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24th Legislature(2005-2006)

Committee Minutes


HOUSE WAYS & MEANS
Dec 07, 2005

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	                 ALASKA STATE LEGISLATURE                                                                                     
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
December 7, 2005
1:30 p.m.

MEMBERS PRESENT

Representative Bruce Weyhrauch, Chair
Representative Norman Rokeberg (via teleconference)
Representative Ralph Samuels (via teleconference)
Representative Paul Seaton
Representative Peggy Wilson (via teleconference)
Representative Max Gruenberg

MEMBERS ABSENT

Representative Carl Moses

OTHER LEGISLATORS PRESENT

Representative Kurt Olson
Representative Mike Chenault
Senator Tom Wagoner

COMMITTEE CALENDAR

DISCUSSION OF THE PERS/TRS FUNDING SHORTFALL

PREVIOUS COMMITTEE ACTION

No previous action to record

WITNESS REGISTER

JUDY SALO
Kenai, Alaska
POSITION STATEMENT: Urged the committee to work toward a
viable and sustainable solution.

CATHY CARROW
Soldotna, Alaska
POSITION STATEMENT: Urged the committee to work toward a
viable and sustainable solution.

TRENA RICHARDSON
Soldotna, Alaska
POSITION STATEMENT: Expressed concern regarding the
current PERS/TRS shortfall.

JOHN CZARNEZKI
Soldotna, Alaska
POSITION STATEMENT: Expressed concern regarding the
current PERS/TRS shortfall.

DAVID TEAL, Director
Legislative Finance Division
Juneau, Alaska
POSITION STATEMENT: Provided expert testimony on the
PERS/TRS shortfall.

MELANIE MILLHORN, Director
Health Benefits Section
Division of Retirement and Benefits
Department of Administration
Juneau, Alaska
POSITION STATEMENT: Provided expert testimony on the
PERS/TRS shortfall.

GAIL SCHUBERT, Chair
Alaska Retirement Management Board
POSITION STATEMENT: Described the newly appointed ARM
Board and its mission.

LARRY SEMMENS, Finance Director
City of Kenai
Kenai, Alaska
POSITION STATEMENT: Provided statistics from the City of
Kenai and offered suggestions.

WALTON SMITH
St. Marys, Alaska
POSITION STATEMENT: Urged the state to provide information
to communities on the consequences of withdrawal from PERS.

RICHARD CAMPBELL, Director
General Services
Kenai Peninsula Borough
Soldotna, AK
POSITION STATEMENT: Testified on behalf of the Mayor of
Kenai.

JEROME SELBY, Mayor
Kodiak Island Borough
Kodiak, Alaska
POSITION STATEMENT: Urged the state to allow local
management of PERS debt.

JEFFREY SINZ, Director of Finance
Municipality of Anchorage
Anchorage, Alaska
POSITION STATEMENT: Expressed concern regarding current
PERS/TRS shortfall.

RICK GIFFORD, Manager
Kodiak Island Borough
Kodiak Alaska
POSITION STATEMENT: Expressed concern regarding the
current PERS/TRS shortfall.

MELODY DOUGLAS, Chief Financial Officer
Kenai Peninsula Borough Schools
Soldotna, Alaska
POSITION STATEMENT: Expressed concern regarding the
current PERS/TRS shortfall.

JERRY PATTERSON
POSITION STATEMENT: Expressed concern regarding the
current PERS/TRS shortfall.

SAM TRIVETTE, President,
Retired Public Employees of Alaska
POSITION STATEMENT: Suggested that the ARM Board be given
spending authority.

JAY DULANY Executive Vice President
Retired Employees of Alaska
Eagle River, Alaska
POSITION STATEMENT: Suggested that the ARM Board be given
spending authority.

ACTION NARRATIVE

CHAIR BRUCE WEYHRAUCH called the House Special Committee on
Ways and Means meeting to order at 1:30 p.m.
Representatives Weyhrauch and Seaton were present at the
call to order. Representatives Rokeberg, Samuels, and
Wilson were present via teleconference. Also in attendance
were Representatives Olson and Chenault and Senator
Wagoner.

^DISCUSSION OF THE PERS/TRS FUNDING SHORTFALL

1:30:16 PM

CHAIR WEYHRAUCH announced that the only order of business
would be the discussion of the Public Employees' Retirement
System (PERS) and the Teachers' Retirement System (TRS)
funding shortfall. He further announced plans to have a
report prepared regarding the findings of the committee as
well as suggested recommendations. Chair Weyhrauch
expressed his hope to have, in early January 2006, a
proposal regarding the legislature's options for the
unfunded liability. The purpose of the meeting was to
obtain the views of those in the Kenai region regarding the
unfunded liability. He specified the desire to look for
solutions to implement and to review the implications of
such to the state and municipalities.

