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Will unfunded pension liability put Alaska finances on road to Detroit-sized debt?

Pat Forgey
In June, the Alaska Retirement Board estimated the state's unfunded liability increased $889 million in the last year. That's the amount between what the state expects to have in its retirement trust funds and what it will need to meet its obligations for pension and health care for retirees. Images_of_Money photo / cc via Flickr

JUNEAU -- Alaska has been underfunding its retirement plans for years, but some lonely voices are trying to see that the 49th state doesn't end up like Detroit, another government that for years failed to adequately fund its retirement plans and is now paying the price.

Like Detroit, Alaska has sometimes made choices that were politically easier but which left much bigger problems looming.

"It's the old story of kicking the can down the road, and the result is costing billions and billions more of contributions over time," said Martin Pihl, a retired pulp mill manager from Ketchikan who serves as a member of the Alaska Retirement Management Board, overseeing the retirement trust funds.

Alaska public employee retirement benefits were once extremely generous, but pensions for new hires have been repeatedly reduced. Since 2006, newly hired state workers, teachers and other public employees no longer get a defined-benefit pension, but instead have a 401(k)-style retirement plan similar to the plans increasingly popular in private industry.

The attraction of those plans to both government and industry is that they are typically much less generous – and they shift the underfunding risk from the employer to the employee.

Because the Alaska Constitution bars diminishing retirement benefits that have already been earned by government employees, the recent benefit changes have applied only to new hires.

Unfunded liability nearly $900 million

In June, the Alaska Retirement Board adopted its latest actuarial valuations of the state's unfunded liability, the amount between what the state expects to have in its retirement trust funds and what it will need to meet its obligations for pension and health care for retired state, municipal, school and other public employees.

That amount rose $889 million in the last year to $12 billion, despite regular contributions into the system, and threatens to grow in future years. Trying to meet those demands, the ARM Board has moved to confront the problem -- and possibly the governor's office and the Legislature, too.

The ARM Board has changed the method by which annual state contribution to the retirement system are made from what's known as "level-rate-of-pay" to "level dollar."

That change, which will take effect with budgets drafted this year, will increase state retirement costs by hundreds of millions of dollars in the early years, but dramatically lower annual cost over the next 10 to 20 years, and result in huge overall savings, say ARM Board members supporting the switch.

"We are talking about the state saving itself literally many billions of dollars," said Sam Trivette of Juneau, a retired probation officer and vice chair of the ARM Board.

Getting more money into the retirement trust funds, earlier, will allow the earnings on those funds to grow and compound over the decades before they’re needed to pay off benefits.

Alaska so far has been able to make the growing annual payments to cover its retirement cost, but ARM Board member Kristin Erchinger of Seward questioned whether they would be able to continue to do so if something isn't done.

"We are really blessed in Alaska that the governor's office and the Legislature have been making those required payments, that's true, but the question is can they continue to make those required contributions as they grow by leaps and bounds," said Erchinger, who is also the chief finance officer for the city of Seward.

She said the state needs to speed up the payments now, while it can, because it might not be able to in the future. "We don't see any way that given the decline in oil production the state can be expected to meet the increased level of contributions," she said.

The switch to level dollar was a long-term process, following years of debate in which the governor's office and the Legislature frequently agreed that the unfunded liability needed to be addressed, but did not do so. Alaska's unfunded liability is roughly the same size as Detroit's, as is its population. The similarities end there, however, as Detroit simply doesn’t have the money to meet its retirement obligations and has filed for bankruptcy protection.

Seeking $2 billion from Legislature

Alaska, on the other hand, has reserve funds of more than the total unfunded liability of $12 billion, but has been unwilling to make extra deposits beyond what was immediately required by law.

A resolution earlier this year asked the Legislature for $2 billion, over four years, which would significantly reduce the unfunded liability. It wasn't granted.

Erchinger said the ARM Board members have received questions about why they haven't done something about the unfunded liability, but they have few tools available. Only the legislature can appropriate money, she said.

"What we can do is say as loudly as we can, 'The only way to solve this problem is to get money into the system as quickly as possible so that the interest earnings can help cover the cost of pension and benefits," she said.

The ARM Board confronted that inaction with the move to level dollar, but it did so over the objections of two members of Gov. Sean Parnell's administration that sit on the board. Commissioner of Administration Becky Hultberg and Commissioner of Revenue Bryan Butcher both opposed the change in a 2012 vote.

The state needed the flexibility of having those cash reserves available for needs, Hultberg said. She assured the board that Parnell was committed to the state meeting its retirement obligations.

Since then the state has cut oil taxes, reducing its revenue. Gov. Parnell has said that those reserves will now be needed to fund budget deficits, which began this year.

Stakeholders meet Thursday

With the ARM Board still trying to get more money into the retirement trust funds, they've organized a stakeholder meeting for Thursday Aug. 8 in Anchorage, where they hope to build support for the additional expense required of the switch to level dollar and finding other ways to strengthen the system, Trivette said.

"We've been trying for some time to engage in dialogue with the administration and other stakeholder groups about the kind of impact these retirement obligations are going to have in the future," he said.

Expected at the stakeholder meeting are legislative leaders, Parnell budget officials, union, city and school representatives, among others.

Erchinger said she and other board members hope the meeting will help provide information about just how big the problem is to those who can advocate for solutions -- if they agree about the immediacy of the problem.

"If we really do have the significant problem that the ARM Board thinks we do, that it means that these contributions that are being required will overwhelm the state budget, if we don't inject funding into the system sooner rather than later," she said.

Contact Pat Forgey at pat(at)alaskadispatch.com