding significant
health benefits due to concerns about over funding. He
asked how the health care portion had become overfunded
despite the concerns.
Mr. Novell deferred the question.
Ms. Lea responded that the improvement in health care
funding was primarily due to a federal program known as the
Employee Group Waiver Program (EGWP). She noted that DRB
had been a recipient of EGWP funds for several years, which
provided considerable discounts. Although the division
could not predict the exact amount of funds it would
receive each year from the federal government, the influx
of funds had contributed to the improvement in health care
funding. Additionally, cost containment measures had
further helped stabilize the funding.
Co-Chair Josephson asked whether reformers should consider
EGWP when discussing health benefits for retirees.
Ms. Lea responded that the division did not take a position
on whether EGWP should be included in proposals for adding
significant health benefits for retirees. The legislature
provided the plans and the division simply implemented the
plans.
1:47:31 PM
Representative Stapp remarked that the unfunded liability
on the pension side was significantly greater than the
total amount on the health care side. He asked what
percentage the fund would need to perform at in order to
clear the liability, assuming no additional contributions
were made. He estimated that the fund would need to perform
at around 18 percent annually to clear the liability by
2040.
Mr. Novell responded that he would follow up with the
information.
Co-Chair Josephson asked for clarification that
Representative Stapp was asking if the liability would be
cleared by 2040.
Representative Stapp explained that the fund was currently
68 percent funded and he was asking for a ballpark estimate
of the required performance for the fund to clear the
liability by 2040.
Mr. Novell replied that he would follow up with the
information. He suggested that the actuary from Gallagher
provide additional information.
1:49:19 PM
Representative Stapp posed his question to Mr. David
Kershner. He asked what the annualized rate of return on
the fund would need to be in order to clear the liability.
DAVID KERSHNER, ACTUARY, ARTHUR J. GALLAGHER AND COMPANY,
SOUTH CAROLINA (via teleconference), responded by
explaining that the question of how the fund would perform
without additional state contributions had not been
considered before, and no relevant analysis had been
conducted. He stated that for a pension plan to be
sustainably funded, the money coming in from both
contributions and investment income must equal the amount
going out in benefits and expenses. He noted that if the
assets performed better than expected, the required
contributions would decrease, and if the assets
underperformed, the required contributions would increase.
He clarified that if the state were to stop making
additional contributions and only rely on the contributions
from employers, which would be 22 percent for PERS and
12.56 percent for TRS, the fund would need to generate
excess investment earnings to make up for the shortfall.
While Gallagher had not done projections on the scenario,
he assured the committee that the actuaries could perform
the analysis and follow up.
Co-Chair Josephson asked if someone could explain the
meaning of the 22 percent for PERS and 12.56 percent for
TRS contributions.
Ms. Lea responded that the 22 percent contribution for PERS
was set in statute. Employers were required to pay 22
percent of total salaries for their employees towards the
unfunded liability and funding the benefits. She explained
that the TRS contribution rate was 12 percent, which was
also set in statute. She noted that in the past, each
employer was responsible for funding benefits for their own
group of employees, but the process had since changed. The
state now provided what was known as an "on-behalf"
contribution.
Representative Hannan asked for clarification regarding
industry standards for acceptable levels of pension
funding. She recognized that achieving 100 percent funding
was a common goal, but many pension funds were not fully
funded and still remained solvent. She asked for the
typical pension ratios that were required to maintain a
smooth path forward. She asked what the industry norms
were.
Mr. Novell responded that a 90 percent funded ratio was
generally considered a comfortable industry standard for
pensions.
1:53:17 PM
Co-Chair Josephson asked how many states achieved the 90
percent goal for pension plans.
Mr. Novell responded that he would follow up with the
information. He continued to slide 7, which included a
graph that depicted the funding status for PERS and health
care side by side, with the caveat that the pension and
health care funds were completely separate and should not
be viewed as affecting each other. The chart showed the
PERS pension in blue and health care in orange. He
highlighted that the PERS pension was below the 100 percent
mark, while the health care funding exceeded 140 percent.
Representative Galvin asked whether there were any
consequences for having an overfunded health care fund. She
wondered what was typically done in other states in such
situations. She asked what the gold standard for funding
levels was and what the division's desired level was.
Mr. Novell deferred the question to Mr. Kershner.
Mr. Kershner responded that the question of what could be
done with overfunded health care liabilities had been
raised by ARMB trustees over the years. He explained that
according to legal advice, the excess health care funds
could not be used to cover the pension fund shortfall. The
health care funds were legally segregated in a trust and
could only be used for the benefit of the participants and
their beneficiaries. The health care fund could not be
accessed to address the pension fund's shortfall even
though it was overfunded.
