Legislature(2023 - 2024)SENATE FINANCE 532

02/23/2023 09:00 AM Senate FINANCE

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09:01:13 AM Start
09:06:19 AM Presentation: Pers/trs Tier Comparisons
10:52:29 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
PERS/TRS Tier Comparisons
Ajay Desai, Director, Division of Retirement and
Kevin Worley, Chief Finance Officer, Division of
Retirement and Benefits
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 SENATE FINANCE COMMITTEE                                                                                       
                     February 23, 2023                                                                                          
                         9:01 a.m.                                                                                              
9:01:13 AM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair  Stedman   called  the  Senate   Finance  Committee                                                                    
meeting to order at 9:01 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                                                                                                                
ALSO PRESENT                                                                                                                  
Senator  Cathy Giessel;  Ajay Desai,  Director, Division  of                                                                    
Retirement  and  Benefits,   Department  of  Administration;                                                                    
Mindy Voigt,  Retirement and  Benefits Manager,  Division of                                                                    
Retirement  and  Benefits,   Department  of  Administration;                                                                    
Representative Andy Josephson.                                                                                                  
PRESENTATION: PERS/TRS TIER COMPARISONS                                                                                         
Co-Chair Stedman  discussed the agenda. He  noted that there                                                                    
would  be   an  analysis   and  comparison  of   the  Public                                                                    
Employees'   Retirement   System    (PERS)   and   Teacher's                                                                    
Retirement System  (TRS). He  relayed that  the presentation                                                                    
would be  one of several  presentations over the  next year.                                                                    
He  recounted  that historically  the  state  had a  defined                                                                    
benefit  (DB)  plan  for  many years,  and  about  16  years                                                                    
previously had  closed the new  plans and all  new employees                                                                    
entered a defined  contribution (DC) plan for  PERS and TRS.                                                                    
He noted that  a lot of municipalities  also participated in                                                                    
the systems.                                                                                                                    
Co-Chair Stedman  recalled that it  had been about  16 years                                                                    
since the implementation of the DC  plan, and it was time to                                                                    
review  the  performance  and  status  of  the  newer  tiers                                                                    
relative to the  tiers that were replaced.  He mentioned the                                                                    
goal of  having a healthy and  competitive retirement system                                                                    
for employees,  and to have  the new  tiers on par  with the                                                                    
tiers that  were replaced. He  relayed that the  Division of                                                                    
Retirement and Benefits (DRB) would  give a presentation. He                                                                    
noted that  the committee had also  requested some retention                                                                    
and turnover analysis,  which would be presented  at a later                                                                    
time.  He mentioned  the importance  of the  state being  an                                                                    
attractive employer, and its retention and turnover.                                                                            
^PRESENTATION: PERS/TRS TIER COMPARISONS                                                                                      
9:06:19 AM                                                                                                                    
AJAY DESAI,  DIRECTOR, DIVISION OF RETIREMENT  AND BENEFITS,                                                                    
DEPARTMENT   OF  ADMINISTRATION,   discussed  a   PowerPoint                                                                    
presentation  entitled   "Defined  Benefit   Versus  Defined                                                                    
Contribution Comparison,"  (copy on file). He  discussed his                                                                    
background.  He had  been with  the division  for about  six                                                                    
years and had  spent 29 years in the private  sector. He had                                                                    
worked in  the benefits  administration arena for  35 years,                                                                    
and  had  worked  with  corporate  banks,  the  Walt  Disney                                                                    
Company, and the motion picture industry.                                                                                       
9:07:21 AM                                                                                                                    
Mr. Desai  looked at slide  2, "Defined Benefit  v/s Defined                                                                    
     Defined Benefit (DB) plan                                                                                                  
     o Is 'defined' in the sense that the "benefit" formula                                                                     
     is defined.                                                                                                                
     o Employer contributions (Normal Cost and Past Service                                                                     
     payment) will fluctuate annually based on the                                                                              
     actuarial valuation.*                                                                                                      
     o Benefit calculated on set formulas such as the                                                                           
     multiplier (percentage), salary history, and duration                                                                      
     of employment.                                                                                                             
     o Provide a fixed, guaranteed benefit for employees at                                                                     
     retirement based on the formula.                                                                                           
     o  Benefits  can be  paid  as  monthly payments  for  a                                                                    
     Defined Contribution (DC) plan                                                                                             
     o Is  'defined' in  the sense that  the  contributions"                                                                    
     are defined.                                                                                                               
     o  Contributions   are  maintained  in   an  individual                                                                    
     o These  contributions are  invested on  the employee's                                                                    
     o Provide  an account  balance that will  fluctuate due                                                                    
     to the  changes in  the value  of the  investments. The                                                                    
     employee will  ultimately receive the balance  in their                                                                    
     account   based   on   contributions  plus   or   minus                                                                    
     investment gains or losses.                                                                                                
     o  Benefits can  be  a lump  sum,  rollover to  another                                                                    
    retirement plan, or conversion to annuity payments.                                                                         
Co-Chair Stedman  asked how  Mr. Desai  had compared  the DC                                                                    
plan to the DB plan.                                                                                                            
Mr. Desai explained  that when a person  retired and planned                                                                    
for retirement,  the most important comparison  was the last                                                                    
salary earned with  the pension benefit that  would be drawn                                                                    
each  month. He  recounted  that many  years previously  the                                                                    
rule  of thumb  had been  that when  a person  retired, they                                                                    
must  have  at least  two-thirds  of  the salary  income  to                                                                    
retire.  Presently the  amount was  70 percent.  He pondered                                                                    
how to compare  the lump sum to the last  salary, and how to                                                                    
compare against  monthly pension  benefits. He  relayed that                                                                    
he would try to show a scenario to compare the plans.                                                                           
9:12:03 AM                                                                                                                    
Mr. Desai spoke to slide 3, "Chronology":                                                                                       
     • Defined Benefit Tiers                                                                                                    
     o January 1961: Established                                                                                                
     o July 1986: Tier II established                                                                                           
     o July 1996: Tier III established                                                                                          
     • Defined Contribution Tier                                                                                                
     o July 2006: Tier IV established                                                                                           
     o July 2008: Cost  Share with 22% employer contribution                                                                    
