MINUTES OF THE NEVADA LEGISLATURE’S

INTERIM RETIREMENT AND BENEFITS COMMITTEE (Nevada Revised Statutes 218.5373)

June 12, 2006 A meeting of the Nevada Legislature’s Interim Retirement and Benefits Committee (IRBC) was called to order by Vice Chairman William J. Raggio on June 12, 2006, at 2:10 p.m. in Room 3137 of the Legislative Building in Carson City, Nevada. COMMITTEE MEMBERS PRESENT: Assemblyman Morse Arberry Jr., Chairman Senator William J. Raggio, Vice Chairman Senator Bob Beers Senator Bob Coffin Assemblywoman Ellen Koivisto Assemblyman Bob Seale OTHER LEGISLATORS PRESENT: Senator Mark Amodei LEGISLATIVE COUNSEL BUREAU STAFF PRESENT: Mark W. Stevens, Assembly Fiscal Analyst, Fiscal Analysis Division Gary L. Ghiggeri, Senate Fiscal Analyst, Fiscal Analysis Division Bob Atkinson, Senior Program Analyst, Fiscal Analysis Division Melinda Martini, Program Analyst, Fiscal Analysis Division Brenda Erdoes, Legislative Counsel, Legal Division Joel Benton, Senior Deputy Legislative Counsel, Legal Division Cheryl Harvey, Secretary, Fiscal Analysis Division COMMITTEE MEMBERS ABSENT: None EXHIBITS: Exhibit A: Agenda and Meeting Packet Exhibit B: One-Fifth Year Purchase by School District – replacement of page 70 of the

meeting packet submitted by the Public Employees’ Retirement System (PERS)

I. ROLL CALL Vice Chairman Raggio called the meeting to order. He requested the secretary to take roll; it was determined that a quorum was present.

II. APPROVAL OF THE MINUTES FROM THE JANUARY 25, 2006 MEETING Vice Chairman Raggio requested a motion for approval of the minutes from the January 25, 2006 meeting.

SENATOR COFFIN MOVED FOR APPROVAL OF THE MINUTES FROM

THE JANUARY 25, 2006, MEETING OF THE NEVADA LEGISLATURE’S COMMITTEE ON INTERIM RETIREMENT AND BENEFITS.

ASSEMBLYMAN SEALE SECONDED THE MOTION, WHICH CARRIED

UNANIMOUSLY.

III. PUBLIC EMPLOYEES’ RETIREMENT SYSTEM (PERS) A. Report on actuarial valuation for the Judicial Retirement System as of

January 1, 2006.

Ms. Dana Bilyeu, Executive Officer, Public Employees’ Retirement System (PERS), introduced herself and referred the committee to page 37 of the meeting packet, Exhibit A. She pointed out the actuarial valuations of the Judicial Retirement System (JRS) were performed on an annual basis in order to measure assets and liabilities in the fund. The normal cost results were 22.1 percent, slightly below the current contribution rate of 22.5 percent that had been set for the biennium.

Ms. Bilyeu noted that the contribution rate reflected the normal cost of the benefits only.

Payment on the unfunded accrued liability of this fund was made in a lump sum that was based upon payment schedules established during the creation of the fund. In the current biennium, PERS received a payment of $1,554,600 in July 2005 and was scheduled to receive a lump sum payment of $1,608,800 in FY 2007.

Ms. Bilyeu pointed out that PERS placed seven Justices of the Peace or Municipal Court Judges into this valuation as a place holder. Since this was a non-rate setting year, PERS decided this was a temporary measure to capture the costs of the judges for less than a full plan year. With the next valuation cycle, which would be a rate-setting cycle for this particular program, PERS would break out the judges into their own individual employer valuations so the employers would bear the full normal cost and any unfunded accrued liability associated with those judges.

Vice Chairman Raggio asked for questions. Hearing none, he directed the committee to the next agenda item.

B. Status report on implementation of Senate Bill 438 of the 2005 Legislative Session

(potential inclusion of Justices of the Peace and Municipal Court Judges in the Judicial Retirement System).

Ms. Dana Bilyeu, Executive Officer, Public Employees’ Retirement System (PERS), reintroduced herself and referred members to page 39 of the meeting packet, Exhibit A, which was an update from the January statistics that PERS had provided the committee concerning enrollment of Justices of the Peace and Municipal Court Judges into the JRS. Only one additional county and one additional city had opted to cover its Justices of the Peace and Municipal Court Judges in the JRS. Concurring with Vice Chairman Raggio’s observation, Ms. Bilyeu indicated that ten members were enrolled in the JRS as indicated on page 40 of Exhibit A.

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Addressing Senator Beers’ question regarding how the liability was handled when a member transferred from PERS to JRS, Ms. Bilyeu testified the enabling legislation required that if the member was a participant in PERS prior to transferring into the JRS, PERS would perform a calculation of the liabilities associated with that member. Ms. Bilyeu added that PERS transferred 100 percent of that liability amount over to the JRS. When a member came into the JRS program, the liability would be fully funded for the period of time prior to enrollment in the JRS. In response to Senator Beers’ question, Ms. Bilyeu confirmed that the transferred funds would increase the unfunded liability in PERS. Senator Beers asked if the funding cost the state, or if the local government entity shared in the cost. Ms. Bilyeu replied PERS was a cost-sharing program. She said all public employers and employees were pooled from a risk perspective. Senator Beers explained when a new judge came into the JRS, the unfunded liability in PERS increased because 100 percent of the individual’s accrued value of PERS would be added to the value in JRS, a direct expense to the PERS system. Ms. Bilyeu confirmed that if an individual transferred out of PERS, the liability moved also, thus extinguishing the liability associated with the individual in PERS. Senator Beers explained that judges who participated in PERS could opt to go into JRS. At that time, the judge had a liability fixed with PERS for the his/her actuarial piece of the total liability, which was 71 percent funded. PERS extinguished the liability but transferred 100 percent of the assets to JRS, increasing the total unfunded liability while insuring that it would not transfer under-funded liabilities from PERS. Senator Beers said a judge enrolling in JRS would not have any unfunded liability. Ms. Bilyeu responded that Mr. Beers was correct from the perspective of JRS, but noted the intent of the original creation of the JRS and transfers of the District Court Judges and Supreme Court Justices was not to create a new unfunded liability, but to transfer funds at 100 percent. Assemblyman Seale asked under what authority PERS was moving 100 percent instead of 71 percent of the funds. Ms. Bilyeu answered the enabling legislation for both the JRS and the new legislation enabling the Municipal Court Judges and Justices of the Peace contained the requirement that PERS transfer the liability of the individuals.

