Legislature(2005 - 2006)CAPITOL 106
02/01/2005 08:00 AM House STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| Department of Administration: Division of Retirement and Benefits Tier Iv Pers/tier Iii Trs | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
HOUSE STATE AFFAIRS STANDING COMMITTEE
February 1, 2005
8:02 a.m.
MEMBERS PRESENT
Representative Paul Seaton, Chair
Representative Jim Elkins
Representative Carl Gatto
Representative Bob Lynn
Representative Jay Ramras
Representative Berta Gardner
Representative Max Gruenberg
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
OVERVIEW(S): DEPARTMENT OF ADMINISTRATION: DIVISION OF
RETIREMENT AND BENEFITS TIER IV PERS/TIER III TRS
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
MELANIE MILLHORN, Director
Division of Retirement & Benefits
Department of Administration
Juneau, Alaska
POSITION STATEMENT: Co-presented an overview of the division's
proposed Tier IV PERS/Tier III TRS, on behalf of the Department
of Administration.
BOB REYNOLDS
Mercer Human Resource Consulting
No address provided
POSITION STATEMENT: Co-presented an overview of the division's
proposed Tier IV PERS/Tier III TRS, on behalf of the Department
of Administration.
KATHY LEA, Retirement Manager
Health Benefits Section
Division of Retirement & Benefits
Department of Administration
Juneau, Alaska
POSITION STATEMENT: Responded to questions during the overview
of the proposed Tier IV PERS/Tier III TRS.
ACTION NARRATIVE
CHAIR PAUL SEATON called the House State Affairs Standing
Committee meeting to order at 8:02:08 AM. Present at the call
to order were Representatives Gatto, Elkins, Gardner, Gruenberg,
and Seaton. Representatives Lynn and Ramras arrived as the
meeting was in progress.
^OVERVIEW(S)
^DEPARTMENT OF ADMINISTRATION: DIVISION OF RETIREMENT AND
BENEFITS TIER IV PERS/TIER III TRS
8:02:45 AM
CHAIR SEATON announced that the only order of business was the
overview regarding Tier IV in the Public Employees' Retirement
System (PERS) and Tier III in the Teachers' Retirement System
(TRS).
8:03:29 AM
MELANIE MILLHORN, Director, Division of Retirement & Benefits,
Department of Administration, noted that Bob Reynolds of Mercer
Human Resource Consulting, an actuarial for the division, would
be assisting her in offering the presentation of the overview.
8:04:49 AM
MS. MILLHORN said that in January 2004, at the request of the
commissioner of the Department of Administration, a new tier
system was created for consideration. Involved in the process
were two board members and two representatives from the
Teachers' Retirement board, in concert with Mercer Human
Resource Consulting. There were multiple meetings, all of which
were noticed to the employers.
8:06:31 AM
REPRESENTATIVE GRUENBERG asked if the unions were notified also.
8:06:43 AM
MS. MILLHORN answered yes. She said the survey was designed and
sent to all employers.
8:07:06 AM
REPRESENTATIVE GRUENBERG asked how members were selected.
8:07:18 AM
MS. MILLHORN said subcommittees of the Teachers' Retirement
board and the Public Employees' Retirement board made the
selection.
8:07:28 AM
MS. MILLHORN said all the information that was collected from
studies and surveys was presented in Anchorage on November 19.
All board members not involved with the subcommittee were asked
to approve of the subcommittee's work and forward a
recommendation to the commissioner of administration. Although
the tier committee work was done, the board members were not
able to muster the requisite votes, because some board members
were not present and some did not support the new tiers. In
response to a question from Representative Gardner, she
clarified that the chair of the Public Employees' Retirement
board was not present, and two out of the four members of that
board who were present did not support a new tier in PERS. All
five board members of the Teachers' Retirement board were
present, but only 2 out of the 5 members supported the new tier.