     • Defined Benefit Tiers                                                                                                    
     o March 1945: Established                                                                                                  
     o July 1990: Tier II established                                                                                           
     • Defined Contribution Tier                                                                                                
     o July 2006: Tier III established                                                                                          
     o July 2008: Cost Share with 12.56% employer                                                                               
     contribution rate                                                                                                          
Mr.  Desai  indicated  that  in  any  given  year  when  the                                                                    
actuarial valuation  was done to determine  the contribution                                                                    
rate,  if   the  rate  was   over  22  percent,   the  state                                                                    
contribution would  fill the  gap. He  noted that  the state                                                                    
had   paid   about   $8.2  billion   in   additional   state                                                                    
Co-Chair Stedman  asked for more detail  and history related                                                                    
to the tiers.                                                                                                                   
Mr.  Desai recounted  the  establishment of  the  tier I  DB                                                                    
system, until  July 1986  when tier  II was  established. He                                                                    
continued that  tier II simply changed  the eligibility rule                                                                    
from age 55 to age 60.  He discussed changes between tiers I                                                                    
and  II  and tier  III,  in  which the  primary  calculation                                                                    
changed from 3 years to 5 years.                                                                                                
Mr.  Desai  discussed  the  changes  in  TRS  since  it  was                                                                    
established in 1985. Under the  PERS system, tier IV offered                                                                    
a DC  plan. He explained  that prior years offered  DB plans                                                                    
based  on a  formula with  a  flat benefit  for a  lifetime.                                                                    
Under DC  tiers, funds  were invested  in a  marketplace and                                                                    
benefits were based on returns.  There were multiple options                                                                    
as to how the funds could be managed.                                                                                           
9:17:06 AM                                                                                                                    
Co-Chair Stedman  asked Mr.  Desai about  his mention  of $8                                                                    
Mr. Desai recounted  that two years after the  DB plans were                                                                    
ended, a cost-share plan was  adopted by the legislature. As                                                                    
a  part of  the statute,  all  of the  PERS employers  would                                                                    
contribute up  to 22 percent.  He explained that  the reason                                                                    
was that  at the time, the  annual rate was over  30 percent                                                                    
each  year and  would  be cumbersome  for  employers due  to                                                                    
unfunded  liabilities.  The   cost-share  plan  would  offer                                                                    
employer a  flat 22 percent  contribution rate,  despite the                                                                    
actuarial rate for each year.  The gap between the actuarial                                                                    
rate and  the flat 22 percent  rate would be made  through a                                                                    
state contribution for all employers under PERS.                                                                                
Co-Chair Stedman  asked for some of  the fundamental reasons                                                                    
as  to why  tier  IV  was created.  He  asked  Mr. Desai  to                                                                    
discuss the  creation of unfunded liability,  and to discuss                                                                    
who was responsible.                                                                                                            
Mr. Desai relayed  that when a pension plan  was created, it                                                                    
was created by  the employer. An employer had  the option of                                                                    
offering  an independent  single employer  plan, or  to join                                                                    
into the multi-employer  plan. In the private  sector it was                                                                    
also known as a multi-employer  plan. In the situation being                                                                    
discussed, over 200 employees had  come together in the PERS                                                                    
and  TRS  plans.  Each  employer  was  responsible  for  the                                                                    
nominal  cost,  which  was  the  valuation  of  each  person                                                                    
working. When  the nominal cost  was regularly paid,  it was                                                                    
added to  the trust fund  and future benefits would  be paid                                                                    
to the retirees.  In an environment when the  market was not                                                                    
returning  what  was  expected, an  unfunded  liability  was                                                                    
Mr. Desai  continued to discuss  the unfunded  liability. He                                                                    
pondered a  return rate calculated  with the  present value,                                                                    
which  was  a  changing  number  due  to  variation  in  the                                                                    
marketplace  and   could  create  unfunded   liability.  The                                                                    
unfunded  liability was  the employer's  responsibility, and                                                                    
each employer would pay its  own share based on its employee                                                                    
pool under the plan.  The calculations and annual valuations                                                                    
would  include a  calculation of  nominal cost  and unfunded                                                                    
liability for each employer.                                                                                                    
Mr. Desai  discussed potential different employee  costs. He                                                                    
explained that by adopting the  22 percent flat rate for all                                                                    
PERS employers, the state had to  step in to fill the gap of                                                                    
owing beyond 22 percent. He  mentioned the cost sharing plan                                                                    
started in 2008  and estimated that all  the additional gaps                                                                    
for state contribution added up to about $8.2 billion.                                                                          
9:22:40 AM                                                                                                                    
Co-Chair  Stedman  summarized  that the  unfunded  liability                                                                    
created by all  the tiers added up to $8.2  billion, and the                                                                    
cost was covered by the employer.                                                                                               
Mr. Desai  relayed that  the goal  of the  cost-sharing plan                                                                    
was  to cover  a 100  percent funding  ratio, so  that every                                                                    
person in  the retirement  system was covered  regardless of                                                                    
what  happened  in  the  market.  He  noted  that  actuarial                                                                    
studies showed  that the last  DB employee would be  done at                                                                    
the end of the century.                                                                                                         
Co-Chair Stedman rephrased that  the liability was projected                                                                    
to last  until the end of  the century until the  state paid                                                                    
it off.                                                                                                                         
Mr.  Desai answered  affirmatively.  He  noted that  funding                                                                    
policy had published with the cost sharing plan in 2014.                                                                        
Co-Chair  Stedman   wanted  to  make  the   point  that  the                                                                    
liability sat  with the employer  rather than  the employee.                                                                    
He  thought there  might be  confusion  that employees  were                                                                    
paying for previous tiers, which was not the case.                                                                              
Mr.  Desai  agreed.  He explained  that  under  the  defined                                                                    
benefit  plan,   the  entire  responsibility  went   to  the                                                                    
Co-Chair  Stedman thought  it  was  important to  understand                                                                    
when contemplating the new tiers on the next slides.                                                                            
9:25:50 AM                                                                                                                    
Co-Chair  Olson   thought  it  sounded  as   though  smaller                                                                    
entities such  as municipalities  would find  it easy  to go                                                                    