CHAIR WEYHRAUCH noted one of the concerns with the unfunded
liability is in regard to the impact it has on the
operation of the communities. Therefore, he wanted to take
testimony from municipal representatives regarding what
they are doing and what they recommend doing about the
unfunded liability. He expressed interest in how the state
and local level could partner to address the issue. Chair
Weyhrauch opined, "We want a secure future for our children
and our residents, our businesses, and our policymakers in
the future. I think a $5.7 billion unfunded liability
poses some significant risks to a stable state government
and sources of financing for other kinds of projects if it
is not dealt with."

1:36:23 PM

JUDY SALO, former legislator, teacher, and president of the
National Education Association - Alaska, provided the
following testimony:

I'm sure, as you stated earlier, that you don't
want to rehash the arguments for and against the
passage of SB 141. And with that in mind, I'll
try to keep those issues separate. But I must
say first, however that the passage of SB 141 did
little to address the real problems faced by the
state, by employers, and certainly by employees
in the State of Alaska. To the contrary, it
potentially causes new financial issues, as the
system will not be sustained with the
contributions of new members after the effective
date of July '06. So, I come before you today to
ask [you] to consider specific legislation before
that effective date."

MS. SALO referred to the $5.7 billion dollar amount that
had been put forth. She argued statistics could be used to
back any position, which she said was never clearer than in
the debate last year. Furthermore, the [actuarial]
information [in the committee packet] illustrates the
vastly different estimates. However, she surmised that
everyone would agree the market was different a few years
ago when temporary financial circumstances were used to
insinuate a total demise of the retirement system.
Mercer's change in actuarial assumptions in 2003 created a
distorted view of the crisis. "And thus, I think, was born
the 'Chicken Little' approach that served other political
agendas and ultimately SB 141 was born," she said. Prior
to the legislation of SB 141, there should have been
hearings.

MS. SALO suggested the state doesn't have a financial
crisis. Part of the solution could be to fund the system
to make it sound as well as to make-up for the lack of
contributions in the past. Health care cost containment
could be part of the solution as well. "I think it's kind
of like amassing a huge federal deficit. It doesn't hurt
now, it's easy to do now, but it will undoubtedly hurt
later," she said.

MS. SALO speculated that the consequences of SB 141 on
Alaska education would be negative. The only group likely
to be advantaged is those choosing to leave Alaska in mid-
career. Ms. Salo asked the committee to introduce
legislation to delay the effective date for SB 141 by one
year. "Passage of this type of legislation would give the
legislature the opportunity to turn a terrible situation
into an opportunity to fairly and thoroughly address the
real problems of rising retirement obligations," she said.
There would be great incentives for those coming together
to work to maximize the quality and integrity of the
retirement system.

REPRESENTATIVE ROKEBERG asked Ms. Salo whether she was
suggesting that there was no problem with the PERS/TRS
system.

1:42:43 PM

MS. SALO clarified her belief that the problem is being
exaggerated.

1:43:31 PM

CATHY CARROLL, elementary school teacher, member of the
local teacher's association, reiterated Ms. Salo's
testimony of the problem being exaggerated. She agreed
that SB 141 should be delayed until a solution is
discovered.

1:47:02 PM

ROBERT SALO, retired teacher and previous TRS Board member,
questioned the accuracy of the shortfall predictions.
While he was on the Board, they requested an audit of
Mercer's actuary and as a result, some of the assumptions
were changed. Ironically, SB 141 uses the same actuary to
project the future program. He stated there have been
years of under-funding on the part of the state and
suggested it was wrong to put the burden on current
employees. He said the system works when the market is
strong.

1:52:03 PM

REPRESENTATIVE SEATON said for the benefit of listeners
off-site:

We are talking about the actuarial audit that had
been done in 2002 to change the actuarial
assumptions and make them reflect reality. In
other words, the healthcare assumption that had
been fixed at 7.5 percent increase and wasn't in
the realm of the experience or what people
anticipated as reality going forward and also the
mortality rates being kept at 1984 mortality. We
use the longevity...the number of years that
people will be retired... to calculate what the
liability of the system is for payment.

He asked Mr. Salo whether he felt the assumptions to
calculate the payments for future retirees are incorrect
and whether the state truly had as much payment liability
to pensioners as speculated in the audit.

1:54:22 PM

MR. SALO said the actuarial audit is over a year old and it
may behoove the state to order a fresh audit on the current
assumptions.

1:55:04 PM

TRINA RICHARDSON, retiree from the Kenai Peninsula Borough
School District, expressed concern about both current and
future pension shortfalls and fund maintenance.

1:56:25 PM

CHAIR WEYHRAUCH reminded everyone that the Alaska State
Constitution guarantees that benefits cannot be diminished.

1:56:58 PM

MS. RICHARDSON suggested the state should consider using
surplus oil money to supplement the system.

