HOUSE BILL NO. 78 "An Act relating to the Public Employees' Retirement System of Alaska and the teachers' retirement system; providing certain employees an opportunity to choose between the defined benefit and defined contribution plans of the Public Employees' Retirement System of Alaska and the teachers' retirement system; and providing for an effective date." ^PRESENTATION: TIERS & UNFUNDED LIABILITY 1:38:31 PM AT EASE 1:38:55 PM RECONVENED Co-Chair Foster noted that the bill would be taken up first followed by the operating budget. Co-Chair Josephson confirmed the committee would continue with the operating budget after HB 78. 1:39:30 PM KATHY LEA, DIRECTOR, DIVISION OF RETIREMENT AND BENEFITS, DEPARTMENT OF ADMINISTRATION, introduced the PowerPoint presentation, "Defined Benefit Versus Defined Contribution Comparison" dated April l2, 2025 (copy on file). She explained that the first 15 pages of the presentation were an overview of a presentation provided earlier in session. She would later turn the presentation over to actuary David Kershner to discuss unfunded liability. Ms. Lea continued to slide 2 and highlighted the purpose of the Public Employees' Retirement System (PERS) and Teachers' Retirement System (TRS) plans to attract and retain qualified personnel. She noted that the purpose of the plan for TRS was repealed in 2005; therefore, the language only currently applied to defined benefit (DB) participants. Slide 3 showed the chronology of the PERS and TRS systems including DB tiers and the defined contribution (DC) tier. She began with DB tiers and detailed that PERS was established in 1961, Tier 2 was established in 1986, Tier 3 in 1996. The DC tier was established in July of 2006. She detailed that TRS was established in 1945, Tier 2 was established in 1990, and the DC tier was established in July 2006. MS. Lea continued to slide 4 and gave an overview of PERS Tier 1: • Vesting 5 years of membership service • Non-Occupation Disability and Death Benefits • Occupational Disability and Death Benefits • Early Retirement at age 50 • Normal Retirement at age 55 • At any age with 30 years of membership service • At any age with 20 years of Peace Officer/Fire fighter service • System paid medical at retirement • Alaska Cost of Living Allowance (COLA) eligible at retirement • Post Retirement Pension Adjustment (PRPA) o Automatic: Eligible at age 60 or 5 years of receiving benefits as of 7/1 o Ad Hoc: Eligible if there was a change in the Consumer Price Index (CPI) at time of retirement and current year July 1 (system must be 105% funded) Ms. Lea elaborated that the automatic PRPA was instituted because it was prefunded. The ad hoc PRPA was not prefunded. She explained that the automatic PRPA was a lesser benefit because an individual had to be age 60 or have five years as of July 1 of a given year; it paid 50 percent of the change in the CPI in Anchorage for members under the age of 65 and 75 percent of the change at the age of 75. 1:43:53 PM Ms. Lea continued to slide 5 and provided an overview of PERS Tier 2: • Vesting 5 years of membership service • Non-Occupational Disability and Death Benefits • Occupational Disability and Death Benefits • Early Retirement at age 55 • Normal Retirement at age 60 • At any age with 30 years of membership service • At any age with 20 years of Peace Officer/Fire Fighter service • System paid medical at: o At age 60 with at least 5 years of credited service o 30 years of membership service o 25 years of Peace Officer/Fire Fighter Service • Alaska Cost of Living Allowance (COLA) eligible at age 65 • Post Retirement Pension Adjustment (PRPA) o Automatic: Eligible at age 60 or 5 years of receiving benefits as of 7/1 o No Ad Hoc Representative Bynum stated that when an individual went into retirement, they received a medical benefit. He asked if the same benefit continued once the individual hit Medicare eligibility. Alternatively, he wondered if the individual would go onto Medicare and have a supplemental [medical benefit]. Ms. Lea responded that the retirement health plan was primary until Medicare age and at Medicare age it became supplemental. Ms. Lea continued to slide 6 and reviewed PERS Tier 3: • Vesting 5 years of membership service • Non-Occupational Disability and Death Benefits • Occupational Disability and Death Benefits • Early Retirement at age 55 • Normal Retirement at age 60 • At any age with 30 years of membership service • At any age with 20 years of Peace Officer/Fire Fighter service • System paid medical at: o At age 60 with at least 10 years of credited service; o 30 years of membership service; or o 25 years of Peace Officer/Fire Fighter Service • Alaska Cost of Living Allowance (COLA) eligible at age 65 • Post Retirement Pension Adjustment (PRPA) o Automatic: Eligible at age 60 or 5 years of receiving benefits as of 7/1 Ms. Lea elaborated that the change from the Tier 2 to the Tier 3 plan was to the medical benefit. Tier 3 required 10 years of membership service at age 60. The COLA and PRPA remained the same. She moved to PERS tier 4, DC plan: • Vesting in employer contributions: o 25% with two years of service o 50% with three years of service o 75% with four years of service o 100% with five years of service • Normal Retirement at: o Medicare eligibility (Age 65) with at least 10 years of membership service o any age with 30 years of membership service o any age with 25 years of Peace Officer/Fire Fighter service • HRA eligible if meet the normal retirement eligibility • No COLA or PRPA • Occupational Disability and Death Benefits Ms. Lea expounded that normal retirement [shown above] only referred to medical benefits in Tier 4. She relayed that because it was a DC account, a participant could liquidate their account within 60 days of termination. There was no true retirement event as there was in the DB plans. She elaborated on the HRA [Health Reimbursement Arrangement] and explained that if a retiree met the requirements for medical eligibility, they could begin to draw from the HRA, which could be used for premium payments or spend down for copays or coinsurance. 1:48:05 PM Representative Tomaszewski asked if the tiered step on the vesting applied to SBS [Supplemental Benefits System] enrollees as well. Ms. Lea replied that SBS did not have a tiered vesting. She added that SBS participants were eligible for the 6.13 percent employer contribution immediately. Representative Stapp asked if the Division of Retirement and Benefits (DRB) tracked the outflows of individual HRAs to see what individuals were spending the money on. He wondered if individuals used accounts primarily for premiums, deductibles and copays, or known medical expenses. Ms. Lea responded that she did not have the statistics on hand but she could follow up with the information later that day. Representative Stapp stated that typically if an individual bought health insurance under an HRA, there were questions that were specific to QSEHRAs [Qualified Small Employer HRA] because the premium tax calculations were deducted off HRA revenue. He remarked that it was something the state should be telling participants or working it out with them. He asked if Ms. Lea had any details. Ms. Lea responded that she was not the health insurance expert in DRB and would follow up with the information. Representative Bynum asked Ms. Lea to describe the difference between the HRA and medical plan under Tier 3 and what the typical value would be for an average retiree. Ms. Lea responded that the samples later in the presentation gave an estimate of the average HRA at the time of eligibility. She stated that the medical plan was the same in all tiers; the differences arose in eligibility, who paid the premium, and how much they paid. Representative Galvin remarked that recently there had been some Alaska Retirement Management Board (ARMB) recommendations on whether or not there was requirement to retire directly from the system. She asked Ms. Lea to provide some context on the decision. Ms. Lea responded that ARMB's recommendations and resolutions were passed based on what the ARMB felt it needed to see and not in consultation with DRB. She relayed that DRB was currently neutral on the decisions. The current requirements to retire directly from the plan and to have been employed for at least 12 months prior was a direct result of the condition of the health plan funding in 2006. She noted that the health plan funding and the pension funds had been under water at the time. She explained there had been a run of people who had been working years before in the DB plans who had come back to work for the state when close to retirement age, some for as little as one day, in order to re-vest in order to access health insurance. She elaborated that the intent behind the provision was to prevent that sort of occurrence. 