Mr. Kershner stated that the division was working towards
reaching 100 percent funding for the pension trust. If the
funding trend continued as projected, the pension trust was
expected to reach 100 percent funding by FY 48. He
emphasized that from an actuarial perspective, the key
concern was not the funded status or funded ratio at any
specific point in time, but the trend in the funded ratios.
The goal was to prevent the ratios from declining as time
progressed, and instead to see the ratios steadily rise.
Mr. Kershner continued that one of the important factors to
consider when reviewing the funding status chart was the
change in the assumptions used to discount future benefits,
which affected the size of the liabilities. He relayed that
in 2006, the blue bar indicating the funded status of the
pension plan was around 80 percent, but the funded ratio
was currently just below 70 percent. The assumptions on the
interest rate had changed over time, such as the expected
return on assets. In 2006, the assumed interest rate was
around 8.5 percent, but it had gradually declined due to
adjustments in future expectations for equity returns, bond
yields, and other factors impacting the investments of the
trust assets. The current interest rate assumption was 7.25
percent.
Mr. Kershner noted that the liabilities were highly
sensitive to any changes. For example, for every 100 basis
point change, the liabilities would change by approximately
11 percent to 12 percent. As the interest rate assumption
decreased, the liabilities increased, and conversely, the
liabilities would decrease if the interest rate increased.
He emphasized that funding was a "moving target" because
the assumptions were always being adjusted. The statutes
required the assumptions to be evaluated at least once
every four years and the interest rate was the primary
driver, although many other assumptions also played a role.
Mr. Kershner stated that the goal was to improve the funded
status over time. He acknowledged that there would be
fluctuations due to market returns and changes in
assumptions. The long-term aim was to reach a 100 percent
funding status, which was what the funding policy adopted
by ARMB was designed to achieve. The health care
liabilities had increased significantly due to the adoption
of EGWP, but favorable cost containment measures
implemented by the DRB had helped stabilize the health care
costs, which led to more a favorable valuation of health
care liabilities. He emphasized that the increases in
health care costs were not as significant as the costs had
been in prior years.
2:00:25 PM
Representative Galvin understood that the pension trust was
projected to reach 100 percent funding by 2048, based on
the current trend. The current projection was at 7.25
percent, but it had increased since the projection was
made. She understood that the gold standard was around 95
percent funded. She recalled in some prior hearings that 90
percent had been expressed as a goal. She was grateful that
Mr. Kershner was hoping to reach 100 percent.
Co-Chair Josephson asked how many states had DB plans.
Mr. Kershner replied that every state had DB plans, but
Alaska was unique in that it had closed its DB plans to new
hires in 2006. He noted that Alaska was also one of the few
states that funded both medical and health care liabilities
for its employees, a practice not commonly seen across
other states. The differences made it difficult to compare
Alaska's pension system directly with others.
Co-Chair Josephson asked how many states had DB plans for
people who were "hired yesterday" in the state.
Mr. Kershner responded that approximately 47 other states
still maintained active DB plans for their employees.
Co-Chair Josephson asked what the typical funded ratio was
in the 47 states.
Mr. Kershner responded that funded ratios varied
significantly from state to state. Some states, like South
Dakota, had their pension funds fully funded or even over
100 percent funded, while other states, such as Illinois,
had a much lower funded ratio at around 40 percent. He
stressed that while the funded ratio varied by state, it
was more important to focus on the long-term trend of the
funding ratio rather than a specific point in time. During
FY 21 and FY 22, the market experienced significant
declines that led to negative returns and lower funding
ratios; however, the funding ratios had since rebounded,
underscoring the importance of looking at trends rather
than short-term fluctuations.
Co-Chair Josephson agreed that the trend line was crucial.
2:04:39 PM
Representative Allard asked how many states did not have a
sales tax or income tax.
Mr. Novell asked to defer the question to Mr. Kershner.
Representative Allard rephrased her question. She asked if
the absence of sales tax or income tax in certain states
impacted the ability to afford a DB plan.
Mr. Kershner replied that there were many factors to
consider when deciding whether to maintain a DB plan for
new hires, and the lack of sales or income tax was not
within his area of expertise. He added that offering DB
plans could make it more difficult to attract and retain
employees, particularly in sectors like police and fire
services, which typically offered generous pension plans.
Representative Allard clarified that her question was
specifically about whether the absence of the taxes
impacted the financial feasibility of maintaining DB plan.
Co-Chair Josephson explained that Mr. Kershner had answered
that it was beyond his area of expertise.
