Alaska is sitting pretty financially, with oil revenue flowing in and billions of dollars in ready cash available.
The one multi-billion-dollar flaw in the state’s otherwise stellar balance sheet is future retirement costs, but that one black mark is getting increasing attention from state officials.
The state’s retirement costs, including growing medical expenses and unfunded pension expenses, may grow to unsustainable and crippling levels, some are warning.
“Those will drive ever-increasing spending in this state,” said Gov. Sean Parnell.
He’s proposed spending an extra half a billion dollars in his budget this year to keep up with the growing expense.
Soon, that may not be enough. Additional retirement expenses of $1 billion a year may hit the state in the future, and while coffers are flush with oil revenue now, Alaska’s fields are aging and their reserves of oil are running out.
“The Legislature is going to have to have to figure out how to pony up contributions exceeding $1 billion a year, 15 years from now,” said Kristin Erchinger, finance director for the city of Seward.
And she doubted the state could afford that.
“With oil production declining approximately 5 percent per year I don’t see how that can happen,” Erchinger said.
Erchinger is a member of the Alaska Retirement Management Board, and was speaking at a recent meeting of the board.
What’s at issue is what is known as the “unfunded liability” of the Public Employee Retirement System and the Teacher Retirement System. The state has been putting aside extra money to pay future years’ benefits, but despite savings of billions of dollars, that’s still billions less than what is expected to be needed.
The last actuarial review of the program, released in 2010, estimated the combined public employee and teacher unfunded liability to be $9.7 billion, but there are concerns among many in the legislature, state and local governments and administration the number could actually be higher and continuing to grow.
ARMB member Martin Pihl, who had headed a task force looking into the issue, said that the retirement savings have still not recovered from recent market declines.
“The problem has been greatly aggravated by the 2008 and 2009 market crash,” Phil said.
Pihl said he didn’t expect Alaska would be able to get the kind of investment earnings that it has made in the past, and wouldn’t be able to earn its way out of the hole.
“It’s harder to make a buck than it was 15-20 years ago,” he said. Pihl is a retired Ketchikan pulp miller executive, and a former executive director of the Alaska Permanent Fund Corp.
Coping with the growing deficits will largely be the state’s problem, though PERS/TRS provide retirement for 77 cities and boroughs, 53 school districts and more than two dozen other organizations.
Employers pay 22 percent on employee wages and salaries, but the state is responsible for any additional costs beyond that.
The state saw growing unfunded liability developing years ago, and has made some dramatic and controversial changes to its retirement programs. First, it set up two new levels for Public Employees and Teachers, called Tier III for PERS and Tier II for TRS, that offered marked lower benefits in an effort to hold down costs for the state.
Then, in 2006 it made its most dramatic change, switching from a defined-benefit plan to a defined-contribution plan.
While most retirement plans in private industry are defined-contribution plans, such as in 401(k) plans, traditional pension plans are much more common for government workers. Alaska’s public employees are among two percent of the nation’s public employees who don’t have defined-benefit plans.
The switch was controversial, and was approved largely along party lines with Republicans supporting the change. The defined benefit plans were closed to new entrants as of July 1, 2006
Sen. Bert Stedman, R-Sitka, was an advocate for the change and has been its top defender since then from his seat as co-chairman of the Senate Finance Committee. Former Sen. Kim Elton, D-Juneau, fought the change, saying the reduction in benefits that came with PERS Tier III and TRS Tier II adequately addressed the problem.
An analyst with Moody’s Investors Service praised the change, and cited it in an announcement the state’s credit rating was being upgraded to Triple A. The analyst noted despite the change, funding for the plans remains weak, however.
Some members of the Alaska Retirement Management Board are saying additional steps are going to be needed to, but praised Parnell for his attention to the issue after inaction by some past administrations.
“This problem was inherited by the current administration,” Pihl said.
One of the reasons for the unfunded liability, state officials say, was bad actuarial estimates of future costs provided by the state’s actuary, Mercer Consulting. The state fired Mercer and sued it for fraud, last year winning a $500 million settlement from Mercer’s parent company.
The state had claimed Mercer’s actions were responsible for as much as $2.8 billion of the unfunded liability.
• Contact reporter Pat Forgey at 523-2250 or firstname.lastname@example.org.
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