Legislature(2017 - 2018)SENATE FINANCE 532
02/14/2018 09:00 AM Senate FINANCE
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| Presentation: Pers Trs Overview - Department of Administration | |
| Adjourn |
* first hearing in first committee of referral
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SENATE FINANCE COMMITTEE
February 14, 2018
9:03 a.m.
9:03:25 AM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 9:03 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Anna MacKinnon, Co-Chair
Senator Click Bishop, Vice-Chair
Senator Peter Micciche
Senator Donny Olson
Senator Gary Stevens
Senator Natasha von Imhof
MEMBERS ABSENT
None
ALSO PRESENT
Leslie Ridle, Commissioner, Department of Administration;
Ajay Desai, Director, Division of Retirement and Benefits,
Department of Administration; Mike Barnhill, Deputy
Commissioner, Department of Revenue.
SUMMARY
^PRESENTATION: PERS TRS OVERVIEW - DEPARTMENT OF
ADMINISTRATION
9:04:28 AM
LESLIE RIDLE, COMMISSIONER, DEPARTMENT OF ADMINISTRATION,
introduced herself, her staff, and members from other
departments that were present to provide support
information if necessary.
Commissioner Ridle discussed the presentation "Public
Employees' Retirement System (PERS) Teachers' Retirement
System (TRS) 2018 UPDATE" (copy on file).
Commissioner Ridle displayed slide 2, "Organization PERS
/ TRS," which showed a flow chart of how the duties were
split between departments. She detailed that the Department
of Revenue (DOR) did all the investment of retirement
assets and took care of general consultants and staff that
did external and internal investment management. The
Department of Administration (DOA) administered the
retirement and benefits systems and managed actuaries, as
well as had a third-party administrator for the health and
retirement system. The Alaska Retirement Management (ARM)
Board set contribution rates, invested funds, and oversaw
all retirement system assets.
9:06:40 AM
Commissioner Ridle read to slide 3, "Public Employees'
Retirement System."
Commissioner Ridle spoke to slide 4, "Chronology PERS":
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 with 22% employer contribution
rate
Commissioner Ridle referenced slide 5, "Membership PERS
(as of 12/31/2017)":
?157 Member Employers
?3 Defined Benefit (DB) Tiers
o 34,750 retirees
o 5,614 terminated members entitled to future
benefits
o 14,431 actives (41%)
o 54,795 total DB members
?1 Defined Contribution (DC) Tier
o 21 retirees
o 991terminated members entitled to future benefits
o 20,458 actives (59%)
o 21,470 total DC members
SOURCE: Division of Retirement and Benefits.
Membership Statistics as of 12/31/2017
Commissioner Ridle detailed that the 34,750 retirees listed
on the slide included beneficiaries and dependents of the
retirees. The 5,614 terminated members were people who had
left the system, but the state still had an obligation if
the members retired from the state system.
9:07:53 AM
Commissioner Ridle reviewed slide 6, "FY 18 Contribution
Rates PERS":
Defined Benefit
Employee:
?6.75% All Other employees
?7.50% Peace Officer/Firefighter
?9.60% School District Alternate Option
Employer:
?22% Cost Share
State:
?3.01% Additional State Contribution
Defined Contribution
Employee:
?8% All Employees
Employer:
?5% Investment Account
?1.03% Health Care
?0.43% Occupational Death & Disability
Peace Officer/Firefighter
?0.16% Occupational Death & Disability All Others
?HRA flat dollar, 3% of all PERS/TRS average annual
compensation
Senator Micciche noted that there was a differential
between peace officers and fire fighters and all other
employees. He asked if the differential had been deemed
constitutional or if it had been challenged in any way.
Commissioner Ridle did not think that the differential had
been challenged.
Senator von Imhof referenced slide 5 and asked if the
department tracked whether retirees lived in Alaska or
elsewhere.
Commissioner Ridle answered in the affirmative and noted
that retirees could sign up for the Cost of Living
Allowance (COLA) if they lived in-state, which the
department tracked.
Senator von Imhof asked if the department had run a
comparison to see if the individuals that received COLA had
also received a Permanent Fund Dividend (PFD).