8:10:53 AM
MS. MILLHORN, in response to a question from Representative
Gatto, reported that on the Public Employees' Retirement board,
three out of four members are PERS beneficiaries, while on the
Teachers' Retirement board, all five are TRS beneficiaries. In
response to a follow-up question from Representative Gatto, she
said it is mandated in statute that the Teachers' Retirement
board must have one member retired from the system.
8:12:06 AM
MS. MILLHORN, in response to a question from Representative
Gruenberg, reiterated the process by which a recommendation for
a new tier must be approved by the boards and sent to the
commissioner of administration for recommendation.
8:13:07 AM
CHAIR SEATON, in response to a follow-up question from
Representative Gruenberg, explained that the legislature has not
been asked by the administration to forward the tier initiative,
but has simply asked for a review of the work that has been done
by the tier committee, with a view to solving a long-term fiscal
problem.
8:14:25 AM
REPRESENTATIVE GRUENBERG asked, "Does the administration plan to
do so?"
8:14:37 AM
MS. MILLHORN said she thinks that "this is on the table for
discussion and consideration."
8:14:44 AM
MS. MILLHORN turned to presentation material [included in the
committee packet]. She explained that she would refer to both
the page number and the slide number on the page during her
presentation. Ms. Millhorn directed attention to page 1, slide
1, which shows three policy areas that govern PERS and TRS.
Those areas are: investment policy, benefits policy, and
funding policies. The investment policy is governed by the
Alaska Pension Investment board, which was created in 1992 and
resides within the Department of Revenue. The benefits policy
is the exclusive purview of the legislature to make
determinations about retirement benefits. Both PERS and TRS
play a role in looking at the funding policies for the systems.
PERS does so by setting the employer contribution rate, while
TRS has the authority to make a recommendation once a year,
regarding the employer contribution rate, to the commissioner of
administration. Ms. Millhorn noted that there are also thorough
actuarial experience studies conducted periodically on the
system, which look at the twenty underlying assumptions of the
system. Those assumptions are divided into economic and
demographic assumptions. She offered further details. The
other periodic review is actuarial audits that are conducted
every 4 to 5 years. The last audit was conducted in 2002. Both
PERS and TRS adopt recommendations that arise out of the
actuarial audits.
8:19:25 AM
MS. MILLHORN, in response to a question from Representative
Gatto regarding the timing of assumptions and audits, said
[auditors] look at the actuarial assumptions that are in place
at that time and make recommendations for revisions. She
deferred to Mr. Reynolds for further explanation.
8:19:46 AM
BOB REYNOLDS, Mercer Human Resource Consulting, clarified that
the actuarial audit is conducted by an independent firm, and
that firm either renders an opinion that an assumption is
reasonable or offers an opinion that a change is warranted. He
said the 2002 audit opinions were, by and large, that the
results were appropriate and reasonable. There were some
recommendations for changes, all of which were implemented
following the audit.
8:21:19 AM
MS. MILLHORN directed attention to slide 2, on page 1, which
shows employer contribution rates for PERS for fiscal year (FY)
05 and FY 06. She said, "The normal cost rate ... provides for
the benefits expected to be earned by active members during that
fiscal year." She explained that that's important, because if
the system was fully funded, the rate that would be paid would
be the 13.31 [percent] normal cost rate. That would contemplate
that each one of the approximately 155 PERS employers also were
at 100 percent funding. She said the normal cost rate is the
same for all employers; the average past service rate is
averaged among all the PERS employers, but each PERS employer
has his/her own past service rate that is dependent on his/her
individual liabilities and assets in the system.
8:23:55 AM
MS. MILLHORN said Mercer Human Resource Consulting comes to the
Public Employees' Retirement board each year and provides a
recommendation for the average contribution rate for the
employers, recognizing that each individual employer has his/her
own contribution rate, which is found in the actuarial
supplement to the systems.
8:24:58 AM
CHAIR SEATON asked Ms. Millhorn if she is talking about the
current accumulated benefits over the projected lifespan of all
of those employed.
