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Returns on state retirement accounts rebound from loss last year

Alaska's pension accounts for teachers and other public employees are still suffering from years of underfunding, but got a boost this year with investment earnings in the double digits, a marked improvement from losses the year before.

Bad advice from an actuarial firm led to years of underfunding the constitutionally protected pension funds, setting them back by billions of dollars. The state has been playing catch-up ever since and came close last year to issuing controversial bonds to close the gap, known as the "unfunded liability."

The pension funds — the Public Employees' Retirement System and Teachers' Retirement System — each earned more than 13 percent in returns in the fiscal year ending June 30, according to the Alaska Department of Revenue. The funds reported less than 1 percentage point of losses the previous year.

Jerry Burnett, deputy revenue commissioner, credited the comeback to strong performance in domestic and international stocks and private equity.

"There are people who believe it's overvalued or undervalued, but what we've had is very strong corporate earnings all over the world," Burnett said.

Burnett said despite the good returns, there are no plans in the works to issue pension obligation bonds to cover the state's unfunded liabilities, which were $6.7 billion in fiscal year 2016, down from $12 billion in 2014. The state has 22 years to pay them off.

Issuing bonds, or borrowing, would provide the state with more money to invest in equities. But the risk is that the interest the state must pay on that borrowed money exceeds the returns it earns from investing that money in stocks, which could be calamitous for the state budget.

In the last 33 years, annual earnings for the two retirement accounts have averaged about 9 percent, according to the department. Current interest rates, which would apply to the bonds on a long-term basis, are about 4 percent.

The bonds can be issued through approval by a board of the commissioners of departments of Administration, Revenue and Commerce. Burnett said the Legislature, fearing the downside risk the bonds posed, objected to a plan for issuing them last year. In response, the governor asked the board of commissioners to nix it.

"We would look really good right now if we had done them last year," Burnett said. "But if we did the bonds now, I don't know how we would look next year."

A nationwide comparison put Alaska's pension plans in the top third of similar plans nationwide for earnings over a five-year period, including 2017, according to Callan, a consulting firm hired by the state.

Burnett said the pension funds are "generally pretty healthy."

The dollar value of 2017 earnings was about $4 billion, Burnett said. In the same year, contributions from the state, employers and employees totaled $600 million across both funds.

"People should have very little concern, unless some catastrophe happens," he said. "As long as the state exists and is financially solvent, people will be good."

Payouts totaled $1.2 billion from PERS and $568 million from TRS in 2017, according to preliminary numbers from the Administration Department.

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