Legislature(2011 - 2012)SENATE FINANCE 532
02/24/2011 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Public Employee Retirement System (pers) and Teachers Retirement System (trs) Update. | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
February 24, 2011
9:06 a.m.
9:06:16 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:06 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Lesil McGuire, Vice-Chair
Senator Johnny Ellis
Senator Dennis Egan
Senator Donny Olson
Senator Joe Thomas
MEMBERS ABSENT
None
ALSO PRESENT
Mike Barnhill, Deputy Commissioner, Department of
Administration; Gary Bader, Chief Investment Officer,
Department of Revenue.
SUMMARY
^Public Employee Retirement System (PERS) and Teachers
Retirement System (TRS) Update.
9:06:23 AM
Co-Chair Stedman discussed the financial overview of the
PERS and TERS retirement systems. He mentioned that the
Permanent Fund Dividend (PFD) would be discussed in a
future meeting.
MIKE BARNHILL, DEPUTY COMMISSIONER, DEPARTMENT OF
ADMINISTRATION introduced himself.
GARY BADER, CHIEF INVESTMENT OFFICER, DEPARTMENT OF REVENUE
introduced the PowerPoint presentation "Public Employee
Retirement System (PERS) and Teachers Retirement System
(TRS) (copy on file)."
Mr. Barnhill discussed Slide 2: "PERS/TRS Update."
I. Basic Facts
II. Investments
III. Recent Assumption Changes
IV. SB 125 State Assistance
V. Future
VI. Other Issues
Mr. Barnhill detailed Slide 4: "PERS/TERS Basic Facts."
A. Membership
B. Organization
C. Balance Sheet
D. Health Cost Trends
E. Funding Ratio History
F. Employer Contribution Rates
Mr. Barnhill discussed Slide 5: "Basic Facts-Membership-
PERS."
160 Member Employers
3 Defined Benefit (DB) Tiers
25,015 retirees
6,566 terminated members entitled to future
benefits
27,565 actives (74.55%)
59,146 total members
1 Defined Contribution (DC) Tier
0 retirees
304 terminated members entitled to future
benefits
9,412 actives (25.45%)
9,716 total members
9:12:18 AM
Mr. Barnhill discussed Slide 6: "Basic Facts-Membership-
TRS."
TRS:
58 Member Employers
2 Defined Benefit (DB) Tiers
10,255 retirees
884 terminated members entitled to future
benefits
8,226 actives (78.4%)
19,365 total members
1 Defined Contribution (DC) Tier
0 retirees
394 terminated members entitled to future
benefits
2,269 actives (21.6%)
2,663 total members
884 terminated members entitled to future
benefits
8,226 actives (78.4%)
19,365 total members
1 Defined Contribution (DC) Tier
0 retirees
394 terminated members entitled to future
benefits
2,269 actives (21.6%)
2,663 total members
Co-Chair Stedman elaborated that TRS included teachers and
PERS was comprised of municipalities and state employees.
Mr. Barnhill added that the PERS included 160 member
employers, the largest of which is the state comprising 50
percent of the workforce and contributions. The remaining
159 employers are municipalities, school districts and other
small organizations.
Co-Chair Stedman asked if every school district and
municipality was included. Mr. Barnhill concurred.
Senator McGuire asked about the smaller organizations. She
requested a list of organizations. Mr. Barnhill responded
that a small number of organizations are members of PERS. He
offered to provide a complete list.
9:15:00 AM
Senator Egan asked how many retirees were entitled to future
benefits. He wondered how many retirees were not entitled to
future benefits. Mr. Barnhill responded that PERS included
the category termed "inactive non-vested" including people
who cashed out contributions to the system. He noted that
PERS had 14,600 people in the category. He stated that the
deadline for re-vesting has already expired.
Senator Egan asked if the 14,600 people were not eligible
for reentry to the system. Mr. Barnhill concurred.
9:16:24 AM
Mr. Barnhill detailed Slide 7: "Basic Facts-Organization."
He explained that the organization of the system is divided
into three primary entities, the Department of Revenue
(DOR), the Alaska Retirement Management Board (ARMB) and the
Department of Administration (DOA). Each entity has separate
functions with respect to the system. The DOR through the
treasury division is the investment manager of the trust
fund assets. The department hires investment managers and
consultants. The ARMB is the fiduciary of the trust fund
assets. The ARMB sets the rates and the investment policy,
which the division of treasury carries out.
Mr. Barnhill continued that DOA handles the liability
issues. The department has staff to serve the ARMB. The
department also has a contract with the actuary, which
serves the needs of the Division of Retirement and Benefits
(DRB) and ARMB.
