Legislature(2007 - 2008)SENATE FINANCE 532
03/14/2007 09:30 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Pers Defined Benefit Plan Accounting | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
MINUTES
SENATE FINANCE COMMITTEE
March 14, 2007
9:35 a.m.
CALL TO ORDER
Co-Chair Bert Stedman convened the meeting at approximately
9:35:43 AM.
PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Kim Elton
Senator Donny Olson
Senator Joe Thomas
Senator Fred Dyson
Senator Charlie Huggins
Also Attending: SENATOR STEVENS; REPRESENTATIVE HAWKER; ANNETTE
KREITZER, Commissioner, Department of Administration; CHARLENE
MORRISON, Chief Financial Officer, Division of Retirement and
Benefits, Department of Administration.
Attending via Teleconference: There were no teleconference
participants.
SUMMARY INFORMATION
^PERS Defined Benefit Plan Accounting
Presentation by Division of Retirement and Benefits
9:35:53 AM
ANNETTE KREITZER, Commissioner, Department of Administration,
gave an introduction to presentations on the policy goals of two
bills that would be introduced by Governor Sarah Palin's
Administration in the coming weeks. The first bill related to
"technical fixes" within the Public Employees Retirement System
(PERS), pertaining to death and disability benefits. The second
bill was referred to as a "cost share bill," necessitated by
accounting issues within PERS. This presentation would address
the accounting concerns.
Ms. Kreitzer informed that presentations would be on-going to
"show the Committee each step of a plan that starts with
shifting to cost share plan; how doing that impacts the State
and local governments' bottom line; how we can keep costs down
for all of us and address the unfunded liability." She noted
that $355 million was currently included in the FY08 budget to
fund State employees' pension costs, and that figure did not
include pension costs for the University, the legislature, the
Alaska Court System or the Alaska Marine Highway System.
9:39:07 AM
CHARLENE MORRISON, Chief Financial Officer, Division of
Retirement and Benefits, Department of Administration, began her
presentation which was accompanied by a handout titled, "Public
Employees' Retirement System (PERS), Defined Benefit (DB) Plan,
Accounting Issues, Senate Finance, March 14, 2007" [copy on
file].
AT EASE 9:39:39 AM/9:41:07 AM
9:41:13 AM
Page 2
Why are we here today?
™Concerns about employer level accounting for the PERS
DB plan.
™Contribution rates for PERS DB plan not supported by
employer level accounting records.
™Set the stage to discuss the proposed solution.
Ms. Morrison reviewed the page.
9:41:43 AM
Page 3
Proposed Solution
Cost share legislation
™Administer the PERS DB plan like the TRS DB plan
™State to assume 65% of unfunded liability at
6/30/2006 (estimated $3.6B of $5.5B total)
™All employers share the cost (benefits,
administration and investment)
™Simplify administration
Ms. Morrison overviewed the page, adding that the unfunded
liability is not yet known for June 30, 2006.
9:42:45 AM
Page 4
Proposed Solution (cont.)
Address the unfunded liability
™If market conditions warrant, use pension
obligation bonds as part of solution to reduce
the unfunded liability.
Ms. Morrison summarized the page.
9:43:03 AM
Page 5
PERS = One System but Two Plans
™Defined Benefit Plan (Tiers I, II, and III)
™Defined Contribution Retirement Plan (Tier IV)
Ms. Morrison read the page, referring to the Defined
Contribution Retirement Plan as the "hybrid plan".
9:43:44 AM
Page 6
PERS DB Accounting Issues
No impact on:
™Teachers' Retirement System (TRS)
™Benefits paid to members
™PERS DB Plan level accounting (PERS as a whole)
™New PERS Defined Contribution Retirement Plan (Tier
IV)
Ms. Morrison reviewed the page. She noted that many "pieces" of
the PERS Defined Benefit (DB) issues had been studied throughout
the State, but she would focus on two primary issues.
