Legislature(2019 - 2020)SENATE FINANCE 532
02/13/2020 09:00 AM Senate FINANCE
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| Start | |
| Prs/trs Update | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
February 13, 2020
9:00 a.m.
9:00:25 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:00 a.m.
MEMBERS PRESENT
Senator Natasha von Imhof, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Click Bishop
Senator Lyman Hoffman
Senator Donny Olson
Senator Bill Wielechowski
Senator David Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Senator Cathy Giessel; Ajay Desai, Director, Division of
Retirement and Benefits, Department of Administration;
Emily Ricci, Chief Health Administrator, Division of
Retirement and Benefits, Department of Administration;
Kevin Worley, Chief Finance Officer, Division of Retirement
and Benefits, Department of Administration; Kathy Lea,
Chief Pension Officer, Division of Retirement and Benefits,
Department of Administration.
SUMMARY
PRS/TRS UPDATE
Co-Chair Stedman stated that the presentation would pertain
to the ongoing review of the state's retirement system and
funding levels. The presentation would consider history as
well as projections. He asked testifiers to refrain from
using acronyms.
^PRS/TRS UPDATE
9:02:39 AM
AJAY DESAI, DIRECTOR, DIVISION OF RETIREMENT AND BENEFITS,
DEPARTMENT OF ADMINISTRATION, discussed his background. He
had worked for 33 years in pension and health
administration. He had strong IT development background. He
had actuarial and regulation experience. He had started
with a bank corporation and had worked with Walt Disney
company and the motion picture industry in Hollywood before
coming to Alaska in 2017. It was his fourth year with the
division.
EMILY RICCI, CHIEF HEALTH ADMINISTRATOR, DIVISION OF
RETIREMENT AND BENEFITS, DEPARTMENT OF ADMINISTRATION,
discussed her background. She had been working with the
division since 2016, focusing on healthcare policy and then
taking the lead in operations and policy early in 2019. She
had worked in various state government positions, focusing
on health care policy for the state's plans, as well as the
Medicaid program.
KEVIN WORLEY, CHIEF FINANCE OFFICER, DIVISION OF RETIREMENT
AND BENEFITS, DEPARTMENT OF ADMINISTRATION, discussed his
background. He was a graduate of the University of Alaska
Fairbanks. He had worked in public accounting for four
years before relocating to Juneau in 1990. He had been with
the division in various capacities off and on since 2000.
9:05:39 AM
Mr. Desai wanted to discuss significant numbers that would
be considered in the presentation. He explained that
effective January 2019, the division had implemented an
employee group waiver plan in order to receive a higher
subsidy from the federal government. The project had been
"on the radar" for the previous several years, but the
division had not had the necessary strength, support, or
partnerships. He thanked Ms. Ricci and others for their
work on the project. He noted there had been strong support
from the Alaska Retirement Management (ARM) Board. He
thanked the Retiree Health Plan Advisory Board, which had a
significant role in the project. He extended gratitude to
Optimum RX.
Mr. Desai discussed the presentation "PERS/TRS 2020 Update"
(copy on file).
Mr. Desai looked at slide 2, "Organization PERS / TRS,"
which showed a flow chart. He stated that the division
worked with the Department of Revenue and the ARM Board on
the different subject matters. Effective October 1, 2005;
the ARM board began serving as a trustee for the pension
and retiree health trust, as well as the state's
supplemental annuity and deferred compensation plans.
Mr. Desai spoke to slide 3, "Membership (as of June 30,
2019)," which showed a table. The slide had been expanded
from the previous year to include more detail. He pointed
out the plans and tier levels of plan members. He detailed
that all of the participants and members would total around
101,000. He cited a ratio of 37 percent to 63 percent for
active participants in the defined benefit plan compared to
the active participants in the defined contribution plan.
9:08:39 AM
Co-Chair Stedman asked for a brief explanation of a defined
contribution plan and a defined benefit plan.
Mr. Desai explained that prior to 2006, the state offered
all employees a defined benefit plan, which was a
predefined benefit similar to social security, that would
pay a monthly pension after retirement. The defined
contribution plan was effective in 1978. The plan offered a
lump sum upon retirement. He added that there was also the
option for an annuity. Any participants hired under the
Public Employees Retirement System (PERS) or the Teachers
Retirement System (TRS) after July 1, 2006 would be
eligible for the defined contribution plan.
Mr. Desai referenced slide 4, "AlaskaCare Employer Group
Waiver Plan Update":
? An Employer Group Waiver Plan (EGWP) is a group
Medicare Part D prescription drug plan option.
? EGWP provides a direct subsidy which allows it to be
considered when calculating the Other Post-Employment
Benefits (OPEB) liability under both GASB & FASB
accounting schemes.
? The implementation of EGWP reduced 6/30/18
healthcare liabilities by $959M, which resulted in
lower projected liabilities, lower projected
contribution rates, and lower projected Additional
State Contributions ($711M for PERS, $248M for TRS).