C. Update on investment earnings – PERS, Legislators’ Retirement and Judicial Retirement Funds. Ms. Bilyeu referred the committee members to Item III-C, Exhibit A. The report included an update regarding the status of the investment programs for the PERS, Legislators, and Judicial funds, including information about their program objectives, investment strategy and performance through April 2006. She said the investment objectives were stated beginning on page 43, Exhibit A. The long-term investment return assumption was eight percent for all three funds. The investment program was constructed to achieve a long-term eight percent annual objective while minimizing risk and volatility. The goal of

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PERS was to aggressively manage risk at all levels and to maintain transparency in its process. Continuing, Ms. Bilyeu turned to page 45, which summarized the investment performances for the PERS, Legislators, and Judicial funds for a number of time periods. The first column reflected the performance for the current fiscal year through April 30, 2006. PERS had not reconciled performance data through May 2006; however, the sharp drop in equity markets over the last 30 days indicated total returns lower than the numbers published in the meeting packet, Exhibit A. Ms. Bilyeu said it was also important to note that the annualized return numbers in the last column varied significantly among the three funds due to different inception dates. Ms. Bilyeu further explained the year-by-year performance for each portfolio. She referred the committee to the PERS fund on page 46, Exhibit A, which was not only the largest of the three plans but also had the longest track record. Given the objective of generating eight percent annualized long-term returns at the least possible risk, the PERS portfolio was conservative relative to many other pension funds. Ms. Bilyeu said even a conservative portfolio was subject to the volatility inherent in both the domestic and international financial markets. The up and down pattern created by market volatility was seen in the Legislators results on page 47 and in the Judicial results on page 48, Exhibit A. She noted that the PERS timeframe was much shorter with regard to oversight of the Judicial fund. The investment strategies for all three plans were similar (pages 49 and 50 of the meeting packet). Given the smaller size of the Legislators and Judicial funds, Ms. Bilyeu noted there was a modest difference in allocation of the funds relative to the PERS portfolio. The exclusion of private market investments in both venture capital and private real estate were offset by increases to Real Estate Investment Trusts (REITS) and the international asset class. The PERS investment strategy for all three plans was formally revisited by the Retirement Board on an annual basis. Ms. Bilyeu noted that PERS provided supplemental information to the report, which included details requested on other occasions by the committee. Information included year-by-year analyses of PERS’ returns and fees paid to the investment manager for all three funds. Assemblyman Seale thought the asset allocation between equity and the fixed income was greater than 35 percent. Ms. Bilyeu pointed out that the exposure to equities had been increased incrementally since 2001, both in the international market and the domestic portfolios. In response to a question from Senator Coffin, Ms. Bilyeu stated PERS met annually with the portfolio managers to discuss trends in the market and capital market returns. Ms. Bilyeu said PERS had a very detailed dialogue with the managers and took their advice. The Retirement Board ultimately set all the bench marks for the funds for all the various investment styles.

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D. Update on recruitment for Investment Officer Position.

Ms. Bilyeu announced Ms. Laura Wallace, PERS Investment Officer, retired after 25 years of service. At the time, PERS was actively recruiting a replacement and would seek confirmation at the next Retirement Board meeting on June 21, 2006. Mr. Seale stated Ms. Wallace would be greatly missed. Senator Raggio thanked Ms. Wallace for her 25 years of service.

E. Status report on Assembly Bill 555 (2001), Senate Bill 439 (2003), and Senate Bill 485 (2005) regarding critical labor shortage exemptions from PERS’ reemployment restrictions. Ms. Bilyeu explained Item III-E, beginning on page 61, Exhibit A, was an update on the exemption from PERS’ reemployment restrictions, commonly referred to as the critical labor shortage provision extended by the 2005 Legislative Session to July 1, 2009. The memo detailed PERS’ reemployment restrictions and set forth the criteria used by the employers in determining if a position should be classified as one of critical labor shortage. Ms. Bilyeu added that as of May 16, 2006, 208 retirees from PERS had been reemployed in positions of critical labor shortage. Fifty-three of the 208 had since left those positions, leaving 155 retirees actively employed in critical labor shortage positions. A review of the positions continued to reveal primary use by the school districts; approximately 85 percent of all positions were education-related if the Nevada System of Higher Education was included. In answer to a question from Vice Chairman Raggio, Ms. Bilyeu explained that the senior judges had been designated by the Supreme Court as a critical labor shortage.

F. Status report on benefit provided under NRS 391.165 – one-fifth of a year purchase of service for certain education employees. Ms. Bilyeu explained Item III-F, Exhibit A, was an update on the purchase of one-fifth year of service credit provided to certain K-12 education employees. Ms. Bilyeu said a handout had been provided to the committee with an updated spreadsheet that included all purchases. The spreadsheet in the packet did not include pre-2005 purchases. Total costs were reconciled with the Department of Education. Since drafting the memorandum for the committee’s review, Ms. Bilyeu noted PERS had received lists from the school districts for purchases for the 2005-06 school year. The first step in processing each purchase request was to determine eligibility to purchase under the Retirement Act. Ms. Bilyeu testified PERS received the Washoe County School District list, which reflected a 20 percent increase over last year. Senator Coffin asked if librarians had been given the benefit to purchase service credit. Ms. Bilyeu did not believe the benefit had been extended to librarians.

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G. Status report on Senate Bill 346 (2005) relating to voluntary participation in the Legislators’ Retirement System. Ms. Bilyeu referred the committee to Item III-G of the meeting packet, Exhibit A, which addressed Senate Bill 346 of the 2005 Session, making participation in the Legislative Retirement System (LRS) voluntary. The bill provided sitting legislators with the ability to opt out of the LRS and receive a refund of personal contributions. Each legislator was sent a packet of information detailing the benefits available under the LRS and a refund request form. Page 75 of the meeting packet, Exhibit A, listed seven legislators who opted out of the LRS and their refund amounts. Senator Coffin asked if a BDR would be created to fully fund the JRS. Mark Stevens, Assembly Fiscal Analyst, answered the cost to completely finance the unfunded liability in the JRS was estimated at $21–$22 million and would be impacted based on the actuarial review as of January 1, 2007.