Commissioner Ridle answered in the affirmative, and stated
that there was about 2,000 people that received COLA but
did not get the PFD. The commissioner had directed the
division to reached out to the individuals to double check
that they understood the COLA rules. She noted that there
were further tools that the department would utilize in the
near future.
Senator von Imhof hoped that the committee would see a
report with clarification in terms of residency
requirements and proof of residency for individuals that
received COLA. She hoped that process was as rigorous as
that of PFD eligibility.
9:12:12 AM
Commissioner Ridle showed slide 7, "Teachers' Retirement
System."
Commissioner Ridle reviewed slide 8, "Chronology TRS":
?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 Ridle spoke to slide 9, "Membership TRS (as
of 12/31/2017)":
?57 Member Employers
?2 Defined Benefit (DB) Tiers
o 12,998 retirees
o 709 terminated members entitled to future
benefits
o 4,882 actives (47%)
o 18,589 total DB members
?1 Defined Contribution (DC) Tier
o 9 retirees
o 441 terminated members entitled to future
benefits
o 5,550 actives (53%)
o 6,000 total DC members
SOURCE: Division of Retirement and Benefits.
Membership Statistics as of 12/31/2017
Commissioner Ridle reiterated that the number of retirees
listed on the slide included dependents.
Commissioner Ridle showed slide 10, "FY 18 Contribution
Rates TRS":
Defined Benefit
Employee:
?8.65% All Employees
Employer:
?12.56% Cost Share
State:
?14.22% Additional State Contribution
Defined Contribution
Employee:
?8% All Employees
Employer:
?7% Investment Account
?0.91% Health Care
?0.00% Occupational Death & Disability
HRA flat dollar, 3% of all PERS/TRS
average annual compensation
Commissioner Ridle pointed out that under the Defined
Contribution plan, employers did not pay for occupational
death and disability, but did pay for the Health
Reimbursement Account (HRA).
Co-Chair MacKinnon referenced slide 10 and asked if the
additional state contribution of 14.22 percent (under
defined benefit) was above the employer cost share. She
wondered if the amount was capped in statute.
Commissioner Ridle stated that the employer would pay 12.56
percent, and the state paid an addition 14.22 percent to
fill the unfunded liability.
Co-Chair MacKinnon asked if the amount was capped in state
statute.
AJAY DESAI, DIRECTOR, DIVISION OF RETIREMENT AND BENEFITS,
DEPARTMENT OF ADMINISTRATION, informed that the 12.56
percent was capped for the Teacher's Retirement System
(TRS), and the 14.22 was state assistance based on
evaluation of 2018.
Co-Chair MacKinnon observed that the number went up and
down for the state. She stated that the state was picking
up the difference based on what actuaries reported was
needed to make up the difference in unfunded liability.
Mr. Desai answered in the affirmative.
Senator von Imhof thought the number was significant. She
wondered if there was a graph to show how the number had
fluctuated over time, and what the contributing factors
were. She wondered about a projection of the figure over
the next three to five years. She thought the matter needed
to be better understood and managed to the degree it was
possible.
Commissioner Ridle thought there were upcoming slides that
would address the matter.
9:15:56 AM
Commissioner Ridle reviewed slide 12," Balance Sheet PERS
/ TRS (in thousands)," which was the balance sheet for the
years 2016 and 2017. She made note of the word "draft" next
to the 2017 column and noted that the figures would not be
finalized until the meeting of the ARM board in June 2018.
She pointed out that the funding ratio for the Public
Employees' Retirement System (PERS) Defined Benefit program
had stayed close to the same between the two years. The
same was true for the TRS Defined Benefit.
Commissioner Ridle addressed Senator von Imhof's question
and noted that there had been some unexpected occurrences.
Salary increases, medical, and retirement had been lower
than expected. Additionally, the department had updated
retiree dependents to remove duplicates and other
inaccuracies. Additionally, there had been a smaller than
expected post-retirement pension adjustment. There had been
higher costs for pharmacy, and fewer terminations in the
system than previously assumed; both of which did not work
in the state's favor. All the factors were considered in
the actuarial analysis.