9:44:29 AM
Page 7
Agent Multiple Employer Plan
Defined and described as follows:
A plan that provides benefits to employees of more
than one employer
™Pooled administrative and investment functions
™Share costs/income of pooled functions
™Separate accounts for each employer
™Each employer's contributions are to provide
benefits only for that employer's employees
Ms. Morrison overviewed the information.
9:45:07 AM
Page 8
Alaska Statutes
AS 39.35.100(b)(3)
™A separate account for each employer shall be
maintained.
™The account shall be credited with contributions of
the employer.
™This account shall be charged with the employer's
actuarial charge for pension, death benefits, and
other benefits paid under this plan to or on behalf of
the employee of the employer.
Ms. Morrison reviewed the page, adding that although the Alaska
statutes do not use the term "multiple employer plan," they
require many of the same components.
9:45:51 AM
Page 9
Alaska Statutes (cont'd)
™AS 39.35.680 (22) defines employee as "…a retired
member…"
™AS 39.35.250 states that the past service portion of
the employer's contribution rate is that "required to
amortize the unfunded obligations of the employer…"
Ms. Morrison read the page.
9:46:12 AM
Page 10
PERS DB Plan
[Flow chart showing the following:
Assets
Investment Income
Contributions
DB Employee
DB Participating Employer
Minus
Liabilities
Pension Benefits
Health Costs
(both measured annually)
Equals
Surplus or (Unfunded Liability)
Employer responsible for funding shortfall]
™This calculation is performed at the employer level as
well as at the plan level
™There are concerns regarding employer level accounting
and allocation methodologies in use
Ms. Morrison walked the Committee through the chart.
9:46:52 AM
Page 11
Assets
Employer contributions are accounted for in two separate
buckets:
™Active employer asset accounts
o One account for each individual employer
™Retiree reserve asset account
o One consolidated account for all participating
employers
Ms. Morrison overviewed the page, commenting that there were 160
individual employers participating in the PERS DB plan, the
largest of which is the State of Alaska. The retiree reserve
account has caused concerns due to the fact that it is a
"consolidated" account, and therefore accounting is not
maintained at the employer level.
9:47:48 AM
Page 12
Retiree Reserve Account
Funding Sources
™Share of the plan's net investment income
™Transfers from the active employer's asset accounts
Ms. Morrison read the page, noting that the lack of employer
maintenance was an issue to be discussed in this presentation.
9:48:24 AM
Page 13
Transfers
™In order to calculate an employer's past service
contribution rate, we assign retiree reserve assets to
employers
™Allocation process is used to assign retiree reserve
assets to individual employers
Ms. Morrison summarized the page.
9:48:54 AM
Page 14
Allocation Process
Allocate retiree reserve account balance to employers
resulting in employer's retiree reserve account balance
™based on the employer's pro rata share of retiree
liabilities at year end
™The amount allocated to an employer does not represent
contributions made by the employer
o simply represents assets assigned
™Concerns have been raised about this practice - no
accounting by individual employer.
Ms. Morrison reviewed the information on the page.
9:49:39 AM
Page 15
Allocation example
Participating employer has the following assets and
liabilities in the Plan at 6/30/04.
[Table depicting the following:
Assets
Active: $237,819
Allocated share of retiree reserve account: -
Total: $237,819
Liabilities
Active: 350,172
Allocated share of retiree reserve account: -
Total: 350,172]
™Unfunded liability is $112,353
™Employer has no retirees at 6/30/2004, so has not
contributed to the retiree reserve account
Ms. Morrison overviewed the example provided.
9:50:24 AM
Page 16
Next year - FY05
Employer now has retirees in the plan for the first time so
will get an allocation of the retiree reserve account
balance based on their retiree liabilities compared to
total retiree liabilities even though they have not
contributed to the retiree reserve account in the past.
Ms. Morrison continued with the example overview.
9:50:44 AM
Page 17
The allocation
[Table depicting the following:
Employer retiree liabilities: $453,428
Total retiree liabilities 7,131,974,579
% allocated to employer .006%
Retiree reserve account balance 6,194,055,956
Account balance allocated to employer $393,883
Even though employer has not contributed to this
account]
Note: This is the impact if the employer's retiree
liabilities are growing; however, the reverse is the impact
if the employer's retiree liability is declining.