1:53:15 PM Ms. Lea continued on slide 8 and detailed the PERS participation numbers. She detailed the DB population was dwindling, but there were still 368 Tier 1 members. There were 7,631 total active employees in the three DB tiers. The slide also showed employees who terminated with a balance and had retained their contributions in the plan who could come back to work for the state at a future date in order to draw retirement and benefits. Some of those individuals may have to come back to work for the state for a time in order to get vested. The slide showed the total benefit payments for each tier and the split between police/fire and all others. Representative Hannan asked for clarification on the benefit payments in relation to the tiers. She asked if it was a dollar value. Ms. Lea responded that the slide showed the number of people receiving benefits and not a dollar amount. Representative Hannan stated her understanding that the slide indicated there were 368 actively working Tier 1 employees. She asked for verification that the slide also showed there were 20,829 retired people receiving Tier 1 benefits. Ms. Lea responded affirmatively. Ms. Lea continued on slide 9 showing the PERS employer normal cost by tier. She stated that DRB did not normally split out the cost by the DB tiers when calculating the overall amount needed to fund benefits in a given year. She explained that normal cost referred to the percentage of salary needed in order to fund benefits due for the coming year. She elaborated that if it was above or below the estimated amount, it reflected a gain or loss to the unfunded liability. For example, if DRB estimated it needed 34.31 percent for Tier 1 and it turned out only 30 percent was needed, it would result in a reduction to the unfunded liability. Alternatively, if DRB estimated it needed 34.31 percent and it actually needed 40 percent, it would result in an addition to the unfunded liability. The slide showed the different percentages needed, which was a direct reflection of the value of the benefit in each of the tiers. 1:57:19 PM Ms. Lea continued to slide 10 and reviewed TRS Tier 1: • Vesting 8 years of membership service • Disability Benefits • Non-Occupational and Death Benefits • Early Retirement at age 50 • Normal Retirement at age 55 • System paid medical at retirement • Alaska Cost of Living Allowance (COLA) eligible at retirement • Post Retirement Pension Adjustment (PRPA) o Automatic: Eligible at age 60 or 8 years of receiving benefits as of 7/1 o Ad Hoc: Eligible if there was a change in the Consumer Price Index (CPI) at time of retirement and current year July 1 (system must be 105% funded) Representative Tomaszewski asked at what point TRS opted out of or did not opt into SBS. He understood that Tier 4 teachers did not have SBS. Ms. Lea explained that in 1955 Social Security extended benefits to government plans (TRS is a government plan) and plans had an opportunity to opt into Social Security or use the replacement plan. She elaborated that teachers across Alaska had voted to retain TRS as their retirement rather than go into Social Security. She noted it had remained that way ever since. She relayed that they could get into Social Security if they chose to do so. She stated her understanding that TRS employees could opt into Social Security on a school district by school district basis. She relayed that to be eligible for the current SBS system, an individual had to be eligible for Social Security. She explained that teachers could not currently enter SBS because they were not eligible for Social Security. She explained that SBS was the Social Security replacement program. She reiterated that teachers had chosen TRS as their Social Security replacement program and it was not possible to be in two at the same time. Representative Tomaszewski asked how PERS employees were able to be in Social Security and SBS while TRS employees were not. He asked Ms. Lea how TRS members were able to vote themselves into the ability to be in Social Security. Ms. Lea clarified that the State of Alaska as an employer did not chose to use PERS as their Social Security replacement program. She explained that they did participate in Social Security for a time. She explained that in 1980, they chose SBS as their Social Security replacement plan. She expounded that while PERS qualified to be a replacement plan, the state chose SBS instead. She noted there were PERS employers who had PERS as their Social Security replacement plan instead of SBS. Representative Tomaszewski asked how a teacher could get into SBS. Ms. Lea responded that it could happen by a referendum vote. She elaborated that if a school district wanted to come into Social Security, it would contact the state Social Security administrator within DRB to start the process to hold a referendum vote for entry into Social Security. She explained that it required the involvement of the Social Security regional representative. She expounded that they would have to decide how to do the vote. For example, would it be an all or nothing arrangement or would existing employees be able to choose whether or not they wanted to be enrolled, but as soon as their position was vacated, the new employee must be enrolled in Social Security. 2:02:55 PM Representative Allard asked if teachers opted out of Social Security and SBS in 1989. Ms. Lea asked if Representative Allard was referring to the state and SBS. Representative Allard thought the teachers opted against having Social Security and SBS in 1989. Ms. Lea responded that teachers had made the decision in 1955 when Social Security expanded to government plans. She stated that 1989 was not ringing a bell as a seminal date for TRS. Representative Allard thought it had something to do with SBS. She asked Ms. Lea to follow up with the information. Representative Bynum stated his understanding that teachers had never opted out of Social Security, they had never opted in. He elaborated that SBS was a state plan that allowed opting into the plan in lieu of Social Security if eligible. He stated that the TRS program was not an alternative to Social Security, it was the retirement plan that did not have Social Security associated with it unless opting in. He clarified that teachers had the option currently to get together and opt into Social Security. He understood there were some issues with the federal windfall provision that created potential issues, but it was no longer in place. He expounded that if teachers opted into Social Security as individuals or by group, it would not mean they would lose their TRS benefit. He stated they would receive a Social Security benefit in addition to TRS. He asked if his statements were accurate. Ms. Lea clarified that Social Security required a qualified plan: either Social Security or another qualified plan. She explained that TRS qualified as a Social Security replacement plan. She confirmed that at the time the option to join Social Security was offered, teachers had not opted in. She agreed they had never opted out, they had not opted in. Representative Bynum asked if teachers would lose TRS if they opted into Social Security. Ms. Lea responded that teachers would not lose TRS. Co-Chair Foster noted that Representative Bill Elam had joined the meeting. 