Public Pensions in Alaska and the Unfunded Liability

1. Public Pensions in Alaska and the Unfunded Liability Michael Worth, Diego Bayuk, Kristen Hall, and Kim Raymond University of Alaska Anchorage April 13, 2013

2. Executive Summary • Challenges faced by Alaska public pension system • Long history of pensions • Best practice models • Recommendations

3. 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%

4. Deductions • Pension benefits • Post employment healthcare benefits • Refunds of contributions • Administrative costs

5. Additions • Member contributions: • PERS: 6.75 – 9.6% of pay • TRS: 6.65% of base pay • Employer contributions • Contributions from State • Investment Income

6. 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

7. 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

8. 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.

9. National Snapshot of Liabilities Source: Pew Center on the States, 2012

10. 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

11. Comparative Analysis • Comparing Alaska’s pension policy and fiscal situation with Utah, Florida, and Illinois • Identifying best practice models

12. 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

13. 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%

14. 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

15. Arguments for Reform Yes No Private and Public Pensions Not Comparable Benefit levels typically negotiated • Private vs. Public Funding Ratios • Overly generous benefit levels

16. Recommendations • Adjust funding ratio • Lower assumption rate • Discourage double dipping • Replacement Ratio philosophy • Tighten oversight • Maintain reserves

17. 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