bankrupt with  a 22 percent  contribution rate. He  asked if                                                                    
there were records of which  employers had suffered from the                                                                    
negative stock market.                                                                                                          
Mr.  Desai agreed  that  each employer  did  pay 22  percent                                                                    
based on its pool of employees.                                                                                                 
Co-Chair Olson  asked if  the municipality  was on  the hook                                                                    
for making up the difference with the unfunded liability.                                                                       
Mr.  Desai  explained  that in  the  cost-share  plan,  each                                                                    
employer  was equally  responsible.  He  explained that  the                                                                    
multi-employer  plan was  looking to  fill the  gap for  the                                                                    
promises  that were  made to  employees.  Before 2008,  each                                                                    
employer would  have to  have paid a  much higher  cost than                                                                    
the 22 percent that was in effect currently.                                                                                    
Co-Chair Stedman clarified that the  legislature put in a 22                                                                    
percent cap after  a concern that some  communities (such as                                                                    
Fairbanks) would  go broke and  would not be able  to handle                                                                    
the pension liability.  The state had picked  up the balance                                                                    
over 22 percent.                                                                                                                
Mr.  Desai   referenced  slide  4,  which   showed  a  table                                                                    
depicting contribution  rates for different tiers.  He noted                                                                    
that under  PERS, the employee  paid about 6.75  percent for                                                                    
all  other categories,  7.5 percent  for peace  officers and                                                                    
firefighters, and 9.6 percent  for school district alternate                                                                    
option. Under the  DC tier IV, the  employee contribution of                                                                    
8  percent went  to  the individual  account. The  employers                                                                    
under tier III paid the  nominal cost, currently 22 percent,                                                                    
with additional  contributions from the state.  Under the DC                                                                    
tiers,  the employer  paid 5  percent that  went toward  the                                                                    
individual blance of the employee.  Similarly, under TRS the                                                                    
employee  contribution  rate was  8.65  under  tier II,  and                                                                    
under tier III  it was 8 percent. Under the  tier II DBplan,                                                                    
employer  contribution   was  the  nominal  cost   plus  the                                                                    
unfunded  liability capped  at 12.56  percent. The  employer                                                                    
contribution on  the DC  tier was at  7 percent,  which went                                                                    
into employees individual accounts.                                                                                             
Mr.  Desai  identified  that  the  table  below  showed  the                                                                    
Supplemental  Annuity  Plan  (SBS), which  had  an  employee                                                                    
contribution of  6.13 percent  and an  employer contribution                                                                    
of 6.13 percent.                                                                                                                
9:31:04 AM                                                                                                                    
Senator  Kiehl  thought  it  looked   like  the  slide  only                                                                    
compared the DB pension and  the DC individual account cost.                                                                    
He asked  if there were  healthcare costs under the  DC plan                                                                    
that would be included.                                                                                                         
Mr. Desai relayed  that part of the  22 percent contribution                                                                    
included healthcare  costs. The numbers were  broken down in                                                                    
the presentation that he had  provided the previous week. He                                                                    
explained  that  the intent  of  the  presentation was  more                                                                    
towards  the pension  comparison between  tier III  and tier                                                                    
IV. The 12.56 contribution  rate also encompassed healthcare                                                                    
Senator Kiehl asked if the  PERS tier IV DC employer numbers                                                                    
did not include the other costs.                                                                                                
Mr. Desai agreed that the 8  percent from the employee and 5                                                                    
percent from  the employer under  PERS was  directly towards                                                                    
individual account balances for pension only.                                                                                   
Senator Kiehl thought  it looked like the  state would focus                                                                    
on the pension  side. He asked what share of  the 22 percent                                                                    
rate paid by employers prefunded the pension check.                                                                             
Mr.  Desai recalled  from the  most  recent actuarial  study                                                                    
that about  2.64 percent  was the normal  cost and  about 16                                                                    
percent was for the unfunded liability.                                                                                         
Mr. Desai turned to slide 5, "Comparison":                                                                                      
     • What are we comparing?                                                                                                   
          o DB  Plans provides fixed monthly  benefits based                                                                    
          on  the pre-defined  formulas,  where the  benefit                                                                    
          does not fluctuate                                                                                                    
          o DC  Plan account  balance will fluctuate  due to                                                                    
          the changes in the value of the investments                                                                           
     • Is it a true or fair comparison?                                                                                         
          o These  comparisons are  illustrated based  on DC                                                                    
          account  balances  calculated assuming  the  long-                                                                    
          term  average rate  of returns  and also  assuming                                                                    
          the average interest rate for annuity payouts                                                                         
          o It  may derive lower or  higher account balances                                                                    
          and  possibly lower  or  higher converted  annuity                                                                    
          payments based  on the actual  rate of  return and                                                                    
          the prevailing interest rate                                                                                          
9:34:48 AM                                                                                                                    
Mr. Desai  considered slide  6, "Formulas  and Assumptions,"                                                                    
which showed  DB plan formulas.  He identified that  the top                                                                    
section showed the  DB plan formulas. He  mentioned that for                                                                    
tiers  I/II/II of  PERS and  tiers I/II  for TRS,  there was                                                                    
some information about how the  benefits were calculated and                                                                    
eligibility   rules.   He   highlighted  that   the   normal                                                                    
retirement age  had changed  for tier I  versus tier  II. He                                                                    
discussed  multipliers, with  a  2 percent  formula for  the                                                                    
first 10  years PERS, and a  2.25 percent for all  tiers for                                                                    
years  10 to  20, and  2.5 percent  for any  years over  20.                                                                    
Similarly,  there  was  a  different  formula  for  TRS.  He                                                                    
explained that  the 2  percent formula  simply derived  a 20                                                                    
percent benefit every 10 years.  The amounts could fluctuate                                                                    
somewhat  based on  final average  earnings and  the formula                                                                    
beyond 10 or 20 years.                                                                                                          
Mr. Desai considered  the DC plan assumptions  listed on the                                                                    
slide. The  slide considered entry  level salaries  for each                                                                    
group,  for  all  employees  under  PERS,  firefighters  and                                                                    
police  officers, and  teachers.  The  salary was  projected                                                                    
