Legislature(2023 - 2024)SENATE FINANCE 532
02/14/2023 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Alaska Retirement Management Board | |
| Presentation: Prs/trs Funding Update | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE FINANCE COMMITTEE
February 14, 2023
9:01 a.m.
9:01:14 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:01 a.m.
MEMBERS PRESENT
Senator Donny Olson, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Click Bishop
Senator Jesse Kiehl
Senator Kelly Merrick
Senator David Wilson
MEMBERS ABSENT
Senator Lyman Hoffman, Co-Chair
ALSO PRESENT
Pam Leary, Director, Treasury Division, Department of
Revenue; Bob Williams, Chair, Alaska Retirement Management
Board; Alysia Jones, Alaska Retirement Management Board
Liaison Officer, Treasury Division, Department of Revenue;
Ajay Desai, Director, Division of Retirement and Benefits,
Department of Administration; Kevin Worley, Chief Financial
Officer, Division of Retirement and Benefits, Department of
Administration; Betsy Wood, Acting Chief Health
Administrator, Division of Retirement and Benefits,
Department of Administration.
PRESENT VIA TELECONFERENCE
SUMMARY
PRESENTATION: ALASKA RETIREMENT MANAGEMENT BOARD
PRESENTATION: PERS/TRS UPDATE
Co-Chair Stedman reviewed the agenda. He commented that the
committee would consider a comparison of the retirement
systems towards the end of the following week.
^PRESENTATION: ALASKA RETIREMENT MANAGEMENT BOARD
9:02:58 AM
PAM LEARY, DIRECTOR, TREASURY DIVISION, DEPARTMENT OF
REVENUE, introduced herself and her team. She discussed a
PowerPoint presentation entitled "Alaska Retirement
Management Board Overview," (copy on file).
Ms. Leary looked at slide 2, "Agenda":
• Background & Mission
• Organizational Structure
• Board Duties & Statutes
• Meetings & Decision-Making Process
9:03:36 AM
Ms. Leary spoke to slide 3, "Background":
• The Alaska Retirement Management Board (ARMB) was
established on October 1, 2005, as fiduciary of the
assets of the state's retirement systems, replacing
the Alaska State Pension Investment Board (ASPIB).
• The board's primary mission is to serve as trustee
of the assets of the state retirement systems:
• Public Employees' Retirement Trust Funds (PERS)
• Teachers' Retirement Trust Funds (TRS)
• Judicial Retirement Trust Fund (JRS)
• National Guard and Naval Militia Retirement
Trust Fund (NGNMR)
• State Deferred Compensation Plan
• State Supplemental Benefits System
9:04:38 AM
BOB WILLIAMS, CHAIR, ALASKA RETIREMENT MANAGEMENT BOARD,
introduced himself and discussed his background. He had
been on the board since 2016.
Mr. Williams referenced slide 4, "Board Composition":
• Nine Members
• Commissioners of Administration & Revenue
• Seven members appointed by the Governor
• Qualify for permanent fund dividend
• Recognized competence in investment management,
finance, banking, economics, accounting, pension
administration, or actuarial analysis
• Two PERS and two TRS members, each selected from a
list of four nominees submitted from PERS and TRS
bargaining units
• Two members of the general public
• One member employed as finance officer for a
political subdivision
• Other than commissioners, members serve staggered,
four-year terms
9:06:40 AM
Mr. Williams turned to slide 5, " Board Composition cont.:
• Bob Williams (TRS), Chair
• Allen Hippler (Public), Vice Chair
• Michael Williams (PERS), Secretary
• Lorne Bretz (Finance Officer)
• Adam Crum (DOR Commissioner)
• Donald Krohn (Public)
• Dennis Moen (PERS)
• Sandra Ryan (TRS)
• Paula Vrana (DOA Commissioner)
9:06:52 AM
Ms. Leary considered slide 6, "Organizational Structure,"
which showed a flow chart that illustrated the organization
of the ARM Board. She explained that the board was
established in the Department of Revenue (DOR) and the
Treasury Division staff were the board staff. The Division
of retirement and Benefits administered the plans. The
assets were managed under the Treasury division and the
liabilities were managed by the Division of Retirement and
Benefits. She highlighted that the bottom of the flow chart
showed key advisors that worked with the board. She said
that KPMG was the external auditor for both the treasury
Division and the Division of Retirement and Benefits. She
shared that Callan LLC provided performance measurement and
investment consulting.
Ms. Leary cited that IAC stood for Investment Advisory
Council, which served the purpose of advising the board on
investments. She highlighted that all IAC members possessed
expertise in investment management. Per statute, the
council was permitted to have 3 to 5 members and currently
had 3. The review actuary was Gabriel, Roeder, Smith, and
Company (GRS) and the role of the review actuary was to
review and certify the results of all actuarial assumptions
prepared by the primary actuary, which was Buck Global
Consulting. She Shared that the audit actuary, contracted
by the state no less than every 4 years, was also GRS. She
continued to discuss the boxes under the green box on the
right-hand side of the slide titled, Liabilities. She
detailed that Buc was the primary actuary and the board
coordinated with the Division of Retirement and Benefits to
have an annual actuarial evaluation of each retirement
system. She said that the primary actuary also conducted
experience analysis of the retirement systems not less than
once every 4 years. Third party administrators would be
discussed later in the presentation.