Mr. Desai detailed that the slide discussed the largest
group of members.
Co-Chair Stedman asked about the implementation of EGWP.
Mr. Desai stated that EGWP was originally named the Retired
Drug Subsidy Program (RDS). When the EGWP came along, there
had been complications in implementation. Many private and
public sector plans elected to implement the plan.
Co-Chair von Imhof commented on the savings listed on slide
4. She hoped that the management of prescription
medications for the Medicare population could continue.
Mr. Desai thought it was important to note that the state
would continue to receive the subsidy that was started in
2019, which would help reduce employer contributions.
9:12:55 AM
Mr. Desai turned to slide 5, "EGWP Projected Subsidy for
2019," which showed a table listing the types of funding
that would be received for 2019. He pointed out that the
total added up to $52.9 million. He stated that it took
about 6 months to reconcile claims with the federal Centers
for Medicare and Medicaid Services (CMS). He stated that
once the numbers were reconciled it would be possible to
see yearly totals.
Senator Wilson asked if the $52.9 million total represented
the annual subsidy.
Mr. Desai answered in the affirmative.
Senator Wilson asked if the amount of the subsidy would be
annually consistent or if there would be a trend.
Mr. Desai stated that the subsidy was annual, but the
number could fluctuate. He asked Ms. Ricci to expand.
Ms. Ricci stated that it was anticipated that the different
subsides would vary according to a number of different
factors. Some of the subsidies varied through a risk
projection based on the disease and condition burden across
the state's retirees. The division continued to monitor any
changes at the federal level that might impact how CMS
calculated anticipated subsidies. She did not foresee major
changes in the overall amount in the coming years but
reminded that the amount was always subject to changes at
the federal level via regulation, which was monitored by
the division.
Mr. Desai added that the savings had been higher than
originally estimated.
Co-Chair Stedman relayed that the committee faced many
challenges and rarely had successful financial issues in
front of the members. He was pleased at the substantial
savings shown.
9:16:24 AM
Mr. Desai considered slide 6, "Additional State
Contributions Projected (6/30/2018)," which showed the
projected numbers of state contributions based on an
evaluation from July 30, 2018. He qualified that the
numbers would have been much higher in the absence of the
EGWP implementation.
Mr. Desai displayed slide 7, "Additional State
Contributions - History," which showed that from 2008
through 2020, the state had contributed about $7.5 billion
into the PERS and TRS systems.
Co-Chair Stedman asked if Mr. Desai could discuss the
recurring costs for employees and the unfunded liability.
Mr. Desai stated that the additional state contributions
helped the unfunded liability. Under PERS employers were
required to make a maximum 22 percent contribution, and
under TRS were required to make a 12.56 percent
contribution. The contributions were paid by the state and
went towards the unfunded liability.
Co-Chair von Imhof looked at the big contributions shown
for 2015. She had anticipated a jump and wondered what
could affect the numbers to go up in a short period of
time.
Mr. Desai stated that the numbers on the slide were
projected and amortized. If the amount was paid in a lump
sum, the unfunded liability was projected to be $6.6
billion in total. The numbers in the later years were more
cash-based and as a result were higher. The numbers were
consistent because they were based on the same rate of
expectation.
9:19:28 AM
Mr. Desai highlighted slide 8, "Investment Experience":
The actuarial value of assets was reinitialized to
equal fair value as of June 30, 2014. Beginning in
FY15, the valuation method recognizes 20% of the
investment gain or loss each year, for a period of
five years ("Smoothing").
Mr. Desai addressed a table on slide 8. In any given year
if the returns were higher than expected, only 20 percent
of the gain or loss would be recognized. The actual earning
rate of PERS and TRS for 2018 was about 8 percent. If
computed using the smoothing over a five-year period, the
amount would be 6.1 percent and 6.2 percent for PERS and
TRS respectively. He discussed rates for 2019, and the
smoothing effect.
Co-Chair Stedman asked if the unfunded liability was
calculated from the smoothing the actuarial value of the
assets.
Mr. Desai answered in the affirmative. He stated that any
time one viewed the actual value of the assets lesser the
earning rates, chances were that the funding ratio would
decrease at some level. He stated there were many other
factors included in the funding ratio.
Mr. Desai looked at slide 9, "Funded Status Valuation
Results ($000's)," which showed a table. He pointed out
that the slide showed the total funding results for PERS
and TRS. He pointed out that the funded ratio of PERS was
slightly higher in 2019, and the same was true for TRS.
Senator Wielechowski was curious about the dates for the
2019 draft amounts. He pointed out that the stock market
was up 30 percent for the last year. He wondered if
valuation of assets would increase.
Mr. Worley stated that valuation reports were dated as of
June 30, 2019; and only recognized half a year of
investment gains as mentioned by Senator Wielechowski. He
relayed that the second half would not be seen until the
June 30, 2020 valuation.
Mr. Desai addressed slide 10, "Funded Status Valuation
Results ($000's)," which showed a table with a breakdown of
the total, specific to the defined benefit pension plan. He
noted that in 2018, the actual funded ratio had dropped. He
added that the funded ratio for TRS had gone up.