9:17:48 AM
Mr. Barnhill detailed Slide 8: "Basic Facts-Balance Sheet."
PERS DB:
Assets (Mkt. Value, 12/31/10) $10,901,792,145
Accrued Liabilities (Net Present Value 6/30/2010)
17,190,284,000 Unfunded Liability
$6,288,491,855
Funding Ratio 63.42%
TRS DB:
Assets (Mkt. Value, 12/31/10) $4,603,709,667
Accrued Liabilities (Net Present Value 6/30/2010)
8,449,650,000 Unfunded Liability
$3,845,940,333
Funding Ratio 54.48%
Mr. Barnhill stated that the figures differ from the assets
that the actuary reports in its most recent evaluation. He
mentioned that Buck Associates is the state's actuary. An
update is expected in April.
Co-Chair Stedman asked about the trust's litigation. Mr.
Barnhill replied that the topic is covered on Slide 31:
"Other Issues-Mercer Settlement." He noted that the
Department of Law (DOL) on behalf of ARMB settled the
lawsuit against the system's former actuary Mercer for $500
million in June 2010. The system netted $402 million from
the settlement. The $402 million was allocated between PERS
and TRS.
Co-Chair Stedman asked if the balance reflected in Slide 8
accounted for the contribution of the settlement. Mr.
Barnhill responded yes, in addition to recent investment
gains in the market.
9:20:31 AM
Mr. Barnhill continued that the unfunded liabilities listed
are estimations and Bach Consultants is working on its 2010
evaluation. He expected the figures to change somewhat.
Co-Chair Hoffman asked how the funding ratios for defined
benefits under PERS compare to other defined benefits in the
nation. Mr. Barnhill replied that Alaska's funding ratio is
low in comparison with other systems in the nation. Co-Chair
Hoffman asked for a percentage in comparison with other
defined benefit contributions. Mr. Barnhill replied that
some systems have approximately 100 percent funding ratios.
Other systems have less than 50 percent funding ratios. He
stated that various estimates are used by actuaries to gauge
the health of a system. He opined that a healthy system
showed ranges of 70 to 80 percent. He added that PERS is 63
percent and TRS is closer to 50 percent. The percentages are
indicative of a poorly funded system.
Co-Chair Stedman asked about and the pension site without
the health insurance. Mr. Barnhill stated that Alaska is one
of four states that forward funds health care.
9:24:01 AM
Co-Chair Stedman clarified that benefit programs are not at
risk. He stated the goal to shrink the balance. Mr. Barnhill
appreciated the point and highlighted the constitutional
requirement.
Co-Chair Stedman pointed out that Alaska includes the
prefunding of health insurance. Mr. Barnhill noted that
Alaska was one of four states that prefunded health care.
The funding ratio for both pension benefits and health
benefits is equal.
Co-Chair Stedman pointed out the negative $10 billion
balance. He did not want the public to assume that the
benefit payments were at risk. He stated that the goal is to
shrink the negative $10 billion imbalance between assets and
liabilities. Mr. Barnhill agreed and added that everyone
working on the problem is committed to one goal ensuring
that all benefits are paid when due. He agreed that many
challenges exist to bring the system back into a status of
full funding.
9:25:41 AM
Mr. Barnhill discussed Slide 9: "Basic Facts-Health Cost
Trends." He noted that the slide is derived from the
actuarial evaluation released by Buck Consultants. The slide
depicts the last 30 years during which Alaska experienced 9
percent inflation in its health care costs. The number
demonstrates that Alaska has been unable to control health
cost growth over the long term. Medical costs increased in
excess of the rate of inflation in Alaska. The actuary must
recognize the trend adequately in the rates set for the
system. The rates produced less than adequate contributions
by employers, which was the basis of the Mercer law suit.
The DOR is reviewing the situation carefully with
consideration of a variety of initiatives designed to change
the trend.
9:27:26 AM
Mr. Barnhill discussed Slides 10 and 11: "Basic Facts-
Funding Ratio History-PERS." He noted that the relative
funding of the systems in 1979 is similar to present times.
The state achieved 100 percent funding in the mid 1980s.
Mr. Barnhill discussed Slide 12: "Contribution Rates." He
noted that rates are board adopted. The board adopted rates
in the early 2000s are low reflecting the oversight of the
actuaries. He recalled that the teacher's retirement board
had a policy of flat rates in the 1990s, which eliminated
rate volatility for school districts. In 2002, the systems
received an actuarial audit and the oversights by Mercer
were first detected. The actuary rates spiked after the
audit, but the boards pursued a policy of increasing rates
by 5 percent per year. He noted that 2004 through 2007 show
an incline of contribution rates. He recalled SB 141 passing
in 2005, which sunset the Teacher's Retirement board and the
Public Employees Retirement board and replaced them with the
current ARMB. The ARMB set the rates at the actuarial rate
creating the spike seen in 2007 and 2008. He mentioned
considerable concern about the impact of 50 plus percent
contribution rates in school districts. The legislature took
measures by appropriation and passed SB 125, which set, by
statute the employee contribution rate for TRS at 12.5
percent and for PERS at 22 percent.
