Legislature(2013 - 2014)FBX LIO Rm 308
11/01/2013 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Presentations: Unfunded Liability for Public Employees' Retirement System (pers) and Teachers' Retirement System (trs) | |
| Department of Health and Social Services Fy 14 Budget Overview and Fy 15 Budget Preview | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE FINANCE COMMITTEE
FAIRBANKS LEGISLATIVE INFORMATION OFFICE
November 1, 2013
9:00 a.m.
Note: The following meeting convened in the Fairbanks
Legislative Information Office and was teleconferenced and
recorded in Juneau.
9:00:24 AM
CALL TO ORDER
Co-Chair Kelly called the Senate Finance Committee meeting
to order at 9:00 a.m.
MEMBERS PRESENT
Senator Pete Kelly, Co-Chair
Senator Kevin Meyer, Co-Chair
Senator Anna Fairclough, Vice-Chair
Senator Click Bishop
Senator Mike Dunleavy
Senator Lyman Hoffman
PRESENT VIA TELECONFERENCE
Senator Donny Olson; Fred Sturman, Self, Kenai.
MEMBERS ABSENT
None
ALSO PRESENT
Kristin Erchinger, Member, Alaska Retirement Management
Board; Robert Grove, Retired Public Employees of Alaska;
Ron Johnson, Retired Public Employees of Alaska; Charles
Gallagher, Chair, Retired Public Employees of Alaska;
Michael Barnhill, Deputy Commissioner, Department of
Administration; Angela Rodell, Acting Commissioner,
Department of Revenue; Gary Bader, Chief Investment
Officer, Treasury Division, Department of Revenue; David
Teal, Director, Legislative Finance Division; James
Armstrong, Staff, Senator Co-Chair Meyer; William Streur,
Commissioner, Department of Health and Social Services;
Senator Charlie Huggins.
SUMMARY
Unfunded Liability for Public Employees' Retirement System
(PERS) and Teachers' Retirement System (TRS) Presentations:
Alaska Retirement Management Board
Department of Administration
Legislative Finance Division
Department of Revenue
FY 14 Budget Overview and FY 15 Budget Preview:
Department of Health and Social Services
9:00:39 AM
^PRESENTATIONS: UNFUNDED LIABILITY FOR PUBLIC EMPLOYEES'
RETIREMENT SYSTEM (PERS) AND TEACHERS' RETIREMENT SYSTEM
(TRS)
9:00:52 AM
KRISTIN ERCHINGER, MEMBER, ALASKA RETIREMENT MANAGEMENT
BOARD, testified that the board had researched and educated
itself about the issue of unfunded liability. The board
wished to convey the information to the legislature for
decision making purposes. She initiated the PowerPoint
presentation titled "Alaska Retirement Management Board"
dated November 1, 2013 (copy on file). She noted that some
slides would be skipped in the morning, but the
presentation was available in member's packets and on BASIS
for the public.
Ms. Erchinger began with slide 1: "Alaska Retirement
Management Board (ARMB)."
· Role of the Alaska Retirement Management Board
· ARMB Actions(and Limitations) to Address Unfunded
Liability
· Funding Request
· Outcomes of Anchorage Stakeholder Workshop
Ms. Erchinger recognized that the unfunded liability of the
retirement system was astronomical with a significant
effect on the state. The actions taken by ARMB on the
unfunded liability strained the state budget making it
difficult for competing stakeholders. Stakeholders were
poled at a recent meeting to attempt to craft a solution of
least financial impact for Alaska.
9:04:03 AM
Ms. Erchinger continued with slide 2: "Role of ARMB."
Alaska Retirement Management Board (2005 - present)
1. Manage/invest assets to meet liabilities and pension
obligations of the systems, plan, program and trusts.
2. Set employer contribution rates
3. Greater duty w/respect to pension liabilities and
obligations
4. Recommend to budget-setting and appropriations arms of
gov't, but cannot appropriate or submit a budget
5. Adopt investment policies for each of the Funds;
approve investment options for DC plans after
consulting with Plan Administrator.
Ms. Erchinger continued with slide 3: "Role of ARMB."
6. Approve investment objectives for DB Plans
7. Annual actuarial evaluation to determine assets,
accrued liabilities, funding ratios and certify
appropriate contribution rate for normal cost and
liquidating past service liability
8. Annually report to Governor, legislature, employers
valuation of trust fund assets and liabilities and
other statistical data to understand system
9. Quarterly report of investment performance to
Legislative Budget and Audit
10. Contract for services to execute boards powers
and duties
Ms. Erchinger discussed slide 5: "Limited Ability to Impact
Unfunded Liability."
ARMB Responsibilities:
· Determine asset allocation and investment
objectives
· Determine amortization methodology
· Set investment return assumption
· Set employer contribution rates
· Provide input on actuarial assumptions
9:06:37 AM
Ms. Erchinger noted that a typical pension system had 70
percent of paid-out benefits derived from investment
earnings. To the extent that ARMB had sufficient assets in
the retirement plan, future benefits would be paid, but
without the money upfront, investment earnings would not
provide the necessary benefit payments. The benefit
payments would instead come from the state and employers in
the system. She stressed the importance of up-front money
available in the system to drive the earnings to pay
pension benefits.
9:08:42 AM
Ms. Erchinger stated that the level percentage of pay
method held that as the covered payroll grew, the mortgage
payments grew over time. The board recognized that the plan
was contrary to Alaska's likely reduction in oil revenues.
A levelized mortgage payment would allow a closer match to
the future state revenue.
Ms. Erchinger added that ARMB set the investment returns
assumption and employer contribution rates.
9:09:34 AM
Ms. Erchinger noted that actuarial assumptions were often
seen as untrustworthy and as the cause of the unfunded
liability. She argued that other factors contributed to the
state's unfunded liability. She discussed a change in plan
benefits in recognition of the tremendous liability. She
agreed that actuarial assumptions played a large role in
the unfunded liability of the state's system, but she
stressed that the assumptions provided the best tool for
the board.
Ms. Erchinger noted that the board had been criticized for
not doing enough to solve the unfunded liability problem.
She explained that the board could not appropriate funds
and submit budgets to affect the unfunded liability. She
stated that the board supported pension obligation bonds as
a tool, but she could not authorize issuance of bonds or
any type of loan between state funds.
9:11:34 AM
Ms. Erchinger stressed that the board wished to open a
dialog with the legislature. She noted the board's support
of direct appropriations by requests through the
legislature into the PERS and TRS system. She noted that
the money would earn interest to pay pension benefits,
reducing the need for future contributions from the state
in the future. The board supported the use of the use of
pension obligation bonds as a partial and potential
solution to address the unfunded liability. She noted the
reduction of the earnings assumption rate in the plan from
8.25 percent to 8 percent. She noted a change in the
amortization payment to flatten the mortgage payments over
time.
Slide 7: "Where We Have Been." The Alaska Retirement
Management Board evaluated 40 potential scenarios in 2011.
Recommended:
· 25-year or 30-year amortization
· Lump-sum contributions with continued State
assistance
· Change to level dollar amortization
Rejected:
· Lump-sum contributions with no further State
assistance >22 percent
· Cost-shifting from the State to municipalities
and vice-versa
· Requiring assets outside trust fund be used to
set rates
· Extending amortization if significantly higher
costs than status quo
Ms. Erchinger mentioned that in 2011, the ARMB reduced
their earnings assumption from 8.25 percent to 8.00
percent. The return was believed to be consistent with the
asset allocations. The risks and rewards of the allocation
were balanced to achieve the target return. She noted
increased difficulty achieving the target return with the
oncoming liquidity problem. With insufficient assets to pay
benefits, the state must draw down their assets affecting
the ability for long-term investment. The decision to
reduce the investment earnings assumption from 8.25 percent
to 8.00 percent impacted the funded ratio because future
assets will be lower as a result of the lower investment
return.
9:13:53 AM
Ms. Erchinger moved to slide 8: "Impact of Reduced Earnings
Assumption."
· Reduced earnings assumption 8.25 percent to 8.00
percent
· 3.12 inflation assumption = 4.88 percent real return
· Return is consistent with asset allocation
· Reduces funded ratio due to lower assumed future
assets
· Increased ER rate by 1.53 percent PERS; 1.88 percent
TRS (2012)
Ms. Erchinger highlighted the investment returns on slide
9. The slide intended to display the board's ability to
meet the 8 percent return assumption. The returns were net
of fees, resulting from the investment fees minus the the
cost of running ARMB and the retirements system.
Senator Bishop asked how close the actuarial assumptions
predicted the returns displayed in slide 9.
Ms. Erchinger replied that a later presentation would offer
the requested information. She noted that in the 20-year
term the assumption was just under the 8 percent return,
while the 30-year was greater.
Co-Chair Meyer wondered about the asset allocation. He
asked about the equity/bond ratio.
Ms. Erchinger responded that ARMB was highly invested in
equities that were split between domestic and
international. She mentioned that the board had lowered its
allocation in recent months to fixed income with the
anticipation of increasing interest rates. As interest
rates rise, the values of fixed-income investments fall.
The board strived to move out of fixed-income and into
equities. She discussed the investment in infrastructure
such as farmlands, timber and real estate providing long-
lived assets with a higher return.
Co-Chair Meyer appreciated the information and was happy to
see that the board was investing in a manner comparable to
the Permanent Fund Board.
9:17:00 AM
Ms. Erchinger referenced slide 10: "Impact of change from
Level Percent of Pay to Level Dollar Amortization."
· Reduces overall contributions by nearly $2 Billion
· Reduces State Assistance by $1.26 Billion
· Reduces overall State payments by $1.64 Billion*
· Reduces Muni payments by $285 Million
· Level Percentage of Pay delays contributions to future
· Level Dollar results in higher contributions in early
years, reduced contributions later
· Increased contributions rates for PERS by 7.21 percent
of pay and for TRS by 13.07 percent of pay
· Since 2006, Level Dollar would have added $6.23
Million addtl to PERS; $351 Million addtl to TRS
*Includes State Assistance and State payments as an
employer
9:19:10 AM
Ms. Erchinger discussed slide 12: "Why change Level
Percentage of Pay to Level Dollar." The graph's red line
depicted the new method for state assistance payments.
While the levels would increase in the short-term, the
later years would see the reduction of the required state
contribution. The blue glide path depicted the former
amortization method, which over time increased the payments
required by the state.
Ms. Erchinger continued discussing slide 12 and noted that
the blue path projected state-assistance payments of 22.6
percent by FY 29 of general fund unrestricted revenue. The
red line predicted a maximum percentage of 18.7 percent in
FY 19. The general fund unrestricted revenues resulted from
the historical number via the 2012 Fall Revenue Source
Book.
9:21:32 AM
Ms. Erchinger stated that the forecasted revenues came from
the spring 2013 Revenue Forecast adjusted by fiscal note
for SB 21. The level dollar forecast assumed no additional
oil production. Slide 13 depicted the same information in
numeric format.
9:22:02 AM
Ms. Erchinger referred to slide 14: "Projected Actuarial
Results Revised."