Co-Chair MacKinnon referenced the unfunded liability, which
hovered just above $6 billion between the two systems. She
understood that the administration had short-funded the
amount due to the retirement system and asked if there was
a slide to address the matter. She asked if the
commissioner could provide feedback.
Commissioner Ridle wondered if Co-Chair MacKinnon was
referring to the $1 million Employer Group Wavier Program
(EGWP) contribution that had been placed in the budget. She
stated that the department would apply the EGWP to the
pharmacy program, which would take a year to implement. The
new program would reimburse retirees as they used the
pharmacy program rather than after the use of the drugs.
The department expected to have a $25.1 million
reimbursement the following year for drugs.
Co-Chair MacKinnon asked if the ARM board supported the
administration in the process. She thought accounting for
savings before it was realized could cause concern.
Commissioner Ridle stated that the ARM board had passed a
resolution to support the EGWP. She thought the ARM board
had taken a vote to accept the process.
9:20:36 AM
Co-Chair MacKinnon asked if the ARM board supported short-
funding.
Commissioner Ridle stated that the ARM board supported the
idea that the state would get the funds as time passed, get
reimbursed, and use the funds right away.
Senator Micciche thought it would be helpful to see a chart
of funding ratio differences of the unfunded liability for
the last ten years.
Commissioner Ridle advanced to and reviewed slide 19, "PERS
Funding Ratio History (Based on Valuation Assets)," which
showed a bar graph depicting the funding ratio over time
from 1979. She noted that slide 20, "TRS Funding Ratio
History (Based on Valuation Assets)," showed the funding
ratio history for TRS.
[Commissioner Ridle returned to slide 12]
Co-Chair MacKinnon asked if there were new assumptions that
were being considered that would change the funding ratio
downward. She recalled that there were new criteria being
adopted for mortality rates. She discussed changes in the
funding ratio and was concerned since all of the numbers
transferred to local communities.
Commissioner Ridle stated that the board had been going
through an experience study and would vote in an upcoming
meeting on the expected rate of return. The rate had been
about 8 percent for about 11 years, but with the experience
study new information would be considered.
Co-Chair MacKinnon asked when the ARM board would vote on
the matter.
Commissioner Ridle thought the vote would be in June 2018.
Co-Chair MacKinnon asked if the legislature could expect to
see a supplemental request if the rate was reduced.
Commissioner Ridle answered in the affirmative.
Co-Chair MacKinnon expressed concern.
9:24:06 AM
Senator von Imhof referenced slide 24, which she thought
was compelling. She discussed the importance of cash flow
and wondered about the cash flow needs for the next five
years based on actuarial inputs. She thought a supplemental
request was a complete surprise that would affect all the
other departments. She asked the commissioner to estimate a
range of future payments based on assumptions.
Mr. Desai stated when the actuarial evaluation fluctuated
for any reason, it did not have an immediate impact, but
rather in a future valuation process. He addressed the
question of under-funding. He discussed the Retention and
Disposition Schedule (RDS) project, through which the
department got a retirement drug subsidy. He explained that
EGWP worked in reverse, and if the state enrolled, it
allowed for discounted drugs instead of subsidies, so
savings were realized up front. State law allowed for
appreciation of funds into future liability, compared to
RDS, which did not.
Co-Chair MacKinnon understood, and clarified that the
change in assumptions and in the rate of return would
necessitate a supplemental.
Commissioner Ridle had been mistaken and corrected that the
savings was worked into future valuations and the
department did not necessarily submit a supplemental budget
request.
Co-Chair MacKinnon asked if the state would see an increase
in the request in FY 20 to reflect the changes.
Mr. Desai answered in the affirmative.
Co-Chair MacKinnon asked if the numbers were available to
share.
Commissioner Ridle answered in the negative.
Co-Chair MacKinnon explained that the unknown increase in
spending was seen as a supplemental.
9:28:28 AM
Vice-Chair Bishop commented that the subject could be a
policy discussion with the administration. He discussed
working from assumptions versus estimating.