Ms. Morrison summarized the page, stressing that the employer
would receive a deduction to their retiree reserve balance if
their retiree liabilities decreased rather than increased.
9:52:02 AM
Page 18
Transfer
AS 39.35.100 states, "Upon retirement, the amount
actuarially determined…to fully fund benefits…shall be
transferred…from the employer contribution account into the
retirement reserve account."
™Transfer, from the employer's active asset account,
the balance needed to fully fund the employer's
retiree reserve asset account
o Compare the assigned assets to the allocated
liabilities and transfer the difference
Ms. Morrison reviewed the page.
9:52:36 AM
Page 19
The transfer
Per statute, the retiree reserve account is to be fully
funded.
[Table depicting the following:
Employer retiree liabilities $453,428
Account balance allocated to employer 393,883
Amount transferred from employer
active account $59,545]
Ms. Morrison read the information on the page, adding that the
employer would be responsible for contributing the balance
necessary after the transfer to fully fund its retirement
obligations, as required by statute.
9:53:10 AM
Page 20
Effect of allocation and transfer
Participating employer has the following assets in the Plan
at 6/30/05 after transfer to fully fund the retiree reserve
account.
[Table depicting the following:
Assets:
Active
(237,819 + 32,261 - 59,545)
$210,535
Allocated share of retiree reserve account
(393,883 + 59,545)
453,428
Total
$663,963
Liabilities:
Active
(237,819 + 32,261 - 59,545)
$18,107
Allocated share of retiree reserve account
(393,883 + 59,545)
453,428
Total
$471,535]
™Over funded by $192,428.
Ms. Morrison summarized the exampled calculation, commenting
that, as previously mentioned, the employer could find their
retirement obligations underfunded if their retirement
liabilities were declining instead of increasing.
9:54:06 AM
Page 21
Liabilities
Annually calculated by employee
™Allocated to individual employer
o Based on pro rata service earned with employer
o Does not take into account salary earned with
employer
o Concerns have been raised about this allocation
process as well
Ms. Morrison informed that an individual's liabilities are
allocated to each employer if the employee had more than one
participating employer.
9:54:38 AM
Page 22
Liability allocation example
One employee is a covered elected official for the City of
X for 5 years earning 5 years of service credit. Is paid
$1,000 for attending meeting during these 5 years.
Same employee worked for City of Z for 5 years prior to
serving as elected official. Was paid $200,000 for the 5
year period.
Ms. Morrison read through the example.
9:55:08 AM
Page 23
Example (cont.)
Actuary calculates a $750,000 liability for the member.
This liability is allocated to employers as follows:
[Table depicting the following:
City of X
Salary Paid: $1,000
Service Earned: 5 yrs
% by employee 50%
Liability allocated $375,000
City of Z
Salary Paid: $200,000
Service Earned: 5 yrs
% by employee 50%
Liability allocated 375,000
Total
Service Earned: 10 yrs
% by employee 100%
Liability allocated $750,000]
Note: Extreme example to clearly reflect the impact of the
current practice. Approximately 735 or 1.2% of all PERS
members have service in both categories shown above.
Ms. Morrison reviewed the example, noting that this calculation
was the current practice.
9:56:04 AM
Page 24
Impact on Contribution Rates
Assets - Liabilities = Surplus or (Unfunded Liability)
Concerns raised about both the assets and liabilities
assigned to employers, individually, and collectively,
impact the employer's unfunded liability.
Unfunded liability - basis of the past service cost portion
of the employer's contribution rate.
Ms. Morrison summarized the page.
9:56:34 AM
Page 25
Proposed Solution
Cost Share Legislation - long range
™Redesign the PERS DB plan - align with TRS
o All employers share the cost/income of the Plan
(benefits, administration, and investment)
o One uniform, less volatile, contribution rate
™ARMB supports concept - Resolution 2007-04
™AML supports concept
™Administration of plan simplified
™Will be introduced by the Governor
Ms. Morrison reviewed the information.
