Legislature(2007 - 2008)SENATE FINANCE 532
02/02/2007 09:00 AM Senate FINANCE
| Audio | Topic |
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| Start | |
| Pers/trs Overview & Update | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
MINUTES
SENATE FINANCE COMMITTEE
February 2, 2007
9:01 a.m.
CALL TO ORDER
Co-Chair Bert Stedman convened the meeting at approximately
9:01:01 AM.
PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Charlie Huggins, Vice Chair
Senator Kim Elton
Senator Joe Thomas
Senator Donny Olson
Senator Fred Dyson
Also Attending: SENATOR GARY STEVENS; REPRESENTATIVE MIKE
HAWKER; ANNETTE KREITZER, Commissioner, Department of
Administration; MELANIE MILLHORN, Director, Division of
Retirement and Benefits, Department of Administration; CHARLENE
MORRISON, Chief Financial Officer, Division of Retirement &
Benefits, Department of Administration;
Attending via Teleconference: There were no teleconference
participants.
SUMMARY INFORMATION
The Committee received a presentation from the Department of
Administration overviewing the State's public retirement
systems.
9:02:30 AM
^PERS/TRS Overview & Update#
Co-Chair Stedman announced that this meeting would be the first
of several addressing the pension liability challenges facing
the State. It would provide "background" information related to
the Public Employees Retirement System (PERS) and Teachers
Retirement System (TRS) issues.
9:03:04 AM
Co-Chair Stedman recognized that retirement and benefit concerns
are typically handled in the Operating Budget, which Co-Chair
Hoffman is charged with in this year. However, Co-Chair Hoffman
had delegated this aspect of the Operating Budget to Co-Chair
Stedman.
Co-Chair Stedman told that the concerns related to the
retirement systems were significant and would be addressed as
clearly and with as much information as possible. He anticipated
the Committee would be attending to these issues for several
weeks, and would eventually produce a "clean-up bill" to SB 141,
the PERS/TRS legislation passed by the 24th Legislature. The
Alaska Retirement Management Board (ARMB) would assist in the
process.
9:05:13 AM
ANNETTE KREITZER, Commissioner, Department of Administration,
introduced herself as the Commissioner Designee for the
Department, explaining that she had not yet been confirmed by
the legislature. She reported that the goal of the presentation
was to ensure all Members were equipped with an adequate
understanding of the conditions that led to the current
situation, and to review the objectives and components of SB
141.
9:06:29 AM
MELANIE MILLHORN, Director, Division of Retirement and Benefits,
Department of Administration, instructed Committee members that
the final page, page 7, of the presentation, titled "Department
of Administration, Financial Overview, PERS and TRS, Senate
Finance" [copy on file] dated February 2, 2006, would be
referenced throughout the presentation.
9:07:24 AM
Ms. Millhorn noted three areas to be covered in the
presentation: protections established by SB 141, current
financial reports for PERS/TRS, and the financial summary on the
last page.
Ms. Millhorn emphasized the unique situation the retirement
systems were in, as they had had three separate financial
reports prepared during 2006. Typically, only an actuarial
valuation report would have been prepared, but as a result of
the trio of studies conducted, three different rates were
produced. The three reports were the actuarial report as of June
30, 2005, a level dollar amortization schedule, and the
experience study for PERS and TRS. Ms. Millhorn also referred to
the "experience study" as the "actuarial experience analysis"
throughout her testimony and presentation. All of the detailed
financial reports that would be discussed are available on the
Division of Retirement and Benefits webpage.
9:09:53 AM
Ms. Millhorn directed attention to page 3 of the handout, and
informed that SB 141 established the ARMB under AS 37.10.210.
The ARMB assumed the function of three separate boards that had
previously governed the dealings of the retirement systems. The
Senate Finance Committee of the 24th Legislature had decided to
consolidate the separate boards, the Public Employees'
Retirement Board (PERB), the Teachers' Retirement Board, and the
Alaska State Pension Investment Board (ASPIB), into one entity.
9:10:52 AM
Ms. Millhorn explained that the ASPIB had handled the investment
functions of the State pension fund. PERB and TRB dealt with the
liabilities and appeals of the different boards.