IV PUBLIC EMPLOYEES’ BENEFITS PROGRAM (PEBP) A. Presentation of various scenarios for providing post-retirement health benefits to

retirees of the state of Nevada and the resulting impact of Statement Numbers 43 and 45 of the Governmental Accounting Standards Board. Mr. James Wells, Chief Financial Officer, Public Employees’ Benefits Program (PEBP), introduced himself for the record and directed the committee to tab IV-A of the meeting packet, Exhibit A, which contained a recap of his presentation given in January regarding the actuarial valuation. Mr. Wells reviewed the Governmental Accounting Standards Board (GASB) rulings issued for Other Post Employment Benefits (OPEB), which in this case applied to the state’s health insurance subsidy provided to retired state employees.

GASB 43 ( Applies to the plan effective FY 07) • State does not have a qualified trust fund that meets the criteria for an OPEB

plan. • Most of GASB 43 will not apply to the state at this time.

GASB 45 ( Applies to the employers effective FY 08) • Sets standards for measurement, recognition and display of the OPEB

liabilities and related expenses. • Requires additional note disclosures and required supplementary

information presented in the state’s financial statements.

Mr. Wells advised the committee OPEB was a form of compensation to attract and retain employees, but had a long-term horizon. The program’s cost was a function of what benefit was promised by the state for a subsidy program, the demographics of the covered group, and the return on fund assets. Mr. Wells reviewed the original valuation in April 2005:

Total OPEB liability: $1.75 and $4.4 billion in Present Value Benefits (PVB). The reason for the range was the discount rate (investment return) used in calculations.

Unfunded accrued liability: $1.3 to $2.6 billion (amount previously earned by existing employees and retirees).

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Annual Required Contribution (ARC): $119 million if the subsidy was pre-funded and $222 million if the subsidy was financed on a pay-as-you-go basis.

Senator Beers asked how the time assumptions fit into the presentation. Mr. Wells stated the presentation was looking at the scope of time from the first retiree, who might have started work 50 years ago, to someone who was 20 years old, was just starting work and would live to be 90 years old. The total present value of benefits could be 150 years. PEBP was looking at both the people who were already retired and those just starting careers and would not retire for 30 years and live for some time after that. Directing the committee to page 82 of the meeting packet, Mr. Wells pointed out the unfunded liability amount, the amount that was earned by existing employees and retirees over the course of their working lives, could be amortized over a 30 year period. Mr. Wells said the amount depended on whether the benefit was pre-funded or pay-as-you go. The discount rate (investment return) dictated the dollar amount. Mr. Wells reviewed some of the key actuarial assumptions:

Discount rate of 3.5 percent for the general investment funds of the state under a pay-as-you-go plan and eight percent if the plan was funded. GASB allowed for a blended rate if the plan was partially funded.

Thirty-year amortization of previously earned benefits. Entry-age normal and level percent of pay actuarial method. This was one of six methods approved by GASB and was consistent with the PERS’ actuarial methodology.

Mr. Wells listed other assumptions that were necessary:

Demographic assumptions (i.e., retirement rates, withdrawal rates, mortality rates). Economic assumptions (i.e., medical trends, future increase in state subsidy rates). Actuarial asset methodology (i.e., investing funds). Determination of the substantive plan (i.e., the plan as communicated and understood by the plan participants).

Determination of any implied subsidy (i.e., if experience was commingled for rate setting, then one group may be subsidizing another group).

Mr. Wells further explained the 2006 update. He said PEBP wanted to update the liability and the ARC to changes in certain key assumptions. It was important to understand that the overall cost of providing healthcare benefits was fixed based on a substantive plan of benefits. Any changes to the subsidization of these costs would result in a shift in the burden between the state and the retiree. Mr. Wells explained Aon Consulting (PEBP’s actuary) estimated the impact of the following items on the liabilities and ARC:

Eliminating the state subsidy for new entrants into the plan effective July 1, 2006 (similar to S.B. 484 in the 2005 Legislature).

Decreasing the starting state subsidy amount by 50 percent and letting it grow with medical inflation.

Freezing the state subsidy as adjusted for years of service at current levels going forward (retirees to pick-up all increases in future medical costs).

Eliminating the subsidy for people retiring on or after July 1, 2010.

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Decreasing benefits and changing plan design to maintain medical inflation at the Consumer Price Index (CPI) rate of three percent per year.

Commingling all retirees but segregating the active employees (eliminate the implied subsidy). The subsidy provided to retirees by commingling claims experience of both actives and retirees for rating purposes.

Commingling early retirees and actives but segregating the retirees age 65 and older (increase the implied subsidy for the early retirees).

Assemblyman Seale complimented Mr. Wells on the list of assumptions and disclosed, for the record, that he would be working on GASB 45 issues in his private business in the future.

Assemblyman Seale asked if any demographic group’s benefits cost significantly more than another group’s. Mr. Wells answered part of the issue was active employees became early retirees. Everybody lived through some life cycles and transitioned through being a less expensive active, a more expensive early retiree and a less expensive Medicare retiree. The more expensive group was the early retirees, the group of people between their early fifties and Medicare age.

Continuing with his presentation on page 87, Exhibit A, Mr. Wells informed the committee that the original valuation numbers were revised slightly due to:

Southern Nevada HMO rates changed. Changes in valuation date from April 1, 2005, to July 1, 2005, to coincide with the plan year.

Adjusted subsidy cost for pre-1994 retirees. The result was a change in the total liability, with a decrease from $1.75 billion to $1.62 billion (pre-funded), from $4.4 billion to $4.1 billion (pay-as-you-go) and a slight decrease in the unfunded liability to $1.2 billion if funded, $2.4 billion if unfunded (pay-as-you-go). Mr. Wells also said there would have been a slight decrease in the first year ARC to $114 million if funded and $215 million under pay-as-you-go.

