Legislature(2007 - 2008)SENATE FINANCE 532
02/15/2007 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Pers/trs Funding Status & Review by the Department of Administration | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
MINUTES
SENATE FINANCE COMMITTEE
February 15, 2007
9:02 a.m.
CALL TO ORDER
Co-Chair Bert Stedman convened the meeting at approximately
9:02:06 AM.
PRESENT
Senator Bert Stedman, Co-Chair
Senator Charlie Huggins, Vice Chair
Senator Kim Elton
Senator Joe Thomas
Senator Fred Dyson
Senator Donny Olson
Also Attending: MELANIE MILLHORN, Director, Division of
Retirement & 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 heard a presentation from the Department of
Administration regarding the Employer Contribution Rates for the
Public Employees Retirement System and the Teachers Retirement
System and the affect of establishing a new Defined Contribution
Retirement Plan for employees. No Committee action was taken.
9:02:13 AM
^PERS/TRS Funding Status & Review by the Department of
Administration
PERS/TRS Funding Status & Review
By the Department of Administration
Co-Chair Stedman listed three issues the Department of
Administration (DOA) would address during this meeting: the
first being how the actuarial contribution rate recommendations
for the Public Employees Retirement System (PERS) and the
Teachers Retirement System (TRS) impact the State and
municipalities; the second being "the effect of closing
membership" to the Defined Benefit (DB) retirement plan on June
30, 2006; and the third being the fiscal impact of implementing
a new Defined Contribution Retirement (DCR) plan for employees
as of July 1, 2006.
9:05:27 AM
MELANIE MILLHORN, Director, Division of Retirement & Benefits,
Department of Administration, addressed the material in the
Department's presentation titled "PERS and TRS Elements of
Defined Benefit Plans and Future Challenges" [copy on file]
dated February 15, 2007.
Page 2
Overview
I. Health Care Costs'
- A primary cost driver
II. Projected Contribution Amounts
III. Level-Dollar Amortization
IV. Closing Defined Benefit Plans
- Does not increase unfunded liability
Ms. Millhorn stated that the goal of this presentation is to
explain why "the Health care component is a significant driver
in the unfunded liability for PERS and TRS" and why it would
continue to be a challenge. The discussion would also include a
projection of the Employer Contribution Rate levels that might
be required to fund PERS and TRS benefits through the year FY
14; an explanation of the Level-Dollar Amortization method; the
implications of closing the DB plan; and the impact of
introducing a new PERS and TRS employment Tier with a DCR plan.
Ms. Millhorn emphasized that closing the DB plan to new
employees would not increase the unfunded liability experienced
by PERS and TRS. "In fact, it stems the growth of unfunded
liabilities that would be introduced to the system had those
systems not been closed."
9:08:01 AM
Page 3
I. Health Care Costs
AlaskaCare Retiree Health Plan
Article 12, Section 7 of the Alaska Constitution protects
pension and medical benefits for members from diminishment
or impairment.
How does the AlaskaCare Retiree Health Plan compare with
retiree health plans for other state pension plans?
· Workplace Economics, Inc. studied all 560 states in 2004
regarding retiree health plans and found that, for
Medicare-eligible retirees, 2 states offer no medical
plan; 11 provide no funding; 20 cost share; and 17 have
system-paid medical.
· Of the 17 states that offer system-paid medical, research
indicates there are only 8 that have constitutional
protection for medical benefits.
· The total PERS and TRS actuarial accrued liability as of
June 30, 2005, is $8 billion for medical and $11.3
billion for pension.
Ms. Millhorn qualified that PERS and TRS retiree medical plans
are protected benefits under Article 12, Section 7 of the Alaska
Constitution. A Public Fund Survey [copy on file], conducted in
2004 by Workplace Economics, found that, at the time, Alaska and
20 other states provided a DCR or cost share health plan. 17
states employed a system-paid medical plan in which the state's
retirement system rather than the member provided the cost of
the premium. Like Alaska, eight of those 17 states, had
constitutional protection provisions which prohibited
diminishment or impairment of benefits.
