Legislature(2007 - 2008)SENATE FINANCE 532
02/20/2007 08:30 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Pers/trs Funding Status & Review | |
| 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 20, 2007
8:33 a.m.
CALL TO ORDER
Co-Chair Bert Stedman convened the meeting at approximately
8:33:34 AM.
PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Charlie Huggins, Vice Chair
Senator Kim Elton
Senator Donny Olson
Senator Joe Thomas
Senator Fred Dyson
Also Attending: DAVID TEAL, Director, Legislative Finance
Division, Legislative Agencies & Offices
Attending via Teleconference: There were no teleconference
participants
SUMMARY INFORMATION
^PERS/TRS Funding Status & Review
PERS/TRS Funding Status & Review
8:33:39 AM
Co-Chair Stedman stated that the information presented today
would assist the effort to address continuing issues pertaining
to Employer Contribution Rate levels and the unfunded
liabilities of the Public Employees Retirement System (PERS) and
the Teachers Retirement System (TRS), and their impact on the
operating budgets of the State, municipalities, school
districts, and the University of Alaska. The "asset/liability
mismatch" would be one of the key elements addressed today.
AT EASE 8:35:40 AM / 8:36:48 AM
DAVID TEAL, Director, Legislative Finance Division, Legislative
Agencies & Offices, noted that many of the items slated for
discussion were previously addressed in the "PERS and TRS
Funding Status and Review" presentation conducted for the
Committee on February 15th by Melanie Millhorn, Director,
Division of Retirement & Benefits, Department of Administration.
Mr. Teal directed his remarks to the Legislative Finance handout
titled "PERS & TRS Funding" [copy on file] dated February 20,
2007.
8:37:47 AM
Page 2
Liability/Asset Gap
PERS/TRS Funding Ratio
[Chart comparing the Accrued Liability of the PERS/TRS
systems to its Assets. The references to FY 97 through FY
05 below the chart indicate the data year. The Rate Years
FY 05 through FY 08, inside the chart, reflect the year
impacted by that data. For example, data from FY 02
impacted the Rate Year FY 05.]
Mr. Teal explained that, as depicted on the chart, the PERS and
TRS systems' assets and liabilities were in alignment during
data years FY 1997 (FY 97) through FY 2001 (FY 01). However,
when data was updated in FY 01 and factored into Rate Year FY
04, the scenario changed. The discrepancy between the two has
continued to increase and a $6.9 billion gap is projected for
Rate Year FY 08. Thus, what was not an issue of concern four
years ago, has now become a major concern to the State and local
governments.
Mr. Teal stated that the retirement systems must forecast for
the long-term "because it has to look at people's entire working
lives and then their retirement as well". A minimum 50-year time
horizon is the norm.
Mr. Teal communicated that the systems are "supposed to be self-
adjusting" in that assets should increase in step with
liabilities. Such things as growth in the wage base and/or an
increase in the contribution rate level would increase the asset
base. To that point, he noted that the contribution rate levels
"are calculated by actuaries and adjusted each year".
Mr. Teal asserted that the self-adjusting system worked well
until "suddenly, the system exploded and opened a gap" between
the systems' liabilities and assets. That gap is referred to as
the "unfunded liability of the system … it went from virtually
zero to five million dollars in one year."
8:40:54 AM
Mr. Teal pointed out that the systems' unfunded liabilities were
increasing faster than their assets. This is evidenced by the
fact that the upward slope of the accrued liability line on the
chart was steeper than the growth slope of the assets line.
Mr. Teal advised that because the systems' self-adjusting
mechanism was designed to address "drifts" rather than
"explosions", there is a question of whether that mechanism
could address the level of unfunded liabilities being
experienced.
Mr. Teal expressed that such things as the downturn in the
financial market in 2001 attributed to the decline in assets.
The actuary credited increasing medical costs and longer life
expectancy as factors increasing liabilities. Changes in the
actuarial assumptions also were a factor.
8:42:32 AM
Mr. Teal reiterated that the systems might have reached a point
beyond that which could be addressed by the self-adjusting
mechanism. This is one of the reasons this discussion "is so
important". A deep understanding and review of the details is
paramount.
Mr. Teal contended that a minimum of one piece of new
legislation would be required "to adjust the system" as simply
adjusting the contribution rates would not be sufficient.
8:43:10 AM
Page 3
Questions
1. What Does the Unfunded Liability Mean?
· To Retirees - Not Much. Benefits cannot be reduced.
There is no cash flow problem.
· To Employees - No direct impact; employee contribution
rates cannot be increased unilaterally. But there may
be indirect costs associated with higher benefit
costs.
· To Employers - Higher Contribution rates in the
absence of other cash infusions.