Co-Chair MacKinnon stated that the committee was concerned
with the fiscal situation of the state. She knew that in
the background was a $6 billion plus unfunded liability and
was thankful it already reflected health costs. Other
states had unfunded liabilities that were much greater. She
referenced Vice-Chair Bishop's remarks and expressed
concern about the unfunded pension liability. She thought
that several members of the committee felt similarly.
Commissioner Ridle did not disagree.
Commissioner Ridle discussed slide 13, "ARM Board Long -
Term Returns," which showed a table of ARMB Long Term
Returns through June 30, 2017. She reminded that the ARM
board would be considering the return rate in June 2018.
The slide showed long term returns from the first year
through 33 years, along with the averages.
Commissioner Ridle turned to slide 14, "Benefit Formula":
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.
Commissioner Ridle stated that the slide was intended to
show how contributions combined with investment earnings
should equal benefits and expenses, if actuarial
assumptions were accurate. She reminded that any of the
dozens of assumptions could change the outcome.
Senator von Imhof referenced the State of Wisconsin, which
was solvent. The state had made larger payments in higher
earning years and had established a floor for years when
returns were not good. She thought the arrangement had
worked over time and had acted to decrease the unfunded
liability. She did not know if it was possible to utilize
the same technique in Alaska. She thought there were other
states that had successfully addressed benefit plans
through the same technique. She wondered if Alaska could
attempt the same structure.
Commissioner Ridle understood that it was not possible to
return to the tiers because of a constitutional
diminishment issue.
9:33:38 AM
Co-Chair MacKinnon thought the Alaska Supreme Court had
ruled on the matter of diminishment of retirement plans. It
was found that benefits were guaranteed. Alaska would have
to do a constitutional amendment to address the court
ruling.
Senator von Imhof considered that it was possible, only
difficult.
Co-Chair MacKinnon thought that if a constitutional
amendment came to the legislature or during a
constitutional convention to address benefits, it could go
before the people of Alaska for consideration.
Senator Stevens commented that on behalf TRS retirees, he
appreciated the constitution and the courts.
Co-Chair MacKinnon thought all retirees were thankful that
benefits were protected. She shared her concern that if the
state couldn't make the payments, the system could
collapse. She suggested that many members of the committee
had been working to solve the problem. She discussed the
concept of managing current benefits with retiree benefits.
Co-Chair MacKinnon referenced slide 14, and asked if there
would be less of a liability if revenues were greater. She
relayed that there had been conversation that the
administration had been conservative with its projections
on revenue.
Commissioner Ridle answered in the affirmative.
Commissioner Ridle displayed slide 15, "Additional State
Contributions - PERS / TRS," which showed a table of of
historical state contributions to PERS and TRS. She pointed
out that the current year's contribution of $135.2 million
for PERS and $128.1 for TRS before the EGWP reduction.
Commissioner Ridle moved to slide 16, "Unfunded Liability
PERS / TRS," which showed a bar graph that depicted the
unfunded liability over time.
Commissioner Ridle showed slide 17, "Funding Ratio PERS /
TRS," which showed a table that depicted the funding ratios
starting in 2015. She noted that the table was continued on
the next slide.
Commissioner Ridle spoke to slide 18, "UPDATED Funding
Ratio - PERS / TRS DRAFT2017 Results," which showed the
data table from the previous slide, updated for 2017. She
reiterated that the 2017 numbers were in draft form until
they were voted upon at the ARM Board meeting in June 2018.
She pointed out that the funding ratios remained fairly
similar across the table.
Co-Chair MacKinnon pointed out that the amounts on the
slide were affected greatly by the $3 billion cash infusion
in FY 15 to the TRS and PERS system put forth by the
legislature, in collaboration with the governor.
9:38:45 AM
Commissioner Ridle explained that slide 19, "PERS Funding
Ratio History (Based on Valuation Assets)," and slide 20,
"TRS Funding Ratio History (Based on Valuation Assets),"
both showed bar graphs depicting funding ratios over time.
Vice-Chair Bishop considered slide 20 and noted that the
years of 1996 through 2001 showed over-funding.
