Legislature(2005 - 2006)CAPITOL 106
02/15/2005 08:00 AM House STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| Executive Order 113 | |
| Department of Administration | |
| 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 15, 2005
8:05 a.m.
MEMBERS PRESENT
Representative Paul Seaton, Chair
Representative Carl Gatto, Vice Chair
Representative Jim Elkins
Representative Bob Lynn
Representative Jay Ramras
Representative Berta Gardner
Representative Max Gruenberg
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Mike Kelly
COMMITTEE CALENDAR
EXECUTIVE ORDER 113
- HEARD AND HELD
OVERVIEW(S): DEPARTMENT OF ADMINISTRATION: DIVISION OF
RETIREMENT AND BENEFITS Tier IV PERS/Tier III TRS
- HEARD
PREVIOUS COMMITTEE ACTION
Executive Order 113: See House State Affairs minutes from
2/8/05
WITNESS REGISTER
MELANIE MILLHORN, Director
Division of Retirement & Benefits
Department of Administration
Juneau, Alaska
POSITION STATEMENT: Co-presented an overview [continued from
2/1/05] 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 [continued from
2/1/05] of the division's proposed Tier IV PERS/Tier III TRS, on
behalf of the Department of Administration.
KEVIN BROOKS, Deputy Commissioner
Office of the Commissioner
Department of Administration
Juneau, Alaska
POSITION STATEMENT: Answered questions on behalf of the
administration during the overview of the proposed Tier IV
PERS/Tier III TRS.
KATHY LEA, Retirement Manager
Division of Retirement & Benefits
Department of Administration
Juneau, Alaska
POSITION STATEMENT: Answered questions on behalf of the
division during the overview of the proposed Tier IV PERS/Tier
III TRS.
JOSEPH M. BEEDLE, Vice President for Finance
Office of Finance
University of Alaska, Fairbanks
Fairbanks, Alaska
POSITION STATEMENT: Testified on behalf of the university
during the overview of the proposed Tier IV PERS/Tier III TRS.
JIM JOHNSEN, Vice President for Faculty and Staff Relations
University of Alaska
Fairbanks, Alaska
POSITION STATEMENT: Testified on behalf of the university and
answered questions related to the Optional Retirement Program
(ORP) 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 8:05:54 AM. Present at the call
to order were Representatives Elkins, Lynn, Gardner, Gruenberg,
and Seaton. Representatives Gatto and Ramras arrived as the
meeting was in progress.
^EXECUTIVE ORDER 113
CHAIR SEATON announced that the first order of business was
Executive Order 113.
CHAIR SEATON explained that the committee has before it two work
drafts that address the inclusion of the legislative branch's
telecommunications under the auspices of the Department of
Administration.
8:06:41 AM
REPRESENTATIVE GARDNER moved that the committee [place before
it] work draft Version 24 LS 0464\A. There being no objection,
Version 24 LS 0464\A was before the committee.
8:07:07 AM
CHAIR SEATON explained the differences between the two work
drafts.
8:08:31 AM
CHAIR SEATON, in response to a question from Representative
Lynn, clarified that the version before the committee [exempts]
the legislature [from EO 113]. If anyone, during the hearing of
the bill, wishes to also exempt the Alaska Permanent Fund
Corporation and Alaska Housing Finance Corporation, he/she could
do so through an amendment at a later date.
8:09:12 AM
REPRESENTATIVE GRUENBERG asked if the railroad is also included
"under the executive order."
8:09:21 AM
CHAIR SEATON said his staff will find out the answer to that
question. He said, "Neither one of these [work drafts] mentions
the Alaska railroad." In response to Representative Elkins, he
clarified that existing law exempts the railroad and neither one
of the suggested work drafts would change that.
^OVERVIEW(S)
^DEPARTMENT OF ADMINISTRATION
8:10:46 AM
CHAIR SEATON announced that the next order of business was the
overview from the Department of Administration regarding the
Public Employees' System (PERS) and its proposed Tier IV and the
Teachers' Retirement System (TRS) and its proposed Tier III.
8:11:50 AM
MELANIE MILLHORN, Director, Division of Retirement & Benefits,
Department of Administration, presented a continuation of the
overview which was begun on 2/1/05. She directed attention to
two handouts [included in the committee packet]: One is
[titled, "State of Alaska PERS & TRS Proposals House State
Affairs, previously referred to during the House State Affairs
Standing Committee's 2/1 meeting] and the other is [titled,
"Alaska Legislative Report, Response to Questions from House
State Affairs on The Public Employees' Retirement System and The
Teachers' Retirement System," dated February 2005 and presented
to the committee on this date].
