public pensions in alaska and the unfunded liability

Public Pensions in Alaska and the

Unfunded LiabilityMichael Worth, Diego Bayuk, Kristen Hall, and Kim

RaymondUniversity of Alaska Anchorage

April 13, 2013

Executive SummaryChallenges faced by Alaska public pension systemLong history of pensionsBest practice modelsRecommendations

Funding FiguresPERS (Fiscal year 2012)

Unfunded actuarial accrued liability:> $6.9 billion

Funding ratio: 63%TRS (Fiscal year 2012)

Unfunded actuarial accrued liability:< $4.2 billion

Funding ratio: 54.1%

Deductions

Pension benefitsPost employment healthcare benefitsRefunds of contributionsAdministrative costs

AdditionsMember contributions:

PERS: 6.75 – 9.6% of payTRS: 6.65% of base pay

Employer contributions Contributions from State Investment Income

MercerImproper (too low) actuarial calculations

improper figures on healthcare costs for retirees under 65 consulting “real world” data on healthcare costs every 5

years insufficient accounting of raises and survivor benefits

Mistakes made in 2002; repeated (to cover up) in 2003State alleged a loss of $1.9 billion

$1.2 billion that it failed to collect from participants$700 billion in lost investment earnings

Cited as a reason for move to defined contribution plan

Pensions in HistoryPensions date back to Roman EmpireAmerican colonists and military pensionsU.S. adopted pension plans in the 1920sMassachusetts established first retirement

pension plan for general state employees in 1911Social Security Act of 1935Welfare and Pension Plan Disclosure Act

Amendments of 1962 Revenue Act of 1978

History of Alaska’s Unfunded LiabilityIn 2005 the Alaska Legislature passed a measure

taking the state’s pension systems from a defined benefit, or pension, program to defined contribution, or 401(k)- style benefit.

In 2007 Alaska passed 3 acts to related to pensions.

As of 2010 Alaska had 29,943 public employees and 48,359 active and inactive pension fund members, with 35,880 receiving periodic benefits.

National Snapshot of Liabilities

Source: Pew Center on the States, 2012

Recent Attempted Legislation2012- SB 121- Return to DB- Sen. Dennis Egan

(did not pass House finance) 2013- SB 30 – Return to DB- Sen. Dennis Egan

(never received a hearing schedule)Arguments on both sides

Source: AK Legislative Corner, 2013

Comparative AnalysisComparing Alaska’s pension policy and

fiscal situation with Utah, Florida, and Illinois

Identifying best practice models

What is a Best Practice?Smallest unfunded liabilities

Minimizes riskEnsures long term sustainability

OverfundingPreserves extra funds to cover losses in the pension

system

Successful policymakingConsensusShared vision

Why These States?Utah

Smaller population with similar public sector sizePension plan funded at 85%

FloridaOne of the best managed and funded pension plans

at 101%

IllinoisOne of the worst managed and funded pension plans

at 54%

Findings leading to successKept up with funding requirementsReduced benefits and/or increased retirement ageShared riskIncreased employee contributionsImproved policy governance and investment

oversight

Arguments for ReformYes

Private vs. Public Funding Ratios

Overly generous benefit levels

NoPrivate and Public

Pensions Not Comparable

Benefit levels typically negotiated

RecommendationsAdjust funding

ratioLower

assumption rateDiscourage

double dipping

Replacement Ratio philosophy

Tighten oversightMaintain

reserves

ConclusionUnfunded liability an issue in Alaska, but not

uniqueEvaluation of other states necessary to find best

practicesRecommendations emerge from best practices,

can and should be used concurrently