Legislature(2005 - 2006)
03/24/2006 09:03 AM House W&M
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| Overview - Alaska Retirement Management Board Recommendations to the Legislature | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
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+ teleconferenced
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ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
March 24, 2006
9:03 a.m.
MEMBERS PRESENT
Representative Bruce Weyhrauch, Chair
Representative Ralph Samuels
Representative Paul Seaton
Representative Peggy Wilson
Representative Max Gruenberg
Representative Carl Moses
MEMBERS ABSENT
Representative Norman Rokeberg
COMMITTEE CALENDAR
OVERVIEW - ALASKA RETIREMENT MANAGEMENT BOARD RECOMMENDATIONS TO
THE LEGISLATURE
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
GAIL SCHUBERT, Chair
Alaska Retirement Management Board (ARMB)
Anchorage, Alaska
POSITION STATEMENT: Provided information and answered questions
regarding the unfunded liability of the Public Employees'
Retirement System (PERS) and Teachers' Retirement System (TRS).
LARRY SEMMENS, Board Member
Alaska Retirement Management Board (ARMB)
Kenai, Alaska
POSITION STATEMENT: Provided information and answered questions
regarding one possible solution to addressing the unfunded
liability of the Teachers' Retirement System (TRS).
DAVID SLISHINSKY, Principal and Consulting Actuary
Buck Consultants
Denver, Colorado
POSITION STATEMENT: Provided information and answered questions
regarding the actuarial findings by Buck Consultants, the
state's actuary for the Public Employees' Retirement System
(PERS) and Teachers' Retirement System (TRS).
GARY BADER, Chief Investment Officer
Treasury Division
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Answered questions regarding the unfunded
liability of the Public Employees' Retirement System (PERS) and
Teachers' Retirement System (TRS).
TOM BOUTIN, Deputy Commissioner
Treasury Division
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Answered questions regarding the unfunded
liability of the Public Employees' Retirement System (PERS) and
Teachers' Retirement System (TRS).
ACTION NARRATIVE
CHAIR BRUCE WEYHRAUCH called the House Special Committee on Ways
and Means meeting to order at 9:03:06 AM. Representatives
Weyhrauch, Moses, Seaton, and Wilson were present at the call to
order. Representatives Gruenberg and Samuels arrived as the
meeting was in progress.
^OVERVIEW - ALASKA RETIREMENT MANAGEMENT BOARD RECOMMENDATIONS
TO THE LEGISLATURE
[Includes brief mention of HB 238, HB 278, HB 375 and HB 492.]
9:03:21 AM
CHAIR WEYHRAUCH announced that the only order of business would
be an overview provided by the Alaska Retirement Management
Board (ARMB) with its recommendations to the legislature for
addressing the unfunded liability of the Public Employees'
Retirement System (PERS) and Teachers' Retirement System (TRS).
9:04:08 AM
GAIL SCHUBERT, Chair, Alaska Retirement Management Board (ARMB),
as per the request of Chair Weyhrauch, introduced members of the
of the board to the committee: Gayle Harbo representing TRS;
Sam Trivette representing PERS; Larry Semmens representing a
municipal government; and Michael Williams, from Department of
Revenue (DOR) in Anchorage, representing PERS. She also
introduced others present with some affiliation to the board:
Rob Johnson as outside legal counsel; Susan Taylor, from DOR, as
staff to the ARMB; Melanie Millhorn from Department of
Administration (DOA); Gary Bader, Chief Investment Officer for
the ARMB; and Tom Boutin, Deputy Commissioner with DOR. She
noted the three ARMB members not present at today's meeting:
Commissioner William Corbus with DOR; Commissioner Scott
Nordstrand with DOA; and Martin Pihl, the board's representation
for the public. She added that with the resignation of Bob
Roses of Anchorage, there is now a vacant position on the board.
9:07:09 AM
MS. SCHUBERT announced that the committee would be hearing a
report from the actuary "that is not good news, unfortunately."
She relayed:
The unfunded liability of PERS and TRS is
significantly higher than it was this time last year.
The unfunded liability of PERS is now $4.4 billion and
the unfunded liability of TRS is $2.5 billion. The
combined total is $6.9 billion. When Mr. Bader
previously testified before the committee, he stated
that the ARMB had asked the actuary to estimate the
amount of annual supplemental appropriations required
to retire the unfunded liability using various
amortization periods and capped contribution rates.
