HOUSE BILL NO. 220 "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." 9:26:02 AM Co-Chair Merrick reported that the bill had been returned back to the committee from the Rules Committee to approve of a new fiscal note. 9:26:10 AM DAVID KERSHNER, CONSULTING ACTUARY PRINCIPAL, BUCK GLOBAL LLC, FLORIDA (via teleconference), reviewed the new fiscal impact note from the Department of Administration with control code szCfR. He indicated that the original fiscal note was dated March 24, 2022. The revised fiscal note reflected changes made in Version B of the committee substitute (CS). The CS changed the following: the normal retirement eligibility requirements for employees under the Public Employees' Retirement System (PERS) and Teachers' Retirement System (TRS), the average compensation for teachers changed from three years to five years, the member contribution rate for public employees other than police and firefighters [PERS Other] increased from six percent to eight percent, and all employees would be required to retire from active service in order to qualify for retirement benefits. 9:30:25 AM Vice-Chair Ortiz asked how requiring employees to retire from active service to qualify for benefits would affect potential retirees. Mr. Kershner responded that if an employee ended their employment before retirement and ultimately retired later on, they would still receive retirement benefits upon retiring under the original version of HB 220. The language in the committee substitute [version B] reverted back to statutory language that required an employee to retire from active service to receive benefits. The healthcare liabilities would increase if a higher population of people were eligible for benefits, which is why the liabilities decreased under version B. Co-Chair Merrick invited the bill sponsor to the table for questions. 9:33:50 AM Representative Josephson asked Mr. Kershner about page 2 of the fiscal note (copy on file) that showed a savings to PERS and TRS of $28.5 million in FY 24. However, the savings in FY 28 would be about a fifth of the savings in FY 24. He wondered why the savings decreased over time. Mr. Kershner responded that currently, the defined benefit plans were closed to new entrants. It was assumed that anyone hired on or after July 1 of 2006 would be entered into the defined contribution plan. As the system currently stood, it was projected that as the number of employees covered by defined benefit plans decreased over time and employees entering into defined contribution plans increased, contributions from employers into the defined contribution plans would increase. However, if HB 220 were to pass, current members of the defined contribution plans would be given a choice between remaining in a defined contribution plan or transferring to a defined benefit plan. All future hires would be given the choice between a defined contribution plan and a defined benefit plan. For the purpose of the fiscal note, Buck had assumed that all current members of the defined contribution retirement plan would elect to transfer to the defined benefit plan. It was also assumed that all future hires would enter the defined benefit plan. As a result, there would be a shift in employer contributions between the two plan types as the defined benefit plan membership increased over time. 9:37:22 AM Representative Josephson suggested that the legislature's aggressive pay down of the unfunded liability had been helpful. He wondered if the state would have realized additional savings if the plan had been implemented earlier. Mr. Kershner responded that it was hard to answer the question definitively. The total contribution rates as proposed in the CS were about the same as they were in the current system. Employers would continue to contribute the same amount, which was 22 percent of pay for PERS and 12.56 percent of pay for TRS. The difference proposed by the bill was an increase in employer contributions into the defined benefit plans rather than the defined contribution plans. It was a shuffling of funds. The shift would mean that the state would have to make up a smaller difference, which would lead to a decrease in state contributions. When defined benefit plans were closed to new entrants in 2006, it reduced the risk to the state of unfunded liabilities and therefore higher contributions. Re-opening defined benefit plans would mean that the state would reassume some of the previously prevented risk and would likely have to contribute at a higher rate. It was important to note that if asset returns were lower than Buck's projections, contributions to the state would be higher. Conversely, if the returns were more favorable than projected, the state contributions would be reduced. Vice-Chair Ortiz suggested that the passage of the legislation would result in a savings to the state. Mr. Kershner responded in the affirmative as long as the state's future experiences under the plan were not lower than projected. 9:43:32 AM REPRESENTATIVE GRIER HOPKINS, SPONSOR, responded the committee had been previously presented with the Monte Carlo analysis done by actuaries from Cheiron that looked at risk analysis. There was a strong level of confidence in the legislation's ability to uphold the projections. There was a variable employee contribution rate built into the bill, which mean that there was risk sharing with the employee. If there were adverse market returns, the employee contribution rate could be increased to compensate for the lower returns. A one percent increase in employee salary contributions would result in a $200 million additional investment into the pension fund. He referred to the Buck actuarial analysis (copy on file) on page 3, line 7. He highlighted the state's contribution percent decreasing over the lifetime of the legislation. 9:46:39 AM Representative LeBon asked about the assumed rate of return, which he thought was about 7.8 percent. He asked what the impact on the plan would be if a return of 6.5 percent was assumed instead. Representative Hopkins responded that the specific hypothetical scenario was discussed by Cheiron at a previous hearing. He thought that Cheiron had considered 6.75 percent, but he would have to look at the analysis for the exact figures. The unfunded liability that was currently being whittled down due to the closure of the system in 2006 would not be the responsibility of current employees. The state would experience reduced costs as a result of reopening the system in order for new employees to participate. Representative LeBon asked if the formula for contribution percentages was defined in the bill. He suggested that once the formula was enacted, the minimum retirement benefit contribution would be established. He wondered if there was a provision to increase the benefit in any way if the fund became more successful than projected. Representative Hopkins replied in the negative. He explained that the post-retirement pension adjustment was the only thing that could be changed. Additionally, if the pension fund was more than 90 percent funded, a 10 percent increase would be allocated to retirees. However, there would not be a reduction below the eight percent employee contribution minimum. A future piece of legislation could accomplish a reduction, but HB 220 would not. 9:51:32 AM Co-Chair Foster MOVED to report CSHB 220(FIN) out of Committee with individual recommendations and the accompanying fiscal note. There being NO OBJECTION, it was so ordered. CSHB 220(FIN) was REPORTED out of committee with four "do pass" recommendations and three "no recommendation" recommendations and with one new fiscal impact note by the Department of Administration. Co-Chair Merrick reviewed the agenda for the following meeting.