MIKE BARNHILL, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,
addressed the chart on slide 20, which reflected the
percentage funded ratio shown in the actuarial evaluations
each year since 1979. He recalled that there was a period
of time in which the actuary used a set of assumptions that
were not grounded in reality, which was reflected in the
periods of over-funding. In 2002, there was an actuarial
audit requested by DOA, which showed that there had been
actuarial practices that had been inappropriate,
particularly with respect to the projection of healthcare
costs. As a result of the audit, the actuarial valuation
for 2002 reflected the emergence of a substantial unfunded
liability. At that time, the unfunded liability had been
approximately $4 billion.
Mr. Barnhill continued to discuss Vice-Chair Bishop's
question. He noted that in the wake of the audit and
resetting of the funded ratios, the legislature looked at
ways to address the under-funding, which had culminated in
the passage of legislation in 2005 which closed the defined
benefit system to new employees. He thought one way of
looking at the chart was to recognize that actuaries at the
time thought the system was overfunded, but in reality the
funding had been overstated through actuarial negligence.
9:42:03 AM
Vice-Chair Bishop asked if the legislature was making any
deposits into the fund during the time frame being
discussed.
Mr. Barnhill showed slide 21, "PERS Contribution Rates,"
which showed a line graph spanning the years 2000 to 2019.
He noted that prior to 2007, the system was primarily
employer and employer-contribution funded. The state did
not begin making contributions separate and apart from its
status as an employer until 2007.
Vice-Chair Bishop emphasized that a defined benefit plan
would work if it was honest with the multiplier in the
actuarial assumptions.
Mr. Barnhill thought it was possible to discuss the subject
at length. He thought that defined benefit systems were
infinitely sustainable if the payments were maintained, and
if the actuarial computations were continually checked for
fairness. He discussed the employment structure and audit
of actuaries to ensure things were being done correctly
each year.
Senator von Imhof referenced Mr. Barnhill's statement about
plans working if payments were made. She thought that there
many assumptions in the statement. She considered that the
plans had a hard time working when there were costs and
market fluctuations beyond the state's control. She thought
that simply "making the payments" crowded out other state
expenditures such as public safety and education.
Mr. Barnhill did not intend to be cavalier. He affirmed
that Senator von Imhof's remarks were correct, and there
was a variety of things that had to happen. He thought
there were many factors to intervene to make the
sustainment difficult. He thought that the legislature had
been incredible in supporting the system through additional
state assistance payment. He thought it was not reflected
in the experience of most other states. He considered the
state of Kentucky, that had a funded ratio of close to 18
percent and was close to imploding. He did not want to
diminish the substantial challenge in the state of Alaska.
Mr. Barnhill thought there was a variety of tools that the
legislature and administration had engaged to balance
expenditure concerns in a fair way. He referenced the $3
billion cash infusion )by the extension of amortization of
the liability by 9 or 10 years) to manage state assistance
payments in the short term and balance competing needs.
9:47:48 AM
Co-Chair MacKinnon acknowledged that the topic was
important to all.
Senator Micciche did not want to overstate the position the
state was in with unfunded liability. He understood Mr.
Barnhill's comments. He thought the state had realized
after 2002 that the legislature had not prioritized the
systems in the time of greatest revenue. He discussed
fluctuating state revenue and thought in higher revenue
years the state would need to keep the systems as a
priority and consider additional cash infusions.
Co-Chair MacKinnon asked if past higher revenue years were
the same years the state was in a lawsuit with the
actuaries. She wondered if legislators had not made
payments in higher revenue years because the actuaries were
producing a lower number for liability.
Mr. Barnhill had neglected to mention that in addition to
the declining funding ratios in 2002 to 2007; the state had
filed a lawsuit against its actuaries for actuarial
negligence, which had been settled in 2010. There had been
additional action taken in the state's interests to seek
recovery. The state asserted that from 1994 to 2000 the
actuary was acting negligently, which formed the basis for
the lawsuit.
Co-Chair MacKinnon thought Vice-Chair Bishop had pointed
out that there were reduced payment requests at a time when
higher payments should have been made.
Mr. Barnhill answered in the affirmative. He explained that
actuaries used past experience to look forward in time to
determine what employers should contribute on a year over
year basis. The employer contribution rates set during the
period in question had been inappropriately low. Had the
actuaries been using best practices, the employer
contribution rates would have been substantially higher.
