Legislature(2017 - 2018)SENATE FINANCE 532
02/02/2017 09:00 AM Senate FINANCE
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| Presentation: Pers and Trs Overview | |
| Adjourn |
* first hearing in first committee of referral
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SENATE FINANCE COMMITTEE
February 2, 2017
9:02 a.m.
9:02:31 AM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 9:02 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Anna MacKinnon, Co-Chair
Senator Click Bishop, Vice-Chair
Senator Mike Dunleavy
Senator Peter Micciche
Senator Donny Olson
Senator Natasha von Imhof
MEMBERS ABSENT
None
ALSO PRESENT
Sheldon Fisher, Commissioner, Department of Administration;
Kevin Worley, Chief Financial Officer, Department of
Administration; Pat Pitney, Director, Office of Management
and Budget, Office of the Governor; Former speaker of the
House Mike Bradner.
SUMMARY
PRESENTATION: PERS and TRS OVERVIEW
Co-Chair MacKinnon discussed the agenda for the day.
Senator Dunleavy introduced students from his district from
American Charter School in the Meadow Lakes area, who were
visiting the capitol to learn about the legislative
process. He relayed that Ms. Huggins, wife to former
Senator Charlie Huggins, was the principal of the school.
^PRESENTATION: PERS AND TRS OVERVIEW
9:04:35 AM
SHELDON FISHER, COMMISSIONER, DEPARTMENT OF ADMINISTRATION,
discussed the presentation "Public Employees' Retirement
system (PERS) - Teachers' Retirement System (TRS)" (copy on
file). He relayed that he would move quickly through the
early slides, and go more slowly as the slides advanced
into financial information he thought would be of interest.
Commissioner Fisher discussed slide 2, "PERS/TRS -
Organization," which showed a flow chart. He specified that
PERS and TRS was managed through the Alaska Retirement
Management (ARM) Board, which was staffed by the Department
of Revenue (DOR) and the Department of Administration
(DOA). He detailed that DOR was focused primarily on the
advertisement of the assets, and worked with Callan
investment consultants. He continued that DOA was focused
on the administration of the benefits, and worked with
actuary staff to make information available to the ARM
Board.
Commissioner Fisher spoke to slide 4, "Basic Facts - PERS
Chronology":
• January 1961: Established as a joint contributory
plan
• 1975: Retiree Health Insurance with system-paid
premiums added
• July 1986: Tier II established
• July 1996: Tier III established
• July 2006: Tier IV (DC) established
• July 2008: Cost Share
Commissioner Fisher recounted that in the past the state
had previously had a multi-tier defined benefit plan, until
Tier III closed in 2006 when the legislature initiated Tier
IV. He indicated that under Tier IV members were assured a
defined contribution, while the benefits received were
dependent upon the returns achieved. He added that the
members had materially greater control over the investments
and management.
Commissioner Fisher continued discussing slide 4,
indicating that in 2008 the state had accepted to fund part
of the cost of the plan, and forthcoming slides would
elaborate on the subject. He explained that as the unfunded
liability had grown and the obligations on employers
presented a greater challenge, the state took on some of
the funding.
9:07:37 AM
Commissioner Fisher displayed slide 5, "Basic Facts -
Membership - PERS (as of 12/31/2016)":
• 157 Member Employers
• 3 Defined Benefit (DB) Tiers
o 32,733 retirees
o 5,835 terminated members entitled to future
benefits
o 15,826 actives (44%)
o 55,394 total DB members
• 1 Defined Contribution (DC) Tier
o 11 retirees
o 691 terminated members entitled to future
benefits
o 19,377 actives (56%)
o 20,079 total DC members
SOURCE: Division of Retirement and Benefits.
Membership Statistics as of 12/31/2016
Commissioner Fisher pointed out that after 2015, there was
more employees in the defined contribution tier than in the
defined benefit tiers.
Senator Micciche inquired about average costs per capita
and types of plans in other states. He wondered how other
entities managed the liability of retirement systems. He
relayed that he would send more exacting questions through
email.
Commissioner Fisher relayed that most states had moved away
from defined benefit programs, and most had a defined
contribution or hybrid plan to split the liability and
risk. He described hybrid plans, in which a portion of the
plan was a defined benefit and a portion was a defined
contribution. He added that there were benefits associated
with the defined benefit plan, such as a more efficient use
of capital.
Commissioner Fisher reported that one of that largest
issues was that an individual approaching retirement moved
out of the higher-returning but volatile asset classes and
moved into a more conservative asset allocation, which
resulted in a lower return. Thusly some states had gone to
a hybrid plan to try to maximize returns while minimizing
the risk to the state.
Senator Micciche clarified that he was interested in cost
per capita, exposure, and how states looked at unfunded
liability. He was unsure if Alaska was similar to other
states or was an extreme outlier with the state's unfunded
liability and future exposure.
Commissioner Fisher relayed that the PERS plan was funded
at about 78 percent, and the TRS plan was funded at about
82 percent. He specified that the average funding for
public plans was about 74.5 percent, and therefore Alaska
was a bit above average. He recalled that there were only
two plans in the country that were fully funded, in the
states of South Dakota and Wisconsin. He thought the best
plans in the country were about 90 percent funded.