1:58:00 PM

JOHN CZARNEZKI, Kenai Peninsula Borough employee, asked
members to deal with the retirement shortfall.

1:59:10 PM

MR. CZARNEZKI continued it is the responsibility of both
the Kenai Peninsula Borough as well as the State of Alaska
to ensure the system is set up correctly. The failure to
add funds in the past has led to the current problem. He
speculated that the benefits are a major incentive for
people to take state jobs and urged the legislature to come
up with a long-term solution.

2:00:46 PM

CHAIR WEYHRAUCH explained his plan to move to expert
testimony then return to public testimony later in the
meeting.

2:03:18 PM

DAVID TEAL, Director, Legislative Finance Division, Alaska
State Legislature recapped his testimony from the Fairbanks
meeting. He referred to a graph in the committee packet
showing assets versus accrued liability. The two lines
follow together until about 2002 when there is a gap, which
is unfunded liability to the tune of $5.7 billion. Poor
investment returns, health care cost increases, and new
life expectancy tables are the reasons for the shortfall.

MR. TEAL opined that the unfunded liability doesn't mean
much to the retirees due to a guaranteed payment of
benefits. Contribution increases cannot be approached with
the current employees without legal action. Employers will
be hit with higher contribution rates until they hit 50
percent of salary for TRS and 30 percent of salary for
PERS. Employer contribution rates are designed to close
the gap in 25 years with no cash infusion. "Some people
think the legislature had to come up with $5.7 billion this
session, which is not true" he said. These increases will
apply significant financial pressure to communities, school
districts, and state agencies.

MR. TEAL informed the committee that the state portion of
the unfunded liability is about $2 billion at 35 percent.
Adding the university to that brings the state total to
about $2.2 billion. The state could pay the gap using
general funds yet if the state simply let the rates go up,
about half would be paid with federal and other funds.

2:13:05 PM

MR. TEAL said that it looks like the state will be filling
the school district gap using general funds either now or
later because the state pays for most of the cost of K-12
education. He said it makes sense to pay it now to avoid
higher costs in the future.

MR. TEAL then referred to page 3 of the committee packet
and highlighted that there was no surplus available for FY
05. Fiscal year 06 began with no surplus projected but oil
is now much higher than projected and the latest figures
show a projected surplus of about $1.2 billion. However,
that's likely to decline as the legislature makes
supplemental appropriations. For FY 07 there is a small
projected surplus of $235 million before supplementals.
For FY 08 and beyond, expenditures are likely to increase
for PERS, TRS and state contracts. Furthermore, deficits
will resurface if oil revenues fall. The bottom line, he
stated, is that the state has a one-time surplus of about
$1.2 billion. Although the $1.2 billion is insufficient to
fill the entire $5.7 billion, using the surplus to reduce
the unfunded liability would reduce future costs, he noted.
"In effect, spending surplus revenue to fill the gap is
savings," he opined.

MR. TEAL the moved on to the final issue in fiscal planning
and offered that there are three knowns:

The legislature won't be forced to come up with the
entire $5.7 billion required to fill the gap;
$1.2 billion is available to address the problem;
There will be competing needs and desires for that
surplus.

However, the options are only to either spend the money now
or save it. Saving it offers more options worthy of
discussion, such as depositing money into the Permanent
Fund or letting it fall into the constitutional budget
reserve fund. Another option is to pay some of the
retirement system's unfunded liability. The last option is
to capitalize the public education fund, which rolls the
surplus forward one year. Both spending and saving require
an appropriation, he highlighted.

2:21:02 PM

MR. TEAL recommended taking the surplus off the table in FY
06 and using it to reduce the budget in FY 07 and to put it
all toward the TRS system rather than PERS. That would
avoid massive increases to the educational formula.

2:23:30 PM

REPRESENTATIVE SEATON asked how the interest earned in the
education fund compared to the 8.25 percent PERS
projection.

MR. TEAL said he did not know.

2:24:22 PM

REPRESENTATIVE ROKEBERG asked Mr. Teal whether the real and
true general fund expenditures for FY 06 budget were
approximately $3 billion.

2:25:52 PM

MR. TEAL said yes.

2:27:38 PM

REPRESENTATIVE ROKEBERG asked whether there would be a
surplus in FY 07.

2:27:57 PM

MR. TEAL explained a FY 07 surplus is iffy. He cautioned
not to try to budget a year and a half in advance. The
vast majority of the surplus is an FY 06 surplus. FY 07 is
almost a balanced budget and FY 08 may be back to deficits.

2:31:26 PM

REPRESENTATIVE SEATON asked Mr. Teal to detail the
percentages on his pie chart titled "Figure 2. Shares of
Alaska Retirement System Unfunded Liability ($ billions)."

