Legislature(2023 - 2024)SENATE FINANCE 532
05/02/2023 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Confirmation of Governor's Appointee: John Morris, Alaska Mental Health Trust Authority | |
| SB88 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 88 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
May 2, 2023
9:02 a.m.
9:02:54 AM
CALL TO ORDER
Co-Chair Olson called the Senate Finance Committee meeting
to order at 9:02 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Donny Olson, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Click Bishop
Senator Jesse Kiehl
Senator Kelly Merrick
Senator David Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Senator Cathy Giessel, Sponsor; Sonja Kawasaki, Legal
Counsel, Senate Majority.
PRESENT VIA TELECONFERENCE
Doctor John Morris, Appointee, Anchorage; William Fornia,
Alaska Public Pension Coalition, Seattle.
SUMMARY
SB 88 RETIREMENT SYSTEMS; DEFINED BENEFIT OPT.
SB 88 was HEARD and HELD in committee for further
consideration.
^CONFIRMATION OF GOVERNOR'S APPOINTEE: JOHN MORRIS, ALASKA
MENTAL HEALTH TRUST AUTHORITY
9:04:23 AM
DOCTOR JOHN MORRIS, APPOINTEE, ANCHORAGE (via
teleconference), introduced himself, and provided his
background related to the position. He stated that
successful trustees have abilities in financial management
and investment or in service to beneficiaries of the trust.
He noted the remarkable trustees on the board, and felt
that he had personal experience and education that would
benefit the board. He shared that he had lived in Alaska
for seven years. He explained his extensive medical
education and work in psychiatry.
9:09:32 AM
Co-Chair Olson wondered about his work as the homeless
coordinator in Anchorage.
Dr. Morris replied that the brief time he spent in the
mayor's office was a great opportunity to make a positive
impact on the issue of homelessness. He expressed
disappointment that there was not a more positive impact on
the city.
Co-Chair Olson asked why Mr. Morris tenure as homeless
coordinator so brief.
Dr. Morris replied that he stayed until he felt that his
services were no longer beneficial as an employee.
Senator Bishop wondered whether there were evaluations on
the homeless populations, and queried the percentage of the
population that had mental illness. He asked whether the
position on the board could help those people.
Dr. Morris responded that one of the primary strategic
objective was to develop data from surveys about a person's
individual experience in homelessness. He stated that
implied in those surveys was the presence or absence of
mental illness. He explained that they were not able to
achieve funding for that survey, but the initiative had
begun. He remarked that he had personally met with hundreds
of people experiencing homelessness, which was a remarkably
diverse population. He said that "all of the stereotypes
are true, and none of the stereotypes are true." He felt
that the common denominator of a person experiencing
homelessness was the inability to adapt to a life
experience. He remarked that it could be something that
none of us could adapt to, or something that would
conventionally be adaptable.
9:16:27 AM
Co-Chair Stedman FORWARDED the appointment of John Morris
for consideration in accordance with Alaska Statute. He
relayed that this did not reflect an intent by any member
of the Senate Finance Committee to vote for or against the
confirmation of the individuals during any further
sessions. There being NO OBJECTION, it was so ordered.
9:16:54 AM
AT EASE
9:18:04 AM
RECONVENED
SENATE BILL NO. 88
"An Act relating to the Public Employees' Retirement
System of Alaska and the teachers' retirement system;
providing certain employees an opportunity to choose
between the defined benefit and defined contribution
plans of the Public Employees' Retirement System of
Alaska and the teachers' retirement system; and
providing for an effective date."
9:18:39 AM
SENATOR CATHY GIESSEL, SPONSOR, presented, "Senate Bill 88,
A Shared Risk Retirement Plan" (copy on file). She
addressed slide 2:
Challenge
Alaska's Recruitment and Retention Crisis
History
2005 Alaska implemented a Defined Contribution plan
Solution
A retirement system with reasonable costs and fair
benefits
Why SB 88
Alaska has a strong interest in ensuring quality
public servants fill the ranks of our public service
agencies
9:23:41 AM
Senator Giessel pointed to slide 3, "Challenge":
Recruitment and Retention has collapsed
Staggering vacancy rates
Senator Giessel discussed slide 4, "Why Is This Happening?"