9:24:33 AM
Senator Wilson asked for an explanation of the factors and
why PERS was reducing.
Mr. Desai recalled that in 2018 there had been an actuarial
experience study, which realigned all the factors. There
were many factors connected to determining the value of the
plans at any time. For 2018, the division had used an
expected rate of 7.3 percent, which had changed the
projection.
Co-Chair Stedman asked if the numbers were good or bad. He
wondered if people listening should be worried about
pension checks.
Mr. Desai thought the numbers were just numbers. He
mentioned federal guidelines as to how the plans were
supposed to be funded. He thought the good news was that
the state put a plan funding ratio in place ten years
previously. He thought it was important to understand that
although the ratios were changing, there was policy of how
to meet the state's obligation. Participants were receiving
benefits. He thought the ratio showed that the state had to
extend to meet benefits in the future. The good news was
that the state was targeting to meet the 100 percent
funding requirements by 2039, and the state had enough
funding to pay checks to participants. He did not think
participants had to worry about pension checks. He thought
people should be pleased that the state was committed to
making the plan 100 percent funded by a certain date and
already had plans in place.
Mr. Desai advanced to slide 11, "Funded Status Valuation
Results ($000's)," which showed a table. He pointed out
that under PERS the funded ratio went up for 2018 and 2019;
and there were similar results for TRS. He thought the
changes were a direct impact of the EGWP implementation.
9:28:54 AM
Co-Chair von Imhof thought in the past the committee had
heard the healthcare portion, rather than the pension
portion, had risen and incurred higher costs. She thought
it was good to see the state was over 100 percent of the
funded ratio. She asked what other efforts were being made
to control the healthcare cost curve. She mentioned
coordinated care and the continuum of care. She suspected
that the savings could get eaten up as the cost of
healthcare increased over the consumer price index (CPI)
each year. She was hoping to hear how the state was going
to maintain the funding ratios.
Co-Chair Stedman asked for commentary on the ability to
strengthen the pension side of things.
Ms. Ricci explained that particularly with the retiree
health plan, implementing changes had to be done incredibly
carefully. The EGWP had been available to the division for
at least six to ten years, but for a variety of reasons it
was not viewed as feasible. There was a narrow window of
success with any potential changes made. She stressed the
importance of being able provide the same or increased
level of benefit without adding to the unfunded liability.
She detailed that there were two paths the division was
continuing to pursue regarding health plan management. She
discussed the way the division contracted. She relayed that
she was one of twelve staff that was fully focused on
managing the health plans. The staff did not perform the
functions of the health insurer but did manage contractors.
Ms. Ricci continued to address Co-Chair von Imhof's
question. She stated that the division focused on
leveraging contracts to get the highest level of stability
and competitive advantage. She used the example of the
recent contract with Optimum RX that was implemented in
2019, which had an initial three-year period with up to six
one-year renewals. The contract allowed for initial
stability as well as annual leverage to renegotiate
pricing.
Ms. Ricci mentioned another $27 million in savings achieved
as a result of renegotiating contracts. Further savings
were expected to be negotiated at a mid-market check in two
months. The division wanted to achieve additional savings
in medical services through ensuring the best pricing and
value was achieved in everything that was negotiated.
9:33:47 AM
Ms. Ricci addressed another pursuit of the division. She
reiterated that the division, in addition to pursuing
savings, worked towards providing equal or better benefits
for retirees. Prior to the creation of the Retiree Health
Plan Advisory Board in 2018, the division did not have a
formal avenue to engage in the retiree community. A board
was established and was a mechanism through which the
division was pursuing additional changes. Some of the
changes were focused on modernizing the retiree health
plan. Health plans and benefit expectations had changed
since the last time the changes were considered twenty
years previously. There was a combination of changes that
would benefit members, such as adding preventive care and
looking at a lifetime maximum. The current lifetime maximum
was $2 million. In 2000, the amount was reasonable; but the
amount needed to be updated.
Ms. Ricci mentioned that any time benefits were added, it
was important to consider an offset to balance an
additional cost to the system. The division was focusing on
offsets that allowed the state to leverage its purchasing
power. She did not think the current plan design put the
state in the best position for negotiation with providers
or venders. The division was focusing on whether the plan
allowed the state to pay for what it wanted to receive. She
thought in some areas, the plan was designed in a way that
added cost but did not necessarily benefit members.
9:36:34 AM
Senator Wilson asked about over-funding of the defined
benefit plan. He asked about what the division or the ARM
board had in mind for the funding, and whether it could be
reinvested into the fund.
Mr. Worley stated that the division considered what to do
with the asset allocation of the overfunding. The subject
had been brought up by the ARM Board. He noted that pension
and healthcare were invested in a similar manner. He
pondered if there were ways to diminish risk on the
healthcare side. He pondered whether funds could be shifted
from health to pension, and informed that the shift was not
allowed due to Internal Revenue Service (IRS) code.
