02/19/2004 09:06 AM Senate FIN
| Audio | Topic |
|---|
+ teleconferenced
= bill was previously heard/scheduled
MINUTES
SENATE FINANCE COMMITTEE
February 19, 2004
9:06 AM
TAPES
SFC-04 # 14, Side A
SFC 04 # 14, Side B
SFC 04 # 15, Side A
CALL TO ORDER
Co-Chair Gary Wilken convened the meeting at approximately 9:06 AM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Con Bunde, Vice Chair
Senator Fred Dyson
Senator Ben Stevens
Senator Donny Olson
Also Attending: SENATOR GARY STEVENS; DIANE BARRANS, Executive
Officer, Alaska Student Loan Corporation and Director, The Alaska
Commission on Postsecondary Education; MELANIE MILLHORN, Director,
Division of Retirement& Benefits, Department of Administration;
ANSELM STAACK, Chief Financial Officer, Division of Retirement&
Benefits, Department of Administration
Attending via Teleconference: From an Offnet Sites: KEN VASSAR,
Bond Counsel, Alaska Student Loan Corporation; BOB REYNOLDS,
Actuary, Mercer Human Resource Consulting-Actuary
SUMMARY INFORMATION
SB 277-STUDENT LOAN PROGRAMS
The bill heard testimony from the Alaska Student Loan Corporation.
The bill reported from Committee.
PUBLIC EMPLOYEES RETIREMENT SYSTEM/TEACHERS' RETIREMENT SYSTEM
PRESENTATION
The Committee heard a presentation from the Division of Retirement
and Benefits in regards to the Public Employees Retirement System
and the Teachers' Retirement System. No action was taken.
SB 203-OFFICE OF ADMINISTRATIVE HEARINGS
The bill was scheduled but not heard.
SB 285-MEDICAL ASSISTANCE COVERAGE
The bill was scheduled but not heard.
CS FOR SENATE BILL NO. 277(HES)
"An Act relating to the Alaska Commission on Postsecondary
Education; relating to the Alaska Student Loan Corporation;
relating to bonds of the corporation; relating to loan and
grant programs of the commission; relating to an exemption
from the State Procurement Code regarding certain contracts of
the commission or corporation; making conforming changes; and
providing for an effective date."
This was the second hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken communicated that additional work is required on an
amendment that was discussed during the February 17, 2004 hearing;
and therefore, it would not be offered. It would be addressed in
other committees' hearings as the bill progresses.
Senator B. Stevens shared the understanding that bonds associated
with this legislation were recently issued.
DIANE BARRANS, Executive Officer, Alaska Student Loan Corporation
and Executive Director, The Alaska Commission on Postsecondary
Education, Department of Education and Early Development,
explained, "that Phase One of the three-year return of capital
plan" included the issuance of bonds, supported by Corporation
"assets that were already free and clear from our existing
indenture." Therefore, yesterday's bond issuance, which received a
good financial rate, was not dependent on this legislation.
KEN VASSAR, Bond Counsel, Alaska Student Loan Corporation,
testified via teleconference from an offnet site and concurred that
existing regulations allowed the issuance of the bonds in question.
This legislation would allow the Corporation to issue additional
bonds.
Senator B. Stevens asked whether the $75 million bond package that
was just issued would accrue against the $280 million designated in
this bill.
Ms. Barrans affirmed.
Co-Chair Green moved to report the bill from Committee with
individual recommendations and accompanying fiscal notes.
There being no objection, CS SB 277 (HES) was REPORTED from
Committee with previous zero fiscal note #1 from the Department of
Administration; previous zero fiscal note #2 from the Department of
Community and Economic Development; and a new $120,000 fiscal note,
dated February 12, 2004 from the Department of Education and Early
Development.
[NOTE: This bill was returned to the Senate Finance Committee for
further consideration. An additional hearing was conducted on March
22, 2004.]
Public Employees' Retirement System
Teachers' Retirement System
Presentation
Co-Chair Wilken noted that this presentation would further educate
the Committee on "the serious issue" of funding the Public
Employees' Retirement System (PERS) and the Teachers' Retirement
System (TRS).
MELANIE MILLHORN, Director, Division of Retirement & Benefits,
Department of Administration, noted that Anselm Staack a thirteen-
year employee of the Division accompanied her. In addition, Bob
Reynolds, who has been the Actuarial Consultant to the State for
four years, would be participating via teleconference. His
employer, Mercer Human Resource Consulting-Actuary, is the
actuarial firm that has been assisting the State for twelve years.
Ms. Millhorn defined an actuary as a person who "makes assumptions
based on data in order to calculate benefit costs by using
assumptions to project costs into the future as compared to the
assets and the earnings that it will pay for those liabilities."
Due to the fact that "the costs and the earnings have some
uncertainty associated with them," this process is annually
reviewed "by the PERS/TRS Board for adjustments and modification."
