Legislature(2011 - 2012)SENATE FINANCE 532
02/22/2012 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Financial Update: Public Employees' Retirement System and the Teachers' Retirement System by the Department of Administration and the Alaska Retirement Management Board | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| += | SB 187 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
February 22, 2012
9:04 a.m.
9:04:11 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:04 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Lesil McGuire, Vice-Chair
Senator Johnny Ellis
Senator Dennis Egan
Senator Donny Olson
Senator Joe Thomas
MEMBERS ABSENT
None
ALSO PRESENT
Michael Barnhill, Deputy Commissioner, Department of
Administration; Angela Rodell, Deputy Commissioner,
Treasury Division, Department of Revenue; Senator Cathy
Giessel.
SUMMARY
^FINANCIAL UPDATE: PUBLIC EMPLOYEES' RETIREMENT SYSTEM AND
THE TEACHERS' RETIREMENT SYSTEM BY THE DEPARTMENT OF
ADMINISTRATION AND THE ALASKA RETIREMENT MANAGEMENT BOARD
9:05:08 AM
Co-Chair Stedman indicated that the meeting would include
an update from the Department of Administration on the
financial status of the state's Public Employees'
Retirement System (PERS) and Teachers' Retirement System
(TRS), specifically related to asset size, management and
fiduciary oversight, investment policy, asset allocation,
and potential investment performance. He shared that the
prior meeting had included a presentation from the Alaska
Permanent Fund Corporation and Callan Associates related to
future market performance expectations. He added that the
meetings were meant to be informative for the public and
the committee; public testimony would not be taken during
the meeting.
9:06:14 AM
MICHAEL BARNHILL, DEPUTY COMMISSIONER, DEPARTMENT OF
ADMINISTRATION (DOA), provided a PowerPoint presentation
titled: "Public Employees' Retirement System (PERS)
Teachers' Retirement System (TRS) Update" (copy on file).
The purpose of the update was to give a snapshot of the
current vital statistics of PERS and TRS. He noted that the
presentation was very similar to the one provided the past
year.
Mr. Barnhill pointed to statistics taken from the 2011
Comprehensive Annual Financial Report (CAFR) on slide 5.
There were 160 PERS member employers; the State of Alaska
represented the largest employer and others included
municipalities, school districts and more. He noted that
due to the reporting method the 2011 CAFR used numbers from
the 2010 actuarial evaluation; therefore, numbers shown
were slightly out of date. The report showed approximately
26,000 retirees, but the current number was slightly over
30,000. Additionally, the report showed about 26,000 active
employees; however, the current number was approximately
35,000. Employees [in the Defined Benefit (DB) plan] were
spread between three benefit tiers (Tiers I, II, and III).
He shared that beginning July 1, 2006, all new employees
under the 160 member employers were in the Defined
Contribution (DC) tier [Tier IV); the total active
employees in the DC system were just over 11,000. Between
the two plans there were approximately 47,000 active
employees; 75 percent in the DB system and 25 percent in
the DC system.
9:08:59 AM
Mr. Barnhill addressed TRS on slide 6. There were 58 member
employer school districts. He noted that many of the school
districts were also PERS members. The CAFR reported
approximately 10,600 retirees, but currently the number was
closer to 11,800; there were approximately 10,000 active
employees. There was one DC tier that began for all new
employees starting July 1, 2006; there were just over 2,700
active employees in the DC system. Approximately 79 percent
of the active employees were in the DB system and 21
percent fell under the DC system.
Mr. Barnhill spoke to slide 7 titled "Basic Facts -
Organization." He stated that the structure of Alaska's
retirement system was different from other states' because
responsibility for various aspects of the system was
divided among three different organizations. He elaborated
that under CalPERS in California, the benefits,
investments, and management of staff were all consolidated
into one organization; whereas, in Alaska, the Department
of Revenue handled the investments, the Alaska Retirement
Management Board was the fiduciary of the assets under
management, and DOA was responsible for administering the
plan of benefits (ensuring benefits were disseminated,
paying medical bills, and contracting with the actuary).
