Legislature(2019 - 2020)ADAMS 519

03/04/2020 01:30 PM FINANCE

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Audio Topic
01:35:14 PM Start
01:35:52 PM HB79
03:21:34 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Bills Previously Heard/Scheduled TELECONFERENCED
Heard & Held
HOUSE BILL NO. 79                                                                                                             
     "An  Act relating  to  participation  of certain  peace                                                                    
     officers and  firefighters in  the defined  benefit and                                                                    
     defined  contribution plans  of  the Public  Employees'                                                                    
     Retirement  System of  Alaska; relating  to eligibility                                                                    
     of  peace   officers  and  firefighters   for  medical,                                                                    
     disability, and  death benefits; relating  to liability                                                                    
     of the  Public Employees' Retirement System  of Alaska;                                                                    
     and providing for an effective date."                                                                                      
1:35:52 PM                                                                                                                    
Co-Chair Johnston indicated that the  bill was last heard on                                                                    
March  2,  2020  when  the  committee  adopted  a  Committee                                                                    
Substitute   (CS)  work   draft  version   31-LS0462\O.  She                                                                    
announced that amendments for the  bill were due on March 6,                                                                    
2020 by 5:00 pm.                                                                                                                
1:37:07 PM                                                                                                                    
KEN  TRUITT,  STAFF,  REPRESENTATIVE CHUCK  KOPP,  indicated                                                                    
that the bill  was the same as the prior  version apart from                                                                    
the identifier "O".                                                                                                             
Co-Chair Johnston asked for a brief  review of HB 79 for the                                                                    
REPRESENTATIVE CHUCK  KOPP, BILL SPONSOR, reported  that the                                                                    
bill  introduced  a  hybrid  Defined  Benefit  (DB)  pension                                                                    
system. The  legislation was  three-fold; it  contained cost                                                                    
saving  features, plan  asset  enhancement adjustments,  and                                                                    
plan  benefit  reductions.  He  briefly  outlined  the  cost                                                                    
saving provisions. He indicated that  the plan did not offer                                                                    
retirement  medical insurance  and the  medical benefit  was                                                                    
the  same   as  the  Tier   4  plan,  which  was   a  Health                                                                    
Reimbursement  Arrangement  (HRA).  He  explained  that  the                                                                    
retirement age was fixed at age  55 with 20 years of service                                                                    
and   prohibited  retirement   at  any   earlier  age.   The                                                                    
retirement income average  was based on the  highest 5 years                                                                    
and  precluded  a  cost of  living  adjustment  (COLA).  The                                                                    
plans   asset  enhancement  allowed  for  increases  to  the                                                                    
employee contribution to keep the  plan funded at 90 percent                                                                    
predicated on  market conditions. The  employer contribution                                                                    
was 22  percent comprising  a mandatory  12 percent  for the                                                                    
employee benefit  and the remaining 10  percent allocated to                                                                    
the  current plan  unfunded  liability.  The plans   benefit                                                                    
reductions included withholding  the post retirement pension                                                                    
adjustment if the  plan was funded at less  than 90 percent.                                                                    
He pointed  out that the plan  was a hybrid due  to the lack                                                                    
of  a guaranteed  medical benefit.  The  plan transferred  a                                                                    
significant amount of risk to the employee.                                                                                     
1:40:17 PM                                                                                                                    
DAVID  KERSHNER, BUCK  GLOBAL  LLC,  reviewed the  actuarial                                                                    
analysis.   He   explained   that  the   analysis   involved                                                                    
projections  of   potential  contributions  to   the  Public                                                                    
Employees'  Retirement  System  (PERS)  both  currently  and                                                                    
after the adoption  of HB 79. The projections  were based on                                                                    
three different  economic scenarios. The first  scenario was                                                                    
based on  what the  assets were expected  to earn  under the                                                                    
ongoing  funding  of  PERS  at   7.38  percent.  The  second                                                                    
scenario  included a  below expected  return for  five years                                                                    
from  FY 21  through  FY  25 based  on  5.75 percent,  which                                                                    
represented  the actual  return  averaged over  the prior  5                                                                    
years.  The third  scenario modeled  poor asset  returns and                                                                    
was  unlikely.  However,  the actuaries  had  to  include  a                                                                    
scenario   with   unfavorable   asset  returns   to   create                                                                    
conditions that  caused the plans   cost saving  measures to                                                                    
 kick  in.   He  exemplified  the  post  retirement  pension                                                                    
adjustment as  one of the  cost saving provisions.  He noted                                                                    
that two  pie charts  were included in  the fiscal  note and                                                                    
thought the charts simplified the  analysis. [The pie charts                                                                    
were included  in the untitled actuarial  analysis narrative                                                                    
document by Buck  Global, LLC. (copy on  file)]. Both charts                                                                    
depicted  the  distribution  of  the  22  percent  statutory                                                                    
employer contribution  rate for  the members affected  by HB                                                                    
79 based on FY 22 projections.                                                                                                  
1:42:52 PM                                                                                                                    
AT EASE                                                                                                                         
1:46:07 PM                                                                                                                    
Mr. Kershner explained  that the first chart  showed how the                                                                    
percentages were currently distributed.  He pointed out that                                                                    
the  yellow  slice  denoting  1.8  percent  represented  the                                                                    
amount  for  the  DCR  Trust or  the  death  and  disability                                                                    
benefits and  the retirement  medical benefits.  The average                                                                    
HRA  contributions were  shown in  green at  3 percent.  The                                                                    
maroon piece  signifying 5  percent represented  the defined                                                                    
contribution  accounts of  the  plans   members. The  amount                                                                    
dedicated  to  paying down  the  unfunded  liability in  the                                                                    
existing PERS  defined benefit plan for  members hired prior                                                                    
to July  2006 was 12.2  percent depicted in  orange totaling                                                                    
22 percent.                                                                                                                     
Mr. Kershner continued to the  second pie chart representing                                                                    