Ms. Millhorn noted that a recent [unspecified] article
proclaimed that, according to Governmental Accounting Standards
Board (GASB) standards which require health care benefits
obligations to be calculated on an accrual basis, New Jersey's
future health care benefits obligation amount to approximately
$78 billion in owed benefits. A separate article specified that
Texas, which does not provide constitutionally protected
benefits, has promised health care benefits amounting to $50
billion.
9:11:04 AM
Page 4
I. Health Care Costs
AlaskaCare Retiree Health Plan (cont'd)
· Retirees and dependents increased from 45,293 members to
53,235 from December 2001 to December 2006. This
represents an increase of just over 17.5% during this
period.
· Annually, the medical plan enrolls approximately 2,000
retired members and, with dependents, adds approximately
4,000 lives to the retiree plan.
· The universe of members who are or may become eligible
for a medical benefit in the future is approximately
100,000, not including dependents.
Ms. Millhorn discussed the demographics of the State's
retirement system members. The ratio of dependents per retiree
is approximately 0.9 percent. Approximately 4,000 individuals
are added to the retiree plan each year even though only
approximately 2,000 members retire each year. Dependents of the
retiring members account for the difference.
Ms. Millhorn estimated that approximately 250,000 people could
be eligible for medical benefits in the future when dependents,
"deferred vested" and vested retirees are considered. Deferred
vested members are "individuals who have service in the system.
They have not refunded out and they can come back and serve that
additional period of service and receive medical benefits and a
pension benefit from the system."
Ms. Millhorn pointed out however, that "individuals who have
refunded out of the system over the period of years" were not
included in the 100,000 "universe" of members who might be
benefit-eligible. This group of individuals was the subject of
intense discussion by the Senate Finance Committee during
deliberations on SB 141, the PERS and TRS legislation passed by
the 24th Alaska State Legislature that established the DCR plan.
Ms. Millhorn noted that these individuals are referred to as
"former members" in Section 39.35.680, the definition section of
the State statute pertaining to PERS. "They have retired out of
the system but the law allows them to come back, re-establish
their indebtedness to the system up until 2010." Refunded
members would be ineligible to return to State service and
subsequently establish indebtedness after that date. The
Division of Retirement & Benefits sent notification to 68,000
such individuals.
Ms. Millhorn communicated that the ability of these former
members to reenter the system during this time period was a
significant consideration. Based on historical data, 800 or 900
members reenter the PERS and TRS system and re-establish "that
indebtedness provision" annually. The liabilities for these
individuals are unaccounted until "the next valuation period"
conducted after the re-establishment of that relationship.
9:15:16 AM
Page 5
I. Health Care Costs
AlaskaCare Retiree Health Plan (cont'd)
· Medical share of PERS liability has grown from just under
30% to approximately 45% in last nine years. Medical
share of TRS liability has grown from just under 20% to
approximately 33% in last nine years.
· Medical plan is the same for all members of PERS/TRS
Defined Benefit (DB) plan. Differences are found in the
eligibility criteria for PERS and TRS.
· 75% of medical costs is for DB plan members between ages
55 and 65. Alaska statute requires that the AlaskaCare
plan becomes supplemental to Medicare at age 65. Medical
cost for members age 65 and over represents 25% of total
medical costs.
Ms. Millhorn reviewed the information and noted that, while the
DB medical plans for PERS Tier I, II, and III employees and TRS
I and II employees were identical, there were differences in the
eligibility criteria. PERS Tier I employees vest after five
years of service and could receive normal pension and medical
benefits at age 55; Tier II employees vest after five years and
could receive normal pension and medical benefits at age 60;
Tier III employees vest after five years but must serve ten
years before becoming eligible for pension and medical benefits
at age 60.
9:17:07 AM
Page 6
I. Health Care Costs
Retiree Plan Claims Costs
Noted below are the retiree plan claims costs for FY2001
through FY2006.
Health Claims Cost
by Fiscal Year Amount
FY 2006 $285 Million
FY 2005 $256 Million
FY 2004 $226 Million
FY 2003 $205 Million
FY 2002 $148 Million
FY 2001 $128 Million
Ms. Millhorn noted that claims costs increased 223 percent
between FY 2001 and FY 2006. The addition of 4,000 new retirees
to the plans each year attributed to this increase. The
expectation is that costs would continue to rise.