9:10:10 AM
Ms. Leary displayed slide 7, "Key Advisors:
• Investment Consultant (General & Real Assets):
Callan LLC
• Investment Advisory Council
• Primary Actuary: Buck
• Review Actuary: GRS
• Audit Actuary: GRS
• Auditors: KPMG
• Department of Revenue (DOR) Staff
• Division of Retirement & Benefits (DRB) Staff
• Department of Law
9:10:17 AM
Ms. Leary highlighted slide 8, "Summary of ARMB Duties":
• Establish Investment Policies
• Establish Asset Allocation
• Provide Investment Options
• Monitor Performance
• Review Actuarial Earnings Assumptions
• Set Contribution Rates of Employers
Ms. Leary noted that the slide gave a high-level overview
of the boards duties. She explained that the annual
establishing asset allocations was based on review of
capital markets, risk tolerance, time horizon, and peer
assumptions. She relayed the details related to the duty
bullet points.
9:12:06 AM
Co-Chair Stedman asked for more detail regarding normal
cost of liabilities.
Ms. Leary deferred the question to the Division of
Retirement and Benefits.
Co-Chair Stedman explained that normal costs were ongoing
annual costs related to payroll checks.
9:12:49 AM
Ms. Leary looked at slide 9, "Board Statutes & Duties,":
AS 37.10.210 Alaska Retirement Management Board
• Make investments as a fiduciary of a state fund
under AS 37.10.071
• Serve as trustee for pension and retiree health
trusts, the State of Alaska Supplemental Annuity
Plan, and Deferred Compensation programs
• Manage and invest assets in a manner that is
sufficient to meet the liabilities and pension
obligations of the systems
AS 37.10.071 Investment Powers & Duties
• Secure safe and adequate custodial facilities for
assets; maintain accounting records in accordance
with Generally Accepted Accounting Principles (GAAP)
• Exercise the powers of an owner of these assets
• Concentrate or diversify investments as appropriate
• Delegate investment, custodial, and depository
authority to employees of the state and to external
firms
• Utilize consultants, advisors, custodians,
investment services, and legal counsel
• Apply the Prudent Investor Rule and exercise duty in
the sole financial best interest of the
beneficiaries
Co-Chair Stedman offered the background that there had been
separate boards for PERS, TRS, and managing assets in the
past, which meant responsibility for liabilities and assets
was kept separate. Currently the ARM Board had
responsibility for both.
9:14:24 AM
Ms. Leary addressed slide 10, "Board Statutes & Duties
cont.," which cited AS 13.36.230 290 (Prudent Investor
Rule) and gave a consolidated list of what was stated in
the Prudent Investor Rule:
AS 13.36.230 290 (Prudent Investor Rule)
• Consider the purposes and requirements of the trust
• The risk and return objectives should be reasonably
suited to the trust
• Investment decisions should be evaluated in the
context of the portfolio as a whole
• Make a reasonable effort to verify the facts
relevant to the investment and management of assets
• Diversify
• Prudently delegate scope of delegation,
periodically review actions to monitor performance
and compliance with terms
• Incur reasonable and appropriate costs
Co-Chair Stedman asked for Ms. Leary to expand on the
evolution of the Prudent Investor Rule.
Ms. Leary explained that the Prudent Man Rule was in place
through the 1960s and was replaced in the 1990s with the
Prudent Investor Rule. The rule stated that and stated that
the individual that was the fiduciary of a trust should
invest and manage the trust similarly to a prudent investor
with the same type of management capabilities.
Co-Chair Stedman added that the prudent investor referred
to a professional in the field, whereas the prudent man
referred to the common man on the street.
Ms. Leary agreed that the Prudent Investor Rule elevated
the capabilities to someone who was a professional in the
field.
Co-Chair Stedman shared that the issue had come up when
discussing the structure of the Power Cost Equalization
(PCE) fund. He noted that there were other portfolios in
the state that fell under the same credence.
9:16:51 AM
Senator Bishop asked about the last bullet on slide 10. He
asked how long the board had used KPNG for auditing and
whether bids went out to other contractors for audits.
Ms. Leary responded that KPNG contracted with the Division
of Retirement and Benefits for over 20 years. She said that
contracts went out to bid frequently and the contract had
just reupped within the last two years.