8:25:34 AM
MS. MILLHORN said that's correct. She explained that the normal
cost rate and the average past service rate combined together
make of the average contribution rate for the employer. She
offered further details.
8:26:57 AM
MR. REYNOLDS, in response to a question from Chair Seaton,
confirmed that the intention of the actuarial method is that
benefits be paid essentially during the working lifetime of each
active member. He stated, "So, if you had assets to exactly
match the accrued liability, you would be on target, in terms of
that funding policy and, as long as all the assumptions
continued to be met and the normal cost rate was paid, you would
remain on target into the future."
8:27:58 AM
REPRESENTATIVE GATTO asked if an employee's past contributions
would be sufficient to cover him/her at retirement after, for
example, 11 1/2 years of work.
8:28:25 AM
MR. REYNOLDS responded, "The contributions attributable to that
member ... would be the member's contributions themselves, as
well as the contributions that the employer has made towards
that member's benefits through the normal cost rate."
8:28:41 AM
REPRESENTATIVE GATTO asked if a new member has to contribute
something to the past service rate to take care of "member
number one who now left the state."
8:29:02 AM
MR. REYNOLDS responded that, presuming all assumptions had
always been met and none had ever needed to be revised, no past
service rate would ever develop. He noted that the past service
rate has developed from a variety of factors, including
experience different from assumptions and program changes to the
benefit levels.
8:30:08 AM
REPRESENTATIVE LYNN offered his understanding that a person
retired from the National Guard can "buy ... 5 years into the
plan," while a person retired from the active duty Army cannot.
He said he cannot understand that.
8:31:32 AM
MS. MILLHORN offered to get back to Representative Lynn
regarding that question. In response to a related question from
Chair Seaton, she said, "Military service is covered in
statute."
8:32:19 AM
REPRESENTATIVE GRUENBERG said he had read that Congress has
changed law to allow recent veterans to buy into the federal
civil service upon their return from Iraq. He asked if there is
anything that Alaska should do on the state level.
8:33:00 AM
MS. MILLHORN deferred all military-related questions to Ms. Lea.
8:33:25 AM
CHAIR SEATON said he would like the questions focused on what
the effects of allowable buy-ins are on the retirement system
and whether other people in the system are being taxed to pay
for the benefits that people are accruing.
8:34:26 AM
KATHY LEA, Retirement Manager, Health Benefits Section, Division
of Retirement & Benefits, Department of Administration,
regarding Representative Lynn's previously stated question,
noted that in 1986 the legislature passed a cost-containment
bill that created Tier II. Part of that bill contained a
"double dipping" rule pertaining to military service; it stated
that if a member was receiving a federal retirement benefit
based on the same service, he/she could not claim that military
service in PERS. She noted that the U.S. Government passed a
law in Title 10 that contravenes the state law as it refers to
National Guard and Reserve members. She clarified that the
federal law did not include career military people. She told
Representative Gruenberg that he is correct that "they have
allowed that claiming into the federal retirement system, but it
is not a federal law - it's a provision of that retirement
system." Regarding [Chair Seaton's previously stated question]
regarding the cost effect to the [retirement] systems, she said:
We have several different kinds of ... service that
can be purchased into the system. Some of them are at
... full actuarial cost, and what that means is that
the employee that's claiming it pays all the costs
that are associated with that service. Military
service is different - it is a subsidized service.
The member pays 8.5 percent of their vesting-year
salary for every year they claim, up to five years of
service, but the employer pays the rest. So, when
they do claim military service, it does create a past-
service liability to the employer.
CHAIR SEATON indicated to Ms. Lea that he would like more
details submitted to the committee regarding this issue.
MS. LEA agreed to his request.
8:37:01 AM
MS. MILLHORN directed attention to page 24 of the handout, which
shows the normal cost rate and actuarial computed rate from FY
83 through FY 06 for both PERS and TRS. She said changes in the
normal cost rate are caused by changes in the assumptions and
new tiers being introduced.
