ALASKA STATE LEGISLATURE
HOUSE STATE AFFAIRS STANDING COMMITTEE
April 16, 2005
9:39 a.m.
MEMBERS PRESENT
Representative Paul Seaton, Chair
Representative Jim Elkins
Representative Bob Lynn
Representative Berta Gardner
Representative Max Gruenberg
MEMBERS ABSENT
Representative Carl Gatto, Vice Chair
Representative Jay Ramras
OTHER LEGISLATORS PRESENT
Representative Peggy Wilson
COMMITTEE CALENDAR
CS FOR SENATE BILL NO. 90(STA)
"An Act relating to Alaska Territorial Guard Day."
- MOVED CSSB 90(STA) OUT OF COMMITTEE
HOUSE BILL NO. 34
"An Act relating to the expungement of records relating to
conviction set asides granted after suspended imposition of
sentence."
- HEARD AND HELD
HOUSE BILL NO. 238
"An Act relating to contribution rates for employers and members
in the defined benefit plans of the teachers' retirement system
and the public employees' retirement system and to the ad-hoc
post-retirement pension adjustment in the teachers' retirement
system; requiring insurance plans provided to members of the
teachers' retirement system, the judicial retirement system, the
public employees' retirement system, and the former elected
public officials retirement system to provide a list of
preferred drugs; relating to defined contribution plans for
members of the teachers' retirement system and the public
employees' retirement system; and providing for an effective
date."
- HEARD AND HELD
CS FOR SENATE BILL NO. 141(FIN)
"An Act relating to the teachers' and public employees'
retirement systems and creating defined contribution and health
reimbursement plans for members of the teachers' retirement
system and the public employees' retirement system who are first
hired after July 1, 2005; relating to university retirement
programs; establishing the Alaska Retirement Management Board to
replace the Alaska State Pension Investment Board, the Alaska
Teachers' Retirement Board, and the Public Employees' Retirement
Board; adding appeals of the decisions of the administrator of
the teachers' and public employees' retirement systems to the
jurisdiction of the office of administrative hearings; providing
for nonvested members of the teachers' retirement system defined
benefit plans to transfer into the teachers' retirement system
defined contribution plan and for nonvested members of the
public employees' retirement system defined benefit plans to
transfer into the public employees' retirement system defined
contribution plan; providing for political subdivisions and
public organizations to request to participate in the public
employees' defined contribution retirement plan; and providing
for an effective date."
- BILL HEARING CANCELED
PREVIOUS COMMITTEE ACTION
BILL: SB 90
SHORT TITLE: ALASKA TERRITORIAL GUARD DAY
SPONSOR(s): SENATOR(s) HUGGINS
02/04/05 (S) READ THE FIRST TIME - REFERRALS
02/04/05 (S) STA
02/17/05 (S) STA AT 3:30 PM BELTZ 211
02/17/05 (S) Moved CSSB 90(STA) Out of Committee
02/17/05 (S) MINUTE(STA)
02/18/05 (S) STA RPT CS 4DP
SAME TITLE
02/18/05 (S) LETTER OF INTENT WITH STA REPORT
02/18/05 (S) DP: THERRIAULT, ELTON, WAGONER, HUGGINS
02/23/05 (S) TRANSMITTED TO (H)
02/23/05 (S) VERSION: CSSB 90(STA)
02/24/05 (H) READ THE FIRST TIME - REFERRALS
02/24/05 (H) MLV, STA
03/17/05 (H) MLV AT 1:00 PM CAPITOL 124
03/17/05 (H) Moved Out of Committee
03/17/05 (H) MINUTE(MLV)
03/18/05 (H) MLV RPT 4DP
03/18/05 (H) DP: THOMAS, GRUENBERG, ELKINS, LYNN
04/16/05 (H) STA AT 9:30 AM CAPITOL 106
BILL: HB 34
SHORT TITLE: EXPUNGEMENT OF SET ASIDES
SPONSOR(s): REPRESENTATIVE(s) WEYHRAUCH
01/10/05 (H) PREFILE RELEASED 12/30/04
01/10/05 (H) READ THE FIRST TIME - REFERRALS
01/10/05 (H) STA, JUD
03/01/05 (H) STA AT 8:00 AM CAPITOL 106
03/01/05 (H) Bill Postponed
03/17/05 (H) STA AT 8:00 AM CAPITOL 106
03/17/05 (H) Heard & Held
03/17/05 (H) MINUTE(STA)
04/16/05 (H) STA AT 9:30 AM CAPITOL 106
BILL: HB 238
SHORT TITLE: PUBLIC EMPLOYEE/TEACHER RETIREMENT
SPONSOR(s): STATE AFFAIRS
03/30/05 (H) READ THE FIRST TIME - REFERRALS
03/30/05 (H) STA, FIN
03/31/05 (H) STA AT 8:00 AM CAPITOL 106
03/31/05 (H) Heard & Held
03/31/05 (H) MINUTE(STA)
04/02/05 (H) STA AT 10:00 AM CAPITOL 106
04/02/05 (H) Heard & Held
04/02/05 (H) MINUTE(STA)
04/05/05 (H) STA AT 8:00 AM CAPITOL 106
04/05/05 (H) Heard & Held
04/05/05 (H) MINUTE(STA)
04/07/05 (H) STA AT 8:00 AM CAPITOL 106
04/07/05 (H) Scheduled But Not Heard
04/09/05 (H) STA AT 9:30 AM CAPITOL 106
04/09/05 (H) Heard & Held
04/09/05 (H) MINUTE(STA)
04/12/05 (H) STA AT 8:00 AM CAPITOL 106
04/12/05 (H) Heard & Held
04/12/05 (H) MINUTE(STA)
04/14/05 (H) STA AT 8:00 AM CAPITOL 106
04/14/05 (H) Heard & Held
04/14/05 (H) MINUTE(STA)
04/16/05 (H) STA AT 9:30 AM CAPITOL 106
WITNESS REGISTER
SENATOR CHARLIE HUGGINS
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: As sponsor of SB 90, offered praise and
introduction of his staff member, Ryan Moore.
RYAN MOORE, Staff
to Senator Charlie Huggins
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Presented SB 90 on behalf of Senator
Huggins, sponsor.
REPRESENTATIVE MIKE KELLY
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Offered brief comment during the hearing on
SB 90.
LINDA SYLVESTER, Staff
to Representative Bruce Weyhrauch
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Reintroduced HB 34 on behalf of
Representative Weyhrauch, sponsor.
KATHERINE SHOWS, Staff
to Representative Paul Seaton
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Reviewed information regarding the medical
aspect of HB 238 on behalf of Representative Seaton, sponsor.
REPRESENTATIVE MIKE KELLY
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Offered his opinions regarding the medical
aspect of HB 238.
JOHN ALCANTRA
Palmer, Alaska
POSITION STATEMENT: Testified on behalf of NEA - Alaska during
the hearing on HB 238.
SAM TRIVETTE, President
Retired Public Employees of Alaska (RPEA)
Juneau, Alaska
POSITION STATEMENT: Paraphrased his written testimony and
answered questions during the hearing on HB 238.
JERRY PATTERSON, President
NEA-Alaska/Retired
Juneau, Alaska
POSITION STATEMENT: Testified on behalf of NEA-Alaska/Retired
and as a former TRS Board member in opposition to HB 238.
MELANIE MILLHORN, Director
Health Benefits Section
Division of Retirement & Benefits
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Testified on behalf of the division and
answered questions during the hearing on HB 238.
ACTION NARRATIVE
CHAIR PAUL SEATON called the House State Affairs Standing
Committee meeting to order at 9:39:50 AM. Representatives
Elkins, Lynn, Gardner, and Seaton were present at the call to
order. Representative Gruenberg arrived as the meeting was in
progress.
CHAIR SEATON discussed the upcoming calendar.
SB 90-ALASKA TERRITORIAL GUARD DAY
9:41:40 AM
CHAIR SEATON announced that the first order of business was CS
FOR SENATE BILL NO. 90(STA), "An Act relating to Alaska
Territorial Guard Day."
9:41:47 AM
SENATOR CHARLIE HUGGINS, Alaska State Legislature, as sponsor of
SB 90, offered praise and introduction of his staff member, Ryan
Moore.
9:42:39 AM
RYAN MOORE, Staff to Senator Charlie Huggins, Alaska State
Legislature, presented SB 90 on behalf of Senator Huggins,
sponsor. He noted that 6,500, predominately Alaska Native
people formed the Alaska Territorial Guard over 60 years ago,
and SB 90 is a long time coming in honoring them. He stated the
reason for choosing October 8 to be Alaska Territorial Guard Day
is that that was the day [in 2004] when the members of the
[Alaska] Territorial Guard were recognized as United States
veterans by the U.S. Army.