9:11:48 AM
Ms. Millhorn mentioned that the ARMB consisted of nine trustees,
including Commissioner Kreitzer.
9:12:08 AM
Ms. Millhorn continued that SB 141 contained "important
protections" found in AS 37.10.220., including a requirement
that an experience study be conducted not less than once every
four years, and that health care costs be reviewed annually by
the State's contracted actuary. This is important as healthcare
assumptions are one of the largest contributors to the unfunded
liability costs.
9:12:44 AM
Ms. Millhorn added that SB 141 also called for actuarial
assumptions to be reviewed by a separate, independent actuary,
and required an independent audit to be conducted on the actuary
at least once every four years.
9:13:23 AM
Ms. Millhorn informed that the most recent independent audit was
performed in 2002 and resulted in dramatic increases to the
unfunded liability. That audit was referred to as a "limited
scope audit", which is different from a full scope audit in that
it does not provide for replication testing.
9:14:09 AM
Ms. Millhorn anticipated that the independent audit of the
State's consultants carried out every four years would reduce
the "shock factor" that accompanied the valuations for 2002 and
2005.
9:14:38 AM
Ms. Millhorn turned attention to page 4 of the handout, which
contained the following information.
Actuarial Valuation Results
In November 2005 Buck Consultants was awarded contract to
provide professional actuarial services to the Division of
Retirement and Benefits.
In March of 2006 Buck performed a replication and actuarial
review of methods and assumptions used by Mercer in the
June 30, 2004, valuations. Correction of errors discovered
in the replication process were incorporated into the June
30, 2005, valuation reports for PERS and TRS. Principal
replication findings are summarized as follows:
™Did not find significant errors or concerns regarding
pension liabilities for PERS or TRS.
™Found several items in replication process where
Mercer failed to properly value medical liabilities
for PERS. This resulted in approximately $399 million
underestimate for PERS medical liabilities.
Based on the valuation results, the increase to the
employer contribution rates for FY08 and FY07 are as
follows:
FY07 FY08
PERS 28.19% 35.51%
TRS 41.78% 42.26
Ms. Millhorn commented that prior to November 2005, Mercer Human
Resource Consulting had been the State's actuary for the PERS
and TRS retirement systems for 29 years. She stated the purpose
of an actuary evaluation was to measure the accrued liabilities
for the retirement system, and compare that to the system's
assets to determine the funding ratio for the system. This also
determines the employer contribution rate for the year.
Ms. Millhorn reported that the replication study performed by
Buck Consultants in March of 2006 was an attempt to certify the
older data they would inherit from Mercer. In order to accept
Mercer's body of work, the data must be reproduced with results
within one to three percent of the original figures.
9:17:05 AM
Ms. Millhorn told that Buck found major errors in the medical
component of Mercer's work, and the variation in medial
liabilities was 5.8%, resulting in a rejection of the Mercer
data. Investigation revealed that Mercer had made medical coding
errors and had not properly applied the statute provisions.
9:18:36 AM
Page 5
Level Dollar Amortization Schedule
At the request of the ARMB, Buck Consultants calculated
FY08 rates based on a level dollar amortization of the
unfunded liability for the PERS and TRS. The current
funding policy adopted in 2002 amortizes the initial
unfunded liability and the change in the unfunded liability
in subsequent years over a fixed 25-year period, using a
4.25% payroll growth assumption.
The plan is now closed to new members so it is appropriate
to not use a 4.25% payroll growth assumption. The ARMB
adopted the rates developed using the level dollar
amortization method.
Two important points:
™Closing the defined benefit plans to new members does
not increase the liability to the plans
™Adopting the level dollar amortization schedule does
not increase the unfunded liability to the plans
What does not using the payroll growth factor do?
™Removing the payroll growth factor acts to increase
the contribution rates for FY08. However, according to
Buck it will result in a lower contribution schedule
in future years.
PERS
FY07: 28.19%
2005 Valuation FY08: 32.51%
Level Dollar Amortization FY08: 39.76%
TRS
FY07: 41.78%
2005 Valuation FY08: 42.26%
Level Dollar Amortization FY08: 54.03%
Ms. Millhorn summarized the information on page 5, and mentioned
that detailed minutes of the ARMB meeting are available at the
Department of Revenue, Division of Treasury webpage. She noted
that lower long-term contribution rates are achieved by paying
more into the fund through the current higher rates to reduce
the interest paid on the unfunded liabilities.