Mr. Barnhill directed attention to slide 8 titled "Basic
Facts - Balance Sheet." He believed that a significant
amount of time would be spent on the unfunded liability
shown on the slide. To determine unfunded liability the
actuary computed the difference between the value of the
assets and the accrued liabilities (a form of discounted
net present value of all liabilities the systems would have
to pay between present-day and when the last DB member
dies).
9:11:46 AM
Co-Chair Stedman asked for a definition of the term
"actuarial value." He requested an estimate of the June 30,
2011 market value. Mr. Barnhill replied that actuaries used
a variety of techniques to smooth short-term volatility in
investment markets. He detailed that a gain or loss at the
end of the year was divided by five in order to smooth the
gain over a five-year period. He shared that the actuarial
value of assets and the fair value of assets (market value)
were almost the same for June 30, 2011. The unfunded
liability was essentially the same when it was computed
based on actuarial value of assets and on fair value of
assets.
Co-Chair Stedman asked for the market value. Mr. Barnhill
responded that as of June 30, 2011 the market value of
assets was approximately $11.3 billion; the number was
closer to the actuarial value of assets than it had been in
a long time. He added that the number had continued to
decline; Department of Revenue Deputy Commissioner Angela
Rodell would share data for December 31, 2011. He
elaborated that the numbers had gone down because the third
quarter in the calendar year of 2011 was a loss quarter for
the plans.
9:13:40 AM
Mr. Barnhill communicated that as of June 30, 2011 the
unfunded liability on an actuarial basis was $6.9 billion;
the number was slightly higher on a market value basis. The
TRS actuarial value of assets was $4.9 billion; the market
value was slightly lower. The difference between the TRS
actuarial value of assets of $4.9 billion and accrued
liabilities of $9.1 billion equaled an unfunded TRS
liability of $4.19 billion. The funding ratio was
calculated by dividing assets by liabilities; the ratio was
63 percent for PERS and 54 percent for TRS. He explained
that funding ratios were used to gauge the overall
financial health of the system (whether there were
sufficient assets on hand that would meet the liabilities
as they came due over the next 60 years). He relayed that
actuaries liked to see a funding ratio of 80 percent or
higher for a healthy plan. He shared that actuaries would
indicate that the plans needed more funding, given that
they were not close to 80 percent.
Mr. Barnhill referenced a Callan Associates presentation
related to short-term and long-term forecasts on expected
investment returns that had been provided to the committee
the prior day. The presentation had also been given to the
Alaska Retirement Management Board (ARMB) the previous
week. He referred to discussion related to Callan's 5-year
to 10-year forecast that an 8 percent return (the expected
earnings return assumption adopted by ARMB) would be
difficult to impossible to meet and a 7 percent return
would be a challenge. The systems' actuary Buck Consultants
projected that the unfunded liability would continue to
rise as losses from FY 09 were smoothed in. Buck projected
that under an 8 percent return scenario by FY 21 the
unfunded liability (measured on an actuarial value basis)
would be approximately $10.5 billion; the projected number
was closer to $12 billion with a 7 percent return (a
difference of approximately $1.5 billion). Callan projected
that 8 percent returns over the next 30 years were still
achievable.
9:17:21 AM
Co-Chair Hoffman noted that the numbers were staggering,
but asked for verification that retirees did not need to be
frightened by them. Mr. Barnhill did not disagree; the good
news was that the legislature had historically been
committed to providing responsible support to the systems.
He detailed that on an annual basis, actuaries calculated
their required contribution (he likened it to a mortgage
payment). If the actuarially required contribution was made
for the term of the "mortgage" (ARMB had adopted a 25 year
amortization term) the unfunded liability would be paid off
in that time. He stated that it was very promising that
that the legislature had made the payment on an annual
basis since ARMB's origination in 2006; therefore, retirees
should not be afraid. He relayed that some legislatures did
not make their actuarially required contribution, which
caused the funding ratio to decline over time and led to a
threatened fiscal status.
Co-Chair Stedman pointed out that the state had
approximately $16.7 billion in assets as of June 30, 2011,
which did not include the state's liquid savings or the $40
billion in the permanent fund that constitutionally backed
up the liability. He observed that the state would have to
exhaust its savings and the permanent fund before it was
not able to meet its obligations. Mr. Barnhill agreed and
remarked that the state was blessed with assets. He shared
that the conversation around the table continued to be how
to responsibly continue to address the issues while
maintaining the state's commitments to other items (e.g.
education, public safety, infrastructure, government
services, etc.).