9:17:54 AM
Co-Chair Stedman asked the results of the effort to control and
contain increasing medical benefit costs by requiring members in
the PERS and TRS systems to provide dependent verification such
as marriage certificates and birth records.
Ms. Millhorn responded that a 13.6 percent reduction in eligible
dependents has resulted from the dependent verification process
conducted with active and retiree plan members. This equated to
annual health care plan savings of approximately $14 million.
The retirement health care plan accounted for ten percent of the
dependent reduction and $10.7 million of the savings.
9:19:45 AM
Co-Chair Stedman recalled that when the Legislature initially
became aware of the PERS and TRS unfunded liability situation a
few years prior, the unfunded liability associated with members
who were eligible to reenter the system to vest was estimated to
be $300 million.
9:20:28 AM
Ms. Millhorn stated that the results of a study on individuals
who were vested and who might re-employ with the systems would
be provided. The circumstances of such a person nearing
retirement and "the universe of opportunity" the systems would
provide "would incentivize an individual to come back to PERS or
TRS employment in order to secure those benefits into the
future." "The probability of that happening" and the resulting
exposure to the system "was very high".
Ms. Millhorn noted that in the early 1990s, the Financial
Accounting Standards Board (FASB) initiated the requirement that
retirement systems "accrue for retiree medical benefits". At
that time, 66 percent of employers with 200 or fewer employees
provided retiree medical benefits. After the accrual requirement
mandate, the number of such employers providing those benefits
declined to approximately 33 percent.
Ms. Millhorn pointed out that a similar trend could occur in the
public sector.
Ms. Millhorn stressed that while retiree medical benefits are
"very valuable to employees … they are expensive to employers".
9:22:35 AM
Senator Elton remarked that the possibility of 68,000 former
employees reentering the system "sounds alarming". He asked an
estimate of the number of people who might re-enter the system
before 2010, considering the limited number of job openings and
the fact that hiring is conducted on a competitive basis.
Ms. Millhorn communicated that the PERS and TRS systems
typically have 4,400 job openings each year. A probability study
conducted by the Department indicates that historically 800 to
900 former members re-enter the systems annually. Additional
information could be provided.
9:24:21 AM
Senator Elton thus expressed that utilizing the numbers 800 to
900 per year, rather than a universe of 68,000, was "more
relevant" to the discussion. He deduced, however, that the 2010
deadline might spur an increase in those numbers.
Ms. Millhorn reiterated that the figures reflect the historical
experience.
9:25:08 AM
Co-Chair Stedman shared that approximately 56,000 prior service
individuals existed as of February 2005. Even though the number
of people who might re-enter the systems was an unknown element,
the "magnitude" of the potential increase in liabilities is not
reflected in the data.
9:26:04 AM
Senator Olson asked whether contributions made by employees
hired on or after July 1 2006 would "co-mingle" with those of
employees in the DB plans.
Ms. Millhorn responded in the negative.
Senator Olson questioned whether employees hired on or after
July 1, 2006 would have a positive or negative affect on the
systems' unfunded liabilities.
Ms. Millhorn asserted that the introduction and design of the
new tier, which became effective July 1 2006, was "beneficial to
the systems". The defined and fixed components of this "hybrid"
DCR plan would not increase the unfunded liability.
9:27:30 AM
Senator Thomas asked whether the aforementioned universe of
68,000 people included both vested and non-vested individuals.
Ms. Millhorn noted that the "former member" reference applies to
those individuals who "have refunded out of the system" by
withdrawing their contributions and its earnings from the
system. In order to be eligible for plan benefits, former
members must re-employ with either the PERS or TRS system to re-
establish their indebtedness and repay their contributions to
the system either as a lump sum or via a payment schedule.
Depending on circumstances such as a person's age or prior
length of service, a former member might be able to re-establish
their indebtedness after being re-employed for as little as one
day.
