Legislature(2009 - 2010)

04/18/2010 05:16 PM Senate FIN

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05:16:00 PM Start
05:19:10 PM HB280
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
CS FOR HOUSE BILL NO. 190(FIN)                                                                                                
     "An  Act  amending  the  Alaska  children's  trust  and                                                                    
     relating to the trust;  establishing a children's trust                                                                    
     grant  account;  relating  to  birth  certificates  and                                                                    
     certificates of  marriage; relating to  special request                                                                    
     Alaska  children's trust  license plates;  and amending                                                                    
     the  State  Procurement  Code   to  exempt  the  Alaska                                                                    
     children's trust and the Alaska Children's Trust                                                                           
6:01:10 PM                                                                                                                    
Co-Chair Stedman addressed three  zero fiscal notes from the                                                                    
Department of Health and Social  Services, the Department of                                                                    
Revenue, and Department of  Commerce, Community and Economic                                                                    
Co-Chair Hoffman MOVED to report  CS HB 190 out of Committee                                                                    
with individual recommendations  and the accompanying fiscal                                                                    
notes. There being NO OBJECTION, it was so ordered.                                                                             
CS HB  190 was REPORTED  out of  Committee with a  "do pass"                                                                    
recommendation  and with  three previously  published fiscal                                                                    
notes: FN 2 (CED), FN 3 (DHS), FN 4 (REV).                                                                                      
^RECENT PERS-TRS TIMELINE                                                                                                     
KEVIN   BROOKS,    DEPUTY   COMMISSIONER,    DEPARTMENT   OF                                                                    
ADMINISTRATION  began with  a general  discussion about  the                                                                    
recent  Public   Employees  Retirement  System   (PERS)  and                                                                    
Teachers'   Retirement  System   (TRS)  timeline.   He  drew                                                                    
attention  to  the  issue  of  unfunded  liability  and  the                                                                    
significant impacts  since 2002 when Mercer  changed several                                                                    
actuarial  assumptions  following  an audit  by  a  separate                                                                    
firm, Milliman.  The change resulted in  a dramatic increase                                                                    
in unfunded  liability and decrease in  funding ratio, which                                                                    
continued  in  a  general  upward  trend.  The  most  recent                                                                    
evaluation of  June 30, 2008  showed the  unfunded liability                                                                    
equaled  $7.5  billion   dollars.  Since  then,  significant                                                                    
losses occurred in the market.                                                                                                  
Mr.  Brooks   highlighted  the  passage  of   SB  141  which                                                                    
constructed  the  hybrid   Defined  Contribution  Retirement                                                                    
(DCR)  plan and  passage  of SB  125  which constructed  the                                                                    
shared cost, blended rate system  among public employers. He                                                                    
noted  that SB  125  set  the PERS  contribution  cap at  22                                                                    
percent for employers and the  TRS contribution cap at 12.56                                                                    
percent  for school  districts.  The  state contributes  the                                                                    
amount   greater   than    these   percentages   by   direct                                                                    
appropriation to the funds.                                                                                                     
6:06:36 PM                                                                                                                    
JERRY  BURNETT, DEPUTY  COMMISSIONER, DIVISION  OF TREASURY,                                                                    
DEPARTMENT  OF REVENUE,  referred  to  Slide 20:  "Long-term                                                                    
return Relative  to Target 7.33 percent  versus 7.41 percent                                                                    
over 18 and 1/4 years". He  explained that PERS and TRS have                                                                    
similar  returns. He  noted  that the  line  in the  graph's                                                                    
center exhibits the  actuarial expected return at  8 and 1/4                                                                    
percent.  The purple  and blue  lines  represent the  actual                                                                    
returns. He pointed out the rise  in returns in 2008 and the                                                                    
subsequent fall in 2009. As of  February 28, 2010 PERS had a                                                                    
total  cash asset  value of  $9,554,000,000 and  TRS had  an                                                                    
asset value of 4,167,000,000.  The 2009 calendar year earned                                                                    
13.28 percent  on PERS  and TRS.  Returns were  3.19 percent                                                                    
over the past five years.  Returns were 6.65 percent for the                                                                    
past  7 years.  The past  18  years showed  returns of  7.33                                                                    
Co-Chair Stedman  asked about the  liability spread  for the                                                                    
end of June.  Mr. Brooks responded that a  draft report from                                                                    