9:43:46 AM
MR. MOORE, in response to a question from Representative
Gardner, offered his understanding that approximately 300 of the
Alaska Territorial Guard are still alive today.
9:44:03 AM
SENATOR HUGGINS emphasized "how quickly these people are
passing."
9:44:22 AM
REPRESENTATIVE GARDNER said she's sure it would mean a lot to
the members and to their children.
9:44:54 AM
SENATOR HUGGINS noted that Representative Carl Moses was in the
Alaska Territorial Guard at the age of 13. He said many rural
Alaska Natives share stories of an uncle or grandfather who
served in that guard. He also noted that there were also a
number of females who served.
9:45:19 AM
REPRESENTATIVE MIKE KELLY, Alaska State Legislature, to share a
case in point, noted that his cousin, Joe Kelly, was associated
with the [Alaska Territorial] Guard.
9:45:58 AM
CHAIR SEATON, in response to comments by Representatives Elkins
and Lynn, offered his understanding that the bill is available
for cross sponsorship.
9:46:01 AM
SENATOR HUGGINS confirmed that's correct.
9:46:34 AM
SENATOR HUGGINS, in response to a comment from Representative
Gruenberg, mentioned a desire to honor certain families.
9:47:03 AM
CHAIR SEATON closed public testimony.
9:47:10 AM
REPRESENTATIVE LYNN moved to report CSSB 90(STA) out of
committee with individual recommendations and the accompanying
fiscal notes. There being no objections, CSSB 90(STA) was
reported out of the House State Affairs Standing Committee.
9:47:55 AM
HB 34-EXPUNGEMENT OF SET ASIDES
9:48:01 AM
CHAIR SEATON announced that the next order of business was HOUSE
BILL NO. 34, "An Act relating to the expungement of records
relating to conviction set asides granted after suspended
imposition of sentence."
9:48:29 AM
REPRESENTATIVE GRUENBERG moved to adopt the committee substitute
(CS) for HB 34, Version 24-LS0240\Y, Luckhaupt, 4/15/05, as a
work draft. There being no objection, Version Y was before
committee.
9:49:05 AM
LINDA SYLVESTER, Staff to Representative Bruce Weyhrauch, Alaska
State Legislature, reintroduced HB 34 on behalf of
Representative Weyhrauch, sponsor. She reminded the committee
that statute allows judges to suspend imposition of sentences
and set aside the conviction following the defendant's
completion of the conditions of that suspended sentence. Many,
including some judges, have assumed that a "set aside" means
that the person walks away form the criminal conviction.
However, in 1995, the [Alaska] Supreme Court ruled that that's
really not the case.
MS. SYLVESTER stated that "criminal convictions are
discoverable" on applications for a new job or apartment, or on
credit references. She offered an example. The proposed
legislation, Ms. Sylvester explained, would enable the set aside
to "actually do what we thought it was supposed to do: let
somebody ... walk away from their record of their criminal
conviction." The expungement statute would breath life into the
set aside statute, she said.
9:52:03 AM
MS. SYLVESTER highlighted the new language in Section 1, to
illustrate how the process would take place; Section 1 of
Version Y read as follows:
*Section 1. AS 12.55.085(e) is amended to read:
(e) Upon the discharge by the court without
imposition of sentence, the court may set aside the
conviction and issue to the person a certificate [TO]
that provides that, under state law, the person has
not been convicted of a crime. The person may, within
the two-year period following the issuance of the
certificate, petition the court for an order sealing
the records of the arrest, the judgment, the suspended
imposition of sentence, and the set aside. The court
shall issue the order if the court finds that the
person is not likely to reoffend. The order must
state that the effect of the order under state law is
that the person has not been arrested, been adjudged,
convicted, or received a suspended imposition of
sentence or a set aside unless the person reoffends.
The person shall provide the order to the Department
of Public Safety and the clerk of court along with
payment for the cost of sealing the records. The
department and the clerk of court shall seal all
records pertaining to the arrest, judgment, suspended
imposition of sentence, conviction, and set aside.
The records sealed may be accessed only by law
enforcement or court officers for the purpose of
investigating crimes or assisting with criminal
prosecutions [EFFECT].
MS. SYLVESTER emphasized the importance of giving judges control
over the issuance of an expungement order. She noted that the
federal government has an expungement statute for certain
federal crimes. When a crime is expunged, a person is able to
check "no" where an application asks if he/she has ever been
convicted of a crime.
9:54:54 AM
MS. SYLVESTER indicated that some states' expungement orders
totally erase the conviction, while other states' expungement
statutes allow [the record to be readily accessible by the
criminal justice system. She said Representative Weyhrauch's
position is that Alaska's expungement statute should go far and
allow the person to have his/her record totally erased; however,
that presents some problems. First, the criminal justice system
has an interest in retaining the sealed records. Second, the
courts disseminate information by computer on discs and various
databases, and it would be "physically impossible for them to
collect that information back."
MS. SYLVESTER said she has language ready for an amendment to
Version Y that would specify that the state could not be held
responsible for "information that was disseminated or broadcast
in the world prior to the date of the expungement." Ms.
Sylvester described [HB 34] as "a little bit of grace that we
would like to offer society."
9:59:19 AM
MS. SYLVESTER, in response to a question from Representative
Gardner, noted that those crimes that would be expunged are tied
to those crimes that current statute allows for set asides. She
listed those major crimes that would be excluded: drunk
driving, any degree of homicide, manslaughter, kidnapping - with
the exception of noncustodial interference, reckless
endangerment, stalking, robbery, all forms of sexual assault,
unlawful exploitation of a minor, indecent exposure, and arson.
10:01:01 AM
REPRESENTATIVE LYNN questioned if this would really be in the
interest of society. He said he was taught that actions have
consequences.
10:01:39 AM
MS. SYLVESTER responded that "someone can commit a minor
infraction of the law and society will never let them move on
from that." She offered an example.
10:02:46 AM
REPRESENTATIVE LYNN said there is usually a place on an
application that allows for explaining the circumstances of a
crime.
10:03:14 AM
MS. SYLVESTER replied that it's true; however, most often [a
prospective employer, for example] won't look at the
circumstances. She reiterated that the current set aside
statute leads people to believe that "they walk away from it,"
but they only get a certificate that leaves out the actual word
"expungement."
10:04:41 AM
CHAIR SEATON offered clarification.
10:06:46 AM
REPRESENTATIVE GRUENBERG said he strongly supports the policy
behind the bill, but he sees a lot of problems with the way the
bill is currently drafted. He stated his concern that no one
from the Department of Law is present to testify. He requested
a copy of the citation from the previously mentioned Alaska
Supreme Court case. He noted that the fiscal note has "raised a
lot of problems," yet no one is present from the Department of
Public Safety.
10:07:21 AM
CHAIR SEATON emphasized that he would feel uncomfortable moving
[HB 34] without giving a copy of [Version Y] to those who
generated the fiscal note.
10:07:59 AM
REPRESENTATIVE GRUENBERG remarked that usually the defendant has
the burden of proof. He referred to page 1, line 11, which
read: "The court shall issue the order if the court finds that
the person is not likely to reoffend." He noted that the
language doesn't specifically say who has the burden of proof on
that issue.
10:09:08 AM
REPRESENTATIVE GRUENBERG said his second concern is in regard to
"the applicability" and effective dates. For example, page 2,
line 10, addresses destruction, but he noted, "You don't destroy
the records here, all you do is seal them." He expressed his
wish that the House State Affairs Standing Committee deal with
these issues before moving the bill out of committee.
10:10:12 AM
CHAIR SEATON stated his intent to send any amendments to the
Alaska State Troopers and the court system for comment and
revised fiscal notes. He reviewed that ideas for possible
amendments are to address preponderance of evidence, limitation
on liability to the state, and applicability.
10:11:10 AM
REPRESENTATIVE GRUENBERG said he would like to work with anyone
else interested to come up with a new committee substitute.
10:11:53 AM
CHAIR SEATON suggested that a word change may be needed on page
2, line 10, regarding the sealing of documents.
CHAIR SEATON announced that HB 34 was heard and held.
The committee took an at-ease from 10:14:44 AM to 10:23:22 AM.
HB 238-PUBLIC EMPLOYEE/TEACHER RETIREMENT
[Contains brief mention of SB 141 and HB 191.]