ARMB requested actuaries revise Table of Projected
Actuarial Results purporting to show System
overfunding (surplus) in excess of $3 Billion by 2072,
as misleading.*
Ms. Erchinger discussed slide 15: "Where we have Been."
The Alaska Retirement Management Board evaluated 40
potential scenarios in 2011.
Recommended:
· 25-year or 30-year amortization
· Lump-sum contributions with continued State
assistance
· Change to level dollar amortization
Rejected
· Lump-sum contributions with no further State
assistance >22 percent
· Cost-shifting from State to municipalities and
vice-versa
· Requiring assets outside trust fund be used to
set rates
· Extending amortization if significantly higher
costs than status quo
9:25:14 AM
Senator Hoffman asked if the $28 billion was reflected in
the chart.
Ms. Erchinger responded no. Slide 13 reflected the state
assistance payment.
Ms. Erchinger explained that the most costly option
included the elimination of state assistance. She furthered
that the solution provided by the board was the least
costly for the long run. Less expensive solutions require
greater state contributions up-front. She related the issue
to SB 187 and the added cost of approximately $11 billion
in the legislation's proposed scenario. Since the board's
plan would extinguish the entire debt by $28 billion, the
legislation proved too expensive for the state.
Senator Hoffman asked if the state would have been
reimbursed all contributions under SB 187.
Ms. Erchinger replied that the lines highlighted in SB 187
that the status quo showed that the municipalities' cost
would be $3.6 billion today and would rise to $10 billion
under SB 187. The cost would shift from the state to the
municipalities. With SB 187, state assistance payments
would be eliminated.
9:28:25 AM
Ms. Erchinger offered to provide the committee with
additional information from the actuaries to help the
committee further research the issue. She suggested that
the legislature guide ARMB regarding the level of state
assistance payments that could be feasibly financed. She
wanted to know the amount of payment that the legislature
would be willing to make and how it would change over time.
She also wished to know the level of up-front cash infusion
possible. With the information, the board could begin
running scenarios to meet the target.
Ms. Erchinger continued that the assumptions would change
as a result of the legislature's input. She supposed that
the amortization period might require an extension and
different options could be considered. Without the key
information, the target and solution are difficult to
acquire.
9:30:05 AM
Ms. Erchinger discussed slide 23: "State Assistance:
Baseline vs. $2B injection." She noted that ARMB had
submitted a request for funding to the legislature at the
end of the legislative session for a $2 billion injection
into the system to be spread over 4 years. The outcome of
the meeting with the stakeholders yielded the question
about spreading the money out over 4 years. Slide 23
provided further information to the committee about the
request.
Ms. Erchinger continued with slide 23. She noted that the
red bar depicted the state assistance payments with the
state contributing $500 million per year for 4 years in a
row. After 4 years, the red glide path reduced the required
state assistance payments over time. When oil revenues were
expected to be much lower, the impact on the state budget
would be reduced by $322 million per year on average. She
stressed that any contribution today would limit the
contributions required in the future.
Senator Hoffman asked if the interest rate assumed was 8
percent.
Ms. Erchinger concurred.
9:32:29 AM
Ms. Erchinger discussed slide 29: "Primary Outcomes."
· Borrow from ourselves
o Mitigates risks of borrowing from capital markets
o Provides guaranteed return to reserves
o Prefer to borrow from CBR since SBR earnings are
swept into GF
o State's bond rating not adversely affected if we
borrow from ourselves
o Demonstrates that Alaska has a plan to address
U/L
o Leverages significant reserves without consuming
them
· Direct appropriation
o Prefer a single lump-sum rather than spread over
multiple years
· Pension Obligation Bonds as a partial solution
Majority agreed on the need for substantial injection
into system now.
9:35:28 AM
Vice-Chair Fairclough asked about other retirement systems
managed by the ARMB. She noted that the state contributed
to the other retirement systems. She requested a brief
synopsis of the status of the systems.
Ms. Erchinger deferred the question to another board
member.
Vice-Chair Fairclough wondered about the possibility of
over-funding one of the pension programs.
9:36:24 AM
AT EASE
9:38:52 AM
RECONVENED
ROBERT GROVE, RETIRED PUBLIC EMPLOYEES OF ALASKA, thanked
the committee for addressing the issues. He noted much
confusion among current and potential retirees throughout
the state regarding the unfunded liability. He also thanked
ARMB and the information provided by the board. He recalled
his previous position with Alaska Housing Finance
Corporation (AHFC). He believed that the problem with
Alaska's retirement system was repairable and he suggested
a comparison of Alaska with other states in the nation. He
stated that Alaska had options to solve the problem unlike
other states who delayed action on similar issues.
9:41:34 AM
RON JOHNSON, RETIRED PUBLIC EMPLOYEES OF ALASKA, thanked
the committee for their attention to the issue. He echoed
the opinion of ARMB regarding the transition to the level
dollar or up-front cash infusion. He worried about the
future retirees and their solvency. He preferred not to see
a vote to access the Permanent Fund to bail out the
retirement fund. He preferred a use of budget reserves to
reduce the total payments over time. He commented about the
earnings assumptions. He mentioned that the public pension
funds saw good returns in the last 10 years. He supported
the idea of a cash infusion or level dollar to the current
pay-down.
9:44:53 AM
CHARLES GALLAGHER, CHAIR, RETIRED PUBLIC EMPLOYEES OF
ALASKA, stated that Alaska had progressed with the work on
this very important issue. He expressed gratitude that ARMB
and the legislature were addressing the situation. He
agreed with the testimony provided by ARMB. He stated that
multiple meetings occurred in Fairbanks over the summer to
address the unfunded liability problem.
9:47:05 AM
AT EASE
9:48:12 AM
RECONVENED
MICHAEL BARNHILL, DEPUTY COMMISSIONER, DEPARTMENT OF
ADMINISTRATION, provided a PowerPoint presentation titled
"Public Employee Retirement System (PERS) Teachers
Retirement System (TRS) Fall 2013 Update (copy on file)."
He noted the intention of the slides to produce both
introductory information as well as an update.
Mr. Barnhill stated that the governor believed that the
unfunded liability presented a very serious problem to the
state.
9:50:07 AM
Mr. Barnhill communicated that the administration believed
in the moral obligation to ensure that all benefits were
paid when due. He stressed the importance of the long-term
nature of the commitments necessary and the need to ensure
that the commitments were kept through 2070 or 2080. He
offered gratitude to the legislature and the assistance
provided on behalf of school districts and municipalities.
9:51:45 AM
Mr. Barnhill added that Alaska had a unique situation
regarding state funding of school district retirement
systems. He added that approximately 159 municipalities
participated in PERS. He noted that the state legislature
had appropriated $609 million since 2008 to the state's
retirement systems. He stated that municipalities must also
pay their obligations in a timely fashion.
9:52:14 AM
Mr. Barnhill stated that the administration agreed to
consider the lump-sum solution presented by Ms. Erchinger.
Mr. Barnhill discussed slide 2: "PERS/TRS Basic Facts
Organization." He explained that three entities had key
roles in the function of the state's pension system. He
began with Department of Revenue and the Division of
Treasury, which was charged with acting as staff to ARMB
and managing the trust funds for each of the state's
pension systems. The division managed a great variety of
assets. The fiduciary of the assets was ARMB. The board was
created in 2005 during the closure of the Alaska defined
benefit system to new entrants in FY 07 and the closure of
the previous boards.
Mr. Barnhill explained that his department, the Department
of Administration (DOA) was statutorily charged with
administering the liability side of the state's equation.
He elaborated that DOA calculated and issued the pension
checks, processed retirement health claims, worked with
actuaries on various projections to help with the
administration of the system. He noted that many pension
systems had a different organization. He referred to
California and their state's retirement system
organization.
9:55:10 AM
Mr. Barnhill discussed slide 3: "PERS/TRS Basic Facts
Membership" and the active employees. He highlighted the
36,300 active employees in PERS. Since the closure of the
defined benefit system in 2006, the number of people in the
defined contribution system had risen steadily. He added
that approximately 40 percent of the payroll was now active
in the defined contribution system. He added that the
increase was less pronounced in TRS with 35 percent of
active teachers in the defined contribution system. He
noted that the state had approximately 41,000 retirees with
anticipation of numbers greater than 60,000 in the next 20
years.
9:56:59 AM
Mr. Barnhill discussed slide 4: "PERS/TRS Basic Facts
Defined Benefits."
Defined Benefit Pension: fixed benefit amount from
date of retirement to death.
Contributions + Investment Earnings = Benefits +
Expenses
If All actuarial assumptions are accurate
Actuarial Assumptions:
Inflation, Investment Return, Mortality, Date of
Retirement, Cost of Healthcare, Payroll Growth,
Disability, Spouse Age, Dependent Children, COLA,
Plan Expenses, Turnover
Inaccurate Projections lead to Unfunded Liability
Employer Takes the Risk
10:00:29 AM
Mr. Barnhill stated that multiple actuaries were hired by
the state to make a series of actuarial assumptions.
Mr. Barnhill discussed slide 5: "PERS/TRS Basic Facts
Contributions - Employee." Contributions were derived from
two different populations, the employees and employers. The
employee contributions for PERS and TRS were set in
statute. He stated that police and fire employees paid 7.5
percent from their paychecks every payroll period. The
other employees in PERS paid 6.75 percent and TRS employee
contribution rate was 8.65 percent for the teachers
retirement trust. He explained that the amounts were fixed
in Alaska because of a section of the state's constitution
known as the diminishment clause, which prohibits changing
features of the defined benefit system once an employee is
hired. The Supreme Court maintained that benefits vest on
the date of hire.
10:03:08 AM
Mr. Barnhill discussed slide 6: "PERS/TRS Basic Facts
Contributions - Employer." He repeated that if the
actuarial assumptions fell short, the employer must make up
the difference through employer contribution rates. He
stated that the red line depicted the TRS contribution
rate, while the blue line represented PERS contribution
rate. He pointed out that rates had grown substantially
since 2005. The ARMB developed a defined contribution rate
of 40 percent for the employer in PERS and 66 percent for
TRS.
Mr. Barnhill stated that the rate increase was due to the
inaccuracy of the actuarial assumptions. He noted that
actuarial assumptions set in the 1990s were too low. Health
care cost growth was increasing in the late 1990s
contributing and were not reflected in the actuarial
calculations. The board brought a suit against its former
actuary Mercer for actuarial negligence, which was settled
for a sum of approximately $500 million.
10:05:56 AM
Mr. Barnhill recalled the 1999-2001 time period of economic
recession brought on by the dotcom collapse in the equity
market. Subsequently, other investment losses in the 2009
time period were weathered. The 8.25 percent rate of return
was an investment assumption that had not been realized and
contributed to the increases in employer contribution
rates.
Mr. Barnhill referred again to slide 6 and the green and
purple lines. He noted that those lines depicted the result
of relief from the high contribution rates through a bill,
SB 125 enacted in 2008. The bill capped the rates paid by
the employers for TRS at 12.56 percent for PERS at 22.00
percent of payroll.