"A lot of our vacancies and our cyclic throughput on
employees really began increasing since 2006. If you
remember that was the break point between Tier III and
Tier IV employees for the State of Alaska so once the
pension benefits disappeared and we became
contribution or matching based employer, those
benefits became transportable. Our ability to retain
employees, really much longer than four or five years
anymore, and no more than ten years became largely
impacted by trends and portability of those benefits.
-
Wolfgang Junge, DOT/PF Central Region Director,
House Finance, February 15, 2022
9:24:47 AM
Senator Giessel addressed slide 5, "Budget Challenges -
Vacancy." She stated that there were not adequate
employees, so there were unsustainable hiring bonuses.
Senator Giessel discussed slide 6. She noted that the slide
compared the outcome of a defined contribution system with
the defined benefit system. She shared that they were in a
larger form in the addendum of the slide deck. She stressed
that the defined contribution salary replacement failed to
compete with the defined benefit system. However, she noted
the outliers on the comparison.
Co-Chair Stedman felt that the snapshot with the rates of
return after the market downturn in the previous year. He
remarked that nearly every state had a retention problem,
and stressed that Alaska was not unique.
Senator Giessel agreed, and stated that it all depended on
the time of retirement, so the defined contribution was a
volatile system.
9:31:26 AM
Senator Giessel pointed to slide 7, "HISTORY":
? Prior to 2002 the DB system was well funded
? 2002 to 2004 Erroneous actuarial advice by Mercer
compromised the DB system
? 2006 The Defined Contribution plan was implemented
? 2007 State of Alaska ARM Board filed suit against
Mercer for covering up its malpractice, SOA prevailed
Senator Giessel addressed slide 8, "DB System Funded Ratio
History." She shared that up until 2002, the defined
benefit retirement system was well-funded and stable.
Co-Chair Olson wondered whether it was the legislature's
responsibility to "watchdog" the actuarial reports.
Senator Giessel replied in the affirmative.
Co-Chair Stedman agreed with most of the statements, but
disagreed that there was full funding.
9:41:16 AM
Senator Bishop asked for the slide to be restated with the
deposits. He noted that there was some money from Mercer,
but settled for less than what was owed.
Senator Giessel appreciated the comments. She noted the
lack of oversight of the funds and the lack of adjustments
for changing systems. She stated that the issues were
addressed in SB 88.
Senator Giessel looked at slide 9, "Will this happen
again?"
Triple Safeguards Since 2006
1. Buck Consulting, (State Actuary) provides annual
review of pension assets and liabilities
2. ARM Board Actuary reviews Buck's work every year
3. Every 4th year a third Actuary reviews ARMB and
Buck actuarial reports.
Senator Giessel discussed slide 10, "A Proposed Solution
Senate Bill 88."
Senator Giessel pointed to slide 11, "Structural Features
of SB 88":
? Builds on best practices of other states
? Shares risk between employees, employers, and
retirees
? Ensures system will remain solvent
Senator Giessel highlighted slide 12, "Employee
Contribution":
PERS and TRS
-12 percent adjustable by ARM Board
•Employees share the risk contributing more during
poor market returns
9:44:30 AM
Senator Giessel discussed slide 13, "EMPLOYEE CONTRIBUTION,
SB 88 Structure":
States that use a Variable Employee
Contribution Rate
? Arizona
? Colorado
? Idaho
? Iowa
? Maine
? Montana
? Nevada
Senator Merrick looked at page 12, and wondered how often
the ARM Board would make adjustments.
Senator Giessel replied that adjustments were made
annually.
Co-Chair Stedman noted that the current employer rate for
PERS was 8 percent, and the bill would adjust it to 12
percent, and would be set by the ARM Board automatically.
He shared his concern about changing clauses.
Senator Giessel said that the question would be addressed
later in the presentation.