the June 30, 2009 evaluation  will be released to the Alaska                                                                    
Retirement  Management (ARM)  board in  the near  future. He                                                                    
stated that  the draft exhibited  an unfunded  liability for                                                                    
TRS  at  $3,370,000,000  and  $6,330,000,000  for  PERS.  He                                                                    
pointed  out  the rebound  in  the  market during  the  last                                                                    
calendar year.                                                                                                                  
6:10:07 PM     AT EASE                                                                                                        
6:11:17 PM     RECONVENE                                                                                                      
Mr.  Brooks  continued  that  scenarios  were  run  by  Buck                                                                    
Consultants for the expected payroll  assessment of PERS and                                                                    
TRS. He  explained that  the charts  included in  the packet                                                                    
exhibited "slow  recovery". Some might argue  that eight and                                                                    
one quarter is  not necessarily a slow  return. He explained                                                                    
that  the  charts  reflect  the  cost  to  the  state  as  a                                                                    
percentage  and in  dollars. The  first chart  includes PERS                                                                    
contribution rates  with a thirty  year horizon.  The yellow                                                                    
bars reflect  those appropriations required in  excess of 22                                                                    
percent  for PERS.  The actuarial  determined rates  rise to                                                                    
over 40 percent by 2016 and remain there until 2029.                                                                            
6:13:17 PM                                                                                                                    
Mr.  Brooks  Slide  31:   "PERS  Contribution  Amounts  Slow                                                                    
Recovery" He explained  that with TRS, the  employer rate is                                                                    
set at 12.56  percent. The yellow bar  represents the amount                                                                    
above 12.56 that  the state contributes on  behalf of school                                                                    
districts and  other public  employers employing  members of                                                                    
the TRS retirement system.                                                                                                      
Mr.  Brooks   Slide:  37   "TRS"  Contribution   Rates  Slow                                                                    
Recovery" exemplifies  the dollar  amounts connected  to the                                                                    
prior   slide's  information.   A  requirement   exists  for                                                                    
significant appropriations to  the PERS and TRS  fund to pay                                                                    
down the liability.                                                                                                             
Co-Chair Stedman  requested an  explanation of  the acronyms                                                                    
listed on the  bottom of the page. Mr.  Brooks answered that                                                                    
DCR stands  for Defined  Contribution Retirement  System and                                                                    
ER   is  Employer   Contribution.  He   noted  that   DB  ER                                                                    
contributions   stand    for   Defined    Benefit   Employer                                                                    
Co-Chair  Stedman  asked  if   the  coming  report  will  be                                                                    
released  in a  few  weeks. Mr.  Brooks  responded that  the                                                                    
reports presented were generated last fall.                                                                                     
Co-Chair  Stedman asked  when the  next actuarial  check was                                                                    
6:16:01 PM                                                                                                                    
PAT  SHIER, DIRECTOR,  DIVISION OF  RETIREMENT AND  BENEFITS                                                                    
stated  that  the  consulting   firm  conducted  a  thorough                                                                    
replication of  the actuarial evaluation  last year.  He did                                                                    
not expect  another evaluation for three  years. Mr. Burnett                                                                    
added that a second actuary  review is performed annually by                                                                    
Buck Consultants.                                                                                                               
Mr.  Brooks  continued with  an  analysis  for the  deferred                                                                    
contribution plan.                                                                                                              
Mr.  Shrier pointed  out that  the comparison  is made  more                                                                    
useful  by calculating  the percentages  in  the column.  He                                                                    
explained that 40  percent of individuals hired  in FY03 for                                                                    
the DB plan continue to be active.                                                                                              
6:18:35 PM                                                                                                                    
Senator  Ellis  assumed   that  separation  interviews  were                                                                    
conducted  to  provide  information  regarding  reasons  for                                                                    
leaving state employment.                                                                                                       
Mr.  Burnett responded  that anecdotal  information suggests                                                                    
people  are  leaving because  of  the  retirement system  or                                                                    
because   the  pay   is  substandard.   He  opined   that  a                                                                    