Ms. Millhorn reminded the Committee that SB 141 contained a
provision that specified that former members had only until 2010
to re-establish their indebtedness. The Division "was required
to identify who those members are" and provide "proper notice"
of the July 1, 2010 date to them "because under law" their
ability to re-employ had not previously been date certain.
9:30:45 AM
In response to a question from Senator Thomas, Ms. Millhorn
clarified that not all 68,000 former members were vested.
Regardless of their vesting status, a former member would be
required to re-employ and re-establish indebtedness in order to
receive plan benefits. Those who were not vested must re-employ,
repay the indebtedness, and serve the required amount of time to
become vested.
Senator Thomas understood that, while information reflecting the
potential impact of this issue was available, it had not been
provided.
Ms. Millhorn specified that the information gleamed from the
Division's analysis could be provided.
9:32:26 AM
Co-Chair Stedman emphasized that there was "liability of some
magnitude that's not reflected" in the provided material.
Members seeking further information should contact the
Department.
9:32:52 AM
Page 7
II. Projected Contribution Amounts
PERS Projected Contribution Amounts FY 04 through FY 15
Projections at Calculated Rate
[Bar chart depicting actual contributions: $106 for FY 04,
$178 for FY 05, and $272 for FY 06; and projected
contributions: $356 for FY 07, $615 for FY 08, $616 for FY
09, and amounts ranging between $655 and $657 for FY 10
through FY 15.]
Data, Assumptions, Methods and Plan Provisions:
· No payroll growth is used for FY 08 rates and later.
· No new members after July 1, 2006.
· All other data, assumptions, methods and plan
provisions are the same as those described in the June
30, 2005 valuation reports.
Ms. Millhorn directed attention to the projected PERS
contribution amounts depicted on the chart. The contribution
amounts required into the future would be "based on the
valuation of June 30 2005 and the unfunded liability for PERS
and TRS".
Ms. Millhorn reviewed the contribution rates for PERS and
advised that, although the rates appear to stabilize between FY
08 and FY 15, the determining factor would be whether "the
assumptions" in the valuation report would be achieved
"annually". Any deviation from those assumptions, such as an
increase in health care costs, would increase the contribution
amount.
9:34:12 AM
Page 8
II. Projected Contribution Amounts
TRS Projected Contribution Amounts FY 04 through FY 15
Projections at Calculated Rate
[Bar chart depicting actual contributions: $69 for FY 04,
$94 for FY 05, and $128 for FY 06; and projected
contributions for FY 07 ($149), FY 08 ($290), FY 09 ($275)
and amounts ranging between $291 and $304 for FY 10 through
FY 15.]
Data, Assumptions, Methods and Plan Provisions:
· No payroll growth is used for FY 08 rates and later.
· No new members after July 1, 2006.
· All other data, assumptions, methods and plan
provisions are the same as those described in the June
30, 2005 valuation reports.
Ms. Millhorn reviewed the contribution projections for the TRS
system. These rates would be subject to the same terms that
applied to the PERS system.
9:34:20 AM
Page 9
II. Projected Contribution Amounts
PERS/TRS Projected Contribution Amounts
FY 04 through FY 15
Projections at Calculated Rate
[Bar graph consolidating the PERS and TRS projected
contribution rates. Combined actual contributions were:
$174 for FY 04, $272 for FY 05, and $400 for FY 06; and
projected contributions for FY 07 ($505), FY 08 ($905), FY
09 ($891) and amounts ranging between $946 and $961 for FY
10 through FY 15.]
Data, Assumptions, Methods and Plan Provisions:
· No payroll growth is used for FY 08 rates and later.
· No new members after July 1, 2006.
· All other data, assumptions, methods and plan
provisions are the same as those described in the June
30, 2005 valuation reports.
Ms. Millhorn reviewed the information.
9:35:13 AM
Page 10
II. Projected Contribution Amounts
How is the PERS Employer Contribution Rate Calculated?