9:18:06 AM
ALYSIA JONES, ALASKA RETIREMENT MANAGEMENT BOARD LIAISON
OFFICER, TREASURY DIVISION, DEPARTMENT OF REVENUE,
introduced herself and discussed her background. She
advanced to slide 11, "ARMB Meetings," which showed an
illustration of the board meeting schedule. She noted that
the board met quarterly to perform their fiduciary duties.
Typically, meetings were two days in length and included
presentation from key advisors, legal counsel, committee
chairs, staff of both Treasury and the Department of
retirement and Benefits, and investment managers. The chart
showed the key duties of the board and when the timeframe
for execution of duties. She noted that some of the tasked
listed under the purple chevron occurred annually and
others every few years, with timeframes noted on the slide.
She said that additional meetings could be held for issues
that arose outside of the normally scheduled meeting
schedule.
9:19:57 AM
Ms. Jones looked at slide 12, "ARMB Committees:
• Committees are established by the board to assist
with completing board business
• Committees are not authorized to act on behalf of
the board, but provide in depth review, research,
and recommendations to the board
• Current standing committees:
AUDIT
Michael Williams, Chair
Provides independent oversight of the integrity of the
ARMB's financial statements and reporting systems of
internal controls, and compliance with legal and
regulatory requirements.
DC PLAN
Bob Williams, Chair
Has the authority to research, review, and recommend
policies and procedures that it believes may be
beneficial to the members of the retirement systems,
or that represent best practices, or that result in
efficient administration of the defined contribution
plan for public employee members and teachers.
ACTUARIAL
Allen Hippler, Chair
Assists the board in fulfilling the board's function
of independent oversight of the integrity of the ARMB
retirement systems' actuarial valuations, experience
analyses, and other requested reports and analysis,
including compliance with legal, accounting, and
regulatory requirements.
OPERATIONS
Dennis Moen, Chair
Considers input from outside sources as well as the
Department of Revenue (DOR) for the purpose of making
recommendations to the board on the following matters:
(a) an annual operating budget for the board; (b)
salary considerations for DOR staff who work on
matters relating to the board and the funds
administered by the board; and (c) policies and
procedures relating to the functioning of the board.
9:22:29 AM
Ms. Jones showed slide 13, "Decision Making Process," which
showed a flow chart that illustrated a high-level overview
of the boards decision-making process. She explained that
the process was multi-phased and involved input from key
advisors, plan members, and other interested parties. She
said that the input was then funneled to the appropriate
committee for review, followed by making a recommendation
to the board. She said that once the committee made a
recommendation to the board, additional discussion could
occur before the decision was made whether to adopt the
recommendation.
9:23:34 AM
Senator Kiehl asked about the board conducting evaluations
of each employer.
Ms. Leary replied that the division would go into further
detail but that schedules of evaluation for each employer
were determined by the board. She noted that liabilities
were one of the areas of evaluation.
Senator Kiehl understood that the state had moved to a
pooled plan due to difficulty in apportioning the
liabilities among participant employers in the plan. He
wondered why the money was being spent now.
Co-Chair Stedman asked for clarification of the question.
He asked whether Senator Kiehl was referring to the
consolidation of contributions for all communities.
Senator Kiehl thought he needed further information on the
matter to craft his question.
Ms. Leary interjected that the assets were managed together
in various investment options. The liabilities of the plan
rolled up into different employers. She said that the
differentiation based on the Government Accounting
Standards Board (GASB) was what was reviewed in the
evaluations.
Co-Chair Stedman noted that there was an appendix to the
presentation that pertained to the timeline for valuations.
Ms. Jones said that the timeline for the June 30, 2022,
valuations had been included at the end of the presentation
as a reference for the committee.
Co-Chair Stedman asked Ms. Jones to walk the committee
through the timeline.
9:27:00 AM
Ms. Leary turned to slide 16, which showed the timeline for
June 30, 2022, valuations. She explained that the actuaries
did preliminary evaluations, which were the reviewed by the
board, and then returned to the actuaries. She said that
the Division of Retirement and Benefits would go through
the components. She said that in the end the valuations
would be used to forecast funding and other assumptions.
Co-Chair Stedman hoped to discuss the delay factor when
accumulating the data.
9:28:24 AM
Senator Kiehl recalled a previous discussion of the normal
cost rate contribution for healthcare and wondered whether
the issue would come up in the presentation.
Co-Chair Stedman thought the current year's budget
recommendation was to skip the contribution for healthcare.
He warned that markets did not always perform as predicted,
which could result in underfunding healthcare. He suggested
that if healthcare was overfunded in a budget year the
extra funds could go to the underfunded pensions.
Mr. Williams shared that the ARM Board decided to zero out
the normal healthcare cost in 2021, as well as in 2022,
because it was overfunded. Prior to 2006, the healthcare
and pensions were mixed, until the Internal Revenue Service
had indicated the systems had to be separate. He said that
money could not be moved from one to the other. He stated
that the health trust was currently overfunded.
Co-Chair Stedman asked about the meaning of EGWP.