Co-Chair Stedman thought different risk level strategies
could be addressed in greater detail when there were
consultants before the committee. He thought it was nice to
have one side of the retirement system fully funded.
Senator Bishop commented that healthcare might be currently
overfunded, but if the state looked at increasing the
limit, the overfunding might evaporate.
Ms. Ricci stated that the division had to achieve a balance
between ensuring added benefits were offset by savings.
There were strict criteria outlined by the court that the
division used as a guide. She pondered that generally
healthcare costs continued to climb, and even if there were
no efforts to modernize the plan for the next ten years,
she anticipated there would be erosion in the funding
ration from the nature of healthcare cost inflation.
Co-Chair Stedman commented that there had been a problem as
Ms. Ricci described in the past, particularly with TRS.
9:40:43 AM
Mr. Desai looked at slide 12, "Historical Rate of Return
and Funded Ratio," which showed a table. He pointed out the
changes in assumed actuarial funding rates starting in
1996. After the actuarial study in 2018 there was
expectation of a funding ratio of 7.38 percent, which had
been used for calculations. The second column under PERS
showed actual returns, starting with 13.79 percent. He
pointed out the drop in the actuarially funded ratio in
2002. There were many factors involved in any change in the
ratio, but he thought the key point was that the red
numbers on the table correlated with a drop in the ratio.
One of the key factors was market returns.
Co-Chair Stedman thought the funding ratio for TRS had
increased, and PERS was also making progress; although
slow.
Mr. Desai agreed.
Mr. Desai spoke to slide 13, "Funded Ratio History (Based
on Actuarial Valuation Reports)," which showed a bar graph.
Since 2011 the ratio had been steadily going up. He
referenced Co-Chair von Imhof's earlier comments and noted
that in 2015, the additional state contribution of $3
billion dramatically brought the funding ratio to a higher
level. The rate was steady for the recent few years and he
hoped it would rise.
9:43:33 AM
Senator Hoffman noted there was a drastic drop of the
funded ratio from 2001 to 2002. He asked what measures the
division had made so that such a drop would not happen in
the future.
Mr. Desai stated that the ratio prior to 2002 was high and
reiterated that the numbers were questionable. There had
been measures put in place, and there was a secondary
actuary put in place to review the work of the primary
actuary. He noted that the ARM Board now met regularly, and
there were many components of the evaluation.
Co-Chair Stedman recalled that in 2002 when there was a
precipitous drop in the funding ratio, there had been
issues surfacing such as erroneous previous calculations
that had led to litigation. There had been a requirement by
the committee that the actuary was reviewed by another
actuary to avoid another similar situation. He thought the
numbers in the early part of the chart should be taken with
a grain of salt. He thought the line from 2002 showing a
drop down to 75 percent was a more accurate depiction. He
noted that the practice of having a secondary actuarial
review continued.
Mr. Desai noted that there was another significant drop; in
2001, 2002, and 2003 returns were very low. He pointed out
that in 2001 and 2002 the returns were negative. There was
an altogether loss of 30 percent of what was expected over
the three years.
9:47:46 AM
Mr. Desai referenced slide 14, "Unfunded Liability
PERS/TRS ($000's)," which showed a bar graph. He pointed
out the total unfunded liability of about $6.6 billion.
Co-Chair Stedman thought the state had been making some
progress from peaking at $12 billion in unfunded liability.
Mr. Desai stated that there had been good progress towards
lowering the unfunded liability. He thought, based on
studies that had been done, that the funds were more in
line with the rest of the marketplace. He thought there was
alignment of all the actuarial studies done in the past
year. He believed the trend going forward was positive, and
the state was moving in the right direction.
Mr. Desai turned to slide 15, "Employers and Additional
State Contributions Projection," which showed a flow chart
depicting the process of the allocation of projected
employer and additional state contributions. He noted that
the timeline showed how the rates were calculated using the
previous two years data. He pointed out that the rates for
2022 would be calculated using the 2019 valuation, which
would be completed by March 2020.
Co-Chair Stedman thought the slide related to Senator
Wielechowski's question regarding the calendar year versus
the fiscal year, and the rate of return. He thought the
higher returns would factor into the calculation for the
following year.
9:51:00 AM
Mr. Desai considered slide 16, "FY2021 Contribution Rates
DB Plans," which showed a table. He pointed out the 6.75
percent employee contribution. Police officers and fire
fighters contributed 7.5 percent, and school district
alternate options contributed 9.6 percent. Under TRS there
was a flat contribution rate of 8.65 percent. The employer
contribution was 22 percent under PERS and 12.56 percent
under TRS. He pointed out that the total required
contributions for FY 21 were 30.85 percent for PERS and
30.47 percent for TRS. The additional state contribution
was 8.85 percent.
Co-Chair Stedman discussed the state's contribution and
unfunded liability. He asked if the 22 percent was going
back to the municipalities or hospitals and PERS membership
programs.