Mr. Teal reviewed how the unfunded liability issue might affect
PERS and TRS retirees, employees, and employers. Retirees would
experience little impact as their benefits could not be reduced.
While there would be no direct impact on employee's contribution
rates since those rates are fixed, indirect impacts such as
restrictions on future employment opportunities and salaries
could be experienced as employers absorb additional system
costs.
Mr. Teal explained that the unfunded liability would have the
most impact on employers as their contribution rates would
continue to increase, absent some "major cash infusion" by the
State.
8:44:49 AM
Page 4
Questions
2. Can the gap close as quickly as it opened?
Don't count on it. (But note TRS 91-98)
3. If rate increases close the gap, are we looking for a
solution when no problem exists?
Ask municipalities if contribution rate increases is a
crisis.
4. What is the State's role in fixing the system?
That depends on the system.
Mr. Teal questioned whether the system's self-adjusting
mechanism "on its own" would be able to close the unfunded
liability gap without increasing employer's contributions rates
to unreasonable levels.
Mr. Teal directed attention to the chart titled "Board Adopted
Employer Contribution Rates - FY '90 thru FY '08", page 16, of
the aforementioned February 15th Department of Administration
Division of Retirement & Benefits' presentation [copy on file].
As depicted on that chart, the TRS adopted Employer Contribution
rates were lower than the actuarial recommended rates for eight
years. "What that would normally mean is that the system is
being under-funded" and a gap between the assets and liabilities
would occur. The fact that the Actuarial recommended rate
lowered after those eight years indicates that "the system fixed
itself. It can happen, but I think it could only happen when you
catch it quick enough and it's sort of a drift rather than a
major shift in what happened."
Mr. Teal identified this as being an issue in the lawsuit the
State is contemplating against the State's former actuarial,
Mercer Human Resources Consulting. "Although it's a self-
adjusting system and we could have or should have been paying
more into it, we didn't."
Mr. Teal contended that the level of the unfunded liability
exceeds the system's ability to self-adjust. "The actuarial
assumptions that were used may be responsible for opening up
that system to the point where the system cannot fix itself."
8:46:38 AM
Mr. Teal assured the Committee that the gap between liabilities
and assets would close; however, it would not "close quickly" as
the "rate increases are designed to close the gap over a 25 year
period."
8:46:56 AM
Mr. Teal addressed the question of whether there "really was a
problem" if the gap could be "closed by itself in 25 years". He
could not definitively counsel the Legislature in respect to
whether we might be "looking for a solution" to a non-existent
problem, but he did suggest that Legislators "ask the
municipalities if the current contribution rates are a crisis in
their eyes". He believed their response would be that "they
simply can't afford the high rates." A determination must be
made as to what role the State should take in "fixing the
system".
8:47:54 AM
Page 5
State Financial Support
· The state fully paid cost increases in the TRS system.
· The state fully paid cost increases for its own
employees.
· The state paid a portion of cost increases for local
governments, despite the fact that it has no legal
responsibility to pay these costs.
Mr. Teal reviewed the State's financial support efforts since
2004. There is a question as to whether the portion of the costs
paid by the State for local governments was enough as the State
simply picked up the annual increases in costs.
8:48:30 AM
Page 6
Financial Contributions (%)
[Bar graph depicting the level of the State and Local
Contribution Rates to Local PERS for FY 2004 through FY
2008:
FY 2004: State 0.0%, Local 7%
FY 2005: State 5%, Local 7%
FY 2006: State 5%, Local 12%
FY 2007: State 5%, Local 17%
FY 2008: State 18%, Local 22%]
Mr. Teal addressed the question of whether the State had truly
picked up the increase in costs since the percentages paid by
municipalities increased from seven percent in FY 04 and FY 05
to 12 percent in FY 06, to 17 percent in FY 07, and to 22
percent in FY 08 while the State's percent remained constant at
five percent until it increased to 18 percent in FY 08. The
percents depicted for municipalities were averages as rates
varied from one municipality to another.
Page 7
Financial Contributions ($ Mill)
State and Local Contributions to Local PERS
[Bar graph depicting the level of State and Local monetary
contributions to Local PERS for FY 2004 through FY 2008:
FY 2004: State $ 0.0, Local $30.0
FY 2005: State $21.4, Local $30.0
FY 2006: State $21.4, Local $51.4
FY 2007: State $21.4, Local $72.8
FY 2008: State $77.0, Local $94.2]
Mr. Teal stated that the State/municipality contribution
percents on page 6 are depicted in terms of dollars on page 7.
"The State has picked up the annual increases from the prior
year, but not cumulative increases." Thus, local contributions
increased from $30 million in FY 04 to $94 million in FY 08.