Commissioner Fisher relayed that the state's unfunded
liability, on a per capita basis, was among the highest in
the country. He noted that the state constitution protected
retirees from a diminishment of the level of benefits. He
noted that the Supreme Court had established guidelines,
and it was very difficult for the state to reduce benefits
to retirees.
9:12:37 AM
Co-Chair MacKinnon referred to an analysis given by the
state's debt manager the previous day. She referred to
credit rating agencies. She indicated that the committee
had a great deal of interest pertaining to the huge
unfunded liability. She referred to a slide from the
previous day that showed for 2015 PERS was at a 67 percent
funding ratio; and TRS was at a 76.9 percent funding ratio,
which was improved from 2014. She asked Commissioner Fisher
to restate the PERS and TRS funding levels, and wondered if
the numbers for health insurance and retirement liability
were blended.
Commissioner Fisher accelerated to slide 17, "PERS/TRS
Basic Facts -Health Cost Funding Ratio," which depicted a
table showing PERS and TRS pension and healthcare
liabilities for 2014 and 2015. He pointed out the 59.7
percent pension liability for PERS in 2014; and informed
that of the $3 billion payment that was made to the state's
unfunded liability, $1 billion was contributed to PERS.
With the additional contribution, the funded ratio had
increased to about 67 percent the following year.
Commissioner Fisher continued to discuss the table on slide
17, and highlighted that between 2014 and 2015; there was
an improvement in the defined benefit health care unfunded
liability, which went from 87 percent to nearly 100
percent. The improvement was a result of having returns
better than what had been forecast. He thought the
actuaries had been using a conservative set of assumptions,
and the department had been working to better manage
healthcare growth. He noted that the 78 percent (total
funded ratio) was a blend between the pension and the
healthcare liability.
Co-Chair MacKinnon wanted to provide greater clarity. She
had wondered if there had been a split in the $3 billion
deposit to the system. She referred to the ARM board, and
asked if it split the deposit further.
Commissioner Fisher explained that a modest amount of the
bulk deposit had gone into healthcare. Of the $3 billion,
$1 billion had gone into PERS, all of which had gone into
the pension. Of the $2 billion that had gone into TRS,
about $1.67 billion went into the pension, and about $330
million had gone into health. He offered to provide precise
numbers at a later time. Out of the $3 billion, a little
more than 10 percent went toward health care in TRS.
Co-Chair MacKinnon asked if the split was an internal
determination of the ARM board.
Commissioner Fisher answered in the affirmative, and stated
that the decision was based on a recommendation from the
actuary.
9:17:48 AM
Senator von Imhof thought that 2015 was a snapshot in time,
and asserted that the funded ratios changed each year as
the liabilities and actuarials changed. She assumed that
the next slide would indicate how the funding ratios
dipped.
Commissioner Fisher answered in the negative, and furthered
that he had wanted to highlight the risk the state was
facing. He elaborated that the state's fiscal year ended in
June, at which time the actuary took the financial
statements and produced an evaluation to present to the ARM
board in its March meeting. He indicated that in March of
the current year, the numbers from 2016 would be presented
to the ARM board and then there would be a roll forward of
the data.
Commissioner Fisher stated that periodically (every four to
five years), the ARM board and the actuaries went through a
detailed review of all the assumptions. He did not want to
prejudge, but thought there was more risk that the unfunded
liability would grow than shrink. The ARM board was
operating on a return assumption of 8 percent, which was on
the high end for pension plans. There had been ongoing
discussion within the ARM board that the assumption should
be reduced. He had reviewed an analysis that listed the
average return assumption for public pension funds at 7.6
percent. He stated that there was no pension plan with an
assumption higher than 8 percent. Additionally, the board
would review the mortality rate.
Commissioner Fisher pointed out other factors that
influenced the contribution rate, including a potentially
smaller size of government, which could affect the
contribution ratio. He wanted to make the legislature aware
that the numbers being presented were accurate as of 2015,
but there was a risk that the unfunded liability or state
assistance would grow. There would be upcoming slides that
addressed the subject.
9:21:30 AM
Senator von Imhof stated that eventually she would like to
see an actuarial liability valuation versus the market
value evaluation.
Commissioner Fisher explained that that actuary smoothed
the assets over a 5-year period, which had been advised as
a best practice to minimize volatility and allowed the
legislature to have more consistency in the state
assistance payment. He wondered if Senator von Imhof was
asking about an un-smoothed asset valuation number.
Senator von Imhof asked for a later conversation to clarify
her question.
Commissioner Fisher agreed.
Vice-Chair Bishop asked about the declining numbers of
participants due to budget cuts and attrition. He asked
about figures on slide 5.
