HOUSE BILL NO. 55 "An Act relating to participation of certain peace officers and firefighters in the defined benefit and defined contribution plans of the Public Employees' Retirement System of Alaska; relating to eligibility of peace officers and firefighters for medical, disability, and death benefits; relating to liability of the Public Employees' Retirement System of Alaska; and providing for an effective date." 2:57:48 PM AT EASE 2:58:12 PM RECONVENED DAVID KERSHNER, PRINCIPAL AND CONSULTING ACTUARY, BUCK GLOBAL (via teleconference), shared that the firm was the actuary for the Department of Administration Division of Retirement and Benefits. He continued that Buck Global had completed a cost-benefit analysis for the bill. He asked if he should summarize the key elements of the bill and the costs. Co-Chair Merrick agreed. Mr. Kershner explained that the bill would allow active members of the Peace Officers and Firefighters an opportunity to transfer to the Public Employees' Retirement System (PERS) Defined Benefit (DB) Plan which currently only covered employees hired prior to July 2006. The Defined Contribution (DC) Plan covered those hired after 2006. The bill proposed that all future hires would enter the DB plan. There was a separate schedule of benefit provisions that would apply to the members covered by the bill, as well as cost-sharing provisions. He relayed that the Alaska Retirement Management (ARM) Board oversaw the funding of the PERS system, and per statute all employers contributed a fixed 22 percent of pay to the PERS system. A portion went to the DC plan and the remainder of the 22 percent went to the DB plan. The cost sharing would not change, but under the bill a new separate trust would be established in the PERS system that would cover the benefits provide for the members affected by HB 55. All the assets contributed to the trust would be separately tracked and dedicated for the members. Mr. Kershner continued to describe the provisions of the bill. He explained that currently PERS employer contribution rate was fixed at 22 percent, and the actuarial contribution was based on ARM board policy. The excess of the contribution rate was the additional state contribution rate. He cited that currently the members covered under HB 55 had just under 10 percent of pay contributed to the DC plan, and the remainder contributed to the DB plan. Under HB 55, there would be 12 percent going to the trust as well as the HRA accounts currently set up, which left 12 percent to go towards the DB plan. The portion of the employee contribution going toward the DB benefit plan for members would decrease from 12.2 percent to 10 percent of pay. The difference would have to be made up per ARM Board policy and was made up by additional state contributions. The fiscal note included the estimated increase for five years starting of about $5.3 million in FY 23 and $28.4 million for the five years after. 3:04:57 PM Representative Thompson asked what the figure would be with correctional officers included. Mr. Kershner replied that he was not certain the corrections officers were included in the group of peace officers and firefighters in the bill. Representative Josephson clarified that corrections officers were covered as part of the group. Mr. Kershner was happy to provide further details or answer questions. Representative Josephson asked if the plan would be solvent if Alaska had just become a state and the only DB plan was for peace officers and firefighters. Mr. Kershner answered in the affirmative. If the plan had just started there would be no assets or liabilities, and under the funding policy each year a percentage of pay would be contributed that was equivalent to the cost of benefits accruing under the plan. As long as the actuarial calculations projected dozens of years into the future, and if there were related to life expectation, length of employment, and salary amounts. He acknowledged that in any given year the assumptions would not be correct, but they should be reasonably close to actual experience in the long-term. He noted that every year there were deviations from the assumptions, and if assets did not earn as much as expected there were created losses to the plan and the losses had to be funded over a period of time. Mr. Kershner continued that if the plan started in the present, and all of the experience matched assumptions for the future, accrued benefits would be funded and the state would never have any of the losses. The state would only be funding the benefits accruing annually in the 8 to 9 percent range. He noted that the PERS DB plan was significantly underfunded at present and the cost for the DB plan was a makeup for the current costs in addition to unfunded liabilities accumulated over time. He affirmed that if the plan were to start today, the cost sharing and contribution rates proposed in SB 55 would be enough to cover the cost of the benefits if all future experience matched the assumptions. 3:10:08 PM Representative Josephson reiterated that if the plan was starting fresh it would be solvent at inception and without a negative history. He referenced HB 79 from the previous legislature, which was related to the same topic and "virtually identical." He recalled that Mr. Kershner had determined that HB 79 was anticipated to be somewhere above 99 percent anticipated solvent. Mr. Kershner answered that the HB 55 trust that would cover the liabilities for the members as well as the assets being transferred in, was expected to remain solvent for many years. He addressed the $5.3 million cost increase for FY 23 that was due to the portion of the 22 percent employer contribution currently going into the DB plan, and noted that more would go to the new trust. The increase was not because the HB 55 trust was not solvent or expected to remain solvent, rather there was a shifting of the 22 percent between the various trusts was giving rise to cost increases. 3:12:45 PM Representative LeBon referenced HB 79 from the previous legislature, which was related to the same topic. He recalled that the fiscal note had totaled $18 million through the five years ending 2027, and he thought the note had jumped up to $28 million for the same period. He asked about the unfunded liability for the PERS program, and referenced an amendment proposed to transfer about $1 billion from the Permanent Fund to PERS to close the unfunded liability. He asked what impact the action would have had in the discussion about a DB program as proposed by HB 55. Mr. Kershner replied that if $1 billion were transferred into the DB plan, the cost impact of HB 55 would likely be similar to what Buck had determined for the bill because the current additional state contribution would go down. The plan would start from a lower funding point, and the provision of HB 55 would enact the same cost increases through a shifting of contributions. Under HB 55, the state would contribute about $5.2 million less into the DB plan, and the cost would be independent of the $1 billion. He contemplated the scenario of putting $3 billion or $4 billion into the PERS system, which would likely wipe out the initial state contribution entirely with no increase. He acknowledged that a $1 billion contribution would help the funding of the DB plan, but it would not eliminate underfunding, and there would still be an additional state contribution of a lower amount. Mr. Kershner mentioned the analysis of HB 79 and noted that the most recent analysis was in February 2020. The process had started about a year earlier and was based on 2018 data because it had been the most recent available data at the time. The HB 55 analysis was based on 2020 data, and in the two years the payroll for peace officers and firefighters had increased about 11 percent in total for a larger pay base resulting in larger dollar amounts than under HB 79. 