8:50:18 AM
Mr. Teal advised that municipalities' contribution levels would
continue "growing rapidly" absent a change in the State's
current practice. Municipalities' costs could increase to $170
million in FY 09.
8:50:35 AM
Page 8
Going Forward
But paying the bill is not the same as fixing the system.
There are several issues the legislature may wish to
address:
· Discriminatory hiring
· Allocation of costs
· Affordability
· Unfunded liability
· Other technical items
A Possible Fix? - Make PERS a "Cost Share Plan" like TRS.
Mr. Teal stressed that the State's simply "paying the bill"
would not fix the system. The issues depicted on this page as
well as consideration of making PERS a cost-sharing system like
TRS should be included in the discussion. He characterized the
retirement system as having "some broken pieces" as opposed to
being "dysfunctional."
Mr. Teal, in concluding his remarks, specified that Co-Chair
Stedman had requested him to focus today's discussion on issues
and costs being experienced by the systems. He also noted that
the PERS and TRS' Alaska Management Retirement Board (AMRB)
recently passed a resolution urging implementation of a cost
sharing system for PERS. He understood that Governor Sarah Palin
intended to introduce a bill to that effect soon. The discussion
regarding how to fix the system would occur after that.
8:52:01 AM
In response to a question from Senator Dyson about the Financial
Contribution bar graph on page 6, Mr. Teal explained that the
lower portion of the bar graphs on the horizontal axis
represented the municipal employer contribution percent level;
the upper portion represented the percent paid by the State that
year.
Mr. Teal further explained that the percents depicted on the
vertical axis represented percent of payroll. For example, the
total employer and State contribution to the retirement system
for an employee earning $100,000 would be $45,000.
8:53:11 AM
Mr. Teal stated that the percent of payroll rates are "expected
to climb" under the current system. The PERS rate in 12 to 15
years would exceed 100 percent and the TRS rate would exceed 200
percent.
Senator Dyson exclaimed "wow!"
Mr. Teal communicated that the TRS retirement costs for a
teacher earning $50,000 a year could eventually be $100,000.
8:54:05 AM
Senator Elton referred to the list of issues depicted on page 8;
specifically the unfunded liability issue. To that point, he
asked whether an analysis had been conducted on the affect an
"extraordinary deposit" to the PERS/TRS retirement system from
the State, $250 million for several years for example, might
have on future contribution rates.
8:55:02 AM
Mr. Teal divulged that the Division of Retirement and Benefits
had conducted an analysis based on a $500 million deposit. That
information could be provided. He was surprised to find that a
$500 million contribution would have "minimal impact" on
contribution rates: instead of anticipated contribution rates of
100 percent for PERS and 200 percent for TRS, the rates would be
95 or 180 percent, respectfully.
8:55:47 AM
Co-Chair Stedman noted that a variety of dollar infusion levels
toward the unfunded liability have been discussed. He had also
been surprised at the minimal impact the infusions would have on
employer contribution rates.
8:56:26 AM
Co-Chair Stedman identified the unfunded liability as "the issue
of most concern in the immediate future" in the effort to reduce
employer contribution rates.
Co-Chair Hoffman noted that Governor Palin had included $77
million in her FY08 budget proposal to assist local governments.
While the Governor had identified this as "a one-time approach",
his concern was that this effort might result in increasing
local government dependence on the State "to pick up those
dollars". Such a commitment would be difficult to continue under
current State revenue parameters.
Co-Chair Hoffman asked whether a level of support from the State
for the long term had been identified.
8:57:42 AM
Mr. Teal disclosed that a spreadsheet (copy not provided) had
been developed that depicted State funding support options for
the long term. This "is a decision that's completely up to the
Legislature."
Mr. Teal referred to the FY08 local contribution level of $94
million depicted on page 7, and noted that even were a one-time
infusion of $77 million made in FY08, the local contribution
rate would continue to increase by $77 million every year there
after. He noted however, that local contribution rates would not
continue the dramatic increases experienced between FY04 and
FY08, and would level out over time. Regardless, municipalities'
contribution obligations would be a hardship "given tax caps,
given revenues at the local level."
8:59:09 AM
Co-Chair Hoffman calculated from the data on page 7 that were
the State to continue picking up the difference between the
rates of one year and the next, the local government
contribution base rate in FY09 would be $171 million. Thus the
problem: local governments would be unable to pick up those
additional costs. "If we don't do something the municipalities
are going to end up bankrupt."
9:00:10 AM
Senator Olson asked for examples of "other technical items" as
specified in the list of issues on page 8.
Mr. Teal considered that to be a question best answered by the
Legislature.