9:23:15 AM
Commissioner Fisher showed slide 6, "Basic Facts - PERS
Contribution Rates":
Defined Benefit
Employee:
•7.50% Peace Officer/Firefighter
•6.75% All Other employees
•9.60% School District Alternate Option
Employer:
•22% Cost Share
State:
•State on - behalf 4.14%
Defined Contribution
Employee:
• 8% All Employees
Employer:
• 5% Investment Account
• 1.18% Health Care
• 0.49% Occupational Death and Disability -
Peace Officer/Firefighter
• 0.17% All Others
• HRA - flat dollar, 3% of all PERS/TRS average annual
compensation
Commissioner Fisher pointed out that under defined
contribution, the employee made an 8 percent contribution,
and the employer made between a 5.25 percent and 5.75
percent contribution. The range of .49 percent was the
occupational death and disability contribution for peace
officers and fire fighters, which had a higher contribution
rate. Anything beyond the contribution was to cover the
unfunded liability.
Vice-Chair Bishop reiterated his question about individuals
still in Tiers I, II, III; and wondered if the individuals
were funding the defined benefit plan.
Commissioner Fisher answered in the affirmative.
Vice-Chair Bishop asked if the funds were comingled.
Commissioner Fisher replied that the state paid 22 percent
for every employee in either plan type. A portion of the
funds were comingled, and a portion was segregated.
Vice-Chair Bishop indicated that he wanted to have further
discussion on the matter outside of the meeting. He
requested that Commissioner Fisher research the hybrid plan
in the State of Nebraska.
Co-Chair MacKinnon looked at slide 6, and understood that
the employer contribution was 22 percent; PERS had state
employee members as well as others. She thought there had
been concern about the blending of funds. She thought there
would be potential for discrimination toward those under
the defined benefit plan if the state defined the
contribution at a lower rate. She thought the problem was
more complex than the dollar amount. She referenced
employers who owned 40 percent of the liability, and had
not paid a fair share.
9:27:55 AM
Commissioner Fisher continued to discuss slide 6, adding
that under the defined benefit the employer contribution
was 22 percent (fixed by statute). The state covered the
gap between what was actually required to fund the plan
versus the 22 percent, which currently equated to a little
over 4 percent.
Vice-Chair Bishop expressed concern about a termination
study. He understood there were community concerns.
Commissioner Fisher stated that termination studies were a
complex subject, with an issue that the employer had a
share of the unfunded liability that needed to be serviced.
If an employer made radical changes to its structure, there
would need to be accountability. He thought it was most
challenging for smaller municipalities, and made it
difficult to downsize. The administration had supported the
concept of considering reform to termination studies.
Commissioner Fisher continued that part of the way that the
determination liability was calculated assumed a person
left state employment. If a person left a municipality and
went to another municipality or state job and was still in
the system, he thought it was a fair point that it could be
appropriate to make an adjustment. He stated that the
subject had come to his attention, and the administration
was prepared to examine the matter to see whether an
adjustment was appropriate.
9:31:15 AM
Senator Micciche asked Commissioner Fisher to describe the
benefit under the defined contribution side that covered
occupational death and disability for peace officers and
fire fighters.
Commissioner Fisher explained that the benefit offered was
a 40 percent salary replacement, and that the ongoing
discussion pertained to healthcare, which was not currently
provided to survivors.
Senator Micciche asked if the state was able, under the
state defined contribution plan, to have a separate
category that was related to a salary replacement for peace
officers and fire fighters.
Commissioner Fisher answered in the affirmative. He added
that it was also possible to do the same with healthcare.
Senator Olson asked if there was a specific community that
wanted to leave the PERS system. He referred to the
community of Galena in his district, which had decreased
population and revenues, and asked what options there were
for the community to stay solvent.
Commissioner Fisher noted that the issue was a perfect
example of how the administration wanted to work with the
legislature to provide options for such communities. He did
not think it was helpful for the system to burden the
community. He thought it was a question of a relatively
modest amount. He thought it would require a change in
statute to be able to accommodate a different option.
Senator Olson asked if Commissioner Fisher was stating that
the department could not make a change without changing
statute.
Commissioner Fisher answered in the affirmative.
Co-Chair MacKinnon relayed that her district had also
requested the elimination of a termination study. She
asserted that it was also challenging for larger cities,
and thought there was an equity issue if other areas with
taxing authority were released from obligation.
Commissioner Fisher agreed that it was a complicated topic.
Commissioner Fisher showed slide 7, "Teachers' Retirement
System (TRS)."
Commissioner Fisher spoke to slide 8, "Basic Facts - TRS
Chronology":
• March 1945: Established
• 1951: TRS excluded from Social Security
• 1955: Became a joint contributory plan
• 1966: Retiree health insurance (RHI) added
• 1975: System-paid premiums for RHI
• 1990: Tier II established
• 2006: Tier III (DC) established
Commissioner Fisher reviewed slide 9, "Basic Facts -
Membership - TRS (as of 12/31/2016)":
• 57 Member Employers
• 2 Defined Benefit (DB) Tiers
• 12,731 retirees
• 756 terminated members entitled to future
benefits
• 5,240 actives (51%)
• 18,800 total DB members
• 1 Defined Contribution (DC) Tier
• 2 retirees
• 383 terminated members entitled to future
benefits
• 5,072 actives (49%)
• 5,457 total DC members
Commissioner Fisher pointed out that TRS had an almost
50/50 split between active defined benefit members and
active defined contribution members. He expected the
numbers would flip in the following years.
