Legislature(2001 - 2002)
03/05/2002 09:25 AM House STA
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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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