with  2.75 percent  wage increases  per  year, then  further                                                                    
assumed  a  7  percent  annual rate  of  return.  Under  the                                                                    
assumption there was an average life expectancy of age 85.                                                                      
Mr. Desai  continued that there an  approximate 5.89 percent                                                                    
annuity rate  payout. He  noted that  once a  person started                                                                    
drawing benefits  from the  DC plan,  there was  a reduction                                                                    
each month. He  noted that the data on the  slide had used a                                                                    
7 percent market rate to project the account balance.                                                                           
9:38:59 AM                                                                                                                    
Senator Kiehl  appreciated the information on  the slide. He                                                                    
asked what  respective group  was used  for the  entry level                                                                    
Mr.   Desai  thought   further   slides   would  show   more                                                                    
information related to Senator Kiehl's question.                                                                                
Co-Chair Hoffman asked about the  highest average salary for                                                                    
PERS for  the highest  three years of  earning. He  asked if                                                                    
overtime and bonuses  were included in the  highest three or                                                                    
highest  five years  of earning  for calculating  retirement                                                                    
Mr. Desai affirmed  that the highest three or  five years of                                                                    
earnings  used   for  calculations  included   overtime  and                                                                    
included a differential for police and firefighters.                                                                            
Co-Chair Hoffman asked if the calculation included bonuses.                                                                     
Mr.  Desai relayed  that  under the  statute,  there was  no                                                                    
specific description of using a  bonus for the highest three                                                                    
or five years of earnings.                                                                                                      
Co-Chair Stedman asked for more detail.                                                                                         
Mr.  Desai  relayed  that  the  definition  of  compensation                                                                    
included overtime but did not address bonuses.                                                                                  
Co-Chair  Stedman  asked if  bonuses  were  included in  the                                                                    
9:41:16 AM                                                                                                                    
MINDY VOIGT,  RETIREMENT AND  BENEFITS MANAGER,  DIVISION OF                                                                    
RETIREMENT  AND  BENEFITS,   DEPARTMENT  OF  ADMINISTRATION,                                                                    
relayed  that  bonuses  were included  in  the  compensation                                                                    
calculation  based on  the  way they  were  defined. If  the                                                                    
bonus was  defined as   for services  rendered  then  it was                                                                    
included. If the bonus was  for a person leaving service, it                                                                    
would not be included in the calculation.                                                                                       
Co-Chair Hoffman  asked if it  was normal for  other systems                                                                    
to  have overtime  included in  the calculation  for highest                                                                    
years of earnings.                                                                                                              
Mr.  Desai affirmed  that  it was  normal  for a  retirement                                                                    
system  to  use  overtime,  and other  plans  even  included                                                                    
commission. Whether  or not parts  of compensation  could be                                                                    
used or not  used towards a pension  benefit calculation was                                                                    
specifically identified.                                                                                                        
9:42:31 AM                                                                                                                    
Senator Kiehl  asked about the  7 percent  return assumption                                                                    
for DC participants and asked  if there were actuals to show                                                                    
the return.                                                                                                                     
Mr.  Desai  relayed that  a  further  slide would  show  the                                                                    
Senator  Kiehl asked  for discussion  of the  annuity payout                                                                    
rate. He had  been unable to find the  current annuity rates                                                                    
on the states  retirement website.  He had found lower rates                                                                    
from other sources.  He asked how the state  derived what he                                                                    
considered a significantly higher rate.                                                                                         
Co-Chair  Stedman suggested  that  Mr.  Desai discussed  the                                                                    
definition of annuity.                                                                                                          
Mr.  Desai explained  that  an annuity  was  a total  annual                                                                    
payout  from a  specific  source, and  there were  different                                                                    
annuity  calculations.  In  most cases,  annuities  involved                                                                    
for-profit insurance companies with much lower rates.                                                                           
9:46:10 AM                                                                                                                    
Senator  Kiehl  asked if  one  would  expect a  person  that                                                                    
managed their own withdrawals would  try and draw about four                                                                    
percent  and then  adjust for  inflation. He  asked why  the                                                                    
state would use something significantly higher.                                                                                 
Mr. Desai  agreed. He explained  that any  financial advisor                                                                    
would use  a rule  of thumb  to extend  your funds  by using                                                                    
four  percent, or  five percent  at  most. The  illustration                                                                    
that  was  being considered  tried  to  show as  closely  as                                                                    
possible  the rate  of return  compared  to projections.  He                                                                    
considered  that after  having  an assumption  of 7  percent                                                                    
earnings, using 5.89 was still comparatively conservative.                                                                      
Senator Kiehl  asked with the  5.89 percent  assumption, was                                                                    
there an  assumption that the annuity  provided an inflation                                                                    
adjustment through the retirement years.                                                                                        
Mr.  Desai stated  that  when assuming  the  annual rate  of                                                                    
return, in  general inflation  was included  as part  of the                                                                    
interest rate.                                                                                                                  
Senator Kiehl asked to restate his question.                                                                                    
Co-Chair Stedman  suggested the  discussion take  place when                                                                    
there were numerics on the slide to consider.                                                                                   
9:49:51 AM                                                                                                                    
Mr. Desai  displayed slide  7, which showed  a table  with a                                                                    
comparison of  PERS tier III  DB and  tier IV DC  plans. The                                                                    
table used an  entry level salary with a  mid-range of about                                                                    
$57,949, assuming a 2.75 percent  wage increase per year. On                                                                    
the left  side, he  pointed out that  column A  showed total                                                                    
service  up  to 30  years.  The  last  salary was  shown  at                                                                    
$64,591. He noted  that based on the formula  from tier III,                                                                    
after  five years  and being  vested, there  would be  about                                                                    
$6,100  of  annual pension  benefit,  which  was about  9.48                                                                    
percent of  the salary. At  30 years,  there was about  a 64                                                                    
percent salary replacement ratio.                                                                                               
Mr.  Desai addressed  the right  side  of the  table on  the                                                                    
bottom right of the  slide, and noted employee contributions                                                                    
were  at 8  percent  and employer  contributions  were at  5                                                                    
percent.  He  discussed  account  balance  growth  shown  in                                                                    