10:08:32 AM
Mr. Barnhill noted that the results of the capped employer
contribution rates included state assistance for
approximately $1.7 billion.
Mr. Barnhill continued with slide 7: "PERS/TRS Basic Facts
Investment Returns." He noted that the past investment
return assumption adopted by the Alaska State Pension
Investment Board and subsequently by ARMB was 8.25 percent
and recently reduced to 8.00 percent. The slide depicted
the annualized return scenarios for both PERS and TRS over
various time frames. He pointed out that last year was a
great period with earnings of 12.5 percent. The prior years
were less successful. He remarked that the returns listed
on the slide were gross returns and did not include the
expenses.
10:11:59 AM
Mr. Barnhill detailed slide 8: "PERS/TRS Basic Facts
Benefits."
DB Benefit Amount:
Sum of multipliers X Avg. High 3(Tier 1-2) or Avg.
High 5 (Tier 3)
PERS Multipliers: 2 percent first 10 yrs; 2.25
percent second 10 years; 2.5 percent thereafter
TRS Multipliers: 2 percent first 10 years; 2.5
percent thereafter
Example: 30 years PERS service:
(2percent X 10) + (2.25 percent X 10) + (2.5
percent X 10) X $85,000=
67.5 percent X $85,000 = $57,375
Note: State of Alaska employees also participate in
the supplemental annuity plan (SBS).
Co-Chair Kelly clarified that the 25-year look provided the
current assumptions.
Mr. Barnhill concurred. He noted that the topic encountered
much debate. Some economists believe that a defined benefit
public employee system should not adopt an interest rate
assumption above a riskless rate of return. He added that
the majority of pension systems adopted a rate of
approximately 8.00 percent. He stated that the adoption of
a lesser rate (4.50 percent) would double the current
unfunded liability.
10:15:19 AM
Mr. Barnhill stated that the majority of the actuarial
community agreed that 8 percent was the appropriate rate of
return.
Vice-Chair Fairclough asked about the effect of the rate of
return on Alaska in the form of liquidity.
Mr. Barnhill deferred issues involving liquidity to Mr.
Bader. He pointed out that liquidity was an issue for
Alaska as a closed system.
Mr. Barnhill discussed slide 9: "PERS/TRS Basic Facts
Benefits." He noted that the chart displayed the total
benefit payouts between 2013 and 2080. In 2013, the state
would pay $1.5 billion in pension and healthcare benefits
between PERS and TRS. As the number of retirees grows, the
amount of benefits would exceed $3.5 billion annually in
approximately 2036. The total spending on the system
between 2013 and its closure would be $140 billion over the
next 70 years. He assured that with actuarially required
payments and good assumptions, the trust funds would have
sufficient funds to pay the necessary benefits. He admitted
that future time periods might yield down-turn investment
markets allowing for new unfunded liabilities.
10:19:38 AM
Mr. Barnhill noted discussion about the development of a
new defined benefit plan. Until the fiscal structure of the
state was stable enough to support a defined benefit plan,
the department opposed the creation of a new defined
benefit plan.
Mr. Barnhill discussed slide 10: "PERS/TRS Basic Facts
Expenses." He noted that the one-year snapshot indicated
that expenses added up to approximately 30 basis points. He
stated that 0.3 percent of the return was deducted for
expenses, which added up to $54 million.
10:20:57 AM
Mr. Barnhill detailed slide 11: "PERS/TRS Events that Led
to C+I=B+E."
2002 - Milliman actuarial audit; dotcom collapse
2003 - FY 02 valuations released with revised
assumptions. $4.1B unfunded liability
2005 - SB 141 enacted: Mr. Boyle plans closed; DC
plans created; PERB/TRB/ASPIB sunset; ARM Board
created
2007 - ARM Board files suit against Mercer for
actuarial negligence; SB 123 enacted: PRS cost share
Senator Dunleavy asked about the comment that a return to a
defined benefit system was unsustainable. He asked if a
return was unsustainable under any scenario.
Mr. Barnhill responded no. He stated a return to a defined
benefit system was sustainable if the state had a stable
fiscal structure that could support sufficient revenues
into the indefinite future.
10:23:46 AM
Mr. Barnhill continued with slide 11.
2008 - SB 125 enacted: employer contribution rates
capped; state assistance begins; Great Recession
begins
2009 - PERS/TRS investment loss: (20.5%)
2010 - Mercer litigation settled for $500 mm (net
$403mm); other states begin to cut Mr. Boyle benefits,
change plans;
2012 - ARMB adopts level dollar amortization; $11.9B
unfunded liability
2013 - 12.5 percent investment gain; recession over?
10:26:24 AM
Mr. Barnhill discussed slide 12: "PERS/TRS Funding Ratio
History - PERS." The slide displayed the funded level,
which was a percentage of assets to accrued liabilities.
With 100 percent the state would have sufficient assets to
pay accrued liabilities. The PRS system was 61 percent and
the TRS system was in the lower 50 percent. He noted that
actuaries claimed that 80 percent funded level indicated
relative health in the system.
10:27:25 AM
Mr. Barnhill discussed slide 13: "PERS/TRS Funding Ratio
History - TRS." The slide showed the monthly premiums
charged to early retirees that pay for health insurance,
which had increased by a compound rate of 9 percent
annually since the late 1970s. He explained that the
extraordinary increases in health care costs were not
envisioned during the system's inception. He stated that
monthly premiums were $57 in the 1970s, and they have grown
to over $1200. The rate of growth flattened in the last few
years. Predictions are for further increases in health care
costs resulting from the Affordable Care Act.
10:28:45 AM
Senator Hoffman understood that other states had found
modifications that allowed for more affordable plans. He
asked if Mr. Barnhill would comment on the state's efforts
to seek out more affordable options.
Mr. Barnhill replied that the state's retiree health plan
remained static over the last 14 years, resulting from the
diminishment clause. He mentioned changes made in the year
2000 time period. The changes resulted in litigation
between the state and an advocacy group. The Alaska Supreme
Court held that the retiree health care benefits were
subject to the diminishment clause. The retirement
healthcare benefits could be changed if one piece of
coverage was eliminated or reduced.
10:30:50 AM
Mr. Barnhill pointed out that the decision led to
unfavorable results for both the state and the retirees. He
mentioned that retirees were competing for enhancements of
benefits in the form of preventative care, which was not
provided by the retiree plan. Another cause of concern was
the lack of coverage for dependents to age 26, which was a
function of the Affordable Care Act. The retiree health
plan was not subject to the Affordable Care Act, the
enhancement was not added.
Mr. Barnhill continued that the diminishment clause acted
to freeze the retiree health plan. The state had strategies
to improve the coverage and its sustainability from a cost
perspective. The department planned to work with the
retiree community through the fall and into the following
year.
Co-Chair Kelly asked if employees contribute to the
premium.
Mr. Barnhill responded that a fully vested retiree would
pay nothing.
10:32:16 AM
Mr. Barnhill pointed out that the Affordable Care Act
assumed that everyone should contribute a portion toward
the premium of the retiree insurance plan. He noted that
most people would pay 9.5 percent of modified adjusted
gross income. Alaska's system allowed vested retirees to
pay nothing. He explained that the defined contribution
plan was different with the premium share provision.
Depending on the years worked, a person would pay different
levels of their premium.
10:33:09 AM
Vice-chair Fairclough asked about the Government Accounting
Standards Board GASB (number 67 and 68) statements that
would take effect. She understood that the reasons that
health benefits were not separated with the reflection of
the unfunded liability resulted from the diminishment
clause as interpreted by the Alaska Supreme Court.
Mr. Barnhill said that the unfunded liability associated
with healthcare was evaluated separately. Of the $11.9
billion of unfunded liability, $3.5 billion related to
healthcare. He mentioned that GASB 67 and 68 presented new
requirements imposed on public pension systems. The bills
required computation of a new figure called the net pension
liability utilizing a different and standardized formula.
The primary difference was a standard method of computing
the value of assets using a fair rather than actuarial
value.
10:35:07 AM
Mr. Barnhill continued that the net pension liability was
reported on employers' balance sheets beginning in FY 15.
With PERS and TRS, the department would allocate the net
pension liability for various participants in the system.
Co-Chair Meyer understood that other states did not include
healthcare costs as part of their unfunded liability.
Mr. Barnhill replied that the medical piece was not part of
GASB 67 and 68. Sometimes the medical piece referred to
other post-employment benefits, which included health and
life insurance benefits.
Co-Chair Meyer asked if a comparison of Alaska's unfunded
liability to other states provided a fair comparison.
Mr. Barnhill replied that Alaska behaved differently than
other states. For Alaska, the unfunded liability includes
all school districts, municipalities and the state. He
pointed out that California's unfunded liability did not
include any school districts. Alaska reported a
comprehensive unfunded liability. He noted that some states
were beginning to report medical unfunded liability. He
stated that most systems were computing the liabilities,
but were not prefunding them. He noted that Alaska was
distinguished from other state entities with its practice
of prefunding healthcare benefits since the 1970s.
10:38:22 AM
Co-Chair Meyer asked about the states bond ratings and the
incorporation of medical costs.
Mr. Barnhill could not speak to the issue; he deferred the
question to Commissioner Rodell.
Senator Hoffman asked if retirees had to pay monthly health
care premiums for defined benefits in all tiers.
10:39:35 AM
Mr. Barnhill said he would get back to the committee with
an answer.
Mr. Barnhill continued with slide 15, "Balance Sheet." The
slide depicted the systems in terms of the actuarial value
of assets and accrued liabilities. He noted the 61 percent
funded ratio for PRS, 52 percent for TRS adding up to $16.7
billion in assets and $28.6 billion in accrued liabilities.
The unfunded liability was listed at $11.9 billion. He
noted that the most recent treasury report showed assets of
$19 billion as of September 30, 2013.
10:40:31 AM
Mr. Barnhill stated that the next two charts, slides 16 and
17, illustrated approaches to unfunded liability and
general fund appropriations. He noted that both
methodologies depicted past state assistance under SB 125.
He explained that both the level dollar and the level
percentage of pay were displayed in the slides. He
clarified that level percentage of pay was a "back-loaded"
methodology, where level dollar was a "front-loaded"
methodology that dropped over time. He reminded that ARMB
recently adopted the level dollar methodology. The amount
of money appropriated from the general fund to provide
assistance would increase by approximately $272 million in
FY 15.
Mr. Barnhill furthered that both methodologies were
acceptable from an actuarial point of view. Both
methodologies ensured that all payments were made to
beneficiaries when due. He mentioned strategies used to
address unfunded liabilities. The various strategies
stemmed from the actuarial formula of contributions plus
investment equals benefits plus expenses. He noted that the
majority of solutions focused on contributions. A direct
correlation could be found between the length of the term
and the amount of the payments.
10:43:49 AM
Vice-chair Fairclough asked about liquidity.