Co-Chair Stedman understood that there were two components
under discussion for current and previous employee payments
and the discrepancies between payments made by the two. He
hoped for clarity for those listening and addressed slide
14. He
9:50:44 AM
Senator Giessel addressed slide 14, "Employer Contribution,
SB 88 Structure":
PERS
• 22 percent is no longer fixed (22 percent 12
percent)
TRS
• 12.56 percent is no longer fixed (12.56 percent 12
percent)
• Provides relief when full actuarial cost drops below
existing contribution rates, to a lower limit of 12
percent
• Remains the same and aligns with current rates set
by DB and DC tiers
Senator Giessel said that 22 percent did not disappear.
She discussed the criteria. She spoke to the continuation
of service costs.
Co-Chair Stedman said that he did not understand the amount
under discussion and offered some history.
Senator Giessel replied that the percentage was continually
reviewed by the ARM Board, but she remarked that the 22
percent would not be changed because that was the amount
paid by the employer.
Co-Chair Stedman stressed that it was a complex issue.
Senator Wilson wondered how the variable rate for employer
contribution took effect for termination studies in
municipalities.
Senator Giessel replied that there were no changes related
to the termination studies.
9:55:55 AM
Senator Kiehl surmised that the bill accounted separately
for the new tiers. He stated that normal and past costs
were calculated for the new tier, and they would not
"cross-contaminate" with the legacy tiers. He wondered
whether the adjustment on the employer side would be based
on a blended rate of both the new and legacy trust so they
only paid one rate.
Senator Giessel replied in the affirmative.
Co-Chair Stedman asked for clear definition of terms like
"termination liability studies."
Senator Giessel explained that termination studies were
conducted by communities. She furthered that when an
employee retired, the employer had to continue to pay for
the retirement of that employee. She stressed that those
costs were a burden to communities, but noted that the bill
did not address that issue.
Co-Chair Stedman recalled that Sitka had a hospital that
was under PERS, and the community wanted to sell the
hospital. He stated that selling the hospital could result
in the state picking up the cost for retirement. He stated
that there was now a requirement for a "past service
analysis", which was an analysis of the present value of
the unfunded of the liability that required payments by the
communities or municipalities.
10:00:24 AM
Senator Giessel stressed that the termination studies were
not addressed in the bill.
Co-Chair Olson wondered how the liabilities may be
rectified if the termination studies were not within the
bill.
Senator Giessel replied that nothing would change about the
past liabilities and the past service costs.
Senator Wilson wondered how the liabilities would be
calculated with a variable rate of the employer
contribution from 22 percent to 12 percent. He asked
whether it would be 22 percent in perpetuity.
Senator Giessel replied that the ARM Board would continue
to annually assess the liabilities to balance out the
system.
Senator Wilson remarked that there may be too much
reliability on the ARM Board and waiting for the
possibility of a rate change to impact the municipalities.
Senator Giessel restated that termination studies were
currently not an aspect of the bill.
Senator Giessel discussed slide 15, "2024 Actual Employer
Contribution Rates."
10:06:19 AM
Co-Chair Stedman noted that the funding ratio was 90
percent, but could be changed to 22 percent. He wondered
how it would interplay with health care costs and pensions.
Senator Giessel replied that it was a component of the full
actuarial costs.
Co-Chair Olson queried the definition of "normal costs."
Senator Giessel replied that the normal costs were all the
costs of the benefits for all of the active members.
Co-Chair Stedman surmised that the normal costs would be
used to calculate the current year for all employees if all
projections remained true.
Senator Giessel displaying slide 16, "Employer Fee for Late
Contributions PERS and TRS":
SB 88 Structure
• Reduced to normal interest rate from current law of
1.5 x interest rate
• Intended to provide financial relief to employers
10:10:36 AM
Senator Giessel pointed to slide 17, "Vesting PERS and
TRS":
SB 88 Structure
Vested at 5 years for both PERS and TRS
• PERS is consistent with prior Defined Benefits (DB)
plan
• Aligns TRS with PERS vesting period
Senator Giessel addressed slide 18, "Qualification For
Retirement":
SB 88 Structure
PERS (Public Safety only)
50 years of age with 25 years of service
OR
55 years of age with 20 years of service
Allows Public Safety employees to reach retirement
eligibility prior to 60 years of age
Co-Chair Stedman wondered whether the schedule would change
with attaining 70 percent of salary replacement in year 30.