10:23:29 AM
CHAIR SEATON announced that the last order of business was HOUSE
BILL NO. 238, "An Act relating to contribution rates for
employers and members in the defined benefit plans of the
teachers' retirement system and the public employees' retirement
system and to the ad-hoc post-retirement pension adjustment in
the teachers' retirement system; requiring insurance plans
provided to members of the teachers' retirement system, the
judicial retirement system, the public employees' retirement
system, and the former elected public officials retirement
system to provide a list of preferred drugs; relating to defined
contribution plans for members of the teachers' retirement
system and the public employees' retirement system; and
providing for an effective date."
10:23:33 AM
CHAIR SEATON said the hearing's focus will be on the medical
element. He noted that SB 141 was recently received from the
Senate and has medical elements similar to those in HB 191.
10:24:14 AM
KATHERINE SHOWS, Staff to Representative Paul Seaton, Alaska
State Legislature, on behalf of Representative Seaton, sponsor
of HB 238, directed attention to a [two-page] handout showing
possible medical scenarios for members of [the Public Employees'
Retirement System (PERS)] and [the Teachers' Retirement System
(TRS)] before Medicare eligible age. She said the handout was
created by extrapolating data from a chart prepared by [Mercer
Human Resource Consulting ("Mercer")], which was distributed at
the House State Affairs Standing Committee meeting on 4/14/05.
10:25:13 AM
CHAIR SEATON clarified that the charts from Mercer total [16
pages, including the contents page] and showed "Projected Values
for Health Reimbursement Accounts."
10:25:31 AM
MS. SHOWS noted one change in the aforementioned two-page
handout is that in all the examples, the retirement age has been
changed from 55 to 60. She highlighted that [shown at the top
of the first page] the PERS "other" early hire, who works for 30
years and retires at age 60 would receive a 90 percent subsidy.
The medical cost would be $304,491, the subsidy amount would be
$200,739, and the amount paid by the health reimbursement
account (HRA) would be $160,578. When the last two amounts are
subtracted from the first amount, the net out-of-pocket expense
to the retiree for his/her 60-month pre-Medicare medical
coverage would be -$56,826.
10:28:10 AM
CHAIR SEATON clarified that the negative amount means that there
is still $56,826 in the health reimbursement account for that
employee. In response to questions from Representative
Gruenberg, he reviewed how the new handout correlates with the
Mercer handout, including that the page numbers shown just below
each chart in the new handout correlate with the pages of the
Mercer charts. He offered examples and further details.
10:33:26 AM
MS. SHOWS highlighted the two other possible medical scenarios
shown for PERS: "other" late hire, retiring at 60 with 20 years
and a 60 percent subsidy, with and without spouse. She
explained that the second page shows the same three scenarios
for TRS retirees.
10:35:35 AM
MS. SHOWS, in response to a question from Chair Seaton,
explained that the reason that the net amount left in the
account is higher for TRS than PERS is because the average
salary for TRS employees is higher and the percentage that was
put into the HRA would be larger.
10:36:06 AM
CHAIR SEATON reminded the committee that when there is a
percentage shown next to the HRA - for example 2 percent - that
percentage is on the average salary, not an individual salary.
Everyone gets the same HRA contribution, because a U.S. anti-
discrimination clause provides that there can be no
discrimination between people based on salary. He stated that
the same is not true for the percentage that goes into a
person's subsidy amount.
10:38:52 AM
REPRESENTATIVE GARDNER offered her understanding that the
scenarios in the two-page handout are just "examples of how the
system works." She observed that the examples are for a person
who retires at the age of 60, when Medicare eligibility doesn't
begin for 60 months - at age 65; however, the age at which
Medicare eligibility begins is apt to change.
10:39:22 AM
CHAIR SEATON answered that's correct. He clarified that the
intent of the bill is to have the retirement age be 60 months
[five years] before whatever the Medicare eligibility age is.
Therefore, the age is set at 60 for the current Medicare
eligibility age of 65, but it could shift should the Medicare
eligibility age be raised.
10:40:37 AM
MS. SHOWS concluded highlighting the scenarios for TRS.
10:41:55 AM
CHAIR SEATON reminded the committee that the scenarios are based
on the current actuarial assumptions, which he briefly reviewed.
10:43:24 AM
REPRESENTATIVE GRUENBERG stated his concern about the
possibility that the actuarial figures may not be accurate.
10:45:07 AM
CHAIR SEATON reminded the committee that Milliman was hired to
conduct an audit on the Mercer Human Resource Consulting
actuarial numbers and, beyond that, he indicated that he doesn't
know what else can be done.
10:46:32 AM
REPRESENTATIVE GRUENBERG suggested that the only assumption that
the committee can use is that it cannot predict. He indicated
that the only sure thing is that [medical costs] will increase.
He suggested that something be built into the system that
requires the legislature, every few years, to reexamine the
health care plan.
10:49:11 AM
CHAIR SEATON responded that SB 141 tackles that issue through
its proposed reconstruction of the [retirement] board. He said
the committee has a plan that is based on estimates, so the
question is how to get a plan that works well, provides
benefits, attracts and retains employees, and has fiscal
stability. He said if nothing is done, the legislature would
basically be okaying the status quo. He stated his intent to
get all the choices on the table.
10:51:12 AM
REPRESENTATIVE GARDNER listed her view of the possible choices:
the state has known costs and the employees' costs vary
according to what the true costs are; the employees' costs are
set and the states' vary; or the risk is shared by employee and
employer. She observed, "But the plan that protects the
employer and the state by limiting costs is a discouragement
under our current system for ... recruitment and retention of
employees, unless pay scales are higher." She said a lot of
people have stated that they deal with lower pay scales in
exchange for a more secure retirement. If additional costs are
built into retirement, [the employer] will have to give more
[salary] to keep the employee.
10:52:18 AM
CHAIR SEATON talked about the 30-year employee and the scenario
shown in the previously reviewed two-page handout. He said the
legislature has to decide what comparisons it wants to make and
what it wants to "be able to afford to do."
10:53:27 AM
REPRESENTATIVE GARDNER responded that much of [the outlined
scenario] is for an employee who works for 30 years, and she
questioned how many people stay 30 years in the same job today.
10:53:45 AM
CHAIR SEATON said, "You're right," yet reminded Representative
Gardner that two of each of the PERS/TRS scenarios were set up
for retirement after 20 years.
10:53:51 AM
REPRESENTATIVE LYNN asked if there might be a way to design a
system whereby employer/employee costs fluctuate depending on
health care costs.
10:54:28 AM
REPRESENTATIVE GRUENBERG said Chair Seaton has used a variable
whereby the retirement age shifts with the Medicare eligible
age, with 60 months between the two. He suggested allowing
other variables.
10:55:19 AM
CHAIR SEATON proffered, "As a percentage, it's not a fixed
dollar. It's a limited dollar, but it's a contribution that
does change as a percentage of the medical cost."
10:55:57 AM
REPRESENTATIVE LYNN clarified that he is trying to think of a
new idea that the committee has yet not considered.
10:56:13 AM
REPRESENTATIVE MIKE KELLY, Alaska State Legislature, said this
issue is so overwhelming in terms of future dollars that it
would behoove the legislature to be extremely conservative "on
the theory that ... once you lock it in, that is going to be
locked in and remembered for all time to come for that new class
of employee." He said the numbers show that young employees are
brought in the door by things other than retirement benefits.
10:58:51 AM
REPRESENTATIVE GRUENBERG noted that Representative Kelly said
retirement benefits don't bring new people into the system, yet
he has been told the opposite. He emphasized that that is an
essential issue to address.
11:00:13 AM
CHAIR SEATON said he thinks there are two separate issues:
attracting people to the system and retaining people in the
system.
11:01:55 AM
CHAIR SEATON said it would be known what the unfunded liability
would be going forward, because it would be set at a maximum 5
percent increase per year.
11:03:11 AM
REPRESENTATIVE ELKINS stated that he agrees with Representative
Kelly that the young are focused on dollars in the pocket rather
than retirement savings. In regard to pushing the bill forward,
he said he would rather see a task force work on the bill over
the interim to put to a vote the first part of the next session.
11:04:18 AM
CHAIR SEATON said he appreciates Representative Elkins'
comments, but wants the committee to work as work hard and fast
as possible.
11:04:28 AM
REPRESENTATIVE KELLY indicated that he doesn't want to "buckle
under the pressure" and "ship it forward into an election year."
He stated that he is a strong advocate of putting a new board in
place with the charge of tuning up the plan. He concluded, "We
can do it, if we have the will."
11:05:19 AM
REPRESENTATIVE LYNN, regarding the motivation of employees,
said, "The closer you get to retirement the more likely you are
to stay in there." Regarding Representative Kelly's comments
about an election year, he said, "I don't think we should vote
yeah and nay on this or any other bill in the legislature based
upon what is and is not an election year."