2:32:44 PM

MR. TEAL explained. [Please refer to pie chart]. 41
percent is TRS at 3.28 billion, 35 percent is state PERS at
1.69 billion, 12 percent is local PERS at .68 billion, 7
percent is school district PERS at .41 billion, 4 percent
is university PERS at .2 billion, 1 percent is other PERS
at .051 billion.

2:32:56 PM

SENATOR WAGONER asked the effect of the five percent
decrease in the state's share (each year) the past three
years.

2:33:27 PM

MR. TEAL said it reduces the account. He deferred the
exact figure to Melanie Millhorn.

2:34:00 PM

SENATOR WAGONER asserted it is a matter of reinstating the
money and adding the percentage back in for each year that
it has been deleted and then continuing. He said that is
part of the reason the system went down.

2:34:23 PM

REPRESENTATIVE SEATON asked whether Senator Wagoner was
talking about the reduction in the PERS contribution rate
by employers.

2:34:40 PM

SENATOR WAGONER said yes.

2:35:14 PM

MELANIE MILLHORN, Director, Health Benefits Section,
Division of Retirement and Benefits, Department of
Administration, advised that the realized savings to the
PERS employers was $356 million when the rate went from
11.9 to 8 percent. For TRS the contribution rate was 12
percent for a number of years then for two years was
lowered to 11 percent for a total savings of $11 million in
2002 and 2003.

2:36:31 PM

REPRESENTATIVE CHENAULT asked whether that was the same
number that municipalities would have also saved.

2:37:06 PM

MS. MILLHORN said yes. The savings to the State of Alaska
was approximately $232 million and the remainder would be
the savings to the individual PERS employers. She noted
that the contribution rate is different for each employer.

MS. MILLHORN referred to her prepared testimony and to
Attachment 1, which shows that the PERS employer
contribution rate was reduced due to the gains in the
system. As a result, the actuary determined the rate for
each year. The Board adopted the rate, which translated
into $356 million savings for employers over seven years
time. In 1991 the PERS Board adopted a cap upon request by
the Municipality of Anchorage [regulation 2AAC3500].
However, SB 141 supersedes the regulation to the extent
that it cannot fall below the normal cost rate.

2:40:51 PM

She related that the normal cost rate for PERS for FY 07 is
13.24 and 14.28 for TRS. For FY 07 the Alaska Retirement
Management (ARM) Board adopted a rate of 21.77 for the
average calculated rate and for TRS they adopted a five
percent increase, which equals 26 percent. So, each system
is above the normal cost rate and is compliant with the
regulation in force right now. The ARM Board members could
repeal the regulation in its entirety if it chose to do so.

2:42:21 PM

REPRESENTATIVE ROKEBERG understood that SB 141 repealed the
regulation. He asked whether he was mistaken.

2:42:38 PM

MS. MILLHORN responded only to the extent that they cannot
fall below the normal cost rate. When the Board met it
recognized the existing regulation did not allow it to go
above the five percentage point increase.

2:43:28 PM

REPRESENTATIVE WILSON asked the amount the rate could have
been so that there was no loss.

2:43:59 PM

MS. MILLHORN advised that the ARM Board could have raised
the rate all the way to the actuary-determined rate, which
is 41.78. The actuarial calculated rate for PERS is 28.19.
In the absence of having a valuation, the Division sent a
letter to employers letting them know that the valuation
had not been formally adopted resolving the PERS/TRS Board
and that when the ARM Board met in November and adopted the
valuations, the Division told the ARM board that for
budgetary purposes they should at a minimum budget a 5
percent increase.

2:46:34 PM

REPRESENTATIVE OLSON inquired as to the last time there was
a request for proposals for actuarial services.

2:46:50 PM

MS. MILLHORN advised that the ARM Board has recently
received a presentation from the new actuarial firm. The
actuary told the ARM Board members that they have audited
two state pension systems and the audit concluded within
one percentage point in the two audits that they have
conducted with regard to unfunded liability. Buck
Consultants will take the last valuation report and
replicate that actuarial valuation report to the degree of
comfort and will provide a report on their findings
sometime in March [2006]. SB 141 requires a second actuary
to review that information before it is finalized.

2:49:09 PM

CHAIR WEYHRAUCH asked whether the ARM Board had its own
actuary.

2:49:15 PM

MS. MILLHORN advised that the ARM Board has access to the
actuary. There will be another RFP conducted and the
actuary will report to the ARM Board.

2:49:39 PM

CHAIR WEYHRAUCH asked whether Mercer was still employed by
the state.

2:49:48 PM

MS. MILLHORN responded that Mercer was under contract until
December 2005. She clarified that an experience study will
be conducted for every system to determine, based on the
last four years of experience, the accuracy of that
particular assumption and they might have recommendation
for change associated with that. They will also provide a
financial analysis on the impacts of change to any of the
assumptions and, after review by the second actuary, will
be provided to the ARM Board and to the legislature.