Senator Giessel remarked that slide 20 would talk about the
benefit calculation.
Senator Wilson remarked that there were many state
employees that had dangerous and difficult jobs and
wondered why there was not a simple system for all those
jobs.
Senator Giessel replied that every job was different in the
system, and noted that public safety employees had more
dangerous jobs.
10:15:21 AM
Senator Wilson stated that there were jobs that had
significant stress.
Co-Chair Stedman remarked that the police and fire jobs was
that some communities did not cover their social security
and were not included in the supplemental benefit system
(SBS). He wondered whether the bill dealt with that issue.
Senator Giessel replied that it was a concerning issue. She
noted that it was a modest retirement plan in the bill. The
defined benefit retirement system provided significantly
more security, but did not solve every issue.
Co-Chair Olson surmised that a new employee could either
get a DB or DC route.
Senator Giessel replied in the affirmative.
Co-Chair Stedman stressed that there were a significant
number of employees who did not work for the state but had
a state-sponsored plan that were underfunded because they
were not in social security or SBS.
Senator Giessel agreed.
10:21:05 AM
Senator Giessel discussed slide 19, "Qualification For
Retirement":
SB 88 Structure
PER S (Non Public Safety)
TRS (Teachers)
• 60 years of age OR 30 years of service
• Aligns TRS with PERS qualification for retirement.
Senator Giessel displayed slide 20, "Benefit Calculation
Formula":
SB 88 Structure
PERS (Public Safety
• 2.00 percent first 10 years
• 2.50 percent thereafter
• New plan is consistent with PS PERS Tier III
Senator Giessel pointed to slide 21, "Benefit Calculation
Formula":
SB 88 Structure
PERS (Non Public Safety)
TRS (Teachers)
• 2.00 percent first 10 years
• 2.25 percent next 10 years
• 2.50 percent thereafter
• Aligns TRS with PERS benefit calculation
Co-Chair Stedman explained that 67.5 percent was the cap
after 30 years of service.
Senator Giessel replied with slide 22, "Final Average
Salary":
SB 88 Structure
PERS
• Highest 5 consecutive years of service
TRS
• Highest 5 nonconsecutive (contract) years of service
10:26:01 AM
Co-Chair Olson wondered whether the TRS contracts were
union or school districts.
Senator Giessel replied that they were the contracts with
the individual school districts.
Senator Kiehl wondered how the slide compared to the legacy
TRS.
Senator Giessel replied that she did not know.
Senator Kiehl recalled that Tier one was the highest
contract years.
10:27:40 AM
SONJA KAWASAKI, LEGAL COUNCIL, SENATE MAJORITY, stated that
the highest eight contracted consecutive years was in TRS
defined benefit.
Senator Kiehl surmised that there were experienced studies
to inform the decisions.
Senator Giessel looked at slide 23, "Alaska Cost Of Living
(COLA)":
SB 88 Structure
PERS and TRS
• No COLA is provided for new PERS or TRS Defined
Benefit (DB) plans
• Keeps the plan solvent
Co-Chair Stedman noted that the diminishment clause
protected the employees. He wondered whether there could be
a negotiation into the retirement system.
Senator Giessel replied that she could not predict the
actions of the future.
10:30:43 AM
Co-Chair Stedman noted that the other tools could return to
the plan, but could not be removed from the plan. He
stressed that there needed to be great care in making the
changes to the retirement system.
Senator Giessel agreed.
Senator Giessel discussed slide 24, "Post Retirement
Pension Adjustments (PRPA) aka Inflation Protection":
SB 88 Structure
• ARM Board may provide or withhold PRPA to retirees
if Defined Benefit (DB) Trust Fund valuation drops
below 90 percent
• Non-residents receive only 50 percent in PRPA
• This keeps the plan solvent regardless of funding
level
Senator Kiehl stated that it was not a full inflation
adjustment and asked for more information on that subject.