11:06:54 AM
MS. SHOWS mentioned a study that shows that "salary's far more
important than benefits" for beginning teachers.
11:07:19 AM
CHAIR SEATON directed attention to a one-page handout entitled,
"Comparison of the States Normal Retirement by Age/Service,"
compiled by the Senate Finance Committee from [National
Association of State Retirement Administrators (NASRA)] public
fund survey data. The date shows the years and ages for various
retirement scenarios for teachers and "other" for all 50 states.
11:09:09 AM
REPRESENTATIVE GRUENBERG said he would like to see related
numbers for federal government jobs.
11:09:47 AM
MS. SHOWS reviewed two individual pages, labeled "A" and "B,"
showing details of major medical coverage for HB 238 and SB 141,
respectively. [This information is available in the committee
packet.]
11:12:32 AM
REPRESENTATIVE GARDNER offered her understanding that, under the
proposed plan, if the retiree does not keep up with his/her
premium cost, he/she loses both access to the system, as well as
the 60-month subsidy prior to Medicare.
11:12:38 AM
MS. SHOWS answered that's correct. She said this is an
encouragement for "employment up to age 60." She added that if,
for example, an employee serves for 30 years and retires early,
he/she would have to "bridge the gap between [his/her] early
retirement age and 60 months pre-Medicare with some other
qualified medical insurance."
11:13:14 AM
CHAIR SEATON added that "other qualified medical insurance"
could be insurance from a spouse or through previous employment,
for example. He offered further details.
11:15:15 AM
REPRESENTATIVE GARDNER stated that it seems unfair that if an
employee has worked 30 years and earned the 60 months pre-
Medicare care coverage but can't afford to keep up the premiums
for the 10-12 years between retirement and eligibility, it will
cost him/her "that entire 60 months." She said, "As you said,
it's an incentive to keep working, but it seems to sort of
unfairly stack the deck in favor of the employer."
11:16:01 AM
CHAIR SEATON said that's not the intent. He clarified that the
intent is to say that the employee cannot bring in to the system
five years of unserviced [accumulated and unaddressed medical
problems] medical costs. He said that's the purpose for
requiring that someone retire directly out of the system. He
said it's a conundrum that is difficult to solve.
11:16:49 AM
REPRESENTATIVE LYNN proffered that the intent is not as
important as what actually happens to the employee.
11:17:14 AM
CHAIR SEATON predicted that 30 years from now employees will
have a very definite incentive to remain employed, because
medical costs will have risen so substantially.
11:18:14 AM
CHAIR SEATON, in response to a question from Representative
Gardner, confirmed that HRA funds can be used for insurance
premiums. He added that they can also be used for any medical
deductible or co-pay, for example. He described [the HRA] as
dollars in an employee's pocket to spend on any qualified
medical expense, including insurance.
11:18:43 AM
REPRESENTATIVE GRUENBERG asked if older people who are changing
careers will be attracted to work for the state or if they will
be discouraged because they will "never be able to have a
portable health care system."
11:19:20 AM
CHAIR SEATON reminded Representative Gruenberg that some of the
scenarios that the committee has seen are for employees
beginning at age 40 and working for 20 years. He offered
further details.
11:22:07 AM
REPRESENTATIVE KELLY emphasized the importance of portability in
a plan.
11:23:11 AM
REPRESENTATIVE GRUENBERG indicated that it is important to many
to be able to change careers mid-stream, and [the result of
doing so as it relates to HB 238] would have to be carefully
explained to the public.
11:24:02 AM
CHAIR SEATON directed attention back to the aforementioned
handout "A" and the list of employee percentages of premium at
various years of service. In response to a question from
Representative Gardner, he stated that the subsidy base is
variable and can escalate up to 5 percent a year. If it rose to
7 percent, the employee would have to pick up 2 percent.
11:27:09 AM
CHAIR SEATON highlighted aspects of handout "B" to SB 141. He
noted, "There's less difference between the two plans in the
length of service and the subsidy you'll get." The component
for having 60 months pre-Medicare eligibility does not exist in
SB 141.
11:28:48 AM
CHAIR SEATON reviewed some of the decisions before the committee
regarding the medical aspects of a retirement plan. He asked
the committee members if they could decide whether they want to
support a pre-Medicare eligible plan or to "be looking at
everything post-Medicare eligible."
11:31:04 AM
MS. SHOWS directed attention to a one-page, double-sided handout
[available in the committee packet], entitled, "Comparison of
Other States' Experience with Widespread Defined Contribution
Plans."
The committee took an at-ease from 11:32:32 AM to 11:37:51 AM.
11:38:03 AM
MS. SHOWS returned to the aforementioned handout - "Comparison
of Other States' Experience with Widespread Defined Contribution
Plans" - and noted that Nebraska, West Virginia, and Michigan
are the states most talked about when referring to defined
contribution (DC) plans, hence those are the states compared
here. She highlighted the details on the handout, which
include: which employees have a defined contribution plan, what
the employee and employer contribution rates are, the employee
investment options, aspects of vesting and medical coverage, and
whether the state is a social security employer.
11:40:33 AM
MS. SHOWS, in response to a question from Representative Gardner
regarding Michigan's employee contribution rate, said she does
not know what the IRS maximum is, but it is a significant
amount. She offered an example illustrating scenarios for
employer match amounts in Michigan, which she clarified are
significantly less than [HB 238] is suggesting.
11:41:52 AM
MS. SHOWS, in response to a question from Representative
Gruenberg, said there are states that allow employees to choose
between DC and DB plans. She noted that there are also
approximately 20 states that have a small portion of their
public employees under some form of defined contribution plan.
11:42:30 AM
REPRESENTATIVE GRUENBERG observed that two of the three states
represented on the handout are changing back to DB plans.
11:42:45 AM
MS. SHOWS reiterated that there are many states that have
elements of a DC plan for some of their employees. She
specified that the DB plan that Nebraska switched to is called a
"cash balance benefit" and is similar to a DC plan. She said
that type of plan guarantees an investment return of a certain
percentage on an employee's account. She offered further
details. In response to a question from Representative
Gruenberg, she stated that currently there are 48 states that
are primarily using a defined benefit plan.
11:45:19 AM
MS. SHOWS returned to her review of the handout.
11:47:33 AM
MS. SHOWS, in response to a question from Chair Seaton, offered
her understanding that "vesting" means, "Once you're vested in
your defined contribution account, you can take the full dollar
amount with you when you leave employment."
11:47:46 AM
CHAIR SEATON offered an example.
11:47:54 AM
MS. SHOWS continued with her comparison of the three states.
CHAIR SEATON observed that the Michigan plan is quite similar to
HB 238.
MS. SHOWS noted the difference is that in the Michigan plan the
employee doesn't have to retire directly from the system and the
percentage subsidy is "of the premium, not of a subsidy base."
11:50:10 AM
MS. SHOWS drew attention to the backside of the handout, which
illustrates "the experience of the different states." She said
she read a union position paper regarding West Virginia's
experience, which concluded that, similar to Nebraska, when
employees have to manage their own accounts, they do not get
high enough returns. She reiterated that many states have plans
with DC components, and she noted that those states are listed
on the back page as being: Florida, Montana, New Jersey, North
Dakota, Ohio, Louisiana, and South Carolina. Ms. Shows
paraphrased from the bottom of the page, "In the private sector
more than twice as many employees are under defined contribution
plans as defined benefit plans."
11:52:06 AM
REPRESENTATIVE KELLY pointed out:
Some of those people that just moved into a DC began
to manage their own money to some extent or another,
... then hit the perfect storm that we're all here
because of, and it devastated the individual investor,
as well as everyone else. So, just as they got into
their own management, they got punched hard. So, it's
not surprising that given the timing of the
conversions, that that happened.
REPRESENTATIVE KELLY mentioned the state's Supplemental Benefits
System (SBS) as being a model.
11:52:56 AM
CHAIR SEATON highlighted that Nebraska, West Virginia, and
Michigan are all social security employers. He noted that PERS
employees have SBS and social security, while TRS employees do
not.
11:54:22 AM
REPRESENTATIVE GRUENBERG questioned why TRS doesn't have the
option for SBS.
11:54:50 AM
MS. SHOWS responded that it's because teachers' salaries are
significantly more than that of PERS employers. Furthermore,
many school districts have their own retirement plans for their
employees that are similar to a defined contribution account.