2:51:20 PM

MS. MILLHORN informed the committee of her 14-page analysis
included in the packet (also provided to the public), which
breaks down the average increases for fiscal years 2007-
2012. Attachment 3 is a one-page document rough estimate
of the amount of state general funds that are contributed
to PERS/TRS by the employer groups outlined. Attachment 4
is a list of the employers that chose to stay at the
previously reported (FY 06) rate and which ones chose to
use the reduced (FY 05) rate in response to SB 46 where the
legislature provided $18.4 million in relief to 74 PERS
employers.

2:54:30 PM

REPRESENTATIVE KELLY asked Ms. Millhorn whether the
direction of some funds was triggered by reports that state
funds had gone to the IRS because of problems in some
municipalities.

2:54:50 PM

MS. MILLHORN responded she was not sure on an individual
employer basis how their decisions came about. There could
be one of two variables. They could pay the FY 06 rate and
have that 5 percent added to their assets and it would
further reduce their unfunded liability, or the
appropriation language allowed the employer to stay at the
FY 05 rate and then that 5 percent appropriation that came
to the division provided the complete employer contribution
rate by individual employers. She suggested Jeff Sinz with
the Municipality of Anchorage could provide further
clarification.

2:56:42 PM

CHAIR WEYHRAUCH asked Gail Schubert to inform the committee
about the ARM Board.

GAIL SCHUBERT, Chair, Alaska Retirement Management (ARM)
Board, introduced herself:

The ARM Board was created by the passage of SB
141 and became effective on October 1, 2005. The
Alaska State Pension Investment (ASPI) Board
served in a transitional role until the ARM Board
was officially appointed by the Governor and
seated. The ASPI Board managed investments,
drafted and adopted regulations relating to the
nomination of bargaining unit members to the ARM
Board and also approved the issuance of the
request for proposals to hire a new actuary for
the ARM Board.

I'm very appreciative of the work done by the
state to ensure smooth transition from one Board
to another. In early October the Governor
completed the appointment of trustees to the
Board. Two trustees are ex-officio members of
the Board, the Commissioners of Revenue and
Administration. [Introduction of members] The
first meeting of the Board was held in Anchorage
thth
October 11 and 12. At that meeting officers
were elected, a review of SB 141 was provided by
Department of Revenue staff, and the fiduciary
and statutory responsibilities of trustees were
described by legal council. The ARM Board
formally accepted fiduciary responsibility to
manage the assets of the systems. The state's
actuary did a presentation on actuarial
principles. The actuary presented the 2004
actuarial valuation report for PERS and TRS. We
also heard from the Department of Revenue on a
presentation on planned assets.

We set the fiscal year 2007 contribution rate at
21.77 percent and 26 percent for TRS. Both rates
are five percent greater than the fiscal year 06
rates. We established a menu of investment
options for the new defined contribution planned
that will be offered to new employees starting
July 1, 2006. We also continued the contracts of
three investment advisory council members. We
reviewed capital market assumptions and the
PERS/TRS asset allocation target. We agreed to
hire Buck Consultants as the new actuary. We
continued the investment policies previously
adopted by the ASPI Board with a commitment to
review them systematically over time. Finally we
also reviewed a report that for the fiscal year
05 the PERS earned 8.95 percent and TRS earned
9.01 percent gross of fees.

MS. SCHUBERT continued by explaining after fees and
expenses the funds experienced an actuarial gain on
investments last year but that employer contributions were
less than the actuarial computed rate and she expects that
when the FY 05 valuation is completed the funding ratio
will fall again. She then detailed what occurred at the
thth
Board's second meeting on November 29 and 30. At the
meeting the Board heard reports from four investment
managers and a presentation from Buck Consultants, the
state's new actuary. One of the things that Buck will do
is to replicate the FY 04 valuation completed by the
previous actuary. It's anticipated that the replication
will not be complete until late February 2006. Completion
of the June 30, 2005 actuarial valuation is not anticipated
to be completed until March 2006. The Board does not
anticipate an experience analysis with the actuarial cost
impact until June.

MS. SCHUBERT continued:

The Board also received a preliminary earnings
estimate for the period ending September 30,
2005. The preliminary earnings estimate for the
first quarter of fiscal year 2006 for PERS is
4.13 percent gross of fees and expenses and 4.14
percent for TRS. One of the requirements of SB
141 is that the Board provide the legislature
with a report that includes a preliminary
assessment of the financial health of the
retirement plans, an assessment of the actuarial
services purchased by the Board, recommendations
for additional legislative or administrative
policy to improve the financial health of the
retirement plans, and short-term and long-term
recommendations for addressing the unfunded
liabilities of the plan.

MS. SCHUBERT advised the committee that she has appointed a
committee of four Board members to begin work on the
report.