Each year the Legislature receives an Actuarial Valuation report on
PERS/TRS as well as the Judicial Retirements System and others.
This report measures a plan's liabilities; assets; compares the
assets to the liabilities; and thereby determines a funding ratio.
It also determines the employers' annual contribution rate, which
is referred to as the calculated rate. Approximately twenty-three
actuarial assumptions support the PERS/TRS valuation report with
the two most important assumptions being investment results and
health care expenses.
Ms. Millhorn stated that today's presentation is recapped in a
handout titled "State of Alaska Public Employees' Retirement System
Teachers' Retirement System Presentation to the Alaska State
Legislature 2004" [copy on file]. The two aforementioned
assumptions would be the primary focus of this presentation;
specifically in regards to how they affect the retirement systems
funding ratios today. The actuarial assumptions are located in
Section 2.3 of the most recent Valuation Report [copy not provided]
which is dated June 30,2002. That report is the basis for
determining the FY 05 employer contribution rate.
Ms. Millhorn noted that the handout also includes a section titled
"White Paper" which summarizes the actuarial assumptions. Its
purpose is to provide Legislators, employers and any other
interested party, information and answers to commonly asked
questions about the Retirement System. The Comprehensive 2003
Annual Report [copy not provided] also depicts the actuarial
assumptions. These reports are available on the Department's
website.
Ms. Millhorn stated that this "high level overview" would focus on
the funding status, the FY 04 through FY 06 summary, "the two
primary drivers that influence the funding ratio for the PERS/TRS
System," which are the increase in health care costs and the loss
of investment earnings, a review of the Employer FY 01 through FY
05 contribution rates, and the Employer contribution savings that
occurred between FY 98 and FY 04.
Ms. Millhorn directed the Committee to the "System Funding Goals"
which have been adopted by the PERS/TRS Board, as depicted on page
13 in the "White Paper" section of the handout.
System Funding Goals
The following are proposed system funding goals based on
observed board discussions:
• Relatively stable contribution rates over time
• Actuarial funding of retire medical benefits
• 100% (102% for PERS) funded ratio of assets to accrued
liabilities (including retiree medical)
• Pay for benefits during working lifetime (25 year period)
Senator Bunde asked the reason the PERS funded ratio is more than
100 percent.
ANSELM STAACK, Chief Financial Officer, Division of Retirement&
Benefits, Department of Administration, explained that when the
target is for 100-percent funding, "mathematically you don't quite
ever get there." Therefore, the PERS Board designated 102-percent
as the goal with the anticipation that 100 percent would be
achieved.
Senator Bunde asked why the TRS Board did not mirror this approach.
Mr. Staack responded that the goals differ due to the fact that
different boards are involved.
BOB REYNOLDS, Actuarial Consultant, Mercer Human Resource
Consulting-Actuary, testified via teleconference from an offnet
site in Seattle Washington and agreed that one of the reasons the
percentage goals differ is that two different boards are involved.
When a goal is determined, the end result is either higher half of
the time or lower half of the time than the specified goal. The
PERS Board acted a bit more conservatively than the TRS Board.
Senator Bunde asked whether this percentage goal difference is the
reason that the PERS deficit is larger than that of TRS.
Mr. Reynolds responded that the PERS deficit is larger because, in
absolute dollars, the liability to the system is larger. At the
last valuation, the TRS system had approximately five billion
dollars in liabilities and less than four billion dollars in assets
whereas PERS had about $8.5 billion in liabilities and six billion
dollars in assets. Rather than being the result of the 102 percent
funded ratio, the unfunded liability for PERS is greater due to the
fact that it has a larger asset and liability base.
Senator Bunde asked whether reducing the PERS funded ratio to less
than 100 percent would affect this deficit.
Mr. Reynolds responded that lowering the funded ratio to less than
100 percent would serve to reduce the deficit, as at 102 percent,
the liability has been loaded by two percent. Therefore, were the
percentage lowered to 100 percent the liability would be two
percent lower. Subsequently, a lower unfunded amount would result.
In summary, the two percent difference has a modest effect in
relationship to the effect generated by the larger asset and
liability base.
Ms. Million directed the Committee to "Current Issues and
Challenges" on page 15 of the White Paper section.
Current Issues and Challenges
Rising employer contribution levels and deteriorating funded
status
• Primary reason:
- financial market performance
- rising cost of medical care
Ms. Millhorm then referenced the section in the booklet titled
"Funding Status FY 04-FY 06 and explained that the document
portrays the Earnings, the Actuarial Rate, the Health Care Costs,
the Employer Rates, and the Funding Ratios for the Mercer Valuation
Reports, dated June 30, FY 01, FY 02, and FY 03. These reports,
respectfully, are used by the Board to determine the Employer
Contribution Rate for FY 04, FY 05 and FY 06.