11:55:55 AM
CHAIR SEATON indicated that the reason the states with defined
contribution plans are not happy with them has to do with the
contribution rates. He stressed, "It's not so much whether it's
defined contribution or defined benefit, but it's how well we
structure the plan so that it's ... attracting and retaining
employees. And that's going to depend on how much of a
percentage ... we are willing to put into the plan."
11:57:26 AM
REPRESENTATIVE GARDNER, regarding the "Comparison of Other
States' Experience with Widespread Defined Contribution Plans"
handout, noted that a lot of private employers can offer
different incentives for employees to stay, such as extra
vacation time, sabbaticals, and bonuses - all things that she
said "we don't generally have available."
11:58:10 AM
CHAIR SEATON said one consideration would be to have [the Alaska
State Pension Investment Board (ASPIB)] "do the investment." A
decision would have to be made whether to have a broader variety
of investment opportunities or to keep investment costs down as
much as possible within the system "and let that grow."
12:01:18 PM
CHAIR SEATON asked members to review SB 141 before it comes
before the committee on Tuesday, 04/19/05. He discussed a plan
to hear the bill in the morning and recess to a call of the
chair until Tuesday night.
12:03:00 PM
REPRESENTATIVE GARDNER mentioned Representative Lynn's earlier
comments about [not pushing something through the legislature
based on whether an election years is or is not to follow]. She
noted for the record that she received a letter from Tim Steele,
President, Anchorage School Board, which suggested that PERS/TRS
issues should be carried over into the interim so that all the
key players can be involved. Mr. Steele also suggested that
hearings should be held around the state, with opportunities for
all sides.
REPRESENTATIVE LYNN clarified that he would like the committee
to "proceed with all deliberate speed" without rushing to
judgment.
JOHN ALCANTRA, testifying on behalf of NEA-Alaska, said that
organization is comprised of 12,500 public school employees and
retirees. He noted that Governor Arnold Schwarzenegger of the
State of California recently decided to "go against the DC plan
for the time being." He opined that several committee members
have brought up a good point in recommending taking the time to
do things the correct way. He suggested that perhaps the reason
that some states are changing directions is that they didn't
initially take the time to do things properly.
MR. ALCANTRA noted that about 8,000 of his members are in TRS,
and he said 7 out of 10 teachers in the state are recruited from
the Outside. He admitted that salary and intrigue about the
state is "a draw," but said in order to retain quality personnel
the state needs a quality retirement system.
MR. ALCANTRA said teachers in TRS have a higher pension amount
because, as a general rule, they spend more time in the
profession and make more money than PERS employees. Teachers
don't have access to social security. He applauded the
committee's efforts, but asked that the legislature take time
over summer and fall to work with various groups, communities,
and task forces to ensure a quality plan is adopted that will
recruit and retain personnel in both PERS and TRS. In closing,
Mr. Alcantra disclosed, "I'm a vested member of PERS, and I'll
be one of those folks that only had 6.5 years in the system but
will get a quality retirement."
12:08:42 PM
SAM TRIVETTE, President, Retired Public Employees of Alaska
(RPEA), paraphrased from the following written testimony [with
some format, grammatical, and punctuation changes]:
I'm retired from the Department of Corrections after
32 years. Nineteen years of that time I served as the
Director of the Alaska Parole Board, and in that
capacity, worked closely with the legislature in a
complete rewrite of the Parole Administration Act and
in rewriting other legislation and regulations. I
also worked as the Director & Deputy Director of
Probation & Parole, Chief Probation Officer, Parole
Officer, and Correctional Officer. I have extensive
involvement in leadership positions in various non-
profit organizations at the local, state, and national
level spanning 5 decades.
I am currently the President of the Retired Public
Employees of Alaska, having served in various
capacities on its Executive Board since 1999. In my
capacity as President, I have attended many of the
PERS/TRS Board and ASPIB meetings in recent years. I
have watched them work and participated extensively in
their meetings.
I have attended or watched almost all of the Senate
Finance Committee hearings on their retiree bill since
it was introduced and spent countless hours discussing
issues surrounding retiree legislation with numerous
people. I have attended many of the hearings and work
sessions of this committee in the last few weeks. I
don't consider myself an expert on the retirement
system, but I do think I have gained much knowledge
about the system over the last five years that gives
me a reasonable perspective.
12:10:09 PM
Let me first complement the committee in being willing
to respectfully listen to a diverse group of people
with an open mind and ask important questions. Folks
that I talked to in recent weeks that attended or
watched your hearings and work sessions were heartened
by your approach.
In spite of some rhetoric to the contrary, everyone
I've talked to thinks the system needs change. But
citizens are asking that the problem areas be clearly
& accurately identified before we try to design fixes.
Mr. Chair, I thought you did an excellent job of your
overview of the system in your work session of March
24. I hope all of the members were able to listen to
those comments as well as the testimony provided at
your April 6 work session when the members of PERS/TRS
and ASPIB, and their attorney testified. I think that
information is critical to committee members as you
develop new legislation.
Rolling all this together, here are some of my
observations:
1. The State's contracted actuaries made major
errors in judgment and in calculations that were
responsible for seriously understating the current and
future liabilities of the retiree systems - a few
mortality tables, salary schedules, medical benefits,
[and] statutory change impacts.
2. Because of the significant errors beginning in
the mid-90s, the actuaries' advice to the PERS/TRS
Board resulted in the adoption of artificially low
rates at a time when full funding would have resulted
in a much lower shortfall today.
3. The many intended and unintended "enhancements"
created by the legislature or employers over the years
have resulted in unintended significant additional
liabilities for the systems. These "enhancements"
refer to any law, regulation, or practice that allows
an employee to capture a benefit that is not fully
actuarially funded. Many are legislative decisions:
allowing local governments to provide retirement
benefits to elected officials with minimal system
contributions; allowing legislative staff to vest in
the retirement system with full benefits with minimal
contributions; [and] allowing some Tier II employees
Tier I medical benefits and not requiring full funding
of this change. Some others are the result of local
government decisions, such as allowing senior
employees significant overtime pay during the three
high years or paying bonuses to encourage retirement,
significantly increasing the employees retirement pay.
4. Many of these practices have existed for decades,
including the transferring of employees to [the] Bush
- high geographical pay differential areas - for the
last three to five years of employment to allow for
large increases in retirement pensions. Let me
stress: Not one employee is committing fraud on the
system or in anyway doing anything improper by
following these laws, regulations, or rules. They are
not. The employees are only using the rules set up by
the system. But I believe these benefits that are not
fully funded must be altered.
12:13:12 PM
The logical question is: If all these laws and rules
were changed to disallow the unfunded benefits, how
much money would be saved? Would there even be a need
to consider the drastic move to a defined contribution
system? If you review the minutes of the PERS and TRS
meetings last fall when they did not recommend a new
defined contribution plan, they believed there were
many other options that they were not allowed to put
forth and study that could put the retirement systems
on sound footing. Besides removing the "enhancements"
already discussed, the other options included
increasing the employee contribution, reducing the
employer Supplemental Benefits System contributions,
raising the number of years of service before vesting,
and of course adjusting the health benefits package.
These options need to be fully considered before
adopting a defined contribution plan.
So, where do we go from here? I agree with you, Mr.
Chair, there is no evidence any of the three boards -
PERS, TRS, [and] ASPIB - have made decisions in the
recent past that have adversely affected the funding
of the retiree systems. Quite the contrary, let me
mention a few decisions by these boards that
positively affected the status of the funds. Most are
decisions by the PERS/TRS Boards that deal with the
"cost savings" or liability side of the equation.
Many more examples exist if you need additional
information.
Most of you have heard about the education program on
generic drugs that is now saving $5-$6 Million a year
by encouraging retirees to use generic versus brand
name medications and also [have] prescriptions filled
by mail order, resulting in further savings to the
state.
You probably haven't heard about the savings to the
state on payments to the Term Life Insurance Program.
Retirees and the state had been overpaying premiums
and fees to the firm administering the retiree self-
funded program for years, resulting in much higher
payments than necessary. This problem was identified
after continued probing of the PERS/TRS Board members.
PERS/TRS retirees for years were paying more than
necessary into the self-funded retiree
dental/audio/visual plan. By pushing for accurate
expense information on the plan, the Board recommended
the state increase the benefits. The plan continued
to make these increased reimbursements for three years
before the premiums had to be increased. This bought
a huge amount of good will from the retirees for the
system's attempts to hold down retiree expenses.
12:15:43 PM
Let's take a look at one mistake made without the
direct involvement in the details by the PERS/TRS
Boards or RPEA volunteers, which caused much grief for
[the Division of] Retirement & Benefits when trying to
successfully control system expenses. [The division]
correctly identified some retirees were using personal
credit cards to charge medications, without notifying
the pharmacies the customer was a retired employee.
