State employees' pension fund almost $2.5 billion short

Posted: Monday, July 28, 2003

FAIRBANKS - The fund in which the state holds its employees' pension money, as well as communities and groups that subscribe to its pension plan, is almost $2.5 billion short, according to recent figures.

The shortfall is being blamed on skyrocketing health-care costs combined with a lackluster market in the last few years. The state's teacher retirement fund is also about $1.7 billion short of the money it needs to fund retirement benefits.

To deal with the deficits, the state plans to dramatically increase the amounts that communities and other entities will have to contribute to the plans, adding to the problems many already face due to the loss of state revenue sharing.

"It's huge for the state and it's huge for all the municipalities," said Kevin Ritchie, president of the Alaska Municipal League.

Around 150 communities, school districts, and other entities, including the state itself, use Alaska's Public Employees' Retirement System to fund pension plans and post-retirement health care for employees.

Each entity, as well as each enrolled employee, contributes a certain amount each year into the plan, with the contribution rates adjusted annually by the state based on estimates of how much money will ultimately be needed to fund the plans' benefits.

In the 2003-04 fiscal year, the average community or organization is putting $6.77 toward the fund for every $100 paid in salary to each enrolled employee.

Contributions go into a state investment fund which, during the flush stock market years of the late 1990s, earned more than enough to keep rates low while still holding the fund's level above the estimated amount needed to pay for the pensions and health care of all the people on the plan.

But then the stock market began a nose dive.

In 2001-02, the fund, which is expected to earn 8.25 percent a year, lost 5.25 percent, or $458.4 million. In 2002-03 it lost 5.48 percent, or $431 million. Meanwhile, rising health-care costs pushed the fund's liability from $7.9 billion in mid-2001 up to $9.9 billion in mid-2002, the latest numbers available.

"They got two years of 5 percent losses when they were looking for 8 percent gains," said Gary Bader, chief investment officer of the state Department of Revenue. "That, combined with an escalating health-care cost ... is really what has impacted the system to the largest degree."

With the value of the fund at $7.4 billion on June 30, 2002, the state of Alaska was about $2.5 billion in the hole. The state's Teachers' Retirement System fund is also short: In mid-2002, that fund fell to $3.7 billion in value versus liabilities of $5.4 billion.

Those numbers are often referred to as an "off-books debt" because they aren't, in the strictest sense, tangible debts that will come due at a specific date. Rebounds by the funds could decrease or even erase them.

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