2:07:02 PM Representative Hannan stated her understanding that an individual teacher could not opt into Social Security. She believed it had to be a statewide referendum administered by the Social Security administrator. She noted that Ms. Lea had also stated that an individual employee could opt out if there was a vote in favor of joining; however, the subsequent employee would have to participate. Ms. Lea explained that a statewide vote was not required; it could be done school district by school district, but the school district had to be the one to opt in because they had a contribution to pay. Representative Hannan asked for information about the differences in the disability and death benefits in TRS Tiers 2 and 3. Ms. Lea explained that the benefits offered for the occupational disability were the same under each of the tiers with the exception of who paid for the health insurance. Representative Hannan stated that the occupational benefit applied to active employees who died. She asked if there was a difference between the tiers for non-occupational death during retirement. Ms. Lea answered that there was no non-occupational death benefit in the DC tiers. Representative Hannan stated her understanding that the disability and death benefit was only available in Tiers 1 and 2, while under the DC plan in Tier 3 there was no death benefit unless an employee died at their job. Ms. Lea clarified that the cause of a person's death had to be occupational. She explained that if a person died at their job for another reason, it was not an occupational disability. 2:09:47 PM Representative Johnson stated her understanding that for PERS employees, SBS was an add-on, and there was no Social Security replacement in Tier 4. Ms. Lea clarified that there could be no Social Security, no SBS, and just PERS for an employer. The employer had the ability to choose what types of plans they wanted to make contributions to and offer to their employees. There were about 25 employers that only had PERS. Representative Johnson understood that different municipalities could have different things. She asked about a state employee with PERS, SBS, and Social Security. She asked for verification that SBS was not the individual's Social Security replacement because they had Social Security. Ms. Lea answered that state employees had SBS instead of Social Security while actively employed. She clarified that state employees did not contribute to Social Security while actively employed. She elaborated that if the individual had Social Security prior to working as a state employee they did not lose it. Representative Johnson asked for verification in the case of teachers, TRS was the Social Security replacement. Teachers did not have SBS or Social Security. She provided a scenario where a school district wanted to have TRS and Social Security. She asked if they would have to go through the process of opting out of TRS. She wondered if they could opt into having TRS, SBS, and Social Security. Ms. Lea provided a hypothetical scenario where a school district wanted to opt into Social Security. She explained that the school district could do so if it chose without having to make a declaration or change to its TRS. She noted that they only needed to do so if they were not going to be in Social Security. Representative Johnson provided a scenario where a school district decided to opt into Social Security and TRS would not act as its Social Security replacement. She asked if the district could continue in TRS and also have Social Security. Ms. Lea answered affirmatively. She explained that teachers could not currently get into SBS; there would need to be statutory changes to allow them to do so. She relayed that they could opt into Social Security at any time. She added that with the elimination of the two penalties that Social Security leveled for employment with a non-Social Security employer, the option became more attractive. Co-Chair Foster took an at ease to check on the schedule. 2:14:46 PM AT EASE 2:15:31 PM RECONVENED Co-Chair Foster reviewed the timing of the meeting schedule. Representative Bynum appreciated a previous question about death benefits. He stated his understanding that if a person in TRS Tier 3 opted into Social Security, the individual would receive a death benefit and potentially a disability benefit. Additionally, if the individual died, the retirement collected through the DC component would be transferable to whatever will they wanted. Whereas individuals in the Tiers 1 and 2 plans had the benefits tied to a DB plan. He asked if his understanding was accurate. Ms. Lea responded affirmatively. The DB plans paid out a lifetime benefit to the survivor. Under the DC plans, the account could be split in any way. Representative Bynum asked if the survivor benefit component was something individuals had to opt into. He understood it was an option under many retirement plans and when an individual took the option (e.g., under the Federal Employees Retirement System (FERS) or IBEW) there was a reduced benefit during retirement. He asked if it was the same with PERS Tiers 1, 2, and 3 and TRS Tiers 1 and 2. Ms. Lea replied that it was a statutory provision for occupational death. A DB survivor could choose to take a contribution account in lieu of a lifetime benefit, but they would lose all of the employer contributions. Representative Allard stated her understanding that in a DC plan, an individual could leave their money to a spouse in the event of their death. She believed any remaining money could then go to the couple's children if the spouse also passed away. Ms. Lea replied affirmatively and explained it was the case because "it's simply a money account." Representative Allard stated her understanding that under a DB plan, if a person passed away, the benefits went to a spouse or next of kin; however, once the spouse passed away the money would not go to another beneficiary. She asked if her understanding was accurate. Ms. Lea responded that the benefit could be left to a spouse or incapacitated child. When a retiree began receiving benefits - by statute they used their own contribution account first - they exhausted their account within 2.5 years, and the employer paid the cost of their benefits from then on. Generally, unless a person lived less than 2.5 years, there was nothing left in the contribution account to pass onto a non-spouse if the spouse was deceased. Representative Allard clarified that she was speaking about DB plans. She asked if Ms. Lea was saying that under a DC plan, there may not be any money left within a couple of years of a person dying. Ms. Lea explained that she was talking about DB plans. 