Representative Johnson thought that hybrid systems that
combined DB plans and other forms of pensions could be more
similar to Alaska's pension system, as opposed to
traditional DB systems. She suggested that the question of
how many states had DB plans was difficult because the
answer was not as clear-cut, since pension plans were
structured in many different ways.
2:07:49 PM
Ms. Lea relayed that she would follow up on the questions
relating to DB plans in other states.
Mr. Novell continued on slide 8 which showed the funded
ratio for the TRS pension and health care plans. The chart
showed that there was an overfunded health care fund and an
underfunded pension fund.
Mr. Novell moved to slide 9, which illustrated the
correlation between the actual rate of return and the
actuarial funded ratio. Factors such as members leaving or
joining the retirement system impacted the funded status.
He emphasized that the metrics presented focused purely on
the effect of the rate of return on the fund. The
percentages in bold under the actuarial funded ratio
indicated an increase in the funded ratio in the last year,
which could be compared to the actual rate of return on the
left side of the slide. Since 2000, the assumed actual
earnings rate had been changed three times, most recently
in 2022 to 7.25 percent. He noted that it was important to
consider the impact of the $3 billion infusion that
occurred in 2015 when analyzing the data.
Representative Stapp asked why the assumptions for the rate
of return always seemed to be wrong in one direction. He
observed that since 2004, the actual returns had been
approximately 100 basis points lower than projected. He
asked what it would look like if the returns were 100 basis
points off in 2048, assuming the current rate of returns.
Mr. Novell deferred the question to Mr. Kershner.
2:10:54 PM
Mr. Kershner replied that the assumptions used for
determining funding contributions and liabilities were
long-term expected assumptions, which were considered best
estimates. He clarified that actual returns were rarely
exactly the same as assumed returns. Typically, actual
returns would either be higher or lower than what was
assumed, but the important takeaway was the long-term
trend. He highlighted that the 30-year average return for
both PERS and TRS was about 7.8 percent, which was close to
the long-term assumption. He acknowledged that the outlook
today was different from 20 years ago when the assumption
was 8.25 percent because long-term expectations for
equities and bond yields were lower now than they were two
decades ago, which was why the assumption had been adjusted
downward. He noted that the trend was consistent with every
other state pension plan in the country. He emphasized that
the actuaries did not focus on one-year or two-year periods
but always looked at the long-term outlook because pension
benefits were expected to be paid out for the next 20 to 40
years.
Representative Stapp clarified that he agreed with Mr.
Kershner that it would have been strange if the actual rate
of return had exactly matched the assumed rate of return.
However, the assumption had always been revised in the same
direction: downwards. He asked why the projected rate of
return could not have been revised upwards to help the
state pay off the liability. He noted that the last 10
years of the fund's performance had shown an average return
of about 7.3 percent for both funds. He asked how long-term
liability would be impacted if the average rate of return
in the next decade was 6.5 percent.
Mr. Kershner asked for clarification that Representative
Stapp was asking what the long term liability would be if
6.25 percent was assumed rather than 7.25 percent.
Representative Stapp responded, "Sure."
Mr. Kershner responded that for every 100 basis point
decline in the investment assumption, liabilities would
increase by about 10 percent or 11 percent. If the
assumption had been lowered by just 50 basis points to 6.75
percent, the liabilities would have increased by about 5
percent to 6 percent.
2:14:33 PM
Representative Bynum remarked that there was a significant
change in the funded ratio between 2001 and 2002. He asked
what events had occurred during that period that led to
that change.
Co-Chair Josephson assumed that the reason was the dot-com
recession.
Mr. Kershner replied that in 2001 and 2002, there had been
two consecutive years of negative returns exceeding 5
percent, which had caused significant accumulated losses.
The declining returns had been a key driver in the funded
ratio dropping from 100 percent to 75 percent. There could
have been other factors at play, such as changes in
demographics or large salary increases in 2002, which would
have also driven up the liabilities. He clarified that the
slide only reflected asset returns, but changes in
demographics and salary expectations also could have
contributed to the shift in the funded ratio. While many
factors had influenced the funded ratio, the negative
returns in those two years had played a large role.
2:16:36 PM
Mr. Novell continued on slide 10, which was related to
slide 7. The slide displayed the unfunded actuarial
liability in dollar amounts rather than as a percentage of
the total liability. Since 2006, the pension fund,
represented in blue, and the health care fund, represented
in orange, had both fluctuated. From 2018 onwards, the
health care fund had moved from being underfunded to
overfunded.
