SENATE BILL NO. 220 "An Act relating to additional state contributions to the teachers' defined benefit retirement plan and the public employees' defined benefit retirement plan; and providing for an effective date." Co-Chair Kelly noted that the committee was hearing the bill for the first time. ANGELA RODELL, COMMISSIONER, DEPARTMENT OF REVENUE, pointed to a PowerPoint presentation titled "PERS/TRS Funding Solution" dated April 2014 (copy on file). She stressed that pension funding, and its associated liability was a concern for many years. She stated that she had evaluated the history, and shared that there had been several Arm Board meetings that addressed the severity and urgency of the unfunded liability. MICHAEL BARNHILL, DEPUTY COMMISSIONER, DEPARTMENT OF ADMINISTRATION, pointed to slide 3, which outlined the organization of the state's pension system. He stated that the far left showed the DOR Treasury Division, the middle showed the Alaska Retirement Management Board, and the right showed the Department of Administration (DOA). He moved to slide 4. He announced there were currently 27,000 active employees and close to 42,000 retirees. He looked at slide 5 titled "Benefits." The state was currently paying out $1 billion in benefits. All told the state was looking at over $130 billion in benefit payments over the next 70 years. He stressed that the unfunded liablity was approximately $11.9 billion 5:25:43 PM Mr. Barnhill looked at the basic actuarial formula on slide 6. He stated that hopefully the amount would equal the benefits. He stated that it was 7.5 percent for teachers, and the amount typically did not change, but it had changed in the past. He remarked that TRS had gone from 12 percent to over 70 percent. He pointed to a variety of actuarial assumptions. He turned to slide 7 titled "Events": 2002 - Milliman actuarial audit; dotcom collapse 2003 - FY 2002 valuations released with revised assumptions. $4.1 billion unfunded liability 2005 - SB 141 enacted: DB plans closed; DC plans created; PERB/TRB/ASPIB sunset; ARM Board created 2007 - ARM Board files suit against Mercer for actuarial negligence; SB 123 enacted: PERS cost share 2008 - SB 125 enacted; employer contribution rates capped; state assistance begins; Great Recession begins 2009 - PERS/ TRS investment loss: 20.5 percent 2010 - Mercer litigation settled for $500 million, net $403 million; other states begin to cut defined benefits, change plans 2012 - Arm Board adopts level dollar amortization ; $11.9 billion unfunded liablity 2013 - 12.5 percent investment gain; recession over question 5:31:39 PM Co-Chair Meyer queried what kind of cash infusion it would take to get to the 80 percent. Mr. Barnhill answered that if the $3 billion was funded the 80 percent would not quite be reached. He looked at the actuarial letter, which outlined the date as to which it would be met. Co-Chair Meyer asked if it was easier to reach 80 percent if there was a focus on only one approach. Mr. Barnhill replied that it was difficult to say, when the discussion was regarding appropriating billions of dollars from the Constitutional Budget Reserve (CBR). He stressed that TRS had a $4.7 billion unfunded liability, so if that was funded more that PERS, the question was whether TRS could reach the 80 percent mark quicker than TRS. He felt that approach was possible, because it was a smaller unfunded liability. He added that, with the governor's proposal, PERS would reach the 80 percent level in 2025 and TRS would reach the 80 percent level in 2027. Co-Chair Meyer agreed that TRS would be easier to reach 80 percent, but felt that the PERS was a shared responsibility with 60 percent from the state at 40 percent from the municipalities. Mr. Barnhill agreed that it was a shared responsibility. He remarked that there could be some additional cost sharing between the state of Alaska employers and the municipal employer, but the question was regarding the best method to share the responsibility. Mr. Barnhill moved to slides 9 and 10 that included different ways to pay down the unfunded liability. Until 2012, the ARM Board had methodologies to amortize the unfunded liability over a 25-year period at a level percentage of pay. This means that the payments on the unfunded liability will increase at the same rate as payroll. He stated that the trend of the payments from FY 15 through the FY 20s, the payments will increase. He remarked that there was a concern that the approach would be more expensive over time, so the ARM Board had examined dozens of scenarios to find an affordable and appropriate way to address the unfunded liability. He stated that slide 10 showed that the ARM Board created a level-dollar amortization, which provided for level payments over time. This formula was identical to a house mortgage formula. He noted that the payments would increase from $630 million in FY 14 to $975 million in FY 15, then crest over $1 billion in in FY 16, and slowly decrease after that. He stated that the ARM Board's recommendation caused some concern, because of the affordability of the cash infusion. Reconciliation must be met between the current needs and the future needs. The governor weighed man approaches to strike the future and current needs. GARY BADER, CHIEF INVESTMENT OFFICER, TREASURY DIVISION, DEPARTMENT OF REVENUE, introduced himself. 5:38:48 PM AT EASE 5:39:14 PM RECONVENED Co-Chair Kelly asked to leave the investments out of the presentation, because that topic had been discussed at a previous meeting. Commissioner Rodell moved to slide 16, "Problem: $11.9 Billion Retirement System Unfunded Liability." The Public Employees Retirement System (PERS) and Teachers' Retirement System (TRS) combined unfunded liability is $11.9 billion State Assistance payments to PERS and TRS rise from $629 million in FY2014 to over $1 billion per year Funding State Assistance solely through the operating budget crowds out funding for other vital public services Rating agencies express concern with the increasing liability Commissioner Rodell highlighted slide 17, "Proposal: $3 Billion Investment in Trust Funds." Invest a total of $3 billion in the Retirement Trusts in FY 15: $1.12 billion - Teachers' Retirement Fund $1.88 billion - Public Employees' Retirement Fund Funding source: The CBR Includes state assistance payments for FY 15 Beginning FY 16, State Assistance payments would be fixed at $500 million annually: $157 million - Public Employees' Retirement System (PERS) $343 million - TRS State assistance projected until FY 36; length of time depends on actuarial gains or losses experienced Commissioner Rodell looked at slide 19, "Governor's Proposal." She noted that the governor proposed a one-time cash infusion, so the annual payments into the 2030s would remain at $500 million per year. 5:42:50 PM Senator Bishop thanked the department for the presentation. He asked about the number one credit concern raised by ratings agencies. He wondered if the ratings agencies would provide something to the state showing that its credit was okay if the infusion was made. Commissioner Rodell replied that the ratings agencies issued reports. The department would report on the action taken by the legislature, expected to see something over the course of the year. Vice-Chair Fairclough asked about the two components related to the ratings agencies. Commissioner Rodell answered that each of the ratings agencies had its own criteria. Debt counted for an additional 20 percent and also included pension debt. Senator Dunleavy had heard that if a certain approach was used the accumulated debt included bonds, the unfunded liability, and other potential liabilities. Commissioner Rodell replied that agencies had noted strengths and challenges in their reports. She announced that the unfunded liability was listed as a credit concern for the state. Senator Dunleavy wondered what about the proposed approach was made it the best option. Commissioner Rodell responded that the approach recognized that additional contributions were necessary and that a lump sum was not enough to make the trust funds healthy, but amortized the debt over 25 years and put the state in a better place 5 years from now. 5:51:21 PM Senator Dunleavy asked what the department would say about putting another $2 billion or other into the fund. Commissioner Rodell answered that DOR would examine what the ongoing obligation would be for an additional $2 billion. She remarked that $3 billion was chosen, because there was a consideration for other needs from the reserves. Co-Chair Meyer referred to Vice-chair Fairclough's earlier question. He surmised that the cash infusion would be a good option, if oil revenue would be increasing. Commissioner Rodell believed it was the challenge the state was faced with related to the revenue forecast. The concern was not something that would continue to have support especially with a closed system. There was no reason to believe that it would not. She stressed that the liability was inching up instead of down, which was why the concern remained. Co-Chair Meyer would appreciate acknowledgement from the ratings agencies on how the action would impact the state's credit rating. He asked if the bill locked the state into annual payments of $500 million. Commissioner Rodell replied that the bill did not lock the legislature into the amount, it only recognized a fixed amount. Co-Chair Meyer wondered how it differed from the pay as you go plan. Commissioner Rodell answered that the pay as you go method did not allow for the one-time appropriation. The bill recognized the actuarial recommendation and the commitment to an annual payment. Co-Chair Meyer asked about the $700 million payment. Commissioner Rodell answered that the bill included the amount. Co-Chair Kelly did not see vast differences between the approaches to justify the bond rating improvement. He wondered if Commissioner Rodell had ever worked for a bond rating agency. Commissioner Rodell replied that she had never worked for a bond rating agency. Co-Chair Kelly never heard the case beyond bond raters on why the state should not use the pay as you go method. 5:57:55 PM Vice-Chair Fairclough pointed to slide 18 of the presentation. She queried the effect on the state's partners with the accumulation of the 38 percent and the extension on the flat payments. She wondered how the flat payments would impact the municipalities. She specifically wondered if there was an analysis of the additional employer contributions that would be required at a local level to support the proposal. Mr. Barnhill replied that those payments had been calculated, and agreed to provide that information. He stated that the Buck letter outlined the specifics of those payments. Vice-Chair Fairclough clarified that she was interested in specific costs to communities. She believed that Anchorage was in the $200 million range. Co-Chair Kelly asked the presenters to stay on track. 6:02:10 PM Vice-Chair Fairclough wondered about an allocation to PERS/TRS, and stated that David Teal, Director, Legislative Finance Division had stated that the unfunded liability was 100 percent the state's responsibility. She wondered why the specific mix had been chosen. Mr. Barnhill answered that there were a variety of reasons and ways to slice and dice the issue. He stressed that the PERS unfunded liability was greater than TRS. Vice-Chair Fairclough looked at the unfunded liability ratio, and remarked that the unfunded liability was higher in the TRS system. She remarked that 80 percent was a good target, but the lower rates would affect the ratio. She wondered why the ratio was not examined as well as the dollars. Co-Chair Kelly asked if 60 percent was the minimum funding for TRS. Mr. Barnhill replied that he would like to get above 60 percent. He furthered that exploring ratios was a legitimate concern, and he was willing to engage in that conversation. Co-Chair Meyer referred to the bill language "subject to appropriation." He was attempting to determine what a bond rater may consider. He felt that the proposal may not appropriate the amount. Commissioner Rodell replied that the language was to recognize the constitutional requirement that future legislatures could not be bound. Co-Chair Meyer asked if the language would give the bond raters cause for concern. Commissioner Rodell replied that DOR had made avenues available to adjust the amount. She stressed that the focus what on not locking in to something the state could not sustain. Co-Chair Meyer pointed to an issue that had not been addressed. He believed Alaska was one of four states that counted its medical benefits in the unfunded liability. He wondered if the state received credit for counting it in the unfunded liability. Commissioner Rodell replied in the affirmative. SB 220 was HEARD and HELD in committee for further consideration.