8:39:17 AM
MS. MILLHORN turned to page 2, slide 3, which shows the current
financial summary for TRS, including the normal cost rate, the
past service rate, the total contribution rate, and the board
adopted rate. She offered further details.
8:40:45 AM
REPRESENTATIVE GRUENBERG observed that the third line of slide
2, relating to PERS, shows the average contribution rate, while
the third line of slide 3, relating to TRS, shows the total
contribution rate.
8:41:01 AM
MS. MILLHORN explained as follows: "The difference being is
that for the Teachers' Retirement system, it is one single
employer rate, and they share the liabilities of the system
together."
8:42:40 AM
MS. MILLHORN, in response to Representative Ramras, explained
that as new legislators are appointed to their positions and
begin participation with PERS, their contribution is set in
statute. That contribution rate that is made on behalf of a
legislator's benefits is 6.75 [percent]. That employee
contribution rate was established in 1986 and has not changed
since then. As increases in benefits costs arrive and the
assumptions take place, such as rising medical costs, the
employer bears the additional cost to the system to "pay for
your future benefits." It is the employer's responsibility to
make up the difference in the past service rate to pay off the
unfunded liability.
8:44:19 AM
REPRESENTATIVE RAMRAS asked if it would be likely that a
legislator would create a liability to the system after 20 years
in office.
8:44:52 AM
MS. MILLHORN answered that it would be subject to the variables
that occur year after year and any changes in actuarial
assumptions. She continued as follows:
The design of the system is that your contribution
rate, along with the employer contribution rate, is
designed that at the time ... you are appointed to
retirement ... there is all of the necessary funds to
begin your payment stream into retirement. The plan
is designed to accomplish that goal, and it does that
over that period of time, recognizing that there will
be changes in investment income; there will be
actuarially changed assumptions that will contribute
to what the employer has to pay in order to collect
all of those funds at the time of your retirement.
Based on the historical look back, the employee
contribution amount, coupled with the employer
contribution amount, represents 25 percent of the
funding for the system. The remaining 75 percent is
collected over the working lifetime of that
individual, and that is the investment income that is
earned. So, that's the historical look back on the
funding and the percentages that contribute to the
retirement system.
8:47:13 AM
MS. MILLHORN explained that a person is vested into the tier
level at which they start, through a contractual agreement with
the state.
8:51:33 AM
MS. MILLHORN, in response to a question from Representative
Gruenberg regarding the administration's responsibility to the
fund, said the division looks at the actuarial report that is
provided to the boards each year and is often asked for its
recommendation for setting the employer contribution rate. The
division's position has been to support Mercer Human Resource
Consulting's recommendation to increase the contribution rate to
properly fund the system.
8:52:24 AM
CHAIR SEATON offered his understanding that there is a provision
in statute that restricts the increase in the contribution rate
to 5 percent a year.
8:52:46 AM
MS. MILLHORN said the provision is in PERS, in regulation 2 AAC
35.900, and it will not allow, on average, the employer
contribution rate to be higher than or lower than 5 percent in
any one year. She said that regulation was adopted by the
Public Employees' Retirement board at the request of the
Municipality of Anchorage in 1981, for budgetary purposes. She
emphasized that it is not a regulation with TRS.
8:53:29 AM
MS. MILLHORN directed attention to pages 3 and 4, which show the
funding ratios for PERS and TRS. She listed the studies and
reports that can be found on [the division's web site]. Ms.
Millhorn turned the presentation over to Mr. Reynolds.
8:54:37 AM
MR. REYNOLDS explained that the discussion would now move into
the subject of the new tier proposals. He directed attention to
page 5, slide 5, which shows the financial context, including:
rising contribution levels; volatile investment returns and
investment uncertainty; and rising medical costs.