8:13:16 AM
BOB REYNOLDS, Mercer Human Resource Consulting, co-presenting
the overview on behalf of the Department of Administration,
directed attention to the handout in the committee packet,
entitled, "State of Alaska PERS & TRS Tier Proposals, House
State Affairs." He noted that the committee had received a
summary of the first portion of that handout at a previous
meeting. He reminded the committee that two alternative tier
plans are described in the handout; they are called Alternative
1 and Alternative 2. Mr. Reynolds directed attention to slide
40, on page 22, which shows normal cost rates for Alternative 1.
He explained that means what the costs of the system would be in
the absence of any unfunded liability.
MR. REYNOLDS, in response to a request for clarification,
reviewed the overview shown in slide 16, on page 10, which
describes the components of Alternative 1 and 2. In response to
a question from Representative Gruenberg, he explained that both
alternatives were arrived at by the "tier committee of the
boards" to recommend to the "full boards."
8:17:04 AM
CHAIR SEATON clarified that the purview of the legislature is to
define the benefits and tiers, and to construct new tiers, but
it cannot diminish accrued benefits to employees. He reminded
the committee members that they are looking at two [alternatives
under consideration] for the purpose of understanding the
system; they are not considering the tiers as a proposal or a
bill.
8:18:19 AM
MR. REYNOLDS returned to slide 16, on page 10. He noted that
subsequent slides, on pages 11-21 provide more detail. In
response to a previously stated question regarding what normal
cost rates mean, he directed attention to slide 2, on page 1,
which shows the employer contribution rates for PERS, and slide
3, on page 2, which shows the employer contribution rates for
TRS. He said these slides show the calculated actuarial
contribution rates needed to fully fund the systems after a 25-
year period. The rates are composed of two components: a
normal cost rate, which provides for benefits expected to be
earned by active members during the fiscal year; and the past
service rate, which is the part of the contribution that is
intended to pay off the unfunded liability over 25 years. He
explained that the past service rate would not exist if the
systems were fully funded; it is the "make-up" part of the
contribution.
8:21:26 AM
MR. REYNOLDS, in response to remarks by Chair Seaton, confirmed
that the contributions shown on slides 2 and 3 relate to
employer contributions, and in each of the two systems, employee
members make contributions, as well.
8:21:36 AM
CHAIR SEATON added that the normal cost rate is expected to pay
100 percent of the retirees' benefits.
MR. REYNOLDS responded, "Yes, correct, together with the
members. This is the employer's portion of that."
8:22:07 AM
MR. REYNOLDS, in response to a question from Representative
Gatto, said the benefit is expected to cover the additional
years post retirement. He said the idea is to fund a member's
benefit during his/her working lifetime.
MR. REYNOLDS redirected attention to slide 40, on page 22. He
noted that the numbers shown in parentheses are related to the
current program. He noted that the four components of
Alternative 1 are: the medical normal cost rate, the defined
benefit normal cost rate, the defined contribution rate, and the
health reimbursement account (HRA). He highlighted details of
the slide.
8:25:50 AM
MR. REYNOLDS, in response to a question from Chair Seaton,
explained that the medical normal cost rates for TRS and PERS
are conceptually the same program. However, the PERS "others"
members have a later normal retirement date, so TRS provides
medical benefits for Medicare for a longer period prior to
eligibility; therefore, the teachers' benefits cost a little bit
more, because they are being provided over a longer period of
time prior to Medicare eligibility. He concluded, "So, it
relates to the retirement ages that are built in to the two
systems - not the level of the medical benefits themselves."
8:26:48 AM
MR. REYNOLDS, in response to a follow-up question from Chair
Seaton, directed attention to slide 17, on page 11, which shows
the normal retirement for both PERS and TRS. PERS has a "25-
year-and-out" system.
8:27:51 AM
CHAIR SEATON indicated that "the differences" are structural and
are mostly related to the number of years before retirement.
8:28:13 AM
MR. REYNOLDS replied, "That's correct for both the medical and
the defined benefit; and then, of course, the costs for the
defined contribution component are solely related to the actual
contribution level itself ...."
8:28:51 AM
MR. REYNOLDS, in response to a question from Chair Seaton,
explained that the committee - made up of two members from each
board - arrived at different recommendations for the two
systems, in part based on overall cost level objectives; their
focus was to decide what level of benefits and what ultimate
cost level to the employer was desired.
