How Is the State Dealing With the Shortfall in Pension Systems?

Abstract

I n early 2003, financial analysts gave Alaska state officials some very bad news: the two largest pension systems for public employees wouldn’t have the money to cover all the expected future costs of pensions and health-care benefits for state and local employees when they retired. This shortfall—called the unfunded liability— had been caused by, among other things, several years of poor returns on fund investments and soaring health-care costs. Public pensions are protected in Alaska’s constitution, and the state has already contributed nearly $7 billion to reduce the shortfall. How much more it will need to pay is uncertain, since it depends on many things that are hard to predict. But most analysts believe it will be billions more. That poses a major challenge for the state—which has been dealing with big budget deficits—and for local governments, which need to help pay the unfunded liability but have far smaller financial reserves than the state.