column  E.  He  compared  column   D  and  column  G,  which                                                                    
indicated there was a gap in the salary replacement ratio.                                                                      
9:54:39 AM                                                                                                                    
Senator Kiehl asked  how the entry salary was  chosen to use                                                                    
as an example.                                                                                                                  
Co-Chair Stedman asked how the starting salary was chosen.                                                                      
Mr. Desai recalled that he had  tried to pick a middle range                                                                    
rather than  the highest or  lowest. He noted that  slide 16                                                                    
would show how the exercise came close to the real data.                                                                        
Co-Chair Stedman did not want  the committee to get involved                                                                    
in  comparisons of  hypothetical  situations.  He wanted  to                                                                    
look at performance and actual results.                                                                                         
Senator Kiehl thought  there was some relevance  in what was                                                                    
being looked at.  He looked at column C for  the DB members,                                                                    
and  thought it  reflected  a starting  annual benefit  with                                                                    
eventual mandatory pension adjustments  that accounted for a                                                                    
portion of inflation.  He considered column F,  and asked if                                                                    
under  the assumptions  on  the  model it  would  be a  flat                                                                    
number  for  the retirees  life  or  if  there would  be  an                                                                    
Mr. Desai  affirmed that on the  DB side on column  C, there                                                                    
was room  for post-retirement  adjustment for Tier  I, which                                                                    
may or  may not be  for other  tiers. He reiterated  that on                                                                    
the  DC side,  the  assumptions were  based  on the  assumed                                                                    
rate. If the  returns were higher or lower  in future years,                                                                    
the  numbers  would  change. He  emphasized  that  that  the                                                                    
entire  structure  of  the DC  plans  solely  depended  upon                                                                    
market returns.  The state could  only make  assumptions. He                                                                    
agreed that the annuity in column F would also fluctuate.                                                                       
9:59:11 AM                                                                                                                    
Mr. Desai highlighted slide 8, "PERS  - Tier III and Tier IV                                                                    
Comparison  - Peace  Officers/Firefighters," which  showed a                                                                    
table. The data used a  salary range starting at $80,000. He                                                                    
observed  that  the  slide would  address  some  of  Senator                                                                    
Kiehl's  earlier questions.  He thought  it was  interesting                                                                    
that on  the DC side  that regardless of salary  amount, the                                                                    
salary replacement ratio was identical.                                                                                         
Co-Chair  Stedman  wanted  to  slow  down  the  process.  He                                                                    
mentioned that  the presentation  was informational  for the                                                                    
public. He wanted  to ensure the concepts  behind the slides                                                                    
were understood.  He wanted the  concepts explained  so that                                                                    
the average Alaskan would be able to understand.                                                                                
Mr.   Desai  explained   that  the   slide  showed   similar                                                                    
information  to  slide  7.  He   pointed  out  the  employee                                                                    
contribution rate  of 7.5 percent,  compared to a  6.75 rate                                                                    
for others.  Because of the  formula difference,  the annual                                                                    
benefit  was a  bit  higher  compared to  slide  7, and  the                                                                    
salary replacement  ration was also slightly  higher. On the                                                                    
right side  of the  slide, it  showed the  same contribution                                                                    
rate of  8 percent for  the employee  and 5 percent  for the                                                                    
employer. He identified the account  balance on column E and                                                                    
annual benefits  on column F.  The salary  replacement ratio                                                                    
was higher for DB plans.                                                                                                        
10:03:13 AM                                                                                                                   
Mr. Desai  looked at slide  9, "TRS -  Tier II and  Tier III                                                                    
Comparison -  Teachers," which was  similar to  the previous                                                                    
slide.  The entry  level salary  was shown  at $59,581.  The                                                                    
employee contribution rate  was 8.65. He pointed  out the DB                                                                    
calculations  and salary  replacement  ratios. He  continued                                                                    
that on  the DB  side, there was  a high  salary replacement                                                                    
rate  of 63.28  percent  after  30 years.  The  DC side  was                                                                    
different in that the employer  contribution rate was higher                                                                    
than  PERS. He  pointed  out that  the  account balance  had                                                                    
grown higher  in 30  years and resulted  in a  higher salary                                                                    
replacement rate of 70.12 percent.                                                                                              
Co-Chair Stedman asked Mr. Desai to repeat his conclusion.                                                                      
Mr. Desai reiterated his comments.                                                                                              
Senator  Wilson  thought  tier   III  would  have  the  same                                                                    
percentage of  salary replacement  ratio, regardless  of the                                                                    
salary amount.                                                                                                                  
Mr. Desai agreed.                                                                                                               
Co-Chair Stedman  reminded that  the presentation had  to be                                                                    
understandable  to  the general  public  and  others in  the                                                                    
10:06:30 AM                                                                                                                   
Mr.  Desai addressed  slide  10, "Actual  Plan  Data (as  of                                                                    
     • 1st Group: Comparable Salaries                                                                                           
          o Closest match with the projected wage increases                                                                     
          with 2.75% at the respective year of comparison                                                                       
     • 2nd Group: All Salaries                                                                                                  
          o All comparable salaries plus all salaries                                                                           
          higher than hypothetical projected salaries                                                                           
     • 3rd Group: Account Balances higher than the                                                                              
     projected balances                                                                                                         
          o Actual account balances for those that are                                                                          
          equal to or higher than the projected with the                                                                        
          7.00% Rate of Return                                                                                                  
     Note: For all groups above, the member's minimum                                                                           
     account balance must equal or exceed the account                                                                           
     balance projected with a 0.0% Annual Rate of Return.                                                                       
Mr. Desai reiterated that he  used projected information for                                                                    
the  DC  plan  side   and  contemplated  how  realistic  the                                                                    
projected rate of return and  payout rates. The division had                                                                    
compared actual  data from  18,000 records  of plan  data to                                                                    
compare  with the  DB side.  He  discussed comparing  actual                                                                    
salaries   with  projected   salaries.   He  discussed   the                                                                    
replacement   percentage.   He    thought   overtime   could                                                                    
contribute to the findings of higher actual salaries.                                                                           
Mr. Desai  discussed the second comparison,  which had shown                                                                    