Mr. Williams explained that EGWP was a federal subsidy that
helped with the health plan. He thought the following
presentation would show the overall cost for PERS and TRS
for the state had increased over time. He understood Co-
Chair Stedmans idea of moving funds from healthcare to the
pension but that the legislature would have to craft
legislation directing the board to do so.
Co-Chair Stedman relayed that the committee could continue
the discussion with the next presenter.
9:32:38 AM
Mr. Williams added that in the 2021 and 2022 votes by the
board, he had voted yes twice, but reluctantly.
9:33:30 AM
Senator Bishop relayed that he had brought up the topic of
overfunding a year previously. He mentioned his experience
with the union pension trust. He expressed the philosophy
that it was not possible to be overfunded.
Mr. Williams shared Senator Bishop's concern. He had
questioned why there were so many actuaries. He said that
the board had worked to explore what had happened with PERS
and TRS in the past. He related that there were unknowns
such as the rate of return.
Co-Chair Stedman thanked the testifiers for their time.
^PRESENTATION: PRS/TRS FUNDING UPDATE
9:37:04 AM
Co-Chair Stedman commented on the importance of the subject
matter but noted the limit time left in the current
meeting.
9:37:35 AM
AJAY DESAI, DIRECTOR, DIVISION OF RETIREMENT AND BENEFITS,
DEPARTMENT OF ADMINISTRATION, introduced himself. He
discussed his background. He had been with the department
since January 2017. He introduced his staff.
9:39:14 AM
Mr. Desai discussed a presentation entitled "Presentation
to the Senate Finance Committee" (copy on file). He looked
at slide 2, "Organization PERS / TRS," which showed a
graphic illustrating the two state departments (Department
of Revenue and Department of Administration) and the ARMB
that worked together to facilitate the PERS and TRS
programs.
9:40:16 AM
Mr. Desai spoke to slide 3, " Membership (as of June 30,
2022)," which depicted participation under both TRS and
PERS systems, for active, inactive, and retired members,
broken down by tier He relayed that there was a total of
about 104,000 participants in the PERS/TRS systems. He
pointed out 27 percent active members fell under Defined
Benefit (DB) plans and 73 percent fell under Defined
Contribution (DC) plans.
9:41:17 AM
KEVIN WORLEY, CHIEF FINANCIAL OFFICER, DIVISION OF
RETIREMENT AND BENEFITS, DEPARTMENT OF ADMINISTRATION,
introduced himself and discussed his background.
Mr. Worley referenced slide 4, "Investment Experience,"
which showed a table with a comparison of the data from the
Buck Actuarial Valuation Report as of June 30, 2021, and
2022. He referred to first line, showed the assumed
actuarial rates of return, which had been adopted by the
ARM Board for the calculation of the accrued liability for
PERS and TRS. He explained that the department had recently
completed an experience study, which was required every 4
years. In 2021 the actuarial rate of return was 7.38
percent and the board had recently adopted a reduced rate
of return of 7.25 percent.
Co-Chair Stedman asked for the testifiers to refrain from
using acronyms as much as possible, and to define complex
terms.
Mr. Worley described that the actuarial rate of return was
the rate of return used to determine the present value
calculation of liabilities in the plan. He explained that
the actuaries looked at the cost incurred to pay off
pension and healthcare cost going forward and would present
value the cost in current dollars. He said that any of the
investments that DOR was investing for PERS and TRS would
be assumed to have a rate of return of 7.25 percent. This
was the primary assumption used in the valuation reports.
9:44:26 AM
Co-Chair Stedman understood that if the assumed targets
were met unfunded liability would not be incurred.
Mr. Worley answered in the affirmative.
Co-Chair Stedman thought it was important to differentiate
between the unfunded liability and the normal yearly cost
of employees. He believed that people new to the
legislature would benefit from the clarity.
Mr. Worley reminded the committee that the assumption on
the page was one of over thirty used in the creation of the
report. He addressed the second line on the table on slide
4, which showed what was based on fair market value of
assets. He cited that fair value was what the price the
asset would sell for on the open market. He said that the
30 percent assumption of 2021 had dropped to -6 percent in
2022, which resulted in a loss to the plan. He noted line 3
showed that the smoothing happened over a five-year period,
and using the smoothing method 11.6 percent was projected
for 2021, and 8.7 percent in 2022. Beginning in 2015, the
valuation method recognized 20 percent of the investment
gain or loss each year for five years. The slide indicated
that the actuarial value of assets was reinitialized to
equal fair value as of June 30, 2014, with the $3 billion
infusion from HB 119.
9:47:53 AM
Senator Kiehl thought Mr. Worley had indicated that the
percentage change on line 1 had been based on the
experience study. He wondered how long the study had looked
back to get to 7.25 percent.
Mr. Worley informed that the division looked at a four-year
period while looking at assumptions versus actual
experience for each of the plans. He said that Ultimately
the assumed actuarial earnings rate was adopted by the
board after consultation from Buck and review by the board
actuary and other stakeholders.