The lawsuit had tried to articulate the theory that the
state had not been allowed the opportunity to contribute in
an appropriate way because the issues in the system were
not transparent because of the inappropriate projection of
healthcare costs.
9:52:12 AM
Mr. Barnhill made the distinction that the lawsuit t did
not bear on the state contributing additional money (such
as through state assistance); but rather bore on what
employers contributed through the employer contribution
rate. The state was the biggest employer and had an issue
with PERS during the time reflected on slide 21.
Senator Micciche thought that after the state settled the
lawsuit it experienced high revenue years. He thought
changes to retirement benefits in the constitution was a
difficult topic to consider. He thought the system could be
properly maintained to avoid disaster.
Vice-Chair Bishop thought it would be interesting to see a
slide that considered the funding ratio if there had been
an additional $1 billion deposit. He thought some
legislators had pushed for a bigger cash infusion towards
the unfunded liability. He wondered how many states would
like to be at 82 percent funding for pension systems.
Mr. Barnhill thought all states would like to be funded at
82 percent with respect to health plans. He stated that
Alaska's health funded ratio was close to 100 percent. He
referenced slide 18 and thought there were no other states
funding at the same level as Alaska. Most defined benefit
health plans were started with the assumption that the
benefits would be paid on a pay-as-you-go basis; rather
than the notion of saving in advance. He thought that the
fully-funded nature of the state's health program was due
to the wisdom of the legislature and the executive branch
in taking reasonability for funding the programs in
advance. He addressed the funded status of the pension
side, and thought the state was doing ok. He thought that
anything funded at less than 80 percent on an open plan
could use improvement. He thought it was essential to keep
working to make sure the programs were administered and
funded properly.
9:56:27 AM
Senator Micciche referenced the $3 billion cash infusion to
PERS and TRS. He asked if the funds were deposited into the
area of the state's liability with the greatest financial
value.
Mr. Barnhill stated that the intention was for 100 percent
of the appropriation was to go into the pension portion of
the unfunded liability. The relative funded ratio between
pension and health and PERS and TRS was different. The
health funded ratio had increased steadily since 2007. The
state had wanted to maintain similar funded ratios for
pension and health. The spread emerged between pension and
health because the new actuary had introduced a level of
conservativism in projecting health costs, so the state
over-collected from 2008 to 2014. When the funds came in,
the actuaries did another calculation, and believed to
maintain parity, additional funds needed to be added to the
health part of TRS.
Mr. Barnhill continued that subsequent to approving the
$233 million (of the $2 billion deposit to TRS), the
actuary had considered additional information: in January
of 2014 the state transitioned to Aetna and had a more
advantageous network resulting in lower claims costs. There
had been substantial savings which the actuary considered,
as well as a health care assumption change made by the ARM
board. The two considerations offset the actuary's mid-year
determination of where the $2 billion should be placed. At
the close of FY 15, the funded status in the TRS health
plan was approaching 100 percent, which had not been the
objective. Had the $233 million been moved into pension as
originally planned, the funded ratio in TRS would not have
gone up as much. He believed that over time the matter
would work itself out.
10:00:53 AM
Senator von Imhof thought it would be useful if the chart
on slide 15 could be extrapolated to include the years 2019
through 2023 in order to plan future cash flow. She
referenced charts on slide 21 and 22, which showed employer
contribution rates in blue and the state subsidized amount
above. She asked if there were unintended consequences. She
used the hypothetical scenario of closing a library in
Cordova. She understood that if any municipality eliminated
a job classification, there would be consequences and a
report would be required to show the impact to PERS and TRS
contributions. She thought the potential lack of
contribution sometimes exceeded the impact of just keeping
the position filled.
Co-Chair MacKinnon asked if Senator von Imhof was speaking
about a termination study.
Senator von Imhof answered in the affirmative. She thought
that there was a disincentive for communities to contract
during difficult economic times.
Mr. Barnhill stated that the issue of termination studies
had been a perennial issue since statute was amended to
explicitly require termination studies. He thought there
was a balance of concerns, triggered by the fact that the
terminated group and its accrued constitutional benefits.