that there  was a gap  between the  DB versus DC  plans. The                                                                    
division had also  found in the actual data  study that many                                                                    
people had higher balances than projected balances.                                                                             
10:10:18 AM                                                                                                                   
Mr. Desai  advanced to slide 11,  "PERS - Tier III  and Tier                                                                    
IV Comparison - All Other  Members," which showed two tables                                                                    
comparing  hypothetical salaries  with the  salaries of  the                                                                    
three groups shown on slide 10.                                                                                                 
Co-Chair  Stedman  asked  Mr. Desai  to  clarify  the  three                                                                    
groups being compared to the hypothetical salaries.                                                                             
Mr. Desai  explained that  the numbers on  the left  in blue                                                                    
derived   from  slide   7  and   were  hypothetical   salary                                                                    
replacement projections  using the 7 percent  rate of return                                                                    
for  DB and  DC  plans. The  right hand  side  of the  table                                                                    
showed 17 years  of data for three  different groups. Column                                                                    
C was the  group that had been considered  for actual salary                                                                    
matching projected salary, and  findings had shown about 214                                                                    
10:14:07 AM                                                                                                                   
Mr. Desai  discussed the difference  in column B  and column                                                                    
C,  and   the  gap  in  projected   salary  replacement.  He                                                                    
addressed  column D  and the  group  with real  data of  all                                                                    
salaries,   as   compared   to   the   hypothetical   salary                                                                    
projections  in  column  A. He  addressed  column  E,  which                                                                    
derived  information from  real account  balances. The  data                                                                    
showed higher  account balances  than the  projected account                                                                    
balances under  column B. The  group had about  528 members.                                                                    
He  thought the  column illustrated  that there  were people                                                                    
under the DC  plan that had drawn account balances  with a 7                                                                    
percent assumption.                                                                                                             
Senator Kiehl  wanted to understand  the proportions  on the                                                                    
slide. He estimated that about  12 percent of the members in                                                                    
the  three  groups  did  better  than  the  projections.  He                                                                    
wondered  if  the proportion  applied  to  the rest  of  the                                                                    
members that had DC plans.                                                                                                      
Mr. Desai asked Senator Kiehl to repeat his question.                                                                           
Co-Chair  Stedman thought  the question  was related  to the                                                                    
percentage of over-performers.                                                                                                  
Mr.  Desai  relayed  that  the division  had  not  done  the                                                                    
reverse calculation to determine the  rate of return for the                                                                    
group. He relayed that he  could do further analysis and get                                                                    
back to the committee.                                                                                                          
Co-Chair Stedman thought it was  a significant minority that                                                                    
had a better actual rate than the projection.                                                                                   
10:19:19 AM                                                                                                                   
Mr. Desai looked  at slide 12, "PERS - Tier  III and Tier IV                                                                    
Comparison  -  Peace Officers/Firefighters,"  and  addressed                                                                    
the  table on  the left  side,  which derived  from slide  8                                                                    
based  on hypothetical  salaries for  DB and  DC plans.  The                                                                    
analysis on  the right-hand table  with column C  showed the                                                                    
results based  on comparable salaries against  the projected                                                                    
salaries. The data found 26  people with comparable salaries                                                                    
to see  how balances came  out. Since the numbers  were low,                                                                    
there  was  a secondary  group  with  672 members  shown  in                                                                    
column D.                                                                                                                       
Mr. Desai noted  that similarly, the last  column showed how                                                                    
many members  did better than  the 7 percent  return assumed                                                                    
for projections.                                                                                                                
Co-Chair  Stedman   asked  for   Mr.  Desai  to   share  any                                                                    
difficulties he had  finding employees in the  data that may                                                                    
have left and come back.                                                                                                        
Mr. Desai  relayed that the  division had found  many people                                                                    
in the  18,000 records  that were pulled  that had  very low                                                                    
balances.  The  division  had  found  that  because  of  the                                                                    
affordability  of the  plan, many  people had  intentionally                                                                    
left  the  plan  and  withdrawn  balances  and  returned  to                                                                    
continue service.  He noted  many people  between 10  and 15                                                                    
years of service  with balances less than  $8,000 or $9,000.                                                                    
He realized  it was  not possible  to use  all the  data. He                                                                    
noted  that for  the comparison  purposes, the  division had                                                                    
calculated projections  based on  a zero  rate of  return to                                                                    
calculate the minimum balance. There  were many employees in                                                                    
the  group as  part  of  the average  that  had  a very  low                                                                    
balance assuming  the zero  rate, which  was one  reason for                                                                    
low averages in column C and column D.                                                                                          
Senator Bishop asked what Mr.  Desai would attribute the low                                                                    
account  balance to  when people  left and  returned to  the                                                                    
Mr. Desai  relayed that  research would need  to be  done to                                                                    
see the  reasons for leaving  the plan. The numbers  did not                                                                    
imply that lower balances were  indicative of lower returns,                                                                    
but rather  implied that  there was  a significant  group of                                                                    
people that had previous terminations and re-employment.                                                                        
10:24:59 AM                                                                                                                   
Senator  Kiehl understood  the practice  of excluding  those                                                                    
that had  terminated and withdrew  their money.  He wondered                                                                    
if the  table risked  excluding people that  had experienced                                                                    
market  losses to  the degree  that the  returns were  below                                                                    
zero percent.                                                                                                                   
Mr. Desai relayed  that it was possible  through market loss                                                                    
and  lower-than-expected returns  that  the account  balance                                                                    
would decline from  the previous year. He  continued that if                                                                    
balances  remained   un-drawn,  the  tendency   from  market                                                                    
history indicated  that the balance  would grow  beyond zero                                                                    
Mr.  Desai showed  slide 13,  "TRS -  Tier II  and Tier  III                                                                    
Comparison - Teachers," which was  identical to the previous                                                                    
slide.  The left  table showed  numbers from  slide 9  using                                                                    
hypothetical  salaries and  projected  rates  of return.  He                                                                    
noted that similarly, the middle  column C showed 215 people                                                                    
with respective  years with  comparable salaries  to compare                                                                    