the plan  percentages after  passage of  the bill.  He noted                                                                    
that the  average HRA contributions shown  in green remained                                                                    
the same  at 3 percent. He  explained that HB 79  provided a                                                                    
minimum of 12 percent  for employee contributions hence, the                                                                    
yellow   portion  signifying   9  percent   represented  the                                                                    
contribution for the HB 79  trust. The orange piece depicted                                                                    
the  remaining 10  percent  used to  pay  down the  unfunded                                                                    
liability  in the  existing PERS  defined benefit  plan. The                                                                    
decrease of 2.2  percent  for the unfunded  liability had to                                                                    
be  made  up  by   additional  statewide  contributions.  He                                                                    
concluded that the out years would look similar to FY 22.                                                                       
1:50:57 PM                                                                                                                    
Representative   Wool   pointed   to  the   maroon   defined                                                                    
contribution  slice  reflected  in  the top  pie  chart  and                                                                    
wondered why  it was not  included in the second  chart. Mr.                                                                    
Kershner responded  that under  HB 79  they would  receive a                                                                    
defined benefit rather than a defined contribution pension.                                                                     
Mr.  Kershner  referred  to the  handout,  "PERS  -  20-Year                                                                    
Projection  of  Additional  State  Contributions"  (copy  on                                                                    
file). The  table reflected three  scenarios. He  pointed to                                                                    
note 2 on  the bottom of the page. He  explained that in all                                                                    
cases the analysis reflected the  actual return of 6 percent                                                                    
that  the PERS  DB plan  experienced in  FY 19.  He reported                                                                    
that  6  percent applied  in  all  3  cases. He  varied  the                                                                    
assumed return in future years.  In scenario one, the return                                                                    
was  assumed  at  7.38  percent. In  scenario  two,  it  was                                                                    
assumed that  for 5 years (FY  21 through FY 25)  the return                                                                    
was only  5.75 percent based  on the actuals ending  on June                                                                    
30,  2019 and  after  FY  25 he  assumed  a  return of  7.38                                                                    
percent.  He   emphasized  that   the  third   scenario  was                                                                    
unlikely. He  explained that he  had to present  a situation                                                                    
with very poor  returns to create a  situation that required                                                                    
a  sizeable increase  in state  contributions. The  analysis                                                                    
assumed a zero  percent return from FY 21 through  FY 25 and                                                                    
a  2 percent  return for  two more  years then  returning to                                                                    
7.38  percent in  the  remaining years.  He  pointed to  the                                                                    
 Current   or first  scenario.  The  projections showed  the                                                                    
state  contribution to  be $198  million in  FY 22  based on                                                                    
7.38  percent returns.   Under  Scenario 2  at 5.75  percent                                                                    
returns  the  state  contribution was  projected  at  $201.5                                                                    
million in FY 22. In scenario  3 at zero percent returns the                                                                    
contribution  was projected  to be  $215 million.  The three                                                                    
scenario  columns reflected  the projected  additional state                                                                    
contributions from  fiscal years 2022  to 2041. The  20 year                                                                    
totals  column showed  the  increase  in state  contribution                                                                    
between  scenario  1 and  scenario  2  at $1.8  billion  and                                                                    
increase  dramatically   under scenario  3. He moved  to the                                                                    
columns   titled   HB   79G.   The   columns  included   the                                                                    
provisions of HB 79 that  included the redistribution of the                                                                    
employer  contributions   under  the  three   scenarios.  He                                                                    
pointed out  that under  Scenario One, the  20    year total                                                                    
increased by roughly $100 million  from $4.3 billion to $4.4                                                                    
billion. Under  Scenario 2, the  increase over 20  years was                                                                    
not  a significant  number, about  $2 million.  He explained                                                                    
that  the reason  the large  numbers popped  up in  2040 and                                                                    
2041 under  Scenario 3 was  due to the cumulative  effect of                                                                    
the   poor    asset   returns.   The    contribution   rates                                                                    
significantly increased,  and less  money was  going towards                                                                    
the DB trust and therefore,  the states  contribution had to                                                                    
make  up  the  difference.  He further  explained  that  the                                                                    
higher state  contribution rate  was the  difference between                                                                    
the  actuarially determined  contribution  rate  and the  22                                                                    
percent  statutory  rate.  The  main message  he  wanted  to                                                                    
present was that  because less money from the  HB 79 payroll                                                                    
was directed  towards the DB  plan, the shortfall had  to be                                                                    
made  up by  state contributions.  He determined  that costs                                                                    
would increase under  the plan. He cautioned that  when a DB                                                                    
plan  was replaced  with a  defined contribution  system, as                                                                    
the  state  did in  2006,  the  risk  was shifted  from  the                                                                    
states  investment  returns to the individual.  He furthered                                                                    
that  in a  defined contribution  arrangement, the  employee                                                                    
invested   the  contribution   and   the   returns  on   the                                                                    
investments determined  how much  funding was  available for                                                                    
retirement.  Conversely,   under  a  DB  plan   when  assets                                                                    
underperformed  and  created  deficiencies,  the  deficiency                                                                    
fell  to  the state.  He  concluded  that a  combination  of                                                                    
decreased DB  contributions and the risk  of underperforming                                                                    
future returns increased the states   risk for future higher                                                                    
2:00:40 PM                                                                                                                    
Co-Chair  Johnston surmised  that with  the state's  current                                                                    
arrangement the  state paid 12.2  percent for  all employees                                                                    
towards the  unfunded liability. The added  liability in the                                                                    
HB  79  plan  changed  the 12.2  percent  for  the  unfunded                                                                    
liability  to  10 percent.  Mr.  Kershner  responded in  the                                                                    
2:01:42 PM                                                                                                                    
Representative Kopp asked Mr.  Kershner to comment regarding                                                                    
the HB 79 plans  risk  being  pushed  to the employer, which                                                                    