9:19:47 AM
Mr. Barnhill moved to slide 9 titled "Basic Facts - Health
Cost Trends." The slide showed the change in retiree
premium in the PERS and TRS healthcare plan from 1978
through 2012 and illustrated the story of rising healthcare
costs in Alaska, which were the same as those in the rest
of the country. Premiums had started at $57 in 1978 and had
risen to $1,200 in 2012; reflecting an average compound
growth of 9 percent per year. He relayed that DOA was
working to determine how to change the trend as the growth
was not sustainable.
Mr. Barnhill stated that the department was taking efforts
to implement patient wellness programs within the active
plan in FY 13. If successful, the initiatives would be
rolled out to other parts of the population, with a goal to
ultimately cover the entire population that would roll into
the retiree plans. He stated that many employers around the
county had experienced some success in reducing the 9
percent annual cost growth with the method. He elaborated
that the state needed to have conversations with physicians
about the unsustainable nature of the cost growth and how
they could develop a partnership to make healthcare cost
growth sustainable for the state without bankrupting the
healthcare industry. The department was pleased that the
premium had only risen from $1,176 to $1,200 in the past
year. The 2 percent increase reflected efforts underway;
additionally, historically there had been years of flat
growth followed by years of double-digit growth. He shared
that the challenge was to convert the flat growth to
sustainable modest growth.
9:22:45 AM
Mr. Barnhill turned to slide 10: "Basic Facts - Funding
Ratio History - PERS/TRS," which showed the PERS funded
status over time. He referenced discussions specifically
regarding 2001 to 2002 when the system went from a full
funded status down to less than 80 percent; the change had
prompted litigation against the state's former actuary. He
explained that the funding ratio had remained below 80
percent for some time due to a number of reasons and that
the risks were endemic to any DB system. Risks included
investment loss; there had been four investment loss years
between 2001 and 2012. He furthered that during the time
period ARMB's investment return assumption had been 8.25
percent (it had recently been reduced to 8 percent);
whenever the return was below the assumption the system
fell further behind. He cited Callan's presentation from
the prior day and observed that systems would continue to
struggle with the issue. Another reason for the continued
struggle with funded ratio was that assumptions do not play
out as expected; the actuary projects that healthcare costs
would decrease over time, but costs do not decrease. The
actuarial projection curve for cost growth had started
close to 9 percent and had declined to 6 percent, where it
would remain for the next several decades. The department
hoped that efforts to increase overall wellness would help
the state reach the 6 percent figure in the future. He
shared that mistakes had been made by the actuary in
projecting and computing healthcare calculations in the
1990s; therefore, the state had under collected for a
considerable period of time and subsequently it was still
making up for the under collection. He stated that the TRS
chart was similar (slide 11), but the funding ratios were
slightly worse.
9:25:37 AM
Mr. Barnhill directed attention to slide 12: "Basic Facts -
Contribution Rates." He relayed that contribution rates
rose when funding ratios declined. He discussed how DB
systems were funded and explained that the actuary
discounted benefits to present value and computed what
would need to be collected at present (from employees and
employers) if all of the actuarial assumptions came true.
Historically rates for PERS and TRS ranged from 8 percent
to 12 percent, but rates had climbed dramatically beginning
in the early 2000s; rates had peaked at above 50 percent
for TRS and above 30 percent for PERS in 2008. As a result
the legislature had enacted SB 125 in 2008 to provide
pension relief to municipalities and school districts;
additionally, the TRS and PERS rates had been capped at
12.56 percent and 22 percent respectively. The actuarial
rate in FY 13 was back up at peak levels of 54 percent for
TRS and 35 percent for PERS.
Mr. Barnhill addressed slide 13 titled "Projected
Retirement Population Growth." The chart showed that the
ongoing baby boomer population retirement would increase.
In 2012 there were just over 40,000 retirees; the number
would increase to approximately 60,000 in the next several
years and would subsequently begin to decline.