Mr. Novell continued to slide 11 and explained that the
slide told a similar story for TRS, with the exception that
the health care fund had been overfunded since 2017. He
continued to slide 12 which displayed the history of
legislation relating to additional state contributions,
including the $3 billion infusion into the plans in 2015
under HB 119. He mentioned that the board-adopted rate for
2026 would be $79,807,000 for PERS and $138,980,000 for
TRS.
Co-Chair Josephson asked if the legislature could decide
not to provide the contributions requested by ARMB. He
wondered if the legislature could simply choose not to
allocate the $79 million for PERS, for example.
Mr. Novell responded that Alaska statutes governing PERS
and TRS required an on-behalf contribution by the state.
Representative Stapp asked how many states looked to the
federal government for a "bailout" when the pension plans
became underfunded. He asked if Alaska would also be able
to receive funds or would it be required to pay from the
Permanent Fund.
Mr. Novell deferred the question to Mr. Kershner.
Mr. Kershner responded that he was not sure about what
other states had received from the federal government
beyond the EGWP subsidies but noted that he could look into
it.
2:20:06 PM
Mr. Novell continued to slide 13 which showed the
additional state contributions each year from FY 26 to FY
39, with the top entry reflecting the adopted rate for
2026. He indicated that he would explain more about
additional state contributions in the following slides.
Co-Chair Josephson commented that he was pleased to see
some consistency and predictability. He asked if the
division or the board was confident that the statewide
contribution in 2033 would be $273 million and not
significantly more or less.
Mr. Novell deferred the question to Mr. Kershner.
Mr. Kershner responded that the projected figures assumed
future experiences would follow the established
assumptions, including the 7.25 percent return on assets.
He added that while he could not guarantee that the 2033
contribution would be exactly $273.5 million, he had
provided the board with alternative projections based on
varying assumptions. In the upcoming March meeting, ARMB
would be discussing future projections and what could
happen if there were adverse experiences, such as higher-
than-expected inflation or bad asset returns over a few
years. He emphasized that the board would show some
sensitivity to the variables, but noted that the
projections would evolve over time as new data became
available. He explained that the numbers in the projections
were not static, and that the projections in the prior year
were different due to having one more year of experience.
He added that while they could not guarantee that the 2033
contribution would remain at $273 million, the assumptions
made could lead to coincidental accuracy if the future
experience unfolded exactly as projected. He stressed the
dependency of the numbers on evolving experience compared
to the underlying assumptions.
2:23:18 PM
Mr. Novell moved to slide 14 and detailed the table showing
preliminary rates for contributions to PERS and TRS
alongside the rates adopted by the board. He pointed out
that the preliminary reports indicated a health plan normal
cost rate of 1.97 percent for PERS and 2.15 percent for
TRS, which was influenced by the health plan's overfunded
status. The overfunding led the board to adopt a zero rate
for the health plan. He explained the savings at the bottom
of the table, which were calculated as the difference
between the preliminary and adopted contribution rates.
Mr. Novell continued on slide 15 which showed actuarial
projections of the funded level of the health care trust
over the next 15 years, both with and without normal cost
contributions. Normal costs referred to the annual costs of
future benefit payments and administrative expenses under
the actuarial cost method.
Co-Chair Josephson understood that funds could not be
transferred between the trust's "buckets." He asked if the
board could suspend payments to the health care trust.
Mr. Novell deferred the question to Ms. Lea.
Ms. Lea confirmed that the board could set the rates for
the health care portion of the trust, and due to the
overfunded status of the health care plan, the contribution
rate for health care was set at 0 percent. She clarified
that ARMB revisited the issue each year, which involved
evaluations by the actuary to assess trends and determine
when additional contributions might be needed.
2:26:49 PM
Representative Galvin understood that the funding level was
expected to exceed 200 percent in the future and was
already projected to exceed 150 percent by 2035. She raised
a concern about what actions might be taken when the fund
reached such a high level of funding. She asked if the
board could take any actions to provide some of the surplus
funds back to the recipients, questioning whether the fund
was being "hoarded." She wondered what legal options
existed and whether the legislature needed to act to allow
for such a payout, or if the situation required other types
of actions.
Ms. Lea responded that the increased funding level helped
avoid raising costs for employees, allowed for expanded
benefits like travel benefits, and supported program
enhancements. She emphasized that the goal of maintaining a
high level of funding was to support these benefits and
that high funding levels helped sustain the program over
time.
Representative Galvin asked why the fund was growing at
such a rapid rate. She reiterated her concern about the
fund reaching 150 percent, especially since it seemed that
a 100 percent funding level was adequate. She asked whether
the board had considered a payout to the beneficiaries or
other measures to address the surplus funds. She asked if
it was normal to allow the fund to continue growing at this
rate.