Commissioner Fisher showed slide 10, "Basic Facts - TRS
Contribution Rates":
Defined Benefit
Employee:
• 8.65%
Employer:
• 12.56% Cost Share
State:
• State on-behalf 15.46%
Defined Contribution
Employee:
• 8% All Employees
Employer:
• 7% Investment Account
• 1.05% Health Care
• 0.00% Occupational Death and
Disability
• HRA - flat dollar, 3% of all PERS/TRS
average annual compensation
Commissioner Fisher noted that the employer contribution in
PERS was 22 percent, and in TRS was 12.56 percent.
9:36:09 AM
Senator Dunleavy asked if Commissioner Fisher could explain
why people in TRS were not in the Social Security system.
He had received questions from his constituents about the
matter.
Commissioner Fisher explained that Social Security had the
ability for state entities to opt out of the system and
replace it with a comparable system. The state had made the
election, and rather than making the contributions into
Social Security, it made the contributions into the TRS
plan. He thought the decision was wise, and the kind of
return the state could generate through investments was
meaningfully better than the kind of return a person would
get with an equal contribution into Social Security.
Senator von Imhof relayed that she also had the same
question from her constituents. She shared that she paid
into Social Security as well as a 401k. She asked if there
had been a discussion about reintroducing Social Security
and have it as a secondary retirement plan.
Commissioner Fisher explained that the state also had a
Supplemental Benefits System (SBS), which was exactly like
the contribution made to Social Security. The employer made
half of the contribution, and the employee made half; which
went in to the defined contribution account and vested over
time. The funds were available to be invested as other
assets. To his knowledge there had not been discussion
about returning to the option of Social Security, which he
considered a lesser option. He stated that SBS was not
available to teachers. To his knowledge there had not been
discussion about going back to Social Security.
Co-Chair MacKinnon asked Commissioner Fisher to determine
if it was an option to return to Social Security. She
thought that staying within the system was a one-time
option. She did not want to raise false expectations with
the public.
Commissioner Fisher stated that Co-Chair MacKinnon was
correct, and thought it might be possible to combine
systems, but it was not legally available to change back to
Social Security.
Commissioner Fisher showed slide 12, "Retirement System -
PERS/TRS Financial Information." He informed that he would
discuss financial information, much of which he had already
touched on. He Fisher reminded that the information was
based on June 20, 15 numbers. The June 30, 2016 numbers
would be available in about a month. He reiterated that the
ARM Board and the actuaries would be going through a fairly
detailed review of all assumptions that could impact some
of the underlying numbers.
Commissioner Fisher noted that the financial information he
would discuss would include both pension and healthcare.
The PERS portion had pension assets of about $16 billion,
with liabilities of about $20.5 billion, and an unfunded
liability of about $4.5 billion. On the TRS side, there
were assets of about $8 billion, liabilities of about $9.7
billion, and an unfunded liability of about $1.6 billion.
The totals reflected the 73 percent funding level for PERS,
and the 83 percent funding level for TRS.
9:41:52 AM
Co-Chair MacKinnon asked if there was $5.5 billion in
blended unfunded liability.
Commissioner Fisher stated that on a combined basis, there
was about $6.1 billion in unfunded liability.
Co-Chair MacKinnon discussed the 8 percent rate of return
assumption, and knew there was historical data that
supported achievement of an 8 percent return over a 30-year
period. She thought 8 percent was on the high end of what
pension plans were receiving for a rate of return.
Commissioner Fisher concurred. He continued that the
inflation assumptions in the actuarial model were at 3
percent. Based on the last few years, the state had low
returns as well as a low inflationary period. He reiterated
that all the assumptions would be revisited in the coming
year.
Co-Chair MacKinnon asked if the slides would address
cashflow assumptions.
Commissioner Fisher answered in the affirmative.
Commissioner Fisher discussed slide 13, "PERS/TRS - ARMB
Long Term Returns (through 6/30/2016)," which showed a data
table. He pointed out that long-term, the plans had
averaged a nearly 9 percent return; but more recent returns
had been less.
Commissioner Fisher spoke to slide 14, "PERS/TRS - Basic
Facts":
Defined Benefit Pension:
Fixed benefit amount from date of retirement to death
Contributions + Investment Earnings = Benefits +
Expenses
IF:
Actuarial assumptions are accurate.
IF NOT:
Unfunded liability is created.
Co-Chair MacKinnon pointed out that the reverse of what the
slide described could also be true. She remembered a time
when the system was reported to be overfunded, and the
state had reduced its contributions.
Commissioner Fisher agreed.
Senator Micciche asked if Commissioner Fisher had meant to
indicate that if assumptions were accurate, the unfunded
liability would remain at only $6 billion. He asked if the
commissioner meant that if investment earnings dropped
below 8 percent, then unfunded liability would increase.
Commissioner Fisher agreed with Senator Micciche's
characterization, that as investment declined the unfunded
liability would grow.
Senator Micciche pondered that at an 8 percent return, $6
billion in unfunded liability would remain.
