Public Pensions in Alaska and the Unfunded Liability

Public Pensions in Alaska and the Unfunded Liability Michael 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 billion Funding ratio: 63% TRS (Fiscal year 2012) Unfunded actuarial accrued liability: < $4. 2 billion Funding ratio: 54. 1%

Deductions Pension benefits Post employment healthcare benefits Refunds of contributions Administrative costs

Additions Member contributions: PERS: 6. 75 – 9. 6% of pay TRS: 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 1920 s 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 liabilities Minimizes risk Ensures long term sustainability Overfunding Preserves extra funds to cover losses in the pension system Successful policymaking Consensus Shared vision

Why These States? Utah Smaller population with similar public sector size Pension plan funded at 85% Florida One of the best managed and funded pension plans at 101% Illinois One 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 Yes Private vs. Public Funding Ratios Overly generous benefit levels No Private 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