Ms. Kawasaki replied that the calculation in the statute
was based on a formula that compared two calculations, and
the PRPA was based on the CPI for Alaska which was based in
Anchorage.
10:35:02 AM
AT EASE
10:36:57 AM
RECONVENED
10:37:08 AM
Senator Giessel continued with slide 24.
Senator Giessel looked at slide 25, "Post Retirement
Pension Adjustments (PRPA) Inflation Protection":
SB 88 Structure
States with PRPA contingent on fund performance
Louisiana
Maryland
Massachusetts
Nebraska
South Dakota
Wisconsin
In Depth: Risk Sharing In Public Retirement Plans,
National Association of State Retirement Accounts,
2018
Senator Giessel highlighted slide 26, "Retirement Medical
Coverage PERS and TRS":
SB 88 Structure
• Coverage is consistent with PERS Tier IV and TRS
Tier III Defined Contributions (DC) Plans for all
employees
• Employer makes contribution of 3 percent to employee
Health
Reimbursement Arrangement (HRA)
• HRA can be used for any qualifying medical need
• Keeps the plan solvent
10:40:34 AM
Senator Giessel discussed slide 27, "Death and Disability
Benefit PERS":
SB 88 Structure
• Non occupational disability benefits calculated as
normal retirement, death benefit is provided
• Occupational disability or death provides
40 percent of the gross monthly compensation
• Added non occupational benefits to provide minimal
protection to employees and families should they have
career ending injuries or disabilities occur off the
job
Senator Giessel pointed to slide 28, "Death and Disability
Benefits TRS":
• Non-occupational and occupational disability
benefits are 50 percent of member's base salary
immediately before disability plus 10 percent for each
dependent child up to four
• Occupational death provides 40 percent of the
average base salary until retirement age and then
normal retirement
• Non occupational death provides a lump sum or 50
percent joint and survivor option
Senator Giessel discussed slide 29, "Requirement Of
Separate Accounting":
• In the past, no separate accounting for prior DB
tiers
• Plan administrator and ARM Board are required to
account for and track contributions, assets, earnings,
and liabilities of the members of the new plan
• This will maintain separate attribution of assets
and liabilities
Co-Chair Stedman surmised that it was the employer to avoid
the recent unfunded liability.
Senator Giessel agreed.
Senator Giessel highlighted slide 30, "Requirement Of Sub
Trusts":
• Creation of pension and medical sub trusts for the
new DB plans, along with existing HRA sub trusts
enable better tracking of assets and liabilities and
increase protection from prior past service costs
• The ARM Board shall establish the sub trust
10:45:51 AM
WILLIAM FORNIA, ALASKA PUBLIC PENSION COALITION, SEATTLE
(via teleconference), discussed the presentation, "Shared
Risk Hybrid Retirement Program SB 88 Actuarial
Implications" (copy on file).
10:46:38 AM
AT EASE
10:47:00 AM
RECONVENED
10:47:09 AM
Mr. Fornia looked at slide 2, "William B. Fornia, FSA
Credentials":
• Highest Actuarial Credentials
Fellow of the Society of Actuaries (1986)
Enrolled Actuary under ERISA (1984)
Member of the American Academy of Actuaries
(1983)
Former Elected Board member and
Secretary/Treasurer of 35,000-member Society of
Actuaries
• Author and Frequent Speaker
American Academy of Actuaries Fixed Rate
Pension Funding, 2023
• https://www.actuary.org/sites/default/files/2023-
02/Fixed_Rate_Pension_Funding_Practice_Note.pdf
"A Better Bang for the Buck 3.0" (with National
Institute on Retirement Security), 2022
"Are California Teachers Better off with a
Pension or 401(k)" University of California
Berkeley Labor Center and Journal of Retirement,
2016
Frequent Testimony to Legislatures and City
Councils
Regular Expert Witness (Detroit, Massachusetts
Bay Transit Authority)
Mr. Fornia addressed slide 3, "Sample Work History":
• Corporate actuary for Boeing 1980-1984
• Founded Pension Trustee Advisors in 2010
• Alaska related experience
ARMB first ongoing review actuary 2005-2006
Audited Alaska PERS/TRS actuarial valuations
2009
Former leader of Buck Consultants' Denver
retirement practice
Advisors to labor groups since 2011, including
testimony
• Consulting services for 23 statewide retirement
systems in Alaska, Colorado, Missouri, North Dakota,
Oklahoma, Pennsylvania, Puerto Rico, Utah, Texas,
Vermont, Wyoming and others.