Starting on page 89 of Exhibit A, Mr. Wells explained seven different scenarios.

Scenario 1 - Eliminated state subsidy for new entrants into the plan effective July 1, 2006 (similar to S.B. 484 in the 2005 Legislature). Eliminating the subsidy for those who were hired after July 1, 2006, would not save any money in the first year because the valuation was for employees who were in the program. There would be no change between the total liability, the unfunded liability and the ARC if the plan was pre-funded. Over 20 years, if the plan continued on a pay-as-you-go basis, there would be a decrease in total ARC payments from $13 billion to $12.8 billion, a 1.5 percent decrease.

Scenario 2 – Decreased the starting state subsidy amount by 50 percent and let the subsidy grow with medical inflation. The projected liability in the pay-as-you-go scenario went from $4.1 billion down to $3.8 billion. The unfunded liability decreased from $2.4 billion to $2.2 billion. The ARC would decrease from $215 million to $201 million in the first year. If funded, the projected liability would

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decrease from $1.6 billion to $1.5 billion, the unfunded liability would decrease by about $100 million and the ARC in the first year would decrease from $114 million to $107 million.

Scenario 3 – Froze the state subsidy as adjusted for years of service at current levels so the retirees would pick-up all cost increases. Under the unfunded plan the projected liability would decrease from $4.1 billion to $3.6 billion, and the unfunded liability would be reduced from $2.4 billion to $2.1 billion; the ARC went down about 10.2 percent to $193 million in the first year. If the plan was funded the ARC would decrease about 8 percent, from $114 million to $105 million in the first year and the projected liabilities and the unfunded liability would decrease by $100 million.

Chairman Arberry asked how the retirees would pay for all the cost increases. Mr. Wells replied that Scenario 3 froze the existing subsidy. No increases in the subsidy rate would go forward. When medical inflation increased, the retirees would have to pick up the difference between the new increase and current existing subsidy. PEBP would not increase the subsidy each year.

Chairman Arberry questioned where the retirees’ money would come from. Mr. Wells said the burden shifted from the state to the retirees, based on the amount of the medical inflation component.

Assemblyman Seale stated that in Scenario 1, PEBP would eliminate the subsidy entirely for new participants. In the future, retirees would not receive a subsidy. In Scenario 2, PEBP decreased the subsidy by 50 percent and let the subsidy grow with medical inflation. The amount of savings was almost de minimis. Assemblyman Seale remarked that PEBP was looking at the future and eliminating expenses; if PEBP was to extend the scenario further into the future, it would have a very significant impact. He said Mr. Wells was talking about people 20 years of age starting work and 70 years later receiving benefits; yet PEBP was looking at an actuarial analysis for a 20-year period, which was not half of the potential problem. Nevada was not the only state with the problem.

Commenting on Assemblyman Seale’s statement, Mr. Wells confirmed the further out the proposals went the larger the savings would be generated. Cost of health care would not go away, but the burden would be shifted to employees and future retirees. In Scenario 1, PEBP eliminated the benefit for some future employees, and the savings was minimal at first because they would be just starting their careers. The plan would be much cheaper for the state, but more expensive for those people as retirees.

Chairman Arberry asked if the state should have looked at 40 years in the future and not 20 years. Mr. Wells answered the biggest impact was on two distinct scenarios, the first where benefits would terminate for future hires and the second for retirees who retired after a given date. Assemblyman Seale stated the shorter time frame masked the problem in terms of the size of the unfunded liability and the savings to the state. The state was always shifting

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the burden from one group to another. Assemblyman Seale said the taxpayers were ultimately paying for the benefit. Chairman Arberry disclosed the fact that he was retired and benefited from the plan. He stated that hopefully PEBP could come up with some positive solutions before the next session.

Scenario 4 – Eliminated the state subsidy for all employees retiring on or after July 1, 2010. This scenario was estimated to reduce the ARC payment from $215 million to $192 million in the first year if the plan continued on a pay-as-you-go basis. Over 20 years the total ARC payments would be reduced from an estimated $13.0 billion to $12.6 billion (3.1 percent decrease). If the plan were funded, the first year ARC would be reduced from $114 million to $105 million, while the ARC payments made over 20 years would be reduced from $7.0 billion to $6.9 billion (1.4 percent decrease).

Scenario 5 – Decreased benefits and changed plan design to maintain medical inflation at the CPI assumption rate of 3 percent per year, which would reduce plan benefits to keep plan costs from not increasing above three percent per year. The actuaries stated this was not a viable alternative. Under the pay-as-you-go plan the total liabilities would decrease from $4.1 billion to $1.6 billion and the first year ARC was reduced from $215 million to $80 million (63 percent). Under the funded plan, total liabilities were reduced from $1.6 billion to $700 million while the first year ARC was reduced from $114 million to $50 million (56 percent).

Scenario 6 – Commingled all retirees but segregated the active employees. This scenario eliminated the implied subsidy. Currently, actives and retirees were rated together in determining rates. Since retirees were more costly to the plan than active employees, retiree rates were subsidized by active employees which was defined as an implied subsidy. Under the pay-as-you-go plan, the total liability was reduced from $4.1 billion to $3.8 billion, while the first year ARC was reduced by 8.4 percent, from $215 million to $197 million. Under the funded plan, total liabilities were reduced from $1.6 billion to $1.5 billion. The first year ARC was decreased by 7.9 percent from $114 million to $105 million.

Scenario 7 - Commingled early retirees and actives but segregated the retirees age 65 and older (increasing the implied subsidy). The active employees were subsidizing the retirees even more so than leaving the Medicare retirees commingled with that group, resulting in increased total liabilities and ARC payments compared with the base scenario.

Mr. Wells continued his presentation, with a summary of all seven scenarios:

Eliminated the subsidy for new hires and had a 20-year savings of between 1.4 to 3.1 percent.

Decreased the subsidy by 50 percent, about a 6 percent savings. Froze the subsidy and generated between 8 to 10 percent savings.

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Eliminated the subsidy for retirees after July 1, 2010 and had a 20-year savings of between 1.4 to 2.3 percent.

Decreased benefit growth to CPI, which would result in savings of 56 to 63 percent. Commingled all retirees with estimated savings of 7.9 to 8.4 percent. Commingled actives and early retirees resulting in increased costs.