2005 Valuation/2008 Rate
($ Billions)
$12.844 System's Accrued Liabilities Estimated
- $ 8.443 System's Asset Values Determined
= $4.402 Unfunded Liability
Divided by 25 yrs Amortization Period (w/payroll growth
included)
Approx. $0.286 FY08 Unfunded Liability Payment
Divided by 1.587 FY 08 PERS Payroll Base
= 18.03% Past Service Contribution Rate
+ 7.25% Additional Increment for Level Dollar
Amortization
= 25.28% Past Service Cost
+ 14.48% Normal Cost Rate ($0.338)
= 39.76% Consolidated Board Adopted Rate
Ms. Millhorn, stating that employer contribution amounts are
based on the dollars required to support the system "as
converted to a percentage of pay", reviewed the components
involved in calculating the PERS employer contribution rate. The
2008 employer contribution rate is based on the year 2005
valuation.
Ms. Millhorn defined Normal Cost Rate as "the cost to pay for
benefits for the members at the end of the valuation period"; in
other words, the cost associated with a member not including the
unfunded liability.
9:37:11 AM
Co-Chair Stedman asked the definition and impact of the employee
Past Service contribution rate.
Ms. Millhorn explained that the Past Service cost "is the
unfunded liability for the system that is amortized over that
25-year period".
Ms. Millhorn communicated that the Level Dollar Amortization
process is being considered as a means "to liquidate that past
service cost". In this process, the unfunded liability would be
divided by the amortized period, in this case 25 years, to
determine the level dollar payment that must be paid into the
system each year.
9:38:19 AM
Page 11
II. Projected Contribution Amounts
PERS Contributions as a Percent of Payroll
($ Millions)
[Chart presenting annual contribution rates as a percent of
the Total DB and DCR Employee Payroll or solely the DB
Employee Payroll.]
Ms. Millhorn stated that this chart was developed to address the
concern that closing the PERS and TRS DB plans and implementing
the DCR plan would increase costs of the system. This issue had
been discussed at length during the development of SB 141.
Ms. Millhorn shared that those discussions also contemplated the
issue of whether to "liquidate the past service costs". Doing so
would require inclusion of "the entire payroll base". While this
would "keep the rate into the system low", it would not change
"the annual contribution amount into the system" as depicted in
the first column on the chart. The amounts depicted reflected
the projected contribution rates for PERS as previously
discussed on page 7.
Ms. Millhorn directed attention to the DB and DCR columns under
the Employee Payroll heading on the chart, specifically the
annual contribution rate for FY 12, which is projected to be
$657 million. The FY 12 payroll base specific to DB members was
$1,286,000,000 and the DCR payroll amount was $578,000,000 for a
total payroll base of $1,864,000,000.
Ms. Millhorn explained that the contribution rate as a percent
of Employee Payroll could be approached two ways. It could be
based solely on the DB Employee Payroll which would result in a
51.09 percent contribution rate or it could be "spread across
the entire payroll" of both DB and DCR employees. This would
result in a 35.25 percent contribution rate. "The point being
that" neither method would change the contribution amounts that
would be required to support the system.
9:40:56 AM
Page 12
Illustration of Amortization Methods
Amortization Payment Over 25-Year Period
[Graph comparing the annual costs of the Level Dollar
Amortization payment method to the annual costs of the
Level Percent of Pay method over the years 2005 through
2029.]
· Level dollar amortization amount stays the same over
the entire period
· Level percent of pay starts out at a lower amount and
increases as payroll increases
· Contribution amount is greater over the entire period
under level percent of pay amortization method
Adopting level-dollar amortization schedule is expected to
save $140 million for PERS and $74 million for TRS over the
25-year amortization schedule FY 08 through FY 2031
AT EASE 9:41:13 AM / 9:41:25 AM
9:41:28 AM
Ms. Millhorn pointed out that this chart reflects the affect of
changing the calculation method from a percent of pay to a level
dollar amortization schedule. While the initial costs of
implementing the Level Dollar Amortization method would exceed
those of the Level Percent of Pay method, "it would result in
less interest being paid over that amortized period". This would
result in a savings of $140 million for PERS and $74 million for
TRS.