9:27:57 AM
Mr. Barnhill turned to slide 14 titled "Big Picture Budget
Issues PERS and TRS promises made." The slide addressed the
crux of the issue and showed the benefits that the state
was constitutionally required to pay between present-day
and when the last DB member dies (between 2070 and 2080).
Beginning in 2012 the systems would be responsible for
slightly over $1 billion per year; at the end of the 2020s
the systems would be responsible for just over $3 billion
per year; the payment would cap out at slightly over $3.5
billion in the 2040s. The payment would not dip below $3
billion per year until the late 2040s. The total benefit
payments over the next 70 years were $141 billion. He
believed that although the amount was extraordinary, the
systems were capable of handling it when all of the
resources were considered (i.e. contributions from
employees and employers, investment returns, and general
fund assistance). He acknowledged that issue was large and
one that the state was committed to.
9:29:13 AM
Co-Chair Hoffman asked if there was a chart that showed
what benefit payment assistance would be required from the
general fund from 2012 to 2080.
Mr. Barnhill directed the committee to a chart on slide 21.
The chart showed the different ways the general fund could
be called upon to provide necessary assistance in
fulfilling benefit payments. The chart encompassed the time
period that it would take to pay off the entirety of the
unfunded liability assuming an amortization term of 25
years. There were two methodologies of amortizing the
unfunded liability. The first was called "level percentage
of pay"; one of the actuarial assumptions was that pay
would increase by 3 percent to 4 percent per year and if
payment increased at about the same amount the payment on
the unfunded liability would increase (represented by the
blue bar on the chart). The second form was called "level
dollar"; he equated the method to a house mortgage and
explained that payments were equal on a monthly basis over
the course of the 30-year loan term (represented by the red
bar, which declined slightly due to movement of actuarial
assets).
Mr. Barnhill furthered that level percentage of pay was a
more back-loaded amortization methodology; payments would
be lower in the beginning and higher later on. Level dollar
was a more front-loaded methodology; payments would be
higher initially and lower later on. The blue bar
(representing the status quo) called for an appropriation
from the general fund under SB 125 of $610 million for FY
13; the amount was included in the governor's proposed
budget. The number would increase to approximately $870
million in FY 13 (or more in future years) if the level
dollar method was adopted.
9:32:25 AM
ANGELA RODELL, DEPUTY COMMISSIONER, TREASURY DIVISION,
DEPARTMENT OF REVENUE, began a review of the current
investment status in the retirement trust funds. She
pointed to slide 16: "Investments - ARMB Assets Under
Management," which showed the plan balances as of December
31, 2011. There was approximately $11.1 billion in the PERS
plan; $5.9 billion was in the Retirement Trust and $4.9 was
in the Retirement Health Care Trust. There was a total
balance of approximately $4.6 billion in the TRS plan, with
close to $3 billion in the Retirement Trust. The remainder
of the $19 billion in total assets under management fell
under the Judicial Retirement System, National Guard/Naval
Militia Retirement System, Supplemental Annuity Plan, and
the Deferred Compensation Plan.
Ms. Rodell moved to slide 17 titled "Investments - Asset
Allocation." The slide included two pie charts showing the
actual asset allocation as of December 31, 2011 versus the
target asset allocation. She detailed that the majority of
the assets continued to be in equities (approximately 50.6
percent in domestic and global equities); the number was
slightly higher than the target allocation, which was
partially due to manager selections and timing of purchases
and settlements. She communicated that there was also a
large portion of assets invested in fixed income and real
assets.
9:34:12 AM
Ms. Rodell explained that slide 18 titled "Investments - US
Stock Market Historical Returns" provided historical
returns and highlighted comparisons between the years 2008
through 2011. She added that losses and gains would be
smoothed out over a five-year period. Slide 19 titled
"PERS/TRS Annualized Returns" showed annualized returns
through June 30, 2011. She communicated that the 1-year
annualized return was 21.1 percent for PERS and 21.3
percent for TRS, with an average return of 21.27 percent;
the target return was 21.62 percent (slightly over the
realized returns). She shared that the 10-year annualized
return was 5.43 percent for PERS, with a target of 5.67
percent.