9:57:38 AM
Senator Thomas asked if the example on page 23 was the current
or proposed practice.
Ms. Morrison answered that it was an example of the current
practice.
Senator Thomas asked how the proposed solution would change that
calculation.
Ms. Morrison responded that all employers would share equally in
the cost of the plan, and would no longer maintain individual
employer information.
9:58:38 AM
Senator Thomas furthered, asking if annual statements were sent
to employees.
Ms. Morrison affirmed, clarifying that employees enrolled in the
defined benefit plan receive annual statements, and those
enrolled in the defined contribution plan receive statements
quarterly.
9:59:04 AM
Senator Elton, referring to the statutory requirements listed on
pages 8 and 9 and "concerns raised" over employer contributions,
asked if ambiguity exists regarding liability accruals
9:59:58 AM
Ms. Morrison replied that the liabilities are known, as that
figure is calculated by the member. The "concerns" regard the
assets, as the State currently operates under a consolidated
retiree reserve assets account that does not account for each
employer's contributions.
10:00:16 AM
Senator Elton asked if the current practice violates the
statutory requirements.
10:00:29 AM
Ms. Kreitzer answered: "I don't know that we've been in
contravention with the statute. I would say that this has been
the practice of the State for the last twenty years. I'm now the
Commissioner Designee for the Department of Administration; I'm
here to help you."
10:00:54 AM
Senator Elton continued, speaking to the proposed solution of a
"65/35" cost share of retirement obligations between the State
and municipalities. He was aware of other proposed cost share
ratios, and asked how flexible the Administration would be to
amending that figure.
Ms. Kreitzer suggested the Department present the entire plan to
the Committee before discussing the cost share ratio.
10:02:14 AM
Co-Chair Hoffman asked the proposed implementation date of the
legislation.
Ms. Kreitzer set the effective date as July 1, 2007.
Co-Chair Hoffman asked how the calculations would address the
long-term unfunded liability.
Ms. Kreitzer was not prepared to answer the question, and
anticipated that discussion beginning with the introduction of
the cost share legislation. She would present the Committee with
a "long-term vision" that could include a General Fund
"infusion" into the retirement system, and possibly pension
obligation bonds. The Administration anticipated addressing 80
percent of the unfunded liability.
Co-Chair Hoffman asked if participation bonds would be
introduced as separate legislation.
10:03:41 AM
Ms. Kreitzer informed that House Bill 13 had been introduced and
that bill spoke to the bonding issue. It would allow pension
obligation bonds if passed by the legislature. The Department
would present additional information regarding the bond option
at a later date.
10:04:34 AM
Senator Huggins asked if the municipalities supported the
legislation.
Ms. Kreitzer had heard presentations from the Alaska Municipal
League (AML), and had spoken to a few members. The Department
had taken public comments into consideration while drafting the
legislation, and would meet formally with AML.
Senator Huggins asked the reaction of AML thus far in the
process.
10:05:17 AM
Ms. Kreitzer responded that AML members had not yet taken a
position, as the Administration had not had the opportunity to
present the complete plan.
10:05:40 AM
Co-Chair Stedman identified three issues the Committee would
address in the coming months. The first was a "clean-up" bill to
Senate Bill 141, retirement system legislation passed by the
24th Legislature. The second issue would be the cost share bill,
and the third issue would be addressing the unfunded liability.
He anticipated the "clean-up" bill and the cost share bill would
be before the Committee in the coming weeks.
10:06:54 AM
Senator Thomas asked the Department's position on the use of
obligation bonds.
10:07:17 AM
Ms. Kreitzer replied that the Department would present the
effects of using pension obligation bonds to address a portion
of the unfunded liability, focusing on the long-term savings
that would provide.
Senator Thomas queried if that discussion would include tax
exempt bonds.
Ms. Kreitzer responded that the Department had concentrated on
pension obligation bonds. She looked forward to the cost share
bill serving as a "vehicle" to examine possible solutions for
the unfunded liability facing the State.
ADJOURNMENT
Co-Chair Bert Stedman adjourned the meeting at 10:08:46 AM
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