8:56:33 AM
MR. REYNOLDS highlighted information on slide 6, page 5, which
shows key information, including: an employer survey; member
focus groups with plan members; benchmarking to compare system
benefits to benefits provided by other states; benefit levels;
demographic projections; implications of Medicare changes;
trends, issues, and alternatives; and cost [analyses] and
projections. Mr. Reynolds said one of the primary findings of
the benchmarking activity was the discovery that PERS and TRS
provide relatively rich medical benefits compared to other
programs. Mr. Reynolds asked Ms. Millhorn to further discuss
the employee survey.
8:58:13 AM
MS. MILLHORN said the survey was important and comprehensive.
She noted that surveys were sent out to approximately 155
employers and 89 responded back, while 10 indicated they would
not participate in the PERS survey. For TRS, surveys were sent
to 57 employers and 36 responded. She noted that the survey was
also sent to all collective bargaining units and unions and, out
of 11, only 1 sent it back, while one refused.
9:00:38 AM
REPRESENTATIVE GRUENBERG said he would like to know why people
refused or didn't respond.
9:01:07 AM
MS. MILLHORN said she would get an answer back to him. She
turned the presentation back over to Mr. Reynolds.
9:01:28 AM
MR. REYNOLDS noted that, [beginning on page 34], the response to
the survey can be seen.
9:02:31 AM
MR. REYNOLDS directed attention to page 6, slides 7 and 8, which
list important conclusions regarding [the surveys for] PERS and
TRS, respectively. He outlined the concerns in the PERS survey,
including that employers want the retirement program to continue
to provide medical coverage. Many employers were open to the
possibility of providing differing levels of medical coverage,
depending on length of service, or having members share in the
cost of coverage. PERS employers showed they were also open to
lowering the post-retirement cost-of-living adjustment and not
providing medical coverage to vested, terminated members. Most
systems studied only provide medical coverage to members who
actually retire from the system. He explained that vested,
terminated members are those who leave prior to reaching
retirement age, but with sufficient service to be entitled to a
pension benefit from the system. He noted that some of the
responses did seem to favor continuing a defined benefit
approach in that there was a desire to reward long-service
membership in the system. However, responses did also lean
toward shifting some of the investment risk to members.
9:05:24 AM
MR. REYNOLDS, in response to a question from Chair Seaton, said
contributions are supposed to match future retirement benefits
for the system as a whole when all the membership is averaged
together. He offered an example. He said the contribution
levels would differ by individual, within the state's
membership, and the contribution levels would be higher for
older, longer-service members than for newer ones. However,
when the rates are developed, they are averaged so that the
employer is contributing the appropriate amount for the
workforce.
MR. REYNOLDS noted that there are two primary types of
retirement programs: defined benefit programs, such as PERS and
TRS, and defined contribution programs, which are account-based,
such as a 401(k). The programs are different in the way that
the dollars get distributed between people. One of the
differences is that defined benefit plans tend to direct more of
the money towards older, longer-service members than defined
contribution plans do.
9:07:30 AM
MR. REYNOLDS, in response to a follow-up question from Chair
Seaton, explained that each type of retirement program builds up
benefits over a person's lifetime. The rate at which benefits
build up will be different, depending on which type of
retirement program a person has. In response to a question from
Chair Seaton, he said it's not that one plan is worse than
another. He clarified as follows:
It's that, in the defined contribution plan, at the
end of the day, when you walk out the door with your
account, the majority of that account will be from
contributions that you made at the beginning of your
career, because that money will have grown with
investment returns. The $1,000 dollars you put in
last year is just $1,000, but the $1,000 you put in
when you were 20 has doubled several times, so that
the value of the account comes from the contributions
that were paid early. In the defined benefit plan,
it's more difficult to understand, but it's basically
the other way around: The value of your benefits
grows fastest in the later years.
CHAIR SEATON asked if [the reason the greatest growth in the
defined benefit plan is in the later years] is because the
person takes the highest three years, which would be the last
ones.
MR. REYNOLDS said that certainly is one of the reasons.
