Good news for state pensions

Alaska's looming retirement problem is getting smaller, the Alaska Retirement Management Board was told Thursday.

The state began the year with an unfunded liability in its Public Employees' Retirement System and Teachers' Retirement System of $8.4 billion.

That amount is how much the state expects to need to pay retiree pension and medical costs over the next 25 years, compared to what it expects it will have available.

The state's actuarial firm, Buck Consulting, told the board that it is now projecting a liability that's $1 billion less than last year. It's now about $7.4 billion for the two programs together.

That's in part because of stock market gains in the last year that were called "spectacular" by Buck actuary David Slishinsky, along with legislative contributions of cash.

That means the PERS funding ratio is now up to 68 percent, from 62.8 percent last year. The TRS funding ratio is now 61.5 percent, up from 57.3 percent last year, according to Buck.

The Alaska Legislature two years ago undertook a controversial restructuring of state retirement plans, switching from a traditional defined benefit pension plan to a 401(k)-style defined contribution plan.

That's been unpopular with state employee unions and some legislators, but Slishinsky said the biggest financial improvement so far has come from the strong stock market gains in 2007, the last year included in the analysis.

Slishinsky said the actuarial review process is designed to make sure the state has enough money set aside to meet costs when they come due in future years.

"This process operates as an early warning system for possible future funding problems," he said.

In the past, state officials have been startled by costs that rose unexpectedly. Thursday, they said those were a combination of poor stock market returns from 2000 to 2002, along with unexpectedly sharply rising medical costs.

"We woke up one day and found ourselves deeply in the hole," he said.

The ARM Board is now in litigation with Mercer Consulting, its former actuary, accusing Mercer of having failed to accurately anticipate those costs.

The numbers Buck uses for its calculations are not the actual value of the ARM Board's $14 billion investment portfolio. Instead, they use a process called "smoothing" that averages out the five most recent years' returns.

"The five-year period does a good job of smoothing out the volatility and still does a good job of providing a value that is representative of the market value," Slishinsky said.

That means only one-fifth of the 2007 returns he called "spectacular" are counted in the unfunded liability estimates he presented Thursday.

In 2007, PERS investments returned more than 18 percent, 10 percent above the expected return of 8.25 percent.

"The smoothing method really does work; you can't count on those kinds of gains every year," he said.

In later years, that gain will be fully reflected in the actuarial projections, he said.

The pension plans are actually in even better shape than the new projections show, with additional gains that have been earned in investments, but are not yet being counted.

"There's a billion-dollar cushion here," Slishinsky said, that will go on the books later.

• Contact reporterPat Forgey at 523-2250 or patrick.forgey@juneauempire.com.