9:22:26 AM
Page 6
Actuarial Experience Analysis
Buck Consultants completed the actuarial experience
analysis in October 2006. Purpose of actuarial experience
study is to compare actual plan experience with actuarial
assumptions used in the valuation. The experience study
looked at the five year period from 2001 through 2005.
(1) Actuary will recommend changes to assumptions if
sufficient data is available that shows material
difference between expected and actual experience.
(2) Future experience is likely to be different given
recent trends.
Several of the assumptions include: investment return,
healthcare, mortality, retirement, salary, Alaska
residency, actuarial cost method, and disability.
To get an understanding of the impact of the revised
assumptions and actuarial methods, Buck recalculated FY08
rates using the revised assumptions and actuarial methods.
The results are summarized below.
PERS
2005 Valuation FY08: 32.51%
Level Dollar Amortization FY08: 39.76%
Actuarial Experience Study FY08: 46.64%
TRS
2005 Valuation FY08: 42.26%
Level Dollar Amortization FY08: 54.03%
Actuarial Experience Study FY08: 59.56%
The ARMB adopted the recommendations by Buck, which had
been reviewed by GRS (second actuary) and determined to be
reasonable. The revised assumptions and actuarial methods
will be incorporated into the June 30, 2006, actuarial
valuation reports.
Ms. Millhorn told that an experience study should be conducted
every three to six years, and is called for every four years by
the Department. The study compares actual plan experiences with
the actuarial assumptions, and recommends changes.
9:24:14 AM
Ms. Millhorn located the assumptions in section 2.3 of the
aforementioned valuation report, and provided examples of the
assumptions.
9:24:57 AM
Ms. Millhorn informed that the experience report was prepared to
assist the ARMB in understanding the impacts of the assumptions
and the recommended changes.
Ms. Millhorn specified that the assumption recommendations used
the June 30, 2005 valuation, and summarized the anticipated
changes.
9:26:03 AM
Ms. Millhorn remarked that those assumptions would be
incorporated into the June 2006 valuation, which had not yet
been completed.
9:26:22 AM
Ms. Millhorn spoke to the most recent prior study conducted by
Mercer in 2002. That study canvassed only the past two years of
data, and it was believed that that amount of time was
insufficient to analyze trend changes that would influence
assumption changes.
9:27:25 AM
Page 7
Alaska Public Employees' and Teachers' Retirement System
Earnings - Actuarial Rate - Employers Rates - Funding
Ratios
[Chart listing Actual Investment Return and Actuarial
Investment Return, Unfunded Liability in billions, Average
Calculated Rate and Board Adopted Rate, Funding Ratio -
Assets\Liabilities Total Benefits, and Total Employer
Contribution Amount in Millions for Valuation Years FY 01
through FY 05 and Employer Contribution Fiscal Years FY 04
through FY 08 for the PERS and TRS systems.]
Ms. Millhorn reviewed the summary chart, and stated that
projections of an unfunded liability of approximately $10
billion are based on the fact that the actuarial evaluation as
of June 30, 2006 had not been reviewed.
9:29:41 AM
Ms. Millhorn referred to the "shock factor" associated with the
recent reports on the retirement systems, and explained that
reports will be conducted frequently to avoid unanticipated
"surprises". She exampled the results of a limited scope audit
carried out in 2002, which increased the Average Calculated Rate
for PERS from 6.77 percent to 24.91 percent in one valuation
year. During the same time period, the TRS Average Calculated
Rate increased from 14.44 percent to 35.57 percent.
9:31:21 AM
Ms. Millhorn addressed the decline in the funding ratio as the
total employer contribution rate increased from $105.6 million
in FY 01 to an estimated $676.8 million in FY 08 in PERS. The
TRS employer contribution rate increased from $68.7 million to
$351.7 during the same time period.
9:32:50 AM
Co-Chair Stedman summarized that five years ago the State
contribution was approximately $170 million per year. The
current annual contribution by the State exceeds $1 billion.