He considered how to account for the benefits
appropriately, so the system was not shorted by the
individuals exiting the system early. He thought there was
a provision in law that employees in a terminated class
could vest automatically. When one vested automatically in
benefits, there was an immediate unplanned liability to the
system that needed to be resolved.
Mr. Barnhill asserted that the department understood the
issue as discussed by Senator von Imhof. He stated that the
administration had worked over the years to try and craft a
solution. He thought there was a desire and willingness to
find a fair and balanced solution.
10:05:18 AM
Co-Chair MacKinnon asked if it was fair to say that
municipalities would like to cost shift the liabilities to
the legislature.
Mr. Barnhill thought that it was important to recognize
that in the administration of any defined benefit system
there were multiple stakeholders that had interests that
were not completely aligned.
Co-Chair MacKinnon expressed understanding of Mr.
Barnhill's answer. She thought the state had balanced the
needs of municipalities requesting termination studies over
time. She discussed the 22 percent cap on municipalities'
contribution.
Senator Micciche recalled struggling with termination
studies as the mayor of a small town. He thought it was not
mathematically possible that retaining an employee would
cost less than a termination study.
Mr. Barnhill deferred the question and suggested Senator
Micciche work with Commissioner Ridle to discuss the
matter. He recognized and acknowledged that there were
scenarios in which the math was challenged. He believed
that over the years the division endeavored to administer
the statutes as intended by the legislature. He referenced
non-alignment of stakeholder interest and thought the state
might not have the same view as municipalities.
10:08:50 AM
Senator Micciche appreciated Mr. Barnhill's frankness. He
thought it would be extremely helpful for members to review
a body of information on termination studies and the PERS
and TRS systems, in order to understand how to administer
and maintain the systems. He thought deep knowledge of the
systems was confined to a small number of legislators.
Co-Chair MacKinnon referenced the remarks of Senator
Stevens that said "history was important." She thought it
was important to consider the history of the matter,
including the 22 percent cap on contributions. She thought
that if termination studies were eliminated, the state
would have sole responsibility for making the system whole,
which she did not think was possible considering the
state's current cash flow.
Co-Chair MacKinnon referenced slide 19 and stated that the
Legislative Finance Division had suggested the committee
discuss assumed returns and how they affected the funding
ratio. She discussed an impact on market returns in 2002.
She asked for Mr. Barnhill to highlight market returns when
discussing the history of TRS and PERS.
Mr. Barnhill thought one way to improve or enhance the
narrative of slide 19 was to include the market investment
return at the bottom of each of the bars on the graph. He
mentioned a reversal in investment markets in 2001, which
had contributed to the decline in funded status. The
decline had been coincident with the aforementioned
actuarial negligence. He cited additional market
corrections in 2008 and 2009, which further challenged
funding to the system at the time.
10:12:38 AM
Co-Chair MacKinnon wondered how much of the recently
rebounded stock market was propping up the 77 and 78
percent assumed returns. She discussed a time when oil
prices were low and the state hadn't made payments.
Mr. Barnhill thought there were a variety of enhancements
the chart on slide 19 could benefit from; such as the price
of oil, which could reflect the overall capacity of the
state to make additional contributions. He discussed the
impact of the returns of the investment markets on the 2015
to 2016 time period. The actuarial earning assumption was 8
percent. He acknowledged that market was volatile, but
there had been a long-running bull market that began after
a recession in 2009. The state's investment advisors,
Callan and Associates, were relatively pessimistic about
the continuance of the bull market for the next 10 years
and had advised the ARM board to expect an annual average
return rate of 6.6 percent. The Permanent Fund Corporation
had advised for an expectation of a 6.5 percent rate of
return.
10:15:58 AM
Co-Chair MacKinnon discussed healthcare and referenced
meetings with Mr. Barnhill and DOR Commissioner Sheldon
Fisher. She asked if there were any negative consequences
the state could experience because the plan was 100 percent
funded. She wondered if retirees could call for more
benefits. She was concerned about the possibility of
increased costs for increased benefits because the system
was over 100 percent funded.