We have received that data based upon the fiscal year
2004 (FY 04) valuation reports and expect to receive
data for the FY 05 valuation shortly. One thing that
is clear to the ARMB is that there is an actuarial
cost to failing to address the unfunded liability.
The board has considered a number of strategies to
address the unfunded liability question. Among those
strategies are pension obligation bonds which are
addressed in HB 278, past service cost offset accounts
in HB 238, retirement benefit liability accounts in HB
375 ... and this afternoon the board will also hear a
report on using natural gas royalties.
It's the view of the board that we must begin to
address the unfunded liability this year. The board
is giving serious discussion to an approach that
borrows ideas imbedded in some of the legislation
previously mentioned, and combines them with some
ideas of our own.
MS. SCHUBERT said that the board hopes to be back soon with more
specific recommendations and that the committee would now hear
from Larry Semmens on some of the concepts being considered by
the ARMB for the TRS system.
9:09:31 AM
LARRY SEMMENS, Board Member, Alaska Retirement Management Board
(ARMB), relayed that he is also the finance director for the
City of Kenai. He informed the committee that the ARMB is
considering a proposed solution to the TRS under funding problem
that is patterned after the School Debt Reimbursement Program.
He explained that this program is one in which the state has
agreed to fund a certain percentage of outstanding school debt,
an amount included every year in the state's budget. For TRS,
an annual allocation to an employer would be required, he
explained, that would be "based upon its qualifying payroll for
two years earlier, the past service cost rate, and the amount
appropriated by the state for past service retirement benefit
liability program." He opined that this would produce a known,
calculated amount every year. He reminded that committee that
this pertains to TRS only. He then explained several benefits
to this solution: it allows the ARMB to set the contribution
rates at levels recommended by the actuary - rates currently
markedly lower than recommended; it requires non-general revenue
programs, such as federal programs, to pay the full cost; it
enables the state to provide relief to all non-state employers
with an unfunded retirement liability; it allows budgeting to be
done with precision because the calculations would use
historical data; it allows the legislature to make pro-rata
payments should the legislature be unable to fully fund the
program; and it creates a constituency for the program because
of the statewide benefits it provides the communities. He then
remarked that a similar solution is being considered for PERS,
however, he noted that there are difficulties regarding this
system's allocations. "TRS is simpler because everyone pays the
same rate," he said.
9:13:51 AM
DAVID SLISHINSKY, Principal and Consulting Actuary, Buck
Consultants, accompanied by the company's senior consultant,
Michelle DeLang, informed the committee that an actuarial
evaluation for TRS and PERS was performed as of June 30, 2005,
the results of which were presented at yesterday's meeting with
the ARMB and to be presented again today at this meeting. He
began by providing a brief overview of actuarial process,
explaining that a set of actuarial assumptions is used in an
attempt to predict the future benefit payment to be paid for
both the pension and healthcare plans. He noted that as the new
actuary for the state, one of Buck Consultants' tasks was to go
through the actuarial evaluation performed by the state's former
actuary, [Mercer Human Resource Consulting], with the intent to
replicate those numbers produced by that actuary in its June
2004 valuation results. Additionally, Buck Consultants reviewed
the assumptions and methods used by the former actuary for both
PERS and TRS, one of which is the "projected unit credit
method." He clarified that this method is one of six different
actuarial cost methods approved by the Governmental Accounting
Standards Board (GASB) for purposes of producing actuarial
contribution rates and funded status amounts. However, he noted
that this method is primarily used in the private versus public
sector because the pattern of costs for members increases from
date of hire until retirement. Most public plans use the "entry
age method," he remarked, which produces a more stable cost
derived from a percentage of pay from the date of hire until
retirement. He said:
We found that the investment return assumption of 8.25
percent was reasonable given the current asset
allocation policy of the ARMB. Payroll growth
assumption ... was a little overstated, but we have
not made any changes to any of the assumptions or the
methods for the 2005 valuation. Generally the
demographic assumptions were reasonable, but we are
going to perform an experience analysis within the
next couple of months ... to look in detail at the
demographic assumptions to make sure that they're
reasonable and closely match what the experience has
been for both plans.
9:18:21 AM
CHAIR WEYHRAUCH inquired as to whether the demographic
assumption includes longevity.