Mr. Wells said the scenarios would not generate the savings as PEBP had hoped. Most of the scenarios had a very minimal impact on the overall liability to the state and the amount that would be funded over the long term. Scenario 5 decreased the benefit growth, showing the significant impact of the medical inflation.

Mr. Wells remarked other options that PEBP could have considered included changing the years of service requirements to obtain a subsidy, changing the eligibility age requirement, or creating a defined contribution plan in conjunction with the elimination of the benefit.

Mr. Wells then explained the financial reporting that would be required under GASB 45. The example Mr. Wells chose used FY 2006 numbers as follows:

ARC: $114 million if funded; $215 million if unfunded. Retired subsidy payments: $24.6 million in explicit subsidy (direct cost of the retiree health subsidy).

Retired implied subsidy (subsidy created due to commingling actives and retirees for rating purposes): $7.4 million.

Mr. Wells continued from page 97 of Exhibit A, explaining the financial statement reporting. The governmental fund financial statement would reflect $114 million in operating expenditures (i.e., actual payment) and no impact on the balance sheet. On the government-wide financial statements, there would have been $114 million in expenses on the statement of activities because under GASB 45, as long as the ARC was funded, there was no reporting of a liability on the state’s financial statements. If the state continued with pay-as-you-go funding, the financial statements would have reflected an expenditure of about $32 million, which was the current amount that PEBP spent for both the explicit (direct cost of the retiree subsidy) and the implicit (subsidy created due to commingling actives and retirees) subsidies and no balance sheet impact on the fund financial statements. On the government-wide financial statements, the activities would have shown a $215 million expense (i.e., the ARC). On the statement of net assets, there would have been a $183 million liability, which was the difference between the $215 million and the $32 million that was funded through the explicit and implicit subsidy.

Mr. Wells described the five potential misconceptions regarding implement of GASB 43 and 45:

GASB standards required advance funding of Other Post Employment Benefits (OPEB); no such mandate from GASB to change from a pay-as-you-go funding model.

OPEB would wipe out the General Fund balance overnight. Government would have had to report a liability for OPEB earned previously. The only amount that would have needed to be reported as a liability was the difference between the ARC and the amounts funded on a pay-as-you-go basis.

No written agreement means no OPEB.

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No OPEB if retirees paid the full healthcare premium. The implicit subsidy was created when the premiums were commingled.

Senator Beers affirmed OPEB would wipe out the consolidated funds balance overnight unless funded by the state. Mr. Wells explained the financial statements were prepared on a modified accrual basis using current financial resources. Therefore, the long-term liabilities were not shown on the financial statement. The entity-wide financial statements, of which the General Fund was the largest portion, reflected the long-term liability on the financial statements and could show negative net assets on statewide financial statements. Mr. Wells further explained OPEB could wipe out the entity-wide financial statement because there was no requirement to fund the liability.

Senator Beers said he understood, but he asked if OPEB could remove all fund balances on the consolidated published financial statements. Mr. Wells replied Senator Beers was correct. Senator Beers said this was true for every state and local government jurisdiction to the extent that the liability was not actually funded with cash. Mr. Wells confirmed if the state were to make the ARCs that were required under the funded model, there would be no increase in the liability. Senator Beers said if the state attributed the proportional amount of the consolidated negative funds balance sheet to each entity, or attributed the cost of the unfunded liability to each of the sub-funds that were on the consolidated sheet, then the General Fund balance would be wiped out if the state did not fund the liability. Mr. Wells concurred with Senator Beers.

Assemblyman Seale added that, if the state did not fund some portion, then the bond rating agencies might determine the state had a problem. Impacting the state’s bond rating might put more pressure on the state, costing more when the state issued its debt. Mr. Wells noted three things to remember:

Numbers were horrific: 2-5 times or more than the amount required under pay-as-you-go (about $32 million). The ARC would be about $115 million under the pre-funded plan.

Dollars must go to a trust fund to count as pre-funded. The trust fund requirements required that the employer contributions be irrevocable. The plan assets were dedicated to provide benefits to retirees and beneficiaries in accordance with the terms of the plan. The plan assets were legally protected from creditors of the employer plan or the plan administrator. If pre-funding was desirable, the state would have had to establish a trust fund. If the trust fund was established before July 1, 2007, additional reporting requirements would be necessary.

No liability on financial statements if ARC was pre-funded. Mr. Wells continued, saying the current state plan and the retirees’ subsidy were governed by NRS 287. The plan established PEBP as an internal service fund, which was not eligible for GASB 43 purposes. The plan included the provisions for retiree health benefits and provided for retiree health insurance subsidies. Bills were passed each legislative session that re-established the base rate for the retirees which allowed flexibility containing OPEB costs. This was not a defined benefit plan in statute, but a statute that was driven by the session bills which allowed the Legislature some flexibility. One of the

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concerns was if the state pre-funded and made all the transfers into a trust fund, some of the flexibility may be lost. Mr. Wells went on to explain some important considerations for legislators as they prepared to make decisions related to this issue during the 2007 Legislative Session:

Whether or not the state could continue to subsidize retiree health care; should it be eliminated or changed to a defined contribution plan or some combination of both.

Whether or not to pre-fund and, if so, a separate trust fund would need to be established.

Whether or not to continue to provide an implicit subsidy (commingling issue). Whether or not to continue to fund the current plan of benefits.

Mr. Wells reviewed pre-funding, found on page 102 of the meeting packet and outlined the following issues:

Pre-funding was not required under the GASB rules. Different discount rates (investment returns) were used to determine the total liability.

• Not pre-funded - used the state’s internal rate of return on investments (3.5 percent).

• Pre-funded – used an investment rate of return similar to PERS (8.0 percent). • Anomaly – two plans with exactly the same benefits and people, one

pre-funded and one not. The pre-funded plan would have a lower liability due to use of a higher discount rate (investment return).

Impact on bond ratings and borrowing costs. Mr. Wells stated the rating agency’s opinion was mixed as to what impact the OPEB liabilities would have on the credit rating of the government. Most rating agencies contended it looked for the government to “manage the liability”, not necessarily to pre-fund all at once or cut it out all together. The rating agencies looked for some combination of active management to keep the state’s liability under control. Mr. Wells continued to explain the non-state impact as a result of A.B. 286 of the 2003 Session:

NRS 287.023 conferred a subsidy liability to the local governments whose retirees joined PEBP.