Co-Chair Stedman requested a historical 10-year rolling
projection of returns recommended by Callan compared to the
market value. He observed that targeted returns continued
to be unattainable over time. He referred to a discussion
from the prior day that market returns would potentially be
around 7 percent; whereas, the target return was 8 percent
(reduced from 8.25 percent, which the committee had
expressed concern about for the past several years). Ms.
Rodell responded that the requested information would be
provided to the committee.
9:37:02 AM
Mr. Barnhill referred to Callan's 7 percent 10-year
projection and explained that Callan had an imbedded
inflation assumption of 2.5 percent; however, ARMB's
imbedded inflation assumption was 3.12 percent (not as
bullish). When Buck had run the numbers it had not adjusted
the inflation assumption down to Callan's; its projection
had only included a 7 percent market return (versus an 8
percent scenario), which would result in a $1.5 billion
liability in FY 21. He communicated that the unfunded
liability would be adjusted down if inflation was less than
3.12 percent. He was reluctant to suggest that the actuary
should reduce its inflation assumption because Callan
expected inflation to rise at some point. He elaborated
that Callan had indicated that given the amount of economic
stimulus funds spent in the U.S. and worldwide, logically
inflation would rise. He concluded that 2.5 percent
inflation seemed more bullish than was wise in a long-term
recommendation.
9:38:59 AM
Co-Chair Stedman believed it would be helpful to calculate
historic projections without the inflation numbers. He
understood the purpose of the inflation assumptions, but
the committee was primarily concerned about the targets
that were not met. He asked for historical real return
expectations for the asset allocation. Mr. Barnhill
acknowledged the request.
Mr. Barnhill turned back to slide 21 titled "State
Assistance (SB 125)" and reiterated that the legislature's
commitment to either method of amortizing the unfunded
liability (shown with red and blue bars) was critical to
health of the PERS and TRS systems.
Co-Chair Hoffman shared concern that without a major change
in the state's revenue stream it could potentially be
facing a deficit and subsequently a major reduction in
services by 2020. He pointed out that state assistance
continued to rise in the status quo method (blue bar on
slide 21). Mr. Barnhill agreed.
9:41:23 AM
Mr. Barnhill shared that the dynamic of the demands on the
general fund increasing to above $1 billion over time had
been a grave concern to executive and legislative branches.
In the fall of 2010 the Legislative Finance Division had
asked ARMB to look at the issue and to provide information
and options for consideration. As a result ARMB compiled
40-plus unfunded liability scenarios (slide 23) by
adjusting five different "levers." He expounded that the
unfunded liability was a "soft" liability and there were a
variety of ways to pay it off (it could be paid off all at
once or over time). The first lever was "amortization
methodology"; the two principal forms of methodology were
level dollar (front loaded) and level percentage of pay
(back loaded). The second lever was "amortization term." He
relayed that ARMB was currently amortizing the unfunded
liability over a 25-year period; it had also looked at 30-
year and 40-year amortization schedules. The third lever
was "cash infusion," which had been a topic of significant
discussion in the legislature; the scenario addressed what
would happen to the liability if a lump sum was paid down
(e.g. $2 billion).
Mr. Barnhill looked at the fourth lever "continuation or
discontinuation of state assistance." The scenario
addressed what would happen if the annual payment was
discontinued. The fifth lever was "additional municipal
participation," which looked at increasing the employer
rate cap from 22 percent to 24 percent. The actuary had run
the 40-plus scenarios and had measured the outputs in
various ways.
9:44:34 AM
Mr. Barnhill continued that primary measurements included
how much it would cost participants to pay off the unfunded
liability, the payoff date, amount the state would pay,
amount the municipalities would pay, and the near-term
burden (in percentage terms) on the general fund. He
referenced a spreadsheet [State of Alaska PERS Financial
Projections (in thousands)] showing the actuarial
measurements from FY 11 to FY 71 (copy on file). He
believed the exercise was useful and showed that there were
a variety of responsible ways that the status quo could be
adjusted. In December 2011 ARMB passed a resolution
recommending the legislature to consider certain scenarios
and discard others (the recommendation did not prevent the
legislative or executive branches from continuing to
consider the scenarios). He noted that the work had
culminated in pending legislation that would be taken up by
the committee at a later date.