Mr. Desai answered in the affirmative. He stated the
portion of the unfunded liability was paid from the 8.85
percent. Some portion of the 22 percent employer
contribution went toward the unfunded liability.
Mr. Desai displayed slide 17, "FY2021 Contribution Rates
DC Plans," which showed a table indicating that employees
contributed about 8 percent for both PERS and TRS. He
discussed contribution rates on the table. The remaining
portion of the 22 percent state contribution would go
towards the defined benefit plan's unfunded liability.
Co-Chair Stedman asked about the 0.7 percent contribution
for peace officers and fire fighters. He asked what benefit
would be delivered if something happened to a peace officer
or firefighter.
9:54:53 AM
KATHY LEA, CHIEF PENSION OFFICER, DIVISION OF RETIREMENT
AND BENEFITS, DEPARTMENT OF ADMINISTRATION, discussed her
background. She had worked in the division for 30 years.
She addressed Co-Chair Stedman's question regarding death
and disability benefits. Under the defined contribution
plan, there was only occupational death and disability.
Under the defined benefit plan, there was both non-
occupational and occupational death and disability. The
reason the peace officer and firefighter rate was a little
higher was due to a provision that other employees did not
have, and under occupational death and disability would
receive a percentage of current salary. at the time of
normal retirement, the disability ceased. Peace officers
could continue to receive the disability benefit by
forfeiting the investment account. All other employees had
benefits cease at normal retirement age.
Co-Chair Stedman asked about what would happen if there was
a death on the job.
Ms. Lea stated that for an occupational death, the
survivors would have the choice to receive a monthly
benefit payment based on a percentage of the salary of the
peace officer or firefighter. The benefit would be received
until the normal retirement age of the employee; at which
point the death benefit would stop and the contribution
account could be drawn down for benefits. The employer
would pay the employer and employee contributions to a
separate account established at the time of death.
9:58:41 AM
Co-Chair von Imhof wanted to point out that there was a
'Health Care' line on the table on slide 17 that was
different that was different than state payment of monthly
healthcare premiums. She thought the state paid more than
1.27 percent of an active monthly healthcare cost.
Ms. Lea asked if Co-Chair von Imhof was referring to
retiree health care.
Co-Chair von Imhof asked what the state paid for retiree
health care.
Ms. Ricci addressed Co-Chair von Imhof's question. She
relayed that the state paid a per-member per-month amount
for employee health insurance, in the amount of $1550.
There were only about 60 participants in the defined
contribution health plans for retirees, which had been set
up three years previously. The premiums established for the
plan reflected actuarial expectations rather than the
reflecting the actual experience of the plan. She continued
that depending on the various defined contribution
retirees' personal circumstances, members may be
responsible for a certain percentage of the premium upon
retirement.
Co-Chair von Imhof would follow up with Ms. Ricci at a
later time regarding healthcare costs and the state's
responsibility for active employees and retirees.
Mr. Desai highlighted slide 18, "Contribution Rates
History," which showed two line graphs with contribution
rates for PERS and TERS from 2008 to 20201. He explained
that the flat rate on the top chart was 22 percent. The
orange line showed the gap between the 22 percent and the
required rate for each year. The chart illustrated how much
additional state contributions were put into the pension
systems.
10:02:59 AM
Mr. Desai looked at slide 19, "Projected Pension Benefit
Recipients," which showed a line graph. He noted that the
slide had been modified from previous presentations to show
more information. He noted that the slide showed the count
of pension recipients by year and when the numbers would
peak. It was projected in 2020 that the state would be
paying over 50,000 retirees by the end of the year. The
highest number of people to be receiving benefits from both
systems would be in 2028, which included retirees,
beneficiaries, and disabled retirees.
Mr. Desai addressed slide 20, "Projected Pension Benefits
Payment ($000's)," which showed a line graph. He noted that
the orange line showed that in 2020 the state would be
paying about $1.4 billion a year in pension benefit
payments for PERS and TRS. By 2036, the number would peak
at about $2 billion per year; after which the number was
expected to decline.
Senator Wilson asked about the average timeframe of when an
employee retired until no longer on PERS and TRS. He
wondered if the average age had changed in recent years.
Mr. Desai did not have the numbers at hand. He offered to
get back to Senator Wilson with the information.
Co-Chair Stedman asked if it was possible to get a
breakdown of what percentage of the projected 2020 pension
benefits payment was going to residents versus non-
residents.
Mr. Desai stated that he could provide the information
broken down as described. He continued that more than 40
percent of retirees lived out of state.
Co-Chair Stedman asked for historical information on the
number of retirees living out of state so as to see a
trend.
10:06:08 AM
Co-Chair von Imhof hoped to combine slide 20 and slide 6,
which showed additional state contributions. She considered
the orange line that showed a peak in payments in 2036. She
asked if the amounts shown on slide 6 were expected
payments for the out years.