2:20:14 PM Representative Allard provided a hypothetical scenario where a person passed away and had $900,000 left in their DB plan. She elaborated that the surviving spouse then passed away with $500,000 remaining in the plan. She asked what would happen to the remaining $500,000 if the couple had no incapacitated child. Ms. Lea answered that unless the retiree died soon after retirement, there would not be those kinds of funds in their account. She relayed that if there were any remaining contributions in the individual's account and the spouse was deceased, the funds would revert back to the trusts. Representative Allard shared that she had a 70-year old friend whose parent had been a State of Alaska employee. She relayed that he had passed away and her friend had approximately $1 million left from his defined contributions that she would be able to leave to a potential granddaughter. She remarked that people were living longer and life was expensive in Alaska. She considered the hypothetical scenario she provided about the DB retiree who passed away and the remaining funds went to their spouse. She asked if the remaining $500,000 would go back to the state if the spouse passed away and there were no incapacitated children. Ms. Lea responded that if there was any balance in the employee's account, it would go to the beneficiary. Any of the employer contributions set aside for the lifetime benefit would revert back to the fund. Representative Allard reiterated her question. Ms. Lea responded that if there was a balance under the DB plan - the employee and employer both made contributions to the DB plan and the two funds were kept totally separate - upon the employee's death, any benefits contributed by the employee would go to the surviving spouse. If the spouse passed away, the funds would go to the designated beneficiary. Representative Allard remarked that if the beneficiary passed away, the funds were "done" and there was "no inheritance in it." She would take the questions offline. Co-Chair Foster suggested that Ms. Lea hit the high points in the remainder of the presentation due to time limitations. 2:24:02 PM Ms. Lea explained relayed that the committee had previously seen slides 1 through 14. She suggested moving to slide 15 and turning the presentation over to Mr. Kershner to discuss the unfunded liability. DAVID KERSHNER, ACTUARY, ARTHUR J. GALLAGHER AND COMPANY, SOUTH CAROLINA (via teleconference), was an actuary from Gallagher. The firm provided actuarial valuation services for DRB and ARMB. He continued the presentation on slide 15 titled "Additional State Contributions - History." The slide showed the historical additional state contributions for PERS and TRS since 2006. He pointed out a one-time contribution made by the state in 2015 where $1 billion went to PERS and $1.7 billion went to the TRS pension trust and $300 million went to the TRS healthcare trust. The PERS column reflected a significant drop in the amounts from 2021 to 2022 because SB 55 went into effect in 2022. He elaborated that under SB 55, the state as an employer no longer contributed only 22 percent, but the full actuarial rate based on the payroll of its employees. The additional state contribution only applied to the non-state employees within PERS starting in 2022. He noted approximately half of the total payroll for state and non-state employees. Mr. Kershner continued to slide 16 showing the latest projections from September. The ARMB adopted $79.8 million for PERS and just under $139 million for TRS in FY 26. The numbers were based on the 2024 valuations. Assuming that assets earned the expected rate of 7.25 percent per year, in FY 27 the contribution to PERS was $70.2 million and the contribution to TRS was $147.1 million. The slide showed the numbers increasing through FY 39. He relayed that Gallagher would meet with ARMB in September 2025 for the adoption of the FY 27 amounts, which would reflect actual asset earnings between 6/30/24 and 6/30/25. Based on year to date returns, he expected the returns would likely not meet the 7.25 expected return, meaning the FY 27 [contribution] amounts would be higher than those shown on slide 16. Mr. Kershner continued to slide 17 on FY 26 contribution rates. He noted that cost rates by tier shown by Ms. Lea reflected a percentage of compensation. The percentages on slide 17 were converted to a total plan basis. He explained that it included PERS DB and DC plans. He highlighted the PERS DB pension plan cost rate of 2.14 percent and explained that it was significantly lower than what was seen earlier in the presentation because the rates on slide 17 were spread over a much larger payroll base including DC members. There were two differences between the preliminary and adopted rates for PERS and TRS. He pointed to the DB health plan normal cost and explained that the "preliminary" column represented the actuarial determined rates. He elaborated that ARMB had the flexibility (and had done so since 2023) not to contribute the health normal cost to the healthcare trust because the healthcare trust continued to be significantly over-funded. Additionally, the preliminary column reflected the funding methodology ARMB adopted starting in 2018. The adopted rates [shown on slide 17] reflected the more rapid acceleration of the amortization of the unfunded liability. For example, the DB pension plan past service cost rate under the "adopted" column was 19.29 percent compared to 18.63 percent in the preliminary column. He highlighted that the basic differences between the preliminary and adopted amounts was shown on the bottom of the slide in red. The ARMB's decisions saved the state about $48 million between PERS and TRS for FY 26. 2:31:15 PM Mr. Kershner continued to slide 18 and the contribution rates since 2008 for PERS and TRS (PERS was reflected in a graph on the top of the slide and TRS was reflected in a graph on the bottom). The actuarially determined contribution rate was shown in orange and the statutory employer rate was shown in blue. The statutory employer rate was 22 percent for PERS and 12.56 percent for TRS. The actuarial rate included the DB and DC rate combined because the statutory rate was a combined total rate for both plans. Mr. Kershner continued to slide 19 titled "Investment Experience" showing how assets had performed in 2023 and 2024. He noted that 2024 columns were labeled "draft" because the final figures would not be adopted by ARMB until June. The actuarial rate assumed assets would earn 7.25 percent annually. In 2023, the market return was about 7.6 percent and in 2024 it was just under 9 percent. The actuarial rate of return (in the bottom row on the slide) applied smoothing to the assets to avoid fluctuating contribution levels because market values could go up or down from one month to the next or one year to the next. The smoothing rate recognized market gains and losses of 20 percent per year, so at the end of a five-year period the market gain or loss was fully recognized. Mr. Kershner continued to slide 20 titled "Funded Status - Pension." The slide showed the last three years with PERS on the left and TRS on the right. The top row (line a) reflected the actuarial accrued liability showing the present value of future benefits attributable to service as of the date of the valuation. The second row (line b) was the actuarial smoothed value of assets, and the third row (line c) was the difference between the first two rows reflecting the unfunded liability. In 2024, the unfunded liability was just under $5.5 billion for PERS and just under $1.8 billion for TRS. The funded ratio was shown on line d representing the assets in line b divided by the liability in line a: PERS was about 68 percent and TRS was about 78 percent. There were similar numbers in the following three rows based on the market value of assets. The actual market value of assets in the PERS trust on 6/30/24 was $11.555 billion and TRS was $6.2 billion. 