Public pensions in Alaska

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Alaska public pensions
Flag of Alaska.png
Pension system
Number of pension systems 5
State pension systems: Elected Public Officers Retirement System
Judicial Retirement System
National Guard and Naval Militia Retirement System
Public Employees’ Retirement System
Teachers’ Retirement System
System type: Defined benefit plan; new enrollees in PERS and TRS participate in defined contribution plan
Pension health (2012)[1]
Fund value: $9,871,967,451
Estimated liabilities: $18,062,891,397
Unfunded liabilities : $8,190,923,946
Percent funded: 54.7%
Percent funded change: Decrease.svg4.8% (from 2010)[2]
Percent funded rank: 47[3]
Pension fund members (2012)
Total members: 99,219
Active members: 34,041
Other members: 65,178
Other state pension information
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Policypedia
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Pension policy
Public pensions
State public pension plans
Public pension health by state
Alaska public pensions are the state mechanism by which state and many local government employees in Alaska receive retirement benefits. Alaska operates five distinct pension systems, all of which are administered by the Division of Retirement and Benefits. These include the Judicial Retirement System, the National Guard and Naval Militia Retirement System, the Public Employees’ Retirement System and the Teachers’ Retirement System.[4] The Elected Public Officers Retirement System, which provides benefits to elected state officials (e.g., governor, lieutenant governor and legislators), was repealed by referendum in the 1976 general election, having only gone into effect as of January 1, 1976. The state supreme court ruled that elected state officials who served in 1976 were entitled to benefits under the system.[5]

According to the U.S. Census Bureau, the state also has one locally-administered pension system.[6]

A 2012 report from the Pew Center on the States noted that Alaska's pension system was funded at 60 percent at the close of fiscal year 2010, well below the 80 percent funding level experts recommend. Consequently, Pew designated the state's pension system as cause for "serious concern."[7]

Taken together, the funding ratio for the state's pension systems decreased from 74.2 percent in fiscal year 2006 to 54.7 percent in fiscal year 2012, a decrease of 24.7 percentage points, or 33.3 percent. Likewise, unfunded liabilities increased from approximately $3.4 billion in fiscal year 2006 to more than $8 billion in fiscal year 2012.[8][9][10][11]

Features

Pension plans

In fiscal year 2012, according to the systems' Actuarial Valuation Reports, Alaska had a total of 34,041 active members in its retirement plans. Our membership figures divide plan participants into two broad categories: active and other. Active members are current employees contributing to the pension system. Other members include retirees, beneficiaries and other inactive plan participants (usually terminated employees entitled to benefits but not yet receiving them).[12]

The following data was collected from the state's 2012 Actuarial Valuation Reports, which measured fund status as of June 30, 2012. Valuation reports are annual reports produced by outside consultants, using unaudited data provided by the pension systems themselves, in order to determine what employers in the system should contribute in the coming year to maintain or improve the fiscal health of the pension funds.

Alaska's Actuarial Valuation Reports for 2012 were produced by Buck Consultants, a global human resources consulting firm.[13] The "percentage funded" is calculated by taking the current value of the fund and dividing by the estimated amount of total liabilities. The assumed rates of return used to calculate current fund value vary by system (see "Rate of return" below for more information). The Government Accountability Office (GAO) and Pew Research Centers cite a percent funded ratio of 80 percent as the minimum threshold for a healthy fund, though the American Academy of Actuaries suggests that all pension systems "have a strategy in place to attain or maintain a funded status of 100 percent or greater."[14][15] The column labeled "SBS figure" refers to a market liability calculation of the fund by the nonprofit organization State Budget Solutions. This analysis uses a rate of return of 3.225 percent, which is based upon the 15-year Treasury bond yield. The organization calls this a "risk-free" rate of return that would make it easier for states to achieve their pension funding requirements in the future. Since 2006, all private sector corporate pension plans have incorporated market costs into their funding schemes.[16]

Basic pension plan information -- Alaska
Plans Current value Percentage funded Unfunded liabilities Membership
State figure SBS figure[17] State figure SBS figure[17]
Judicial Retirement System[18] $112,870,360 61.9% N/A[19] $69,397,164 N/A[19] 69 active members
National Guard and Naval Militia Retirement System[8] $33,682,091 102.8% N/A 4,397 active members
Public Employees’ Retirement System[9] $6,530,421,000 57.1% $4,898,523,000 22,730 active members
Teachers' Retirement System[10] $3,194,994,000 49.9% $3,204,783,000 6,845 active members
Elected Public Officers Retirement System[11] N/A 0.00% $18,220,782 0 active members
TOTALS $9,871,967,451 54.7% 30% $8,190,923,946 $23,715,600,000 34,041 active members