Senator Olson questioned whether the solutions being considered
to address the PERS and TRS issues were "obtainable" and
something municipalities could "live with".
9:00:48 AM
Co-Chair Stedman stated that the purpose of hearings such as
this was to gleam a better understanding of the issues being
experienced by the retirement systems. The effort would benefit
the Committee when they address legislation being developed by
the Administration that would "move the PERS system closer to
the TRS" system in that it would pool communities' contribution
obligations together instead of each community having "an
identified liability".
Co-Chair Stedman stated that in addition to pooling liabilities
and infusing money, the effort must include providing
affordability and "predictability to the municipalities on their
general fund and also K-12 education" obligations.
Co-Chair Stedman specified that the $6.9 billion gap between
assets and accrued liabilities was based on June 2005 data.
Current data would indicate that gap to range between $8.5 and
$10 billion today.
Co-Chair Stedman stressed that the State must get ahead of the
issue rather than basing its actions on data that is two years
old. The desire would be for the Committee to address this issue
before legislation on the proposed gasline is referred to the
Committee.
Senator Olson asked for further information about the
"discriminatory hiring" issue also identified on page 8. He
understood that the State has experienced "an alarming" increase
in the number of employees over the past few years, and to that
point, he asked whether that has affected the PERS and TRS
unfunded liability gap. If so, he questioned whether one of the
solutions would be to utilize "contract" employees who would be
outside the PERS and TRS systems.
9:04:09 AM
Co-Chair Stedman qualified that that sort of action should be
avoided. When there is a job opening, the cost per applicant
"should be equal regardless of what tier structure they're in".
The endeavor must avoid allowing "one applicant [to] have a
substantially lower cost to the employer" as an employer might
include in their budget the highest per employee cost but hire
"the lower cost employee; thereby imbedding a spread within his
budgetary process in his department." The effort should also
allow employees to change positions with their employer
regardless of tier status. These issues would be included in the
Administration's forthcoming bill.
Senator Huggins understood the term "pooling" to refer to a cost
share plan.
Co-Chair Stedman affirmed.
9:06:13 AM
Co-Chair Stedman asked that the charts on page 6 and 7 be
revised to include an additional line reflecting the actuarial
recommended rate in addition to the State and Local contribution
rates.
Mr. Teal confirmed that would be done.
Co-Chair Stedman stated that this would further clarify the
discrepancy between the rates adopted by the PERS Board and
those recommended by the actuary.
9:07:28 AM
Senator Thomas asked for confirmation that the employer
contribution rate for a $50,000 employee could be $100,000 in
the future.
Mr. Teal affirmed that was correct.
Mr. Teal advised that this would relate to the discrimination
issue raised by Senator Olson. Contribution rates would continue
to grow were the status quo system left unchanged. This is
because "there's a declining wage base" in that the defined
benefit (DB) system is closed to additional people. Persons
hired after June 30, 2006 would be enrolled in the new Defined
Contribution Retirement plan, and thus, do not contribute to the
DB plan's unfunded liability.
Mr. Teal specified that "the unfunded liability is a fixed
amount" similar to "a mortgage" to which an annual payment of
$657 million is due. Different rates would result were that
amount split among all employees rather than just those hired
prior to July 1, 2006. The rate would continue to climb as more
employees were added to the DCR plan. And thus while "the cost
pretty much remains the same… the rate goes up".
Mr. Teal exampled how this might affect employees: were a person
hired prior to July 1, 2006 to compete for a job paying $100,000
per year against someone subject to the DCR plan, the retirement
benefits' cost to the employer for the DB employee would amount
to approximately $44,000 as compared to $11,000 for the DCR
employee. While this would be "an easy decision for the
employer", it would be detrimental to the career opportunities
of the DB employee. This problem would continue to escalate as
contribution rates increased.
9:11:02 AM
Senator Thomas acknowledged.
Senator Thomas asked whether the chart provided by the Division
of Retirement & Benefits on February 15th, amortized the
unfunded liability over a particular time period.
Mr. Teal explained that the unfunded liability amount would
continue to increase approximately another two or three years
and would "likely flatten out and then decline as retirees die".
Any monetary infusion by the State made in FY 08 would not be
reflected until FY 2011, due to the lag time in data and
applicability.
Mr. Teal reiterated that liabilities would decline over time to
zero as beneficiaries die. Assets would, over time, meet the
declining liability line "and then track the line down to zero".
He estimated that this process could take 60 years, as some of
the people in the DB plan are only in their twenties.
The discussion concluded.
9:13:18 AM
Co-Chair Stedman reviewed the upcoming general Committee hearing
schedule.
ADJOURNMENT
Co-Chair Bert Stedman adjourned the meeting at 9:14:11 AM
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