2:34:40 PM Representative Bynum looked at the employer and actuarial rates on slide 18. He pointed to a 22 percent employer rate for PERS in 2026 and an actuarial rate of 28.33 percent. He asked for the differential on the numbers. He stated his understanding that the actuarial rate was the number needed to be able support the plan. He asked who paid the 6.33 percent differential for PERS. He asked who paid the TRS differential. Mr. Kershner responded that the actuarial rate was based on the assumptions and funding methodology adopted by ARMB and was used to ensure the plans reached full funding over a reasonable period of time. The employer rate was the maximum rate employers paid per statute. The difference between the employer and actuarial rates was paid by the state via additional state contributions. He clarified that starting in FY 22, the state paid the full actuarial rate for PERS employees rather than just the 22 percent. Representative Bynum stated that it also applied to TRS. He highlighted that the liability to the employer was 12.56 percent. He considered the 31.33 percent actuarial rate [for 2026] and the 12.56 percent employer rate. He asked if the differential between the two numbers would be borne by the state. Mr. Kershner responded affirmatively. He pointed to the bottom row on slide 17 [labeled "additional state contributions"] and noted the 18.77 percent [on the TRS side of the slide] reflected the excess the state would pay [for FY 26] because the employer would only pay 12.56 percent. Representative Stapp looked at slide 20 and referenced a similar chart from 2005 presented in the Senate Finance Committee related to the PERS and TRS liabilities. He stated that in 2003, the accrued liability was $16,397,252,000 and the actuarial asset value was $11,439,566,000. The market value of the fund had been just under $11 billion. Since that time, the state had made billions of additional contributions to the fund. He asked how it was possible that the accrued liability and valuation of the plan was nearly the same amount with all of the additional contributions. Mr. Kershner responded that he could not provide every reason but one key reason to keep in mind was that the actuarial accrued liability depended on the assumptions used to measure the liability and in particular, the assumed rate of return on the assets. Over time, the expected return on asset assumption had been slowly dropping (becoming more conservative) because of future expected equity returns and bond yields. He explained that when the expected return assumption was lowered, liability rose because it meant the need for more assets on hand to pay the benefits. He highlighted that for every 100 basis point change in the return assumption (e.g., a change from 8 percent to 7 percent), the liability generally increased by roughly 12 percent. He noted that the presentation would show later on how assumption changes had impacted the liability. He relayed that the expected return was 8.25 percent through 2010, 8 percent from 2011 to 2017, 7.38 percent from 2018 to 2022, and 7.25 percent from 2022 to present. Assumptions also included things like mortality tables showing longer life expectancy at present when compared to 20 years back, which increased liabilities. There were a number of moving parts when comparing the past with the present. Additionally, there had not been as many tiers 20 years back as there were at present. 2:41:44 PM Representative Stapp noted he had been 17 at the time [in 2005]. He looked at slide 15 and highlighted that the total state contribution made above the valuation of the fund was $8.5 billion in PERS and TRS. He referenced Mr. Kershner's statement that 100 basis points was 1 percent. He considered what aging people mentioned by Mr. Kershner looked like. He thought it looked like $8.5 billion in additional contributions. He looked at the exact same actuarial liability and valuation of the fund presented to the Senate Finance Committee the previous year. He wondered why projections were always wrong in the direction that cost the state $8.5 billion in additional contributions. Mr. Kershner responded that they were not always wrong, and he relayed that slides 28 and 29 would show what had contributed to changes in the unfunded liability in the past 10 years. He would answer the question further at that point in the presentation. Representative Bynum referenced conversations about trying to use a fixed number. He pointed out that the plans were fixed and the only thing that changed was how much money continued to be poured in. He thought a conservative number would be 6.5 to 6 percent as opposed to 8 or 8.5 percent. He wondered why they did not take a conservative approach with a lower number as opposed to using higher numbers and not being able to catch up. He thought long-term expected returns should be about 5 to 6 percent instead of 7 or 8 percent. Mr. Kershner responded that conservative was all relative. He agreed that 6 percent was more conservative than 7.25 percent and 7.25 percent was more conservative than 8.25 percent. There were a lot of moving parts. He believed the later slides would help explain how the unfunded liability changed and the sources for the changes over the past 10 years. Co-Chair Foster took an at ease to consider the remaining meeting time. 2:45:37 PM AT EASE 2:46:29 PM RECONVENED Co-Chair Foster asked Mr. Kershner to proceed. Mr. Kershner continued on slide 21 titled "Funded Status - HealthCare." He pointed to the funded ratio based on the actuarial value of assets in line d had been well over 100 percent for the past several years. He explained it was the reason ARMB had decided against contributing the normal cost to the healthcare trust starting several years back. A large reason for the overfunding was because in 2018, DRB implemented the Employee Group Waiver Plan (EGWP). He elaborated that the plan received federal subsidies to help offset the payment of healthcare benefits to plan participants. The subsidies helped reduce the liability. He noted that DRB had also implemented some recent changes with the plan administrator that had increased efficiencies in the payment of claims, which had also brought down liabilities. Mr. Kershner continued to slide 22 which was a graphical representation of the funded ratio for PERS pension and healthcare. The blue bars reflected pension and orange bars reflected healthcare. He pointed out that in 2006 the pension trust was about 80 percent funded, and the healthcare trust was slightly over 40 percent funded. He pointed to a large drop in the funded ratio for the pension trust in 2008 and 2009, largely because of the financial crisis where returns were low or negative. He noted the hit had a lingering impact. He highlighted that the funded ratio of the pension had increased from 2014 to 2015 because of the $1 billion contribution. The subsequent years had seen a slow decreasing in the number followed by a slight increase. The funded ratio for the healthcare trust had been steadily rising over the past several years. He noted that EGWP was implemented in 2018 combined with favorable experience. He added that the liability that went into the funded ratio in 2006 was measured using much different assumptions than those used in 2024. The assumptions had a major impact on the unfunded liability. Mr. Kershner continued to slide 23 showing a similar graphical representation for the TRS pension and healthcare. The pension was shown in green and healthcare was shown in orange. He noted that the slide showed the same basic pattern as slide 22 showed for PERS. 2:50:28 PM Co-Chair Josephson stated that in 2015 the legislature moved from a level percent of payroll method to a level dollar method, which lowered the near-term contributions and eased the state's outlay, partly because of the state's own financial problems (unrelated to the history of defined benefits) related almost entirely to oil prices at the time. He asked for verification that the decision was impactful in terms of the state's ability to pay down liabilities. Mr. Kershner responded affirmatively. He would address the topic in a couple of slides. He agreed that one of the main changes made in 2014 was changing the amortization from level dollar (akin to paying a fixed mortgage where every year a portion of principal and interest was paid down) to a level percentage of pay, which assumed payments toward the unfunded liability would increase as payroll was expected to increase. He explained that when comparing the pattern of payments of level dollar versus level percentage of pay, the level percentage of pay amounts were smaller in the earlier years (8 to 10 years) and much larger in later years. The change from level dollar to level percentage of pay impacted the pattern of paying down the unfunded liability by pushing more of the