Mr. Desai answered in the affirmative. He explained that
the division looked at the total assets of both plans. The
total assets of the plan would be used until the last
payment was made to the last retiree. He calculated that if
the state had a fully funded plan by 2039, the assets would
be at a different level. There was not a direct connection
between the slides. He discussed using a pie chart to
calculate the unfunded liability piece of payments.
Co-Chair Stedman thought the unfunded liability was re-
amortized every year.
Mr. Worley explained that in 2014, after the initial $3
billion contribution to PERS and TRS there had been a
provision to re-amortize at a 25-year level, which set the
payout at 2039. Most recently, through the experience study
(recently adopted by the board) there was a move to start
adding layers. The division would create a new 25-year
layer each fiscal year there was an evaluation report done.
Co-Chair Stedman asked if the change would decrease the
annual cash-flow requirements to feed the unfunded
liability.
Mr. Worley stated that the division expected to pay off the
unfunded liability by 2039; but the smaller layers could
push the date out. The smaller layers could go away if the
fund had a good year.
10:10:10 AM
Co-Chair von Imhof thought it would be helpful to look at
variables such as peak population. She focused on how much
the state owed. She asked about options for planning future
funding.
Mr. Desai stated that based on the current requirement, the
division could consider the goal under statue, that both
plans would be funded at 100 percent by 2039. He stated
that the division looked at the entire picture every four
years, in order to determine expected contributions.
Factors such as age and life expectancy were considered. He
referenced slides 9 and 10, which showed a change in the
funded ratio as a result of a study.
Co-Chair Stedman asked if the expectation of payoff by 2039
was in statute.
Mr. Desai answered in the affirmative. He reiterated Mr.
Worley's remarks about adding additional layers every 25
years, which would help stabilize additional state
contributions.
Senator Wielechowski compared slides 19 and 20. He asked
why the number of pension recipients seemed to peak in
2028, but the benefits peaked in 2036.
Mr. Desai stated that one explanation could be that once a
participant retired, the state was obligated to provide
cost of living adjustments and post-retirement benefits
based on the CPI Index adjustments. Once a participant
retired, benefits would increase.
Co-Chair Stedman asked Mr. Desai to provide additional
detail at a later time.
Mr. Desai advanced to slide 21, "Health Care Cost Trend
Rates," which showed a table with trend rates from 2019
until 2050. The information had been requested the previous
year and showed pre-65 and post-65 projected medical cost
rates. He mentioned the rising cost of healthcare.
10:15:56 AM
Mr. Desai looked at slide 22, "Termination Studies and
Termination Costs,"
Summary of Termination Cost
? Cost of the actuarial study paid by employer
? Cost to fund future benefits for employees being
removed from coverage
? Ongoing Contributions required until unfunded
liability is extinguished
Source: Buck - Trend rates used in the 6/30/18
valuation were updated from the 6/30/17 assumption
Co-Chair Stedman noted that he had requested the
information on the slide. He mentioned that termination
studies were an important topic at the local level and had
significant fiscal impacts. The next slide had an example
that would provide an idea of magnitude.
Mr. Desai recognized that Ms. Lea was retiring after
working for the division for 30 years.
Co-Chair Stedman thanked Ms. Lea for her service.
Ms. Lea thought one confusing piece of termination studies
was the idea that it was a new requirement. She noted that
termination studies had been part of the plan since its
inception in 1961. She explained that the purpose of a
termination study was to assess the change in retirement
behavior that occurred with employee being removed from
participation. She mentioned predicting costs and setting
employer rates. Studies had shown that people did not
generally retire at the first possible retirement date and
worked for an additional four years. The funding was set up
to be fully paid after the retirement date. Once an
employer terminated a group, classification, or department;
it changed the behavior of prospective retirees. There was
a gap in funding between the anticipated date used by the
actuary (to fully fund the benefit) and the actual date the
member would retire.
Ms. Lea continued that as part of the termination process
the state vested unvested employees in benefits. In the
defined benefit plan an employee would be vested in the
pension, whether the employee had five years of service or
not. In the defined contribution plan the employee would be
vested in the employer contributions. An employer still had
to have ten years of service to be eligible the retiree
health plan. When an employer terminated a group or
classification, it created unfunded liability. Prior to
2008, each employer had its own contribution rate. In 2008,
PERS was changed to a cost-share plan. An additional
requirement was placed on employers to pay ongoing
contributions to the plan based on past service costs of
the terminated employees until the plan was fully funded in
2039.
Ms. Lea discussed the three components of costs of a
termination study. There was the cost for an actuary to do
the study, which was paid by the employer. There was the
cost determined by whatever change in retirement behavior,
and the cost of ongoing contributions to the plan.
Co-Chair Stedman stated that the following slide would
provide a real example, and he had asked for the division
to use the Sitka Community Hospital, because it had just
done a termination study.