Ms. Millhorn pointed out that, as reflected on the document, the
PERS Actual Investment Return for FY 01/FY 04 was a negative 5.25
percent with an Actuarial Assumption that assumes that the system
would earn an Investment Return of 8.25 percent. The returns for FY
02/FY 05 reflect an Actual Investment Return of negative 5.48
percent with an Actuarial Investment assumption of 8.25 percent. FY
03/FY 06 reflect an Actual Investment Return of 3.67 percent with
an Actuarial Investment assumption of 8.25 percent.
Senator Bunde noted that as a result of the downward stock market
trend, private individuals would have shifted their 401-K
investment portfolios from stocks to bonds "some time ago."
Therefore, he questioned the reason the System continues to predict
an 8.25 return when the market has reflected a three-year downward
trend. At what point, would "actuarial adjustments be made that
would reflect reality."
Mr. Staack explained that eight-percent would be the middle rate of
fifty percent of the long-term earnings in the United States, long-
term meaning a thirty-year period. The Board is willing to exceed
this average, as historically the earnings of the Pension and
Investment Board have exceeded market performance. The Actuarial
Assumed Rate is key to the funding level of the entire plan as it
is being utilized to amortize the entirety of the liabilities.
Therefore, a decrease in the funded rate would serve to increase
the unfunded balance. Were the Actuarial Investment Return rate of
8.25 percent lowered to seven percent, the increase in liabilities
"would significantly increase and the plan would be more under-
funded." In conclusion, the 8.25 investment return rate is a proven
rate that has been substantiated over a 30-year period.
Senator Bunde acknowledged that, over the long term this rate might
be proven; however, he asked in regard to the short-term effect on
the system.
Mr. Staack communicated that the Division has implemented a system
in which allocated gains or losses are limited to 20 percent in any
one year. This has a smoothing out effect. It must be viewed as a
long-term process. Even though FY 02/FY 05, for example, had a
total funding ratio of 75-percent and an Employer average
calculated rate of 24-percent, the Board adopted a rate of 11.77
percent. It must be recognized that this is "many year process"
rather than being limited to a single year process.
Senator Bunde countered therefore, that it could be argued that
there is no deficit, as if "we wait long enough, it will catch up."
Mr. Staack agreed that argument could be made; however, he
qualified that the plan must be funded "in between." Were some of
those losses not recouped and were contributions to continue into
the plan, the period in which the plan could be balanced would be
expanded. 75-percent of any retirement system's plan are from
investment earnings with only 25-percent balance being derived from
employer/employee contributions. Some of those gaps must be filled
with calculated contributions overtime because, were they not, the
deficit time period would be lengthened.
Mr. Reynolds acknowledged that another issue is that while each
Actuarial Valuation is based on best estimate assumptions, a long-
term trend could change long term funding assumptions. These trends
include such things as longevity, lower mortality rates over the
last ten to 20 years due to medical advancements, and higher
medical expenses. These trends serve to increase the liability of
the system, and therefore, over time, the assumptions must be
adjusted. A higher funding target would require a rate adjustment.
Were long term trends to continue unchanged, there would not be a
need to react to changes in the plan's funding status as the
philosophy could be that things would sort themselves out over
time.
Senator Bunde asked whether poor market returns in the past have
required "a general fund infusion" into the PERS/TRS systems.
Mr. Staack responded that the money that is contributed to the
systems results from the Employer rate contributions. Therefore,
due to the fact that the State is an employer, the general fund has
continuously been utilized in that manner. The general fund has
never been utilized for any extra infusion of funding beyond the
Employer contribution rate.
Senator Bunde understood that due to market fluctuations, a
contribution above the Employer contribution rate might be
required.
Mr. Staack clarified that, other than the increase resulting from a
rise in the Employer calculated rate, no additional general fund
contribution was sought. Any additional monies that would be
required would result from an increase in the Employer contribution
rate.
Senator Bunde acknowledged, but commented that any increase in the
Employer contribution would affect the general fund. In reality,
the $76 million shortfall would be supported by the general fund.
Mr. Staack responded that in some form it would be, as 59 percent
of any State expenditure is derived from the general fund with
approximately 41 percent being derived from other funding sources
such as federal funding.
Senator Bunde understood therefore that approximately 40 percent of
the $76 million PERS deficit would be funded from sources other
than the State.
Mr. Staack concurred.
Senator B. Stevens understood that, as depicted on the document,
the "Non-Medical Benefits only" PERS Funding Ratio-
Assets\Liabilities component was 143.7 percent over-funded in FY
01/ FY 04.
Ms. Millhorn replied that is correct were only the pension portion
considered and the medical cost component removed.
Senator B. Stevens continued that in FY 02/FY 05, there would be a
24.8 percent cumulative funding deficit; however, the Non-Medical
Benefits only component is over-funded by 120.9 percent.