8:30:08 AM
MR. REYNOLDS directed attention to slide 41, on page 23, which
shows similar information to slide 40, but for Alternative 2.
He noted that the defined benefit component was eliminated.
What would have been the costs for the defined benefit portion
of Alternative 1 was combined with the defined contribution
component. He noted that the costs for the medical component
are the same as for Alternative 1; the costs for the defined
contribution portion are higher, because of the inclusion of the
defined benefits component; and the costs for the HRA are the
same as Alternative 1. Alternative 1, although it is expected
to have average costs, would be expected to be more volatile and
less predictable than Alternative 2.
8:32:19 AM
MR. REYNOLDS, in response to a question from Representative
Gruenberg, said, given a choice, employees would choose a
retirement plan that is most advantageous to themselves.
Typically, older, longer-service members would choose
Alternative 1, because more benefit would be delivered to those
members through the defined benefit plan, whereas younger,
shorter-service members would tend to favor Alternative 2, where
benefits would build up faster. He clarified that there is
nothing about either of the alternative programs that would mean
all members would choose one alternative over the other.
8:34:02 AM
MS. MILLHORN noted that when the meeting to discuss new tiers
took place last November, there were a number of employers
present. She said the needs of each group represented by an
employer were different based upon that area's population. She
offered examples.
8:36:00 AM
CHAIR SEATON recalled that the analysis of the member surveys
showed that Alternative 2 was seen as more clearly
understandable. He said, "It's a lot easier to understand a
defined contribution program than it is the mix of defined
benefit and defined contribution."
MS. MILLHORN concurred.
8:37:05 AM
MS. MILLHORN, in response to a question from Representative
Gruenberg, directed attention to a handout in the committee
packet, entitled, "Alaska Legislative Report Response to
Questions from House State Affairs on The Public Employees'
Retirement System and The Teachers' Retirement System," dated
February 2005. She noted that 20 pages, beginning on page 22,
show the individual employer responses. Beginning on page 40 is
a list of unions that were asked to participate in the survey.
She explained that some of them did not choose to participate.
She offered further details.
8:38:30 AM
REPRESENTATIVE GATTO said young people feel they will never see
the money they pay into social security. He asked if there is
the same thought with respect to PERS and TRS.
8:39:39 AM
MS. MILLHORN said she doesn't think so. People working under
the current TRS tiers vest after eight years. The average
credited service under TRS is 10.5 years, so most of those
parties do vest and do receive benefits.
8:41:38 AM
REPRESENTATIVE GRUENBERG asked which alternative the state would
pick.
8:42:15 AM
MS. MILLHORN suggested that the deputy commissioner address that
question.
8:42:33 AM
CHAIR SEATON reminded Representative Gruenberg that it's not the
administration that is coming forward with a proposal, but the
legislature that is looking at the long-term problem of $5.6
billion unfunded liability and structural problems.
8:43:19 AM
REPRESENTATIVE GRUENBERG said he would still like to hear from
the administration.
8:43:46 AM
KEVIN BROOKS, Deputy Commissioner, Office of the Commissioner,
Department of Administration, stated that the department and the
administration do support the formation of new tiers. He said
the administration's belief is that switching the makeup of the
tiers will provide more predictability related to future costs.
He said, "We do believe that there's an interest in younger
workers coming into the work force for defined contribution
plans that provide portability. And really, all this is in
recognition of a very significant $5 billion-plus problem that
we have to come to grips with." In response to a question from
Representative Gruenberg, he confirmed that he thinks the
defined contribution plan [Alternative 2] would be the preferred
option for the administration."
8:45:48 AM
MS. MILLHORN returned to the handout showing the slides. She
directed attention to a table on page 24, which shows the normal
cost rate and the actuarial computed rate from fiscal year 1983
(FY 83) through FY 06 for PERS and TRS. She highlighted
sections of the table.
8:47:16 AM
MR. REYNOLDS noted that page 24 shows a history of the normal
cost rates over time. He pointed out that regarding any medical
component in either alternative and the defined benefit
component in Alternative 1, the normal costs are subject to
changes in the population and changes over time in actuarial
assumptions.
8:48:57 AM
MR. REYNOLDS, in response to a request for clarification made by
Representative Gruenberg, stated that the chronological
variation relates to the fact that the costs are being modeled
actuarially. Over time, he explained, the population of the
system changes, which affects the cost of the model.
Furthermore, the assumptions that are being put into the model
have changed. In particular, there have been increases in
population longevity that have affected the calculations, as
well as a change in the expectation into the future in the rise
in level of medical costs. Mr. Reynolds said the difference
between the normal cost rate and the actuarial computed rate is
related to the system's funded status at a given point in time.