9:33:33 AM
Co-Chair Stedman asked Ms. Millhorn to explain the "lag time"
between the end of the fiscal year and the implementation of the
ARMB-set rates for the following period.
9:33:47 AM
Ms. Millhorn told that questions regarding the "lag period"
involved in the determination of the employer contribution rate
are common. She informed that at the end of the fiscal year, the
Division provides Buck Consultants with information on all of
the members enrolled in PERS and TRS. The data is transmitted in
September or October, and the consultants analyze the data to
prepare the employer contribution rate for the following fiscal
year. The rate for the ensuing fiscal year is typically
available in March or April.
Ms. Millhorn acknowledged that the consultants' timetable does
not allow for legislative consideration of the employer
contribution rate when budgeting for the following fiscal year.
Therefore, there is approximately a two year lag period between
the consultants' analysis and that data impacting the budget
process.
9:36:04 AM
Co-Chair Stedman commented that the asset-to-liability ratio
indicated that the systems were fully funded in 2001, and the
State had not revised the information to reflect the fiscal
realities. The 100 percent funding ratio would not exist if the
ratio was restated retroactively.
9:37:19 AM
Co-Chair Stedman informed that the Committee had not deemed it
necessary to finance a restatement of the funding ratio, but
stressed that the "big reduction" reflected in the chart did not
occur in a single year.
9:37:30 AM
Co-Chair Stedman referred to page 5 of the presentation, and
reiterated that closing the defined benefits plan to new members
would not increase the unfunded liability of the plan. This
would be addressed further by the Department at a later date.
The adoption of a level dollar amortization schedule would also
be considered in future meetings.
9:38:42 AM
Co-Chair Hoffman spoke to the third point bulleted on page 5,
which forecast a lower employer contribution schedule in the
future. He asked if the Department was aware of a timeframe for
the rate reduction and asked the amount of the reduction.
9:39:13 AM
Ms. Millhorn replied that a schedule had not yet been prepared,
but would be requested from Buck Consultants. Section 1.5 of the
current valuations provide that the information will be produced
for the projected 25 year period.
9:40:02 AM
Co-Chair Hoffman found such a reduction "hard to predict" and
suggested that the rate may increase if a large proportion of
State employees who are members of the defined benefits system
remain in State employment.
9:40:43 AM
Ms. Millhorn agreed that the Department needed to provide more
discussion on that issue. She expressed that the unfunded
liability is currently fixed in the defined benefit plan. Use of
the level dollar amortization schedule allows the employer to
"liquidate" the unfunded liability debt, as it is not driven by
employee contributions.
9:41:33 AM
Co-Chair Stedman asked Ms. Millhorn to define "level".
9:41:38 AM
Ms. Millhorn explained that a level dollar amortization does not
include a growth factor.
9:41:49 AM
CHARLENE MORRISON, Chief Financial Officer, Division of
Retirement & Benefits, Department of Administration, elaborated
that a level dollar amortization means that the amount of
amortization in any given year is the same dollar amount. It
does not assume that increased employment rates will translate
into increased contribution amounts.
9:42:17 AM
Co-Chair Stedman clarified that the contributions mentioned
would be employer contributions.
9:42:21 AM
Ms. Morrison affirmed.
9:42:30 AM
Co-Chair Stedman asked for that information in the form of a
table in forthcoming presentations.
9:42:45 AM
Co-Chair Hoffman asked if the funding ratios listed on page 7
were calculated after the employer contributions were made.
9:43:19 AM
Ms. Millhorn responded that the funding ratios were based on the
valuation reports, not the experience study.
9:43:45 AM
Senator Elton asked when the Department would request a
contribution schedule from Buck Consultants, and when they
expected such a schedule to be produced.
9:44:15 AM
Ms. Millhorn replied that the Department would make the request
to Buck Consultants in the current week, and at that time would
ask for an estimate of the completion date as well as the
anticipated cost of the study.
9:44:32 AM
Senator Elton asked if Ms. Millhorn could estimate the date that
schedule would be available.
9:44:52 AM
Ms. Millhorn was unsure, but would inform the Committee when she
knew.