Ms. Millhorn agreed.
Mr. Staack pointed out that were the health costs included, the
funding level would be the "Total benefits" as depicted.
Senator B. Stevens asked the definitions of "Non-Medical Benefits
only" and "Total Benefits".
Mr. Staack defined "Total Benefits" as being the total liability
for the system's monthly pensions and health care costs. The reason
this breakout is provided is due to the fact that Alaska is one of
the few governmental entities in the county that actuarially funds
health care costs. California, Texas, and other states do not. It
is difficult to compare the State's program to others and were
another state to declare that its retirement system was 95-percent
funded; one must compare that claim to the Alaska's "Non-Medical
Benefits only" component. The State of Alaska would be obligated to
pay the Total Benefits component, which includes both monthly
pensions and health care.
Senator B. Stevens understood that while the State has a cash
obligation to the pension portion, the deficit must result from
medical costs as the pension portion is fully funded. Therefore, he
asked how the medical component dollar value obligation is
determined.
Mr. Reynolds responded that the principle at play in this regard is
the determination that the benefit amount that would be anticipated
for an individual's lifetime is based on calculations such as when
that person would retire and the pension and medical benefits that
that person would receive. Once this is determined, such things as
the longevity assumption and medical cost increases would be
applied. An individual's total cost, or "accrued liability" would
be calculated and would be the amount the State would be obligated
to fund. The idea is that adjustments must be made against these
measurements in order to support them over time. As the retirement
components are in regulation and could not be adjusted downward,
any required infusion of supporting funding must be funded via
alterations in the Employer Contribution funding rate.
Senator B. Stevens commented that the fact that the Non-Medical
Benefits-only funding has been maintained at 120 percent even after
recent financial market downturns indicates that the component has
been well managed. However, when the total benefits are considered,
there appears to be a problem in the manner it is being funded.
Furthermore, it appears that this is an issue that rather being
solved by a one time monetary "injection" would continue due to the
escalating costs of health care and longer life spans that would
accrue more medical costs. This is a problem that would not be
going away.
Ms. Millhorn stated that the State's plan is "atypical" and "quite
generous on the medical side."
Senator Dyson asked whether, in the historical sense, changes in
the employer and employee contribution have any affect on behavior.
In other words, would employees take better care of their health to
avoid being required to contribute more or would employers change
the manner in which they treat employees in regards to such things
as a later retirement age.
Ms. Millhorn characterized the situation "as a two-edged sword" as
while improvements in the medical field have increased life spans
there has, on a national basis, been a 13-percent increase in the
cost of health care. In regards to active employees, the State
could implement a variety of options. Requiring employees to pay
more of their health care costs would not necessarily result in
employees making good health care decisions. A Board has been
established that is addressing cost containment issues relating to
the retiree population. She noted that the Retired Public Employees
Association brought a lawsuit before the State Supreme Court,
regarding the fact that some Legislative changes were made that,
while reducing some retirement benefits, did not result in a
corresponding increase in cost savings. The Court decision in June
2003 stated that changes could not be made to the retiree health
care component unless it could be demonstrated that the
corresponding decreases for the 27,000-retiree population and their
dependents, both of which would total approximately 54,000, has a
corresponding offset. An appeal is pending before the Superior
Court.
Senator Dyson concluded therefore that changes would be limited by
Court decisions and employee contracts. Therefore, echoing Senator
B. Stevens's comments, he inquired as to what types of structural
changes might be available to address costs in the long run.
Senator B. Stevens pointed out that, as reflected in the "Employer
Savings FY 98-FY 04" section of the handout, the PERS contribution
rate has decreased from 12.14 percent in 1998 to 6.7 percent in
2003. "How can the Board justify a decrease of that amount" while
health care expenses have annually increased by approximately 14
percent.
Ms. Millhorn responded that for a period of time the costs of
health care were quite volatile in that they increased from 50
percent in one year to 30 percent to zero percent in other years.
However, health care trend costs have been revisited in recognition
of the fact that health care costs would continue to increase.
SFC 04 # 14, Side B 09:53 AM
Ms. Millhorn specified that the health care cost factor would be
increased from 7.5 percent to 12 percent for the next five years.
Costs are projected to taper off thereafter.
Senator B. Stevens reiterated that the question is why has the
Board allowed the Employer Contribution to decrease from 12-percent
in 1998 to 6.7 percent in FY 04 in light of the fact that the cost
of medical expenses has escalated.
Mr. Staack pointed out that there is a two-year lag time between
the rate being established by the Board and when it is implemented.