payment into the future years rather than the early years. Co-Chair Foster recognized Representative Chuck Kopp in the audience. Mr. Kershner continued to slide 24 titled "Unfunded Liability - Background." He noted the next several slides were intended to address committee members' questions provided prior to the hearing. The unfunded liability was the difference between the actuarial accrued liability and the actuarial smoothed value of assets. He detailed that because all of the calculations were based on assumptions made over the next 30 to 50 years, it was a given that assets may or may not earn the 7.25 percent and there would be fluctuations in the liabilities. He elaborated that every year the actuary assumed a certain percentage of active employees would retire at various ages and would live for a certain period of time based on life expectancies. The following year, the actuary received data showing what actually happened in that past year. He added there could also be contributions that were greater or less than the actuarial determined contribution that could cause increases or decreases in the unfunded liability. There could also be changes in plan provisions, but none occurred in a number of years. Mr. Kershner continued to slide 25 and continued to provide background on the unfunded liability. In order to analyze the asset and liability experience, the actuary compared the actual values of assets and liabilities with the expected value based on the previous year's valuation and assumptions. He noted that if the difference was favorable to the plan, it was an actuarial gain and if the difference was unfavorable, it was an actuarial loss. For example, if assets earned 8 percent and the assumed rate was 7.25 percent, it created an asset gain. Whereas if inflation was 5 percent and the assumed inflation rate was 2.5 percent, it meant the system would be paying out higher post- retirement pension adjustments (COLA benefits linked to CPI) and it would create a loss to the plan. There were a number of reasons why liabilities could be higher or lower than expected and the Gallagher valuation reports were posted on the DRB website with details. The contribution gains/losses were due to the two-year lag that was introduced in 2014. He noted there was also a significant contribution gain from the $3 billion state contributions made in FY 15. Per statute, actuarial assumptions were reviewed and modified every four years. Assumptions could cause liabilities to increase or decrease, but there were generally net increases in liabilities as a result of assumption changes. 2:56:59 PM Mr. Kershner continued to slide 26 titled "PERS/TRS Funding Methodology Established by Alaska Statute in 2014." The unfunded liability amortization method was changed from level dollar to level percent of pay. The amortization period was reset to a closed 25-year period. He explained that the plans were expected to be fully funded by 2039. The contribution rate setting process was changed to a two- year roll-forward, sometimes referred to as a two-year lag. He noted it led to the contribution gains/losses he referred to earlier. Additionally, the actuarial value of assets was reset to the market value of assets with a five- year smoothing implemented prospectively. A 20 percent market value corridor was eliminated. He expounded that the corridor meant the actuarial value could not exceed more than 20 percent over market value or 120 percent or below 80 percent of market value. Mr. Kershner continued to slide 27 titled "Pers/TRS Funding Methodology Modifications Adopted by ARMB in 2018." A 25- year layered amortization was implemented in 2018 to help mitigate contribution volatility. He explained that when there were large gains or losses in a given year, without layered amortization the gains/losses had to be funded over a much shorter period of time, which could cause greater volatility. He explained that the method meant there were multiple amortization layers amortized over separate periods of time. When layered amortization was implemented in 2018, the outstanding balance of the unfunded liability from the original period established in 2014 was maintained, which would still be funded by 2039. Going forward, each year's unexpected change in the unfunded liability was separately amortized over a 25-year period. The total amortization amount for each trust was the sum of all of the individual amortization amounts for all of the layers. Representative Stapp asked for more information on layered amortization. He stated his understanding that the initial unfunded liability was amortized over a closed period. When there were gains or losses to the fund, the unfunded liability was re-amortized in order to smooth out the state's additional contribution to avoid volatile upswings and downswings. Mr. Kershner responded affirmatively. He provided an extreme example to illustrate the difference between having layered amortization versus not having layered amortization. He explained a scenario where the state had continued with the original 25-year period implemented in 2014 where plans were to be fully funded by 2039. He provided a hypothetical scenario where in 2037 there was a significant drop in the asset markets that resulted in hundreds of millions of dollars in losses to the assets. He explained that without layering, the losses would have to be funded over the next two years because there would only be two years left in the original 25-year period. With layering, the significant losses would be funded over the next 25 years from that point forward. He stated that an extreme example could help appreciate the impact on volatility by introducing layering. 3:01:58 PM Representative Stapp understood the methodology. He was concerned that there were still cash outflow liability payments to people. He stated that layering amortization made sense to avoid an unfunded mess in the last couple of years of the plan. He reasoned that the money would still be going out the door, meaning assets would have to be liquidated to pay. He asked what happened if the inflationary pressure was high and performance was low in a couple of years with the long term assets of the plan. He thought it would mean needing to "fire sale" the assets in order to make liability payments. Mr. Kershner responded that liquidity is generally not an issue, but if there was a significant decline in assets, it would need to be funded to pay benefits promised to participants. He stated it meant contributions would need to be higher. He elaborated that the basic funding principle over the lifetime of a pension plan was that the money coming in via contributions and investment earnings had to equal the amount going out to pay benefits and trust expenses. As investment earnings went up or down, contributions went down or up to make up for excess asset returns or deficiencies. He stated it was a balancing act over time; as assets did better or worse, contributions needed to be adjusted to ensure there was sufficient funding to pay benefits. Representative Stapp remarked that liquidating assets would impact the rate of return. He reasoned that payments had to be made because they represented a fixed liability. He wondered how badly the projected rate of return would be jeopardized if assets had to be liquidated to make payments. Mr. Kershner responded that it would come down because there would be less of an ability to invest in long-term equities expected to generate higher returns. He explained that when there were short-term cash needs, it meant the need to invest in more short-term assets with lower earning potential. He expounded that assuming a lower expected return meant liability would increase significantly, which would substantially increase contributions. 