Public Pensions in Alaska and the

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

Raymond

University of Alaska Anchorage

April 13, 2013

Executive Summary

Challenges faced by Alaska public pension system

Long history of pensions

Best practice models

Recommendations

Funding Figures

PERS (Fiscal year 2012)Unfunded actuarial accrued liability:

> $6.9 billionFunding ratio: 63%

TRS (Fiscal year 2012)Unfunded actuarial accrued liability:

< $4.2 billionFunding ratio: 54.1%

Deductions

Pension benefits

Post employment healthcare benefits

Refunds of contributions

Administrative costs

Additions

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

Employer contributions

Contributions from State

Investment Income

Mercer

Improper (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 2003

State 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 History

Pensions date back to Roman Empire

American colonists and military pensions

U.S. adopted pension plans in the 1920s

Massachusetts established first retirement pension plan for general state employees in 1911

Social Security Act of 1935

Welfare and Pension Plan Disclosure Act Amendments of 1962

Revenue Act of 1978

History of Alaska’s Unfunded Liability

In 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 Legislation

2012- 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 Analysis

Comparing Alaska’s pension policy and fiscal situation with Utah, Florida, and Illinois

Identifying best practice models

What is a Best Practice?

Smallest unfunded liabilitiesMinimizes riskEnsures long term sustainability

OverfundingPreserves extra funds to cover losses in the pension

system

Successful policymakingConsensusShared vision

Why These States?

UtahSmaller 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 success

Kept up with funding requirements

Reduced benefits and/or increased retirement age

Shared risk

Increased employee contributions

Improved policy governance and investment oversight

Arguments for Reform

YesPrivate vs. Public

Funding Ratios

Overly generous benefit levels

NoPrivate and Public

Pensions Not Comparable

Benefit levels typically negotiated

Recommendations

Adjust funding ratio

Lower assumption rate

Discourage double dipping

Replacement Ratio philosophy

Tighten oversight

Maintain reserves

Conclusion

Unfunded liability an issue in Alaska, but not unique

Evaluation of other states necessary to find best practices

Recommendations emerge from best practices, can and should be used concurrently