He stated that the decision to lower the employer rate was based
upon a combination of factors including the fact that, in addition
to high medical expenses and a high employer contribution, a
"tremendous amount of earnings" occurred between 1996 and the year
2000. Those earnings served to "dramatically" offset the
liabilities. The Board's decision to lower the employer
contribution rate was based on those elements. Now that the trend
of upward medical expenses has been established, the Board's
decision is to increase the Employer Contribution level.
Mr. Staack informed that TRS is a cost-sharing system whereas PERS
is a multi-employer system in which there is an overall employer
rate and a specific past service cost that accompanies each
employer. Therefore the Municipality of Anchorage, the Fairbanks
North Slope Borough and the State have differing rates. The TRS
Board has continually adopted an average rate that is the same
amongst all employers. The Bethel School District pays the same
rate as the Municipality of Anchorage School District. Therein lies
the reason that the rates differ.
Mr. Staack stated that as a result of the reduced Employer
Contribution rate obligations that occurred during the years 1998
through 2004, $460 million in associated employer contribution
expenses were saved by municipalities as well as by the State.
Senator B. Stevens acknowledged this fact, however, argued that
these same entities would now be shouldering the burden of the
deficits that have occurred.
Mr. Staack informed the Committee that rather than actually saving
$460 million, municipalities and the State actually saved $300
million because they experienced increases in other costs due to
such things as an increased numbers of employees.
Senator B. Stevens viewed that as being the result of individual
entities' decisions.
SENATOR GARY STEVENS asked regarding the comment that 75 percent of
retirement earnings are gleamed from investment earnings.
Specifically whether the State could increase current employees'
contribution requirements in order to offset benefits paid to those
who are fully retired or whether current employees' contributions
could be increased to offset future retiree benefit obligations.
Mr. Staack replied that this involves a long-term process with the
theory being that the contribution level should recover, over a
person's working life, all the costs associated with providing
benefits to that person. However, in a matter of eight years, the
average amount of monthly health retirement benefit has increased
from $350.50 per retiree in 1996 to $806 in 2004. As this money was
not recovered during the retiree's working life, the money to cover
past service costs must come from somewhere. All of the "past
service costs" have significantly increased as exampled by the fact
that between the years 1983 to 1994, life expectancy has increased
by 2.7 years and therefore, more than two years of retirement
benefits have been added for the average retiree. While the new
rate absorbs those 2.7 years, previous retiree benefits expenses
were factored upon the lower mortality table. The money to pay for
the extended years must come from the employers in the system,
employees, and the investment earnings. It must be accepted that in
a defined benefit plan system "the employer takes the risk of lower
than expected investment earnings and higher than expected costs."
This is further explained in the White Page section of the handout.
Senator G. Stevens asked whether the past service expense details
are included in the handout.
Ms. Millhorn replied that this information could be found in the
PERS Supplemental Actuarial Valuation report [copy not provided]
for each employer.
Mr. Reynolds commented that while the actuarial assumptions are
made by utilizing the best appropriate data and projections, were
the assumptions too optimistic and the costs of the plan in the
future to be under-estimated, the liability would be passed on to
future generations. However, "were the assumptions set too
conservatively," it would, in essence, place the burden of future
workforce liabilities on the current workforce. It is difficult to
walk that "thin line between being too optimistic and too
conservative." There have been trends, longevity and medical costs
in particular, for which the current workforce is paying for prior
retiree benefit costs. The fluctuating medical costs, as
aforementioned, made that projection difficult for certain periods
of years.
Senator Olson asked how fluctuations and other increased expenses
were addressed in the past.
Ms. Millhorn stated that the employer contribution rate has
historically been "incrementally adjusted" to provide the required
funding ratio.
Mr. Reynolds noted that the current PERS funding ratio is 75
percent and in 1980 the funding ratio was 71 percent. Once during
this time period, the rate was 106 percent. The current funding
ratio for the TRS system is 68 percent and was 67 percent in 1980.
There have been periods of time in which the funding ratio has been
lower than it is now. There is the requirement that the ratio be
adjusted to reflect trends as they occur.
Senator Bunde, noting that the Employer Contribution Rate has been
adjusted over time in response to system needs, stated that this is
contrary to testimony that making such changes takes too long.
Mr. Staack agreed that while the rates have been changed, there
remains a lag time between when the rates are set and when they are
implemented. This is an issue. If the rates go up, it would require
more money from employers. There is no special injection of money.
The fund must sustain itself over time.
Senator Bunde stated that "the practical reality" is that, as rates
increase, the Anchorage School District, for example, would request
a one-time infusion to offset the expense. This is of concern, and
he wondered whether assurances could be provided that this deficit
would not re-occur.
Mr. Staack replied that no assurance could be provided.
Ms. Millhorn stated that Mercer Consulting would be presenting its
June 30, 2003 Actuarial Valuation at upcoming PERS/TRS Board
meetings. The Boards, at that time, would review the report and the
assumptions and determine the Employer Contribution Rate for FY 06.