3:05:37 PM Mr. Kershner turned to slide 28 titled "Sources of PERS Pension Unfunded Liability Incr/(Decr) Since 2014." He noted that slide 29 showed the same information for TRS. The slides focused on the pension unfunded liability because the healthcare trusts were overfunded. He continued with slide 28 and pointed to column A showing market value gains/losses. A gain meant the trust earned more than the assumed return and a loss meant the trust earned less than the assumed return. In 2021, there was a $2.1 billion gain on PERS pension assets resulting from a 31 to 32 percent return. The following year there was a loss of about $1.6 billion. The total market value loss over the ten years shown on the slide [2015 to 2024] was $435 million ($435 million less than projected on a market value basis). The loss meant the need to make up for the loss either by excess returns in the future and/or higher contributions. Column B reflected the smoothed value (gain or loss on the actuarial value used to determine contributions). He noted the values were all off by one year because of the five- year recognition of gains and losses and they all crossed over from one year to the next. He highlighted that columns B through E totaled the net impact on the unfunded liability. The impact of the market loss was $435 million over the ten-year period and $447 million of losses in the actuarial/smoothed value. Mr. Kershner moved to column C on slide 28. Column C showed the impact on liabilities due to experience of the plan (i.e., retirement rates, life expectancy rates, inflation rates). Over the ten years shown on the slide, there were just under $250 million in reductions in liability because the plan experience had been favorable compared to actuarial assumptions. Column D reflected the contribution gain/loss. He pointed to the $1 billion infusion into the PERS pension in 2015 compared to actuarial projections, resulting in a $835 million contribution gain. Overall, $636 million more had been contributed to reducing the unfunded liability. Column E showed assumption changes. He detailed that assumption changes were revised every four years. In 2018, the expected return on assets was lowered from 8 percent to 7.38 percent and updated mortality tables with longer life expectancies had been adopted. The PERS pension liability had increased by slightly over $500 million just from the assumption changes in 2018. Four years later, there was another $206 million increase in the unfunded liability due to assumption changes, partially due to further lowering the expected return assumption as well as a number of other assumptions. Over the ten-year period, $761 million was added to the unfunded liability due to the use of more conservative assumptions. The last column on the slide combined columns B through E and showed that the unfunded liability was $325 million more than expected. 3:11:31 PM Representative Stapp thought it looked like it was time for a reduction in assumption changes again. He wondered what the number would be. He was hoping maybe $100 million. He remarked that it looked like some progress was being made. Mr. Kershner agreed that Gallagher would start looking at the assumptions in 2026 for ARMB and new assumptions would be adopted in 2026. He relayed that it was too early to tell [what the number would be]. He elaborated that Gallagher may pull back some of its assumptions. For example, by not assuming salaries would grow as fast as the current assumption. He explained it would help offset some increases that may occur if the investment return assumption were to be lowered to something like 7 percent. He added that the discussions had not yet occurred. The review of the assumptions was required by statute. Representative Stapp looked at the contribution gain/loss column on slide 28 and observed that it looked like the state was losing out the vast majority. He highlighted there had been annual losses from 2016 through 2020 and in 2024 (six out of ten years). He wondered if there was anything that could be done to do better than 60 percent on the gain/loss ratio. Mr. Kershner responded that a margin could be added to the contribution calculation by adding something to liability to guard against adverse experience. He explained it would mean prefunding some future losses that may be incurred. There were a number of techniques that could be used, but without adding those types of margins, the patterns shown on slide 28 resulted. He explained that in 2014, when the two-year contribution lag was introduced, it meant the contribution rates for a particular year were based on the valuation done two to three years earlier. For example, the FY 26 contribution rates were based on the 2023 valuation. He remarked that things had changed between 2023 and 2026. The figures seen in column D from 2016 to 2024 were due to the two-year lag. The losses shown from 2016 to 2020 meant that contribution rates had been rising steadily. By setting the contributions based on a lower rate that occurred three years earlier compared to the current rate, it gave rise to the contribution losses. The losses were followed by several years where there had been a decline in contribution rates, which helped create contribution gains. Representative Stapp appreciated the in-depth answers. He asked what it looked like in terms of basis points. He considered Mr. Kershner's statement that 100 basis points was the equivalent of 1 percent. He wondered about a scenario where it was amortized over a decade and asked what it did to assumptions. He recognized that assumptions were not limited to the rate of return and included things like longer life expectancy and COLA adjustments. He asked what it looked like in a monetary number. He wondered if a 1 percent miss was the equivalent of $500 million. Mr. Kershner responded that for a $1 million increase in unfunded liability funded over 25 years, the extra payment in the first year would be about $64,000. Under level percentage of pay, the payment would be assumed to increase every year going forward by payroll growth. Similarly, if the unfunded liability went down by $1 million, the first year's payment would be $63,000 less. Representative Stapp asked how to get out "from under this thing." Mr. Kershner responded that actuaries were always focused on the long term, and they always saw the projected funded ratio slowly creeping up to reach 100 percent at the end of the amortization period. He stated that it was a valid outlook, but he compared it to a cruise ship moving towards a distant destination. He elaborated that the cruise ship did not make a one-time change, it turned gradually to get to where it needed to be over time. He explained it was the way actuarial funding of long-term obligations worked in order to avoid, to the degree possible, significant fluctuations from one year to the next. He stated it was a different environment currently than 10 to 20 years back in terms of expectations for the future. In the past, assumptions were that people would live much shorter lifetimes and that assets would earn significantly more. He stated that when comparing 20 years back to the present, too many factors had changed to pinpoint every reason. On a going forward basis, assuming assumptions were used to measure liabilities that were reasonably expected to materialize over the future, the desired goal of 100 percent funding would be reached, but it was a slow process to get there. 