was shared with the employee.                                                                                                   
Mr. Kershner affirmed that there  was some risk sharing that                                                                    
was passed onto the  employee. The members contribution rate                                                                    
started at  8 percent  and the  plan contained  two features                                                                    
that  were initiated  when and  if  the fund  fell below  90                                                                    
percent.  The  post   retirement  pension  adjustments  were                                                                    
reduced,  and  the Retirement  Board  could  adopt a  higher                                                                    
employee  contribution  rate;  higher  than  8  percent  and                                                                    
limited to 10 percent.                                                                                                          
Co-Chair  Johnston recounted  that  inherent  in the  hybrid                                                                    
program  in HB  79 was  the risk  of increasing  the states                                                                     
liability  towards  the  unfunded  liability.  She  wondered                                                                    
whether   she   was   correct.  Mr.   Kershner   asked   for                                                                    
clarification. Co-Chair Johnston  restated the question. Mr.                                                                    
Kershner concurred that she was  correct. He delineated that                                                                    
a  smaller  portion  of  the HB  79  contribution  would  be                                                                    
deposited to the  DB plan trust for  the unfunded liability.                                                                    
He voiced that the shortfall had  to be made up in some way.                                                                    
He  concluded that  if the  peace  officers and  firefighter                                                                    
members were  contributing less to the  liability, the state                                                                    
had to cover the shortfall via the state contribution.                                                                          
Co-Chair  Johnston  clarified  the  difference  between  the                                                                    
employers and the state. She  instructed that employers were                                                                    
entities like  municipalities, the university,  and schools.                                                                    
After the state closed the  DB program, employers had to pay                                                                    
their   full  amount   for   the   unfunded  liability   for                                                                    
approximately  one  year  until   the  state  increased  its                                                                    
contribution  and capped  the  employer  contribution at  22                                                                    
2:07:23 PM                                                                                                                    
Representative  Wool   wondered  how  the   current  defined                                                                    
contribution plan paid for  the unfunded liability. Co-Chair                                                                    
Johnston referred  to the  top pie chart  as a  depiction of                                                                    
how  the  unfunded  liability  was  currently  handled.  She                                                                    
exemplified that  the university  paid a  certain percentage                                                                    
for each of the DB and DC plans.                                                                                                
Representative Kopp interjected that  the plan by itself was                                                                    
structurally very  sound and did  not add to  the structural                                                                    
liability. However,  it was the existing  liability that was                                                                    
a problem and  burdened the plan. He  relayed that according                                                                    
to Mr. Kershner,  the HB 79 plan itself was  projected to be                                                                    
funded  at 99.3  percent  and was  expected  to improve  and                                                                    
increase to above 100 percent  over the years because of the                                                                    
HB 79 trusts   contribution rate. He surmised  that the plan                                                                    
 was  structurally very  sound  but  the unfunded  liability                                                                    
was problematic.                                                                                                                
Co-Chair  Johnston maintained  that one  of the  reasons the                                                                    
plan  was structurally  sound  was because  the  HB 79  plan                                                                    
decreased its  contribution to  the unfunded  liability from                                                                    
12 percent to 10 percent.                                                                                                       
2:10:45 PM                                                                                                                    
Representative Wool  referred to  Scenario 3. He  noted that                                                                    
at the  end of 20  years the  first 2 scenarios  had similar                                                                    
returns. He asked  if HB 79 was not enacted,  but the severe                                                                    
financial conditions modeled in  the third scenario happened                                                                    
how it would affect repayment  of the unfunded liability and                                                                    
if it   fell on  the state.  Mr.  Kershner responded  in the                                                                    
affirmative  and  noted  that  it  fell  to  the  state.  He                                                                    
reiterated  that the  employer  contribution was  set at  22                                                                    
percent and  the excess  difference between  the actuarially                                                                    
required  rate  and  the  22 percent  fell  to  the  states                                                                     
contribution.  He  pointed  to the  three  scenario  columns                                                                    
under the current plan on  the state contribution projection                                                                    
table.  The   Scenario  3  column   portrayed  significantly                                                                    
increased state contributions  of up to $10  billion over 20                                                                    
years  above the  22 percent  employer contribution  because                                                                    
the draconian  asset returns created large  increases in the                                                                    
unfunded liability that had to be made up over 25 years.                                                                        
2:13:40 PM                                                                                                                    
KEVIN   WORLEY,  CHIEF   FINANCIAL   OFFICER,  DIVISION   OF                                                                    
RETIREMENT  AND  BENEFITS,   DEPARTMENT  OF  ADMINISTRATION,                                                                    
addressed the new Department  of Administration (DOA) fiscal                                                                    
note  appropriated to  PERS State  Assistance. He  indicated                                                                    
that the  fiscal note would  not be effective until  July 1,                                                                    
2021 in FY 22. The state  contribution increase in FY 22 was                                                                    
$3.5 million increasing to $4.1 million by FY 26.                                                                               
Representative  Wool   asked  Mr.  Worley  to   restate  his                                                                    
comment. Mr. Worley complied. He  referred to the pie charts                                                                    
in  the actuarial  analysis and  noted that  because of  the                                                                    
shift in  plan contributions to the  unfunded liability from                                                                    
12.2   percent  to   10   percent,   the  additional   state                                                                    
contributions increased  to about  $99.8 million  through FY                                                                    
Representative  Josephson asked  how a  firefighter who  was                                                                    
employed in 2007 would transition into the HB 79 plan.                                                                          
2:16:17 PM                                                                                                                    
KATHY  LEA, CHIEF  PENSION OFFICER,  DIVISION OF  RETIREMENT                                                                    
AND BENEFITS,  DEPARTMENT OF ADMINISTRATION,  explained that                                                                    
the bill  provided for a transition  process. She elaborated                                                                    
that  the  division  would  look  at  a  member's  age,  the                                                                    