Ms. Lea replied that the funds were governed by trust fund
regulations, which had strict rules about how the funds
could be used. She explained that the fund could not be
used to make payouts to participants directly. The
available levers were limited to keeping co-pays and
premiums down or adding benefits.
Representative Galvin asked if the restriction on payouts
was due to statutory requirements or if it was the nature
of the board's rules. She asked whether legislators had any
options to address the surplus funds or if the current
approach was the best one. She wondered if any other states
in similar situations had taken different actions.
2:30:53 PM
Ms. Lea clarified that the restrictions were due to federal
rules that governed the trust funds. The board had to
comply with the rules and there were no permissible options
for making payouts to beneficiaries.
Representative Hannan asked how long the federal government
would continue to provide funds for the program when there
was no clear evidence of need. She asked whether the
federal government's contributions were guaranteed as long
as EGWP was in place or if the funding could be
discontinued.
Ms. Lea responded that the continuation of EGWP payments
was not guaranteed and the payments were dependent on the
federal government's decisions from year to year. She
explained that the federal government could stop the
payments at any time, and the amount received could also
vary.
Representative Hannan asked whether the chart on slide 15
assumed that EGWP would continue to be contributed at its
current rate of return, especially considering that the
projections show that by 2039, TRS could be at 245 percent.
Ms. Lea confirmed that the projections assumed an average
level of EGWP reimbursement.
Representative Hannah shared a personal anecdote about her
husband needing surgery. She explained that while they
could travel and get the surgery covered by insurance, her
husband was insisting on having the procedure locally. She
acknowledged that while she appreciated the expanded
benefits, she felt some members were surprised by the idea
of such additions.
2:33:13 PM
Representative Tomaszewski expressed surprise at how
benefits could be arbitrarily added to the health care
program. He asked for clarification on the regulations and
rules that allowed the board to make such decisions and
requested a list of what had been added to the benefits
over time.
Ms. Lea responded that the board did not make decisions on
benefits "willy-nilly" and that any changes were based on
careful consideration of funding availability. She
explained that decisions also took into account the
potential impact if the EGWP funding was no longer
available. The expansion process was thoroughly considered,
and no coverage was added without the approval of the
actuary and the board. She clarified that the state could
afford the current plan.
Representative Stapp asked how much of the $8.5 billion in
additional contributions to the retirement system were
allocated to the health care section.
Ms. Lee explained that most of the contributions were
allocated to PERS and TRS. She offered to follow up with
detailed information.
Representative Stapp thought that the state had made
additional payments to the health care portion, at least
initially. He asked if his understanding was correct.
Ms. Lea responded in the affirmative. The health plans were
unfunded at one point in the past and some of the on-behalf
payments went to the health plans.
Representative Stapp asked if it was possible to pay back
some of the extra money contributed by beneficiaries
instead of continuously expanding benefits. He suggested
that it would be a favorable situation for DRB.
Ms. Lea responded that since the funds were placed in a
trust for health care purposes, the funds could only be
used for health-related expenses. Once the money was in the
health care trust, it could not be used for anything else.
2:36:44 PM
Co-Chair Schrage asked if DRB had the authority to manage
the plans and expand or reduce benefits based on the
financial status of the fund.
Ms. Lea replied in the affirmative. The division had the
authority to administer the plan as long as it was meeting
industry standards and adhering to federal regulations
governing health plans. The statutes governing the health
plan also outlined that a health plan would be maintained,
which provided the legal framework for the division's
actions.
Co-Chair Schrage asked why 90 percent was considered a
healthy target for the health care portion instead of
aiming for 100 percent or more. He wondered what the
potential downsides were of being overfunded and whether
there were any issues with reaching a funding level of 100
percent or higher.
Ms. Lea responded that being well-funded was not inherently
bad. The funding ratios were assessed based on the ability
to pay full benefits if everyone who was not already
retired suddenly became eligible for retirement. For
example, with a 67 percent funding ratio, the plan would be
able to pay 67 percent of full benefits if everyone retired
immediately. However, it was highly unlikely that all non-
retired members would retire all at once and the funding
ratio needed to account for both the benefits being paid to
current retirees and those expected to retire in the
future. She clarified that being overfunded would mean
there would be fewer contributions required from the state
in the future, and the system would still have enough funds
to pay out benefits to retirees, even if all members were
eligible to retire at once.
Co-Chair Schrage understood that the downside of being
overfunded was essentially the sacrifice of too much state
money for benefits that would not be needed immediately.
