Alaska’s future retirement liabilities suddenly increased by nearly $1 billion when the Alaska Retirement Management Board adopted what it thinks is a more realistic — and lower — estimate of what it expects to make on its investments.
The board last week formally decided to reduce its expected earnings rate on its $18 billion in retirement savings by a quarter percent, from 8.25 percent to 8 percent.
The move was praised by Senate Finance Committee Co-chairman Bert Stedman, R-Sitka, who said it probably should have been done years ago.
“Over the last, I don’t know, 3-4 years, I’ve been concerned that the target rate of 8.25 percent is too high,” he said.
The target rate is used to compute the state’s “unfunded liability,” the difference between how much the state expects to need to pay retiree pension and medical costs and how much it expects to have available to pay those expenses.
The unfunded liability was most recently set last June at $9.7 billion, a combination deficit of $6.3 billion for the Public Employee Retirement System and $3.3 billion in the Teacher Retirement System.
That amount is used to determine how much the state and local governments will have to pay in addition to wages and salary for each employee.
The board’s action will likely increase the PERS unfunded liability by $671 million, based on preliminary estimates provided by Mike Barnhill, Deputy Commissioner of the Department of Revenue.
Barnhill said the TRS unfunded liability will likely see a similar change. Including the TRS amount, the total increase to the unfunded liability may be about $850 million.
The reduction in the investment assumptions came after months of review by the ARM Board, and after its actuarial advisors, Buck Consultants, warned that its investment assumptions were overly optimistic.
The investment return expectation is the board’s most critical assumption, independent actuarial consultant Leslie Thompson told the board last fall. Her company was hired to review Buck’s work, and she said she agreed with its recommendations.
Thompson said she “strongly concurred with Buck’s report that the Board needed to consider a lower rate — so much so that she would restate it to say the Board MUST consider a lower expected return rate,” according to the board’s meeting minutes.
Thompson told the board she’d reviewed the ARM Board’s performance history, along with capital market expectations and did a survey of other pension fund managers, and “did not find anything would indicate that 8.25 percent was a reasonable investment return assumption,” according to the minutes.
The investment assumption is a combination of what the inflation rate and the real return will be.
Rep. Beth Kerttula, D-Juneau, who represents the largest concentration of state employees and follows retirement issues, said she was disappointed to see the official unfunded liability would be increasing, but said the state needed accurate information if it was to deal with the unfunded liability.
“We’ve got to be sure that we can honor our commitment to our retirees, and we have to know how much we actually have to do that,” she said.
The change to the unfunded liability, which will be incorporated in the new actuarial assumptions adopted before the end of June, will increase the unfunded liability in the new calculations.
That won’t change the actual amount of liability, just recognize what’s really there, Stedman said.
“The liability is what it actually is,” he said. “You can change the rate and pretend its some other number, but that doesn’t change what it is,” he said.
The ARM Board’s actuarial consultants said most other pension funds used target rates of 8 percent or less, but Stedman said he hadn’t yet studied whether it should be even lower.
“I’m a lot more comfortable with 8 percent than eight and a quarter,” he said.
• Contact reporter Pat Forgey at 523-250 or firstname.lastname@example.org.