State employees get two kinds of benefits after they retire: pensions and non-pension benefits, like health care. Across the country, most state governments face growing challenges funding those benefits. Compared to other states, though, Alaska is an outlier.
Only five states have fully funded pensions, and no state is anywhere close to fully funding the non-pension benefits it owes. Although Alaska owes a lot to both accounts, it's in the bottom third among all states for funding pensions and in the top percentile for funding non-pension benefits. No other state in the country is in that position.
Those figures come from a February report on state retirement systems from the Pew Center on the States that shows a $1 trillion gap nationally between what states promised their current and former employees and the money they actually have on hand to pay it.
Like most investment funds, state retirement systems were hit hard by the recession, but the Pew report only examines the states through fiscal year 2008, which ended before the full impact of the economic collapse could be felt. Therefore, the report called its conclusions "conservative." State retirement systems took a real beating in the 2000s, partially because of recessions but largely, according to Pew, because of "states' own policy choices and lack of discipline." For instance, after seeing big gains in the 1990s, many states got in the habit of underfunding pensions, even as they expanded benefits and offered cost of living raises.
Some states now have it really bad. Illinois is only 54 percent funded, leaving it with a $54 billion bill to pay. Some states are doing better. New York actually has a $10 billion surplus in its pension account, but has yet to pay any of the $56 billion it owes in non-pension benefits. Arizona is the only state to get high marks from Pew on the state of both its pension and non-pension benefits, but even Arizona owes more than $8 billion. Pew pats Florida, Nebraska, Iowa and Georgia on the back for recent reforms.
The "bill" is what is known as the "Actuarially Required Contribution," or the amount actuaries recommend paying into a plan in a given year to make sure benefits will be fully funded 30 years out. While states can get behind by not paying that amount, actuaries can also be off by guessing wrong on investment returns or salary growth.
Between 1999 and 2008, the pension bill in Alaska grew 86 percent, but the money on hand to pay for it only increased 35 percent. In 1999, the pension system was more than fully funded. By 2008, it was only about three-quarters funded, leaving a $3.5 billion gap.
Because of that, Pew said it had "serious concerns" about how Alaska was managing its pension fund, a black mark given to 18 other states. (The report gave 15 states a grade of "needs improvement" and gave 16 states the highest mark of "solid performers.") On non-pension benefits, though, Alaska is one of only nine "solid performers."
Colorado and Kentucky share Alaska's unique situation, but neither funds non-pension benefits as well as Alaska. Arizona is the only state that outdoes Alaska, but it's also one of the few states to fund pensions at or above 80 percent.
Alaska's unique situation is the result of two decisions, according to Pew.
The first is a law requiring the state to pay 22 percent of payroll for the Public Employees Retirement System and 12.6 percent for the Teachers Retirement and Pension System. As the report notes, this makes Alaska "one of the few states to provide ongoing funding for non-pension long-term obligations," especially because the state requires itself by law to make up any difference between employer contributions and the amount set by actuaries.
Alaska was one of only four states that paid the full amount its actuaries required for non-pension benefits in 2008, along with Arizona, Maine and North Dakota. In 2008, Alaska contributed the sixth highest amount of any state into its pension plan, 106 percent.
That law only covers what the state contributes, though, a plan known as defined benefits, in which employees are guaranteed certain benefits when they retire. Almost all of the states use defined benefits plans to manage their employee retirement packages.
The second decision that led to Alaska's situation: The state has been underpaying its pensions bill.
According to the report, Alaska paid in full in 2000, but in 2005 contributed only 47 percent. As of fiscal year 2008, the Alaska pension system was only 76 percent funded.
A lot changed from 2005 on. Since then, Alaska has authorized a pension obligation bond up to $5 billion to help pay the bill and stopped guaranteeing health care to new employees between retirement and eligibility for Medicare, according to the Pew report.
Senate Bill 141, passed in 2005, placed new employees on a different system, a defined contribution plan. In defined contribution, the state pays a set amount into individual investment funds, like a 401(k), placing retirement accounts at the whim of the markets.
SB 141 continues to draw opposition. At least three bills in the current Legislature would repeal the defined contribution plan, but those bills remain stalled. A major question is whether the switch is making it harder for the state to compete for good employees.
"One of the challenges facing us in this conversation is bringing the data back to the table and showing what the facts are rather than the emotions," Pat Shier, executive director of the Alaska Public Employees Retirement System, told Pew in a September 2009 interview.