SB 30-TEACHERS & PUB EMPLOYEE RETIREMENT PLANS  9:46:00 AM CHAIR DYSON announced the consideration of [SB 30]. 9:46:15 AM MIKE BARNHILL, Deputy Commissioner, Department of Administration, noted that this morning he submitted responses to questions the committee had previously. He asked the chair how he would like to proceed. CHAIR DYSON asked him to reiterate the questions that were asked and summarize the answers. MR. BARNHILL reviewed the following committee questions and his written answers: 1. What is the long-term expectation of growth in the defined benefit plans? A. The Alaska Retirement Management (ARM) Board has adopted the investment earnings assumption of 8 percent per year. 1.b. What will the defined benefit plans look like if the State received an average of 4 percent, 6 percent, and 8 percent return on its investments? A. The assumption is that the returns are long-term. At the, The FY2012 actuarial valuations assume an 8 percent rate of return and show an unfunded liability of $11.9 billion. That valuation will be updated at the end of April when the ARM Board considers the FY2013 actuarial valuations. The expectation is that the unfunded liability will remain about the same. If the assumed rate of return is decreased to 4 percent, which some consider a "riskless rate of return," the unfunded liability would immediately double to roughly $24 billion. If the assumed rate of return is 6 percent, the unfunded liability would be about $18 billion MR. BARNHILL explained that the assumed rate of return assumption has the greatest impact of any of the many actuarial assumptions that are used to calculate the actuarial valuation every year. 9:49:54 AM 2. What is the most current breakdown of costs between healthcare and other pension costs for Alaska's retired public employees? A. For both the PERS and TRS retirement systems, the pension unfunded liability is 69.4 percent and healthcare liability is 30.6 percent. The FY2013 comprehensive annual financial (CAF) report shows that for PERS the pension benefits were just over $599 million and the health benefits were just over $370 million. For TRS the pension benefits were just over $380 million and the health benefits were just about $121 million. 3. Please provide a graph with two trend lines, one being the smooth rate of return compared to a trend showing the fluctuations in Alaska's historic rates of return. A. In the first chart the blue line shows the fairly volatile rate of return across a period ranging from 1989 - 2014. The red line shows a rolling five-year annualized return. From the late 1980s through 2000 the returns trend from 16 percent down to 8 percent. In 2001 the line drops in response to the dotcom collapse and then trends up and down again for the 2009 recession. Over the last couple of years the five-year return has started back up towards the assumed rate of 8 percent. The next two charts show PERS TRS returns versus the S&P 500 over the same time period. The trend tracks fairly closely, primarily as a result of the pension funds' 60-70 percent investment in equities. Page 3 shows the 75 year chart on the S&P 500. The blue line shows the annual return and is the most volatile. The green line shows a five-year rolling return and the red line shows the ten-year rolling rate of return. 4. If the investment rates go down, would the system proposed in SB 30 provide lower risk for the state than the current defined contribution plan? A. The plan may not pencil out fiscally if the return is less than 8 percent. 5. If one tier of the defined benefit plan took a disproportionate amount from the retirement plan, how would this affect the other defined benefit tiers? A. The unfunded liability is computed as the cost to each of the defined benefit tiers. Thus, if PERS Tier I consumed a disproportionate amount of the resources, the system as a whole would reflect an unfunded liability. One way this could happen is if the mortality assumptions proved to be incorrect and Tier I retirees lived longer than projected. If an experience study by the actuary showed that people were living longer than expected, there would be an update to the mortality table and a corresponding unfunded liability for the system would be added to the valuation. Would the defined contribution tier be affected? A. No. 6. Will the unfunded liability decrease with more employees in the system? A. The unfunded liability is computed with respect to every employee so adding new employees will have no impact. A new tier of defined benefit employees may or may not meet or exceed actuarial assumptions but it won't impact the existing unfunded liability associated with the current members of the plan. 7. What number does the administration use to calculate investment returns? A. Eight percent. 8. Please provide a graph that shows the effect of SB 30 employee and employer contributions. A. The chart (with yellow bars) is modeled on the previous version of the bill, Senate Bill 121. The actuarial calculations are somewhat stale and both the model and calculations probably warrant updating. 9:57:56 AM SENATOR WIELECHOWSKI asked if the bill has a positive or negative fiscal note when using the actuary and ARM Board assumption of an 8 percent investment return. MR. BARNHILL replied the administration's fiscal note is indeterminate, primarily because it reflects the inherent uncertainty in any defined benefit plan. He credited the sponsor for going to great lengths to eliminate certain types of uncertainty, particularly with respect to healthcare costs, but continued to assert that it isn't possible to eliminate risk with respect to all of the assumptions. He cited the assumed 8 percent investment earnings, mortality assumptions, and inflation as examples. 10:00:02 AM SENATOR WIELECHOWSKI pointed out that fiscal notes are prepared all the time when all the variables aren't known. He cited the price of oil as an example. He asked if the fiscal impact to the state is positive or negative, using all the assumptions that the actuary and the ARM Board used. MR. BARNHILL conceded that the actuary letter indicates a short- term savings over "the first X years" under the assumptions that go into the bill. SENATOR WIELECHOWSKI asked how much. MR. BARHILL replied it's $68.9 million. CHAIR DYSON asked if there is a discernable difference in recruitment and retention of PERS and TRS employees since the State adopted the defined contribution plan. MR. BARNHILL said he would provide the trend data that was prepared for Senator Giessel and the committee could draw its own conclusions. The State of Alaska hasn't done an employee movement report since the end of FY2011 but those numbers didn't show an increase in employee terminations subsequent to FY2007 when the defined contribution plan was adopted. They showed a small decrease in people leaving the state, but that could be due to the nationwide economic recession. Alaska experienced fairly high rates of employee turnover prior to the closing of the defined benefit plan and he believes that's the nature of Alaska. CHAIR DYSON asked if the state has a formal process for looking at trends and analyzing the efficacy of the salary and benefits program. MR. BARNHILL replied there is an informal process where the State is constantly being asked to evaluate the fairness of its salary schedules and pension benefits. He segued to highlight the benefits of the existing PERS Tier IV defined contribution plan. The employee contributes 8 percent of their income into an account that they control and the PERS employer contributes 5 percent. There is also the Supplemental Annuity System (SBS) in which the employee contributes 6.13 percent and the employer matches that contribution. The combined total comes to a contribution rate of 25.26 percent of an employee's salary. In a defined contribution system, employees are expected to stay employed for 30-35 years. That's not unreasonable; it's a normal working career. He submitted that testimony suggesting fewer years isn't reasonable because it's not possible to build a sustainable retirement plan on a 20-year career. With compounding, 35-40 years of contributions to a defined contribution pension plan add up to a secure retirement. MR. BARNHILL described the array of investment options that the ARM Board and the Division of Treasury put together as phenomenal. Under the U.S. Department of Labor regulations, defined contribution employees default into a target date fund that's based on their age. The funds are professionally managed and have low administrative and investment expenses. For example, the 2040 Target Date Fund charges 0.26 percent, which is far less than the administrative costs paid to the investment managers in the defined benefit plan. An employee who remains employed by the State of Alaska for 30-40 years may build up a defined contribution of over $1 million, assuming an 8 percent rate of return. Adding in the SBS roughly doubles that amount. 10:09:42 AM CHAIR DYSON commented that the defined contribution also allows portability. MR. BARNHILL agreed. 10:10:43 AM CHAIR DYSON stated he would hold SB 30 in committee. Although he didn't believe that the bill would pass this year, he said he was impressed with the efforts that were put forth to make it happen.