Ms. Lea replied that if every member was to become eligible
to retire at once, it would mean that less money would need
to be allocated for remainder of the life of the plan. She
noted that longevity was a challenge. Even if the fund was
overfunded today, there was no certainty that it would
remain overfunded in the long run. The benefits were paid
out for members who had contributed for a relatively short
time but were receiving benefits for many more years,
sometimes 40 years or more.
Co-Chair Schrage asked what the goal was for the funding
level. He asked if it was 100 percent.
2:41:55 PM
Ms. Lea confirmed that the goal was to be 100 percent
funded. She stressed that a 100 percent funding ratio would
ensure that the obligations could be met without
sacrificing significant state funding.
Mr. Novell moved to slide 16, which outlined the FY 26
contribution rates for the DB plans and the rate
calculation methods. The slide detailed the contributions
from both employees and employers. The employee rates were
shown in the first row, followed by the employer rates,
which were capped by statute at 22 percent for PERS and
12.56 percent for TRS. The slide showed the additional
state contributions, including the DC rate, which was 6.33
percent for PERS and 8.77 percent for TRS. As a result, the
total employer required contribution per employee for FY 26
would be 28.33 percent for PERS and 31.33 percent for TRS.
Mr. Novell moved to slide 17, which showed the FY 26 DC
rates for Tier IV employees. He explained that 8 percent of
the gross income would be paid by the employee, with an
employer match of 5 percent for PERS and 7 percent for TRS.
The employer rates were added together, and the difference
between these amounts and the 22 percent for PERS or 12.56
percent for TRS would go towards funding the DB plans and
liabilities.
Co-Chair Josephson asked how teachers ended up without
Alaska Supplemental Annuity Plan (SBS) dollars and Social
Security coverage.
Ms. Lea responded that the situation began in the 1940s
when the teachers had their own state retirement system. In
1955, schools and political subdivisions were allowed to
enroll in Social Security, either in addition to their
state retirement plan or instead of it. A referendum was
held among Alaska teachers, and they voted not to join
Social Security. As a result, teachers were excluded from
the Social Security system and SBS was designed as a
replacement for Social Security. However, the SBS program
was available to those eligible for Social Security, which
was why it did not apply to teachers.
2:46:11 PM
Representative Tomaszewski noted that there was a bill
currently in circulation that would allow teachers to join
SBS if it were to pass. He asked whether Ms. Lea thought it
was a good idea.
Ms. Lea responded that it depended on individual
circumstances. If teachers joined the SBS system, they
would gain an additional supplemental account to draw on,
which they currently did not have. However, teachers would
be required to contribute 6.13 percent from their
paychecks. She reiterated that teachers would likely have
varying opinions on the idea. Some might view it as a
positive change, while others might not. The proposal would
provide an additional source of funds that individuals
could use to accrue retirement savings.
Representative Bynum stated that it was clear to him that
the values presented and the various retirement plans were
not all equal. The costs associated with each plan were
significantly different and the actual dollar value for DB
plans compared to DC plans was not easily discernible based
on the provided information. He thought it would be helpful
to understand was who was actually being covered by these
plans. He referenced slide 14, where the state liabilities
and non-state employee liabilities for the defined
contribution plan were outlined. He did not think there was
a clear connection between those liabilities and the
parties responsible for paying the liabilities. He did not
think the clients of the plans, such as the subdivisions,
the state, and the municipalities, were clearly identified.
He emphasized that it was important to clarify who would be
impacted by the various plans and the costs associated with
the plans.
Ms. Lea responded that she could provide the committee with
a list of the participating employers within PERS and TRS.
The employer rate was currently set by statute as a flat
rate due to the volatility experienced by employers when
each entity was responsible for its own rate. The
fluctuation had made budgeting difficult for employers. She
explained that during periods of low or negative returns on
investments, employers faced rate increases that some could
not afford. She relayed that it was essential to consider
the impact on employers when developing any retirement
plan, particularly regarding the costs that would be
incurred.
2:50:19 PM
Representative Bynum directed attention to slide 17, where
the DC plan was discussed. He noted that the calculations
for the amounts paid into the plan were shown, with the
difference of 22 percent being allocated to DB. He inquired
if there was any indication of how many employees were
still required to contribute to the past liability.
Ms. Lea replied that employees were not responsible for
paying the past liability. Employee contributions went
directly into individual investment accounts and the
additional amount was paid by the employers. She explained
that the figures detailing how much was collected annually
were not prepared at the time but she could follow up.