the salary  replacement ratio with  the projected  ratios in                                                                    
column B.  He noted  that the amounts  were close  but there                                                                    
was still a  gap at the 17 years of  service. He pointed out                                                                    
that  similarly the  entire group  with higher  salaries was                                                                    
from  a little  less  than 2,000  employees,  and the  final                                                                    
column showed  those that earned  more than the  projected 7                                                                    
Mr. Desai referenced slide  14, "Supplemental Annuity Plan,"                                                                    
which was to show the  additional benefit from SBS. He cited                                                                    
that the most important part  of the slide was the left-hand                                                                    
column, which did not show  the DB comparison, since SBS was                                                                    
defined as a DC. As  in previous slides, the tables compared                                                                    
hypothetical  salary  replacement   projections  with  three                                                                    
groups of  actual salary data.  The one difference  was that                                                                    
under  SBS  the  employee   contribution  and  the  employer                                                                    
contribution  were at  6.13 percent,  and as  a result,  one                                                                    
could see lower account balances.                                                                                               
10:28:48 AM                                                                                                                   
Mr. Desai  turned to slide 15,  "Supplemental Annuity Plan,"                                                                    
which showed the SBS for peace officers and firefighters.                                                                       
Co-Chair Stedman though cities were not included in SBS.                                                                        
Mr. Desai  answered affirmatively. He directed  attention to                                                                    
column B and noted that he  had been able to pull comparable                                                                    
numbers as there were very few participants under SBS.                                                                          
Mr. Desai considered slide 16, "PERS  - Tier III and Tier IV                                                                    
Comparison,"  which showed  several  tables.  He noted  that                                                                    
there  was a  gap  between the  DC  salary comparison  ratio                                                                    
versus the DB plan. The  division had considered if it would                                                                    
make  a  difference if  were  to  increase the  employer  or                                                                    
employee contribution.  As the previous slide,  teachers had                                                                    
a 7 percent  of employer contribution compared  to 5 percent                                                                    
for PERS.  The left side  of the table showed  the identical                                                                    
information from  slide 7. Smaller tables  showed additional                                                                    
employer contribution at  6 percent and 7  percent rates. He                                                                    
pointed  out  that  at  the  30-year  mark,  the  6  percent                                                                    
contribution rate had increased  the salary replacement rate                                                                    
to higher than that of the DB rate.                                                                                             
Mr. Desai looked at the last  table on the slide, which used                                                                    
a  7 percent  employer  contribution rate,  and the  30-year                                                                    
amount went up  to 70.12 percent for  the salary replacement                                                                    
ratio. Under the DB plan, the ratio was at 64 percent.                                                                          
10:32:30 AM                                                                                                                   
Senator  Wilson wondered  what the  tables would  signify in                                                                    
total state  dollars. He  asked about the  amount for  a one                                                                    
percent increase to the contribution rate.                                                                                      
Co-Chair  Stedman relayed  that  he had  not  asked for  the                                                                    
information  to be  included in  the  presentation, and  the                                                                    
current  exercise  was for  the  purpose  of comparison.  He                                                                    
thought   the  committee   could   request  the   additional                                                                    
information at a later date if necessary.                                                                                       
Mr. Desai displayed  slide 17, "PERS - Tier III  and Tier IV                                                                    
Comparison,"  which   was  a  similar  analysis   for  peace                                                                    
officers and firefighters, comparing  the 5 percent employer                                                                    
contribution  rate to  a 6  percent and  7 percent  employer                                                                    
contribution.  He pointed  out  the left  column, which  was                                                                    
similar  to  slide  8  and   showed  the  current  projected                                                                    
information.  He pointed  out  the one  percent increase  in                                                                    
employer   contribution,   which   resulted  in   a   salary                                                                    
replacement  ratio  going up  from  60.77  percent to  65.44                                                                    
percent.   The  projection   for   a   7  percent   employer                                                                    
contribution rose  to 70.12 percent,  which was  higher than                                                                    
the DB salary replacement rate.                                                                                                 
Mr. Desai  highlighted slide 18,  "PERS - Tier III  and Tier                                                                    
IV Comparison,"  which was a  similar analysis  but specific                                                                    
to teachers. He  noted that the slide title  should show TRS                                                                    
rather  than PERS.  He  noted that  for  TRS, currently  the                                                                    
employer contribution  was at 7  percent, as  highlighted on                                                                    
the left  side of the  table, and showed a  projected salary                                                                    
replacement ratio of  70.12 percent compared to  DB at 63.28                                                                    
percent. With  an additional  one percent  contribution, the                                                                    
ratio would change  to 74.79 percent, and  an additional two                                                                    
percent would change ratio to 79.47 percent.                                                                                    
Mr. Desai  showed slide 19, "Department  of Administration -                                                                    
Championing  improvement  in  the  state's  performance  and                                                                    
results."  He noted  that there  were  a few  slides in  the                                                                    
appendix with additional details in the footnotes.                                                                              
Co-Chair Stedman asked Mr. Desai to present slide 21.                                                                           
10:36:14 AM                                                                                                                   
Mr. Desai  advanced to slide 21,  "PERS - Tier III  and Tier                                                                    
IV Comparison  - All  Other Members,"  with a  footnote that                                                                    
indicated additional  details of the analysis  were included                                                                    
in  slide 7  and slide  11. The  hypothetical and  projected                                                                    
information  and the  middle column  showed the  tier IV  DC                                                                    
projections with a 7 percent  rate of return. The right side                                                                    
of  the  page, starting  with  column  H through  column  L,                                                                    
showed actual data.  He relayed that the state  had about 17                                                                    
years  of data  for  comparisons. He  highlighted column  I,                                                                    
which showed  average annual salary  at $65,116  compared to                                                                    
the projected  amount of $64,591  in column B. At  16 years,                                                                    
highlighted  in  yellow, there  was  a  projected salary  of                                                                    
$87,000  while the  actual data  showed five  people with  a                                                                    
similar salary.                                                                                                                 
Co-Chair  Stedman   asked  if   the  appendix   contained  a                                                                    
comparison of SBS with a DC or DB plan.                                                                                         
Mr. Desai relayed  that the SBS information  in the appendix                                                                    
did not  show comparison details,  but he could  provide the                                                                    
information at a later date.                                                                                                    
Co-Chair  Stedman  thought  it  would be  good  to  get  the                                                                    
