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Public Pensions in Alaska and the Unfunded Liability. Michael 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.
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Public Pensions in Alaska and the Unfunded Liability Michael 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 billion • Funding ratio: 63% • TRS (Fiscal year 2012) • Unfunded actuarial accrued liability: < $4.2 billion • Funding ratio: 54.1%
Deductions • Pension benefits • Post employment healthcare benefits • Refunds of contributions • Administrative costs
Additions • Member contributions: • PERS: 6.75 – 9.6% of pay • TRS: 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 liabilities • Minimizes risk • Ensures long term sustainability • Overfunding • Preserves extra funds to cover losses in the pension system • Successful policymaking • Consensus • Shared vision
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%
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 Yes No Private and Public Pensions Not Comparable Benefit levels typically negotiated • Private vs. Public Funding Ratios • Overly generous benefit levels
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