Legislature(2001 - 2002)

03/05/2002 09:25 AM House STA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                    ALASKA STATE LEGISLATURE                                                                                  
             HOUSE STATE AFFAIRS STANDING COMMITTEE                                                                           
                         March 5, 2002                                                                                          
                           9:25 a.m.                                                                                            
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
ACTUARIALS OVERVIEW:  DIVISION OF RETIREMENT AND BENEFITS                                                                       
                                                                                                                                
TAPES                                                                                                                         
                                                                                                                                
02-23, SIDE A                                                                                                                   
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
REPRESENTATIVE  COGHILL, Chair,  called the  House State  Affairs                                                               
Standing  Committee meeting  back to  order  at 9:25  a.m.   [For                                                               
minutes on HB 498, see the 8:10 a.m. minutes for this date.]                                                                    
                                                                                                                                
PRESENT                                                                                                                       
                                                                                                                                
Committee  members present  were Representatives  Coghill, James,                                                               
Fate, Hayes, and Crawford.                                                                                                      
                                                                                                                                
SUMMARY OF INFORMATION                                                                                                        
                                                                                                                                
[Contains discussion of HB 248]                                                                                                 
                                                                                                                                
Presenters  in the  overview were  Bob Reynolds,  an actuary  for                                                               
William M. Mercer,  which has served as the actuary  for the PERS                                                               
[Public   Employees'  Retirement   System]  and   TRS  [Teachers'                                                               
Retirement System] for the State of  Alaska for 30 years, and Guy                                                               
Bell, Director, Division of Retirement and Benefits.                                                                            
                                                                                                                                
BOB  REYNOLDS,  Actuary,  William  M.  Mercer,  offered  a  slide                                                               
presentation.    He  noted  that many  people  think  an  actuary                                                               
predicts  when  someone is  going  to  die; however,  an  actuary                                                               
computes  insurance  and  pension  rates and  premiums  based  on                                                               
experience  tables,  and  projects  probabilities  for  dates  of                                                               
employment,  disability,  termination,   retirement,  and  death.                                                               
This formula gives an indication of  how long the benefit will be                                                               
paid.    The goal  of  an  actuary is  to  make  sure assets  are                                                               
available to  pay for the  person's retirement until  that person                                                               
dies, so that future generations don't have to pay for it.                                                                      
                                                                                                                                
MR. REYNOLDS explained that a  25-year-old earning $40,000 a year                                                               
with a  20-year retirement  would have to  set aside  $210,000 in                                                               
assets through  that 20 years  to provide for the  $18,000 annual                                                               
accrued benefit in the retirement  years.  Furthermore, that same                                                               
25-year-old earning $40,000 with  a 30-year retirement would have                                                               
to  set aside  $290,000  to  pay the  annual  accrued benefit  of                                                               
$27,000 available at retirement when he turns 55.                                                                               
                                                                                                                                
MR.  REYNOLDS noted  that  the total  liability  of a  retirement                                                               
system is  based on  the sum  of benefit  values for  each system                                                               
participant.  He  said this figure includes  accrued liability of                                                               
all  retirees and  active  employees' past  service,  as well  as                                                               
normal costs for active employees'  future service.  He explained                                                               
that HB 248  would place an additional liability  of $7.2 million                                                               
on the  retirement system for the  240 members that HB  248 would                                                               
cover, or an additional $30,000 per employee.                                                                                   
                                                                                                                                
MR. REYNOLDS  listed the  following additional  assumptions built                                                               
into the model:  salary  increases, medical inflation, employment                                                               
patterns,   cost-of-living    adjustments,   termination   rates,                                                               
mortality rates, interest rates, and market activity.                                                                           
                                                                                                                                
MR. REYNOLDS  gave a comparison  of two employees retiring  at 20                                                               
years and  30 years.   He  said the 20-year  retiree would  be 45                                                               
years  old  at  retirement  and  would  collect  $18,000  for  an                                                               
expected  38   years;  therefore,  that  retiree   would  collect                                                               
$684,000 in  retirement.  The  30-year retiree would be  55 years                                                               
old at retirement and would collect  $27,000 for an average of 28                                                               
years;  therefore,  that  retiree  would collect  $756,000.    He                                                               
reiterated that  the annuity  value for  the retirement  would be                                                               
$210,000 in assets  for the 20-year retiree and  $290,000 for the                                                               
30-year retiree.                                                                                                                
                                                                                                                                
MR. REYNOLDS noted that if these  two persons had been in service                                                               
with the state  for ten years and wanted to  invest money for ten                                                               
years to  supplement their retirement to  a $40,000-a-year level,                                                               
the 20-year retiree would have  to invest $95,000 and the 30-year                                                               
retiree would have to invest $60,000.                                                                                           
                                                                                                                                
REPRESENTATIVE FATE asked  if there was a study  on the mortality                                                               
rate of juvenile officers now.                                                                                                  
                                                                                                                                
MR.  REYNOLDS replied  that there  is  only a  police-and-firemen                                                               
mortality rate study.                                                                                                           
                                                                                                                                
REPRESENTATIVE FATE asked  if such a study  would be advantageous                                                               
to the state.                                                                                                                   
                                                                                                                                