The difference between the normal cost rate and the computed
rate is the past service rate; therefore, if the system has "an
underfunding," that means there will be a past service
contribution needed, in addition to the normal cost rate, to
provide for the long-term funding of the system. He offered an
example from the table on page 24.
8:51:23 AM
REPRESENTATIVE GRUENBERG noted that the last four years'
actuarial computed rate for PERS shows the greatest change. He
asked if that represented a change in actuaries.
8:52:00 AM
MR. REYNOLDS answered no. He said it represented a change in
both circumstances of the fund and some of the underlying
assumptions occurring at the same time. He explained that, by
circumstances, he means health care costs and assets of the
fund. He said actuaries periodically examine the assumptions
and make recommendations to the boards. Periodic actuarial
audits are performed by an independent firm that may recommend
changes. He said, "The combination of those changes and the
circumstances that I previously described did result in this
increase that you see on the last four lines of the chart."
8:53:34 AM
MR. REYNOLDS, in response to a question from Chair Seaton,
provided further details. In response to a follow-up question
from Chair Seaton, he said he would ask the division to supply
information relating to the last three years and ten years and
an analysis of the factors that have contributed to changes in
the actuarial rates, as well as the funded status of the
systems.
8:54:34 AM
MS. MILLHORN noted that the valuation report shows an itemized
change by experience and assumption changes, which leads to the
calculated rate. She said she could provide the summary sheets
to the committee.
8:55:49 AM
REPRESENTATIVE GRUENBERG said the committee needs to know why
there was such a dramatic change in the actuarial computed rate
between 2001 and 2002.
8:56:32 AM
MS. MILLHORN, in response to a question from Chair Seaton
regarding "how much of that was driven by the health care
assumptions," recollected that "that change increased the
employer contribution rate by 8.5 percent." She directed
attention to the PERS valuation of 1996, "which is the fiscal
year 1999," and noted that that was the time that the
legislature adopted Tier III, and that is the point at which the
normal cost rate decreased. Pointing to TRS in 1991, "which is
the fiscal year 1994," she noted that the legislature adopted
Tier II, and thus the normal cost rate showed a reduction.
8:57:52 AM
REPRESENTATIVE GARDNER asked if there would be an expectation
that some of the "massive discrepancy" shown between the years
2001 to 2002 would be resolved if the President's social
security plan is adopted and many more people have investments
in the stock market.
8:58:31 AM
MR. REYNOLDS said he cannot predict what changes there will be
to social security and "what impact that will have on the
markets." He surmised that the influence that [adopting the
President's plan] might have is to potentially lead to a
revision of some of the underlying assumptions. He noted that
one of the key assumptions that [Mercer] makes at arriving at
the results is the rate of earnings that will occur in the
future, and it is currently assumed that those investments in
the future will earn 8.25 percent, which is based on an analysis
of how the funds are currently allocated and a detailed analysis
of the expectations for each asset class. He said, "If
something were to occur that would lead us to revise our
expectations of the earnings of the fund in the future, then
that could affect these results." He offered an example. He
noted that if the funds earn less, than more would need to come
from the employers, and vice versa.
8:59:57 AM
CHAIR SEATON recognized that Representative Mike Kelly joined
the committee table.
9:00:10 AM
REPRESENTATIVE GATTO asked if the actuarially computed rate data
is used to adjust the normal cost rate.
9:00:58 AM
MR. REYNOLDS said the actuarial number, as well as "all the
components" are reported to the PERS and TRS boards. He said
there is a correlation between the numbers, but there is a
considerable variability. He stated that there are actuarial
techniques being used to attempt to mitigate the volatility;
without those techniques, the numbers would be even more
volatile, because a large number of hard-to-predict influences
are in play. He offered examples.
9:03:35 AM
MR. REYNOLDS, in response to a question from Chair Seaton,
confirmed that the assumptions that underlie [the normal cost
rate and the actuarial computed rate] are the same. The only
difference is that the computed rate takes into account the
funding deficit or surplus.
9:04:17 AM
MR. REYNOLDS, in response to a question from Representative
Kelly, reported that the estimated actual return for FY 04 was
approximately 15.1 percent for the two systems. He said he
doesn't yet know a year-to-date return or end-of-year estimate
for FY 05. He said the assumption is that, over the course of
the year, the investments will earn 8.25 [percent], but he said
there will be variability. In response to a follow-up question
from Representative Kelly asking if he expects an excess of 10
percent, Mr. Reynolds said he has no expectation of what the
markets will do between now and June 30.