Mr. Barnhill explained that a debt financing structure
required payment sooner or later. Debt servicing costs
would increase in aggregate over time. He noted the
liquidity of the trust funds to pay benefits and liquidity
of the general fund to meet requests presented to the
legislature. He pointed out the challenge of structuring an
approach that meets the requirements of paying benefits as
well as cash flow needs. Additional approaches included
payment into the reserve account and cash infusion.
10:47:28 AM
Senator Hoffman understood that administration acknowledged
the unfunded liability as critical. He asked how the
administration viewed cash infusion.
Mr. Barnhill replied that ARMB had a stakeholder meeting in
August where Karen Rehfeld, Director, Office of Management
and Budget, Office of the Governor indicated that the
administration was willing to consider the approach of cash
infusion.
Senator Hoffman asked about a time frame for commitment
from the administration regarding cash infusion.
Mr. Barnhill stated that he could not commit to a time
frame. He added that the adjustment of contribution rates
was typically a function of altering the amortization
method. He stated that some states had changed employee
contribution rates, but he thought it unlikely in Alaska
because of the diminishment clause.
Mr. Barnhill discussed investment returns. He pointed out
that investment returns could not be manipulated to adjust
the unfunded liability. He stated that ARMB had an asset
allocation heavily weighted to equities that was adjusted
on an annual basis.
10:49:53 AM
Mr. Barnhill mentioned that the department addressed the
benefit side of the equation by researching the reduction
of health care costs without reducing health care benefits.
He stressed that the benefits were secured by the
diminishment clause. A new third-party administrator, AETNA
was procured to replace the Health Smart. He noted that the
new administrator had an advantageous discount provider
network, particularly in the Lower 48. The department
anticipated a cost savings of tens of millions of dollars
annually.
Mr. Barnhill pointed out that auditing would enable further
reduction of costs. He added that the diminishment clause
prevented further adjustment to the cost of the benefits.
He assured that both the Department of Revenue and the
Department of Administration were striving to administer
the system for optimal cost savings.
10:52:18 AM
Senator Hoffman understood that 40 percent of Alaskan
retirees lived in the Lower 48. He wondered how that number
had changed over the last decade.
Mr. Barnhill replied that he did not have the ten year
look-back.
Vice-chair Fairclough asked the percentage rate of the cost
of living adjustment affected.
Mr. Barnhill replied "some percentage of CPI."
10:53:07 AM
AT EASE
11:00:31 AM
RECONVENED
ANGELA RODELL, ACTING COMMISSIONER, DEPARTMENT OF REVENUE,
provided an opening statement:
Thank you for the opportunity to make a presentation
today. We have heard a lot about whether or not the
pension trust funds are "healthy" or whether or not
they are in "fiscal stress". We have also talked a
lot about affordability. What can the state afford
and what are our options going forward? Do we really
need to do anything at this time? The State of Alaska
was upgraded by Fitch and Standard & Poor's over the
last two years and we now share triple A ratings from
all three nationally recognized rating services. One
of the primary reasons cited by all three rating
agencies was good or sound financial management.
Good credit scores for any of us means we sometimes
have to make hard decisions. The legislature and the
governors over the years have taken necessary and - at
times uncomfortable - steps towards keeping the state
on sound financial footing. It is no secret that we
have a volatile revenue source which has led us to be
conservative in our budgeting practices. We believe
in paying up front for those things we are required to
provide - even going so far as to forward fund
education. We honor our debts, pay them off early if
we can and equally importantly we honor our contracts.
The unfunded pension liability or net pension
liability is the gap between the assets we have to
fund the benefits promised under contracts made years
ago. In 2005 the legislature and the governor took
the very hard step of closing the defined benefit
program so that the state could take direct control of
its contract obligations by no longer promising
benefits it may not be able to deliver. The liability
continued to grow over those years because the costs
of benefits grew more than predicted and expected
investment earnings failed to materialize.
It is true that under any level percent of pay or
level dollar amortization, liabilities will be paid
off. So why should we take any other actions than
those already described? Because this state needs to
have the financial flexibility in future years to
continue to grow this state - whether it is investing
in a hydroelectric project, rebuilding coal fired
facilities or making a major investment in a gas line
from the North Slope. Right now we rely on the assets
in the pension trust funds to generate enough cash to
pay each year's benefits. We have designed an asset
allocation with the goal of earning at least 8%. If
those assets do not generate enough cash to pay all
the benefits, we are required to sell assets to come
up with the cash deficiency. The unfunded liability
will grow because we are unable to achieve 8% and
requests to the general fund will be even higher than
today. There are very real and tangible benefits to
the State for addressing this issue now - the most
important one maintaining financial resources to fund
future priorities.
At this time I would like to turn to Gary Bader and
have him walk you through an analysis we have prepared
which will demonstrate in more detail our concerns
about our future flexibility.
GARY BADER, CHIEF INVESTMENT OFFICER, TREASURY DIVISION,
DEPARTMENT OF REVENUE, explained that the treasury division
oversaw approximately $50 billion of state assets. He
stated that approximately $22 billion of those state assets
were for ARMB, with $18 billion of the $22 billion for the
defined benefit plans.
Mr. Bader began the presentation, "Retirement Systems
Liquidity Analysis":
Fund Liquidity Analysis
· Although there is a substantial unfunded
liability in both PERS and TRS, there are
billions of dollars to pay benefits well into the
future.
· Benefits payments will increase substantially in
the next decade. Unless addressed, the
combination of increased benefit payments and
insufficient assets in the trusts will require
investing in more liquid assets.
· Investing in more liquid assets will negatively
impact the rate of return of fund assets,
therefore increasing the unfunded liability.
11:06:36 AM
Mr. Bader explained that his presentation's data was based
on the actuarial report prepared by Buck Consultants and
the valuation study as of June 30, 2012.
Mr. Bader addressed slide 3: "PERS Data Points, Fiscal Year
Ending 2014 (Projection from Actuary)." He emphasized that
the earnings assumption was 8 percent. The unfunded
liability would increase substantially if ARMB were to
lower its earning assumption. The ultimate purpose of a
retirement system was to pay benefits. He noted that his
references to liquidity were specifically directed to the
methods of cash generation to pay benefits.
11:07:29 AM
Mr. Bader addressed slide 4: "PERS Data Points, Fiscal Year
Ending 2014, Without State Assistance." The slide displayed
the importance of the annual state assistance that the
governor and legislature have appropriated to PERS. Without
state assistance, the fund would require another half
billion dollars of cash flow from investments to pay
benefits. Investment returns were not cash. He estimated
that the current investment program would generate
approximately $262 million for PERS this year. Without
annual state assistance, the fund would have to sell some
assets to pay benefits, which might impair the ability to
earn the 8 percent return.
Mr. Bader referred to slide 5: "TRS Data Points, Fiscal
Year Ending 2014 (Projection from Actuary)." He noted that
the circumstances with TRS were similar to those of PERS
with an 8 percent earnings assumption.
Mr. Bader addressed slide 6: "TRS Data Points, Fiscal Year
Ending 2014, Without State Assistance." He noted that TRS
required nearly as much as PERS to pay benefits without
state assistance. For approximately $4.8 billion of assets,
TRS would yield approximately $106 million, but the need is
$465 million.
Mr. Bader discussed slide 7: "Growth of Benefits,
PERS/TRS." He noted that ARMB was addressing liquidity
issues through the pooling of assets and opportunistically
selling assets to rebalance funds. The slide demonstrated
how the requirement to pay cash benefits would grow over
the next nine years. Benefit costs for 2013 were $1.5
billion with projections for 2022 of $2.5 billion
11:08:53 AM
Mr. Bader detailed slide 8: "Annual Cash Yield Mr. Boyle
Plans." He discussed methods for generating cash to pay
benefits. He stated that fixed income was ordinarily the
highest yielding asset class but with 10-year treasuries
yielding approximately 2.5 percent, the state's fixed
income return was "anemic." He stated that the state earned
approximately 2.4 percent on the fixed income portfolio
while the public equity portfolio yielded approximately 2.5
percent and real assets earned approximately 2.6 percent.
He pointed out private equity with its unpredictable yield.
Mr. Bader discussed slide 9: "Ten Year Returns by Asset
Class." The private equity asset class was the highest
earning asset class, yet it could not provide a predictable
cash flow for benefit payments. A change in the asset
allocation to the private equity asset class would
significantly impact the state's ability to earn an 8
percent return.
Mr. Bader detailed slide 10: "ARMB Liquidity Projection."
He mentioned the state's pooling of assets as one of the
strategies used to manage liquidity issues. Slide 10
detailed all of the funds managed by ARMB. He noted the
department's daily management of the asset allocation of 14
separate funds. The funds were divided between the pension
trusts for the separate benefit programs. He pointed out
the slide's column headed "net contributions," which
represented the cash in for all of the plans. By 2025,
calculated with state assistance, the state will encounter
a negative cash flow of $1.2 billion. The liquidity problem
will be quite serious by 2025 without sufficient assets in
the fund and a strategy is not found to gain higher yield
from investments.
11:11:29 AM
Mr. Bader said that when the legislature passed legislation
related to the Permanent Fund Dividends, it required that
dividends be paid out of realized earnings. The program was
designed to avoid the sale of assets in order to pay the
benefit or dividend.
Mr. Bader mentioned other strategies presented to the
committee that described strategies to address the unfunded
liability that were based upon an 8 percent earnings
assumption. He noted the both the retirement systems and
the permanent fund earned 7.3 percent. With 10-year
treasuries yielding approximately 2.5 percent, requiring a
substantial portion of earnings to yield for dividends
would create challenges for the system. He stated that the
current return would make the challenge greater if assets
must be sold.
11:13:21 AM
Vice-chair Fairclough asked if Mr. Bader suggested that the
legislature implement a policy change for ARMB making it
impossible for them to dip into the corpus of the
retirement funds. She asked if Mr. Bader suggested that the
legislature base a future fiscal plan on a rate of return.
Mr. Bader stated that he was not making the recommendation
stated by Vice-Chair Fairclough. He stressed that without
state assistance, the liquidity issue may drive events in a
direction that is contrary to earning 8 percent. He
believed that 8 percent was possible, and if the goal was
not achieved, the contribution rate would be impacted,
making it self-correcting. He simply wished to alert the
legislature, the executive branch and ARMB to problems that
may arise.
11:15:03 AM
Senator Bishop commented that the history of the stock
market prior to 2008 yielded greater than 8 percent.
Commissioner Rodell agreed. She stated that a method of
achieving the 8 percent return was to assess the driver of
the return. The return was driven by the private equity.
The private equity was not a liquid asset that could be
easily sold. She noted that some assets required a great
deal of time to sell and recoup the cash. She noted that
the first indication of a negative difference would be seen
in 2020 with a difference of $38 million. The unwinding of
an alternative investment must occur in 2020. With only
five years to act, the state must determine the appropriate
asset allocation. She pointed out that 2020 was an
important year for mega-projects in the state.
11:18:34 AM
Vice-chair Fairclough asked about liquidity for payments.
Mr. Bader asked if Vice-Chair Fairclough was referring to
general fund or retirement fund liquidity.
Vice-Chair Fairclough replied that she was referring to the
retirement fund liquidity.