9:46:38 AM
Senator Thomas asked about the relationship between the
actuarial assumption, annualized returns, and unfunded
liability. He referenced issues associated with all pension
plans (e.g. recessions caused all plans to decline). He
referred to the current situation of many ERISA [Employee
Retirement Income Security Act]/ Taft Hartley plans; he was
not aware of any that were underfunded to the extent of the
Alaska plans. He wondered why the state would continue to
have an actuarial assumption; Taft Hartley plans actuarial
assumptions were directed by the federal government. He was
skeptical that projections would be realized based on the
historical returns that were 3 percent less than actuarial
assumptions.
Mr. Barnhill responded that he did not have any expertise
in Taft Hartley plans. He was aware that the assumption
regarding investment return for ERISA plans was more
tightly controlled; it was similar to a riskless rate of
return in the 4 percent to 5 percent range. He stated that
ARMB could adopt a comparable riskless rate of return; the
topic had been a subject of debate around the country. He
relayed that a Chicago professor named Joshua Rauh was
calling on public pension plans to reduce their rates of
return from 8 percent down to the 4 percent to 5 percent
range. He reminded the committee that a reduction to the
rate of return assumption would increase the unfunded
liability; if the number was dropped to 4 percent or 5
percent the unfunded liability would essentially double
from $11 billion up to $22 billion. He furthered that if
the liability increased to $22 billion the contribution
rate would double; it would be over 100 percent of payroll
for TRS and around 60 percent of payroll for PERS. Rates
had been capped; therefore, pressure would not be placed on
municipalities and school districts (rates would remain at
22 percent and 12.5 percent respectively), but it would put
a huge demand on the general fund under SB 125. The $610
million figure would increase sharply.
Senator Thomas understood, but reiterated his concerns
about going forward with unrealistic actuarial assumptions.
He speculated that the unrealistic assumptions probably
existed 20 years earlier.
9:50:59 AM
Co-Chair Stedman asked the department to have the actuary
run scenarios using 4 percent up to 8 percent return
assumptions. Mr. Barnhill agreed. He relayed that Buck had
recently begun running a sensitivity analysis in its
valuations using 7 percent and 9 percent assumptions. He
noted that Senator Thomas's point was well taken; the state
was between a rock and a hard place and the time to have
adopted lower return assumptions would have been 25 to 30
years earlier.
Senator McGuire stated that it would be difficult to double
the unfunded liability from a political standpoint, but she
believed it was related to how the state got into the
"mess" to begin with. She recalled when the situation had
begun unfolding in the past; part of the problem had arisen
from bad advice, but there had also been some political
sensitivity related to the size of the liability. She
furthered that the returns were 4.3 percent and 5.4 percent
and were not close to the 8 percent assumption. She
believed it was incumbent upon the state to lay the current
facts out, which she hoped would lead to thoughtful
solutions. The committee had proposed a cash infusion
methodology and other solutions included pension obligation
bonds. She stressed the importance of laying out the facts
in order to reach the needed solution. She asked Ms. Rodell
to provide her opinion on the status quo versus level
dollar methods shown on slide 21. Ms. Rodell replied it was
important to recognize that the state had continued to fund
the arc. She preferred the level dollar method that would
allow the state to pay down liabilities while the resources
existed versus later when it could be more difficult.
Additionally, the state would receive more credit in the
national market for taking care of its liabilities quicker.
9:54:41 AM
Co-Chair Hoffman discussed that the state paid costs above
22 percent for PERS and 12.5 percent for TRS. He wondered
whether other states provided financial assistance for
their retirement programs. Mr. Barnhill was unsure, but he
was aware of other states that did not make their
actuarially required contribution. He sensed that Alaska's
magnitude of general fund assistance was unusual. He
communicated that a number of states were included in a
disturbing trend that involved cutting benefits to current
retirees in order to fully fund their systems. He shared
that in Colorado and Minnesota the courts had sustained the
benefit cut, which involved a reduction in the cost of
living adjustment.