Commissioner Fisher qualified that the condition was true
as of June 30, 2015.
9:45:50 AM
Co-Chair MacKinnon asked if the unfunded liability would
begin to diminish if the programs achieved an 8 percent
rate of return in combination with the state's continued
contributions of the 22 percent.
Commissioner Fisher stated that the unfunded liability of
$6.1 billion dollars assumed achievement of an 8 percent
rate of return over the duration of the fund. Over time,
the unfunded liability would change as retirees grew,
expenses were paid, retirees passed away, and the plan
wound down.
Co-Chair MacKinnon remarked on the problem.
Senator Micciche thought that the scenario demonstrated
that state payments would increase even if the 8 percent
rate of return was achieved. He thought the slide was
misleading, and it was possible to get the impression that
there was not an existing unfunded liability even if the
state was successful at 8 percent.
Commissioner Fisher stated he would revise the slide to be
more careful.
9:48:04 AM
Commissioner Fisher highlighted slide 15, "PERS/TRS - State
Assistance," which showed a data table reflecting the
history of state assistant payments. He pointed out that
since 2006, the state had made contributions in excess of
$6.7 billion in to the fund; $3 billion of which was
associated with the 2015 contribution. He added that the
the plan had also extended the amortization by another 9
years. He pointed out that in 2014 the plan had made a
contribution of nearly $630 million, and afterwards dropped
to $256 million. The change was a result of the $3 billion
contribution and the extension of the amortization.
Commissioner Fisher stated that contributions would grow
and in the out years was projected to be in excess of $450
million.
Senator Micciche discussed the extension of amortization.
He thought an adverse effect had been increased payments to
municipalities. He used the example of going from a 15-year
mortgage to a 30-year mortgage.
Commissioner Fisher thought Senator Micciche's
characterization had been accurate, and the amortization
change had reduced the annual payment each year. Because
employers were capped in contribution to 22 percent (under
PERS); by extending it, the employers would pay the 22
percent for 25 years rather than 16.
Senator Dunleavy asked Commissioner Fisher to clarify his
comment about payments in outer years.
Commissioner Fisher stated that over time as individuals
retired and expenses grew, the state assistance payment
would also grow. The forecast for 2027, for example,
indicated that there would be a $450 million state
assistance payment.
Senator Dunleavy thought it was important to consider the
future payments.
Co-Chair MacKinnon asked to take a pause and consider the
slide that Senator Micciche had been referring to.
9:52:38 AM
AT EASE
9:59:19 AM
RECONVENED
Co-Chair MacKinnon referenced slide 17 from the previous
day's presentation, "2017 Credit Review & State Debt
Summary," as discussed by Deven Mitchell, Executive
Director, Alaska Municipal Bond Bank Authority, Department
of Revenue (copy on file).
Senator Dunleavy asked Commissioner Fisher to explain the
out-year estimated total state debt payment for 2039, which
was approximately $880 million.
Commissioner Fisher assumed the numbers on the slide were
correct, and noted that in nominal dollars in 2039, there
would be an estimated payment of $880. He thought it was
important to recognize that the amounts listed were not in
today's dollars, but were in future dollars.
Senator Micciche queried if the curve on the slide's chart
would be relatively flat if it were adjusted to today's
dollars.
Commissioner Fisher stated that the curve would be less
steep if the funds were adjusted.
Senator Dunleavy guessed that the payment would be
approximately $500 billion if the funds were adjusted.
Co-Chair MacKinnon described the slide. She thought it was
fair to state that there was a huge unfunded liability, and
an estimated payment amount in the future. She relayed that
the slide was reflective of nominal dollars, which the
commissioner had suggested may be overstated from the
perspective of today's dollar. She referred to the $3
billion deposit in 2013 to the unfunded liability. She
discussed the liquidity inside the fund, needed to meet the
needs of pensions. She thought the issue was important and
expressed concerns about future cash calls. She discussed
the asset basis for the rate of return.
10:04:09 AM
Commissioner Fisher turned to slide 16, "PERS/TRS Basic
Facts - Unfunded Liability," which showed a bar graph. He
highlighted a decline in unfunded liability in 2014,
associated with a practice of smoothing assets. In
anticipation of the $3 billion contribution, all the
historically smoothed gains were recognized in 2014. Then a
corresponding decrease between 2014 and 2015 was associated
with the $3 billion contribution. He stated that the
decline should not be viewed as a trend, and starting in
2015 the unfunded liability was expected to grow.
Commissioner Fisher spoke to slide 18, "PERS Basic Facts -
Funding Ratio History (Based on Valuation Assets)," which
showed a bar graph. He recognized that Co-Chair MacKinnon
had acknowledged that between the years of 1996 through
about 2001, the fund had an excess of assets over
liabilities (based on actuarial assumptions). He thought
the fairly substantial drop between 2001 and 2002 could be
attributed to adjustments to actuarial assumptions combined
with changes in market conditions.
Co-Chair MacKinnon noted that the state was significantly
underfunded in 1979, and wondered what the legislature had
done at the time to positively impact the unfunded
liability.