comprehensive  compensation  package  must be  presented  to                                                                    
remain  competitive with  wages and  provide a  well rounded                                                                    
benefit  package. He  stated that  the numbers  of retention                                                                    
have  not changed  much  since the  passage  of the  defined                                                                    
contribution  plan.  The  plan   is  portable;  allowing  an                                                                    
employee to leave once vested  and carry the plan with them.                                                                    
He explained  that separation  interviews are  not conducted                                                                    
in standardized ways.                                                                                                           
Co-Chair  Stedman commented  that the  information could  be                                                                    
presented with charts including  data from 2010, which would                                                                    
allow the legislature to track the data.                                                                                        
Senator Thomas asked  about the current balance  of the PERS                                                                    
and  TRS   fund.  Mr.  Burnett   responded  that   PERS  was                                                                    
$9,554,496 and TRS  was $4,167,254 as of  February 28, 2010.                                                                    
He stressed  that the  numbers are not  exactly the  same as                                                                    
those seen  later because real estate  evaluations and other                                                                    
liquid assets lead to a delay in the evaluations.                                                                               
Co-Chair  Stedman asked  for a  liability estimate  for PERS                                                                    
and TRS  as of  January 2010. Mr.  Burnett replied  that the                                                                    
draft evaluation  is $9.7 billion in  unfunded liability. He                                                                    
estimated  that the  current  estimation  for the  actuarial                                                                    
value represents  a higher  value than  the actual  value at                                                                    
the end of the last  fiscal year. Co-Chair Stedman clarified                                                                    
that  the deficit  is $9.7  billion. Mr.  Burnett concurred.                                                                    
Co-Chair Stedman agreed that the gap must close.                                                                                
6:23:37 PM                                                                                                                    
Senator Ellis  that a brief  online exit survey  would prove                                                                    
helpful. Mr. Brooks  concurred and offered to  meet with the                                                                    
division of  personnel to  determine the  outreach occurring                                                                    
with the hiring of managers and staff turnover.                                                                                 
Senator  Ellis  asked  the status  in  the  lawsuit  against                                                                    
Mercer, the  people responsible for  the poor  advice given.                                                                    
Mr.  Burnett stated  that  the lawsuit  is  scheduled for  a                                                                    
court date in Juneau later  this year. He admitted attending                                                                    
confidential  briefings.  Co-Chair  Stedman added  that  the                                                                    
trial will receive much attention.                                                                                              
Senator Thomas understood that employees  hired in 2003 were                                                                    
studied through 2009 compiling the  data for Defined Benefit                                                                    
Plan.  He  understood  that the  Defined  Contribution  Plan                                                                    
employees beginning  in 2007  and ending  in 2009  were also                                                                    
studied. Mr. Brooks  agreed that all PERS  and TRS employers                                                                    
were listed.                                                                                                                    
6:27:14 PM                                                                                                                    
Senator Thomas  noted that in  2002, Mercer  changed several                                                                    
actuarial   assumptions   after   Milliman's   audit.   Buck                                                                    
Consultants replaced Mercer as  the state's actuary in 2005.                                                                    
He asked to  know the reason the  actuarial assumptions were                                                                    
altered. Mr.  Brooks responded  that the  audit in  2002 was                                                                    
not  unusual.   The  changes   made  were   significant.  He                                                                    
understood  the  concern  with   Mercer  and  the  contract.                                                                    
Ultimately the  contract was not  honored and a  new actuary                                                                    
was hired.                                                                                                                      
Senator  Thomas asked  if a  different arrangement  with the                                                                    
current  consultants  includes  a shorter  time  frame  with                                                                    
"several actuarial  assumptions." Mr. Brooks  responded that                                                                    
the passage of SB 141 led  to many of the current checks and                                                                    
balances. He  noted that pension  reform included  an annual                                                                    
review  resulting  in  the implementation  of  safeguard  to                                                                    
ensure timely reaction.                                                                                                         
6:30:33 PM                                                                                                                    

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