9:10:11 AM
MR. REYNOLDS turned to page 7, slides 9 and 10, which show an
overview of system objectives and constraints. Slide 9 shows
the objectives as follows: the system should provide medical
benefits to retirees, but members should bear a greater share of
the cost and should have to retire from the system in order to
be eligible for medical coverage; benefits should, to some
extent, favor longer-service members; employer contributions
should be more predictable and stable; investment risks should
be shared by employers and members; and healthcare inflation
risk should be shared by employers and members. Slide 10 shows
the constraints as follows: non-medical benefits must be
sufficient to satisfy minimum requirements for employers who do
not participate in Social Security; benefit changes must take
the form of new tiers; and annual cost of benefits should be
less than the current systems' normal cost rates.
9:12:17 AM
MR. REYNOLDS, in response to a question from Representative
Gruenberg, said the system of objectives and restraints was
drafted by the tier committee as a result of the information it
gathered, which is described on slide 6. He offered further
details.
9:13:12 AM
MR. REYNOLDS directed attention to page 8, slides 11 and 12,
which show trends and alternatives related to defined benefit
observations. The observations on slide 11 show: plans have
experienced higher cost levels and greater cost volatility;
funded status has declined in the last 3 years; and there are
some advantages to the employer of defined benefit plans, such
as retention incentives and lower turnover cost, workforce
management, and costs allocated to longer-service employees
retirement benefit alternatives. The observations in Slide 12
show: advantages to employees of defined benefit plans,
including the pooling of longevity risk, the employer - in most
cases - bearing the investment risk, and predictable, stable
retirement income; and challenges for the employer of defined
benefit plans, including investment risk and cost volatility.
9:15:26 AM
MR. REYNOLDS turned to slides 13 and 14, on page 9. Slide 13
shows: advantages to the employer of defined contribution
plans, including predictable cost, stable cost, the employee
assuming investment risk, no long-term administrative
commitment, and contribution equity among employees; and
advantages to the employee of defined contribution plans,
including portability, the ability to direct investments, and
contribution equity among employees. Slide 14 shows challenges
for defined contribution plans, including: increased difficulty
to manage the workforce; employee directed money often earning
less; the amount needed at retirement often being
underestimated; the necessity of employees to contribute in
excess of 10 percent, while most do not; and retirees generally
not being equipped to transform the lump sum into monthly
payments that last for a lifetime.
9:17:30 AM
MR. REYNOLDS responded to a question from Representative Ramras
as follows:
What we are addressing here is the nonmedical part of
the program - the pension part - and the defined
contribution approach would eliminate any underfunding
that could occur related to the pension part of the
program. The medical part of the program still could
develop future liabilities. Now, there is a fair
amount of description here about proposed changes to
the medical program that would help alleviate that
situation, but nothing that was contemplated would
entirely eliminate that ... risk from the medical
program.
9:20:36 AM
MS. MILLHORN, in response to a query from Representative
Gruenberg, confirmed that defined contribution plans are often
cheaper for the employer than defined benefit plans.
9:21:01 AM
CHAIR SEATON asked, "Is the cost necessarily less at a
particular time, or is the volatility and liability for change
less?"
9:21:46 AM
MS. MILLHORN responded that the defined contribution plan is
designed to shift the risk and eliminate the volatility for
those future benefits. She offered further details.
9:23:58 AM
MR. REYNOLDS elaborated that there is a difference between the
two programs in terms of cost volatility. He concluded, "So, a
defined contribution plan can be designed to be relatively the
same cost, cheaper, or more costly, but there's nothing inherent
between the programs that's cheaper. What is inherent is the
volatility issue."
9:24:41 AM
MR. REYNOLDS directed attention to slide 16, on page 10, which
shows that two alternatives were shown to the Public Employees'
Retirement and Teachers' Retirement boards, with the tier
committee recommending Alternative 1. Alternative 1 would:
retain a defined benefit component, although a reduced one;
introduce a defined contribution component; retain a medical
component, but with revisions; and introduce a health
reimbursement account (HRA), which is intended to provide
dollars that can be applied solely towards medical benefits.