Ms. Millhorn informed that, by regulation, the PERS Employer
Contribution Rate could only be increased or decreased up to a
maximum of five percent. There is no limitation on TRS rate
increases or decreases. Historically, the TRS Board has addressed
this rate in a conservative manner and has "even adopted a higher
rate to keep the contribution rate stable even though the
recommendation by Mercer would be lower." The TRS Board has adopted
a rate up to four percent higher than the recommended rate.
Co-Chair Wilken stated that this information is depicted in the
third column of the spreadsheet in the "Funding Status FY 04-FY
06"section of the handout.
Ms. Millhorn affirmed.
Co-Chair Green asked for further information regarding the five-
percent variance limitation.
Ms. Millhorn replied that the five-percent limit is specified in a
regulation based on Statute.
Co-Chair Green asked for further information in this regard.
Ms. Millhorn specified that the regulation specifies that the
Employer Contribution Rate could be increased up to five-percent or
decreased up to five-percent.
Co-Chair Green understood therefore, that the five percent is
specified in Statute. She stated that she would further investigate
this limit.
Senator Bunde asked in regards to employee contributions.
Ms. Millhorn responded that the employee contribution could be
addressed via the establishment of a new tier.
Senator Bunde opined that while there is a need for greater
contributions, no current employee could be subject to an increased
contribution rate. A new employee tier level would be required in
order to consider altering the current employee contribution rate.
Mr. Staack stated that the Alaska Supreme Court has specifically
addressed this issue. A court case involving the lowering of
retirement benefits was argued in 1981 with the ruling being that
the State could not diminish employee benefits. New hires benefits
could be altered. This would require a new tier to be developed.
Benefits could not be diminished for employees who retired or were
hired prior to the enactment of the new tier.
Senator Bunde concluded therefore that once a contractual agreement
is in affect, the terms could not be altered.
Mr. Staack stated that the interpretation is that increasing a
current employee's contribution, would, "in a manner, decrease the
benefit."
Senator Dyson asked whether the Court decision would prohibit an
employee from opting to voluntarily agree to make less of a
contribution and receive "less benefits in the future."
Mr. Staack was uncertain of the answer.
Ms. Millhorn specified that while the TRS system is a cost sharing,
multiple employer plan with a single uniform employer rate, there
are 57 different PERS Employer Contribution Rates. She reviewed the
TRS system Earnings, Actuarial Rate, Health Cost, Employer Rates,
and Funding ratios as depicted in the "Funding Status FY 04-FY 06"
section of the handout.
Ms. Millhorn reiterated that the TRS system does not have an annual
percentage increase or decrease limit regarding its Employer
Contribution Rate change. While the TRS Board could recommend a
rate, the final authority is the Commissioner of the Department of
Administration.
Ms. Millhorn noted that the next section in the handout, tabbed
"Employer Savings FY 98-FY 04," individually depicts the increase
that would be experienced by each of the 57 employers. The third
page of that section identifies each of the TRS employers and the
affect of the four percent increase they would experience. The
fourth page of the section specifies that the total cost to
PERS/TRS employers would be $100 million dollars in FY 05.
Mr. Staack communicated that, were School Districts to relay
information that their PERS contributions would amount to $35
million, it should be noted that this amount includes both their
TRS and PERS contributions.
Co-Chair Wilken asked whether a breakout of school districts' PERS
and TRS employers' obligations could be provided.
Ms. Millhorn noted that in addition to the TRS breakout for school
districts, their PERS obligations are incorporated into the PERS
breakout in the section.
Co-Chair Wilken asked that a document be developed that solely
reflects both the TRS/PERS obligations of the school districts.
Senator B. Stevens provided this information is a handout titled
"ALASKA DEPARTMENT OF EDUCATION AND EARLY DEVELOPMENT" [copy on
file], dated February 10, 2004.
Senator B. Stevens calculated that, of the $100 million total
PERS/TRS FY 05 expenses, $38 million would be the State's PERS
obligation, $35 million would be the school districts' obligation,
and the balance of $27 million would be the responsibility of
municipalities and the University of Alaska.
Mr. Staack concurred.
Co-Chair Wilken observed that the University would be obligated for
$5.6 million in PERS and $1.6 TRS expenses.
Senator B. Stevens asked that the Department provide the Committee
a breakout depicting the PERS/TRS expenses associated for State
employees, school district employees, University employees, and
municipality employees.
Mr. Staack stated that of the $100 million, $38 million would be
the State's PERS obligation; $35 million would be school districts'
TRS/PERS obligations; seven million dollars would be the
University's PERS/TRS obligation; and $20 million would be
municipalities' PERS obligations.
Senator B. Stevens asked that this information be provided in
document form.
Co-Chair Green asked that the information for the school districts
and the University be further divided to reflect their PERS and TRS
obligations.