9:05:10 AM
MR. REYNOLDS directed attention to slides 43 and 44, on page 29,
which show cost projections of actuarial rates for PERS and TRS,
respectively. He explained that the solid line shows the
projected increase of rates for the current plan, while the
broken line shows the projected path with the proposed new tier.
He explained that any cost reductions would take some time to be
fully realized.
9:08:57 AM
CHAIR SEATON observed that it would be 2020 before a school
district, for example, would see any difference in the
contribution rate for an employee, and that difference would be
about 2 percent. He offered his understanding that that's
because the graphs assume that the employer contribution rate
for all employees will be the same because it's paying off the
unfunded liability, and the only difference is that there will
be a normal cost differential - a difference in the normal cost
rate between the existing system and the new tier.
9:10:49 AM
MR. REYNOLDS said he thinks that's a good analysis.
9:11:32 AM
MS. MILLHORN, in response to a question from Chair Seaton,
confirmed that the feedback from employers has been that they
recognize [the proposals for a new tier] would not immediately
change the employer contribution rate, but they advocate for a
new tier because it's necessary to do so. She listed specific
employees who had expressed that interest. In response to a
follow-up question regarding whether the employers had any
suggestions for lowering the employer cost rate, she said the
focus was just on the two alternatives presented.
9:12:32 AM
CHAIR SEATON asked if there had been any suggestions made
regarding lowering the employer contribution rate.
9:12:52 AM
MS. MILLHORN offered her recollection that the focus had just
been on the two alternatives.
9:13:11 AM
MR. REYNOLDS turned to page 21 of the previously mentioned
handout containing responses to questions, which shows the
retirement program's financial management as including: funding
policies, which cover assumptions and methods; the investment
policy, which covers assets; and the benefits policy, which
covers plan provisions. He stated that the costs of the system
are directly related to the benefits. The money to provide
those benefits comes from two places: the contributions to the
system - from the members and the employers - and the investment
earnings. Assuming the investment policy is as efficient as it
can be, there are only two places to look to reduce costs over
time: reducing the benefits, which a new tier would accomplish,
or putting in more cash up front.
9:16:31 AM
REPRESENTATIVE KELLY said, "All these numbers that you give are
the employers' contribution net of the employees' contribution."
9:16:51 AM
MR. REYNOLDS confirmed that these charts show figures for
employers; the member costs would be "on top of that."
9:17:00 AM
REPRESENTATIVE KELLY suggested another source could be from the
existing, active employees.
9:17:24 AM
MR. REYNOLDS said he has been asked to model that and will
provide charts. He said it's not rocket science; if the current
rates are 10 percent and the member rates are increased to 15
[percent], then, over the long term, it would be expected that
the employer rates would decrease by that 5 percent.
9:17:45 AM
CHAIR SEATON noted that the figures are set once a year, and he
explained how the bar charts can be used. He also noted a legal
opinion is available in the committee packet and on
Representative Kelly's web site. He offered further details.
9:20:47 AM
MS. MILLHORN, in response to a question from Chair Seaton,
confirmed that at the time that the new tiers were being
formulated, the impression was that an employee contribution
rate could not be changed, because that had been the
interpretation at the time. She said that has been corrected
through the opinion from Legislative Legal and Research
Services.
9:20:55 AM
REPRESENTATIVE KELLY said it's fair to say that that's an
opinion [from Legislative Legal and Research Services] which may
be unpopular with some.
9:23:23 AM
MS. MILLHORN, in response to a question from Chair Seaton,
explained that "IMP" [shown on many columns of the spreadsheets
in the "response to questions" handout] stands for "importance."
9:24:10 AM
CHAIR SEATON offered his understanding that [the columns on the
spreadsheets in the "response to questions" handout] correlate
with the slides in [the "tier proposals" handout].
Specifically, question 1 on the spreadsheet correlates with
slide 46, on page 34.
9:24:43 AM
MS. MILLHORN confirmed that is correct.
9:25:50 AM
MR. REYNOLDS noted that slides 46-71 show results of the PERS
survey, while slides 73-100 show results of the TRS survey.
Each slide shows one question's response. The [spreadsheet]
shows how each employer responded. He explained that on slide
46, the letters "A" through "E" show where the five largest
employers weighed in. At the bottom of the slide are comments
that were taken verbatim. The key implications are conclusions
that Mercer Human Resource Consulting drew from the survey.