members  account in  the DC plan, and the  amount of service                                                                    
the member  needed to purchase. The  actuary would calculate                                                                    
the amount necessary to purchase  the same amount of service                                                                    
in the DB plan, if there  were insufficient funds to buy all                                                                    
of the  service, the division  would calculate how  much was                                                                    
paid for and  the member would pay off the  remainder in the                                                                    
future.   Any  excess   would   remain   in  their   defined                                                                    
contribution plan account.                                                                                                      
Representative Knopp  presented a hypothetical  scenario. He                                                                    
wondered what  it would take  for a  person to buy  into the                                                                    
plan. He  posed the case of  an employee that began  in 2007                                                                    
and had  14 years of  service. He wondered what  the maximum                                                                    
contribution  was.   Ms.  Lee   indicated  the   figure  was                                                                    
difficult to  calculate offhand. However, except  for "a few                                                                    
outliers that  were closer to  retirement,  she  had learned                                                                    
from Buck  Global' s  information that  the majority  of the                                                                    
defined contribution participants would  be able to purchase                                                                    
their service.                                                                                                                  
2:19:42 PM                                                                                                                    
Representative  LeBon  reported  that the  state  still  had                                                                    
employees under  Tiers 1 to 3.  He deduced that most  of the                                                                    
Tier  1 population  had already  reached retirement  age. He                                                                    
wondered about  the size of  the unfunded liability  for the                                                                    
remaining  DB  members.  Kevin  Worley  responded  that  the                                                                    
amount  was about  $5  billion.  Representative LeBon  asked                                                                    
whether  the HB  79 plan  was  neutral to  the liability  or                                                                    
helped to repay it in an indirect way.                                                                                          
Mr.  Kershner  replied that  the  plan  did nothing  to  the                                                                    
existing liability,  but it affected the  amount of employer                                                                    
contribution used to pay back  the liability. He referred to                                                                    
the  pie charts.  He reminded  the committee  that currently                                                                    
12.2 percent  was contributed to repayment  of the liability                                                                    
and  under  the  HB  79  plan  only  about  10  percent  was                                                                    
attributed  to  repayment.  The  extra  unfunded  burden  of                                                                    
roughly $3.5  million to  $4 million per  year for  the next                                                                    
five years fell  to the state, which was the  reason for the                                                                    
increase  in state  contributions  noted  on the  projection                                                                    
2:22:19 PM                                                                                                                    
Representative LeBon  thought the  elephant in the  room was                                                                    
the $5 billion of unfunded  liability and how HB 79 affected                                                                    
the  states  ability  to meet  its obligation.  Mr. Kershner                                                                    
responded that the Alaska  Retirement Management Board (ARM)                                                                    
had  taken  on the  funding  policy  and  the plan  had  the                                                                    
unfunded liability paid off by 2039.                                                                                            
Representative LeBon  asked whether the HB  79 model offered                                                                    
enough  financial   stability  to   ensure  the   state  and                                                                    
municipalities  that in  the future  there would  not be  an                                                                    
unfunded liability.                                                                                                             
Co-Chair Johnston  interjected that  the committee  had seen                                                                    
the actuarial  projection that showed  the plan was  over 90                                                                    
percent  funded  in  the  future. She  noted  that  over  80                                                                    
percent funded was considered stable with most plans.                                                                           
2:24:39 PM                                                                                                                    
Representative  Sullivan-Leonard  asked what  the  employees                                                                    
currently  had regarding  healthcare  compared  to the  most                                                                    
recent version  of the bill.  Ms. Lea responded that  the CS                                                                    
adopted  the  same  health  plan   as  the  current  defined                                                                    
contribution  system  currently  had  at an  80  percent  20                                                                    
percent cost  share. The premiums  were based on  the number                                                                    
of years of service the employee had.                                                                                           
2:26:00 PM                                                                                                                    
Vice-Chair Ortiz asked if passage  of HB 79 would not impact                                                                    
the  unfunded   liability.  Mr.  Worley  responded   in  the                                                                    
negative.  He  offered that  it  did  impact the  ARM  board                                                                    
funding  plan  by  increasing  the  state  contribution.  He                                                                    
reiterated that  the lower  contribution by  the HB  79 plan                                                                    
members towards  the unfunded liability shifted  an increase                                                                    
to the states contribution.                                                                                                     
Vice-Chair Ortiz asked about the  figures going out to FY 26                                                                    
in the  fiscal note.  He asked how  accurate they  were. Mr.                                                                    
Kershner responded  that all the  projections were  based on                                                                    
assumptions of  what would likely  happen in the  future. He                                                                    
pointed to  Scenario One and explained  the assumptions were                                                                    
based  on  no  unexpected   surprises  with  the  assets  or                                                                    
liabilities  of   the  plan.  He  defined   that  unexpected                                                                    
surprises  were underperforming  assets  and differences  in                                                                    
retirement  and mortality  assumptions.  He  noted that  the                                                                    
circumstances  would result  in higher  state contributions.                                                                    
Vice-Chair  Ortiz   asked  the  likelihood  of   Scenario  3                                                                    
happening.  Mr.  Kershner  replied  that Scenario  3  was  a                                                                    
random scenario created to cause  the plans  funding to drop                                                                    
below  90  percent  to  kick   in  the  plans   cost  saving                                                                    
measures.  He  referenced  the  20  percent  to  30  percent                                                                    
decline in the asset market  in 2008. He reasoned that there                                                                    
was no  way of  quantifying another  similar event  like the                                                                    
market decline of  2008 in the projections  and deduced that                                                                    
there was  a low  probability of generating  a zero  and two                                                                    