In 2005, the state legislature passed a measure moving the state's pension systems from a defined benefit program to defined contribution, or 401(k)-style, benefit. Union leaders argued that this was a mistake and has hurt employee retention.[20]

Annual Required Contribution

Annual Required Contributions (ARC) are calculated annually and are a sum of two different costs. The first component is the "normal cost," or what the employer owes to the system in order to support the liabilities gained in the previous year of service. The second component is an additional payment in order to make up for previous liabilities that have not yet been paid for. According to a report by the Pew Center on the States, between 1999 and 2008, Alaska paid 77 percent of its annual required contribution.[7][21]

On June 25, 2012, the Government Accounting Standards Board (GASB) approved a plan to reform the accounting rules for state and local pension funds. These revised standards were set to take effect in fiscal years 2013 and 2014.[22] As a result, ARCs were removed as a reporting requirement. Instead, plan administrators and accountants will use an actuarially determined contribution or a statutory contribution for reporting purposes.[23]

ARC historical data
Fiscal year Judicial Retirement System[18] National Guard and Naval Militia Retirement System[8] Public Employees’ Retirement System[9] Teachers' Retirement System[10] Elected Public Officers Retirement System[11]
Annual Required Contribution (ARC) Percentage contributed Annual Required Contribution (ARC) Percentage contributed Annual Required Contribution (ARC) Percentage contributed Annual Required Contribution (ARC) Percentage contributed Annual Required Contribution (ARC) Percentage contributed
2012 $5,051,754 107.3% $895,565 100.0% $351,674,000 89.2% $229,509,000 85.2% $2,005,829 100%
2011 $3,895,881 98.5% $965,329 100.0% $220,419,000 92.7% $167,978,000 84.6% $1,993,326 100%
2010 $5,236,646 69.8% $2,415,077 107.8% $217,080,000 86.0% $170,788,000 78.6% $2,079,786 100%
2009 $4,937,406 100% $2,473,282 100.0% $166,016,000 116.1% $94,388,000 139.3% $1,832,107 100%
2008 $3,898,001 1,045.0% $1,737,406 675.6% $140,729,000 107.4% $134,544,000 106.0% $1,747,475 100%

Historical funding levels

Historical pension plan data - all systems
Year Value of assets Accrued liability Unfunded liability Funded ratio
2006 $9,720,897,285 $13,106,921,121 $3,386,023,836 74.2%
2008 $11,032,051,482 $14,567,631,177 $3,535,519,695 75.7%
2010 $9,876,700,811 $16,592,761,848 $6,716,061,037 59.5%
Change from 2002-2010 $155,803,526 $3,485,840,727 $3,330,037,201 -14.7%

Rate of return

Alaska presumes an 8% return rate for three of its pension systems (PERS, TRS, and JRS). For NGNMRS, the state presumes a 7% rate of return. For EPORS, the state presumes a 4.75% rate of return.[24] According to a 2012 Pew report, most states presume an 8 percent rate of return, though 18 pension plans in 14 states lowered their expected rate of return in 2010 and 2011.[25]

Analysis

Percent funded status of pension plans
in the 50 states as of November 2013
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Note: The data in this map was compiled from state CAFR reports and Actuarial Valuation documents. Figures reflect a combination of all of the state pension plans.
Funded ration of state public pension plans as compiled by State Budget Solutions.

According to a 2012 analysis by the Pew Center for the States, most state pension plans assume an 8 percent rate of return on investments.[26] Critics assert that this assumption is unrealistic, citing changing market conditions and significantly lower investment returns across the board over the past several years.[27] When states lower the rate of return in an effort to accurately predict investment earnings, it increases the current plan liabilities, thereby lowering the percent funded ratio and causing the ARC to increase. This is because future plan liabilities are discounted based on the rate of return, so smaller expected investment returns result in larger actuarially accrued liabilities.[28] For example, on September 21, 2012, the Illinois Teachers Retirement System voted to lower its rate of return from 8.5 percent to 8.0 percent. This change increased the state's fiscal year 2014 ARC from $3.07 billion to $3.36 billion.[29] Similarly, when California's CalPERS reduced its projected annual rate of return from 7.75 percent to 7.5 percent in March 2012, it cost the state an additional $303 million for fiscal year 2013.[30]