Ms. Millhorn agreed.
Ms. Millhorn referred the Committee to page 23, titled "Retiree
Medical Insurance" of the section titled "Medical Costs." As
depicted, the monthly premium per retiree for health coverage in
1977 was $34.75. The third column on the page depicts the annual
year-to-year percentage changes and reflects the volatility
experienced. "The annualized average increase is 10 percent."
Today, the monthly premium for health coverage is $806 per
individual who is in the plan.
In response to a comment from Senator B. Stevens, Ms. Millhorn
reiterated that the current premium is $806 per individual per
month.
Senator G. Stevens asked whether this includes the employee's
dependents.
Ms. Millhorn affirmed.
Senator B. Stevens surmised therefore that $806 is the whole
liability for the member.
Ms. Millhorn replied that it is correct.
Ms. Millhorn pointed out that the next section in the handout
titled "PERS Employer Rates FY 01-FY 05" reflects a five-year
review of the changes in the Employer Contribution Rates that have
resulted from the gains and losses in accrued liabilities. It
depicts the "differences between the assumed experience and the
actual experience." As depicted in the chart, the Beginning Average
Employer Contribution Rate in 1997 was 7.36 percent; the Mercer
Human Resource Consulting-Actuary recommendation, as reflected in
the "Ending Average Employer Contribution Rate" was 7.03 percent;
and the Board adopted an Employer Contribution Rate of 7.40 percent
for FY 01. This information is specified for each of the years 1999
through 2002. It should be noted that in the years 1998 through
2000, the Board recommended a slightly higher rate than recommended
by Mercer. The adopted rate in 2001, which would become effective
in FY 04, was the rate recommended by Mercer. The information above
the Employer Contribution Rate section depicts the assets verses
liabilities changes that affected the annual employer contribution
rates.
Ms. Millhorn stated that the next page, titled "PERS Summary of
Benefits" reflects the various payment obligations from the PERS
System. The total payments for the year 2003 amounted to
$451,015,000. The total payment in 1994 was $157,913,000. This
reflects the increase in obligations that have occurred. The
medical component in 1994 was $36 million and was $143 million in
the year 2003.
Ms. Millhorn noted that the next tab titled "TRS Employer Rates FY
01 - FY 05" reflects information pertinent to the TRS system. As
depicted in the chart, the Beginning Average Employer Contribution
Rate in 1997 was 13.0 percent; the Mercer Human Resource
Consulting-Actuary recommendation, as reflected in the "Ending
Average Employer Contribution Rate" was 10.55 percent; and the
Board adopted an Employer Contribution Rate of 12.0 percent for FY
01. The TRS Board strives to have an Employer Contribution Rate
that is "consistent over time" as reflected in its decision to
adopt, in 1999, an 11 percent rate rather than the 7.09 rate
recommended by Mercer for FY 02.
Ms. Millhorn noted that the information on page 28 of that section
reflects the total TRS payment obligation. In 1994, the total
benefits paid were $116 million and the total paid in 2003 was $310
million. The total 2003 PERS/TRS payment obligation is a large
amount.
Ms. Millhorn stated that the information located in the tab titled
"PERS/TRS Tier IV - Tier III Subcommittee" describes the Boards'
task to develop Tier re-design recommendations for the future, as
initiated by the Department of Administration Commissioner Mike
Miller. The first meeting recently occurred and was attended by the
Boards' members, the Commissioner, and Mr. Reynolds from Mercer.
The committee would be requesting input from the 154 PERS/TRS
employers in the State by way of a survey that is currently in
draft form. She noted that there are many considerations including
competing interests such as cost containments as compared to a
benefit amount. A compromise must be developed that would balance
those interests. The PERS/TRS Tier Subcommittee consists of Board
members Bob Boko, Alyce Hanley, Richard Solie, and Frank Narusch. A
draft
Ms. Millhorn stated that the final section in the handbook is
titled "Comparison of Other Systems Funding Health Care." This
section provides a comparison of Alaska's retirement system to 123
other government plans. Of those 123 plans, only eight pre-fund the
health care portion of their retirement pension plans.
Co-Chair Wilken asked the purpose of sending the survey to PERS/TRS
employers in the State.
Ms. Millhorn responded that it is necessary to obtain feedback from
the PERS/TRS employers for when reviewing a retirement system and
determining methods to contain costs, it must be recognized that
the options might negatively affect the recruitment and retention
of employees.
Senator B. Stevens asked for confirmation that only eight of the
123 government entities included in the Public Fund Survey pre-fund
their medical expenses.
Ms. Millhorn stated that is correct.
Senator B. Stevens asked whether the chart reflected deficits and
liabilities experienced by those eight in comparison to the others.
Ms. Millhorn stated that the chart does reflect funding ratios.
Senator B. Stevens understood that the asterisked entities are
those that pre-fund their medical expenses.