9:28:34 AM
CHAIR SEATON observed that the bar chart at the top right corner
of the slide shows the level of importance. He surmised that
all employees may score on one side of a question; however, they
might consider that the issue is of lower importance when
considering "the design of the plan."
9:29:08 AM
MR. REYNOLDS answered that's correct.
9:29:13 AM
REPRESENTATIVE GATTO noted that medical coverage consistently
scored high in level of importance for employers.
9:29:36 AM
MR. REYNOLDS revealed that one of the key conclusions that was
drawn by the committee from the survey was that the plan should
provide some level of medical coverage. One of the other key
conclusions was that further cost sharing of the cost of that
coverage with members might be in order.
9:30:03 AM
CHAIR SEATON noted that slide 98 shows that predictability and
stability also scored high in importance.
9:31:29 AM
MR. REYNOLDS, in response to a question from Representative
Kelly, said, "These are what we think is the most likely
outcome, but as you know, the median only shows you what the
middle is - it doesn't show you how wide the spread of possible
outcomes is." A program is subject to a great deal of potential
change and volatility, based on future demographics, health
care, and "911" - a change in the investments.
9:32:09 AM
REPRESENTATIVE KELLY responded, "So, that chart seems to me to
have a little Novocain in it." He said there could be another
$5.6 billion problem "built into that down the road," because
"they are assumptions."
9:32:32 AM
MR. REYNOLDS concurred.
9:32:40 AM
CHAIR SEATON suggested looking at the base changes in the system
that really impact it. He offered examples, including taking
the average of the highest three years for retirement and
changing that in other tiers to more years. He indicated that
there's nothing wrong with taking employment at a higher rate,
but expressed that a system "that allows these things to go in
and be a charge against system" is a problem.
9:35:06 AM
MS. MILLHORN explained the various tier index averages for
various employees and how different calculations are done
depending on the tier.
9:36:09 AM
MR. REYNOLDS, in response to a question from Chair Seaton, said
moving from three years to five reduces system costs for the
nonmedical component by about 4 percent. He continued as
follows:
The committee did look at the whole issue of what the
averaging period should be, and basically was weighing
two factors: One was keeping people's benefits as
current as possible with inflation during their
working lifetime, but mitigating the influence of
large changes in compensation in the last few years of
employment. A three-year average is a lot more
subject to increase if there's a large bonus paid in
the last year than a career average, for example.
And the alternative that the committee arrived at in
the defined benefits component of Alternative 1 was to
use a career average - an average of pay over the
member's entire career - but to index that pay forward
to retirement with inflation, similar to the way
social security does the calculation. Social security
takes your pay in any given year, [and] then ratchets
it up with inflation to age 61, roughly, before
computing the average. It's a little bit complicated.
The issue is that, in trying to accomplish something,
you ... build in a lot of complexity into the system;
you can sometimes over-engineer it. But in this case,
the committee did arrive at a career average rather
than a final three or five.
9:37:50 AM
CHAIR SEATON asked, "Depending on how the [Consumer Price Index]
(CPI) was, ... it could basically eat up ... most of your
investment return, couldn't it?" Chair Seaton calculated that
with an assumed 8.25 investment return and an inflation rate of
4 percent, the return would be 4.25 percent.
9:38:33 AM
MR. REYNOLDS answered that's correct. He added, "On the other
hand, if it's built into the system, we can attempt to predict
and fund for it." He offered an example of the post-retirement
pension adjustments. He noted that in contrast to that are the
ad hoc post-retirement pension adjustments (PRPAs), for which
funding predictions cannot be made.
9:39:46 AM
MS. MILLHORN, in response to a question from Chair Seaton, said
the ad hoc PRPAs are recommended by the PERS and TRS boards to
the commissioner of administration who has the authority to
grant or not grant them. She noted that the ad hoc PRPAs have
been rejected for the past two years. She explained that they
are a significant cost factor; over the last 14 years, 8 ad hoc
PRPAs have been granted. If the last year's recommended PRPA
had to been granted it would have cost approximately $34 million
to PERS in accrued liability and approximately $37 million in
accrued liability to TRS. She indicated that plan changes have
represented approximately $500 million "over the last years,"
and noted that the administration has asked Mercer Human
Resource Group to "determine what the breakout is between the ad
hoc PRPA and the other plan changes through legislation." In
response to follow-up questions from Chair Seaton, she said the
authority for the ad hoc PRPAs are found in AS 39.35.475 and are
specific to and affect only Tier I PERS and TRS members.