10:22:37 AM
Mr. Worley spoke to slide 23, "Termination Costs Recent
Example":
Sitka Community Hospital
? Terminated from PERS on July 31, 2019
? Purchased by SEARHC
? City and Borough of Sitka responsible for annual
past service cost payment until PERS is fully funded
? Termination costs as of July 31, 2019 paid by Sitka
Community Hospital
? Continuing past service costs are paid by the CBS
based on the past service cost percentage calculated
each year during the annual actuarial valuation report
Source: Buck - Trend rates used in the 6/30/18
valuation were updated from the 6/30/17 assumption 23
Mr. Worley explained that the initial termination cost to
have the study done was in excess of $700,000. The amount
was determined based on work done with the hospital and had
been paid to the state some months past. There was a
continuing cost to the plan, which amounted to payroll and
past service costs. Each year there was an evaluation
report done, and actuaries determined annual cost and past
service cost. For FY 21 the past service cost was 18.23
percent. For FY 22 the past service cost was estimated to
be 16.6 percent.
Co-Chair Stedman asked if the annual cost and past service
cost amounts would be discussed in dollars.
Mr. Worley recalled that the payment was approximately
$200,000 per year, and the payment would continue until
2039. He reminded that the City and Borough of Sitka was
liable for the amount.
Co-Chair Stedman thought there was one more component to
discuss.
Mr. Worley stated there was three costs: the cost of the
study, the termination cost, and the annual payment of the
salary times the past service cost (billed to the city).
Co-Chair Stedman thought the cost of the actuary varied by
the size of the entity and number of people. He asked what
kind of cost range a community could expect.
Mr. Worley estimated a community could expect a cost of
$2,000 to $8,000, depending upon the size of the employer.
10:27:11 AM
Co-Chair von Imhof worried that termination studies might
de-incentivize small communities from downsizing staff
because it might be onerous. She asked if Ms. Lea had seen
evidence of such.
Ms. Lea stated that the division heard what Co-Chair von
Imhof mentioned frequently. The cost of the study and the
termination liability did not appear to be a big issue with
communities; but the ongoing contribution that was
problematic. The division had heard back from cities and
school districts that the cost was a problem area. She
thought some had chosen not to take a downsizing approach
because of the cost.
Co-Chair von Imhof asked if there were thoughts to help
alleviate some of the concerns. She thought it was a
perverse incentive to give local communities the
flexibility to manage budgets and personnel. She used the
example of school districts that were trying to free up
money.
Co-Chair Stedman asked for assistance in differentiating
between PERS and TRS in the termination study issue.
Ms. Lea noted that TRS did not have termination studies.
Teachers were mandated into the plan and there was no
option for school districts to remove groups of employees.
Non-classified employees were part of the PERS plan.
Co-Chair Stedman thought the most important topic was the
unfunded liability.
Senator Wilson asked if the state continued to assist in
payments of non-state PERS employees after termination
until PERS was fully funded.
Ms. Lea replied that when a non-state employee was
terminated from participation, the employer was responsible
to pay the ongoing liability for the salary times the past
service cost each year.
10:31:00 AM
Senator Hoffman wanted to ask about the additional funds in
the retirement program such as the Supplemental Benefits
System (SBS) and deferred compensation. He wondered how
much money was being managed under the two programs. There
was concern that the two funds were inaccessible to
individuals until retirement. He thought it should be an
individual's decision to access a deferred compensation
fund. He thought it was a mistake to design the program in
such a way and thought there would be individuals not
participating in deferring income because of the lack of
access.
Senator Hoffman pondered that the state did not know
individuals' reasons for managing funds in a certain way.
He thought that the administration should be looking at
modifying the retirement plan submitted to the federal
government to reassess whether deferred compensation would
be accessible to individuals before retirement. He thought
there was little incentive for state employees to
participate in the deferred compensation program if the
income was tied up for decades. He thought the decision on
deferred comp was a mistake. He wanted the decision
reevaluated.
Co-Chair Stedman asked for Mr. Desai to get back to Senator
Hoffman regarding his question, as well as with information
on additional federal requirements.
Senator Hoffman understood that most other states did not
require deferred compensation be held by the state until
retirement. He asked for information about what other
states did with regards to deferred compensation.
10:35:22 AM
Ms. Lea stated that SBS and Deferred Compensation were tax
qualified plans and were ruled by the IRS. She continued
that SBS was a social security replacement plan, and the
state had no flexibility for accessing funds prior to
termination of employment. There was a required 60-day
waiting period after termination. Under the Deferred
Compensation plan, a 457b plan could not be accessed while
in service by any other means than by a loan. If a plan had
a loan feature, it could loan money to a member that was
required to be paid back. She reminded that a deferred
compensation plan could not be accessed (per IRS rules)
until termination of employment.
Senator Hoffman understood that other states had not
included deferred compensation in retirement plans. He
understood that an individual had to show extreme financial
hardship to obtain the loans referenced by Ms. Lea.
Co-Chair Stedman asked Ms. Lea to discuss the availability
of loans and the interest rate. He thought that the
interest rate might go into one's own account upon
repayment.