Served as system actuary for most of these
(including CO, MO, ND, OK, WY)
Ongoing consultant to Ohio Retirement Study
Council, including reform
• Expert testimony and consulting for governments,
pension systems, and labor groups
• Other clients have included the US Department of
State, Cities of Baltimore, New York and Philadelphia,
IBM, US WEST and Ford
10:50:05 AM
Mr. Fornia pointed to slide 4, "Shared-Risk Hybrid
Retirement Program":
• How did we get here?
• Why is change necessary?
• Actuarial Implications
• Illustration of Financial Projections
Mr. Fornia discussed slide 5, "Shared-Risk Hybrid
Retirement Program."
Mr. Fornia pointed to slide 6, "What might be the
objectives of pension reform":
• Provide a benefit which stems retention concerns
• At little or no additional cost
To the State
To other employers
• With minimal risk of becoming underfunded
• With burdens shared between employer and labor force
Mr. Fornia addressed slide 7, "Illustration of hypothetical
teacher benefits -$50,000 Final Average Salary."
10:55:24 AM
Mr. Fornia pointed to slide 8, "Illustration of
hypothetical police/fire benefits: $80,000 Final Average
Salary."
Co-Chair Stedman looked at slide 7, and remarked that the
defined benefit in Tier 2 could be back calculated with the
final salary. He queried the variables of the defined
contribution plan in Tier 3.
Mr. Fornia replied that the first part of the question
could be clarified by saying that the bar was there for an
informational purpose, to show the benefit versus social
security. He noted that in Tier 4 it showed why the bar was
lower than the bars as shown by Senator Giessel, with the
adjustment of not knowing life expectancy.
Co-Chair Stedman requested the calculations used in the
charts.
Mr. Fornia replied that the Division of Retirement and
Benefit (DRB) numbers were strong and told the same story.
11:00:27 AM
Co-Chair Stedman addressed slide 8, and expressed concern
about the communities that were not in social security. He
wondered how to deal with those employees.
Mr. Fornia responded that most police and fire employees
were not in social security.
Co-Chair Stedman wanted to resolve that issue. He pointed
to the data that showed that most employees did not last
for forty years. He queried the comparison of the employee
that worked ten years in the defined benefit versus a
defined contribution. He wondered whether there was a
significant difference in the ending balance.
Mr. Fornia replied that most employers did not want to
design something for someone that would not stay for many
years. He stated that designing a reasonable pension would
enhance the retention of the employee.
11:05:34 AM
Senator Giessel stated that there would be a slide later in
the day related to the subject of retention.
Senator Kiehl wondered whether there was a conclusion
related to the effect of the structure when examining only
a portion of the system.
Mr. Fornia replied that there were three different factors:
1) Alaska, 2) the retention of a young person in TRS Tier 1
in the 1980s, and 3) the difference between the groups. He
stated that there would be a presentation that related to
teacher retention.