MR.  REYNOLDS  answered that  a  recent  study of  the  actuarial                                                               
assumptions  indicated  only one  table  is  necessary; the  same                                                               
mortality rates are used for police, firemen, and "all others."                                                                 
                                                                                                                                
REPRESENTATIVE CRAWFORD said  he was a member  of the ironworkers                                                               
union.  He noted that recent  stock market gains have resulted in                                                               
an accrual  rate rise from  the guaranteed  rate of 2.25  to 5.15                                                               
percent.   He asked  how recent market  gains have  affected PERS                                                               
and TRS.                                                                                                                        
                                                                                                                                
MR. REYNOLDS  said William  M. Mercer  uses a  long-time horizon.                                                               
For example, it  would use a 48-year time horizon  for a 35-year-                                                               
old retiring at 55 and living an additional 28 years.                                                                           
                                                                                                                                
REPRESENTATIVE CRAWFORD asked what William  M. Mercer is going to                                                               
do with large gains in market returns.                                                                                          
                                                                                                                                
MR.  REYNOLDS  replied that  gains  have  reduced the  "unfunded"                                                               
liabilities of the systems.   Using "smoothing" techniques allows                                                               
the actuary to "smooth out"  gains over the long-time horizons to                                                               
adjust for years with losses, he concluded.                                                                                     
                                                                                                                                
GUY   BELL,  Director,   Division  of   Retirement  &   Benefits,                                                               
Department of  Administration, stated that the  benefit employees                                                               
receive is  set in statute;  only the legislature can  change it.                                                               
He said the  state's contribution rate has gone down,  from 14 to                                                               
15  percent about  seven  years ago  to  approximately 7  percent                                                               
currently.  He noted that there  has been a continual increase in                                                               
medical care costs for retirees;  approximately 36 percent of the                                                               
state's contributions to PERS are for medical care costs.                                                                       
                                                                                                                                
CHAIR COGHILL  stated that  HB 248 would  allow employees  to buy                                                               
past service.   He asked if the costs take  into account that the                                                               
money "wasn't there all the time."                                                                                              
                                                                                                                                
MR. REYNOLDS noted that that was taken into account.                                                                            
                                                                                                                                
REPRESENTATIVE JAMES asked  if the actuary starts at  the end and                                                               
works his/her way back, to come up with a contribution rate.                                                                    
                                                                                                                                
MR. REYNOLDS said yes, because the goal is determined first.                                                                    
                                                                                                                                
CHAIR  COGHILL  asked  about  the   material  from  Janet  Clarke                                                               
regarding how the division would  absorb the cost in the existing                                                               
budget.                                                                                                                         
                                                                                                                                
MR. BELL  responded that  the budget issue  is a  policy question                                                               
that  is  left to  the  legislature  to  decide.   He  said  that                                                               
regardless of how  it is paid, there will be  a $7.2-million cost                                                               
reflected  through the  entire personal  services  column in  the                                                               
operating budget, because of HB 248.                                                                                            
                                                                                                                                
REPRESENTATIVE HAYES asked  whether this cost would  only be true                                                               
if  all 240  employees retired.   He  further asked  whether $7.2                                                               
million would be the worst-case scenario.                                                                                       
                                                                                                                                
MR. BELL responded that the  $7.2 million is based on assumptions                                                               
regarding    turnover   rate,    mortality   rate,    and   other                                                               
considerations.                                                                                                                 
                                                                                                                                
REPRESENTATIVE JAMES asked if this  cost was an annual expense or                                                               
a one-time expense.                                                                                                             
                                                                                                                                
MR.  BELL  answered  that  it   is  money  needed  today  to  pay                                                               
additional  retirement  benefits in  the  future,  not an  annual                                                               
cost.                                                                                                                           
                                                                                                                                
MR. REYNOLDS concurred.                                                                                                         
                                                                                                                                
CHAIR COGHILL  and REPRESENTATIVE  FATE thanked Mr.  Reynolds and                                                               
Mr. Bell for an excellent presentation.                                                                                         
                                                                                                                                
ANNOUNCEMENTS                                                                                                                 
                                                                                                                                
CHAIR COGHILL announced  that HB 248 would be  carried over until                                                               
Thursday  because  he  felt  uncomfortable   passing  it  out  of                                                               
committee with only four committee members present.                                                                             
                                                                                                                                
COMMITTEE ACTION                                                                                                              
                                                                                                                                
The committee took no action.                                                                                                   
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being no  further business before the  committee, the House                                                               
State Affairs  Standing Committee meeting was  adjourned at 10:02                                                               
a.m.  [For minutes on HB 498,  see the 8:10 a.m. minutes for this                                                               
date.]                                                                                                                          
                                                                                                                                
                                                                                                                                
NOTE:   The meeting was  recorded and handwritten log  notes were                                                               
taken.  A  copy of the tape(s)  and log notes may  be obtained by                                                               
contacting the  House Records  Office at  State Capitol,  Room 3,                                                               
Juneau,  Alaska   99801  (mailing  address)  (907) 465-2214,  and                                                               
after  adjournment of  the second  session  of the  Twenty-Second                                                               
Alaska  State Legislature  this  information may  be obtained  by                                                               
contacting the Legislative Reference Library at (907) 465-3808.                                                                 

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