Under GASB 45, local governments were required to treat the current plan as an agent multiple-employer plan to recognize the OPEB liability for “A.B. 286 payments.”

Would require separate actuarial valuation(s): • Additional information not obtained in the original valuation, which focused on the state, would be required.

Determine whether or not a trust fund should be established for non-state governments. If so, should the fund be:

• One for all governments, including the state, like PERS (cost-sharing multiple-employer) where the fund would become liable for future payments? • An agent multiple-employer where separate accounts were maintained for each government.

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Impact of other OPEB plans at the local government level. Mr. Wells told the committee a determination would be necessary as to whether a trust fund should be established for non-state governments or a single trust fund could be established similar to PERS where the fund would become a cost-sharing multiple employer plan. If a trust fund was started, Assemblyman Seale asked if legislative action would be required. Mr. Wells replied PEBP was not sure if legislative action was required to set up a trust fund. PEBP thought legislation would be required for a state fund, but not for the non-state governments. Mr. Seale asked if the legal opinion came from PEBP’s legal counsel. Mr. Wells stated he had not talked to counsel on this issue. Mr. Wells’ opinion was based on the way PEBP’s fund and NRS 287 were structured. Chairman Arberry questioned how much would have to go into the trust fund. Mr. Wells stated any amount could be put into the trust fund. The state could put the pay-as-you-go funding into the trust fund, or fund up to the ARC for the period of time or anywhere in between. There was no requirement that the state must fund the same amount each year. Concurring with Mr. Wells, Mark Stevens, Assembly Fiscal Analyst, Fiscal Division, Legislative Counsel Bureau, stated that on a pay-as-you-go basis, the state had an assessment of about two percent of payroll for employees who were covered by the benefit, which included state employees and university employees. If the state wanted to completely pre-fund the cost, the assessment would go up to about eight percent. Mr. Stevens said that the state could just put the two percent assessment into a trust fund. He noted that there was no requirement to fully fund all of the costs. There were a number of different ways the state could fund the account, but in order to completely fund it, the assessment would increase from two percent to about eight percent of payroll. Senator Coffin asked if the state had an obligation to require other state entities to follow suit to address the problem. The state should force the entity to face the situation earlier rather than later. Mr. Wells replied each of the non-state entities that participated in PEBP’s plan must have an actuarial evaluation performed and the liability recorded on their financial statements. The majority of the problems would first appear at the local government entity level. Continuing on page 105 of the meeting packet, Mr. Wells explained PEBP needed to do a final evaluation report for FY 2008 and FY 2009. PEBP would have to obtain demographic information from PERS, pay centers and local government entities and establish the final demographic and actuarial assumptions for the economic pieces to determine the funding methodology. GASB preferred a link between the valuation date and the reporting periods to be established as an accounting policy. Mr. Wells believed PERS was on a fiscal year basis and thought PEBP should use the same time period to allow comparisons.

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B. Presentation on Public Employees’ Benefits Program 2006-2007 rates and plan design. Mr. P. Forrest Thorne, Executive Officer, Public Employees’ Benefits Program (PEBP), introduced himself for the record, and announced the plan design for 2007. The following report looked at the plan design, participant contribution, and employer subsidy structure for the plan year (PY) July 1, 2006 – June 30, 2007. The board of the Public Employees’ Benefit Program (Board) decisions included:

Maintain the current plan design. Change the coordination of benefit methodology from Maintenance of Benefits (Carve Out) to Integration of Benefits. Both plans calculated benefits. Maintenance of Benefits calculated the benefits at the beginning based on the total cost. The primary plan paid the benefits first. The secondary plan calculated the benefit and deducted what had been paid by the primary plan. Under Integration of Benefits, the primary plan paid its benefit, then the balance went toward a benefit calculation by the secondary provider as if that was the starting point.

Continue the current 80 percent reimbursement level for Medicare Part B premiums for the Medicare retirees.

Increase the PY 2007 rates by the percentage changed in the composite rate for the selected option. PEBP looked at the predictive modeling for the first year and saw a stable picture in the relationship between the tiers. The initial change when PEBP went to predictive modeling caused a significant difference, but had been stable since. In PEBP’s third year there would have been a fairly significant difference in the rate increase between the two tiers. Increasing all of the tiers with the same percentages as the composite rate brought a more stable rate picture for the participants.

Utilize excess Reserves to decrease rates for PY 2007. Instead of a reduction in participant contributions each month, PEBP proposed a one-month premium holiday. The month of July 2006, participants would not make contributions toward health coverage, and contributions would begin again in August. PEBP hoped that would reduce expectations of the cost of coverage and bring down the surplus to the intended amount at budget closing. There would be no premium holiday for the employer portion or assessment to the state agencies because the budget was already reduced to a level that took into account the surplus reduction.

Apply the same cost-sharing methodology between the participants and the state as approved for PY 2006 to allocate the state subsidy dollars to the various plans and tiers.

Provide Medicare retirees in the following categories a supplemental subsidy equal to one-half the difference between fully commingled and fully segregated rates:

• Retiree & Spouse both with Medicare • Retiree & Spouse – one with Medicare and one without • Surviving Spouse

As a result, PEBP had an overall increase of 12.7 percent. The majority of the Medicare retirees realized rate reductions.

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Senator Raggio asked what the Reserve balance would be. Mr. Thorne stated about $23 million would be left in the Reserve and fully funded in the Incurred but Not Reported (IBNR) and the Catastrophic Reserves. Senator Raggio asked Mr. Thorne to clarify the premium holiday. Mr. Thorne explained that instead of reducing the participants’ contributions, PEBP kept the same dollar amount and waived the premium for one month.