MR. SLISHINSKY agreed that it does in addition to other factors
such as mortality, life expectancy, retirement patterns,
withdrawal patterns, and disability. He went on to compare the
former actuary's 2004 evaluation results to those determined by
Buck Consultants, [shown on slide 17 of the PowerPoint
presentation], and noted that although some minor differences
were found, none were significant because any increased
liabilities were "washed out" by decreased liabilities. He
noted, however, that significant differences were found with
regard to the former actuary's valuation of the healthcare
benefits for PERS. Buck Consulting determined that the accrued
liability was [actually] 7 percent greater "than what Mercer
reported in 2004." He added that with the higher accrued
liabilities and higher cost rates for PERS, "the contribution
rates that [Buck Consulting] would have come up with in 2004,
would have been 30.37 percent of pay and not 28.19 percent of
pay [as valuated by the former actuary]. So, a little bit more
than 2 percent of pay greater in the PERS system."
MR. SLISHINSKY directed the committee's attention to the 2005
actuarial valuation results and explained that the same process
was used by Buck Consulting, [as was used for the 2004
determinations], to see if there were any changes. Furthermore,
he noted that there were no changes to the benefit provisions,
the actuarial assumptions, or any of the methodology. With
these points in mind, he read the total actuarial value of
assets for PERS, [listed on slide 21], from June 30, 2004
through June 30, 2005: beginning with $8,030 billion, adding in
the contributions, subtracting any disbursements made, and
finally adding in the expected return on market value based on
8.25 percent. This preliminary actuarial value of [$8.419]
billion, he explained, is then adjusted by gains and losses for
that year to equal the amount used for funding purposes: $8,443
billion. He relayed that over the next four years, future
smoothing amounts of approximately $148 million still needs to
be recognized.
MR. SLISHINSKY then turned the discussion to the history of the
actuarial value, as opposed to the market value, shown in the
graph on slide 22. He highlighted that during the 1990's, there
was healthy growth in the assets, both in the actuarial and
market values. He also provided information about the 2005 data
being used in the evaluation [shown on the chart on slide 23]:
33,730 active members participating in PERS, combined with the
fire and police departments [employees] and the 20,703 retirees
resulting in a higher total of 73,299 [PERS members]. More of
the data on the chart, he explained, covers the differences in
market value and actuarial value assets, the annual benefit
payments, and the accumulated member contributions.
MR. SLISHINSKY noted that in determining the actuarial
contribution [as shown on slide 24], the amount of the accrued
liability is calculated and totals $12,845 billion in 2005
compared to $11,444 billion in 2004. The resulting unfunded
actuarial accrued liability for 2005, he announced, is $4.4
billion, up from the $3.4 billion the previous year. He also
listed amounts for the funded ratio at 65.7 percent, the total
annual actuarial contribution at 39.27 percent, the member
contribution amount at approximately 6.8 percent of pay, and the
employer required contribution of 32.43 percent - almost a $100
million increase from the previous year. He relayed that slide
25 shows the degree to which the accrued liability and the
normal cost is split between pension and healthcare.
9:28:43 AM
CHAIR WEYHRAUCH, referring to the amount of debt for PERS, TRS,
and the total combined liability of $6.9 billion, inquired as to
how this compares to the judicial and military retirement
systems.
MR. SLISHINSKY explained that the latter systems are small plans
in comparison and their total combined liability would "not be
much different than the $6.9 billion." In further response to
Chair Weyhrauch, he said that the chart [on slide 26] shows "the
accrued liability ... [and] does not include the assets." He
clarified that when calculating the unfunded liability, the
assets are deducted from the [accrued liability]. This chart,
he said, shows the relative distribution of the accrued
liability between pension and healthcare and how it's changed
over time. He opined that there has been a faster increase in
the value of the accrued liability for the healthcare benefits
versus the pension benefits and that by 2005, the healthcare
benefits are over 40 percent of the total liability of the
benefits. The final slide for PERS, he said, shows the funding
ratio history.