9:42:16 AM
CHAIR SEATON mentioned cost-of-living adjustments for regional
employees and asked if contributions are made on those expenses
and if they are then included into the base wage on which
retirement is calculated.
9:43:15 AM
KATHY LEA, Retirement Manager, Division of Retirement &
Benefits, Department of Administration, said a geographic
differential can be included in a member's retirement
calculation if that member has served half his/her service in an
area with a differential. Contributions are taken from their
compensation as the member receives it. She added, "If they do
not qualify for using the geographic differential in their
calculation, the contributions that have been made on that
portion are refunded to them." In response to a question from
Chair Seaton regarding overtime pay, she confirmed that that is
also "calculated on PERS."
9:44:43 AM
REPRESENTATIVE GATTO indicated that police in Anchorage are
allowed to work overtime on a seniority basis and, because of
that, are able to put in extravagant weeks in order to "bill
their pay up to as high as they can get it."
9:45:41 AM
MR. REYNOLDS explained that the pay increases in the system are
averaged, which would include those pay increases that are
occurring in the last three years of employment, thus, if a
pattern has been occurring, it is predictable and can be
accounted for.
9:47:14 AM
CHAIR SEATON asked if it would be difficult to get a comparison
between a sample population, such as police and fire employees,
in order to see the structural analysis of the system if over-
time is counted in PERS or if it isn't.
9:47:36 AM
MR. REYNOLDS responded that the only analysis done is a periodic
analysis, which is performed every five years.
9:47:57 AM
CHAIR SEATON asked Ms. Millhorn to prepare "a little
instructional sheet" for the committee. He indicated that he
has looked on the administration's web site, but the information
is quite lengthy and complex.
MS. MILLHORN said, "Sure."
9:48:34 AM
JOSEPH M. BEEDLE, Vice President for Finance, Office of Finance,
University of Alaska, Fairbanks, surmised that part of the
interest on the committee's part is in response to a recent
address by the university's President Mark Hamilton, wherein he
stated that approximately $87 million of unfunded liability has
been avoided because of the university's Optional Retirement
Plan (ORP). He noted that ORP was adopted approximately 15
years ago and is a defined contribution alternative to the plans
previously discussed by the committee. He said ORP is designed
for "regular" faculty and executive staff. The university's
obligation under ORP is to make contributions tied to a rolling
three-year average of the TRS rate. There is no health benefit
provided under ORP. He clarified, "Certainly the calculations
under TRS [assume] a health benefit; so the calculation is based
on something that provides a benefit to include health."
Vesting is immediate. Mr. Beedle stated, "This is an employee's
plan choice. Whether they participate in ORP, TRS, or PERS is
irrevocable; once the employee chooses at time of hire, then
that is irrevocable."
MR. BEEDLE said the advantages to the university include: an
enhanced ability to compete in the national market for top
faculty and administrators with other universities; and
corporations offering to find contribution plans, such as a
401K. The university has the advantage of relieving its
liability under the retirement plan from the obligation to
provide for a costly health benefit upon retirement. He said
the ORP participants prefer the plan, because it provides full
portability. The employee is vested on day one and whatever
he/she contributes, along with whatever is contributed by the
employee, will be owned by the employee. The funds can be taken
immediately by the employee and, even if the employee dies upon
retirement, the funds would go to his/her estate. The funds are
also fully portable to an IRA or self-directed type of
investment. One concern is attracting those who may not stay
through tenure. Mr. Beedle noted that approximately 800 people
participate in ORP and it represents approximately $50 million
of base salary or 25 percent of the university's employee base.
He stated that it's been utilized on a voluntary basis in a
significant way. Faculty composes approximately 90 percent of
participants, with the remaining 10 percent being executives.
9:53:19 AM
MR. BEEDLE directed attention to a [one-page, two-sided] handout
in the committee packet from the University of Alaska, entitled,
"Summary of the Optional Retirement Program." The other side of
the summary shows a retirement program comparison chart, which
compares TRS, PERS, and ORP. The chart compares the following:
Internal Revenue Service (IRS) governing code; social security
replacement plan; State of Alaska governing code; eligibility;
vesting; health coverage after retirement; contribution rate
setting authority; methodology for setting rates; rates for FY
04; projected rates for FY 05; subject of bargaining;
participation rate; and average age. Mr. Beedle offered details
regarding the comparison chart.