Senator Kiehl appreciated Mr. Worley's answer. He asked
about changing the assumed rate assumption and whether it
would call for more money from the employer. He wondered
about the unfunded liability increasing through decreased
earnings exception.
Mr. Worley said that a draft of the experience report could
be made available to the committee.
Co-Chair Stedman asked for Mr. Worley to include the last
3, 5, and 10-year rates of return. He thought that the
report would break down the assumptions by component parts.
Mr. Worley noted that there was a slide that would address
investment rates of return going back 30 years.
Co-Chair Stedman said that the committee would wait for
answers to questions if the question would be addressed by
a slide further into the presentation.
9:51:38 AM
Mr. Worley turned to slide 5, " Funded Status Valuation
Results," which showed the combined totals for pension
healthcare for the defined benefits plans. He pointed out
that in December 2022, the consulting actuary for the
division presented draft results that would be discussed in
March 2023. He directed committee attention to the column
heading 2022 DRAFT for both PERS and TRS and noted a
slight increase in actuarial accrued liability for PERS and
TRS. He said that actuarial assets improved for both, while
unfunded liability decrease. He said that overall, for PERS
the total combined funded level was 87.7 percent, up 2.2
percent from 2021. He added that for the TRS system the
total was 93.1 percent, a 0.5 percent increase from 2021.
He said that the items used in lines A through D were what
was used to determine contribution rates, adopted by the
board each fiscal year. The items in E, F, and G were based
on the fair value of assets. He recalled that during an
update in 2021 the plans were near 100 percent funded on
the combined basis for PERS and overfunded on TRS. He said
that since 2021 the percentage points for PERS had
decreased 11 points; TRS had decreased 14 points. He
pointed to line D, which reflected more stability in 2023.
9:54:48 AM
Co-Chair Stedman asked which number represented the
combined total for unfunded liability.
Mr. Worley explained that the combined totals for unfunded
liability were reflected in the decrease of $400 million
for PERS and $24 million for TRS shown on line C. He noted
that pension was separate from healthcare, which meant that
one could be underfunded, and one could be overfunded.
9:55:44 AM
Senator Bishop asked whether the health retirement account
was invested in the healthcare portion of the pension.
Mr. Worley explained that the slide only addressed the
defined benefit plan, which was granted only to tiers 1, 2,
and 3.
Senator Bishop surmised that there would be a future slide
related to the defined contribution plan for tier 4
employees.
Mr. Worley replied that there was no slide related to the
status of those in the tier 4 plan.
Co-Chair Stedman wanted to make sure the unfunded pension
liability was addressed.
9:57:04 AM
Mr. Worley considered slide 6, " Funded Status Pension,"
which contained a chart depicting the funding status of the
pension system. He noted that there were separate trusts
funds for PERS and TRS. This slide showed numbers for tier
1, 2, and 3 under PERS, and tier 1 and 2 under TRS. He said
that the PERS plan had experienced a slight increase in the
actuarial accrued liability and the funded level increased
0.2 percent. He stated that there was a -6 percent rate of
return on the PERS and TRS plans, reflected on line E. He
relayed that the total unfunded liability was approximately
$6.8 billion.
Co-Chair Stedman asked about fair value of asset numbers.
Mr. Worley affirmed that fair value of assets was based on
the actuarial value of assets. He explained that fair value
of assets was based on the audited value of assets as of
the end of the fiscal year and was in the report generated
by KPNG. He said that that value was different than the
actuarial value of assets.
Co-Chair Stedman thought that the unfunded liability was
closer to $7.1 billion, with the actuarial number being
$6.8 billion.
Mr. Worley thought 2021 was a great example of what Co-
Chair Stedman had mentioned regarding high rising actuarial
liabilities.
10:00:05 AM
Mr. Worley displayed slide 7, "Funded Status HealthCare,"
which showed the healthcare trusts for PERS and TRS. There
was a slight increase in the liability calculated by the
actuaries, which was related to future cost projections
that reflected less healthcare spending. He discussed the
reasons for the increase. He said that 2022 showed a
funding surplus on line C. Mr. Worley detailed the numerics
in the chart on the slide.
Co-Chair Stedman asked for further discussion of the legal
tie-in between the funding of healthcare and pensions and
well as the previously mentioned federal guideline. He
spoke of diverting funding from one trust to another, which
he understood could be done by the legislature.
Mr. Worley relayed that the presentation would address the
rates for 2024 and the funding of the normal cost
calculation.
Co-Chair Stedman hoped the information was present in the
current presentation.
Mr. Worley deferred the question until later in the
presentation.
10:03:15 AM
Mr. Desai highlighted slide 8, "Funded Ratio PERS Pension
and HealthCare," which showed a bar graph pf the funded
ratio, specific to PERS, broken down by pension and
healthcare. The blue color showed pension and the orange
showed the healthcare funded ratio.