10:38:04 AM
Ms. Lea addressed Senator Hoffman's question. She noted
that the plan currently had a hardship provision. The plan
was a standard 457b plan, which was an IRS designation for
a deferred compensation plan. The hardship provisions were
part of the plan, and in order to receive funds it was
required to meet federal definitions for an event or
occurrence that was unforeseeable and for which there was
no other funds. She noted that the hardship area of the
plan was watched carefully by the IRS. The state's plan did
not have a loan option, which could be instituted depending
upon the philosophy towards the deferred compensation plan.
From a retirement perspective, a loan option reduced the
amount of money for distribution at retirement and was not
favored by the state. The situation was different for
deferred compensation plan members versus defined
contribution plan members.
Ms. Lea noted that in conversation with other states and
municipalities, it was found that loan programs were
expensive and required tracking and charging of interest.
She was happy to provide the information on a potential
loan program for the committee to consider.
Senator Hoffman strongly opined that the decision to defer
income should be left to the employee. He did not think the
government should be concerned with employee management of
deferred compensation funds that were voluntarily
contributed. He thought there was very little incentive for
people to put funds into a deferred compensation program.
He thought that the state had made it hard for individuals
to participate in a deferred compensation program.
10:42:32 AM
Co-Chair Stedman reiterated the request for information
about the aggregate balance and other information about the
deferred compensation program. He recalled that if there
was a loan provision that was used incorrectly it would be
possible for the IRS to disqualify the whole plan. He
thought there were strings attached to the loan program. He
suggested that the division provide research on the
programs and exposure to the employer if the option was
left to run amok.
Senator Wielechowski asked if employees in the defined
contribution tier were subject to the federal windfall
elimination provision that lessened social security
benefits the employee might have.
Ms. Lea answered "yes."
Co-Chair Stedman thought social security was a whole
different topic. He asked Ms. Lea to provide the IRS
regulations on the topic.
Senator Wielechowski thought a person had to have 30 years
accrued benefits to qualify. He thought even a couple of
years in a defined contribution program would lessen a
person's social security benefit. He asked if there had
been discussion about going back to social security in the
state.
Ms. Lea stated there had been discussion from time to time
regarding going back to social security, but it would
require a referendum vote by the employees as SBS was
chosen in lieu of social security by such a vote. She
stated that if a person had time with a defined
contribution plan, the earnings and length of time would
dictate any offset to a social security benefit.
10:45:49 AM
Senator Bishop discussed termination studies through the
example of an employee the City of Galena. He described a
hypothetical scenario in which a person was a Tier 2 PERS
employee in the defined benefit plan. The person left
Galena to work for the North Star Borough in Fairbanks. He
asked if Galena would still be paying on behalf of the
person for a termination study.
Ms. Lea stated that the City of Galena would continue to
pay the ongoing contributions based on the salary from
Galena until the past service was completed.
Co-Chair Stedman pointed out that the termination was
different than when an employee quit and moved to another
employer. He thought Senator Bishop was asking if someone
changed employment, it was different than if the city
terminated the participation in PERS.
Ms. Lea stated that if an employee terminated employment
with one employer and moved to another, each employer paid
their share in the form of the 22 percent for the benefits
accrued. In the cost-share plan, all employers paid 22
percent.
Senator Bishop did not think the situation was fair to the
City of Galena. He thought it appeared as though the
employee was double-dipping, since the employee was still
in the system and contributing.
Ms. Lea stated that an employee had accrued service earned
through the first employer and would anticipate to receive
payments based on the years of service accrued with the
first employer. She asserted that the fact that the
employee was still making contributions did not negate the
liability for the years served with the first employer. The
new employer would begin making contributions on the
employee's behalf for service starting at the time of hire.
10:49:00 AM
Senator Wielechowski asked if Ms. Lea was aware of any
states in which in public employees did not have a defined
benefit plan and also did not get social security.
Ms. Lea stated that there were many TRS teachers in other
states that were not in social security like teachers in
Alaska. Some, particularly universities, had defined
contribution plans and were neither in social security nor
a replacement plan.
Co-Chair Stedman understood that teachers under TRS could
vote to opt out of the program and go back into social
security.
Ms. Lea affirmed that with a referendum vote, teachers
could choose to go back into social security. The change
could be done on a district by district basis.
Senator Wielechowski asked if there were public employees
other than teachers in the country that did not have a
defined benefit plan or social security.
Co-Chair Stedman asked Ms. Lea to provide the information
at a later time. He thought it was a good to have some
comparative data. He had heard that there had been some
participants in which a termination study had exceeded the
value of the community due to the small size.
Co-Chair Stedman shared a concern that municipalities had
not closed out departments to shed liability back to the
state. The legislature had tried to figure out how to deal
with the issue of liability.
Co-Chair Stedman discussed the agenda for the following
day.
ADJOURNMENT
10:54:01 AM
The meeting was adjourned at 10:54 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 021320 DOA_PERS_TRS_Overview_2020_DRAFT_v6-Final.pdf |
SFIN 2/13/2020 9:00:00 AM |
PRS/TRS |