Mr. Fornia discussed slide 9, "Key Considerations with
Shared-Risk Hybrid Retirement Programs":
• DB Plans are more cost effective at providing
retirement benefits
DB pension plans pool "longevity risks"
DB pension plans can maintain a better
diversified portfolio because, unlike
individuals, they do not age
DB pension plans achieve better investment
returns because of professional asset management
and lower fees
• DC Plans are more consistent with individual
responsibility
Benefit is a clearly defined contribution from
the employer and employee to a trust
Benefit is more under the control and full
ownership of the individual
Benefit is much more portable
No risk of unfunded liabilities to employer
• Shared-Risk Hybrid Plans have many features of both
Cost-effectiveness of DB plans
But not all of the actuarial risk is borne by
the employer
11:10:28 AM
Mr. Fornia pointed to slide 10, "Actuarial Implications of
SB 88":
• Similar Fiscal notes showed modest cost or savings
• Risk to State is "Adverse Plan Experience"
• SB 88 Plan has Safeguards to mitigate this risk
• We have performed simulations to analyze this risk
• On similar programs (HB 55 for labor groups and
2021 PERS/TRS for legislature)
• Senate Finance Actuary and/or PERS/TRS actuary will
be making similar simulations
• I expect similar findings
• I would be pleased to return to discuss if
desired
Co-Chair Stedman noted the issue of police and fire not
being in social security or SMS, and they worked for the
cities. He wondered whether there could be a requirement
for the cities to have the police and fire in social
security or SBS to not miss half of their retirement.
Mr. Fornia replied that he did not see why no.
11:15:12 AM
Mr. Fornia addressed slide 11, "How does SB 88 strike a
compromise?"
• Start with reasonable employer contribution rate and
manage plan within that target as possible
• Reasonable target benefit levels
Based on benefits provided by DCR and latest DB
• Build in benefit and/or employee contribution
adjustment mechanisms
• These provide cushion against adverse experience
Mr. Fornia addressed slide 12, "Safeguard 1: Reduces
benefits vis--vis legacy Defined Benefits":
• Tighten retirement eligibility
• Five-year average salary
• Eliminate Alaska 10 percent COLA
• Eliminate pre-Medicare health coverage
• Reduce Post-Retirement Pension Adjustment for non-
Alaska-residents
Mr. Fornia pointed to slide 13, "Safeguard 2: Triggers if
funding level falls below 90 percent":
• Plan will start out 100 percent funded
• ARMB Board has authority to adjust if below 90
percent funded
Suspend Post-Retirement Pension Adjustment
Increase employee and employer contributions up
to 4 percent each
Mr. Fornia pointed to slide 14, "Benefit Plan Simulations":
• In the real world, returns will not be stable from
year to year.
• Even though the anticipated cost is less than the
contribution going in, plan still might become
underfunded
• To protect against this, plan has additional
"safeguards" beyond funding cushion
Don't pay Post Retirement Pension Adjustment
Increase member contributions by up to 4.0
percent
Increase employer contributions by up to 4.0
percent
Mr. Fornia pointed to slide 15, "Benefit Plan Simulations -
Stochastic":
• To illustrate this, we simulated potential scenarios
for thirty years using "stochastic" modeling
ARMB investment advisors estimate a "standard
deviation" of 13.55 percent for the investment return
of the current asset mix
This roughly means that in one of every three
years, return would be more than 13.55 percent
above or below 7.38 percent.
• Above 21 percent in one-sixth of the years
and below minus 7 percent in one-sixth of
the years
Although this standard deviation is somewhat
higher than we typically see, we modelled future
returns consistent with ARMB advisors estimates
Above analysis conducted in 2021 based on slightly
different provisions. SB 88 analysis expected to be
similar
Mr. Fornia pointed to slide 16, "Benefit Plan Simulations":
• We modelled 10,000 random simulations based on ARMB
actuaries' assumptions of 7.38 percent return on
assets
• In simulations where the funded ratio fell below 90
percent threshold, we activated the triggers
Boost contributions by 1 percent (up to 4
percent)
• Presumably shared between employees and employer
Suspend the Post Retirement Pension Adjustment
Mr. Fornia looked at slide 17, "Benefit Plan Simulations
(cont.)":
• High likelihood (59 percent) that TRS funded ratio
will be more than 100 percent in most years
65 percent for Other PERS