percent return over a number of years.                                                                                          
2:31:59 PM                                                                                                                    
Representative Wool  thought that  the chart  reflected that                                                                    
the  unfunded  liability would  be  paid  off by  2040.  Mr.                                                                    
Kershner explained that the unfunded  liability would not be                                                                    
paid   off  but   would  not   require  any   further  state                                                                    
contribution  and  would  be   covered  under  the  employer                                                                    
contribution  at   less  than   22  percent;   any  unfunded                                                                    
liability balance would be met by the employer.                                                                                 
Representative  Wool asked  if  he meant  12.2 percent.  Co-                                                                    
Chair Johnston  reminded Representative Wool that  the state                                                                    
would  not   be  participating  in  repayment   if  employer                                                                    
contributions were under 22 percent.                                                                                            
Representative Wool asked  if there was a  scenario in which                                                                    
the  state  would  not  pay   a  contribution  based  on  an                                                                    
exceptionally good  year for  returns. Mr.  Kershner replied                                                                    
that employer contributions were  projected at 29 percent in                                                                    
FY 22  and was projected to  remain in the 30  percent range                                                                    
over the  next several years.  He voiced that it  would take                                                                    
significant asset  returns in  the  teens   for a  number of                                                                    
years  to   generate  the   scenario  that   eliminated  the                                                                    
additional state contribution.                                                                                                  
2:35:13 PM                                                                                                                    
Representative LeBon  inquired whether Mr. Kershner  held an                                                                    
opinion  regarding  the   effectiveness  of  the  adjustment                                                                    
mechanism  of   the  employee/employer   contribution  rates                                                                    
should the plan  have an unfunded liability.  He wondered if                                                                    
the plan  had an ability  to correct itself during  the life                                                                    
of the  plan. Mr.  Kershner responded that  the HB  79 trust                                                                    
was starting  out at  100 percent  funding. He  relayed that                                                                    
even considering the 5  bad   years simulated under Scenario                                                                    
2,  the funding  status was  still projected  to be  over 90                                                                    
percent.  The  lowest  funded   percentage  was  roughly  99                                                                    
percent funded. He  thought it would take a  lot to generate                                                                    
a funding  percentage below 90  percent. He  determined that                                                                    
the  HB  79  plan  was  fairly  secure   with  the  built-in                                                                    
safeguards that  would keep percentages from  sky rocketing.                                                                    
He indicated that even with  the safeguards in the bill, the                                                                    
state contribution was increasing under  the HB 79 plan, but                                                                    
the  safeguards made  it  unlikely the  plan  would ever  be                                                                    
 poorly funded.                                                                                                                 
Representative  LeBon  asked about  a  deposit  made to  the                                                                    
unfunded liability of $3 billion  by the state approximately                                                                    
7 years ago. He wondered  if that deposit made things better                                                                    
and ultimately answered his own  question by discerning that                                                                    
it did. He  asked if the state had a  legal obligation to be                                                                    
the safety  net for HB 79  if something went wrong.  Ms. Lea                                                                    
responded in the affirmative.                                                                                                   
Representative   Josephson  noted   that   the  $3   billion                                                                    
contribution  reduced the  state's  amortized  amount to  $8                                                                    
billion. He asked how the  unfunded amount decreased from $8                                                                    
billion  to $5  billion.  Mr. Worley  answered that  several                                                                    
things  contributed  to  the   decrease.  He  reported  that                                                                    
changes made  to the healthcare  plans through  the Employee                                                                    
Group  Waiver  Plan  (EGWP)  in   the  prior  year  lead  to                                                                    
significant  savings.  In  addition, savings  were  achieved                                                                    
through  a   third  party  administrator   for  medications.                                                                    
Regarding pensions,  the state did  not have the  ability to                                                                    
alter  the   current  plan  set   out  by  the   ARM  board.                                                                    
Representative  Josephson  asked   about  the  $100  million                                                                    
increase in  Scenarios 1 and  2 for the  state contribution.                                                                    
He deduced that  the amount constituted roughly  a 2 percent                                                                    
increase  to the  unfunded  liability.  Mr. Worley  answered                                                                    
that the  number was  the amount necessary  to pay  down the                                                                    
unfunded liability. Representative  Josephson shared that he                                                                    
was  feeling  some confidence in  the legislation   in terms                                                                    
of the  benefit of  the bill  and Mr.  Kershner's assurances                                                                    
regarding  the  plan's   viability  and  sustainability.  In                                                                    
relation to the remainder of  the unfunded liability, it did                                                                    
not appear  that the plan  added a large  burden considering                                                                    
the states   increased contribution  was spread out  over 20                                                                    
years. He asked  Mr. Worley whether he had  any comment. Mr.                                                                    
Worley responded  in the  negative. He  related that  he was                                                                    
acting  in his  capacity  as an  accountant  to analyze  the                                                                    
numbers in the plan.                                                                                                            
Co-Chair  Johnston  commented  that  the  program  could  be                                                                    
considered  a   pilot  plan  for  other   employees  in  the                                                                    
retirement  system.  She  deemed   that  if  the  plan  were                                                                    
expanded  the  cost  of  the  program  to  the  state  would                                                                    
increase due  to the employer's  involvement in  the state's                                                                    
unfunded  liability. She  asked  whether  her statement  was                                                                    
accurate. Mr. Worley responded affirmatively.                                                                                   
Representative Wool thought that at  some point the plan was                                                                    
cost neutral. He wondered, unfunded  liability aside, if the                                                                    
plan was  cost neutral  in any  scenario. Ms.  Lea responded                                                                    
that HB  79 itself was  cost neutral because it  had leavers                                                                    
to  address  any unfunded  liability  and  was starting  out                                                                    