Mr. Barnhill reiterated that there were various sets of
stakeholders involved. He reminded that the retirees
naturally desired the best health benefits the system could
afford. He did not think retirees as a group would ever not
be interested in better benefits. He was not aware of legal
requirements that would require enhanced benefits if a
system was funded over 100 percent. He believed there was a
post-retirement pension adjustment (PRPA) that was
triggered whenever pension funding went over 105 percent.
That state was not close to 105 percent of pension funding,
so the PRPA was not a concern. He thought that as
administrators (for retirees and active employees) the
state wanted a health plan that was sustainable and fair,
and provided security for retirees.
10:19:06 AM
Co-Chair MacKinnon wanted to protect retiree benefits,
which was why the legislature had focused on the benefit
portion of the payment. She shared concerned that if
healthcare options were increased for retirees, it became
constitutionalized and became a fixed cost for the future.
She noted that the legislature had been specific about the
contribution and had argued that the funds not be divided
equally; since the state had a 100 percent responsibility
for teachers and only 60 percent responsibility for those
in the PERS/TRS system. She clarified that the state
supported 100 percent payment for teachers. In the PERS
system, local municipalities hired individuals in
communities, and the state covered part of the expense. She
wanted to ensure that when discussing the unfunded
liability, people knew that it was only 60 percent state
debt.
Senator Micciche was impressed with Mr. Barnhill's earlier
comments. He asked what the most financially beneficial
balance between healthcare and the PERS and TRS liability
funding to ensure the health of the systems. He wondered if
the state should make a shift for the most financially
beneficial balance.
10:22:05 AM
Mr. Barnhill had contemplated a rebalance between the
pension and health care silos. He noted that prior to 2007,
there had only been one account in which pension and health
contributions were co-mingled. Tax counsel at the time had
advised disaggregating the accounts, which was achieved by
passing legislation. The United States Internal Revenue
Service (IRS) had allowed the state to move money from the
legacy account into the new health account on a pro rata
basis. He noted that the funding ratios for pension and
health were exactly the same in 2007, because that's when
the parity in funding ratios policy was established.
Mr. Barnhill continued to address Senator Micciche's
question. He thought the biggest issue was if the IRS would
allow the state to go backwards and move funds from health
care back to pension. He summarized that he felt that the
$233 million had a relatively low overall impact to the
system, especially over time. He noted that there was a
pending experience analysis that would consider an
appropriate earnings assumption and appropriate mortality
table for the systems to adopt. He recommended that
although it was possible to seek permission to reallocate
funds from health to pension, he would wait to see the
outcome of the experience study and how it would impact the
funded status of the systems.
Co-Chair MacKinnon asked for Mr. Desai to comment.
Mr. Desai thanked Mr. Barnhill for his historical
perspective on the matter.
10:26:00 AM
Commissioner Ridle moved to slide 23, "Projected Retirement
Population Growth," which showed a line graph. She pointed
out the downward curve starting in 2027.
Commissioner Ridle discussed slide 24, "Basic Facts PERS
/ TRS Benefits," which showed a graph. She agreed with
Senator von Imhof that the slide could have been shown
earlier in the presentation. The graph showed what payments
were expected to be over the next 70 years. The slide also
showed the PERS/TERS account balance and the unfunded
liability amount.
Senator Micciche asked to return to slide 13. He asked if
there was a way to average or smooth the average in the
actuarial analysis.
Mr. Desai indicated that the slide showed actual rate of
returns. For the actuarial purposes, the numbers were
smoothed out based on 5-year averages. He stated that his
next presentation would show the trend of the actual
returns versus valuation returns compared to the funding
ratio.
Co-Chair MacKinnon stated that in the past, the committee
had been able to see how the ARM board was investing and
had seen further information on asset allocation. She
referenced slide 19, and the volatility of oil revenue. She
asked if the department could provide further information.
Commissioner Ridle answered in the affirmative.
Co-Chair MacKinnon discussed the agenda for the following
day.
ADJOURNMENT
10:29:46 AM
The meeting was adjourned at 10:29 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 021418 DOA PERS TRS Overview S FIN 2.14.18.pdf |
SFIN 2/14/2018 9:00:00 AM |
SB 144 |