3:04:19 PM

It is clear that the under-funding problems of the system
did not occur overnight and there are no easy solutions
but, she indicated, she is confident that the ARM Board
trustees have the experience and knowledge to identify the
approach to fully fund the obligations to public employees
with minimal impact on services.

3:04:58 PM

REPRESENTATIVE SEATON asked whether the ARM Board is still
using the 1994 mortality table and whether there is an
anticipated longevity increase if updated to 2004.

MS. SCHUBERT relayed they are still using 1994 and deferred
to Ms. Millhorn.

3:05:32 PM

MS. MILLHORN explained there is another mortality table
available for 2000 and the actuary will review it.

3:07:36 PM

MR. SEMMENS, Finance Director, City of Kenai, referred to a
number of graphs in the committee packet and reviewed them
with the committee. The graphs show the history of
contribution amounts by the City of Kenai and of rates
percentages. The graphs show that the City of Kenai was
unprepared and unaware of the impending PERS shortfall,
which in the coming years will certainly impact services in
Kenai.

3:13:41 PM

MR. SEMMENS concluded by saying that all Alaskans thought
they were putting the correct amount of money into
retirement. Unfortunately, the actuarial projections that
indicated an over-funded status were incorrect. Normally
in a budget crisis there are two tools that can solve the
problem: Cut expense and raise revenue. The "cut" tool is
unavailable because of a constitutional guarantee of
benefits, which leaves only the "raise revenue" tool.
Another option is to pay down the debt now but there are
risks in that too. There will be little public support to
use the Permanent Fund to pay down the debt but it may make
sense in this case. He continued to say:

Another idea is [to] create a matching grant
program where, in order to receive PERS aide,
municipalities would have to pay last years five
percent increase out of their own resources. If
a municipality pays the full ten percent increase
from their own resources then they would get the
ten percent match from the state along with a two
percent incentive contribution. The biggest
benefit of this idea is that it gets more money
into the retirement system, which reduces the
unfunded liability and future rates. It also
gets municipalities used to the idea that they
are going to have to fund higher rates and it
rewards those that make the hard choice to pay
down this liability now rather than pass it on to
others in the future.

3:18:10 PM

CHAIR WEYHRAUCH asked Mr. Semmens whether the City of Kenai
would be willing to make a substantial contribution to
reduce the unfunded liability if it meant not getting money
for roads, capital projects, and municipal revenue sharing.

MR. SEMMENS replied that his recommendation to the City of
Kenai would be to strongly consider using available
resources to pay down their debt.

3:20:31 PM

MR. SEMMENS expressed his concern that if state revenue
declines, the PERS aid will disappear. If it disappears in
2008, the municipalities will see a 15 percent increase in
the cost of their employees.

CHAIR WEYHRAUCH asked Mr. Semmens what he thought of Mr.
Teal's recommendation that the money go to TRS instead of
PERS.

MR. SEMMENS said he appreciated Mr. Teal's analysis.

3:22:08 PM

WALTON SMITH, former city manager, St. Marys, testifying on
behalf of Richard Alstrom, said the city of St. Mary
decided to withdraw from PERS when city managers realized
that its unfunded PERS liability would continue to increase
while general revenue was decreasing. He said when the
city decided to withdraw from PERS, its published unfunded
liability was [estimated to be] $144,000. By the time, the
city actually withdrew from PERS, the published unfunded
liability had increased to about $165,000, which was still
manageable for the city. The city waited for over a year
for a study, which their termination liability was actually
near $500,000.

He said he was never told that every community that had
withdrawn from the PERS program had faced an actual
termination liability that was much higher than their
estimated unfunded liability at the time of their decision
to terminate. He said, furthermore, that since communities
cannot estimate their termination liability until after
their termination, they are not able to make responsible
decisions regarding their participation in PERS. He urged
the state to try and determine why termination liability is
always much greater than unfunded liability and to provide
this information to communities.

3:27:03 PM

CHAIR WEYHRAUCH asked the witness to submit his testimony
in writing.

3:28:01 PM

RICHARD CAMPBELL, Director, Kenai Pension Board, testifying
on behalf of the Mayor of Kenai. Said municipalities
should consider how they intend to fill the PERS and TRS
shortfall in the event that the state cannot assist them.

3:30:00 PM

JEROME SELBY, Mayor, Kodiak Island Borough, suggested the
legislature cap PERS and TRS contribution levels at 20
percent, that it deal with unfunded liability as a
separate, dead issue, and that it allow municipalities to
decide how to manage their PERS debt. He recommended that
the legislature put $300 to $400 million of the existing
budget surplus into PERS and TRS to start addressing
problems.

3:33:35 PM

REPRESENTATIVE SEATON asked if Mayor Selby is requesting
that the legislature allow local communities to issue bonds
at rates lower then 8.25 percent to finance their PERS
liabilities.

3:34:20 PM

MR. SELBY said he is requesting that the municipalities be
given the authority to sell bonds at whatever rates that
they could get rather than the arbitrary rate of 8.25
percent.