Ms. Millhorn stated that the closing of the DB plan allowed the
Alaska Retirement Management Board (ARMB) to consider the Level
Dollar Amortization method. Implementing it would allow the
plans' unfunded liability to be paid "in a faster manner" at
less cost than the Level Percent of Pay method.
9:43:02 AM
Page 13
Illustration of Amortization Methods
Unfunded Balance Over 25-Year Period
[Graph depicting how the Unfunded Liability would be
liquidated under the Level Dollar Amortization method as
compared to the Level Percent of Pay method.]
· Level dollar amortization method reduces unfunded
balance more quickly.
· Unfunded balance increases under level percent of pay
amortization method at first since amortization
payments do not cover interest in early years.
· More interest is paid under level percent of pay
amortization method.
Ms. Millhorn explained that this graph illustrates that the
Level Dollar Amortization method would liquidate the unfunded
liability debt faster than the Level Percent of Pay method.
9:43:40 AM
Page 14
IV. Closing DB Plans
PERS Defined Benefit (DB) Plan (in billions)
[Diagram depicting the various factors involved in
determining the DB plan's fiscal condition:
Liabilities of $12.84 billion are subtracted from assets
amounting to $8.44 billion, resulting in an unfunded
liability to Employers of $4.4 billion, based on the 2005
PERS Valuation.
The assets consist of investment income and DB Employer and
DB Participating Employer Contributions.
The liabilities consist of Pension Benefits and Health
Costs, measured on an annual basis.]
· Defined Contribution Retirement (DCR) Plan employee
does not contribute to DB plan.
· DCR Plan Employee does not receive DB benefits, so
does not impact DB liabilities or the DB unfunded
liability
· DCR Plan payroll not subject to DB employer
contribution rates
Ms. Millhorn stated that this information reflects the affect of
closing the DC plan. She reminded that the employee contribution
rate is "fixed in statute" at 6.75 percent for PERS. Investment
earnings, in terms of a longtime horizon for the DB plan, would
account for 75 percent of the total system funding; employee and
employer contributions would provide 25 percent.
Ms. Millhorn reiterated that closing the DB plan to new members
would not increase the system's unfunded liability. "The
construction" of the new Tier for DCR plan employees was
designed "to limit that volatility going forward and stem the
growth of unfunded liabilities."
Ms. Millhorn cautioned, however, that "any change in assumptions
that increase the liabilities are borne by the employer. The
employee's contribution amount is fixed."
9:46:37 AM
Page 15
IV. Closing DB Plans
PERS Contribution Comparison
[Graph comparing the contribution levels that would be
required to pay for the benefits of PERS DB plan members to
those of members in the new DCR plan for fiscal years 2008
through 2038.]
Data, Assumption, Methods, and Plan Provisions
· Normal cost for new members under the DB plan remains
constant as of June 30, 2005 (14.48%).
· New tier members are assumed to get the employer DCR
contribution rate of 5%, 3% for the HRA, 1% for the
medical plan, and .67% for occupational death and
disability. These rates are assumed to remain
constant.
· Assets are assumed to earn 8.25% and there are no
actuarial gains or losses assumed.
· Amortization is based on level percent of pay.
· All other data, assumptions, methods, and plan
provisions are the same as those described in the June
30, 2005 valuation report.
Ms. Millhorn reminded Members that the contribution levels
depicted on this graph could increase were assumptions to
change. The contribution levels associated with the new DCR plan
tier were slightly below those required for the DB plan. The
Normal Costs relating to DB plan members is calculated to be
14.48 percent. The fact that members in the DCR plan "do not
carry volatility" would allow the unfunded liability to be
addressed. Costs would peak at approximately 2030 and then
decline as the unfunded liability was paid off. Contribution
amounts after that point "include more members who are under the
DCR plan" and thus the rates are lower.
9:48:29 AM
Page 16
IV. Closing DB Plans
Board Adopted Employer Contribution Rates - FY '90 thru FY
'08
[Chart depicting the PERS and TRS Funding Ratios, the
Employer Normal Rates, Past Service Rates, Actuarial
Computed Rates and Board Adopted Rates from FY 90 through
FY 2008.]