Mr. Bader explained that the retirement funds were
addressing liquidity for payments and the 2.17 percent
could be increased. He stated that he was studying the
issue for ARMB to research a method to change the
allocation for a higher yield without impairing the ability
to earn 8 percent or more. He noted that endowments and
foundations were required to yield 5 percent per year, but
he acknowledged that they took more risks than the state
was accustomed to taking.
Co-Chair Kelly asked about the quoted 2.7 percent.
Mr. Bader replied that 2.17 percent was the current yield.
11:22:36 AM
FRED STURMAN, SELF, KENAI, (via teleconference), stated
that he had been concerned about PERS and TERS for some
time now. He believed that outsourcing jobs was a possible
solution. He suggested that privatizing the DMV was another
possible solution. He thought that the change might lower
the number of people counting on the system. He shared a
personal experience with Social Security benefits.
11:23:09 AM
Vice-chair Fairclough asked about pension payments and
privatization. She understood that when positions were
eliminated, the state contribution continued. She queried
the administration's position on the issue.
Mr. Barnhill responded that when a municipal employer
eliminated a class department, the change would not
necessarily trigger a termination study unless it included
a class of positions or departments. He mentioned pending
legislation, HB 152 that adjusted the conduction and
triggering of termination studies. He stated the primary
concern was to create a solution that did not shift costs
from municipalities to the state. He pointed out that the
state provided substantial amounts of relief to
municipalities. He suggested adjusting the cap of 22
percent.
Co-Chair Kelly introduced David Teal, Director, Legislative
Finance Division and explained that he requested a personal
opinion from Mr. Teal when soliciting the presentation.
11:26:56 AM
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
believed that the retirement system would be an important
topic of the next legislative session. He introduced the
presentation, "A Discussion of Retirement System in Alaska"
(copy on file). He stated that he was comfortable offering
his personal opinion and would clarify the factual
information in his presentation. He opined that the
upcoming session would address the retirement systems and
the Senate Finance Committee meeting provided an
opportunity to inform legislators about the very important
issue. He noted that an earlier meeting focused on
background.
Mr. Teal posed the question on slide 2: "Are Alaska's
Public Employee Retirement Systems Healthy?"
If not, what can be done about it?
Mr. Teal stated that the answer to the question was no. He
planned to talk about actuarial concepts and policy
guidelines with a focus on PERS.
11:30:52 AM
Mr. Teal discussed slide 2: "System Health refers to the
likelihood that the promised benefits will be paid when
due."
· Defined Contribution (DC) Plans
o No promised benefit level
o so not measure of health required
· Defined Benefits (Mr. Boyle) Plans
o Promised benefits (pensions)
o So it is critical to track and maintain system
health
Mr. Teal moved to slide 4: "Measuring the Health of a
Retirement System:"
1. Funding Ratio = Assets/Liabilities.
2. Unfunded Liability--just a dollar amount; not a
relative measure.
3. Are employers paying the actuarially required
contribution (ARC)?
4. Are the contributions causing financial stress?
11:34:05 AM
Mr. Teal stated that most retirement systems had funding
ratios greater than 100 percent through the 1990s.
Mr. Teal discussed the graph on slide 5: "PERS Assets and
Liabilities." The graph showed assets and liabilities in
the funding ratio beginning in 2002. He stated that the
assets and liabilities were closely matched for a number of
years. He pointed out the gap occurring in 2005. He noted
that the graph's dark line represented assets, the dotted
line represented liabilities and the blue line represented
the funding ratio. He did not have concern about the upward
trend in liability because it was common for defined
benefit systems. He stressed that investments must perform
as expected for the system to function optimally.
Mr. Teal acknowledged that the systems were healthy for a
long time, which begged the question about the system's
current lack of health. He stated that unfunded liability
was a consequence of assumptions that failed to
materialize.
11:38:06 AM
Mr. Teal furthered that the defining attribute of a defined
benefit plan was that the employer bears the risk of the
system health. Unfunded liability was the consequence of
risk becoming reality. He agreed with Mr. Barnhill that
liability was a moving target. If any circumstance
increased benefits to a greater than expected value, the
funding ratio declined and unfunded liability appeared. He
noted that the Mercer case was an example of utilizing
outdated assumptions. With the adoption of better
assumptions, the accrued liability increased.
Mr. Teal continued that when benefits followed assumption,
assets sometimes failed to keep pace with the increase in
benefits. He noted that approximately one-half of the $2.5
billion liability in 2005 was attributable to the increase
in liabilities and the decline of assets. He stated that
retirement systems were designed to fill an unfunded
liability gap over a 25-year period through small
adjustments to the contribution rate. Actuaries calculate
the expected benefits. Assets must increase by the same
amount as the change in accrued liability.
11:41:06 AM
Mr. Teal turned to slide 8: "How Volatility of Investment
Returns Affects Unfunded Liability." The excel sheet
provided a simple model. The example used both liabilities
and assets starting at $12 billion, with an unfunded
liability of zero.
11:44:23 AM
Mr. Teal manipulated the Excel spreadsheet as he testified
in an effort to educate the committee about the system's
variables, while exhibiting a variety of potentials
outcomes.
11:48:11 AM
Mr. Teal made more Excel projections. He spoke to Slide 10:
1. Earnings are volatile and unpredictable.
2. Small variations can be addressed by smoothing,
amortization and good fortune.
3. When variations are small, unfunded liability is a
soft liability that can be repaid with earnings
(rather than contributions).
11:49:51 AM
Vice-chair Fairclough asked if the state had realized the
losses and sold something off to make up the difference.
Mr. Teal replied that the PFD did not pay out as much as
the retirement system each year. The PFD paid dividends
while the retirement system paid benefits. Although there
was a recovery of assets, it had not been sufficient. He
relayed that the assets were not a large but that the
liabilities continued to grow. The permanent fund was
viewed differently.
11:51:46 AM
Vice-chair Fairclough asked about 5-year averages if the
system were closed out.
Mr. Teal stated that if the system had not been closed out
the liability would have grown further. He pointed to slide
9 and noted that assets were not lost without recovery. The
assets did recover, but liabilities were growing faster.
The level analyzed was a ratio as opposed to a dollar
amount.
11:53:47 AM
Mr. Teal resumed discussion of Slide 10:
4. The road to recovery from large losses can be very
long-so long that the system may appear to be
broken.
5. The system is unlikely to stay broken in the long-
run.
6. If you pay what you owe, the system will fix itself.
7. As time passes, assumptions are replaced with
reality.
Mr. Teal furthered that the third measure of system health
was paying off debt. The system would fix itself if the
debt was paid. Paying the debt exhibits to credit raters
the willingness to pay other liabilities including bonds.
The choice of assumptions allowed complex decisions
regarding how much to pay toward liabilities.
Mr. Teal explained that Alaska was one of the only states
to include healthcare costs in unfunded liability. The
difference encouraged the perception that Alaska's system
was less healthy.
11:56:16 AM
Mr. Teal opined that the state ought to concern itself with
the problem of unfunded liability rather than compare
itself to other states with similar issues.
Mr. Teal pointed to slide 12, "Arm Board Proposals."
· Cash infusion of $1 billion to PERS and $1 billion to
TRS.
· Adopt the level dollar amortization method in order to
accelerate contributions.
Mr. Teal elaborated that both proposals were aimed at
improving system health. He noted that the cash infusion
would immediately increase assets, which would reduce the
unfunded liability and increase the funding ratio. He
pointed out that the cash infusion proposal was similar to
another rejected proposal two years ago. He noted that a
change in the amortization method was more complex.
Mr. Teal mentioned a method of open amortization, which
referred to a method that added any new unfunded liability
to the existing unfunded liability and amortized it over 25
years. He compared open amortization to refinancing a home
annually. He pointed out that with the open amortization
method, the state would never pay off the unfunded
liability. The gap would be constantly shifted into the
future in hopes that future earning would close the gap.
12:00:11 PM
Mr. Teal stated that soft liability referred to the ability
of future earnings to fill the gap, as opposed to treating
the liability like the death that it is. He pointed out
that Illinois treated their unfunded liability as a soft
liability. Illinois assumed that the contribution rate
would remain the same, while future earnings filled the
gap. He indicated that the solution was unsuccessful for
Illinois. Fortunately, the proposal of open liability or
amortization was not discussed in Alaska. Alaska used
closed amortization with a fixed 25 year period. With the
closed method, any unfunded liability created in a year
would become a new debt with a new 25-year payment
schedule.
Mr. Teal reviewed slide 13, "Amortization Methods":
· Level percent of pay amortization applies a constant
contribution rate over the amortization period. Use of
this method is near universal and is currently used in
Alaska.
· Level dollar amortization splits unfunded liability
into equal payments over the amortization period, much
as for a standard home mortgage. Relative to the level
percent method, payments to eliminate unfunded
liability will be higher in the early years, and
contribution rates required to generate level dollar
payments will decline over time. Because the level
dollar method has larger payments in the early years,
it is sometimes referred to as "front loading."
Mr. Teal added that both methods eliminated the unfunded
liability at the end of the amortization period. Both
methods were acceptable under GASB rules. He acknowledged
that ARMB had debated changing level percent to level
dollar with a final recommendation made for 2015. He opined
that the recommendation was consistent with the ARMB
philosophy that a funding ratio should be increased as
rapidly as possible. Without the assets, there is no base
to balance the system with earnings. The state could not
survive on 8 percent earnings with low assets. Both methods
achieved the same result, using different paths.
Mr. Teal discussed slide 14: "The ARMB Proposals: Questions
to Consider."
1. Are the proposals necessary?
2. Does the path to full funding matter?
3. Are the proposals affordable?
Co-Chair Kelly [undecipherable].
Mr. Teal used a mortgage example in his response. He stated
that level dollar compared to a standard mortgage. Level
percent of pay was compared to an adjustable payment
system, where payments would accomplish a percentage of
pay. For the state, a constant level of payroll achieved
lower payments in the early years, where the payments
increased with payroll.
12:04:57 PM
Mr. Teal continued to answer the question. He stressed that
no action was necessary. The state was on a path to full
funding as determined by standard accepted actuarial
methods. He saw no imperative to deviate from the current
path.
Mr. Teal noted that the recovery from investment losses
could stretch over long periods of time. The state's loss
of greater than 20 percent in assets over 2008 and 2009
ensured that the path to recovery would be long. He argued
that a move to level dollar was an overreaction. He asked
if the path mattered. He assumed that the path mattered to
ARMB since the change to level dollar was proposed. The
changes were recommended in the hope of large financial
savings to the state.
Mr. Teal noted that ARMB did not discount future cash
flows. The savings projected by ARMB were attributable to
the earnings made on the higher balances. A cash infusion
would allow higher earnings. Higher earnings allowed lower
contributions, which would lower the need for state
assistance. He pointed out that the higher balances
available to the retirement systems were generated by the
state. The state would forgo the earnings that they would
have earned on the money without a cash infusion to the
retirement system. A cash infusion would not provide a
savings to the state.