3:34:56 PM

JEFFERY SINZ, Chief of Finance, Municipality of Anchorage,
said the actuaries that analyzed the changes that took
place between 2001 and 2002 used radically different
methods of analysis and came to radically different
conclusions. This demonstrates the importance of
considering the differences between various methods of
actuarial analysis.

He said, for example, that the term 'fully funded' has
different meanings within different perspectives and it is
more useful to work within the perspective of a plan
administrator, which allows for uncertainties, than it is
to work within an accounting perspective, which insists on
exact 100 percent coverage and often leads to unrealistic
planning. He related the following with regard to the PERS
situation in Anchorage:

According to the 2003 evaluation, the unfunded
liability for the municipality of Anchorage is
$229 million. Like the City of Kenai, we view
this as a debt obligation of sorts. It also
happens to be one of the most expensive debt
obligations that we have because it comes with a
rate of interest of 8.25 percent.

In fiscal 2004, the contribution rate for the
Municipality of Anchorage was 3.7 percent. That
number is now in excess of 28 percent. The PERS
obligation for the Anchorage School district has
an unfunded liability of $145 million. They
began in 04' with a contribution rate of 9.3
percent and they are headed for 26.1 percent as
of the 05' evaluation. To put those numbers in
perspective, the Municipality of Anchorage
liability of $229 million represents roughly 8
percent of the total PERS liability, whereas the
school districts 145 million is about 5 percent
of that PERS unfunded liability.

The annual cost associated with the increase for
the municipality from the 04' rate of 3.7 percent
to an actuarial rate of 24.9 percent is about $28
million per year. The tax-supported portion of
that is about [$]21.3 million. That has an area
wide property tax equivalent of about $1 million.
The average value of a single family, owner
occupied, residential property within the
municipality is about $220.2 thousand and that
produces a tax impact of roughly $220 per year
per single family residence in the municipality.

The municipality has no ready ability to produce
revenue to pay for these. Under the municipal
tax limitation, the tax levy from year to year is
limited, in basic terms, by increases in the CPI
for the prior year in the five-year average
change in the population. For the most part,
increases in cost above what would be typically
associated with the CPI have to be offset by
reductions in other areas in our budget. When we
look at a 28 million dollar a year impact, we
view that as a mandate to reduce other costs
within our budget by about that same amount.

MR. SINZ said the Municipality of Anchorage believes it
will be necessary to address the problem in a number of
ways. The Municipality recommends the State of Alaska
initiate a one-time buy down of unfunded liabilities. It
also suggests the implementation of a maximum annual
contribution of a given amount, such as 20 percent, which
is the amount suggested by the Alaska Municipal League.

The implementation of a maximum annual contribution rate
could address the concern that a period of negative growth
could radically increase the cost of benefits and thus the
cost of public employees. If this occurs, local
governments will attempt to manage the costs by outsourcing
services to external contractors. This would shrink the
base of employees contributing to the system thus putting
more pressure on local governments to further reduce costs,
which would thereby create a downward spiraling effect.

MR. SINZ suggested one indirect solution is the
facilitation, at the state level, of pension obligation
debt similar to that proposed in HB 278. He said the type
of legislation is facilitation legislation, which does not
require anything, but rather creates a mechanism for
participating entities to do something at the local level.

This type of legislation provides structure and expertise
for the issuance of debt and overcomes a constitutional
problem associated with the use of general obligation debt
for purposes other than capital improvements.

3:53:29 PM

RICK GIFFORD, Manager, Kodiak Island Borough, said that
like Anchorage, his borough has a citizen imposed tax cap
which makes it difficult to raise taxes. He endorsed Mayor
Shelby's suggestion that the solution must be a shared
responsibility between the municipalities and the state.

3:56:17 PM

REPRESENTATIVE SEATON noted that the City of Kodiak put
state PERS relief money towards their PERS debt, but the
Kodiak Island Borough used its PERS money for something
else. He asked how the state could assure that the money
that it issues for PERS relief actually goes to PERS relief
instead of for other projects.

MR. GIFFORD said the municipalities must, at some level,
budget and pay for some of their PERS burden but they often
must address other needs as well such as their failing
infrastructure.

REPRESENTATIVE SEATON asked how to approach the problem so
that the state does not just pick up the bill for the
voluntary unfunded liabilities of municipalities instead of
those created by the actuarial assumptions within the PERS
system.

MR. GIFFORD replied:

That is a difficult question because you have
municipalities that have, through one way or
another, created permanent funds. I think that
they were looking at forward funding and forward
needs and they need to be recognized for having
done that and not necessarily be penalized. I
also think that this should be a shared
responsibility and municipalities like that
should step forward a fund part of this
liability.