 very well-funded   as there was  no one presently  ready to                                                                    
retire.  She relayed  the actuarial  analysis that  it would                                                                    
take  some very  extraordinary  circumstance for  the HB  79                                                                    
plan to  accrue unfunded liability. She  emphasized that the                                                                    
plan  itself  was  cost  neutral  but  the  effects  on  the                                                                    
unfunded liability  and who paid  for it was  established by                                                                    
the analysis. She elucidated that  the state ended up paying                                                                    
the additional  costs. She exemplified  that instead  of the                                                                    
employer  paying $55.00  and the  state  paying $100.00  the                                                                    
state  would  pay   $125.00.  Representative  Wool  wondered                                                                    
whether  there  was  an  economy  of  scale  to  offset  any                                                                    
potential downturn in the economy  if the plan was expanded.                                                                    
He asked if  a greater safety net was created  with a larger                                                                    
employee base or  was it all the same. Ms.  Lea deferred the                                                                    
question to  Mr. Kershner. She  inferred that the  impact on                                                                    
the state would be greater.                                                                                                     
Mr. Kershner  commented that when  he heard  cost-neutral he                                                                    
interpreted  it  as no  additional  cost  to the  state.  He                                                                    
declared that HB 79 was  not cost neutral. He furthered that                                                                    
the funding of the HB  79 trust was self-contained. However,                                                                    
the employer was contributing less  to pay down the unfunded                                                                    
liability  and the  plan was  not cost  neutral in  terms of                                                                    
total  spend to  the state  for the  benefits. He  expounded                                                                    
that the  risk to the state  was higher as the  DB plan grew                                                                    
larger  because the  liabilities and  assets were  larger so                                                                    
with any  asset losses  the state  had to  make up  a larger                                                                    
shortfall over 25  years according to the  ARM board policy.                                                                    
Representative  Wool commented  that since  the Tiers  1, 2,                                                                    
and  3  recipients  were  a    defined  quantity   and  were                                                                    
diminishing overtime,  he wondered  if an  expanded employee                                                                    
base  would help  with the  unfunded  liability having  more                                                                    
employees  paying   towards  the  liability.   Mr.  Kershner                                                                    
responded  that if  the  plan  population expanded,  payroll                                                                    
would  expand, and  the liability  would increase.  However,                                                                    
the   increased  payroll   did   help  generate   additional                                                                    
contributions.  He surmised  that  extended payroll  helped;                                                                    
however, as the plans   assets and liabilities became larger                                                                    
and larger the percentage  decline in contributions grew and                                                                    
had to  be made up. The  risk to the state  increased as the                                                                    
DB plan increased.                                                                                                              
Representative Wool  determined that under the  medical plan                                                                    
the medical  benefits were not  continuing. He  assumed that                                                                    
medical costs were a factor  that largely contributed to the                                                                    
unfunded liability.  The pension alone  was self-sustaining,                                                                    
the unfunded  liability component  added the extra  cost. He                                                                    
pondered  that since  the  new plan  did  not offer  medical                                                                    
benefits  at  retirement  and employees  would  be  retained                                                                    
longer  under  the  plan,  he  wondered  how  that  affected                                                                    
outcomes. He remarked that he was confusing himself.                                                                            
Ms.  Lea  reminded  committee  members  that  the  plan  had                                                                    
medical  benefits  for active  and  retired  members and  it                                                                    
offered an  HRA to help  retirees pay for the  premiums. The                                                                    
retiree health plan was entirely  funded at 100 percent. The                                                                    
pension plan was not.                                                                                                           
Co-Chair Johnston  reminded members that DOA  would speak to                                                                    
health savings later.                                                                                                           
Vice-Chair  Ortiz  referenced Co-Chair  Johnstons   comments                                                                    
considering the  plan as a  pilot project. He  remarked that                                                                    
Rep. Wool pointed out the  cost saving elements of the plan.                                                                    
He asked  if there  was anything in  place that  would track                                                                    
the  savings from  year-to-year and  use the  information as                                                                    
part of the cost benefit analysis.                                                                                              
Co-Chair Johnston answered that  the committee could ask DOA                                                                    
to perform the analysis. She  indicated the state would also                                                                    
need to include the municipalities in the analysis.                                                                             
2:55:57 PM                                                                                                                    
Representative  Josephson was  surprised to  learn that  the                                                                    
HRA was  fully funded  and that the  liability was  the cash                                                                    
pension portion.  He thought the  idea behind HB 79  was not                                                                    
to  offer  retirees  health benefits  because  it  made  the                                                                    
outcomes more unpredictable. Ms.  Lea pointed to Sections 26                                                                    
through 29 of  the bill that contained  the provisions about                                                                    
the  eligibility for  the medical  benefits and  the premium                                                                    
payments. She indicated that the  benefits were the same for                                                                    
the  defined  contribution  members.  She  deferred  to  Mr.                                                                    
Worley   regarding  the   funding   of   the  health   plan.                                                                    
Representative  Josephson wondered  why  the  author of  the                                                                    
bill  was going  with the  defined contribution  plan rather                                                                    
than a defined benefit plan.                                                                                                    
Co-Chair Johnston  interjected that one difference  with the                                                                    
employee  pool  for  the  HB  79  plan  was  that  employees                                                                    
typically began  their employment in their  twenties retired                                                                    
in 20  years. The  time gap  between retirement  and benefit                                                                    
age could be an additional cost.                                                                                                
Mr.  Worley was  unclear what  Representative Josephson  was                                                                    
referring  to.  He  explained  that the  HRA  was  a  health                                                                    
reimbursement   arrangement  that   equated  to   a  defined                                                                    
contribution  dollar  amount  and  was  different  than  the                                                                    