Representative Bynum understood that the 22 percent figure
referred to the employer's contribution, but the employer
was also responsible for paying the past liability for
previous employees. The contribution benefited past
employees rather than the current workforce. He thought
that current employees were receiving their 5 percent
contribution, along with other percentages that went into
health care and disability funds. However, it was the
municipality, city, or borough that was responsible for the
past liability, which did not directly benefit the current
employees. He thought the situation had an impact on the
ability of employers to pay their current employees. He was
interested in learning what percentage of remaining
liability was present for the positions that were currently
being filled.
Mr. Novell continued, noting that slide 18 displayed the
variation of the actuarial rate from 2008 to 2026 and the
ARMB adopted rate for both retirement systems.
2:52:57 PM
Mr. Novell proceeded to slide 19, which showed the
projected benefit recipients up until 2053. As more
individuals retired, the number of pension recipients was
expected to rise, peaking for PERS in 2030 and for TRS in
2031. During the indicated time frame, all employees were
enrolled in the DC system and not DB, which meant that the
number of DB recipients would naturally decrease.
Mr. Novell moved to slide 20, which depicted a similar
trend to the previous slide, but in monetary terms. He
explained that TRS was expected to peak with $687 million
in benefit payments in 2033, while PERS was projected to
peak with $1.5 billion in 2038. Over time, the recipient
dollars were forecasted to gradually decrease, nearing zero
by the end of the century.
Co-Chair Josephson asked if anything could be concluded
from slides 19 and 20 regarding the difference in assumed
turnover between a DB and a DC plan.
Mr. Novell responded that turnover, along with other
demographic factors, was taken into account in the
assumptions made going forward.
Co-Chair Josephson asked if any analysis had been done
regarding when the cash-outs for Tier IV for PERS and Tier
III for TRS might occur and whether any pressure on the
accounts had been anticipated due to the cash-outs.
Mr. Novell deferred the question to Mr. Kershner.
Mr. Kershner responded that slide 20 only represented the
DB plan pension benefits. He noted that projections for the
DC plans, Tier IV for PERS and Tier III for TRS, were not
included. Both of the plans were overfunded and no strain
on the funds was expected as the DB participants approached
their retirement years.
Mr. Kershner added that although the DC plan had only
recently begun to see a handful of participants receiving
benefits since the plan's inception in 2006, the trust
funds were still in a strong position. He attributed this
stability in part to the EGWP subsidies coming from the
federal government. He emphasized that the trusts were not
projected to face any liquidity issues.
Mr. Kershner clarified that of the $3 billion contribution
made by the state in 2015, $1 billion had been contributed
to PERS, and $2 billion had been contributed to TRS. He
explained that 100 percent of the $1 billion contribution
for PERS went into the PERS pension trust, with none
allocated to the PERS health care trust. Approximately $1.7
billion of the TRS contribution went into the TRS pension
trust, while about $300 million went to the TRS health care
trust.
Mr. Novell turned the presentation over to Mr. Steve Ramos.
2:57:52 PM
STEVE RAMOS, CHIEF HEALTH ADMINISTRATOR, DIVISION OF
RETIREMENT AND BENEFITS, DEPARTMENT OF ADMINISTRATION (via
teleconference), continued on slide 21 detailing EGWP,
which was a Medicare Part D prescription drug plan. He
clarified that the subsidies from Medicare were part of the
plan. The total amount of subsidies for the current year
was expected to approach $100 million.
Mr. Ramos continued to slide 22, which showed a breakdown
of the different segments of the subsidy provided by
Medicare. He explained that each line represented a
different piece of the subsidy. He noted that the expected
total subsidy for 2024 was $102 million, as shown on the
right column of the slide.
Representative Galvin asked for more information about the
unpredictability of EGWP. She noted that in 2021, 2022, and
2023, the direct subsidy amounts were significantly lower,
even showing negative amounts, and that in FY 24, there was
an expected large positive amount. She asked why the
subsidy amounts were negative during those years.
Mr. Ramos responded that he did not have the answer but
suggested that Mr. Kerschner might be able to provide more
insight.
Mr. Kerschner explained that he was unable to provide a
direct answer, as the estimates for the EGWP were not
developed by Gallagher. He understood that the state worked
with Segal Consulting to generate the estimates for the
EGWP subsidies. He noted that Gallagher used the estimates
provided by Segal for its projections and the valuation of
future benefits. He added that the EGWP subsidies had
almost doubled since 2020. As the subsidies had increased,
the future expectations for the EGWP subsidies had also
risen, which contributed to a reduction in health care
liabilities. He explained that these subsidies acted as
"negative benefits" helping to offset the liabilities.