Alternative 2 would: eliminate the defined benefit component and
redirect those dollars towards the defined contribution portion;
retain a medical program with the same revision relative to that
in Alternative 1; and introduce the HRA. Member contributions
under both alternatives were proposed to be higher than under
the current tiers. Contribution rates for the defined
contribution component were higher for Alternative 2 than for
Alternative 1, due to the elimination of the defined benefit
component. The post retirement medical program was proposed to
be the same for each of the two alternatives.
9:28:01 AM
MR. REYNOLDS turned to slide 17, on page 11, which highlights
the defined benefit alternative, showing that the percentage
multiplier is lower relative to the current system. The current
system has multipliers of 2 to 2.5 percent, while [Alternative
1] would use 1 percent. Pay would be averaged over a member's
career, rather than using a "high three" concept; however, the
pay would be indexed from the year received to the year
preceding retirement, similar to the way the social security
system indexes pay to age 62 before "averaging to develop
average pay." Slide 18, he noted, includes some of the key
features of the defined contribution components, showing:
individual accounts are maintained for each member;
contributions are a percentage of base pay; various member-
directed investment options that are 100 percent vested; and
that the terminating or retiring member takes the account, which
is eligible for rollover.
9:30:07 AM
MR. REYNOLDS, in response to a question from Representative
Gruenberg regarding the defined contribution alternative in
slide 18, confirmed that the employer also makes a contribution.
9:32:31 AM
MR. REYNOLDS, in response to a series of questions from Chair
Seaton, summarized that in developing the cost of the defined
benefit portion, the assumption was continued that the
investments behind the program would continue to earn 8.25
percent, on average. He said the actual costs would be shown
later.
9:33:02 AM
MR. REYNOLDS brought attention to slides 19 and 20, on page 12,
which compare the level of benefits that would be provided by
each of the alternatives to a hypothetical member, relative to
the current program's most recent tier. Slide 19 shows the
comparison for TRS, while slide 20 shows the comparison for
PERS. He noted that the current tiers tend to be higher at
retirement age, but in each case "there are many ages prior to
retirement where the proposed alternatives could actually
deliver a higher benefit."
9:34:39 AM
REPRESENTATIVE GRUENBERG asked why it's in the state's best
interest to have a system that encourages people to retire
earlier rather than keeping them when they are more experienced
and productive.
9:35:40 AM
MS. MILLHORN said the plans are designed to have recruit and
retention incentives attached. Historically, the average
credited service for a teacher, under the existing tier, is 10.5
years. The average credited service in PERS is 8.5 years. She
said she thinks people will decide individually what their
particular circumstances are. In response to a question from
Representative Gruenberg, she said the studies that are being
used are both from the Division of Personnel and the Department
of Labor.
9:38:34 AM
REPRESENTATIVE RAMRAS mentioned hearing about a teacher
mentoring system and an attrition rate of 50 percent, with pay
being only a 4th or 5th deciding factor.
9:39:26 AM
MS. MILLHORN said she is not privy to that information, but
suggested that many factors are involved in the longevity of
teachers in the system, and not all of those factors relate
directly to TRS. She offered some examples.
9:41:23 AM
MR. REYNOLDS directed attention to slides 19 and 20, on page 12,
which show the accrual of nonmedical benefits for both TRS and
PERS. He noted that a great deal of cost savings was not built
in to Alternative 1 and 2. He said that some members of the
systems may benefit more from the current tier, while others may
benefit more from one of the alternative tiers. He stated a key
point is that the current systems do provide medical coverage to
terminate vested members. He offered further details.
9:43:22 AM
MR. REYNOLDS said the next few pages deal with the proposals
relative to the medical aspect of the program. Slide 21 shows
that members would be required to retire directly from the
system to be eligible to receive medical benefits. The systems
would provide a health plan; levels of subsidy or cost to the
member would vary. People who retire prior to being eligible
for full normal retirement would get access to the medical
program, but essentially would have to pay their own way.
