A recently published report by the American Legislative Exchange Council (ALEC) shines a light on the growing problem facing state and local governments — the unfunded liability of government-sponsored pension funds.

Unfunded liability is the difference between the anticipated cost of paying retiree pension and medical benefits for decades to come and the future projections of pension fund balances required to support those payments.

Alaska’s total exposure is small compared to many states, but a more realistic comparison of unfunded liabilities to total population places us dead last among all states after adjusting for differences in rate of return assumptions.

Every man, woman and child in the state of Alaska would need to cough up $45,689 to make up the current shortfall in Alaska public pension funds — 28 percent higher than Connecticut which is No. 49 on the list.

The ALEC report (“Unaccountable and Unaffordable”) suggests that “absent significant reforms, unfunded liabilities of state‐administered pension plans will continue to grow and threaten the financial security of state retirees and taxpayers alike.”

The report surveyed more than 280 state-administered public pension plans. Using prudent and reasonable long-term market expectations, the report exposes pervasive pension underfunding across the nation.

While Alaska legislators have attempted to address this issue in the past, it’s notable that even with recent strong market returns, a large funding gap remains.

That’s especially troubling. If state fund managers cannot make significant headway reducing pension liability in a robust investment environment, what happens during the inevitable next bear market?

An April 2018 University of Alaska ISER report estimates $10.815 billion in additional payments will be needed to eliminate the unfunded liabilities of PERS and TRS (the two largest Alaska state-sponsored retirement plans with slightly over 100,000 active and retired participants) under a 25-year amortization schedule the state adopted in 2014.

This funding gap is only a portion of the total since local governments, who may participate in TRS or PERS, such as Anchorage, Juneau and Fairbanks, must also make substantial annual payments to reduce sizable pension fund deficits. While municipal annual liability is currently capped at 12-22 percent of payroll (with the state making up any difference), repeated efforts by the Alaska Legislature to shift more of the cost to local governments may ultimately succeed — further straining municipal budgets.

Ominously, state actuarial projections contained in the ISER report may understate the shortfall after examining Alaska’s liability computation method. The use of overly-­optimistic rate assumptions artificially lowers the total liability thereby masking the true fiscal exposure.

Federal regulators require private sector pension managers to use discount rates of approximately 4.5 percent — but ignore much higher rates used by public sector managers.

For example, as detailed in the City and Borough of Juneau’s 2017 FYE financial statements, auditors computed CBJ’s share of PERS unfunded pension liability at $176 million. If their assumed investment rate (8 percent) was reduced only 1 percent to 7 percent, it would increase CBJ’s liability by over $50 million to $227 million — a 28 percent increase.

Presumably, even a small dip in expected investment returns would cause a similar percentage increase in Alaska’s total pension deficit.

Alaska is one of seven states with state constitutional provisions explicitly protecting pension benefits — thereby limiting the available options to mitigate this financial exposure.

The Legislature’s most important pension reform in 2006 moved new hires from a defined-benefit plan to a defined-contribution plan. More recently, a $3 billion cash infusion was authorized under the Parnell administration.

Yet, while remaining defined-benefit payouts stretch out for almost another 100 years, some Alaska legislators and candidates insist on supporting a return to the unaffordable defined-benefit plan that got Alaska in this fix in the first place.

As states like Arizona, Pennsylvania and Michigan implement similar pension revisions, Alaskans need to remain vigilant to preserve their reforms.

Some believe with the uncertainty surrounding the health of Alaska’s pension funds that large tax increases are unavoidable, if not mandatory, on both the state and local level. Others believe fiscal restraint coupled with judicious economic growth initiatives will allow us to weather this storm.

Over the next several months, Alaskans will be voting for statewide and local candidates who will need to confront this ticking time bomb.

Make your vote count.

• Win Gruening retired as the senior vice president in charge of business banking for Key Bank in 2012. He was born and raised in Juneau and graduated from the U.S. Air Force Academy in 1970. He is active in community affairs as a 30-plus year member of Juneau Downtown Rotary Club and has been involved in various local and statewide organizations. He contributes a regular column to the Juneau Empire. My Turns and Letters to the Editor represent the view of the author, not the view of the Juneau Empire.