Ms. Millhorn affirmed.
Senator B. Stevens noted therefore, that "Kentucky Teachers," which
is one of the eight, has an Actuarial Funding Ratio of 86.6 percent
for its Actuarial Validation Report, dated June 30, 2002.
Ms. Millhorn affirmed. She stated that Alaska's PERS funding ratio
as reflected in the June 30, 2001 Actuarial Valuation Report
reflects a total benefits funding ratio of 100.9 percent for FY 04.
The purpose of the information is to allow the State to compare its
PERS/TRS programs to others with similar components.
SFC 04 # 15, Side A 10:41 AM
Mr. Staack stated that, "the accounting profession has never really
helped this issue very much." Most retirement systems only include
"the costs and the liabilities of their current year expenses" when
determining health care expenses the next year. Most states do not
provide "as generous a plan" as this State provides. However, by
the year 2006, all governmental retirement systems would be
required to include on their financial statements "the liability
for all the unfunded health care that they haven't funded up until
now." Alaska has done this for the last thirty years. Some of the
other states would be surprised when this information is compiled.
He reiterated that the information is to allow proper comparisons.
Co-Chair Green asked for clarification as to whether the new
accounting measures would require pre-funding information to be
displayed.
Mr. Staack stated that it would not. What it would require is that
health care liabilities be reported on the financial statements.
Until then, states such as California only reflect the cost of the
next year's PERS/TRS health care obligations on their financial
statements rather than their true liability.
Co-Chair Green asked whether Alaska's pre-funding mechanism is
established in law.
Mr. Staack responded that the applicable statute is broad in that
it allows the Board "wide latitude" in that they could establish
the actuarial assumptions.
Co-Chair Green understood therefore that the pre-funding mechanism
is Board directed.
Mr. Reynolds avowed that the Statute does require the system to be
actuarially funded. To his knowledge, "it does not distinguish
between the pension benefits and the medical benefits." Therefore,
"the Statute does contemplate pre-funding of both benefits ? in a
pay as you go approach to the medical benefits." "Actuarial funding
does mean pre-funding." Therefore there is both Statutory and
regulatory requirements that would require this scenario for both
medical and pension benefits.
Mr. Staack stated that were the actual liability not pre-funded,
"that liability would be pushed on to future generations."
Mr. Reynolds concurred.
Co-Chair Green understood however, that currently the only entity
which could undergo a rate adjustment to address liabilities would
be the employer, as employees' rates could not be altered unless a
new tier were established.
Mr. Staack affirmed.
Co-Chair Green asked whether any consideration has been provided to
making statutory changes.
Ms. Millhorn responded that all avenues are being considered in the
Tier re-design endeavor.
Co-Chair Wilken asked for confirmation that this is part of the
task assigned to the Commissioner's subcommittee.
Ms. Millhorn affirmed.
Senator B. Stevens commented that were a new tier established that
would include a defined contribution plan, the future employees in
the new tier might be responsible for the escalating costs of the
older tiers.
Mr. Staack clarified that in a Defined Contribution Plan, the
employer would continue to bears the increased costs associated
with retired employees. Were a new Defined Benefit tier to be
established, funding from retirees would remain unobtainable even
were costs increasing. Therefore, "the only party you can go to" is
the employer.
Senator B. Stevens interjected "or the general fund."
Co-Chair Wilken asked the minimal amount that the Legislature could
allocate to address the deficit resulting from this situation. Two
things that might reduce the "$100 million cash requirement" would
include either recalculating the formula by basing the calculation
on current data such as the FY 03 actuarial report and hoping for
the continued healing of the stock market or consideration of
providing, for instance, $50 million contribution towards the
PERS/TERS obligation as a gesture of healing. In other words, is
there anything that could be done to lower the rate increase below
the five-percent scheduled for FY 05.
Mr. Staack stated that the Valuation Report that would be presented
at a March 24, 2004 would serve to update the information. It
indicates that the State is already experiencing a 34 percent
earnings deficit for PERS. He expected that no reduction in the
rate could occur even were updated reports provided.
Mr. Reynolds agreed that the Valuation Report that would be
presented in March would be based on June 30, 2003 information and
it would not provide for a significant rate improvement as the
investment performance returns were approximately four percent
rather than the 8.25 percent assumption. The updated Valuation is
anticipated to recommend a higher Employer Contribution rate.
Mercer does conduct future projections in regards to what the rates
might allow. Therefore the influence of more recent market upturns
would be provided to the Boards during the upcoming March meeting.
Co-Chair Wilken asked whether the five-percent increase in Employer
rates is a firm obligation.
Mr. Staack understood that this obligation would continue.
Co-Chair Wilken voiced that this presentation was very informative.
ADJOURNMENT
Co-Chair Gary Wilken adjourned the meeting at 10:55 AM
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