• Median funded ratio in 20 years is 108 percent for
TRS and 112 percent for Other PERS
• But still about 29 percent chance that TRS funded
ratio will be 90 percent or below after 20 years
25 percent for Other PERS
• Only about 14 percent chance that TRS funded ratio
will be 75 percent or below after 20 years
11 percent for Other PERS
Above analysis conducted in 2021 based on slightly
different provisions. SB 88 analysis expected to be
similar
Mr. Fornia addressed slide 18, "Benefit Plan Simulations
(cont.)":
• It's as likely that TRS funded ratio will be above
131 percent than below 90 percent
Mr. Fornia looked at slide 19, "Benefit Plan Simulations
(cont.)":
• It's as likely that funded ratio for Other PERS will
be above 143 percent than below 90 percent
11:20:47 AM
Mr. Fornia discussed slide 20, "Benefit Plan Simulations
(cont.)":
• Even if we hit our return expectations in the long
run, there's likely to be volatility in short run TRS
example
Mr. Fornia looked at slide 21, "Benefit Plan Simulations
(cont.)":
• Safeguards are what provides downside protection
TRS example
Mr. Fornia addressed slide 22, "Simulation Conclusions":
• Safeguards have been implemented to protect against
downside risk
Baseline contributions slightly higher than
expected cost
Conservative assumed rate or return
Triggers if funded ratio fall below 90 percent
• Increased contributions by up to 4 percent
each employee and employer
Suspension of Post Retirement Pension
Adjustment
• High likelihood of being extremely well funded
• But still some risk of being under-funded
Mr. Fornia pointed to slide 23, "How have other states'
shared risk plans operated?"
Mr. Fornia discussed slide 24, "Case Study - Wisconsin":
• Cost of Living Adjustment is dependent on fund
returns
• At retirement, each member has a fixed benefit
• A variable benefit is added to this, based on fund
returns
• The variable benefit itself can go down as well as
up, but the fixed benefit does not decrease
• Following 2008, the variable benefit did decrease,
but has recovered
Mr. Fornia pointed to slide 25, "Case Study - FPPA":
• Colorado Fire and Police Pension Association
Formed in 1980, creating new statewide plan
Contributions are fixed at 8 percent employee + 8
percent employer
This level was sufficient for core DB plan
Excess contributions went into DC plan during good
times
Board has discretion over COLA, which kept costs
below 16 percent
• But currently, Normal Cost exceeds 16 percent
Employees voted by supermajority to voluntarily
increase contributions to increase likelihood of COLA
Co-Chair Stedman asked about the salary replacement
percentage.
Mr. Fornia replied that the social security was the biggest
variable in that percentage.
11:25:20 AM
Co-Chair Stedman remarked that SBS was the replacement for
social security, and wondered if that multiplier was higher
than other states in social security.
Mr. Fornia replied that the coverage of SBS and the legacy
tiers could result in a higher than average benefit than
other states.
Co-Chair Stedman stressed that he needed the data on that
comparison.
Mr. Fornia replied that he did not mean to give that
impression, and stressed that he had not done that
analysis.
Mr. Fornia pointed to slide 27, "Case Study - Ohio":
• Employer contributions are fixed for each of five
statewide retirement systems
• Systems were and are required to develop plans to
keep funded periods within 30 years
• Major pension reform completed in 2012 leading to
new tiers with lesser benefits
• Plans include retiree healthcare (like Alaska), but
pension funding takes priority.
Mr. Fornia discussed slide 28, "Many other Shared Risk
Plans":
• Colorado Public Employee Retirement Association
• Kentucky Teachers RS
• Missouri PEERS/PSRS
• Utah Retirement System
• Washington State Public Employees Retirement System
• Wyoming Retirement System
Mr. Fornia addressed slide 29, "Recap":
• Alaska has concern with potential future unfunded
liabilities
• DCR provides inadequate benefits
• SB 88 Shared-Risk Hybrid Retirement Program is a
potential solution
If actuarial experience is as expected,
benefits will be paid comparable to Tier 3 PERS /
Tier 2 TRS
If actuarial experience is unfavorable, lower
benefits will be paid
Individuals do not take this risk, the
government does not take this risk; pools of
individuals do
Co-Chair Olson discussed the agenda for the afternoon
meeting.
SB 88 was HEARD and HELD in committee for further
consideration.
ADJOURNMENT
11:30:06 AM
The meeting was adjourned at 11:30 a.m.