MR. SLISHINSKY announced that he would now provide the committee
with the results for TRS pension plans and noted that the
actuarial value of assets in the year ending June 30, 2005 was
approximately $3.8 billion. Then, adding in the contributions
of $150 million, subtracting out benefit disbursements of $359
million, and adding in the expected return on the market value
of $314 million, results in a preliminary actuarial value of
almost $4 billion, he said. He further noted that with the very
small smoothing amount of $9 million, the actuarial value is
$3,959 billion, and with the recognized gains at $68 million,
the market value is $4,027 billion. He then highlighted key
points on the TRS data shown in a series of graphs similar to
those used in featuring PERS data: asset smoothing comparisons
of the market and actuarial values; pension and post employment
healthcare figures for members, compensation, assets, annual
benefit payments, and the accumulated member contributions up to
an average of approximately $50,000. He also noted that the
actuarial accrued liability for TRS in 2005 has increased to
almost $6.5 billion and that the unfunded actuarial accrued
liability, following deduction of the actuarial value of assets,
is approximately $2.5 billion. He also listed numbers for the
funded ratio, the annual [actuarial contribution], member
contributions, and the employer required contribution at $236
million, or 42.14 percent of pay. He interpreted the graphs [on
slides 34-36] noting the similarities and differences between
the TRS and PERS data.
9:37:24 AM
MR. SLISHINSKY summarized:
There were modest gains on the market value
experienced during the year: the rate of return was
about 8.55 percent or .3 percent greater than what was
assumed. There are still some gains that are being
recognized from 2003 and 2004 and ... as a result, the
actuarial value return was a little bit greater at 9.1
percent. So there were asset gains that acted to
reduce the unfunded liability, and we'll see to what
degree that is. There were losses on the liability
due to decremental experience, and healthcare
experience, and changes from the prior actuary
primarily on [the PERS] piece.
CHAIR WEYHRAUCH inquired as to the meaning of "decremental
experience."
MR. SLISHINSKY explained that it is the difference between what
is expected and what actually happens due to such influences as
life expectancy or deaths, patterns of retirement, the degree to
which people terminate service, or salary changes. He returned
to summarizing the unfunded liability for the retirement plans
noting that the majority of losses and changes are on the
healthcare side of the plans. He directed the committee's
attention to the figures [on slide 38] which show the 2005
unfunded liability at $4,402 billion for PERS and $2,540 billion
for TRS. In conclusion, he reviewed [slide 39] showing the
required employer contribution rates for PERS and TRS and the
declining funded ratios.
9:42:17 AM
REPRESENTATIVE SEATON, regarding the PERS contribution of $293
million shown on slide 21 relative to the normal cost of $338
million shown on slide 24, sought confirmation to his
understanding that the system is not contributing the "currently
accruing liabilities" under the existing funding mechanism.
MR. SLISHINSKY said this is correct. He added:
That means that the actual contributions being made
aren't meeting the actuarial rate. So, there is a
contribution shortfall between what is being
determined for purposes of funding the plan on an
actuarial basis by paying the cost of the accruing
benefits as well as amortizing the unfunded liability.
To the extent that [the unfunded liability is not
amortized], the liability will grow. It grows with
interest and it grows with the cost of the accruing
benefits .... to the extent that [should an
amortization payment not be made] on that unfunded
liability, it grows more and then it increases the
amortization payment in the next year.
REPRESENTATIVE SEATON, regarding comparable data for TRS on
slides 29 and 32, again sought confirmation to his understanding
that [the state] is more than paying normal costs and accrued
liabilities than what is being earned in 2005, as opposed to
PERS where "we're still going backwards based on the currently
accruing benefits."
9:44:58 AM
MR. SLISHINSKY provided a more detailed explanation of the data
noting that the $150 million contribution [for TRS] for the year
ending 2005, should be compared to the 2004 annual contribution
[shown on slide 32] with a normal cost of $117 million and an
amortization payment of $146 million. He interpreted that the
$150 million is sufficient to pay for the cost of the accruing
benefits, however, is does not sufficiently amortize the
unfunded liability which is causing [the debt] to grow. With
PERS, he explained that with the contribution of $293 million
and the normal cost of $296, the former amount falls short by $3
million of paying the normal cost. He indicated that "in that
situation over time, you would expect that the unfunded
liability for the PERS would grow faster than for [TRS]."
CHAIR WEYHRAUCH, in noting the significant increase of the
unfunded liability from $5.7 billion last year to $6.9 billion
this year, asked how the state plans to address the debt.