MR. REYNOLDS said that may provide incentive for those close to
retirement eligibility to stick around. He noted that the
retirement period has been divided into three phases. The three
phases would be: early-to-normal retirement, where the member
pays all; "normal retirement to Medicare eligibility portion,"
where members would receive money from the system, but would be
responsible for making up the difference; and upon Medicare
eligibility, where members would enter a program more like the
current one, but still would have some cost sharing elements
implemented relative to the current program.
9:46:47 AM
CHAIR SEATON asked what effect there might be if, on a federal
level, the age requirement of 65 was changed to 66 or 67.
9:47:17 AM
MR. REYNOLDS replied that no sensitivity analysis has been done
because no prediction can be made regarding what changes might
be contemplated by the administration "relative to that."
9:48:36 AM
MR. REYNOLDS, in response to a remark by Chair Seaton, stated
that the idea was to make the system less vulnerable.
9:48:53 AM
MR. REYNOLDS, in the interest of time, encouraged the committee
members to read slides 22-29 on their own.
9:49:18 AM
MR. REYNOLDS directed attention to slides 30-39, which he said
address the HRAs. He said the key point is to understand that
they are accounts with contributions put in each year, and they
grow with earnings. Members would be able to use those accounts
to provide for their expenses in retirement. In response to a
question from Chair Seaton, he clarified that those dollars
could be used for payment of insurance premiums prior to
Medicaid eligibility, as well as for co-pays and deductibles.
9:51:40 AM
MR. REYNOLDS, in response to a question from Chair Seaton,
offered details related to slide 39. In response to a follow-up
question from Chair Seaton, he explained that medical expenses
occur over time and the HRAs will be drained over time;
therefore, it's not a simple matter of subtracting [HRA amounts
from gross retiree cost amounts] to get the net retiree cost.
9:54:21 AM
REPRESENTATIVE GATTO noted that there is a reference to
"Police/Fire" retirement on page 30. He asked how familiar Mr.
Reynolds is regarding the procedures that are used to fund that
medical retirement.
9:55:05 AM
MR. REYNOLDS responded that he is familiar with the provisions
of the program itself. He said he would defer specific
questions about administration to the division.
9:55:32 AM
REPRESENTATIVE GARDNER directed attention back to slide 39 and
noted that the net retiree cost for late hires shows as
significantly less than that of the early hires. She suggested
that is counterintuitive.
9:55:59 AM
MR. REYNOLDS said the reason for the difference is that the
early hire becomes eligible for retirement sooner than the late
hire; therefore, the retirement period presumably is longer for
the early hire and there is a much larger medical expenditure.
9:57:01 AM
MR. REYNOLDS, in response to a question from Chair Seaton,
confirmed that that has to do with the Medicaid eligibility
dollars that would have to be expended. He offered further
details.
9:57:30 AM
MR. REYNOLDS, in response to an observation from Representative
Ramras, confirmed that slides 37 and 38 define the parameters
that go into slide 39.
9:57:51 AM
MR. REYNOLDS directed attention to slides 40 and 41, on pages 22
and 23, which show normal cost rates for Alternatives 1 and 2,
respectively. Slide 40 shows two columns each for TRS and PERS,
including the following components: medical normal cost rate,
defined benefit normal cost rate, defined contribution rate, and
HRA contribution rate. The normal cost rate for the current
program in all tiers are shown in parentheses for comparative
purposes. He offered further details.
10:03:29 AM
REPRESENTATIVE LYNN requested information relating to his
previously stated question regarding military personnel and the
issue of "buying in."
10:04:08 AM
CHAIR SEATON asked committee members to submit any further
questions they would like answered to his committee aide.
ADJOURNMENT
There being no further business before the committee, the House
State Affairs Standing Committee meeting was adjourned at
10:04:38 AM.
| Document Name | Date/Time | Subjects |
|---|