Large jump between FY 07 [Board Adopted Rate of 39.76
percent] and FY 08 [Board Adopted Rate of 54.03 percent]
reflects need to get to the actuarially computed
contribution rate.
Ms. Millhorn spoke to the multitude of information depicted on
this page, including historical costs of the contribution
amounts required to fund the PERS and TRS systems; previous
funding ratios; and rate spikes that occurred as a result of
actuarial audits being conducted.
9:49:44 AM
Co-Chair Stedman stressed the importance of the information on
this page. Continuing, he asked for further information about
the correlation between the Actuarial Valuation Data Year, the
Board Adopted Year, and the Rate for the Fiscal Year, as
depicted in the first column of the chart.
Ms. Millhorn explained that there is a two-year lag between the
time the ARMB adopts a rate and when it is implemented. She
reviewed the timeframe involved in the process and assured the
Committee that efforts have been made to reduce this lag time.
9:52:50 AM
CHARLENE MORRISON, Chief Financial Officer, Division of
Retirement & Benefits, Department of Administration reviewed
some of the ideas that have been considered in the effort to
reduce the lag time including changing the evaluation date to a
calendar year rather than the State's July 1 to June 30 fiscal
year. This "would shave off six months" and allow the ARMB to
receive the valuation earlier in a fiscal year; however, the
determination was that the benefits gained by this effort would
not offset the costs associated with conducting an evaluation
separate from other State timeframes. Another thought was "to
set rates based on a roll-forward evaluation"; however the
Division was uncomfortable with that effort as it would "set
rates on information that is not as solid as a full evaluation".
9:55:52 AM
Co-Chair Stedman affirmed that the two-year lag time issue was
"problematic and … a solution to minimize that" would be
beneficial.
Co-Chair Stedman also asked for information about the five
percent limit placed on employer contribution rate annual
increases.
Ms. Millhorn explained that the PERS Board had adopted a
regulation which "precluded the Board from adopting a rate
higher than five percentage points in any one year."
Ms. Millhorn referred to the calculated rates depicted on page
16, specifically those pertaining to FY 05, FY 06, and FY 07.
While the State's actuary had recommended a rate of 24.91 in FY
05, the five-percent maximum requirement limited the PERS Board
to adopting a rate of 11.77 percent since the FY 04 rate had
been 6.77 percent. While the actuary recommended a rate of 25.63
percent for FY 06 and 28.19 percent for FY 07; the Board was
limited to adopting a rate of 16.77 percent and 21.77 percent,
respectively.
Ms. Millhorn informed that the PERS five percent change
limitation was repealed in June 2006. The FY 08 rates adopted by
the Board "included the recommendation by the actuary and a
Level Dollar Amortization schedule to arrive at the 39.76
[percent] as a consolidate rate across PERS."
Ms. Millhorn noted that, while no rate increase limit had been
adopted by the TRS board, they "adopted rates that were fairly
comparable in increase" to the PERS rates as opposed to adopting
the actuarial recommendations. The result is an approximate $750
million funding shortfall.
9:59:13 AM
Co-Chair Stedman advised the Committee that the impacts of the
Board's adopted rate actions would be discussed further in the
coming week.
9:59:47 AM
Senator Elton asked that the future discussion on the employer
contribution rates delve into such things as how much of the FY
08 39.76 percent PERS and 54.03 percent TRS employer
contribution rates might be attributable to the switch to the
Level Dollar Amortization method.
10:00:27 AM
Co-Chair Stedman acknowledged. Other requests from Members were
welcome.
10:01:04 AM
Senator Elton, referring to the PERS Contribution Comparison
chart on page 15, asked that a chart be developed that would
separately portray the contribution amounts for Tier 1, Tier II,
Tier III, and Tier IV, as "lumping" all the DB members into one
grouping "skews" the information.
Senator Elton also asked that the discussion include the
reasoning behind specifying a 25 year Level Dollar Amortization
schedule.
10:02:08 AM
Senator Elton communicated that many people are confused as to
whether the establishment of the DCR plan would negatively or
positively affect the retirement systems in the future. Of
particular interest is the impact of allowing individuals who
leave employment after five years to take both their
contribution and their employer's contribution with them. People
in the DB plan are only permitted to remove their contribution
from the plan.