12:08:16 PM
Mr. Teal referred to slide 15: "Annual State Assistance
Savings from $2 Billion Cash Injection (vs. Status Quo)
(PERS Only). He stated that the information provided on the
spreadsheet agreed with slide 25 of "Alaska Retirement
Management Board" dated November 1, 2013 (copy on file)
presented earlier by Ms. Erchinger. He noted that the
cumulative savings over the baseline scenario with a cash
infusion allowed the necessary savings assuming that
today's dollar was comparable to one in the future. He
argued that a decline in state contribution did not
necessarily equal state savings. The state would most
likely see earnings on the money if it was not used for the
cash infusion.
Mr. Teal noted that applying a discount rate was a more
typical method of addressing similar cash flows. If the
state earned money on the balances, the cash infusion to
the retirement system would cost the state more than
allowing the money to continue earning in its current
scenario. He suggested that if earnings were greater than 2
percent, the state might reconsider the cash infusion.
Senator Hoffman asked [undecipherable] 8 percent.
Mr. Teal replied that an 8 percent return was highly
unlikely. He projected earnings of approximately 3-4
percent.
Co-Chair Kelly suggested a reserve account.
Mr. Teal replied that the question about a reserve account
was debatable. He pointed out slide 16: "Measuring the
Health of a Retirement System."
1. Funding Ratio = Assets/Liabilities.
2. Unfunded Liability --just a dollar amount; not a
relative measure.
3. Are employers paying the actuarially required
contribution (ARC)?
4. Are contributions causing financial stress?
Mr. Teal highlighted number four: "Are contributions
causing financial stress?" He believed that the
affordability of the chosen path was a crucial measure of
system health. Former chairs of finance chose not to
address the issue due to thinking that high contribution
rates were best made when the state could afford them.
Reductions of costs were best anticipated for times without
budget surpluses. He stressed that the day of deficits had
arrived for Alaska. He noted the timeliness of the
committee meeting.
12:13:32 PM
Mr. Teal shared that he attended the recent National
Conference of State Legislatures (NCSL) pension task force
meeting and he was informed that he was not alone in
believing that fiscal stress was an important measure of
system health. The task force addressed the concern that
the many figures available for detailing pension system
data that might prove concerning to legislators and the
public. Until 2013, the GASB rules were used for
accounting, rating and for funding. He noted current
calculations for books, bonds and budget. The separate
calculations were more easily understood when viewed
individually.
Mr. Teal acknowledged that accountants, raters and
legislators used the data for different purposes. He noted
the lack of significant change in the computation of
unfunded liability. He noted that the amount of unfunded
liability would be reported even when payments were timely.
Every municipality would now be required to report its
share of pension liability. The rating agencies used a
common set of assumptions with the goal of comparability.
12:17:30 PM
Mr. Teal elaborated that rating agencies utilized a uniform
set a rules, which was different from the state's unique
amortization methods. By using a uniform set of
assumptions, comparability was made available. The
assumptions used were often more conservative than 8
percent. The numbers calculated by the rater would imply a
less healthy system for Alaska. The numbers calculated by
the raters with a number of downgrades for municipalities
and the state were not intended for use in accounting or
funding.
Mr. Teal opined that GASB rules were confusing, as they no
longer offered guidance regarding funding. In the past, the
rules informed about the computation of the Actuarially
Required Contribution (ARC). An adequate funding level was
no longer offered in the process; the state must merely
provide a number on their financial statement. With the
lack of funding guidance, the task force offered advice to
legislatures to put guidelines in statute. Another
recommendation was to provide a description of the
computation of the annually required contribution level.
The plan should be exhibited in statute while bringing the
system to full funding.
Mr. Teal detailed slide 19: "Advice from a National Pension
Funding Task Force."
· Put funding guidelines in statute; Describe
computation of the ARC (Annual Required
Contribution). Show the plan to bring the system to
full funding.
· The numeric approach offers sound guidance, but the
funding ratio and other actuarial measures are not
the most important measure of system health. What
really matters is what is affordable.
Mr. Teal stated that the current funding ratio was
identical to that in the past few years, but the health of
the system deteriorated substantially because the state
treasury could no longer afford the current plan. He
clarified that the statement was his opinion.
12:21:43 PM
Mr. Teal discussed the graph on slide 20: "Comparing Three
Cost Drivers to Available Revenue ($ millions)." He stated
that the three drivers (K-12, Medicaid and Retirement
Assistance) took 50 percent of the unrestricted general
fund revenue. If the three drivers increase as projected by
2022, the percentage will be closer to 94 percent of the
state's revenue stream leaving virtually no money for
agency operations or capital budget.
Mr. Teal detailed slide 21: "What Other States have Done to
Improve Retirement System Health."
1. Increase Assets
a. Increase employee contributions
2. Reduce Benefits
a. Raise the retirement age
b. Increase service requirements
c. Reduce post-retirement adjustments
d. Adopt hybrid plans
Mr. Teal believed that Alaska was not behind other states
in its planning because it closed the defined benefit
system at the first signs of distress. When the plan was
closed to new entrants, a radical change was seen in the
liability curve. He referenced the graph on slide 23: "PERS
Accrued Liability."
Senator Dunleavy asked if a successful hybrid system might
be developed.
Mr. Teal replied in the affirmative. He opined that the
issue could be vetted this session. He understood the
benefit of a pension to retirees versus a lump sum of cash.
He believed that a hybrid system could greatly reduce the
employer risk while increasing the comfort of retirees. He
stated that he had not seen an effective hybrid plan
derived in other states.
12:26:33 PM
Mr. Teal believed the downward curve displayed on slide 23
allowed the state to move away from the standard actuarial
approaches in which assets chase the liability curve
upward. He stated that the goal was to end up with no
assets when benefits were completely paid.
Mr. Teal addressed the National Task Force recommendations
on pension funding policies on slide 24:
1. Be based on actuarially determined contribution rates-
and the calculation of rates should be in statute so
the plan is clear to employees, retirees,
administrators, boards, and legislators.
2. Collect a consistent percentage of payroll-use the
Level Percent of Pay amortization method.
3. Be disciplined-to ensure that promised benefits can be
paid (i.e., pay the ARC).
4. Maintain intergenerational equity (i.e., the cost of
benefits should be paid by the generation of taxpayers
that were served by the employees who earned those
benefits).
5. Require clear reporting to show how and when plans
will be fully funded and the progress toward that
goal.
Mr. Teal compared Alaska's revenue stream to a person with
a mortgage losing their job and getting another that paid
20 percent less than the first. He acknowledged that a
person in that position would not be expected to increase
their mortgage payment. He opined that the person would
probably refinance their mortgage to lower the payments.
Mr. Teal opined that the level dollar method was fine if
the discount rate was low and the payments were affordable.
He opined that the method was not in common use, not
recommended and he found it to be an odd response to the
fiscal stress that the state was experiencing.
Mr. Teal elaborated further on intergenerational equity. He
opined that intergenerational equity was impossible to
achieve. He noted that ARMB rejected any plan that that
failed to pay the unfunded liability by the early 2030s. At
that point, defined benefit employees would no longer be a
significant portion of the workforce. He agreed with the
payment of normal costs as they accrued. He defined normal
costs as those that were expected for a person's
retirement.
Mr. Teal stressed that unfunded liability was not a normal
cost and could not be paid in a way that maintained
intergenerational equity. He provided an example of a
person retiring in 2004 when unfunded liability was zero.
If the system lost money, unfunded liability was created
and the contribution rates would rise. The next generation
would have to pay for the cost attributable for the
previous generation of employees.
12:32:22 PM
Mr. Teal pointed out that an employer took the risk of all
losses in a defined benefit system and must pay the
unfunded liability. He explained that unfunded liability
would be paid off in the early 2030s according to Buck's
Actuarial model on slide 25: "PERS Assets and Accrued
Liability." The liability would be paid at that time
because the existing unfunded liability would be fully
amortized. The model never developed new unfunded liability
because earnings remain consistent at 8 percent.
Mr. Teal begged the question, what would happen if the
earnings were less than 8 percent. The answer was that new
unfunded liability would open in unpredictable ways.
Contributions would require increases to compensate. He
suggested that contributions could and probably would
continue after the last defined benefit employee retired
unless earnings were outstanding.
12:35:16 PM
Mr. Teal concluded that the obsession with
intergenerational equity could lead to overly restricted
policy decisions. He opined that the concept of
intergenerational equity did not apply to unfunded
liability. Defined contribution plans more accurately
displayed intergenerational equity.
Mr. Teal noted that ARMB had a policy denying the shifting
of costs between the state and the municipalities. He
argued that ARMB proposals did indeed shift those costs.
Adopting level dollar amortization, which increased the
contribution rate above 22 percent, the state will pay 100
percent of the amount above 22 percent. Rates for
municipalities would remain the same.
Senator Dunleavy pointed out that Regional Educational
Attendance Area (REAA) funding was 100 percent state money.
Mr. Teal replied in the affirmative. He relayed that
anytime state contributions increased without non-state
employer's contribution increases, the costs were shifted
to the state. The state clearly paid more than the
municipalities.
12:38:02 PM
Mr. Teal addressed slide 26: "What is the Goal and What
Options Might Achieve it?"
Goal: a healthy system - meaning a system with a plan
to eliminate unfunded liability in a reasonable time
at an affordable cost.
Mr. Teal stated his opposition to sideboards that were
ignored. He did not object to a cash infusion. He preferred
to focus on the goal of a healthy system. He pointed out
that reamortizing the state liability would reduce the
state cost, but would not save money, similar to the
refinancing of a home mortgage. He noted that a change of
the assumptions used in the model would only create further
number games. He stressed that reality mattered more than
the model. If the model was not the best reflection of
expectations, it was unreliable as a planning tool.
Mr. Teal suggested that elimination of health care costs
from the unfunded liability calculations was another
potential solution. He argued that since the costs were
real, there was no point in basing policy decisions on the
incomplete data. He wondered how the state could reduce
state assistance payments while maintaining the employer
contribution rate at 22 percent and paying off the unfunded
liability in a reasonable time frame.
Mr. Teal referenced slide 27: "PERS Assets and Accrued
Liability." He predicted that unfunded liability would
vanish in the 2030s because past service contributions
would vanish. He noted that there would be few defined
benefit employees working and accumulating additional
benefits. Without contributions, the asset curve also
declined with earnings as the only source of asset growth.
The accrued liability would also decline because retirees
would reach their life expectancy. When the earnings
accelerate, the balance grows and the model is skewed.
12:43:14 PM
Mr. Teal stated that the only option to place assets at
zero when liabilities fall to zero was to earn less. He
could see the potential modeled in slide 27. He argued that
the information raised concerns about the ability to meet
the future needs of Alaskans and sustain spending, which
proved that the state was experiencing financial stress.
Mr. Teal acknowledged that he did not trust a model that
looked 60 years into the future. He stated that as
contributions fell to zero, the liabilities would decline
leading to liquidity issues. He advocated for the inclusion
of the information (lower interest earnings) in the model.
He opined that the state would not benefit from
contributions falling to zero. Contributions were the risk-
based costs and intergenerational equity was not an issue.