9:55:24 AM
MR. BEEDLE noted that the university also has a pension plan
that is similar to the State of Alaska's Supplemental Benefits
System (SBS) plan. The difference, he explained, is that the
university has capped its plan at $42,000, so it's about $3,200
a year, per employee, at maximum - nearly half the amount of
that of the state. He said the university's retirement benefits
will grow from approximately $27 million in [FY] 05 to $65.5
million in FY 08. Currently, retirement benefits account for
approximately 18 percent of the university's total benefits
package. Salary makes up the majority, and health benefits are
12.5 percent. Total combined benefits at the university,
including all staff benefits, are approximately 33 percent.
MR. BEEDLE, in response to a question from Chair Seaton,
confirmed that the university does have a health plan for those
employees currently employed.
9:57:36 AM
CHAIR SEATON offered his understanding that about 25 percent of
[the university's] employees have said they would rather select
the three-year TRS average as a defined contribution plan,
rather than having a portion of that money as a health plan.
9:58:20 AM
MR. BEEDLE confirmed that is true. In response to a follow-up
question from Chair Seaton, he said the other 75 percent have
not had the option to make that selection, because [ORP] is
restricted to "regular" faculty and executive employees of the
university system. He clarified that the 25 percent previously
mentioned is 25 percent of the total employees.
CHAIR SEATON asked what percent of the "regular" and executive
employees have opted for [ORP].
MR. BEEDLE deferred to Mr. Johnsen.
9:59:04 AM
JIM JOHNSEN, Vice President for Faculty and Staff Relations,
University of Alaska, directed the committee's attention to the
participation rate of ORP on the comparison chart. He explained
that at the time the chart was prepared, there were 725
participants, 90 percent of whom were faculty members.
10:00:21 AM
CHAIR SEATON clarified that he wanted to know what percentage of
those who could select ORP actually have.
10:00:34 AM
MR. JOHNSEN answered:
There are approximately 250 members of the [Alaska]
Community College Faculty Union, 44 percent of whom
have selected ORP; approximately 950 members of the
United Academic Faculty Union, 61 percent of whom have
selected ORP, and then about 120 or so total
executives, 76 percent [of whom] have selected [ORP].
10:01:08 AM
REPRESENTATIVE GRUENBERG asked why the most highly paid
employees are in ORP while some of the lower paid employees are
not even eligible.
10:01:34 AM
MR. BEEDLE said it was unknown originally who would participate.
He explained that those who choose ORP are choosing to sacrifice
having a [built-in] health care plan and to manage their own
retirement. He said it has been rewarding to see self-selection
by the faculty. In response to a follow-up question from
Representative Gruenberg regarding what the university is doing
for those who do not make as much money, he said they
participate in either PERS or TRS. He said, "I think it's a
great challenge to consider this new tier opportunity the state
is considering and the education that would go along with it to
allow employees the opportunity to make a decision on a defined
contribution that then they help determine - as they do with SBS
... [and] the university pension - where to invest it and how to
prepare for their future."
10:05:10 AM
MR. BEEDLE added that one attribute that the university did not
anticipate was the elevation of health costs. He said:
It's based on TRS for a payment, so it has the
potential of exceeding the maximum allowed by IRS for
a contribution, and we would have this artificial
limitation under ORP. We also appreciate that we did
not anticipate the growing cost. So, we've avoided
this unfunded actuarial liability, but we have not
avoided the cap - we have not been able to stop the
cost at a certain level.
MR. BEEDLE said he is intrigued by the state's studies on a
defined contribution that would be at "a sum-certain amount."
Regarding ORP, he indicated that there might be an opportunity
for the university to "fix that amount" and to consider "other
employee options to join this plan."
10:06:38 AM
CHAIR SEATON clarified that "we're" talking about the cost rate,
plus the unfunded liability section of TRS. He asked, "So, is
that what raps you into ... that section; instead of having a
three-year normal cost rate, you take the three-year whatever
the rate is, including the rate to pay off the unfunded
liabilities?"
10:07:12 AM
MR. BEEDLE responded as follows:
The bonus ... of this current extraordinary event in
time will accrue to new employees that benefit by ORP
at a very high rate as compared to the private sector.
And so, ... the snake swallowing this balloon will
benefit, and pass, and accrue to those new employees
that may not experience this same bubble effect that
the state and we are experiencing in PERS and TRS.
So, ... in hindsight ..., it might have been something
that, as a finance person, I would have recommended a
number not to exceed, other than simply that imposed
by the IRS as a maximum.
10:08:11 AM
CHAIR SEATON said the committee will "take this under
consideration."
ADJOURNMENT
There being no further business before the committee, the House
State Affairs Standing Committee meeting was adjourned at
10:08:30 AM.
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