Commissioner Fisher thought the time period was associated
with some fairly strong market returns. He was not aware of
whether the state also took action, and avowed to respond
at a later time.
Co-Chair MacKinnon asked if Commissioner Fisher could
provide the employee count at the time, and whether there
was a trend in expanded employees.
Commissioner Fisher showed slide 19, "TRS Basic Facts -
Funding Ratio History (Based on Valuation Assets)," which
showed a bar graph. He highlighted the years of 1999 and
2000, where TRS was at or above being fully funded, as well
as a similar decline as the previous slide.
10:07:39 AM
Commissioner Fisher turned to slide 20, "PERS/TRS Basic
Facts - Contribution Rates," which showed two graphs
illustrating contribution rates for PERS and TERS,
respectively. He noted that the graphs showed the history
of how the practice of state contribution had started. He
highlighted that in 2007 and 2008, it had been forecast
that the employer contribution would be going from the mid-
20s percent to mid-50s percent. He explained that had the
contribution percentage gone up to the mid-50s, for every
dollar paid to a teacher, there would be a 55-cent
contribution to the fund. He thought many school districts
had faced a significant challenge with the prospect, and
the legislature decided to cap the employer contribution at
22 percent under the PERS plan, and at about 12.5 percent
under the TRS plan.
Senator Micciche thought the state had not considered the
feedback on the number of municipal employees. He noted
that the state had no control over the costs, and wondered
if it had been a part of the discussion at the time. He
pondered that if the city became wildly successful from a
new sales tax, and grew employees by a great number, the
state would have no way to control the outcome.
Co-Chair MacKinnon recalled that the committee had
discussed the matter when reviewing school debt
reimbursement. She recalled that municipalities were
accessing debt service - the state could not control it and
had placed a moratorium.
Commissioner Fisher pointed out that now that the state was
in a Tier IV defined contribution plan, if municipalities
increased the number of employees it would help address the
unfunded liability. Now that all employees were in a
defined contribution category, it would not affect
potential expenses of the fund.
Co-Chair MacKinnon went back to slide 5, and referenced the
5,800 terminated employees that were entitled to future
benefits.
Commissioner Fisher affirmed that Co-Chair MacKinnon was
correct, and if the city rehired one of the 5,800
individuals there was an opportunity for the liability to
grow.
Co-Chair MacKinnon stated that it would be discriminatory
to consider the effect upon hiring of the employee.
Senator Micciche stated that in his legislative career he
had made a practice of hiring Tier I retired employees. He
did not think it had an impact on the benefits to the state
after they were retired as a Tier I employee.
Commissioner Fisher clarified that he intended to say that
if one hired a Tier III employee that had 15-years of
service left, the Tier III benefits grew the longer the
individual was a state employee. He clarified that his
earlier comments had been predicated on the assumption that
new employees would be Tier IV; the chair had reminded that
was not necessarily true, and some subset could be within
the defined benefit program.
10:13:51 AM
Senator von Imhof pondered the 19,377 active employees in
the defined contribution plan and considered slide 20. She
asked if the state was paying within the shaded areas of
the two graphs on the slide.
Commissioner Fisher answered in the affirmative, and
indicated that the rate that was on the slide was the true
cost to deliver the defined benefit plan to the PERS
members that had defined benefits. The state made a 22
percent contribution on behalf of Tier IV employees. He
noted that roughly half of the contribution amount went to
pay the past service amount.
Senator von Imhof asked about the shaded blue area on the
PERS graph.
Commissioner Fisher indicated that the shaded blue area
represented the state assistance payment; which was the
difference in what the employer was paying (22 percent),
and the true cost required to keep the plan solvent.
Senator von Imhof asked if the state paid any of the amount
for the 19,377 active employees in the defined contribution
plan.
Commissioner Fisher indicated that the state payment
assistance was not calculated on a per-employee basis. He
explained that when the ARM Board and the actuaries figured
out what was required, and looked at the contribution, the
state picked up the difference. The amount was not tied to
whether the state had employed those with defined benefit
or defined contribution plans.
10:16:15 AM
Senator von Imhof asked if municipalities hired many new
employees, would the amount of state payment assistance
increase due to the increase of overall cost of going into
the plan.
Commissioner Fisher replied that the cost was dependent
upon the nature of the employees that were hired. If a
municipality were to hire 100 percent Tier IV employees,
the state's on-behalf payment would decline as a result of
more employees for whom the employer was making a 22
percent contribution. If the municipality were to hire 100
percent defined-benefit employees, the blue shaded area on
the graph would probably grow. He recounted that on
average, increasingly newer employees tended to be Tier IV.
He offered to run some scenarios for consideration.
Co-Chair MacKinnon asked if it was fair to say that the
administration had been had been trying to limit the growth
on healthcare costs because it was an area the state could
control in the blended pension system. She used the example
of her own benefits through state employment, and noted
there was no longer a third "deluxe" plan available.