Therefore, the retirement system was charged a much
higher price for the drug. However, letters were
mistakenly sent to many retirees that were not a part
of the problem, making them angry at the state for
falsely accusing these retirees of increasing the
costs to the state. Also the letter threatened to
make the retirees pay the difference in costs, further
alienating the retirees, and making it more difficult
to engage them in cost cutting measures in the future.
Another important decision was made by the PERS/TRS
Boards several years ago. After receiving the
disturbing news in the early 2000s, the funds that had
been over 100% funded were now projected to be less
than 80% funded, the Boards asked for a second opinion
from another actuary. This second [actuarial] report
pointed out some of the major problems with the
state's [actuarial] assumptions, and these huge errors
have been corrected.
Our belief is that some significant potential
solutions to cost cutting still have not been
identified. Most employees understand the current gap
in funding and would be more than willing to offer
information and potential solutions to this problem.
Publicly solicit their input.
Everyone involved with the systems has identified
health care costs as one of the primary culprits in
the funding shortfall. Skyrocketing health care costs
are a national crisis. There is nothing the
employees, the employers, the retirees, or any of the
3 boards have done to cause this problem. Until all
of us put pressure on Congress and the health care
industry to make changes, we will be stuck with this
continued pressure on the retirement funds. One clear
example is the new Medicare [prescription] drug law.
It prohibits the federal government from negotiating
drug prices with the pharmaceutical companies. Now,
if you are trying to contain and reduce costs, how
much sense does that make? Different segments of the
federal government, including the Veterans
Administration and the Department of Defense, have
been successfully saving huge sums of money annually
by negotiating drug prices. We need to make health
care cost reductions the number one priority. It
affects all publicly funded and private health care
systems. Skyrocketing health care costs are behind
the massive increases in Medicare, Medicaid, [and]
Worker Compensation costs, as well.
Mr. Chair, your committee bill is the only one
introduced this session dealing with retiree issues
that even attempts to deal with the current funding
deficit. We applaud you for focusing on this critical
issue. And we appreciate your understanding that the
employers do need relief this year and the next year
in meeting their financial obligations to the pension
funds. Hopefully, the upcoming [actuarial] review by
the Michigan firm hired by the Legislative Council
will shed more light on [actuarial] issues resulting
in such a quick downturn of the calculation of the
fund projections. As you all have learned, it is
these projections that are the largest factor in the
employer premium increases today.
As the PERS/TRS/ASPIB contract attorney said, whatever
solutions you come up with must be very carefully
crafted to avert additional unintended consequences in
the future. Thank you again for the opportunity to
testify.
CHAIR SEATON, in response to a question from Representative
Gardner, said Legislative Council is spending $20,000 to ask
another actuary to look at "the projections - the assessment."
He characterized this as a "second opinion of assumptions,"
rather than a full audit.
12:21:37 PM
REPRESENTATIVE GRUENBERG stated that he would like the committee
to glean ideas for further legislation from Mr. Trieste's
testimony. He asked Mr. Trivette how long ago the errors were
made by the actuarial firm.
12:22:11 PM
MR. TRIVETTE responded that the first error he is aware of is
the failure to adopt the 1994 mortality table. He added, "My
impression is that most of those errors were discovered." In
response to a follow-up question from Representative Gruenberg,
he said he recently received information from NEA-Alaska that
there still may be some errors in the current system, in terms
of the calculation of projected salary increases.
12:23:20 PM
REPRESENTATIVE GRUENBERG expressed concern regarding whether
there may be some legal recourse if the standard of care
required in the industry was not met.
12:23:41 PM
MR. TRIVETTE replied, "That was mentioned at some of the
testimony presented at [a] Senate Finance Committee
teleconference," and he said he doesn't know if anyone has
followed up on that. He said he thinks it would be prudent to
talk to the members of PERS and TRS who were available "when
these reports were being presented to them."
12:24:50 PM
JERRY PATTERSON, President, NEA-Alaska/Retired, testifying on
behalf of NEA-Alaska/Retired, noted that he is also a former TRS
Board member. Mr. Patterson read from his written testimony
[included in the committee packet], as follows:
I would like to start by making some observations. My
first observation is that what goes up will come down
and what goes down will go up. Unfortunately, when
the stock market was up, the PERS Board took the
recommendation of the actuaries and lowered
contribution rates excessively costing PERS about
seven hundred million dollars in contributions and
earnings. While the TRS Board only dropped its rate
by a point, they were hit by a flood of early
retirements that combined with the rate drop and lost
earnings, resulted in a loss of over one hundred and
fifty million. Currently, the market has rebounded
and PERS and TRS combined earned around seven hundred
million over the 8.25% assumed return that is not
reflected in the current actuarial report. In
addition ASPIB has a history of outperforming the
return assumption so already the condition of the
retirement funds are improving.
My second observation is that things are never as good
or bad as they appear. When I was on the TRS Board,
we received twenty-five year projections showing that
the contribution rate could drop to one percent. Now
we are getting reports that the contribution rate
needs to exceed thirty percent. Of course those
projections are made from the low point in the cycle.
Depending on the current condition of the retirement
funds, projections can paint a very rosy picture, the
sky can be falling, or we can be somewhere in between.
It would not be good policy to make a decision that
has a drastic effect on the system forty years out
based on one snapshot in time.
My third observation is that it is most likely there
will always be an un-funded liability. Only once in
recent memory have our retirement funds been fully
funded and it has never before been a cause for
concern. It is not uncommon to have an un-funded
liability. Even in 2001, at the peak of the stock
market rise, fifty-three of the top one hundred public
pension funds were less [than] a hundred per cent
funded. A pension fund that is ninety percent funded
is considered very healthy.
My last observation is that the condition of the fund
changes all the time. Even now, the information in
the reports you have received is outdated. When the
boards adopt contribution rates for two years ahead,
it is [based] on information that is nine months old.
Most of the time those changes are slight so it
doesn't matter if the data is slightly behind the
times. But occasionally the changes are significant.
Between 2001 and 2002 our funding ratio dropped about
thirty points. However, half of that drop was due to
a change in the health cost assumption. It then
becomes very important to examine the health care
assumption. In the fall of 2003 Retirement and
Benefits raised the health care premium twelve
percent. At the same time they did a reserve study
and found that they had been accumulating excess
reserves over the previous three years in the amount
of twenty-two million dollars. They then turned back
to ASPIB twenty million. In the fall of 2004 health
care premiums went up less than six percent while the
anticipated rate was over eleven percent. Clearly,
there is a problem with the health care assumption and
it needs to be reexamined.
In looking to the future there are bright spots. The
division's campaign to encourage members to move from
name brand drugs to generics has met with success and
there is room for more savings. There are over
fifteen thousand members between the ages of fifty-
five and sixty-four that will reach Medicare age in
the next ten years saving the retirement system large
amounts of money, as Medicare becomes the primary
insurer and the retirement system secondary. We have
yet to take full advantage of PER's tiers two and
three and TRS tier two. Take TRS tier two for
example. In 2011 the first tier two teachers will
have twenty years of service and will be eligible to
retire. However, they need twenty-five years of
service to receive medical benefits. They will not
retire without medical benefits. So for five years,
teacher retirements will be reduced to a trickle. The
contributions to the system will increase while the
outlay for new retirements will be reduced. And ASPIB
has a long history of outperforming the earnings
assumption. Each one percent of excess earnings is
worth over a hundred and twenty million.
12:28:59 PM
The thrust of this new bill has been to reduce costs
to the system. That does not mean that it will reduce
costs to the employer. In fact, this bill could
increase future costs to the employer. Whenever you
change retirement law you change retirement behavior.
Currently, the average age at the start of retirement
is fifty-five for teachers and fifty-seven for public
employees. The difference between a starting
teacher's salary and a teacher at the top of the
salary scale is about thirty-five thousand dollars in
salary and benefits. If we average three hundred
teacher retirements a year and those three hundred
teachers can not retire because they have no health
benefits, it will cost school districts ten million
dollars a year to keep those people. If for instance
teachers feel they need to be close to Medicare age to
retire and add seven years to their career, it would
cost school districts seventy million dollars a year.
To summarize, we shot ourselves in the foot when we
dropped the rates excessively. We stressed the system
when we had a flood of early retirements as the
employers' cost shifted their most expensive employees
onto the retirement system. We have a health care
assumption that doesn't appear valid. We have an
investment board that has historically outperformed
the earnings assumption. We have projections that are
taken from the lowest point in the cycle and are
already outdated. We have yet to reap the full
benefit of the new tiers already on the books. And we
know this bill will not save any money for years to
come and in the end will probably cost the employers
more than they save. This is not a good recipe for
such a drastic change to the retirement system. I
would urge you to vote no on this bill.