Consequently, the increase in EGWP subsidies had a notable
impact on the state's health care liabilities by reflecting
the higher subsidies in the calculations.
3:01:57 PM
Representative Hannan directed attention to the terms "low-
income premiums" and "low-income cost sharing" used on
slide 23 in relation to EGWP. She asked to be provided with
the definition of "low income" used in this context,
questioning whether it was based on the beneficiaries of
the pension program and if it applied to those who were
qualified or deemed low income. She asked if the definition
was tied to a poverty-level percentage or if it related to
a state-defined ratio of low income, rather than being tied
specifically to pension beneficiaries.
Mr. Kerschner responded that he was not sufficiently
familiar with the details to answer the question.
Mr. Ramos explained that the low-income premiums and low-
income cost sharing were specific to individual members.
Each member with a Medicare prescription drug plan was
identified individually and each plan represented an
individual person, which differed from most other insurance
accounts where the subscriber and family members were
included under a single account. He clarified that the low-
income premium subsidy was designed for individuals who
might be unable to cover their own premiums, while the low-
income cost-share subsidy was provided when a drug's cost
exceeded what the individual could afford. He noted that
DRB did not receive individual-level reporting but received
aggregate numbers. He assured Representative Hannan that
the subsidies were specific to the individual members.
Representative Hannan asked how many pension beneficiaries
were deemed low income by the federal government under EGWP
and whether the data presented on the slide could provide
any insight. She asked whether the ratio in the
calculations was relevant to the determination.
Mr. Ramos responded that while the information was not
irrelevant, there were quite a few unknowns. He explained
that a retiree who had worked for five years in a low-wage
position might be considered low income upon retirement,
while someone who had served for 30 years with a higher
salary would likely not fall into that category. He
indicated that it was possible to pull some numbers and
offered to follow up if Representative Hannan desired.
Representative Hannan suggested that the issue should not
be explored in too much detail because she thought that DRB
had more pressing questions to address.
3:05:55 PM
Co-Chair Josephson asked if an individual who had five
years of service and earned a relatively low salary but
also had significant other income would be eligible for the
subsidy. He wondered if the evaluation of eligibility for
the subsidy was based solely on the person's income from
their five years of service with the state.
Mr. Ramos responded that the evaluation would not be based
solely on the person's income from the five years of
service. He explained that the determination was made based
on the individual's income, specifically the adjusted gross
income from two years prior. He clarified that an
individual with significant income from another source
would not likely qualify for the subsidy.
Mr. Ramos continued to slide 23 which showed the cost trend
rates. He noted that the projections presented in the slide
were based on trends identified by DRB, with an approximate
6 percent trend in the cost of obtaining health care.
Mr. Novell proceeded to slide 24 which displayed the
process timeline. The slide outlined the steps from
valuation to ARMB adopting the additional state
contributions, with the objective of addressing the
unfunded liability for PERS.
Representative Stapp asked for more information about the
22 percent additional municipal contribution and inquired
where municipalities obtained the funds to make the
contribution. He wondered if the money came from property
taxpayers in most cases.
Ms. Lea responded that municipalities typically budgeted
for the additional contribution each year. She clarified
that the source of the funds could vary depending on the
municipality, as different municipalities might draw from
different pools of money to cover the contribution.
Representative Stapp noted that there was no sales tax in
Fairbanks, and only property taxes were collected. He asked
if, as a homeowner in Fairbanks, he would effectively be
contributing to someone's pension retirement system via
property taxes, even if that person had been born after the
pension plan ended in 2006.
Ms. Lea responded that she did not have knowledge of how
municipal budgets were funded. She clarified that DRB did
not deal with the specifics of municipal funding and could
not speak to whether purchasing a house and paying property
taxes contributed to the 22 percent employer contribution.
Representative Stapp emphasized that property taxes were
the only form of taxation in Anchorage and Fairbanks. He
asked again if that meant he was indirectly paying into
someone's pension system through his property taxes.
Ms. Lea reiterated that while she was aware that
municipalities received various grants and had other
sources of income, DRB was not an expert in municipal
funding. She explained that any answer she provided could
be inaccurate.
Representative Stapp suggested that the issue would likely
arise again. He relayed that it was important to lay the
groundwork for future discussions regarding the state's
financial issues.
3:10:54 PM
Co-Chair Josephson reviewed the agenda for the following
day's meeting.
ADJOURNMENT
3:11:44 PM
The meeting was adjourned at 3:11 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| DOA-HFIN-PERS-TRS Update 1-29-25 update.pdf |
HFIN 1/29/2025 1:30:00 PM |