Commissioner Fisher answered in the affirmative. He
reiterated that the state had a constitutional obligation
to continue funding a set of benefits to retirees. On the
pension side, the benefits were well-define and difficult
to change. On the healthcare side, the actual benefit
delivered were defined rather than the dollar amount. If
the state could work to deliver the same benefit at a lower
cost, it could save the plan money and help minimize the
unfunded liability. The department was also trying to
minimize the healthcare costs for active employees.
10:19:33 AM
Co-Chair MacKinnon stated that it was not possible to go
back and change constitutionally protected benefits.
Commissioner Fisher concurred.
Co-Chair MacKinnon wondered if an employee's pension was
calculated on the highest 3 years of earnings, instead of
the total life of earnings.
Commissioner Fisher answered in the affirmative, and
qualified that the calculation varied depending upon the
category and the tier of the employee. For Tier I, the
highest 3 years of earning were considered; while for Tier
III, the highest 5 years were considered.
Co-Chair MacKinnon asked if the administration was trying
to control overtime costs by trying to use lower-cost
employees for overtime. She wondered if rules adopted
inside of contracts allowed for senior state employees to
have the first chance at overtime. She wondered if it was a
measure that the administration could control.
Commissioner Fisher was unsure of the precise regulations
surrounding the matter, but thought it was generally true
that departments worked hard to try and control overtime.
He reminded that over 40 percent of PERS members were not
state employees. He thought there was an opportunity for
people to take assignments that had more premium pay during
the final years of state work to bump up retirement
benefits.
10:22:04 AM
Co-Chair MacKinnon asked the administration to review
policies related to overtime and transferring from one
agency to another that may have cost of living
differentials to drive up pensions. She qualified that she
was not trying to dissuade long-standing employees. She
used a fictitious example of an individual who made a small
salary as a school board member for 10 years, then got a
much higher paid job that skewed pension benefits.
Commissioner Fisher informed that it was possible for the
state to control overtime or premium pay, but could not
change the terms of Tier I, II and III plans.
Co-Chair MacKinnon asked if the state had adopted different
retirement periods. She believed for police and fire
fighters there was a 20-year retirement period; and there
was a longer period the state paid for in benefits than it
received in contributions.
Commissioner Fisher answered in the affirmative.
Co-Chair MacKinnon emphasized that the state supported law
enforcement officers and fire fighters, but pointed out
that the policy affected the unfunded liability.
10:25:16 AM
Senator Micciche discussed the state's exposure, and
dependence upon an 8 percent return. He discussed the
different outcomes based on lower rates of return. He
wondered if the administration was compiling a list of
things for the legislature to consider to reduce potential
future liability to the state. He thought a comprehensive
approach was needed, and wanted state employees to have
competitive options for retirement. He wondered if the
committee should request such a list from the department.
Commissioner Fisher conveyed that he would be pleased to
work with the legislature to consider options. He clarified
that the current liability, to a large extent, was defined
by past commitments, as well as factors beyond the state's
control (such as mortality and return assumptions). He
thought there might be an option to consider a retiree buy-
out, which had had mixed success. He restated that the
state was fairly limited in its ability to redefine the
package it was offering to retirees based on what
commitment had been made, as well as the limitations in the
constitution. He emphasized that it was important to look
at healthcare costs, an area where the state could continue
to meet its obligations to retirees while still reducing
the cost of delivery.
Senator Micciche was aware of the constitutional
requirement that the state not diminish benefits to
retirees; but wondered about Tiers I, II, and III returning
to work. He wondered about an option that state retirees
remain in retirement. He thought it was important to
consider all of the options for future liabilities.
Senator Olson asked Commissioner Fisher about the 5,835
terminated members entitled to future benefits. He wondered
if benefits of the employees would increase if they
returned.
Commissioner Fisher stated that if the terminated employees
returned to work and had more years of service, the
benefits would increase.
Senator Olson asked about the mentality of the
administration in regard to other retirement programs.
Commissioner Fisher stated that the administration had not
considered creating a new tier of jurors.
10:30:42 AM
Vice-Chair Bishop wondered, given that PERS and TRS was
managing the system for current employees, if there would
be value in separating out the functions and missions of
the ARM Board that considered the interests of members who
were retired. He emphasized the idea of examining
reinstatement of the Retired Public Employees Board. He
referred to the department's ongoing discussions on the
matter, and relayed that he had been meeting with
constituents in Fairbanks on the topic as well.
Commissioner Fisher conveyed that the department had
ongoing dialogue with retirees, and intended to adopt
regulations to establish an advisory board of retirees to
assist the department in making choices relating to health
care benefits in particular. He specified that it was
possible to change the nature of the plans (consistent with
the Supreme Court opinion) as long as it was done in a
balanced manner. The department wanted to work with
retirees in considering the changes in order to have input
moving forward. He was optimistic that the change would
happen during the current legislative session.
Commissioner Fisher discussed slide 21, "Projected
Retirement Population Growth," which showed a line graph of
retirees over the years 2016 through 2036, when the plan
projected the last person would retire. He pointed out the
peak on the line graph between the years of 2026 and 2028.
Commissioner Fisher spoke to slide 22, "Benefits -
PERS/TRS," which showed a graph that depicted how projected
retirement population growth affected payments. He noted
that over the next 70 years there would be $140 billion in
benefits payments. The benefits paid peaked in the year
2039, and began to decline.