Thank you.
12:31:45 PM
MR. PATTERSON addressed the previously mentioned fact that
teachers have no social security. He reminded the committee
that during the end of the Twenty Third Legislative Session, a
resolution was passed asking the federal government to repeal
the social security [Windfall Elimination Provision (WEP)] and
the [Government Pension Offset (GPO)] provisions. He indicated
that when teachers become vested in the system, they lose 60
percent of their social security, and he noted that teachers
currently vest at eight years. He interpreted the proposed
legislation to mean that a teacher would be vested on the first
day of employment and thus would lose 60 percent of his/her
social security on that first day, "unless you get out of the
system and go back and continue your social security
membership."
MR. PATTERSON said he is concerned that he has heard no
projections regarding when the defined benefit plan will run out
of money. He stated that if the defined benefit plan is
currently underfunded and closed, then there should be a
projection as to when and how long the money will last and how
much the liability will be to the state when the fund runs out
of money.
12:34:02 PM
CHAIR SEATON reviewed that there are two ways the legislature
can fund the past service cost: by appropriating money, and by
raising the contribution rates. He said the contribution rates
are not based solely on people who are in the defined benefit
program, but on the total employer salary base. He said, "We've
got a constitutional obligation - a supreme court decision -
that says we're going to pay the benefits. So, for ... anybody
that's currently in the system, the benefits are guaranteed;
they've earned those benefits and they're fixed."
12:36:35 PM
MR. PATTERSON, in response to Representative Gardner, clarified
that the bill he urged the committee to vote against is HB 238.
In response to a question from Chair Seaton, he said the
problems exist in the medical portion of the system. He
indicated that the changes that need to be made are primarily on
the TRS side of the system. For example, he said he thinks
eight years to vest and get medical benefits for a short-term
employee is too generous.
12:38:44 PM
CHAIR SEATON said he doesn't want anyone to get the idea that
"we're counting everybody as if they're retiring at Tier I." He
offered further details.
12:39:42 PM
MELANIE MILLHORN, Director, Health Benefits Section, Division of
Retirement & Benefits, Department of Revenue, testifying on
behalf of the division, directed attention to [a memorandum
included in the committee packet] dated April 16, 2005, which
she sent to Chair Seaton. She highlighted from the memorandum
that, as of the most recent actuarial valuation report of June
30, 2004, the accrued liability for retiree medical obligations
to the state's retirees is $6.1 billion. In response to
questions from Representative Gruenberg, she said she doesn't
know what percentage of [the accrued liability] is immediately
payable today, but there are no outstanding bills. She said,
"We are currently 70 percent funded for PERS ... [and] 62
[percent] is our funding ratio for TRS."
12:42:48 PM
REPRESENTATIVE GRUENBERG proffered:
As I understand it, it's like looking at your
mortgage: ... you might have a $100,000 mortgage on
your $150,000 house, but it's not all due today.
Isn't that a good analogy?
12:43:03 PM
MS. MILLHORN said it is, because currently there are active
members who are eligible to retire and may or may not do so.
What is known is that 2,025 members retired from all of the
systems in 2004, and in 2003, 1,800 parties retired.
12:44:21 PM
MS. MILLHORN, complying with Representative Gruenberg's request
to use his mortgage analogy, said, "We are current on our
payments." She stated she does not believe that
12:44:30 PM
REPRESENTATIVE GRUENBERG asked, "Do you see anticipated deficit
in our ability to keep current in our bills in the next ... five
years?"
12:44:39 PM
MS. MILLHORN responded that she thinks the State of Alaska is
fully capable of paying its financial obligations under its
retirement systems.
REPRESENTATIVE GRUENBERG asked, "Then why are we worrying?"
MS. MILLHORN replied, "Because we are at funding ratios of 70
percent and 62 percent when our targeted funding ratio is 100
percent, and we are approximately $5.7 billion underfunded. And
that under funding is expected ... to increase unless some very
key things take place." She detailed that those things would
include: an infusion of $5.7 billion into the systems to make
them whole; having investment returns higher than the expected
return of 8.25 [percent], which though it may be possible, has
not been determined to be probable; and creating a new tier
level as a long-term solution to the existing problem. She
concluded that she does not want to see a continuation of the
unfunded system because of the obvious pain it causes employers.
12:47:01 PM
REPRESENTATIVE GRUENBERG explained that he is trying to look at
the issue from the perspective of young people trying to decide
whether to choose making state service a career, rather than
from the point of view of the employer.
12:47:43 PM
REPRESENTATIVE LYNN asked if an economic boon to Alaska would be
of great assistance to PERS and TRS.
12:48:23 PM
MS. MILLHORN responded that the legislature is the policy maker
regarding benefits and would have to decide what the benefit
level is and whether to provide additional relief to the current
underfunded status. In other words, whatever beneficial
economic developments occur to benefit the state have to be
translated into what the legislature is intending to do to deal
with the underfunded status for PERS and TRS.
12:49:14 PM
REPRESENTATIVE LYNN stated that to do anything, the state has to
have enough money in its treasury.
12:49:29 PM
CHAIR SEATON stated that there is enough money currently,
because there is $6 billion in the earnings reserve and
approximately $2.2 [billion] in the constitutional budget
reserve (CBR), but "I don't think we're going to do that."
12:50:14 PM
REPRESENTATIVE LYNN reiterated that if the state becomes
wealthier, then some portion of its money could be used to help
resolve the problem.
12:50:36 PM
CHAIR SEATON said if that were the case, the legislature would
still have to create a bill that would transfer general funds to
the Division of Retirement & Benefits in "the kind of numbers
we're talking about." Regarding the three options listed by Ms.
Millhorn, he said there is a fourth option: to increase the
employer contribution rate to pay off the past service cost. He
said, "We've got those scheduled in there right now. I mean, I
don't know that we can live with them, but those are the
proposed schedule at this point in time." He asked Ms. Millhorn
if that is correct.
12:51:15 PM
MS. MILLHORN responded that's correct.
12:51:59 PM
MS. MILLHORN, in response to a question from Representative
Gardner, explained that the introduction of a new tier would not
be an immediate relief to employers, but would keep "the line"
from going up. Furthermore, it would continue to bring "that
line" down until, after approximately 2029, the unfunded
liability would be paid off and a new normal cost would come
into the system that is predictable, stable, and would provide
benefits to members. She spoke of comments on a survey of
employers [discussed at a previous committee meeting and
included in the committee packet], which indicated that "the
elements in a new tier is what they wanted." She said, "Those
are the parties who have to recruit and retain and pay the
dollars for these plans; and I think their voice is especially
important."
12:54:00 PM
REPRESENTATIVE GARDNER offered her understanding that even if a
new tier were adopted today, [the unfunded liability] would
continue to grow, because it is not being addressed in any way
with the new tier.
12:54:23 PM
MS. MILLHORN offered her belief that introducing a new tier
wouldn't allow the unfunded liability to continue to escalate
and grow at "a larger proportion."
12:54:44 PM
CHAIR SEATON confirmed that the new tier wouldn't solve the past
service cost, because it's establishing a new normal service
cost and would be constructed in a way that it can acquire no
past service cost. He indicated that the benefit of the new
tier would be to stop the pattern of new employees being hired
under the defined benefit system, which results in a new past
service cost beyond that which already exists. He offered
further details.
12:57:26 PM
REPRESENTATIVE ELKINS offered an anecdote to lighten the room.
12:58:22 PM
MS. MILLHORN reported that there will be an actuarial assumption
study conducted this fall for PERS and TRS, at which time the
2000 mortality tables will be looked at, as well as all the
other underlying assumptions, including the health trend. She
said there is some consternation that the current health trend
is too low. She continued:
It is expected that a new assumption study will be
performed on both of those systems, and it's expected
that there will be additional liabilities as a
consequence. So, when the valuation comes back to all
of you, as of June 30, 2005, every change right now --
The five percent liability change - if that's
discovered with the mortality table - or [a] change
that increases the health trend assumptions ...
translates into an increase to [the] PERS employer
rate of 3.4 percent. If locate 5 percent additional
liability, that rate is going up 3.4 percent to those
employers. For TRS, it's 4.7 [percent]. ...
That's the reality right now, and that's why I'm
concerned. ... We cover 54,000 lives under the
retiree medical plan right now. We also have exposure
with all categories of 90,000, which, when they have
one dependent, that's 180,000 members. That's the
universe of the population that we're going to have
medical system-paid coverage available to in the
future, at some point in time. That is our defined
benefit plan.
