The state filed a $1.8 billion malpractice lawsuit Thursday against a consulting firm it claims is a reason Alaska's public employee pension system is in crisis.
The state alleges that Mercer Human Resource Consulting Inc. gave negligent advice and even made basic math errors. Mercer was the state's actuary company and advised Alaska on its public employee and teacher retirement systems for nearly 30 years until being replaced in 2005.
"Fully aware of the billions of dollars at stake, Mercer nevertheless made fundamental errors in methodology and even in basic calculations, and failed to assign competent, experienced personnel to work for the plans," the state charged in its lawsuit.
The state claims Mercer badly miscalculated the growth rate of health care costs. Public employers used Mercer's actuarial information in deciding how much they should contribute to the pension funds.
The state said the bad advice is a reason the public employee and teacher retirement systems have an unfunded liability of $8.5 billion to $10 billion. That's the gap between the retirement systems' total assets and the amount in benefits they would be required to pay over the next 25 years.
The pension shortfall is especially hard on school districts and municipalities, which, with the state, have been scrambling to find extra funding for their pension plans.
The state said Mercer's mistakes are responsible for $1.8 billion of the problem. The state attributes the rest to a combination of factors including skyrocketing health care costs and the stock market downturn early this decade.
Mercer is a New York City-based global subsidiary of Marsh & McLennan Cos., a conglomerate with more than 55,000 employees worldwide and an annual revenue of about $11 billion.
Mercer spokeswoman Stephanie Poe provided a statement saying the firm stands behind its actuarial work for Alaska and "will defend its interests vigorously."
"To the extent the state has funding issues, they are caused by a number of economic factors, including skyrocketing medical costs, a downturn in the capital markets and the fact that employees are retiring earlier and living longer than anticipated," the firm said.
Mercer said that it started advising the state in 2002 to significantly increase its contributions to the retirement systems. Now Alaska is trying to hold Mercer accountable for economic trends over which the company had no control, according to the statement.
Gov. Sarah Palin asked the Legislature this spring for $12 million to pay for the lawsuit. Lawmakers refused to give her the money.
"At that time my concerns had not been answered as to the probability of prevailing in the lawsuit," said Anchorage Republican Rep. Mike Hawker, a member of the Finance Committee.
The state has instead negotiated a contingency agreement with the law firm it retained to assist in the suit. The firm will get a percentage of whatever award Alaska receives after costs, ranging from 25 percent if the award is up to $200 million to 5 percent if Alaska prevails for more than a billion dollars.
That New York firm -- Paul, Weiss, Rifkind, Wharton and Garrison -- is also paying the Juneau firm of Lessmeier and Winters to help.
Hawker said the contingency seems to be a responsible way for the state to pursue what could be challenging litigation.
Sitka Republican Sen. Bert Stedman also said he's comfortable with that approach to the suit.
"Clearly there's some question as far as the quality of work done by Mercer," said Stedman, co-chair of the Senate Finance Committee.
The lawsuit was filed in Alaska Superior Court in Juneau.
Pensions have also been a problem elsewhere in the nation. In Wisconsin, Milwaukee County has sued Mercer, hoping to recover at least $100 million.
Find Sean Cockerham online at adn.com/contact/scockerham or call him at 257-4344.