C. Status report on current financial status and projections for Fiscal Year 2006-07.

Mr. James Wells, Chief Financial Officer, Public Employees’ Benefits Program (PEBP), reintroduced himself for the record and directed the committee to page 167 of Exhibit A, which reflectd information on the current financial status and projections through the end of 2006 and some projections through the end of 2007. Mr. Wells stated the budget status reported an increase in Realized Funding Available (cash) from $76.8 million on April 30, 2005 to $83.0 million on April 30, 2006. Contributing to the increase was a $2.0 million Anthem contingent premium refund for FY 2005, which was a one-time refund based on Anthem’s FY 2005 experience. In addition, approximately $4.1 million previously had been deposited into the claims checking account, which was converted to a zero balance account on February 1, 2006. Mr. Wells continued, saying the increase was also affected by the additional balance forward amount in FY 2006 ($25.4 million). Premium revenues were $8.0 million less in FY 2006 than in FY 2005, due primarily to the accounts receivable relating to the Retired Employees’ Group Insurance which was remitted beginning in February ($13.1 million). Claim payments for the year had increased $11.2 million over the same period in FY 2005. The average headcount in the Preferred Provider plans had increased by approximately 3.1 percent. Mr. Wells addressed the projections for the remainder of FY 2006 (page 169 of Exhibit A). PEBP was projecting $74.5 million available in realized funding, compared to a budgeted level of $70.0 million. Mr. Wells stated the claims experience reflected a monthly average of $12.8 million for January 2003 through April 2006. The amount for the month of May was $14.2 million, increasing the average monthly claims cost to $12.8 million. Mr. Wells directed the committee to the bottom of page 170, Exhibit A. The average claims experience per self-funded member per month for 2003 through April 2006 was $475.30. The average claim dropped significantly in 2004 and then increased in 2005. In PY 2006 the numbers were above PY 2003 for the first time. Page 174 of Exhibit A included the March 31, 2005 unaudited financial statements. The financial statements were prepared on an actuarial basis, taking into account the receivables and payables not necessarily booked into the Realized Funding available figures. The operating income through the first nine months was $4.1 million, compared to operating income of $24.8 million for the same period in PY 2005. Claim costs were up about $16.7 million; insurance premiums and contractual obligations were up about $3.0 million. Revenues decreased by approximately about $3.0 million. The program had $71.9 million in the bank as of March 31, 2006, and about another $19.7 million in accounts receivable. The

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program owed approximately $2.0 million in current accounts payable as of March 31, 2006. Continuing, Mr. Wells stated in January, PEBP referenced the process of converting the outside checking account to a zero balance. The conversion took place on March 2, 2006, operating at zero balance. Effective May 1, 2006, the account was converted again to a controlled disbursement account to give the Treasurer’s office better control on daily disbursements. Referring to page 172 of Exhibit A, Mr. Wells noted the A.B. 286 payments that Las Vegas Metropolitan Police and the City of Caliente/ Caliente Public Utilities District had not been remitting. He said the Controller’s office would offset funds against the two entities. The state was holding all of the amounts owed by the City of Caliente and the Caliente Public Utilities District, as well as one-third of the amount owed by the Las Vegas Metropolitan Police. Under NRS 353 C, the entities being offset had a right to request a hearing, and both entities had requested a hearing. Mr. Wells continued with a status report on Retired Employee Group Insurance (REGI) funds. PEBP projected revenues in FY 2006 to be $28.6 million. The budget anticipated subsidies of $24.6 million for FY 2006. Actual subsidies through June 30, 2006 were estimated at $25.6 million. In FY 2006 and FY 2007 the budget account would have dispersed additional funds for the Supplemental Subsidy of certain classes of Medicare retirees. A deficit of $1.7 million was anticipated for FY 2006 after the subsidy was added. For the FY 2007 projections, Mr. Wells stated PEBP anticipated the revenues and expenditures would be relatively close to the amounts that were budgeted and approved by the 2005 Legislature. PEBP’s actuarial consultants had estimated claims to be within .4 percent of the amount budgeted in FY 2007, including spending down the Reserves through a one-time premium holiday for the month of July. The projected cash flow loss for the program for FY 2007 was approximately $21.2 million, reducing the ending cash balance as of June 30, 2007 to about $10 million more than estimated.

V. Status report on activities of the Legislative Commission’s Committee to Study the Public Employees’ Benefits Program (ACR 10 – 2003 Session). Senator Mark Amodei, Chairman of the Committee to Study the Public Employees’ Benefits Program (A.C.R. 10, 2003 Legislative Session) introduced himself for the record. In the spirit of trying to keep the right hand informed of what the left hand was doing, he had requested that he provide the Committee with a status report on the A.C.R. 10 Committee’s findings. He noted the other members of the A.C.R. 10 Committee were Senator Coffin, Senator Beers, Assemblywoman Parnell, Assemblywoman Giunchigliani, and Assemblyman Goicoechea. Senator Amodei explained that the PEBP Board was restructured in 1999 as a result of several ongoing issues. He then recited the following language from A.C.R. 10 of the 2003 Session:

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“WHEREAS, In recent months, allegations have been raised regarding the effectiveness, efficiency and efficacy of the Program; and “WHEREAS…larger groups have stronger buying power when seeking coverage; and “WHEREAS, Many public employees are covered under collective bargaining agreements which need to be changed…; and “WHEREAS, Many… (members) are asking for assistance in resolving an untenable situation which has resulted in extraordinarily high premiums for this coverage….”

Continuing, Senator Amodei noted that, among other issues, A.C.R. 10 (2003) also discussed:

• Examining methods used for determining premiums, equitable employee contributions based on actual costs;

• A review of the administration and solvency of the Fund; • The feasibility of soliciting proposals for a contract to take over the entire statewide

operation of group health insurance; • Determining whether all members of PERS should be participating in PEBP; • The desirability of eliminating or changing the composition of the Board; and • The feasibility of allowing voluntary participation.