REPRESENTATIVE GRUENBERG observed that there are only
[approximately] 600,000 people in Alaska.
1:00:42 PM
MS. MILLHORN directed attention to the fourth page of the
aforementioned memorandum, which is titled, "PUBLIC
EMPLOYEES'/TEACHERS' RETIREMENT SYSTEM HOUSE STATE AFFAIRS -
MEDICAL INFORMATION." She said the page shows a breakdown of
all members in PERS and TRS. The total number of PERS and TRS
combined is approximately 90,000, and each member brings with
them one dependent. She said, "Under Tier I, the projections
show that, between [age] 55 and 65, the cost to the system, just
for the one member - not including the dependent - is half a
million dollars."
1:03:06 PM
CHAIR SEATON concluded that means the cost to the system for
each dependent would be another half million.
1:03:11 PM
MS. MILLHORN said the half million dollars is "a locked-in
exposure that we have right now." She illustrated, for example,
that the low-end cost, just for the Tier I member who retires at
age 55, is half a million dollars times [42,674] members.
1:04:03 PM
REPRESENTATIVE KELLY reminded the committee that, [regarding
projections], the first thing the consultant hired by
Legislative Council said was, "Don't be surprise if I come back
and tell you that it's too low."
1:05:24 PM
MS. MILLHORN, in response to questions from Representative
Gardner, said the mortality table currently being used is from
1994. She said Mercer Human Resource Consulting has indicated
that it will bring the 2000 mortality table into the assumption
experience study and will be making a recommendation "for that
adoption."
1:06:14 PM
REPRESENTATIVE GARDNER asked, "Why would it take five years to
get a recommendation to adopt data that we know is the most
accurate?"
1:06:21 PM
MS. MILLHORN explained that the 1994 mortality tables are
nationally used and "the newest mortality table has recently
been available." She noted that the 1994 mortality table
projects forward increases in mortality. She said, "I think if
you were to check most pension systems right now, there are not
that many that are using the 2000 table; it has recently been
made available." She explained that there is some time lag
associated with [the adoption of mortality tables]. In response
to a request for clarification from Representative Gardner, she
said the recommendation in 2005 would be from the actuary to
adopt the 2000 table, whereas, in 2000, the recommendation was
to adopt the 1994 table.
1:07:42 PM
REPRESENTATIVE GARDNER asked why the tables are not being
adopted as soon as they are available.
1:07:54 PM
MS. MILLHORN offered her understanding that there are experience
and assumption studies done, the last one was done in 2002. The
factors from the studies are considered, and changes are made
accordingly. She indicated that the studies are conducted every
four to five years.
1:08:55 PM
REPRESENTATIVE GARDNER said she would like to find out from the
actuaries why the latest data isn't just routinely incorporated
as soon as it's available. She said she is also curious what
the average employee spends on medical costs over the lifetime
of employment and retirement. She said she is wondering if the
system could offer up to a certain amount, for example.
1:09:53 PM
MS. MILLHORN said she would look into that question.
1:10:26 PM
REPRESENTATIVE GARDNER offered further details regarding the
information she would like.
1:10:55 PM
CHAIR SEATON recollected that the legislature "recently
increased from 1 million to 2 million ... per individual." He
said there is also an availability so that if there are two
people within the state system, "you can get the same coverage
under the spouse." He asked Ms. Millhorn, "When was that that
the legislature increased [the] state benefit?"
1:11:17 PM
MS. MILLHORN answered:
That was actually the commissioner of [the Department
of] Administration. In 1999 there were a number of
plan changes that occurred with the retirees -
probably about eight or nine - and that was one of the
changes that took place. And the thought process in
1999 was that there would be a number of enhancements
to the retiree medical plan, and there were a number
of corresponding decreases to the medical plan. They
were supposed to be offset and be neutral to the plan.
So, for example, the increase for lifetime benefit was
... from $1 million to $2 million .... There was also
an increase in the deductibles, ... [and] the co-share
portion. There were a number of changes with
corresponding enhancements and decreases, as well.
What happened there is ... when those changes were
implemented, the State of Alaska was sued ... by [the
Retired Public Employees' Association (RPEA) and NEA-
Alaska], and that lawsuit is still pending resolution.
It went to the Alaska Supreme Court; it's come back to
the superior court for an analysis of those changes.
And the State of Alaska argued that the framers of the
constitution could not possibly have included the
medical component, based on when the constitution was
enacted, because medical costs were not added to the
retiree plan until the 1970s. They lost that
argument. ... The Alaska Supreme Court concluded
that medical benefits are part of an accrued benefit
to the retirees.
MS. MILLHORN, in response to a question from Representative
Lynn, said the mortality tables that are constructed are
national tables.
REPRESENTATIVE LYNN indicated that, "for these purposes," he
cares only about what the death rate is in Alaska.
1:14:47 PM
CHAIR SEATON said the committee would "have to get the [actuary]
to give us the answer on how they apply that to Alaska." He
pointed out, "Not only does it not make any sense for Alaska, it
has to be the working population of Alaska."
1:15:42 PM
REPRESENTATIVE ELKINS asked Ms. Millhorn if he understood her
correctly to say that there is a "formula within the actuary
that allows us to adjust for the lapse of time for ... moving up
toward the new actuary."
1:16:04 PM
MS. MILLHORN stated her understanding that even when the
mortality table is labeled 1994, there are built-in projections
in that table that project into the future.
1:16:36 PM
REPRESENTATIVE ELKINS observed that, in reality, the lapse isn't
as bad as it looks. In response to comments from Chair Seaton,
said, "Somewhere along the line, somebody did not make the call
to upgrade it, and it caused the shortfall." He said he is not
trying to appoint blame.
1:18:27 PM
MS. MILLHORN said, "Essentially, what you're doing is you don't
have an accurate accounting of your liability when you have
waited 2.5 years to have a mortality table that is more updated,
because the benefits to all your benefit recipient - 27,000 - is
to increase those by 2.8 years."
1:19:12 PM
REPRESENTATIVE GRUENBERG said it sounds like there was
insufficient control in auditing of the actuary and other states
are experiencing similar deficits in their systems.
1:19:59 PM
MS. MILLHORN confirmed that most, if not all, defined benefit
plans are "facing some very serious struggles."
1:20:06 PM
REPRESENTATIVE GRUENBERG said he is wondering if there are
common roots of the problems, and whether some of those roots
are problems with the actuarial methods that have been used
across the country.
1:20:28 PM
MS. MILLHORN responded, "Each ... system would have to be
analyzed ... independently to make a determination about the
underlying factors that are causing their particular
circumstance. But universally, what we have heard in the media
is that some of those factors that are common to all of the
defined benefits plans right now include: rising health care
costs, ... loss of investment income, [and] ... actuarial
assumptions that have changed that have increased our
liabilities." She stated that she is certain if other defined
benefit plans were studied, they would be similarly situated.
She offered an example.
1:22:15 PM
REPRESENTATIVE GRUENBERG noted that a few years ago there were
similar problems in the private pension system and the federal
government stepped in. He questioned whether there should be
standardized methodology "so we don't continue to face these
problems."
1:22:58 PM
MS MILLHORN noted that Milliman did not find that the state's
actuary [Mercer Human Resource Consulting] had "made assumptions
that were anywhere out of the tolerance level that would be
acceptable." She encouraged the committee to read the findings
included [in Milliman's report].
1:24:53 PM
MS. MILLHORN directed attention to an article from the Wall
Street Journal, dated March 2005, which talked about the fact
that large employers are moving away from "coverage for
dependents for retirees." In response to a question from
Representative Gruenberg, she confirmed that "as of that date of
retirement, anyone who retired after that date did not have
dependent coverage" even though they thought they would have it.
She said, "It may not be fair, but it is legal."
1:26:45 PM
CHAIR SEATON clarified that that is not the situation in Alaska,
because the constitution says that accrued benefits "have to be
followed through."
1:27:43 PM
REPRESENTATIVE GRUENBERG asked, "Does this include dependents of
the executives, or just the workers who are covered by
collective bargaining agreements?"
1:27:53 PM
MS. MILLHORN responded that she doesn't know that the article
speaks to that directly, but she assumes it makes no difference.
In response to a follow-up question from Representative
Gruenberg, she offered further details regarding the article in
the Wall Street Journal.
[HB 238 was heard and held.]
ADJOURNMENT
There being no further business before the committee, the House
State Affairs Standing Committee meeting was adjourned at
1:31:23 PM.