He pointed out that a 1 percent contribution rate would
generate $100 million per year. The maintenance of a
contribution rate would address the liquidity needs.
Mr. Teal advocated for focus on the near term. He wondered
why the state would choose to build its assets so high
rather than holding them at $15 billion. If the goal was to
have zero assets when the liability curve reached zero, the
safest option was to hold rates at 22 percent to eliminate
future state contribution rates.
Mr. Teal recalled his efforts in SB 187. He referenced
slide 28: "Recommendation: Reconsider an Approach like that
in SB 187."
· A cash infusion sufficient to maintain system health
while capping employer contributions at 22 percent.
· No more state assistance - saving approximately $500
million annually for 15 years.
12:48:42 PM
Mr. Teal clarified that a cash infusion system did not
dictate capping employer contributions. He believed that a
cash infusion should be accompanied by lower rates. The
adoption of level dollar leads to the rate increase.
Eliminating state assistance was not essential to the cash
infusion plan. He acknowledged that the issue of cash
infusion led to many different details encompassing the
comprehensive package of retirement funding.
Mr. Teal concluded that action on funding was not
imperative. He opined that addressing the computation of
the ARC in a plan in statute was the minimum need for the
legislature regarding the retirement system. If the
legislature, governor and ARMB agreed on an approach,
success was likely. He stressed that paying less than the
required ARC would be a mistake as would paying more than
the state could afford.
12:51:31 PM
Co-Chair Kelly thanked Mr. Teal for the presentation. He
stated that a similar presentation would be offered during
session.
Vice-Chair Fairclough asked about the new GASB rules and
the mandates for municipalities. She wondered if bond
ratings would reflect poorly on Alaska.
Mr. Teal replied that he had spoken with the raters and was
assured that the reserve situation in Alaska was well
understood. Municipalities had been saved from literal
bankruptcy by the state. The unfunded liability had no
required payment time. The unfunded liability was a lump
sum for future predictions. He stated that bond raters
wished to see a plan, hence the task force recommendation
that a plan be stated in statute.
12:54:24 PM
RECESSED
2:20:46 PM
RECONVENED
^DEPARTMENT OF HEALTH AND SOCIAL SERVICES FY 14 BUDGET
OVERVIEW AND FY 15 BUDGET PREVIEW
2:20:47 PM
Co-Chair Meyer discussed the schedule for the afternoon.
JAMES ARMSTRONG, STAFF, SENATOR CO-CHAIR MEYER, relayed
that Senator Kelly and Senator Fred Dyson had sent a letter
to Commissioner William Streur regarding potential cost
saving measures the Department of Health and Social
Services (DHSS) was looking to implement related to public
assistance and Medicaid programs. Committee members had
received a copy of the commissioner's response dated August
13, 2013 (copy on file). He detailed that three other
offices were working on a response letter, which should be
finalized in the next 10 days or so. He relayed that the
commissioner had provided Medicaid and public assistance
backup, but given time limitations the meeting would only
focus on the Medicaid components.
2:22:16 PM
WILLIAM STREUR, COMMISSIONER, DEPARTMENT OF HEALTH AND
SOCIAL SERVICES, communicated his intention to provide a
high level overview related to Medicaid. He discussed that
there were many moving pieces related restrictions on the
expired federal American Recovery and Reinvestment Act
(ARRA) funding and to the federal Affordable Care Act
(ACA).
2:23:34 PM
Commission Streur highlighted that controlling Medicaid
spending in the state came down to four variables. The
department was currently looking at $21 million to $22
million in cost savings resulting from implemented
measures. He hoped to come close to doubling the figure in
the upcoming year. He stated that $45 million out of a $1.6
billion budget was not large, but it was a way to begin
detailing some of the department's functions. He was
hopeful that DHSS could take aggressive actions to increase
the amount substantially in the coming year. He intended to
discuss future plans and cost control. He relayed that a
significant portion of funding for the Affordable Care Act
was rooted in fraud control.
Commissioner Streur communicated that Medicaid was a
service for low income patients. He noted that occasionally
he received calls about Medicare; he clarified that
Medicare was a federal program for individuals over the age
of 65. He provided a handout titled "Attachment 2 -
Medicaid" (copy on file). He relayed that Alaska joined the
Medicaid program in 1972 and any actions required federal
approval. The department had been required to submit an
initial state plan; any amendments were made to the initial
plan. He detailed that Medicaid programs were spread across
various DHSS divisions including the Office of Children's
Services, and the Divisions of Behavioral Health, Senior
and Disability Services, Healthcare Services, and Public
Assistance (responsible for authorizing and identifying
eligible recipients). The Division of Juvenile Justice
recipients would be moved under Medicaid in the near
future. Juvenile justice residents were not currently
eligible for Medicaid because the residency was considered
incarceration. The state could use state general funds to
pay for the residents at a Medicaid fee scale; currently it
paid 95 percent of "street" rate. He noted that the change
would bring substantial savings.
2:26:45 PM
Commissioner Streur relayed that pages 8 and 9 of the
handout illustrated Medicaid spending from 1991 to 2012. He
did not intend to cover the changes in depth due to time
limitations. He noted that ARRA funding occurred from 2008
to 2012; spending had been variable. He pointed to
Legislative Finance Division charts depicting department
spending by division on page 11. He noted that the data
shown was confusing given that Medicaid spending across the
five divisions was shown; however, the spending was not
shown for the individual divisions. He was working to show
Medicaid's impact in each of the divisions as opposed to
Medicaid on its own.
Commissioner Streur discussed four ways to control Medicaid
spending on page 13:
· Controlling eligibility
· Controlling covered services
· Controlling what we pay for those services or
products
· Controlling how much or how often recipients access
those services by controlling utilization
Commissioner Streur addressed the first method of
controlling Medicaid spending: controlling eligibility
(pages 13 and 14). He discussed that a maintenance-of-
effort requirement was placed on states when ARRA funding
was provided. The requirement had been extended to 2014 for
adults and 2019 for children [through ACA]. He communicated
that largely the state was not able to control eligibility
because much of the program was federally mandated (e.g.
the percentage of poverty level, people covered, and
other). He elaborated that there had been an attempt in ACA
to make Medicaid coverage for all individuals up to 138
percent of poverty level; currently individuals up to 100
percent of poverty level were covered in Alaska with the
exception of certain groups. Pregnant women, children, and
some families were covered up to a certain level; childless
adults without a disability under the age of 65 were not
covered. He explained that ACA would extend coverage to
everyone under 138 percent of poverty level. He provided a
cost savings measure example; currently pregnant women and
breast and cervical cancer patients were covered up to 175
percent of poverty level. The state could reduce the
coverage to 100 percent or 138 percent of poverty level and
put the individuals in the ACA Health Benefit Exchange to
purchase insurance on their own. He emphasized that the
scenario was nothing more than an example and was not meant
as a recommendation. The change would save $22 million in
general fund spending. He noted the importance of weighing
the benefits and disadvantages of potential changes.
2:31:14 PM
Commissioner Streur stated that under ACA, Medicaid
eligibility would be done using a Modified Adjusted Gross
Income (MAGI). The shift removed some of the income
"disregards" (items not considered as income) that were
previously allowed and increased the eligibility level. The
department expected to see some increase in the number of
individuals eligible for Medicaid.
Commissioner Streur directed attention to the second method
of controlling Medicaid spending: controlling covered
services (page 14). He had gone back and forth on the
method given that approximately half of the services paid
for in Alaska were optional. He noted that page 14 included
a list of mandatory and optional Medicaid services. He had
the ability to reduce some of the optional services;
however, he likened healthcare to a balloon that would
bulge in other areas if pushed in somewhere else. For
example, he wondered how the removal of prescription drug
coverage would it impact emergency room and physicians'
office visits, and individuals with chronic or acute
conditions. He discussed home health services and that
waiver programs served over 2,500 individuals with
conditions that made them eligible for nursing home level
of care; the state would have to pay for a $100,000 per
year nursing home bed if home health services could not be
provided for a cost of $25,000 to $40,000 per year.
Commissioner Streur stated that when looking at optional
benefits the state currently had it was difficult to take a
look at what it did not want to do. Other optional services
included dental coverage and patient transportation. He
discussed the major impact that removing transportation
coverage would have on Medicaid recipients given that the
state transported many individuals for medical services,
particularly from rural Alaska. He relayed that
transportation costs would total $80 million in the current
year. He communicated that it was not feasible to cut
transportation unless the state chose to make substantial
investments in rural areas to increase the specialty level
of care.
2:34:26 PM
Co-Chair Meyer asked for clarification on the cost of
transportation in the current year. Commissioner Streur
responded that transportation for Medicaid recipients would
cost $80 million in the current year. Co-Chair Meyer
remarked that the number was significant. Commissioner
Streur agreed.
Commissioner Streur relayed that going forward the
department would look at ways to reduce transportation
costs. The department had been working closely with the
Alaska Native Tribal Health Consortium (ANTHC) on
telemedicine efforts, which he believed would be
successful. He shared that ANTHC had found that 40 percent
of the telemedicine cases had avoided transportation
services (i.e. airplane transportation). He stressed that
telemedicine services needed to be increased; the
department was working to enhance the capabilities.
Vice-Chair Fairclough inquired whether broadband would be
related to telemedicine access for communities. She
wondered whether ANTHC had solved the issue. Commissioner
Streur replied that the tribal partners had stepped up in
terms of broadband capabilities. The issue had not been
solved, but progress had been made. He commented on the
Yukon-Kuskokwim Health Corporation's ability to communicate
with Anchorage and state offices. He summarized that the
area may or may not need more development depending on the
interface between the department and the entities.
2:37:00 PM
Vice-Chair Fairclough noted that the Department of
Education and Early Development (DEED) legislative
subcommittee had been told that DEED was currently working
on and reviewing a broadband study. She wondered if it
would include existing gaps for the legislature to take a
look at.
Commissioner Streur spoke to the third method of
controlling Medicaid spending: controlling what we pay
providers to deliver those services or products (page 15).
He relayed that the effort to control payments to providers
was "wildly unpopular" at present. He detailed that
controlling rates in Alaska was complex due to the state's
large size and its range in unique services varying in
rural and urban areas. He communicated that it was
necessary for the department to look at the issue
constantly. He emphasized that Medicaid rates in Alaska
were approximately 140 percent of Medicare rates compared
to the Lower 48 where Medicaid rates were 66 percent of
Medicare rates.
Vice-Chair Fairclough asked for verification that the
Medicaid rates were 144 percent of Medicare rates in
Alaska. Commissioner Streur clarified that the figure was
140 percent.
Commissioner Streur communicated that the state paid very
well. He discussed that in the past he had attempted to
move the state to a cost-based system. He opined that many
of the payment systems had not been rational; it had not
been possible to determine that the state was receiving
good value for what it paid. He discussed conducting a
balance against the Medicare rate, nursing homes versus
assisted living facilities, or comparing Alaska to other
states. The department was looking at the issue. He
believed the cost-based rate was a great way to determine
what it truly cost to provide care. The question about how
much profit should be made had been a robust conversation
over the past several months.