The 2008 financial crisis had a devastating effect on pension plans nationwide and has resulted in slower economic growth and increased market volatility. In light of this, some market strategists find the 8 percent assumption to be overly ambitious. Stanford University Finance Professor Joshua Rauh stated that using past investment performance in this economic climate was "dangerously optimistic."[31] Advocates for a lower assumed rate of return argue that the standard assumptions could cause pension fund managers to engage in more risky investments and imprudent stewardship of public funds. Further, if pension plans were using more conservative assumptions, such as the 3 or 4 percent assumed rate of return used in the private sector, and the plans grew more quickly than expected, the fund would have a surplus and smaller future ARCs, which would be preferable to using optimistic assumptions and potentially being caught with larger-than-expected deficits.[32][33][34][35][36]

On the other hand, traditional public pension plan advocates argue that the dip observed in recent years is not sufficient proof of a long-term, downward trend in investment returns. According to Chris Hoene, executive director at the California Budget Project, "The problem with [the market rate] argument is there isn’t significant evidence other than the short term blip during the economic crisis that there’s been that shift. It’s a speculative argument coming out of a very deep recession."[31]

The National Association of State Retirement Administrators compiled data on the median annualized rate of return for public pensions for the 1-, 3-, 5-, 10-, 20-, and 25-year periods ending in 2013. While the median annualized rate of return failed to meet the 8 percent assumption that most public pensions assume over the 5- and 10-year periods, it was just shy (7.9 percent) over the 20-year period, and it exceeded 8 percent for the 1-, 3-, and 25-year periods. It is important to note that the NASRA data is reporting the median returns, indicating that even though median annualized returns exceeded 8 percent in the 25-year period, the investment portfolios for half of the examined public pension funds failed to meet an 8 percent assumed rate of return.[37]

In September 2013, the nonprofit organization State Budget Solutions published an analysis of state pension funding levels. In its calculations, State Budget Solutions used a 3.2 percent rate of return, the 15-year Treasury bond yield as of August 21, 2013, to discount plan liabilities.

The research found that in all states combined, state public employee pension plans have only 39 percent of the assets they need to cover their promised payments—a $4.1 trillion gap. According to the report, Alaska's public pension plans were 30% funded, making it the 44th most funded state.[38]

Moody's report on adjusted pension liabilities

On June 27, 2013, Moody's Investor Service released its report on adjusted pension liabilities in the states. The Moody's report ranked states "based on ratios measuring the size of their adjusted net pension liabilities (ANPL) relative to several measures of economic capacity." In its calculations of net pension liabilities, Moody's employed market-determined discount rates (5.47 percent for Alaska) instead of the state-reported assumed rates of return (8 percent for Alaska's largest pension plan).[39]

The report's authors found that adjusted net pension liabilities varied dramatically from state to state, from 6.8 percent (Nebraska) to 241 percent (Illinois) of governmental revenues in fiscal year 2011.[39]

The adjusted net pension liability for Alaska's two largest pension systems (PERS and TRS) in fiscal year 2011 was ranked the 21st highest in the nation.[39] The following table presents key state-specific findings from the Moody's report, as well as the state's national rank with respect to each indicator.

Adjusted net pension liabilities (ANPL) relative to key economic indicators - Alaska
Governmental revenue* Personal income State GDP Per capita
State findings 55.2% 32.1% 20.6% $14,652
National ranking 22nd 1st 1st 1st
*Moody's uses governmental revenues as reported in each state's consolidated annual financial reports; this includes not only state-generated revenue, but federal funds, as well.[39]


Pension fund management fees

See also: Public pension fund management fees

In July 2013, the Maryland Public Policy Institute (MPPI) and the Maryland Tax Education Foundation released a report detailing the fees paid for the management of state pension systems. According to MPPI, the 10 state pension funds that paid the most in management fees relative to net assets experienced lower returns over a five-year period than the 10 state pension funds that paid the least in management fees. For example, in fiscal year 2012 South Carolina's pension system paid approximately $296.1 million in total management fees (1.31 percent of total net assets at the beginning of the fiscal year) and its five-year rate of return was 1.46 percent. By contrast, Alabama's pension system paid roughly $13.3 million in management fees (0.05 percent of total net assets) and its five-year rate of return was 7.53 percent.[40]

The table below presents the information collected by MPPI for Alaska and surrounding states. For each state's pension system, total net assets are listed (both for the beginning and end of the fiscal year in question), as well as the total amount paid in management fees. In addition, the rates of return for the pension systems are presented. Compared to surrounding states, Alaska had lower total net assets and management fees, and a lower 5-year rate of return for the pension fund.