3:20:28 PM Mr. Kershner continued to slide 29 titled "Sources of TRS Pension Unfunded Liability Incr/(Decr) Since 2014." He pointed to the last column on the slide showing a net decrease in the unfunded liability by just under $1.4 billion. He relayed that most of the total in column D [titled "Contribution (Gain)/Loss"] was due to the large $1.7 billion contributed to the TRS pension in FY 15. He noted the other changes almost offset one another. He stated that TRS was in a much better funded spot than PERS. He explained that over the past couple of years, teacher salaries had not increased as rapidly as salaries for public employees, particularly police officers and firefighters. There had also been a significant number of delayed retirements because teachers had been continuing to work well into their 70s. He detailed that it meant liabilities were lower because they were deferring when they expected to begin payment of the benefits. The teachers' system had better experience over time on the liability side, primarily because of lower salary increases and delayed retirements. He noted that the asset experience was generally the same on a relative basis because PERS and TRS had the same asset allocation. Mr. Kershner moved to slide 30, which showed the historical unfunded liability dollar amounts for PERS. He noted that the blue bars represented pension and orange bars represented healthcare. He highlighted that the blue bars were steadily rising beginning in 2006. He pointed out that it was comparable to the funded ratio graph earlier in the presentation. He explained that as the funded ratio decreased, the unfunded liabilities were going up. He noted that beginning in 2019 the orange bars were negative, meaning healthcare trusts were in a surplus position. The dollar amounts were shown at the bottom of the slide for each year. Mr. Kershner moved to slide 31, which showed the same info for TRS with green bars representing pension and orange bars representing healthcare. The TRS unfunded liabilities were lower and the funded ratios were better. Mr. Kershner continued to slide 32 titled "How are State Contributions Determined?" He relayed that actuaries had to consider several factors including the underlying costs of the benefits. He noted that more valuable benefits with a COLA feature were costlier. Another factor to consider was the total payroll and how the payroll was expected to grow (contribution rates were the underlying cost divided by payroll). He relayed that payroll also generated contributions. For example, PERS non-state employers contributed 22 percent of payroll. He explained that if payroll was not as high as expected in the future, there would be lower contributions from employers. He elaborated that a lower payroll figure meant the state's contribution rate went up. Other considerations included how much members, employers, and the state paid. Mr. Kershner noted that member contributions were set by statute. Under the DB plan, peace officers and firefighters contributed 7.5 percent of pay. All other PERS members contributed 6.5 percent of pay and TRS members contributed 8.65 percent. 3:26:40 PM Mr. Kershner explained that the member contribution rates did not fluctuate based on the funded status of the plan and would only change if statutes changed. He detailed that under PERS the non-state employers contributed 22 percent of payroll. Starting in FY 22, the state as an employer under PERS contributed the full actuarial rate based on the payroll of its employees. He noted that the payroll of the state's employees was just under 50 percent of the total PERS payroll. He detailed that TRS employers contributed 12.56 percent payroll as defined in statute. Mr. Kershner continued to slide 33 and continued to address how state contributions were determined. He relayed that actuarially determined contributions consisted of two components including the normal cost (the cost of benefits expected to accrue in the upcoming year) and the past service cost (amortization of the unfunded liability). He explained that the DB normal cost was paid entirely by member contributions and a portion of employer contributions. The employers also contributed to DC costs (PERS Tier 4 and TRS Tier 3). The DC costs included occupational death and disability benefits, healthcare, the DC contribution (5 percent for PERS and 7 percent for TRS), and HRA contribution (3 percent). He noted that there were no member contributions toward the DC costs. A portion of the employer contribution also went toward the DB past service cost. The amount was determined by taking the total contribution (22 percent of pay for PERS non-state employers, 12.56 percent for TRS, and the full actuarial rate for PERS state employers) and subtracting the portion paid for the DB normal cost and DC costs. The net balance went toward the DB past service cost. The DB past service cost not paid by the employers was paid by the state as additional contributions. He concluded the presentation. Representative Bynum stated that the reason the issue was under discussion was to understand what the state's current retirement system looked like and what reform looked like. He provided a hypothetical scenario using a municipal employee under the PERS Tier 4 system where an employer was able to take all of the money it was obligated to pay for the employee (instead of paying the past liability for previous employees (under PERS Tiers 1 through 3)) and take the difference the employer received on behalf from the state and give it to the employee for retirement. He asked what percentage the employer would be able to give an employee in in their DC plan. He asked if pension reform would even be under discussion if the scenario was allowable. 3:32:59 PM Mr. Kershner responded that it was impossible to answer the hypothetical question. He explained that in any pension reform, the first thing the actuary looked at was the underlying cost of the benefits. If the cost of the reform benefits increased, it would take more contributions to fund them, whether it came from members, employers, or the state. He explained that if the current funding structure remained in place, the extra cost would fall to the state because members and employers had fixed contribution levels. He detailed that it would depend on the type of reform, the associated cost of the reforms, and whether the amounts paid by members, employers, and the state were changing. Representative Bynum looked at a PERS Tier 4 employee in 2025, which had a cost to the employer. Currently the employee paid 8 percent of their wage into their DC plan and the employer contributed about 5 percent plus another 4.5 percent for healthcare and other health benefits. Additionally, the employer had to pay a past liability per employee for the previous DB plan at about 12.5 percent. He added that if the actuarial amount was over 22 percent, the state picked up the difference. He looked at a 2025 chart for PERS on slide 9. He asked for the differential between the 22 percent employer contribution and what the state had to pay in 2025. Mr. Kershner answered that the percentages shown on slide 9 were the percentages of each individual pay. He directed members to slide 17 to look at how the percentages were funded. Representative Bynum remarked that whether it was 2 percent to 5 percent of the on behalf payment, it would mean the employer would have between 12.5 and 17.5 percent for the employee benefit if they were not paying for the past liability. Currently, the municipal PERS Tier 4 employee did not receive that amount because of the past liability payment. He reasoned that if the state had the money available for the employer to pay the employee in the DC or some other retirement plan, there would not currently be a conversation about an $8 billion, $16 billion, or $12 billion past service liability. He stated that it would mean the retirement program would be healthy and the employees would be taken care of. He added that at the end of the day it was about what kind of benefit was received, how much the plan cost, and who would pay for the plan. Under the current scenario, the current employer and the current employee were burdened because they were not able to take the benefit. Co-Chair Foster noted that the committee was at the end of its time allotted for the bill during the meeting. The bill would be heard again the following day. HB 78 was HEARD and HELD in committee for further consideration. 3:38:00 PM AT EASE 3:57:31 PM RECONVENED