Mr. Desai looked at slide 9, "Funded Ratio TRS Pension
and HealthCare," which showed a similar graph for the TRS
system.
Mr. Desai addressed slide 10, "Funded Ratio Combined
PERS/TRS," which showed a bar graph containing the combined
information from the two previous slides for both PERS and
TRS.
Mr. Worley revisited Senator Bishop's comment about
overfunding of the plan in 2001. He referred to changes in
the structure of the board and the addition of a statute
that pertained to the review actuary. He said that the
review actuary had not been present in 2001. He thought
that one of the best things to come out of creation of the
board in 2001, was the actuarial review by independent
actuaries hired by the board and DOR.
10:06:05 AM
Mr. Desai advanced to slide 11, "Correlation between Actual
Rate of Return and Funded Ratio," and highlighted that from
back in 2000, the actuarial funded ratio for PERS was 101.1
percent and 99.6 percent for TRS. In 2001, marked in red in
the middle columns, showed a -5.37 percent, which was 13.6
percent when combined with expected rates of return of 8.25
percent. He said that the direct impact was reflected on
the next line, which showed 100.9 percent (down from 101.1
percent) for PERS and 95.0 percent (down from 99.6 percent)
for TRS. He continued to detail the various drops in
percentage due to smoothing and the rate of return effect
on the funded ratio. He said that any year, when valuation
was done by the actuary, was based on the interest rate at
the time. He said that in a following year, if the expected
rate of return was not met based on the assumptions, it
would affect the funded ratio. He shared that the slide
reflected the impact of market returns on the funding
ratio.
10:08:55 AM
Co-Chair Stedman reminded that 2000 and 2001 returns were
taken with a grain of salt, and he did not believe the
numbers were accurate. He said that at the time of crafting
the pension plan, restating those numbers had been
considered. He recalled that the actuarial information had
been lacking. He asked Mr. Desai to discuss when there
should be concern about the funding ratio on both the high
and low ends.
Mr. Desai offered a description of a healthily funded plan.
Co-Chair Stedman asked the presenter to refrain from using
acronyms.
Mr. Desai continued to discuss healthy functioning pans. He
referred to Co-Chair Stedman question about pension funding
ratios. He said that during the year, at a point in time,
the funded ration was assessed. He spoke of dependence on
market returns and what the protocol was when areas of
concern were recognized. He directed committee attention to
the last column on the slide and noted that the numbers
reflected full funding. He believed that the plan was
headed in the right direction.
10:16:09 AM
Co-Chair Stedman thought it was important for the public to
realize that there was no expectation that the state would
not meet its obligation. He emphasized that the state would
need to grapple with the unfunded liability but, checks to
recipients would not be late. He pointed out that whenever
there was a larger rate of return, it was followed by a
couple of years with lower return.
10:17:42 AM
Mr. Desai looked at slide 12, "Unfunded Actuarial Liability
PERS," which showed a table and bar graph with blue
depicting pension and orange depicting healthcare. The data
was broken down by PERS and TRS, separately, with the
information for TRS reflected on the next slide slide 13.
Co-Chair Stedman commented that the blue lines reflected
the pension unfunded liability.
Mr. Desai agreed. He noted that the following slide showed
the combined numbers.
Co-Chair Stedman thought that if the slide was meant to
reflect a negative number, or what was owed, the blue
should be inverted. He felt that at first glance it could
be gleaned that the blue bars reflected a positive, and the
orange a negative, when the opposite was true.
Mr. Desai agreed that the slide could be misleading.
10:19:52 AM
Mr. Desai referenced slide 14, " Unfunded Actuarial
Liability PERS / TRS," which showed a bar graph with the
combined unfunded liability for PERS and TRS. He pointed
out that unfunded liability was declining and both systems
should be funded by 2039.
Senator Kiehl thought the chart illustrated a time before
accounting rules required Alaska separated pension and
healthcare into separate accounts. He asked Mr. Desai to
discuss the recommendation to not pay the healthcare costs.
Mr. Worley noted that the matter would be addressed on
slide 17.
10:22:21 AM
Mr. Desai turned to slide 15, which showed the history of
additional state contributions. He said that from 2008
forward the state had paid approximately $8.2 billion into
PERS/TRS system.
Senator Wilson asked about the accounting in 2014 and 2015,
and the percentage breakdown between pensions and
healthcare.
Senator Wilson thought the $1 billion went to the pension
trust fund for PERS, and for TRS 97 percent went to
pension. He offered to provide more information to the
committee later.
10:24:13 AM
Senator Bishop looked at 2015 and recalled that some on the
committee were supportive of a $4 billion deposit to the
systems.
Co-Chair Stedman thought it would have been nice to deposit
more when the state had the cash on hand. He reflected that
hindsight was 20/20.