3:17:09 PM Representative LeBon stated that one of his motivations in the discussion was two-fold. He believed that establishing a new DB program meant the state needed to consider that the current DB plan was still underfunded. He believed it needed to be fixed. He stated that it would take 18 years to close the current liability. He added that he may have included Teachers' Retirement System (TRS) in the estimate. He asked about fixing the liability and making room in the budget for a new DB plan. Co-Chair Merrick noted that Mr. Kershner had referenced an 11 percent increase in payroll. She asked if it was because the state had hired more officers or increased pay for existing officers. Mr. Kershner answered that the increase was a combination of both factors. There were more active members than in 2018, and the recent pay increases had been more than expected. 3:19:41 PM Representative Wool referenced Representative Josephson's question about whether the plan from SB 55 would be solvent if it was isolated on its own. He thought Mr. Kershner had given the plan a high score. Mr. Kershner answered affirmatively. Representative Wool thought because the state already had an underfunded DB system, it was not possible to keep the two plans separate entities. He asked if it was possible to pay down the old system while maintaining the new system proposed in the bill. Mr. Kershner replied that based on the way the bill was designed, the HB 55 members would be employees under the PERS system and PERS employers contributed 22 percent of pay, which was allocated to different trusts depending upon the specific yearly calculations. He continued that if the HB 55 plan was established separately from PERS, it could turn out to be more or less expensive. He explained that under HB 55, part of the 10 percent of the payroll for peace officers and firefighters would being deposited into the underfunded DB plan. Currently about 12.2 percent of pay was deposited into the plan. The decrease from 12.2 percent to 10 percent was equivalent to about $5.2 million, which was reflected in the increase in the fiscal note for FY 23. The amounts would be a shifting of contributions away from the unfunded liability in the DB plan, and the amount would be made up through the additional state contribution. 3:23:05 PM Representative Wool asked about the conversations on solvency and the efficacy of the plans. He recalled that if the market returns dropped, there was a trigger and employees would have to contribute more. He considered the increased retention the groups would likely experience, which was one of the purposes of the bill. He asked if it was included in the analysis. Mr. Kershner answered that there were two triggers within HB 55 that meant if the HB 55 trust were to fall below a 90 percent funding level, the post-retirement pension adjustment could be limited, or the current 8 percent member contribution could be increased to ten percent. The two provisions had not come into play because the HB 55 trust was not anticipated to fall below 90 percent funded; however, if it did fall below, the two items could be triggered. He asked for a repeat of the rest of the question. Representative Wool asked if increased retention of members was included in the calculations. Mr. Kershner answered in the affirmative. The current active members were projected through retirement, all current retired members through the retired years based on life expectancy, and a certain percentage of the members were expected to terminate employment every year. The assumptions depended on age, service, gender, and other factors. The withdrawal assumption rates were higher than the corresponding rates in the DB plan due to the general tendency to have more workforce mobility for those covered by a DC plan compared to a DB plan. The lower turnover assumptions were used for members expected to transfer into the DB plan. 3:27:00 PM Representative LeBon looked at the fiscal note (OMB Component Number 2866) showing $5.3 million in FY 23 with upward growth to $5.6 million, and $6.1 million in the subsequent years. He was not surprised there was upward growth in funding. He noted it dropped to $5.7 million in FY 26 and FY 27 and thought the funding impact to the proposed program had many unknowns. He felt there was a sense of urgency to deal with the unfunded liability prior to opening another DB program. Representative Josephson was concerned about the possibility of waiting another 20 years. He looked at the amortization period out to pay off the unfunded liability went out to 2041. He asked if the estimate was correct. Mr. Kershner answered in the affirmative. Representative Josephson shared that he was currently 56 years old and would be 77 when the unfunded liability was retired. He thought the implication of adding the fiscal note would result in an additional 6 months of payment. 3:29:34 PM Mr. Kershner responded that all projections were based on current funding status and expectations about the future, which included assets growing about 7.4 percent per year. He noted that in the current fiscal year assets had returned much greater than 7.4 percent, but the previous two or three years had been unfavorable to the plan. He cautioned that projections could change significantly depending upon the experience to the plan on the asset and liability sides. There could be gains or losses on both the returns and liabilities. He discussed the retirement expectation and explained that if people retired earlier than expected it would create a loss to the plan. Similarly, if the plan population had greater or lesser life expectancy than the standard calculation it could cause a gain or loss to the plan. Representative Josephson clarified that he was asking if the bill did not add substantially to the 20-year journey of paying down the unfunded liability. Mr. Kershner answered that based on the current calculations it was correct. Representative LeBon surmised that it could become a very short journey if the underfunded liability in the existing plan was paid and thought it would help justify a new plan. HB 55 was HEARD and HELD in committee for further consideration. Co-Chair Merrick reviewed the schedule for the following morning.