2:40:15 PM
Vice-Chair Fairclough asked whether the 66 percent figure
related to Medicaid and Medicare rates in the Lower 48 was
an average. She wondered whether a comparison had been made
between Alaska other geographically similar states such as
Montana or Wyoming. Commissioner Streur responded in the
affirmative. He explained that in the Lower 48 on average
Medicaid rates were 66 percent of Medicare rates. Alaska
was the second highest paying state (some would argue that
Alaska was the highest paying state). He believed Wyoming
was the closest comparison to Alaska in terms of payments.
Vice-Chair Fairclough wondered which state paid the highest
Medicaid rates. Commissioner Streur believed it was an
eastern state. Co-Chair Meyer noted that DHSS staff
communicated that the state paying the highest Medicaid
rates was Massachusetts.
Co-Chair Meyer referred to the term "medical tourism." He
wondered if the term was used in Alaska to refer to
insurance companies encouraging individuals to receive
medical procedures out of state due to high costs in
Alaska.
Commissioner Streur responded in the affirmative. He
detailed that there were substantial rate differences in
medical procedures such as hip, knee, and heart surgeries.
Specialty services were much higher in Alaska than in the
Lower 48. He added a Medicaid recipient could receive
services in the state of Washington for approximately 60
percent of the cost in Alaska; however, the preference was
to keep individuals close to home.
Co-Chair Meyer acknowledged the importance of supporting
in-state business, but understood the need to negotiate the
large cost differences.
Commissioner Streur continued to discuss that the
department was moving all providers to a cost-based system,
or if Medicare rates were available, to a Medicare adjusted
rate (page 15). Providers would be paid a certain
percentage above the Medicare rate; as Medicare fluctuated
the payments to providers would fluctuate as well (the
process was currently used with physician services). He
relayed that each provider community had its own advocacy
group; the groups were vocal and were actively involved in
any DHSS regulation promulgation process. He had worked to
open the regulation hearing process as much as possible to
allow for public comment. He had not yet received clearance
to hold open working groups with providers. He remarked
that he almost had to remove a regulation off the table to
have the ability to meet with groups on the regulation. He
continued to work with the Department of Law to have some
give and take on the issue.
2:44:30 PM
Commissioner Streur shared that DHSS continued to partner
with provider groups to learn about their suggestions and
hot button issues. The department also looked at best
practices in other states and pricing models in other
states. Additionally, DHSS considered acuity as it looked
at home and community-based services, assisted living home
services, and behavioral health services; an acuity mix
made it much easier to price the cost of care.
Senator Hoffman relayed that the prior year the Senate
Finance Committee had initiated the assisted living center
in Anchorage that saved tens of millions of dollars over
decades. He wondered whether a similar center was in
consideration for Fairbanks or if ANTHC was considering the
idea. Commissioner Streur did not know where ANTHC stood on
the issue. The state was still working on determining how
to get the value out of the center in Anchorage.
Commissioner Streur discussed needed technology
improvements. He addressed the importance of having the
ability to send an ultrasound from a village electronically
to a larger community saved on transportation cost or the
ability to transport a pregnant mother via plane to prevent
a more significant issue with an unborn child. He addressed
the need to increase care to tribal members within the
tribal health system; approximately 40 percent of money
paid by Medicaid for tribal health members was delivered
within the tribal health system, which meant that the state
only received 50 percent reimbursement. He would meet with
tribal health directors to discuss working to make
improvements. He relayed that the primary reason that
services could not be provided in the communities was a
lack of depth in providers. The department was working on
items such as how to increase capacity and on specialties
that would have sufficient utilization to justify the
expense.
2:48:28 PM
Commissioner Streur addressed the fourth method of
controlling Medicaid spending: controlling utilization
(page 16). He believed that utilization was the area the
department had the greatest capability of controlling. He
communicated that the state did not do enough in measuring
and assessing utilization; therefore, the state had begun
to contract with outside entities to increase prior
authorizations. He discussed that prior authorizations were
challenging for physicians and other providers; however,
the private system had used prior authorizations for years.
The department was beginning to examine where savings could
be found in services delivered. He provided a personal
example related to duplicated x-ray services. He remarked
that when a provider had invested in technology, they
wanted to be able to pay for it. He stated that "in the
private sector to do good you have to do well and in the
public sector to do well you have to do good." He believed
there was tremendous opportunity with prior authorization,
retrospective review, and other. He continued to speak with
the Alaska State Medical Association and Alaska Physicians
and Surgeons on joining DHSS in the efforts. He stressed
that the groups had been very involved in some of the
savings efforts.
2:51:12 PM
Vice-Chair Fairclough inquired if DHSS had the ability to
track some of the cost drivers. She wondered whether
technology upgrades had been implemented. Commissioner
Streur replied that the data warehouse was up and
operational and provided DHSS tracking capability and to
benchmark providers against each other. For example, he
could compare procedure codes between gastroenterologists
to determine outliers, best practices, and where
underutilization may occur.
Vice-Chair Fairclough shared that she had recently broken
her wrist and had been referred to a specialist. She
explained that the initial doctor had taken an x-ray, which
was used by the specialist. She was misdiagnosed and had to
return to the specialist a month later where a second x-ray
was done. The specialist relayed that the original x-ray
had not had sufficient clarity. She wondered whether the
department would be able to track similar situations when
patients needed a second x-ray because the first one was
not sufficient.
Commissioner Streur replied that the department would be
able to track the situations. The department could look to
follow-on therapies occurring that may result from
misdiagnosis or misinterpretation of an x-ray or other
radiology. The system was in the early stages and had gone
into operation recently, but the capabilities were already
significant. The issue related to quality of care, which he
planned to discuss. He relayed that the new management
information system had gone live on October 1, 2013. The
department was paying claims, but it was still receiving
too many rejections in the claims process; the system
continued to be tweaked and would provide significantly
increased capabilities from the previous antiquated system.
2:55:08 PM
Commissioner Streur relayed that DHSS continuously reviewed
other states' best practices and was beginning to implement
some changes to its capabilities. He spoke to the
department's current cost control initiatives on pages 16
through 20. He discussed that DHSS was on track to save
$4.5 million in the current year in care management/case
management of high utilizers of the emergency room and in-
patient hospital stays. Savings came from management of
patients including establishing a primary care physician,
looking at chronic conditions, and determining ways to
address drug-seeking behavior. He highlighted that the
department had saved $7.5 million with the substitution of
generic medication in the past year; savings had been
achieved by working with the physicians and prescribers. He
elaborated that at one point the use of generic medications
had been at 80 percent; however, that figure had been
slipping back. He added that every 1 percent increase
represented approximately $800,000 in savings.
Commissioner Streur briefly mentioned that DHSS had not
priced out psychiatric medication limits (page 17). He
addressed that the department was working on strengthening
third-party insurance recovery. He detailed that the
department was working to recoup money (from third-party
insurance) spent by Medicaid on patient care that insurance
should have paid for.
2:58:34 PM
Commissioner Streur spoke to Medicaid fraud on page 24. He
communicated that changes and the assistance DHSS was
receiving from the Department of Law Medicaid Fraud Control
Unit were remarkable. He discussed increased prosecutions
of individuals who had been inappropriately billing for
services; the prosecutions continued to increase. He
detailed that 29 individuals had been prosecuted a couple
of months earlier. Efforts to identify "low hanging fruit"
fraud continued. He provided an example of an individual
billing Medicaid for personal care services when they had
actually been out of the country for a month. He stressed
that the costs added up to hundreds of thousands of
dollars. Another example involved a nurse practitioner who
had lost their license but continued to bill Medicaid. He
believed erroneous billing was the largest challenge (page
25). Erroneous billing included billing at a higher
procedure code than necessary, billing for a service that
was misinterpreted as a higher level service, no
documentation, billing for delivered service when patients
did not show for an appointment, and other. He noted that
the erroneous billing examples did not constitute fraud. As
of August 2013 the Medicaid Fraud Control Unit had charged
53 cases with 13 convictions over the past six months. He
noted that he was less concerned about the number in the
prosecution and more concerned about people receiving the
message to be more careful. He shared that many providers
had joined the department in the attempt to bill for the
right care, right service, right time, and the right
person.
3:01:30 PM
Senator Dunleavy inquired whether providers received
notification on fraud convictions. Commissioner Streur
replied in the affirmative. The information was shared by
the respective division and a press release was published.
He added that the media picked up on the publications
quickly.
Senator Dunleavy asked when a decision would be made on
Medicaid expansion. Commissioner Streur replied that the
governor had indicated that a decision would be made when
he released the budget on December 11, 2013. He planned to
meet with the governor in the upcoming week to provide an
update and a report analysis. He stressed the importance of
making the right decision. He pointed to disparity in
available data. He stressed that significant variability
existed in the numbers provided on the general fund cost of
Medicaid expansion (such as $90 million or $240 million).
He discussed that one study had shown that Medicaid
expansion would save the state $67 million; combined with
the expected $90 million general fund cost the total was
only $23 million. He remarked that it was not a big effort
to add insurance for 40,000 additional individuals for $23
million, but the cost could end up being much higher (e.g.
$304 million).
3:05:04 PM
Senator Dunleavy remarked that some individuals would argue
that the Obama administration had missed the mark in
getting it right with its roll-out of the new healthcare
plan. He discussed the implementation of large government
programs that had specific goals; once the program was
accepted the system was stuck with it. He noted that some
would contend that a federal takeover of education had
taken place.
Co-Chair Meyer asked whether Commissioner Streur could tell
the committee anything about its budget for the upcoming
fiscal year. He noted that the DHSS budget combined with
the Department of Education and Early Development budget
accounted for two-thirds of the state's operating budget.
Commissioner Streur expressed reluctance to respond given
that the DHSS budget had not been cleared through the
governor. He believed Medicaid would increase in the
upcoming year after two relatively flat years. The data had
not been fully vetted as the entire impact of the
Affordable Care Act was not yet known.
Co-Chair Meyer looked forward to seeing the department's
budget on December 11, 2013.
ADJOURNMENT
3:07:00 PM
The meeting was adjourned at 3:07 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Attachment 2 - Medicaid.pdf |
SFIN 11/1/2013 9:00:00 AM |
H&SS Budget Overview |
| Nov 01 Meeting Comm Streur - Senator Kelly 081313.pdf |
SFIN 11/1/2013 9:00:00 AM |
H&SS Budget Overview |
| RetirementSystemPresentation - Barnhill - Nov 01 2013.pdf |
SFIN 11/1/2013 9:00:00 AM |
PERS and TERS |
| 110113 Erchinger Senate Finance Committee Presentation.pdf |
SFIN 11/1/2013 9:00:00 AM |
PERS and TERS |
| 110113 Revised Senate Finance Presentation - Hall.pdf |
SFIN 11/1/2013 9:00:00 AM |
PERS and TERS |
| 110113 LFD Presentation to SFC.pdf |
SFIN 11/1/2013 9:00:00 AM |
PERS and TERS |