Alaska's retirement woes continue to grow, with underfunding of pension and health care plans growing by an additional $800 million this year, a problem likely to further strain future state budgets.
"Those are costs that we should have paid in the past, but which we didn't for whatever reason," said Kristin Erchinger, a member of the Alaska Retirement Management Board and finance director for the city of Seward.
That unfunded liability is the difference between the anticipated cost of paying decades of retiree pension and medical benefits, compared to the amount the state expects to have available in retirement trust funds.
Growing costs, lagging returns
This year's increase comes from a combination of growing costs and lagging investment returns, and it adds to the woes Alaska has had with its public employee retirement plans recently.
"Accountants measure what actually exists -- we are measuring something that hasn't happened yet," said Dave Slishinsky of Buck Consultants, the state's actuarial consultant, who helps Alaska determine how much money it will need in the future.
The new numbers were officially adopted by the Alaska Retirement Management Board in June, and will be factored into next year's budgets, straining state finances further.
The Alaska Legislature this year passed a deficit budget for the first time in years, as lawmakers took steps to cut oil taxes, limiting future state revenues.
Alaska is attempting to pay down the unfunded liability by adding an additional amount to the cost of each employee to the department, city, school district, or other employer. As those amounts began to soar, however, they were capped at 22 percent for PERS-covered employees and 12.56 percent for TRS employees That's not enough to cover the amount required by law to be paid into the trust funds to pay down the unfunded liability.
In the current fiscal year, which began July 1, the state has had to contribute an additional $634 million to meet those costs.
In the last year, a major part of the growth in the unfunded liability stemmed from weak investment returns of just 0.2 percent in fiscal year 2012.
That ARM Board return exceeded the Alaska Permanent Fund's slight loss for 2012 in what was a difficult period for markets worldwide.
Short by 7.8 percent
Managers had counted on a return of 8 percent for the trust funds.
Consequently, the actual growth in assets fell short by 7.8 percent, Slishinsky said.
The PERS trust fund is now valued at $11.9 billion, while liabilities are anticipated at $11.8 billion.
TRS is in even worse shape, with assets valued at $4.9 billion and liabilities of $9.3 billion.
Following previous flawed estimates from the state's previous actuary, Alaska now contracts with Buck Consulting, a Xerox subsidiary, to provide estimates on how much its retirement trust funds will need to meet future pension and health-care obligations.
Further, Alaska hires a second actuarial firm, Gabriel Roeder Smith & Co., to check the work of the first firm. GRS firm told the ARM Board this year that it found only insignificant differences in interpretation with the work Buck had performed for the state.
Alaska sued its previous actuary, Mercer, a subsidiary of Marsh & McLennan Companies, Inc., and won a settlement of half a billion dollars in June of 2010, but had earlier claimed damages of as much as $2.8 billion.
Can Alaska earn 8 percent?
Alaska has since dramatically increased its contribution to its pension plans, but the years of underfunding continues to have an impact.
The underfunding may still be greater than assumed, Slishinsky and others have warned, if the state doesn't earn the 8 percent on savings that it expects.
State Sen. Bert Stedman, R-Sitka, has followed retirement issues closely and praised a decision a few years ago to reduce the state's expected investment returns each year from 8.25 percent to 8 percent, which he described as more realistic, even if it required the state to contributed more to its pension plans.
He said the current rate of 8 percent may still be unrealistically high.
"It looks a little rich to me," he said.
Stedman said he's been urging for several years to have a lower, more realistic targeted return amount.
"It would also be nice if they had a target you would see them hit it," he said.
Investment rating firm Moody's has recently said that states should lower their investment return targets to the taxable bond rate, which is currently 2-3 percentage points below the 8 percent Alaska uses. Such a change would increase the size of assumed unfunded liabilities here and across the nation.
Moody's has also recommended ending use by state retirement plans, including Alaska's, of a process known as asset "smoothing," which averages annual changes in investment gains or losses over a five-year period.
Eliminating asset smoothing would also slightly increase Alaska's unfunded liability in future years.
Contact Pat Forgey at pat(at)alaskadispatch.com