Public pension fund management fees, 2011-2012
State Fiscal year Total net assets at the beginning of the year Total net assets at the end of the year Total management fees Management fees as a percentage of total net assets at the beginning of the year Five-year rate of return for the pension fund
Alaska 2012 $16,489,643,000 $16,419,886,000 $62,184,233 0.38% 0.86%
Oregon 2012 $55,794,848,695 $53,659,423,570 $335,163,728 0.60% 1.80%
Washington 2012 $68,311,800,000 $67,887,700,000 $297,354,000 0.44% 1.20%
1"Three states— Hawaii, Nevada and Rhode Island—were excluded because they hadn’t published CAFRs for fiscal years ending December 31, 2011 or later. West Virginia was excluded because its June 30, 2012 CAFR lacked sufficient disclosure."[40]
Source: Maryland Public Policy Institute, "Wall Street Fees, Investment Returns, Maryland 49 Other State Pension Funds," July 1, 2013

Reforms

Proposed reforms

2013

Three bills pertaining to pension policy were submitted for consideration during the 2013 session of the Alaska State Legislature, but each died in committee.[41]

2012

Although two bills pertaining to pension policy were submitted for consideration during the 2012 session of the state legislature, each died in committee.[42]

Malpractice lawsuit

In June 2010, the Alaska Attorney General settled a professional malpractice suit for $500 million. In 2007 the state sued Alaska Retirement Management Board and Mercer Inc. for at least $1.8 billion, alleging mistakes by the company had contributed to an $8.4 billion state pension deficit.[43] Mercer had been actuary for the state's Public Employees' Retirement System and Teachers' Retirement System pension plans.[43]

Local public pensions

See also: Local government public pensions

According to the United States Census Bureau, the state has one locally-administered pension system.[6]

Transparency

See also: Public pension disclosure and Governmental Accounting Standards Board
  • The names of recipients are not published on the Alaska pension website. However, pursuant to Alaska code, an individual may request the name of a recipient under the states’ open records laws, provided the request does not constitute a violation of privacy.[44]
  • The amounts dispersed to recipients are not published on the Alaska pension website. However, pursuant to Alaska code, an individual may request the specific amount disbursements under the states’ open records laws, provided the request does not constitute a violation of privacy.[44]
  • Pension fund investment performance data is available, including investment policy review, vesting tracking, and investment performance review and reporting.[45]
  • Pay-to-play (the practice of investment managers contributing to officials with influence over public pension fund decisions) information is unavailable as of July 2012. Pension lobbying information is not available.

While there is no information regarding third party oversight of the pension funds, United Retirement Plan Consultants performs administrative functions for the Alaska pension funds, and provides annual notices to participants and plans annual reviews with employers.[45]