defined  benefit plan  healthcare  trust that  was over  100                                                                    
percent funded.                                                                                                                 
Co-Chair Johnston  asked if Representative  Josephson wanted                                                                    
to hear from Representative Kopp.                                                                                               
2:59:34 PM                                                                                                                    
Representative  Kopp responded  that  under HB  79 a  person                                                                    
would  not  be  eligible  for  the  health  savings  account                                                                    
benefit  until the  employee  had 25  years  of service.  He                                                                    
explained that  even though  the plan  required 20  years of                                                                    
service an employee had to wait  until they were 55 years of                                                                    
age  to retire.  In  order to  access  healthcare sooner,  a                                                                    
person would  have to work  a minimum  of 25 years  prior to                                                                    
being able to  access the medical savings plan.  The HRA was                                                                    
a bridge to  Medicare that enabled the  employee to purchase                                                                    
a  plan  until  eligibility.  He   spoke  to  the  value  of                                                                    
retention. He reported that a  fire fighter trained in their                                                                    
first 3 years  received training equal to  about $1 million.                                                                    
Employees  who  walk  out the  door  early  took the  monies                                                                    
spent  in training  employees. He  considered the  situation                                                                    
 devastating   to  municipalities.  He cited  the  increased                                                                    
state contribution  in one  year at  $3 million  and equated                                                                    
that  to  the  many  millions more  lost  to  municipalities                                                                    
dealing  with lost  retention. He  reported that  the Alaska                                                                    
State  Troopers had  40 trooper  positions vacant  and still                                                                    
had 40 positions vacant after  hiring 40 new troopers due to                                                                    
lack  of   retention.  He  stated  that   even  with  salary                                                                    
increases to  attract new applicants, retention  remained an                                                                    
issue. He  believed that a  retirement plan was  critical to                                                                    
solving  the retention  problem. The  financial loss  to the                                                                    
state was minute compared to  the collective losses suffered                                                                    
by the municipalities from lack of retention.                                                                                   
3:02:21 PM                                                                                                                    
Vice-Chair  Ortiz asked  if there  was  a way  to track  the                                                                    
amount  of savings  from the  plan  over a  period of  time.                                                                    
Representative  Kopp indicated  that  most agencies  tracked                                                                    
their employee  attrition. He thought  that the  state could                                                                    
easily  monitor the  information  to  determine whether  the                                                                    
plan affected retention.                                                                                                        
Co-Chair Johnston invited Mr.  Truitt to provide a sectional                                                                    
3:03:44 PM                                                                                                                    
Mr.  Truitt  informed  the  committee  that  there  were  11                                                                    
substantive sections  which he would exclusively  review. He                                                                    
began with Section 1, page  3, lines 6 through 9 authorizing                                                                    
the  ARM board  to activate  the cost  saving mechanisms  or                                                                    
 plan  asset   enhancement  adjustments   to   the  employer                                                                    
contributions  and employee  contributions if  necessary. He                                                                    
offered that Section  2, page 4, lines 23  through 26 worked                                                                    
in  conjunction   with  Section  1  and   contained  further                                                                    
adjustment authority for the ARM board as follows:                                                                              
     (5)  adjust  the amount  of  the  increase in  benefits                                                                    
     payable  to a  peace officer  or firefighter  who first                                                                    
     becomes  a  member after  June  30,  2006, as  provided                                                                    
     under  AS 39.35.475;  (6) adjust  employee contribution                                                                    
     rates under AS 39.35.160(e).                                                                                               
Mr. Truitt  disclosed that page  4 through page  8 contained                                                                    
technical   and  conforming   language  that   inserted  the                                                                    
statutory  language in  the current  draft  CS. He  reported                                                                    
that the next  major change was in Section  12, beginning on                                                                    
page 9 that created the  new version of the retirement plan.                                                                    
He noted  that the term  Tier  5  was not used  in the bill.                                                                    
He pointed to  the language on page 9, line  9,  first hired                                                                    
after  July 1,  2006  as  the designation  for the  employee                                                                    
group in  HB 79. He  highlighted that Section  13, beginning                                                                    
on  line 12  defined how  the employees  contributed to  the                                                                    
plan.  He  cited line  28  [Section  14] that  mandated  the                                                                    
employee contribution of 8 percent.                                                                                             
Mr. Truitt turned to Section  15, page 10, beginning on line                                                                    
10  that made  clear  that the  total employer  contribution                                                                    
remains  22  percent  for peace  officer  and  fire  fighter                                                                    
employers.  He  moved  to  Section  18  on  page  11,  which                                                                    
contained  asset  enhancement  adjustment language  and  the                                                                    
contribution  formula  of  the   plan.  He  elucidated  that                                                                    
Section  19,  page 11,  beginning  on  line 19  defined  the                                                                    
medical benefit that  was the same as Tier  4. He delineated                                                                    
that  the   CS  assumed  the  new   plans   medical  benefit                                                                    
contributions  would be  deposited into  the current  Tier 4                                                                    
HCR  trust.  However,  in conversations  with  the  division                                                                    
about how the  contributions to the plan would  be handled a                                                                    
second trust might  be created. He indicated  there might be                                                                    
a statutory change needed to establish a separate trust.                                                                        
Mr. Truitt continued  with Section 21, page 12,  line 7 that                                                                    
detailed the service requirements for the plan as follows:                                                                      
     (1)  at age  60 with  at least  five years  of credited                                                                    
     service as  a peace officer  or firefighter; or  (2) at                                                                    
     age 55 with at least 20  years of credited service as a                                                                    
     peace officer or firefighter.                                                                                              
Mr. Truitt pointed to Section  25 beginning on page 13, line                                                                    