10:25:04 AM
Mr. Desai considered slide 16, which showed a table of
projected additional state contributions to PERS and TRS.
He said that the projections were calculation annually and
changed from year-to-year. He said that the board could
determine the contributions for healthcare.
10:26:20 AM
Mr. Desai displayed slide 17, "FY2024 Contribution Rates,".
Mr. Worley discussed slide 17 in conjunction with slide 18,
which showed a table of the healthcare trust fund levels.
He referenced SB 55, which required the state as an
employer to pay the full actuarially determined
contribution rate adopted by the arm board. For PERS, there
was a capped rate in statute of 12.65. The differences in
the rates adopted by the ARM Board and the statutory rates,
in the case of PERS at 22 percent, and TRS at 12.96
percent, became a contribution by the state as an
additional state contribution established in statute. He
noted the the preliminary total payroll column. He said
that there was a normal cost rate for PERS pension at 2.4
percent and a past service cost to pay out some of the
unfunded liability at 16.33 percent. He said that the
computed normal cost rate for the PERS defined benefit
health plan at 2.5 percent, the total for all
contributions, including the make-up for the contributions
to the defined contribution plan for PERS, was 6.63
percent.
Mr. Worley qualified that based on the initial discussion,
the state would pay at 27.6 percent and non-state employers
would pay up to the 22 percent cap, and the difference
would be an additional state contribution paid out of the
General Fund. He said that the same was similar for TRS.
10:29:52 AM
Mr. Worley discussed the defined benefit health normal cost
rate. He provided some background on the matter and
discussions surrounding the National Guard plan. He noted
the overfunded healthcare trust for both PERS and TRS. He
said that statutes had been reviewed surrounding
conflicting state statutes and ARM board statutes.
10:32:01 AM
Mr. Worley highlighted slide 18 and referenced a discussion
about the funded status of the PERS and TRS healthcare
trust in the case of making or not making the normal cost
contribution. He described a discussion about PERS, and
the question of not making the additional contribution to
He referenced prior discussion about putting money towards
an overfunded plan. He mentioned a two-year lag of adoption
of rates. During discussions about rates, actuaries were
consulted regarding not making contributions to the plans
due to overfunded status.
10:34:59 AM
Mr. Worley went back to slide 17 and continued with his
discussion abut statute semantics and the overfunding of
the plan.
10:36:17 AM
Senator Bishop understood the slides. He asked whether the
ARM Board had discussed deferring overpayments into the
pension fund.
Mr. Worley relayed that there had been a discussion about
the adoption of rates. In the case of PERS and TRS, two
separate rates would have to be adopted. The outcome of the
discussion indicated that the adopted rate for the
healthcare trust could not be shifted to the pension plan.
The legislature could craft legislation to allow for the
practice, but the board could not adopt a rate for a
healthcare trust and put those monies into the pension
trust.
10:38:40 AM
Co-Chair Stedman understood that the legislature could
decide to take some funds from the healthcare side and make
a direct to deposit to the pension. He stated that the
advantage to keeping pressure on the unfunded pension
obligation could help to lower the contribution rate for
municipalities.
Mr. Worley pointed that even though the ARM Board
ultimately decided to adopt the normal cost rate, it did
not change the amount that municipalities and school
districts paid. The 22 percent for PERS went into the
pension trust in its entirety and for TRS the entire 12.6
percent. He added that the board reviewed the matter every
year. He relayed that the actuarial committee was reviewing
guideline to consult when making determinations.
Co-Chair Stedman hoped that the ARM Board did not allow any
underfunding. He suggested erring on the side of caution.
He thought there should be a targeted goal for the unfunded
liability before attempting to lower the 22 percent rate.
10:42:17 AM
Mr. Worley continued to address slide 17. He noted the
reflected savings from the preliminary column to the
adopted column for both PERS and TRS.
10:43:37 AM
Mr. Desai looked at slide 19, "FY2024 Contribution Rates
Defined Benefit Plans.":
Defined Benefit Plans
Employee
All Other employees PERS-6.75 percent
Peace Officer/Firefighter PERS-7.50 percent TRS-8.65
percent
School District Alternate Option PRS-9.60 percent
Employer (Rates capped by Alaska statute) PERS-22.00
percent TRS-12.56 percent
Additional State Contribution (for non-State
employers) PRS-3.10 percent TRS 12.96 percent
Total Required Contributions for the Fiscal Year*
PERS-25.10 percent TRS-25.52 percent
*The total contribution rates for PERS and TRS include
the DCR contribution rates.