9:44:58 AM
Co-Chair Stedman expected matters concerning the proposed
natural gas pipeline to dominate latter Committee meetings, and
indicated that the Committee would strive to address the
retirement systems in a timely fashion. He requested the
information from the Division of Retirement and Benefits be
distributed to Members as soon as possible. If the cost of the
studies was an issue, he and Co-Chair Hoffman would address the
funding.
9:45:47 AM
Senator Elton assumed that the cost of funding the requests of
Buck Consultants would not be general fund dollars, but rather
PERS/TRS funds.
9:46:01 AM
Ms. Millhorn affirmed, stating that the studies are paid for
using the retirement system trust funds.
9:46:39 AM
Senator Elton referred to page 6 of the handout, and asked what
assumptions Buck Consultants used for future investment returns,
and how poor returns would affect the experience analysis
assumptions.
9:47:44 AM
Ms. Millhorn responded that Buck Consultants conducts thorough
analysis on investment rate return, as a lower assumption rate
drives up the liabilities. The ARMB sets asset allocations for
the retirement system, and that is the figure that Buck utilizes
to determine the needed investment return. Detailed information
was available.
9:48:47 AM
Co-Chair Stedman informed that both the ARMB and the Alaska
Permanent Fund Board would appear before the Committee.
9:49:06 AM
Senator Elton opined that it would be of benefit to the
Committee to examine the normal cost rate in comparison to the
average calculated rate.
9:49:33 AM
Ms. Millhorn stated that that information is available and would
be provided.
9:49:37 AM
Senator Huggins inquired how Alaska's funding ratio compared to
other similarly situated states.
9:50:06 AM
Ms. Millhorn responded that she must to examine the most recent
information provided by other states to make such a comparison.
She noted that a comparison can be difficult as some states
either do not provide health care to their members, or do not
prefund health care costs in the pension system.
9:50:55 AM
Senator Huggins asked for a brief explanation of the
implications of prefunding.
9:51:08 AM
Ms. Millhorn informed that the Governmental Accounting Standards
Board (GASB) ruled in 2005 that beginning in 2007, retirement
pension systems' post-employment health care must be accounted
for on an accrual basis.
Ms. Millhorn spoke to a report prepared in 2003 by Workplace
Economics that analyzes the health care costs to pensions
systems. The report indicates that there are 11 other pension
systems that prefund health care costs, which the PERS/TRS
systems began doing in 1976. Systems that do not prefund have
even more drastic unfunded liabilities. California, for example,
is facing $40 to $70 billion in unfunded liability as a result
of not accounting for these pension costs.
9:53:06 AM
Senator Huggins shared that he had benefited from learning of
other state's experiences in tackling their pension problems
while at a conference in Hawaii.
9:53:40 AM
Senator Thomas referred to the provision put into place by SB
141 that required an experience analysis be conducted "not less
than once every four years," and asked what the previous
practice had been.
9:54:03 AM
Ms. Millhorn responded that the prior statutory requirement was
once every six years for the PERS retirement system.
9:54:08 AM
Senator Thomas asked when the last experience analysis had been
conducted.
9:54:14 AM
Ms. Millhorn stated it was performed in 2000.
Senator Thomas asked the time frame that analysis covered.
Ms. Millhorn informed it pertained to the years of 1999 and
2000.
9:54:37 AM
Senator Thomas characterized that investment period as
"horrendous," yet noticed that the information on page 7 of the
handout reflected negative unfunded liability amounts for the
fiscal years of 2001 and 2002. He asked if there was any
attention directed towards the trend at that time.
9:54:54 AM
Ms. Millhorn clarified that Senator Thomas was referring solely
to the investment returns, and told that she was not in her
position at that time. Nonetheless, she characterized the
investment returns as "alarming". She advised the Committee to
discuss this subject further with the ARMB.
9:55:40 AM
Co-Chair Stedman added that the Committee's "historical file"
could produce the allocation of the liability for investment
performance, change in health care assumptions, and policy
changes implemented by the legislature. This would illustrate
factors that contributed to the current situation.
ADJOURNMENT
Co-Chair Bert Stedman adjourned the meeting at 9:57:10 AM
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