4:00:12 PM

MELODY DOUGLAS, Chief Financial Officer, Kenai School
District, stated her concern about the ability of the Kenai
Borough Assembly to continue to fund local contributions at
the cap. She estimated the cost at the TRS rate for the
retirement system alone will represent about 13.5 percent
of the Kenai School District's general fund budget for FY
07'. She made the following recommendations:

1) Revaluate all actuarial assumptions and
estimates. 2) Establish a maximum employee
contribution rate for the PERS and TRS system. 3)
Continue to control guaranteed health care costs
4) Pass legislation to allow municipalities and
boroughs to issue pension bonds for rates lower
than 8.25 percent. 5) Continue to offset the 5
percent increases for all public entities until a
solution is determined. 7) Use some of the
state's oil revenue this year to pay for the
state's unfunded debt.

4:03:10 PM

REPRESENTATIVE CHENAULT asked whether the witness
recommends that the state continue to pay the five percent
increase.

MS. DOUGLAS replied that, that is what she is requesting.

REPRESENTATIVE CHENAULT asked whether the money should be
earmarked for PERS and TRS liability exclusively.

4:03:28 PM

MS. DOUGLAS said she did not have the knowledge necessary
to answer that question.

4:04:16 PM

REPRESENTATIVE CHENAULT remarked that if state money
earmarked for municipal PERS and TRS relief is not going
into the PERS or TRS system it should not be labeled as
such.

JERRY PATTERSON, former tourism board member, said that
according to a Mercer study, the TRS fund will be depleted
by 2026 and the PERS fund will be depleted by 2034. He
said when the funds are depleted, about 30,000 members will
be receiving retirement benefits and paychecks at the cost
of about $1 billion per year. He said that despite current
talk about contribution rates, the state will end up
assuming the liability for all of it because the
contribution pool will diminish as employees retire until
it becomes non-existent.

MR. PATTERSON said the committee should ask the actuary
what liability the state will have once the funds run out.
He said that it would be prudent for the state to devote
money to the system now because once the principal of the
fund is used, there will never be another time in which its
earnings will accrue.

4:09:39 PM

REPRESENTATIVE SEATON said the contribution rate on
employers for the past service cost is drawn from the
entire wage base, which is growing at one percent a year,
so the systems will not be unfunded even though there is no
past service cost associated with tier four employees
individually. Therefore, the situation that was just
described should not occur.

4:10:35 PM

SAM TRIVETTE, President, Retired Public Employees of
Alaska, said although the PERS and TRS funds have received
less than 100 percent funding for most time over the past
25 years, the funds have always returned to 100 percent
funding levels. He said this was the result of overstated
projections that arose from inaccurate actuarial
assumptions. It is well established that the rising cost
of health care is causing the problem with the PERS and TRS
funds and if the legislature wants to address this issue
they must give the ARM committee Board authority over
spending. He said the previous cooperative efforts of
retirement and benefits, the former PERS and TRS Boards
retiring organizations, and the health care administrator
have produced millions in savings annually. Given these
savings and the probable inaccuracies in the actuarial
projections, the PERS and TRS funds should not be
considered to be in a state of crisis.

MR. TRIVETTE strongly urged the committee to use some of
the additional surplus money earned this year to pay down
the unfunded liability for all of the regions represented
in the meeting. He said the violation report that was
given to the ARM Board in October of this year was written
before SB 141 was ever even in committee and the results of
SB 141 were not considered. He said at this point we do
not have an actuary report that even takes the impact of SB
141 into account and this is something that the state must
do before proceeding with legislation.

4:14:42 PM

JAY DULANY, Executive Vice President, Retired Employees of
Alaska, represented himself as a PERS retiree. He said
according to a recent attorney general's opinion the ARM
Board has no control over how the trust funds are spent by
the Division of Retirement and Benefits (DRB). It thus
appears that the Board is given responsibility for
oversight for the trust funds without the ability to
control its liabilities. He suggested that the legislature
consider removing the DRB from the Department of
Administration (DOA) and form a retirement and benefits
authority under the ARM Board.

4:19:11 PM

REPRESENTATIVE SEATON said he wants to address the
distinction between voluntary unfunded liabilities and
liabilities that are the consequences of actuarial
assumptions. He voiced concern about communities that pay
municipal and school board members a very low rate and
allow them to access the PERS system by making very small
contributions. He noted in the case of Homer these
practices have created a long-term liability of $300,000 to
$400,000 per employee. He cautioned the communities that
have adopted such practices that the state may not pick up
those voluntary unfunded liabilities in the way that it
picks up those created by actuarial assumptions.

CHAIR WEYHRAUCH announced that the meeting was approaching
its scheduled end and discussion on the topic would be
resumed at the next meeting.

4:22:09 PM

ADJOURNMENT

There being no further business before the committee, the
House Special Committee on Ways and Means meeting was
adjourned at 4:24:19 PM.