Co-Chair Stedman clarified percent of payroll. Mr. Barnhill
concurred. He described the breakdown of the rates
illustrated.
9:31:36 AM
Mr. Barnhill continued that the initial spike trended down
through 2009 and 2010, which reflected investment gains and
actuarial gains. The great recession in 2008 and 2009 caused
rates to spike again. The actuarial rates are projected at
50 percent for TRS and 30 percent for PERS. He noted that SB
125 allows the state to cover the difference and the funding
is appropriated in the operating budget.
Co-Chair Stedman added that the state could fund 14 percent
of payroll without the unfunded liability.
Mr. Barnhill added that rates are high and expected to rise.
Municipal employers will continue to pay 22 percent of their
total payroll. School districts will pay only 12.5 percent
of the total payroll. The state picks up the remainder under
SB 125.
9:33:45 AM
Mr. Bader discussed Slide 14: "Investments-ARMB Assets Under
Management." He stated that DOR manages $18 billion of non-
retirement funds and another $19 billion of funds that are
part of the retirement system now subject to the fiduciary
oversight of the ARMB. He mentioned 14 different funds
associated with the defined benefit retirement account. He
quoted that the PERS trust was at $6 billion, the PERS
health trust at $4.8 billion, the TRS retirement trust at $3
billion and the TRS health trust at $1.5 billion. The ARMB
is responsible for oversight of the supplemental annuity
plan which is in deferred comp and totals approximately $3
billion. He explained that the retirement accounts must be
managed separately according to the advice of tax council.
Mr. Bader discussed Slide 15: "Investment-Asset Allocation."
He mentioned that the asset allocation is currently active
for all defined benefit plans except the military retirement
plan. The target allocation has 29 percent of assets
invested in domestic equities, 23 percent in global
equities, 7 percent in private equity, 16 percent in real
assets, 5 percent in absolute return, 19 percent in fixed
income, and 1 percent in cash. The board adopts bands around
which staff is permitted to allow the investment mix to
change.
Mr. Bader discussed Slide 16: "Investments- US Stock Market
Historical Returns." He commented on the pictorial view of
the history of equity markets. The example shows that 29
percent of the yearly returns are negative.
9:37:50 AM
Mr. Bader discussed Slide 17: "Investments-Fiscal Year
Returns." He explained that returns of the PERS and TRS are
similar to those of the permanent fund. He added that an
eighteen year period shows that the PERS and TRS were very
close to the returns of the permanent fund. Co-Chair Stedman
asked why the five and eighteen year periods were selected
for the illustration. Mr. Bader responded that the ten year
comparison was not favorable.
Co-Chair Stedman requested the measurement periods for one,
three, five, and ten year returns.
9:39:33 AM
Senator Egan asked about returns before 1993. Mr. Bader
responded that Callan Associates had the requested figures.
He offered to provide the returns to the committee.
Mr. Barnhill added that eighteen years was reflective of the
two board's fiduciary responsibility over the assets. He
stated that a 30 year annualized return is 8.7 percent,
which is much higher due to extraordinary returns in the
early 1980s. Mr. Bader added that the five year return
corresponds to the length of period that the ARMB has had
fiduciary responsibility.
Co-Chair Stedman added that some historic data is available
in his office. He noted that the history occurs in a wide
range of annual books addressing stocks, bonds, and other
asset classes.
9:41:51 AM
Mr. Bader mentioned Slide 18: "Investments-Cumulative
Returns." He noted that the lines shown represent the
returns provided. The red line shows the cumulative total
return of the fund over the past 18 or 19 years. The blue
line represents how the fund would perform at its target
asset allocation using index returns. The curvilinear line
represents that which the fund would have earned
cumulatively had it earned the 8.25 percent, or the assumed
rate of return.
Senator McGuire asked about health costs and the
consideration of their percentage of growth. Mr. Bader
responded that the health costs manifest themselves in the
calculated contribution rate. The investments intended to
return a certain amount.
Senator McGuire opined that with an unachieved target of 8.5
percent, the legislature must have future conversations
about the actual costs associated with paying benefits to
beneficiaries including percentages earned.
9:44:49 AM
Mr. Barnhill agreed.