3  that  allowed the  ARM  board  to reduce  Post-Retirement                                                                    
Pension Adjustments (PRPA)  payments (inflation proofing) to                                                                    
peace officers and firefighters if  the plan had an unfunded                                                                    
liability greater than 10 percent  until the plan recovered.                                                                    
He  characterized   the  provision   as  one   the   benefit                                                                    
reduction tools.   He underlined  that Section 28,  pages 14                                                                    
through 15 contained  the statute that referred  to Tiers 1,                                                                    
2,  and 3  medical plan  and  created a  carve-out from  the                                                                    
Tiers 1, 2, and 3 associated  statutes for the HB 79 members                                                                    
to  participate in  the Tier  4 medical  plan. He  expounded                                                                    
that the  section corresponded  to Section  29 that  added a                                                                    
new statute  creating the HRA medical  benefit and specified                                                                    
the  qualifications  and  procedures.   He  added  that  the                                                                    
Section  29 new  medical plan  was identical  to the  Tier 4                                                                    
medical  plan  with a  few  technical  changes necessary  in                                                                    
subsections  (f), (g),  and  (h) to  initiate  the plan.  He                                                                    
reported that  the last  major change  was found  in Section                                                                    
30, pages  17 through 18.  The provision contained  the cost                                                                    
savings feature  reflecting the  calculation for  an average                                                                    
retirement income  based on 5  years of service  rather than                                                                    
the 3  highest years  for Tiers  1, 2,  and 3  employees. He                                                                    
concluded  that   the  remainder  of  changes   were  either                                                                    
technical or  conforming changes. He reminded  the committee                                                                    
that  Section 5  through Section  11 contained  the language                                                                    
and formulas for employee transition into the new plan.                                                                         
3:13:22 PM                                                                                                                    
Representative Merrick had notes  from last year. She showed                                                                    
the   average  cost   of  training   for  firefighters   and                                                                    
paramedics  as over  $130 thousand  for the  first year  and                                                                    
the average  cost of  training a  public safety  employee at                                                                    
over $200  thousand. She asked whether  the analysis assumed                                                                    
better  retention  under  the  HB 79  plan  than  under  the                                                                    
current  Tier   4  plan.  Mr.  Kershner   responded  in  the                                                                    
affirmative.  He furthered  that the  employees transferring                                                                    
into the  new plan were  subject to the same  termination of                                                                    
employment that applied to DB  plan participants. He offered                                                                    
that  a DB  plan provided  more incentive  for employees  to                                                                    
remain  in the  job than  a defined  contribution plan.  The                                                                    
analysis  projected lower  termination rates  for the  HB 79                                                                    
plan than the current defined contribution plan.                                                                                
Representative Josephson  remarked that Alaska  was training                                                                    
employees who  were then being  poached by other  states. He                                                                    
characterized it as an endless cycle.                                                                                           
3:15:59 PM                                                                                                                    
Representative  Kopp responded  affirmatively. He  mentioned                                                                    
that he  included letters  in the  members packets  (copy on                                                                    
file)  from  police  and  fire  chiefs  relaying  the  exact                                                                    
situation.  He maintained  that the  employees were  lost to                                                                    
out   of  state   departments  offering    significant  cash                                                                    
incentives  for  lateral  hire.  Based  on  the  candidates                                                                     
training resume  other departments did  not have to  pay for                                                                    
training.  There  was  a significant  cost  to  Alaska  when                                                                    
others recruited Alaska's troopers.                                                                                             
3:16:47 PM                                                                                                                    
Vice-Chair  Ortiz asked  about statistics  since the  change                                                                    
from Tier 3  to Tier 4. He asked whether  the loss of public                                                                    
safety  workers was  tracked. Representative  Kopp responded                                                                    
that  every [police  and fire]  department  had tracked  the                                                                    
loss. He  reported that  one common  consequence was  a huge                                                                    
age gap  between the younger  employees cycling  out between                                                                    
two  and four  years of  service and  the remainder  with 15                                                                    
years  or more.  The  departments were  losing its  mentors,                                                                    
trainers, and  supervisors to retirement and  the young ones                                                                    
were  leaving   before  promotion   into  those   roles.  He                                                                    
characterized it as  an age and experience  gap that created                                                                    
an   artificial  divide   between  the   young  and   senior                                                                    
Representative Wool believed the  effect on retention should                                                                    
be  emphasized over  the  increased  state contribution.  He                                                                    
asked about  the  medical aspect  of  Tiers 1, 2, and  3. He                                                                    
thought that the  reason the DB plans  were discontinued was                                                                    
due  to  accelerated  medical   costs,  reasoning  that  the                                                                    
pension costs  were more predictable.  He wondered  how that                                                                    
had  changed  as  he  had assumed  medical  costs  were  the                                                                    
problem.  He referenced  testimony that  medical costs  were                                                                    
contained,  and the  pension costs  were not.  He asked  for                                                                    
clarification. Representative Kopp  responded that the state                                                                    
had had  very poor actuarial advice,  which precipitated the                                                                    
liability  problem. He  acknowledged  that healthcare  costs                                                                    
were a  significant cost  driver of pensions  and it  was no                                                                    
different in the states situation.                                                                                              
Co-Chair  Johnston recounted  that healthcare  attributed to                                                                    
one-third  of   the  $3  billion   payment  to   the  Public                                                                    
Employees'  Retirement   System  (PERS)  and   the  Techers                                                                     
Retirement  System  (TRS). She  noted  that  there had  been                                                                    
significant  cost saving  measures taken  by DOA  since then                                                                    
that made a huge difference.                                                                                                    
Co-Chair Johnston reviewed the agenda for the following                                                                         
HB 79 was HEARD and HELD in committee for further