9:47:49 AM
GARY BADER, Chief Investment Officer, Treasury Division,
Department of Revenue (DOR), indicated his belief that he is not
in a position to speak for the administration. He offered his
understanding that it's the ARMB's intent to provide the
legislature with suggestions to address the [unfunded liability
of the state pension plans].
CHAIR WEYHRAUCH then asked Ms. Schubert when the ARMB plans to
present its recommendations to the legislature.
MS. SCHUBERT indicated that the board hopes to report its
recommendations to this committee in two to three weeks.
CHAIR WEYHRAUCH considered the [short] amount of time remaining
in the session. He then referred to earlier testimony where
"the biggest issue" discussed was an appropriation and that "the
best way to deal with this might be just simply cash." He asked
Ms. Schubert whether this solution had been considered by the
ARMB.
MS. SCHUBERT explained that although this approach has been
considered by the ARMB, a consensus has not been reached.
CHAIR WEYHRAUCH, in expressing his understanding that the
board's deliberations were not confidential, he asked what
possible actions have been discussed by the ARMB.
9:49:50 AM
MR. BADER expressed his belief that the ARMB would perhaps first
want to hear the presentation this afternoon, regarding [the
possibility of using] the natural [gas] resource asset, prior to
putting forth recommendations to the legislature. He opined
that although the suggestions made earlier by Mr. Semmens allow
an approach that has "traction among board members," the ARMB
needs more time to consider the options.
CHAIR WEYHRAUCH noted that "significant problems" were
identified regarding the proposed legislation, [HB 492] - the
primary one being the transfer of gas assets to the ARMB. He
opined that this legislation may have to be substantially
amended to not only meet constitutional requirements but to add
value to addressing the unfunded liability. He said, "I was a
promoter of that bill in concept, so just don't hang your hat
too high on that bill."
9:51:50 AM
REPRESENTATIVE WILSON expressed that her main concern and
interest pertains to the unfunded liability and should it not be
addressed within the next 10 years, would it become "huge or
small."
MR. BADER said "huge."
9:52:48 AM
TOM BOUTIN, Deputy Commissioner, Treasury Division, Department
of Revenue (DOR), expressed his belief that although the
unfunded liability has continued to grow since it was discussed
during the 2002 transition in the administration, it is not an
[unexpected] revelation. Each year, he noted, the actuary tells
the employers the amount needed to amortize the unfunded
liability over 25 years, and that it is "obvious" to him that
the debt has continued to grow when the recommended employer
rate has not been paid.
9:54:55 AM
REPRESENTATIVE SEATON said it was his understanding that none
of the employers have seen any contribution rate increases. He
expressed his interest in hearing suggestions from the ARMB on
how to approach the employers regarding increasing payments to
reduce the pension debt.
9:56:13 AM
MR. BOUTIN informed the committee that the ARMB did adopt higher
contribution rates at its first meeting.
MS. SCHUBERT relayed her belief that the [employer] rate [the
ARMB] adopted for PERS was 21 percent and 26 percent for TRS.
She deferred to Mr. Semmens for confirmation of this.
CHAIR WEYHRAUCH interjected that [the legislature] "would want
[the ARMB] to be as scathingly honest and objective as [it]
possibly can and let political chips fall where they may." He
opined that it is very important for the public and the
legislature to understand the fundamental problem with the
[state retirement] system and what measures are needed to fix
the problem.
MS. SCHUBERT expressed her belief that the ARMB is cognizant of
this and intends to make [any] necessary recommendations.
9:57:57 AM
MR. SEMMENS relayed his belief that both TRS and PERS are in the
third round of rate increases with the first round of 5 percent
taken from the employers' resources. The second 5 percent, he
said, "came out with help from the state." He expressed that he
was "glad to hear ... that there's 10 percent available in the
budget for next year" and conveyed his hope that this amount is
approved [by the legislature]. He said that since the state is
expected to have a large budget surplus this year, the ARMB
recommends that the legislature make contributions to the
systems "in order to increase the funding ratio."
CHAIR WEYHRAUCH opined that this was "too qualitative." He then
announced the presence of Commissioner William Corbus, DOR, for
the majority of the meeting.
9:58:59 AM
REPRESENTATIVE SEATON said he hoped that the ARMB would find a
mechanism by which those communities that applied last year's 5
percent, of funded employer contributions, toward retiring their
unfunded liabilities, are recognized for this rather than
penalized.
10:00:13 AM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
10:00 a.m.
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