Co-Chair Stedman agreed that a similar chart led to finance
member confusion in the past when the committee was told
that no problem existed. The committee's request was to take
the targeted 8.25 percent and "shoot it forward." The data
is conceptually difficult for some members. He requested
that the asset value for June 30 with a target of 8.25, with
a new growth line for each year.
9:47:23 AM
Senator McGuire added that the health care costs should be
located in the chart as well. Co-Chair Stedman noted that
the health care costs fall back to an increasing
contribution rate.
Co-Chair Stedman stated that a higher targeted rate would be
unattainable. He noted the need for prudence in an
attainable target. The ARMB is required by statute to match
assets and liabilities.
Mr. Barnhill mentioned a contemporary conversation regarding
the issue of appropriately matching assets with liabilities.
He mentioned that the investment return assumption of
systems like PERS and TRS should be reduced to a riskless
rate of return like 5 percent, which is something that
Alaska has not embraced. The choice would double the
unfunded liability for Alaska, which would increase employer
contribution rates. The historic rates of return are closer
to the rate of return. Alaska, the ARMB, and most pension
boards around the country are not embracing the notion of a
riskless rate of return.
Co-Chair Stedman commented that data from the last 15 years
with a targeted rate of return would be helpful.
Mr. Barnhill offered to portray the numbers in any way
needed by the committee.
9:51:52 AM
Mr. Bader described Slide 20: "Recent Assumption Changes."
ƒAS 37.10.220(a)(9) requires a review of actuarial
assumptions every four years
ƒBuck Consultants performed the experience study
ƒGabriel Roeder Smith & Co. reviewed and certified
the Buck experience study
ƒBased on the Buck and GRS reports, the ARM Board
modified some of its actuarial assumptions
Mr. Bader discussed Slide 21: "Recent Assumption Changes-
Investment Returns."
ƒInvestment Return Assumption reduced from 8.25% to
8.00%
- 4.88% real return assumption
- 3.12% inflation assumption
Senator Thomas referred to Slide 17. He asked why the
proposed investment return assumption is reduced by one
quarter of a percent. Mr. Bader responded that the board
lowered the percentage to 8 percent to remain competitive
with other funds.
Senator Thomas thought that the state's experience and the
performance of the permanent fund might affect the
investment return assumption.
9:55:21 AM
Mr. Barnhill responded that the country saw a gradual
reduction from investment returns in the 8.5 percent range
down to 8 percent and lower. Pension systems are resisting
the notion of percentages lower than 7.5.
Co-Chair Stedman stated that the finance committee has
expressed concern that 8.25 is a high target, which
artificially suppresses the liability. He wished to view a
better estimate of the liability and asset spread. He asked
why the asset allocation is so similar to that of the
permanent fund when the objectives appear to be different.
He encouraged additional opinions. He discussed the state's
liquidity position. He expected the finance committee to
request additional consultants to provide varying opinions.
9:59:14 AM
Co-Chair Stedman appreciated the lower target. Mr. Barnhill
replied that the lower rate will have a future impact.
Whenever the investment return assumption is lowered, some
impact will exist for the unfunded liability. He predicted a
modest increase in the unfunded liability and the total
employer contribution rate. He added that the permanent fund
changed its asset allocation and adopted different asset
categories. The similarity in returns for the funds is a
result of exposure to equities.
10:01:14 AM
Mr. Bader discussed Slide 22: "Recent Assumption Changes-
Contribution Rate Impact."
PERS TRS
FY 2012 Employer Contribution Rate 30.76% 42.61%
Change in Demographics (net) 1.25% 5.55%
(post termination mortality)
Change in Earnings Assumption 1.53% 1.77%
Total Change in Employer Contribution 2.78% 7.32%
FY2012 Employer Contribution Rate -
Revised 33.54% 49.93%
10:04:01 AM
Co-Chair Stedman asked about excess contributions made by
the state.
Mr. Barnhill discussed Slides 23 and 24: "SB 125 State
Assistance." The slides depict the payments made by the
state historically and the projected amounts. He mentioned
2009; the first year that SB 125 took affect when the state
paid $400 million. He mentioned that prior to the enactment
of SB 125, the state made a similar payment to buy down the
rate for the year. He stated that the governor has proposed
amounts of approximately $470 million in the operating
budget for the FY 12 payment amount. The proposed state
assisted amount under SB 125 will climb steeply and will
crest over $1 billion in ten years on its way to $1.4
billion in 2029. He explained the sharp drop in 2029 because
the initial unfunded liability, which was the product of the
actuarial audit in 2002 equaling $4.4 billion, will be fully
amortized under a 25 year amortization. Once fully
amortized, the state assistance will drop considerably under
SB 125.