Senator Amodei said he would be reviewing the legislation recommended by the A.C.R. 10 Committee for consideration by the 2007 Legislature. One of the major issues confronted by the Committee was the size of the plan. Senator Amodei said that many people believed that if all public employees throughout the state were required to participate in PEBP, bigger discounts would be realized. However, testimony received by the Committee indicated that the present size of approximately 23,000-25,000 members was large enough to obtain full benefit of size discounts in today’s insurance markets. Another issue before the Committee was the feasibility of seeking information through a Request for Information (RFI) concerning the possibility of contracting out the operation of the plan. Senator Amodei said the Committee had solicited extensive input from major private insurers in the state, and based upon the information received, the Committee determined that the RFI process would be the most tenable, and since the RFI would have to be funded, the issue would have to come before the money committees at the next session of the Legislature. The Committee voted not to pursue a Request for Information. Senator Amodei said there were two major recommendations from the Committee. The first dealt with the communication with the PEBP Board and the structure of its membership. The Board presently consisted of nine members, all appointed by the Governor. The Committee recommended that four of the members should be appointed by the Legislature – one each by the Majority Leader and Minority Leader of the Senate,

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and one each by the Speaker and Minority Leader of the Assembly. Senator Amodei said that since the Public Employees’ Benefits Program was not in the Nevada Constitution and existed by virtue of legislation, oversight by the Legislature would be advantageous. He noted that the incoming Governor would still have the ability to control the majority of appointments to the Board, but the Legislature would have a direct link to the Board through its appointments, and therefore communication between the Board and the Legislature would be enhanced. Continuing, Senator Amodei said that the Committee had also discussed the potential of implementing advisory boards, but it was ultimately decided to leave that matter to the PEBP Board’s discretion. The Committee also recommended that an annual report to the Legislature be required to include:

• Actuarial accuracy; • Program reserves • Participant deductions; • Changes in benefits and premiums; • Changes in providers; • Communications with participants; and • Activities undertaken by the Board relating to engaging in purchasing coalitions.

The objective of formally reporting this information would be to provide some predictability and stability in premiums and benefits. The report would be submitted to the money committees in legislative years and to the Legislative Commission in non-session years. Senator Raggio asked how the report would differ from the one being presented at this meeting. Senator Amodei replied he anticipated the annual report would be more comprehensive and widely disseminated. Senator Amodei said that since most of the complaints concerning the PEBP involved rising premiums and decreasing benefits, the Committee recommended that the State Insurance Commissioner’s Office play a bigger role in providing oversight to the program. The thinking was that the program should be treated like any other insurance entity in the state for purposes of compliance with state law and market conduct requirements. Again, Senator Amodei remarked, the issue came down to predictability and stability; no one thought healthcare costs would be going down, but PEBP should be required to submit changes through the same regulatory process as other insurance companies in the state. Testimony before the Committee from the Insurance Commissioner’s Office had indicated that some of the existing statutory requirements with regard to PEBP were not presently in compliance with insurance regulations. Another recommendation from the Committee was to draft legislation providing that local governmental retiree participation in the Program be limited to those retirees that retire from entities whose active employees participate in the Program and providing for “grandfathering-in” those individual retirees who currently participated in the program. Senator Amodei said it was common to hear complaints that the school district, police, and fire health insurance plans were better than PEBP, and he explained the major

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reason for this misconception was that those plans covered active employees only. Under current statutes, retirees from those political subdivisions were shifted to PEBP, thereby decreasing the ratio of actives to retirees in the state plan. Therefore, the Committee recommended that retirees from local governments not be eligible for the Program unless the active employees of the local government also participated in PEBP. Senator Raggio asked if some of the jurisdictions were subsidizing their retiree members. Senator Amodei responded that under A.B. 286 of the 2003 Legislative Session, local governments were required to provide a subsidy for their retirees that were enrolled in PEBP. Bob Atkinson, Senior Program Analyst, Fiscal Analysis Division, explained that A.B. 286 (2003 Session) required local governments to subsidize their retirees who participated in PEBP, but there was no requirement for local governments to subsidize their retirees who stayed in the local plans. In general, local governments did not provide a great amount of subsidies to any of their retirees. Mr. Atkinson added that the Washoe County School District had just eliminated its retiree subsidy for participants who retire after July 1, 2006. Continuing, Senator Amodei explained that the 2003 Legislature passed legislation providing that actives and retirees would be rated together in order to obtain overall lower premium rates. He noted that if the retirees were rated separately, the premium amounts would be phenomenal due to the older age group and increased healthcare needs. Senator Amodei said the ACR 10 Committee adopted a recommendation for legislation to be drafted that would require the Commissioner of Insurance to determine the percentage reduction in premiums for Medicare-eligible participants based on the most recently completed actual year’s experience for Medicare participants in the Program and provide the percentage to the PEBP Board by a certain date and further require that the PEBP Board incorporate that percentage into the Plan. Senator Amodei said the percentage and premium impact would be determined prior to the 2007 Legislative Session; it was believed the amount would be from $15 to $20 a month for all participants. Senator Amodei reported that the Committee had also discussed the possibility of PEBP purchasing Medicare insurance for retirees who were over 65 years of age but not eligible for Medicare because the participants did not have enough quarters to qualify. If PEBP were to purchase Medicare coverage, the cost might be lower than if PEBP remained the primary payer for those individuals. Other matters undertaken by the ACR 10 Committee included:

• Under Senator Coffin’s leadership, a resolution to Congress requesting that the age for Medicare eligibility be lowered to 55.

• Collection issues with Las Vegas Metropolitan Police concerning retiree subsidy payments.

• Complaints concerning plan adjustments made through members’ payroll deductions without prior notification.

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In summary, Senator Amodei said that, for the most part, the thought process of the Committee was to confine itself to policy matters, plan administration, oversight, and communications. It was anticipated these matters would be the subject of some fairly extensive review during the 2007 Legislative Session. He asked for questions from the Committee. Senator Raggio stated that the proposals regarding the GASB liabilities would obviously utilize a portion of the large anticipated budget surplus. He was concerned with other proposals, such as higher education capital improvement projects and education needs; by his accounting, requests were now in excess of $2 billion, with only a projected surplus of $400 million, but he had not heard anyone advocate new sources of revenue. He cautioned that the surplus would need to be watched very carefully. The state was going to have to spend and allocate wisely. Chairman Arberry also stated the surplus needed to be watched very carefully. The committee members were not here to spend money but were here to balance the budget. Chairman Arberry called for public comment. There was no public comment. There being no further business before the committee, Chairman Arberry adjourned the meeting at 4:40 p.m. Respectfully submitted: _____________________________ Cheryl Harvey, Committee Secretary APPROVED: ______________________________ Assemblyman Morse Arberry Jr., Chairman Date:__________________________

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