information. He  noted that he  had asked the  department to                                                                    
list all the communities that  were in the plan and included                                                                    
in  SBS. He  noted that  some communities  had opted  out of                                                                    
Social Security  but had not  opted into SBS,  the employees                                                                    
only had  a DC  plan. He  asked for a  status update  on the                                                                    
information request.                                                                                                            
Ms.  Voigt relayed  that  she had  sent  the information  to                                                                    
staff  the  previous  day,  and  the  information  would  be                                                                    
provided shortly.                                                                                                               
Co-Chair   Stedman  requested   that   the  information   be                                                                    
submitted for  dissemination to  all the  committee members.                                                                    
He  cautioned  care  be   taken  when  considering  employee                                                                    
benefits. He pondered why communities  would opt out of both                                                                    
Social Security and  SBS. He thought there might  need to be                                                                    
legislation to deal with the situation if necessary.                                                                            
10:40:59 AM                                                                                                                   
Senator  Kiehl  appreciated   help  with  understanding  the                                                                    
comparisons. He would refrain from  commenting unless it was                                                                    
the will of the committee.                                                                                                      
Co-Chair Stedman noted there  would be further presentations                                                                    
and  opportunity for  comments. He  mentioned a  request for                                                                    
work on the topic of  employee retention and turnover, which                                                                    
he thought was tied to  the retirement system. He noted that                                                                    
the Legislative  Finance Division  (LFD) was working  on the                                                                    
information   in  conjunction   with  some   information  on                                                                    
retirement and  benefits in other  state agencies.  He asked                                                                    
for any members with questions  to submit them to his office                                                                    
so  everyone could  benefit from  the  same information.  He                                                                    
mentioned explanation  regarding the data sets,  and thought                                                                    
the process  had been more challenging  than anticipated. He                                                                    
thought  the  director  might  make  some  comments  on  his                                                                    
Mr.  Desai relayed  that his  previous career  included work                                                                    
with  motion  picture  industry pension  and  health  plans.                                                                    
Under  the  plan,  there were  hybrid  benefits  offered  to                                                                    
employees  and  participants  joined by  studios  and  union                                                                    
representatives.  Both  defined  benefit  plans  produced  a                                                                    
monthly  benefit   and  were  100  percent   funded  by  the                                                                    
employer.  He relayed  that he  had created  a program  that                                                                    
showed  realistic   comparisons.  He  shared  that   he  had                                                                    
pondered  whether it  was a  realistic  approach to  compare                                                                    
state  programs  with  insurance-provided annuity,  and  the                                                                    
answers  he found  had not  been encouraging.  He understood                                                                    
why  people were  not interested  in converting  DC balances                                                                    
into an annuity.                                                                                                                
10:44:25 AM                                                                                                                   
Mr. Desai continued that it  was important to consider how a                                                                    
person could manage a benefit  as an active employee, how it                                                                    
would grow if  a person started drawing from it  at the same                                                                    
pace while  it stayed in  the marketplace. The model  he had                                                                    
worked on was a simple  comparison DB versus DC systems. The                                                                    
model had  assisted in explaining information  to colleagues                                                                    
and board  members. When he  came to Alaska  and encountered                                                                    
multiple tiers, he  already had a comparison tool  to use to                                                                    
see  how they  systems played  out against  one another.  He                                                                    
discussed  comparisons of  tier  I, tier  II,  and tier  III                                                                    
under PERS,  which had minimal differences.  All three years                                                                    
had an  identical formula except  for the 5-year  average in                                                                    
tier III rather than the earlier 3-year average.                                                                                
Mr.  Desai recounted  that  the DC  plan  was introduced  in                                                                    
2006. In  2017 or 2018  there had been  a bill in  place for                                                                    
firefighters  and peace  officers,  and  his comparison  had                                                                    
come  in   handy  in   sharing  information   to  illustrate                                                                    
differences.  He discussed  the  word  "pension," which  was                                                                    
defined  as a  monthly  pension, but  was  simply a  benefit                                                                    
drawn  after  retirement. There  was  nothing  prior to  the                                                                    
1970s, and  in 1978  the first DC  plan was  established and                                                                    
recognized,  then  the  supplemental plan  was  created.  He                                                                    
hoped that  he had made  some progress in making  a side-by-                                                                    
side comparison,  and emphasized that both  systems had pros                                                                    
and cons.                                                                                                                       
10:48:28 AM                                                                                                                   
Co-Chair  Stedman  asked  if  the  same  analysis  one  year                                                                    
previously would have shown different numerics.                                                                                 
Mr.  Desai   answered  "yes,"  and   noted  that   one  year                                                                    
previously  would  have shown  a  much  better position  for                                                                    
actual data.                                                                                                                    
Co-Chair Stedman  asked if  Mr. Desai had  relied on  any of                                                                    
the state's actuaries when compiling  the information, or if                                                                    
the work was done in-house.                                                                                                     
Mr. Desai  answered affirmatively,  and relayed that  no one                                                                    
had  a comparison  of  the two  systems.  He qualified  that                                                                    
drawing the lump sum versus  a monthly pension benefit based                                                                    
on  a  formula  was   comparing  two  different  things.  He                                                                    
mentioned insurance  companies that offered an  annuity with                                                                    
lifetime benefits, although they were much lower.                                                                               
Senator  Bishop relayed  that he  had  written questions  he                                                                    
would provide to the chairs office for the next meeting.                                                                        
Co-Chair Stedman did  not know when LFD would  be before the                                                                    
committee   with  information   about  retention,   but  the                                                                    
committee would work through the  subject matter in the next                                                                    
couple  of months.  He thought  some  of the  data would  be                                                                    
useful for some of the bill work in the building.                                                                               
Co-Chair Stedman thanked the department for the work it had                                                                     
put together. He discussed the agenda for the following                                                                         
10:52:29 AM                                                                                                                   
The meeting was adjourned at 10:52 a.m.                                                                                         

Document Name Date/Time Subjects
022323 PERS-TRS_DB-Vs-DC_Comparisons_2023-Final.pdf SFIN 2/23/2023 9:00:00 AM