Senator McGuire asked to see pre SB 125 and post SB 125 data
regarding state contribution to PERS and TRS.
Co-Chair Stedman offered to provide the information to
Senator McGuire.
10:09:31 AM
Mr. Barnhill stated that the legislature contributes
considerable funding to the system. He noted further
contributions from the employers.
Co-Chair Stedman mentioned the judiciary retirement plan.
Mr. Barnhill added that the contribution to the judicial
retirement system was considerably smaller with a funding
hole of $10 or $20 million. The proposition of fully funding
the judicial retirement system is an easy prospect in
comparison to that of PERS and TRS.
10:11:22 AM
Mr. Barnhill discussed Slide 26: "PERS/TRS Future."
ƒARM Board held work session in September 2010 at the
request of legislative finance.
- Discussed how to best address unfunded
liability
- Modeled different approaches and scenarios
- Discussion and modeling is ongoing
Mr. Barnhill discussed Slide 27: "PERS TERS Future." He
informed that unfunded liability is referred to as soft
liability and equals roughly $10 billion. The legislature
and ARMB determine the payment of the liability. The policy
concern is whether to pay more now or later. He stressed
that the actual benefit payments were not a soft liability.
The payments will exist until 2080 or 2090 when the last
defined benefit member passes away. A long term view of the
benefit payments was projected by Buck Consultants and
depicted on the slide. The projected benefit payments will
crest over $3 billion per year for a 20 year period
beginning in 2028.
Mr. Barnhill detailed Slide 28: "Future."
Long term observations:
ƒSharply declining petroleum revenues post-2030
ƒOther obligations (schools and Medicaid) will
compound fiscal situation - paying now versus paying
more later is in sharp tension
ƒPaying more now and reducing state savings accounts
could reduce budgeting flexibility post-2030 at a
time when state savings account may be necessary to
"keep the lights on"
ƒPaying less now increases expenses in the long term
ƒMore critical thinking and discussion about a global
approach to structuring state finances and budgeting
including a long term plan for PERS/TRS funding is
needed
10:16:26 AM
Mr. Barnhill discussed Slide 30: "PERS/TRS Other Issues-
Termination Studies." He informed that the PERS statute
states that when an employer either terminates completely
from PERS, or terminates a classification of employees from
PERS, a termination study is required. The additional cost
of the study will be billed to the employer. The actuaries
report that when a class of employees is terminated, changes
in retirement behavior occur. When an employee retires
earlier than anticipated, an unfunded liability is
established in the system. The termination study ensures
that the system remains whole as a result of changes caused
by a particular employer. Co-Chair Stedman added that the
liability would fall to the state. He did not want the
liability to shift. Mr. Barnhill agreed.
Mr. Barnhill added that he requested that Buck Associates
summarize the termination studies that occurred in 2010. The
studies are depicted on Slide 30. Each study cost a total of
$25 hundred and produced a onetime termination ranging from
$10 thousand to $21 thousand. The statute allows the
division of Retirement and Benefits to have a payment plan
with the municipality allowing the cost to be spread over
time to reduce the impact on finances. He opined that the
statute was fair. One issue raised regarded the production
of unfair double counting. He mentioned current work with
the Department of Law (DOL) with the objective of the
elimination of unfair double counting.
Co-Chair Stedman mentioned Fairbanks and a similar issue.
The risk is that multiple municipalities will go broke. He
stressed that shifting liability presents a large issue. He
wished to see the contribution rate drop to 14 percent.
10:21:28 AM
Mr. Barnhill mentioned Slide 32: "PERS/TRS Other Issues-
PERS Payroll." The information was requested by the
Legislative Finance division. The defined benefit portion of
the declining payrolls is illustrated in the slide.
Mr. Barnhill noted Slides 34 and 35: "PERS/TRS." The slides
illustrate the employee contribution rates in PERS and TRS
including the adoptive rate, the board rate, and the SB 125
rate.
Co-Chair Stedman offered to work with the department on the
regulatory issue of the termination study. He explained that
some municipalities feel that they are not treated fairly.
Mr. Barnhill understood and welcomed the collaboration. He
offered to provide information from the DOL regarding the
reported double counting.
Co-Chair Stedman expected to have additional information
from Buck Associates regarding the payment structure. He
wished to avoid the payment of $1.4 billion per year.
ADJOURNMENT
10:25:41 AM
The meeting was adjourned at 10:26 AM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 110224 Retirement System Presentation to Senate Finance.pptx |
SFIN 2/24/2011 9:00:00 AM |
PERS and TRS Presentation |