Recent news

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See also

Additional reading

External links

References

  1. Figures below are compiled by adding up all state pension plans
  2. This figure is derived by calculating the percent difference between the current year's funding level and the system's percent funded from the prior year.
  3. Rank is relative to the 50 state pension programs. "1" refers to the healthiest pension plan while "50" would be the least well-funded plan.
  4. Alaska Division of Retirement and Benefits, "All Programs," accessed October 28, 2013
  5. Alaska Division of Retirement and Benefits, "Elected Public Officers Retirement System," accessed October 28, 2013
  6. 6.0 6.1 “Public Employee Retirement Systems State- and Locally-Administered Pensions Summary Report: 2010,” United States Census Bureau, April 30, 2012
  7. 7.0 7.1 "Widening Gap Update: Alaska," June 18, 2012
  8. 8.0 8.1 8.2 8.3 "National Guard and Naval Militia Retirement System Actuarial Valuation Report as of June 30, 2012," accessed October 28, 2013
  9. 9.0 9.1 9.2 9.3 "Public Employees' Retirement System Actuarial Valuation Report as of June 30, 2012," accessed October 28, 2013
  10. 10.0 10.1 10.2 10.3 "Teachers' Retirement System Actuarial Valuation Report as of June 30, 2012," accessed October 28, 2013
  11. 11.0 11.1 11.2 11.3 "Elected Public Officers Retirement System Actuarial Valuation Report as of June 30, 2012," accessed October 28, 2013
  12. Organisation for Economic Co-operation and Development, "Pensions Glossary," accessed November 27, 2013
  13. Buck Consultants, "About Buck," accessed October 28, 2013
  14. United States Government Accountability Office Report to the Committee on Finance, U.S. Senate, "State and Local Government Retiree Benefits: Current Status of Benefit Structures, Protections, and Fiscal Outlook for Funding Future Costs," September 2007. accessed October 23, 2013
  15. American Academy of Actuaries, "Issue Brief: The 80% Pension Funding Standard Myth," July 2012. accessed October 23, 2013
  16. Governing Magazine, " Is There a Plot Against Pensions?" October 14, 2013
  17. 17.0 17.1 State Budget Solutions, "Promises Made, Promises Broken - The Betrayal of Pensioners and Taxpayers," accessed September 20, 2013
  18. 18.0 18.1 18.2 "Judicial Retirement System Actuarial Valuation Report as of June 30, 2012," accessed October 28, 2013
  19. 19.0 19.1 Analysis only available for system totals and not individual funds.
  20. Fairbanks Daily News Miner, Alaska pension-option bill sees change, Feb, 9, 2012
  21. Government Accounting Standards Board, "Annual Required Contribution (ARC)," accessed October 17, 2013
  22. Reuters, "Little-known U.S. board stokes hot pension debate," July 10, 2012
  23. State Budget Solutions, "GASB's ineffective public pension reporting standards set to take effect," June 5, 2013
  24. "State of Alaska Comprehensive Annual Financial Report for the Fiscal Year July 1, 2011 – June 30, 2012," accessed October 29, 2013
  25. "The Widening Gap Update,” Pew Center on the States, accessed October 17, 2013
  26. "The Widening Gap Update,” Pew Center on the States, accessed October 17, 2013
  27. The New York Times "Public Pensions Faulted for Bets on Rosy Returns," May 27, 2012
  28. Benefits Magazine "Public Pension Funding 101: Key Terms and Concepts," April 2013. accessed October 23, 2013
  29. Crain's Chicago Business "State teachers pension board lowers expected rate of return," September 21, 2013. accessed October 23, 2013
  30. Huffington Post "California Pension Funds Expect Lower Investment Return," March 14, 2012. accessed October 23, 2013
  31. 31.0 31.1 Governing "Expert: Governments Are Masking Their Pension Liabilities ," October 25, 2013. accessed October 25, 2013
  32. The Washington Post "Kansas’s pension funding gap just grew by $1 billion," September 6, 2013. accessed October 25, 2013
  33. Topeka Capital-Journal "KPERS' unfunded liability rises to $10.2B," September 4, 2013. accessed October 25, 2013
  34. Wall Street Journal "Pensions Wrestle With Return Rates," October 10, 2011. accessed October 23, 2013
  35. The Courant "Promising Too Much On Public Pensions," August 10, 2012. accessed October 23, 2013
  36. Business Wire "NCPERS 2013 Survey: Public Pension Plans Report Increasing Confidence, Lower Costs, Growing Returns," October 22, 2013. accessed October 25, 2013
  37. National Association of State Retirement Administrators "Issue Brief: Public Pension Plan Investment Return Assumptions," October 2013. accessed October 23, 2013
  38. State Budget Solutions, "Promises Made, Promises Broken - The Betrayal of Pensioners and Taxpayers," accessed September 20, 2013
  39. 39.0 39.1 39.2 39.3 Moody's Investor Service, "Adjusted Pension Liability Medians for US States," June 27, 2013
  40. Cite error: Invalid <ref> tag; no text was provided for refs named report
  41. National Conference of State Legislatures, "Pensions and Retirement State Legislation Database - Alaska 2013," accessed October 29, 2013
  42. National Conference of State Legislatures, "Pensions and Retirement State Legislation Database - Alaska 2012," accessed October 29, 2013
  43. 43.0 43.1 Anchorage Daily News, Alaska settles pension lawsuit for $500 million, June 11, 2010
  44. 44.0 44.1 Pension recipient identification
  45. 45.0 45.1 Creation and Services Comparison.pdf Fund performance data