10:33:54 AM
Senator Micciche asked if the lump of benefit risk on slide
22 was marketable.
Commissioner Fisher wondered if Senator Micciche was
inquiring if the state could go to a third party to ask it
to take the risk.
Senator Micciche stated that a third party would be
gambling on the fact that the actual exposures were
somewhat lower than the curve. He wondered if the
marketability was worth considering.
Commissioner Fisher noted that the administration had not
considered looking for a third party to take the risk. He
thought the question was largely dependent upon considering
that there was another entity that could manage the funds
and achieve a better return than the state. He thought
there was also a risk that the exposures were higher than
what was estimated. He thought that generally third parties
wanted to be compensated for taking the risk. He thought
the state had done a good job managing the plan and had
enjoyed good returns.
Senator Micciche thought there was a combination of
considerations on reducing the risk: one was better
returns, and the second was managed care to bring down
healthcare costs. He thought there was combinations of risk
to consider.
Commissioner Fisher was not aware of someone in the
position to assume both the financial risk and returns
associated with the set of assets, and to effectively
manage the healthcare costs.
10:36:57 AM
Co-Chair MacKinnon thought there were existing trusts that
were trying to create a market for buying improved
healthcare outcomes. She discussed pension buyouts, and
thought there was a bill in the legislature that pertained
to early retirement and buyouts.
Senator Micciche complimented the commissioner and hoped he
was not becoming bureaucratic. He pondered a third-party
taking the risk.
Co-Chair MacKinnon asked if Commissioner Fisher had a
response regarding to the idea of a buyout.
Commissioner Fisher relayed that the administration had
looked at the scenario, and observed a range of successes
in the marketplace. He thought there was a risk in
designing the program to avoid selection bias; meaning that
those who tended to have a low life expectancy would tend
to take the buyout, and those with an expectation of a
longer life expectancy would not. He stated that the
department would be more proactive in coming back with a
set of options and more studied consideration of the
likelihood of success.
10:39:53 AM
Senator Dunleavy was concerned that people were not working
hard enough to reduce the size of government and curtail
spending. He felt as though the legislature was being
directed toward revenue enhancements. He mentioned
insurance pooling. He stated that some of the legislature
would be hesitant to approve revenue enhancements (taxes)
until it was felt that the administration had exhausted
every single possibility to try and address the deficit. He
thought it was somewhat frustrating that the conversation
had turned to taxing Alaskans. He wished there was more of
an attempt at exhausting the collective imagination in how
to reduce the size of government before additional
taxation.
Commissioner Fisher relayed that the department had a
fairly long list of initiatives underway (such as shared
services, IT integration, focus on healthcare cost) to
reduce spending. It had tried to prioritize those
activities that had the greatest likelihood of returning a
benefit to the state. He was happy to share the list of
initiatives for consideration as to whether it was
prioritized appropriately. He shared a concern that the
department was at risk of not being able to achieve what it
had taken on, rather than having excess capacity.
Senator Olson discussed health care costs, and did not see
a graph that reflected the requirement of individuals over
65 to go on Medicare.
Commissioner Fisher stated that the department did not have
a graph that reflected the information. The plan assumed
that when a person turned 65, state healthcare became
secondary to Medicare. He stated that most of the
healthcare spend was before retirement and age 65, and the
retiree plan was spending about $500 million per year on
healthcare.
10:45:05 AM
Co-Chair MacKinnon asked if there were re-opener clauses in
the state's negotiated contracts.
Commissioner Fisher was not aware of any reopener clauses
in the contracts.
Co-Chair MacKinnon wondered if there was a mutual benefit
to reopening contracts.
Commissioner Fisher stated that it was always possible to
invite the union to the bargaining table, but it did not
have an obligation. There had been a past discussion about
reopening contracts in the event of a particular oil price
scenario, but an agreement had not been reached.
Co-Chair MacKinnon asked if the practice was standard
procedure for an employment contract.
Commissioner Fisher stated that his experience in the
private sector as well as in his current position was that
reopener clauses were quite unusual.
Co-Chair MacKinnon contemplated the extreme idea be to go
to the people of Alaska and ask to streamline health
benefits as a constitutional amendment, and have retirees'
health benefits mirror whatever was being provided for the
current working state employees.
Co-Chair MacKinnon pondered the state's revenue shortfall
and the rate of return for the current pension asset
allocation.
Senator Micciche believed that collectively, the difference
(from diminished rates of return) could be tens of billions
of dollars.
Co-Chair MacKinnon relayed that the administration had been
evaluating the use of pension obligation bonds. She mused
about a potential course of action in which municipalities
could buy out of their 40 percent of the financial
reasonability, which would provide a cash infusion for the
plan and reduce the municipalities' future obligation.
Co-Chair MacKinnon discussed the agenda for the following
Monday.
ADJOURNMENT
10:49:53 AM
The meeting was adjourned at 10:49 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 020217 DOA PERS TRS Overview S FIN.pdf |
SFIN 2/2/2017 9:00:00 AM |
PERS/TRS |