Post on 28-Dec-2015
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