Co-Chair Hoffman queried why the state had elected to
provide the assistance. Mr. Barnhill answered that the
state chose to provide the assistance in order to do the
responsible thing. Additionally, under the Diminishment
Clause of the Alaska Constitution, the state was required
to pay all of the benefits when due.
Co-Chair Hoffman agreed that state assistance was the
responsible action. He surmised that some municipalities
would have gone bankrupt if assistance was not provided.
Mr. Barnhill agreed.
Co-Chair Hoffman asked whether the state had the legal
responsibility to provide the benefit assistance. Mr.
Barnhill stated that there were a variety of ways to handle
the situation. Following SB 125 was one responsible way and
there were a number of others. He observed that some
municipalities may be at their contribution limit, but
there were others that could probably contribute more.
9:57:48 AM
Co-Chair Stedman recalled that there had been discussion
regarding the department's inability to accurately
calculate potential liability sharing between different
municipalities; therefore, to avoid lengthy litigation and
significant insolvencies in various communities, the state
had stepped in and had taken responsibility for costs above
22 percent. He shared that 22 percent had been set as a
negotiated amount in order make municipalities aware of the
problem, but to avoid pushing them into insolvency. He
believed it was incumbent on the committee to use all of
the resources that the state had available in order to
protect communities and retirement plan participants from
diminished benefits.
Co-Chair Hoffman asked how much the assistance was costing
the state and whether it would increase substantially. Mr.
Barnhill responded that to date, under SB 125 the state had
paid approximately $2 billion between 2007 and 2012 split
evenly between PERS and TRS. He shared that within state
assistance provided to PERS, the state and university paid
approximately 60 percent of payroll and municipalities paid
40 percent. He elaborated that the state, as the employer,
was responsible for $600 million out of $1 billion; about
$400 million had been paid on behalf of municipalities and
about $1 billion paid on behalf of school districts. He
pointed to the blue bars [status quo] on slide 21 and
relayed that the state would be responsible for $610
million in FY 13, peaking at $1 billion in 2025 (the figure
would be divided in half between PERS and TRS and the same
60/40 percent split was used for PERS).
10:00:27 AM
Senator Egan asked for detail on assumptions used in the
projections. For example, he wondered whether assumptions
included an annual 10 percent healthcare increase into the
future. Co-Chair Stedman asked for a brief response, with
follow up at a later time. Mr. Barnhill explained that the
assumptions had been adopted by ARMB. The board was
required to do an experience study every four years; at
that time the actuary and secondary actuary looked at
assumptions and made recommendations to the board. He was
unsure where the 10 percent inflation figure had come from.
He explained that the health cost trend graded down over
the course of 100 years; the actuarial assumption going
forward was 6 percent growth for the next several decades.
The actual premium growth in recent years had been 9
percent (shown on slide 9); there had been a flattening
down to 2 percent in the past year (the past 3-year average
was around 8 percent). The change was promising, but he
believed it was premature to say that the growth had flat
lined at 6 percent.
Co-Chair Stedman felt the 0 percent change in 2007 and 2008
was optimistic (slide 9). Mr. Barnhill responded that the
figures were based on the claims experience. He shared that
in the early 1990s there had been talk of federally
regulated healthcare (the "Hilary Clinton" plan); he had
heard (but did not know) that the health industry had
unilaterally flat lined its cost growth during that time
period. The department was focused on sustainable trends;
the current trend continued to be 9 percent. The state
would like to get to the actuarial trend of 6 percent, but
it was not there yet.
10:03:37 AM
Co-Chair Stedman stated that conversations would continue
as the state worked to find a solution to the unfunded
retirement liability. He reviewed the agenda for the
following day.
ADJOURNMENT
10:04:17 AM
The meeting was adjourned at 10:04 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 2011 AK Proj PERS TRS Callan 7%.pdf |
SFIN 2/22/2012 9:00:00 AM |
PERS and TRS |
| Retirement System Presentation to Senate Finance (Feb22-2012).pdf |
SFIN 2/22/2012 9:00:00 AM |
PERS and TRS |
| Rodell to SFC 3-1-2012.pdf |
SFIN 2/22/2012 9:00:00 AM |
Overview: PERS and TERS |