Source: Buck, September 1, 2022, letter as of June 30,
2022, roll-forward for PERS and TRS DB and DCR and
2021 DCR valuations.
Mr. Desai addressed slide 20, "FY2024 Contribution Rates
Defined Contribution Plans.":
Defined Contribution Plans
Employee (to Investment Account) PERS-8.00 percent
TRS-8.00 percent
Employer
Investment Account PERS-5.00 percent TRS-7.00 percent
Health Care (Retiree Major Medical Plan PERS-1.01
percent TRS-0.82 percent
Occupational Death and Disability
• All Others PERS-0.30 percent TRS-0.08 percent
• Peace Officer/Firefighter PERS 0.68 percent TRS-
N/A
Health Reimbursement Account (HRA)
(3 percent of all PERS/TRS average annual
compensation) PERS-flat dollar TRS-flat dollar
Excess from Employers Contributions (22 percent/12.56
percent) To DB Plans Unfunded liability
Source: Buck, September 1, 2022, letter as of June 30,
2022, roll-forward for PERS and TRS DB and DCR and
2021 DCR valuations.
Co-Chair Stedman looked at the last line of the table on
slide 20. He asked for clarification on whether the
employee or employer was paying the unfunded liability.
10:47:27 AM
Mr. Desai said that the employer paid the difference
between the 22 percent and whatever contributions that were
paid on behalf of the employee.
Co-Chair Stedman understood that the employer paid for the
unfunded liability.
Mr. Desai agreed.
10:48:44 AM
Mr. Desai advanced to slide 21, "Contribution Rates
History," which showed two graphs that illustrated the
actual rate per year: a flat 22 percent for PERS and 12.56
percent for TRS. He reminded the committee that each year
the actuarial rate was different, and the gap between the
two lines in each box represented the state contributions
paid year-by-year.
Co-Chair Stedman noted that the state set the rate at 22
percent to level out the percentage for all communities.
He thought a conversation should be started regarding a
plan to lower the contribution rate for municipalities.
Co-Chair Stedman added that TRS was treated differently
than PERS because the state was constitutionally obligated
to provide for education.
10:51:13 AM
Mr. Desai explained that the other purpose of slide 21 was
to show the state contribution history from 2008 to 2024.
He said that the blue area on top totaled $3.5 billion paid
for PERS and the green area reflected $4.7 billion for TRS.
10:51:41 AM
Mr. Desai looked at slide 22, which showed a graph of
projected pension benefit recipients. He cited that in
2024, it was projected that the state would be paying 54
thousand retirees, which would peak in 2029 and then begin
to decline as both systems were closed system and would not
be taking on new retirees.
10:52:22 AM
Mr. Desai spoke to slide 23, "Projected Pension Benefits
Payment," which showed a graph depicting the dollar value
of pension benefit payments. He noted that in 2024, the
state would pay approximately $1.6 billion in pensions to
retirees, and that number would decline as participants
passed away.
10:52:51 AM
Mr. Desai referenced slide 24, "AlaskaCare Employer Group
Waiver Plan":
• 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).
10:55:11 AM
Mr. Desai turned to slide 25, "An Employer Group Waiver
Plan (EGWP) Subsidy," which showed a table of types of
subsidy funding in millions. The 2022 amounts on the slide
were estimates due to the dynamic nature of claims. The
actual subsidy was subject to minor adjustments due to
true-up.
10:55:53 AM
Mr. Worley considered slide 26, which showed a table of
healthcare cost trend rates, which were used for projecting
increases in healthcare costs. Trends rates were adopted
with the June 30, 2022, actuarial valuation reports by the
adoption of the board of the most recent experience study.
Beginning in FY39, trend rates were revised to reach an
ultimate rate of 4.5 percent in FY50.
Co-Chair Stedman asked whether the trends in healthcare
seemed to be less now than the previous decade.
Mr. Worley replied in the affirmative.
10:57:06 AM
Senator Bishop asked about the longevity of the EGWP
benefit.
BETSY WOOD, ACTING CHIEF HEALTH ADMINISTRATOR, DIVISION OF
RETIREMENT AND BENEFITS, DEPARTMENT OF ADMINISTRATION,
explained that EGWP was a federal subsidy program run by
the Centers for Medicare and Medicaid Services (CMS). She
relayed that the department believed that the program would
have some longevity. She pointed out that slide 25
reflected some changes in subsidy categories. She said that
the subsidy rates were set by CMS and could vary but
performance had remained strong.
Co-Chair Stedman requested that more information on the
program be sent to Co-Chair Bishops office.
10:59:00 AM
Mr. Desai displayed slide 27, which showed a flow chart
that illustrated a process timeline including allocation of
projected employer and additional state contributions with
liabilities rolled forward two-years, with assets rolled
forward one-year and smoothed.
Co-Chair Stedman thanked the testifiers. He commented on
reducing the 22 percent rate.
Co-Chair Stedman discussed housekeeping.
ADJOURNMENT
11:01:03 AM
The meeting was adjourned at 11:01 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 021423 ARMB_Presentation_SFIN_.pdf |
SFIN 2/14/2023 9:00:00 AM |
|
| 021423 DOA_PERS_TRS_Overview_SFC-2023.pdf |
SFIN 2/14/2023 9:00:00 AM |