10:03:07 AM
Ms. Millhorn affirmed that employees in the new DCR plan "do
have portability associated with their benefit plan." She
recognized this as being a benefit to both the system and the
employee. Demographic research indicates that the portability
component is important to employees "as they move between
different employment opportunities". For example, this would be
attractive to nurses working at the City and Borough of Juneau's
Bartlett Regional Hospital who move frequently. The portability
component "does not add liabilities to the system": the employer
contribution rate is known and employees have employment
mobility.
10:04:47 AM
Co-Chair Stedman understood Senator Elton's question to be to
"the mechanical side of how the Trust works with the different
tiers", including how the DCR plan would impact Trust dollars or
employee and employer contributions.
10:05:28 AM
Ms. Millhorn responded that the DCR plan includes a vesting
schedule that specifies that a PERS employee must contribute
eight percent and the employer must contribute five percent.
Employees are 25 percent vested after two years; that amount
increases 25 percent each year with full vesting after five
years. In addition, the employer makes a .99 percent annual
contribution to the medical plan on behalf of the employee as
well as a contribution to their occupational death and
disability benefits. The medical and occupational death and
disability benefits are fixed and guaranteed.
Ms. Millhorn noted that, under the DCR plan, employers also
contribute to another defined contribution component, the Health
Reimbursement Account (HRA). The employer contribution to HRA
would be restored were an employee who left employment after
five years to re-employ before the age of 65. "That's a very
powerful recruitment and retention tool."
10:07:07 AM
Senator Elton understood "the mechanics" of the program, but
required convincing that the system would not be negatively
impacted when employer dollars were pulled out of the system.
Employer dollars remain in the system under the DB plan.
Ms. Millhorn clarified that both the employer and member
contributions to each of the DCR plan benefits detailed earlier
are placed in a Trust account in the DCR system "for the
exclusive benefit of the member." The accounting of that money
"is completely separate" from the DB plan.
Senator Elton asked to meet with the Department separately to
further discuss his concern.
Co-Chair Stedman acknowledged.
10:09:52 AM
Senator Dyson, referring to the PERS and TRS projected
Contribution Amounts information depicted on pages 7, 8, and 9,
asked whether the assumption going forward was that health costs
would not increase.
Ms. Millhorn replied that the trends would support there being
continuing increases in health care costs both nationally and in
Alaska. Health care costs have compounded annually over the past
ten years in spite of cost containment efforts.
10:11:08 AM
Senator Dyson opined that "the leveling out" of the projected
contribution rates depicted on pages 7 though 9 give a false or
"unrealistic" impression. He estimated that a seven or eight
percent increase in health care costs would continue to be the
experience.
Co-Chair Stedman noted that the Level Dollar Amortization
schedule that occurred in conjunction with the closing of the DB
plans would be addressed in future discussions on this issue.
Co-Chair Stedman also stated that, in an effort to better manage
the systems, reviews by numerous actuaries as opposed to a
single actuary would be conducted.
Co-Chair Stedman requested Members to notify him of any issue
requiring further attention.
10:13:35 AM
Senator Elton revisited his earlier requests; specifically
asking that future data be aggregated by tiers rather than
lumped together.
Co-Chair Stedman thought this information might be available.
Ms. Millhorn, responding to Senator Elton's request, clarified
that the actuary "has not calculated liabilities by Tier I, Tier
II, and Tier III". She did not desire "to create a false
expectation that such information was "readily available". The
Division would ask the actuary to provide an estimate of the
time and cost of conducting such an exercise.
Co-Chair Stedman acknowledged and surmised that the older the
tier the more expensive.
10:15:42 AM
Co-Chair Stedman expressed that some historical information
regarding tiers might be available. This discussion would
continue next week.
AT EASE 10:16:16 AM / 10:16:27 AM
Co-Chair Stedman conducted Committee housekeeping.
ADJOURNMENT
Co-Chair Bert Stedman adjourned the meeting at 10:16:39 AM
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