History and Options Regarding the Unfunded Liabilities of Alaska’s Public Employees’ and Teachers’ Retirement Systems

Abstract

In early 2003, financial analysts working for the State of Alaska announced that the two largest public employee retirement systems in Alaska had become significantly underfunded.3 From fiscal year 2006 (July 1, 2005 through June 30, 2006) to date, the state has paid $6.951 billion— (an average of $534.7 million annually)—to pay down these obligations, which will be called “unfunded liabilities” in this paper.4 The State of Alaska has substantial unfunded liabilities remaining to pay off for these two systems, the Public Employees’ Retirement System (PERS) and the Teachers’ Retirement System (TRS). There is uncertainty about the size of these unfunded liabilities, and there are also different ways of calculating them. For example, the State of Alaska’s snapshot balance-sheet approach, subtracting the accrued liabilities from the assets, based on their actuarial value, produces an estimate of $6.609 billion for the combined unfunded liabilities of PERS and TRS.5 That figure is an estimate of the unfunded liabilities discounted to the present day. Estimates of the size of the unfunded liabilities particularly vary based on the use of different critical assumptions, such as the rate of future returns on investment. As an example, using an estimated rate of return of 2.142 percent instead of the State of Alaska’s assumption of 8 percent produces an estimate of $33.9 billion for the state’s unfunded liabilities. 6

The State of Alaska has committed to paying off the unfunded liabilities under a 25-year amortization schedule that started in 2014, so another highly relevant measurement of those liabilities appears to be the amount actuaries for the state currently project will be needed under that pay-off plan, which runs through fiscal year 2039. The state’s actuaries project that from fiscal year 2019 through fiscal year 2039 the state will pay a total of $10.815 billion in extra contributions—called “state assistance” or “additional state contributions” in this paper—to pay off the unfunded liabilities. 7 In contrast to the state’s snapshot estimate of $6.609 billion, this estimate of $10.815 billion in state assistance represents a flow of annual cash payments. That is, the $10.815 billion is an estimate of the total amount needed to eliminate the unfunded liabilities of PERS and TRS under the 25-year amortization schedule the state adopted in 2014. 4 Note that this state assistance is above and beyond the amount the state is projected to owe in its role as employer in the normal course of funding the two systems.8 Employers other than the state—primarily local governments and school districts—also participate in PERS and TRS, and the figure for state assistance covers not only unfunded liabilities attributed to the state but also a portion of the unfunded liabilities attributed to non-state employers. As explained more later, the state has assumed, by statute, the responsibility to pay for a share of the unfunded liability of these other employers. 9 This paper: • Describes the structure of the Alaska public employee retirement systems in the context of some unusual features of public employment on the Last Frontier • Reviews how the problem of unfunded liabilities came about • Examines how concerns over unfunded liabilities produced both changes and proposed changes in the retirement systems over the past dozen years, including proposals for changes in the allocation of burdens between the state and local governments in paying for retirement benefits • Describes current projections of future amounts needed to pay off the unfunded liabilities • Discusses how future estimates of the unfunded liabilities might change in response to economic and demographic factors • Discusses legal provisions protecting the rights of beneficiaries of the retirement systems • Lays out options for policymakers—other than the current policy of paying down the unfunded liabilities over time—including buyout, bailout, and bankruptcy