Reality or Hoax: The Alaska Public Employees Retirement System “Crisis”
3 May 2006Despite everything you may have heard in the last year about the “unfunded liability crisis of the public employees retirement system,” and despite everything you may have heard about how the debt has grown to billions of dollars and is increasing year after year, the facts indicate that there may be no financial crisis at all. An examination of the same facts that have been available to everyone appears to indicate that the “unfunded liability crisis” may be nothing more than an empty, mean-spirited, politically motivated manipulation of the media message. Worse yet, Senate Bill 141 which destroys the public employee retirement system and replaces it with a vastly inferior retirement savings account and a vastly inferior health insurance plan, is totally unnecessary. Let’s just take a look at the existing facts, the facts that have been generated by the actuarial experts hired by the state.
Before we go on, I want to emphasize how important this issue is because this is not an issue that just affects the health and welfare of future retirees, this is an issue which ultimately will affect every single Alaskan resident. Senate Bill 141 destroys a pension system which allows Alaska public employees to retire with dignity and replaces it with a glorified savings account which may or may not have much in it when the employee is ready to retire. The retiree health plan which is tied to the new retirement system is complicated, expensive, and may not serve the retiree well. When retirees under the new plan run out of money and do not have adequate health care, who will they turn to? They will turn to their families, probably their children, to help support them, and they will turn to the state, probably Medicaid. And remember, public employees in the state of Alaska do not even have Social Security, so there is no safety net.
Another reason why ultimately every Alaskan will be affected by the destruction of the existing public employees pension system is that recruitment for thousands of key public employee positions will become vastly more difficult than it is currently. Most teachers in Alaska are currently recruited from outside. Why would they come to a state where they are not offered Social Security and where they are not offered a pension plan? Where will the police and firefighters and public health nurses come from in the future? Why would they come to Alaska where they will receive an inferior retirement plan that is hardly more than a savings account, and where they will not even have the safety net of Social Security? Once the full impact of SB 141 becomes widely known, it will become clear that the public employees in Alaska have less retirement security than public employees in any other state. Public safety will suffer. Education will suffer. Public health will suffer. And everyone in Alaska will be impacted.
So, what are the facts? The single most revealing document that I have found to date has the informative but ungainly title of, State of Alaska Public Employees’ Retirement System Actuarial Valuation Report as of June 30, 2004 As Approved by the Alaska Retirement Management Board on October 12, 2005. The document was prepared by Mercer Human Resource Consultants who have been, until recently, the actuarial consultants for the public employees retirement system, for the state of Alaska. Note: there is an equivalent document for the teachers retirement system, but I am focusing on the public employees retirement system since it has about three times as many members as the teachers retirement system.
An actuary is defined as “a person professionally trained in the technical aspects of pensions, insurance, and related fields, who estimates how much money must be contributed to an insurance or pension fund in order to provide future benefits.†In the last few months, the state has replaced Mercer with Buck Consultants, another actuarial firm. Buck consultants has reviewed and reported on the assumptions used by Mercer in 2004, and for the most part has found these assumptions to be accurate and reasonable. Let’s move on to some of the most important findings in the Mercer report.
Page 2 of the Mercer report includes a bar chart entitled, PERS Funding Ratio History. The funding ratio is the ratio of assets to liabilities, so for example, if a pension fund only has enough assets to meet half the liability, then the funding ratio is 50%. If a pension fund has enough assets to meet all its liabilities, then the funding ratio is 100%.
The bar chart on page two of the Mercer report looks like a roller coaster ride. In 1979, the first reported year, the funding ratio was at 68%. The funding ratio rose steadily until by 1986 the funding ratio was 102%. In other words the pension plan had more assets than liabilities. There was no unfunded liability because the plan was designed to reduce unfunded liabilities and come into balance, the balance of assets and liabilities. Between 1986 and 1991 the funding ratio declined to a low of 88%, but then it shot back up again and by 1996 the funding ratio was 106% where it happily stayed until 1999. By 2004, the last reported date on this bar chart, the funding ratio had fallen to 70%. Note that 70% is still higher than where the funding ratio started in 1979 at 68%. Note also that each time the funding ratio declined, it corrected itself until there was a balance between assets and liabilities. This is exactly what a successful pension plan is supposed to do. Now let’s see what the projections are for the balance of assets and liabilities in the future.
On page 31 of the Mercer report is another bar graph entitled Projected Funding Ratios. This bar graph starts in the year 2004 just where the previous bar graph left off, and continues to the year 2030. Here is what this bar graph shows: the funding ratio drops from 70% in the year 2004 to about 67% in the year 2007. And beginning in 2008 something quite extraordinary happens–the funding ratio begins to steadily climb just as it has several times in the history of this pension fund, and just as it is designed to do. By 2014 the funding ratio climbs to about 75%. By 2019 the funding ratio is over 80%, and by 2020 the funding ratio is around 90%. Finally, by 2029, the funding ratio is balanced at 100%.
In other words the actuarial experts hired by the state of Alaska to analyze the public employees retirement system tell us that there is no unfunded liability crisis whatsoever, and that using reasonable assumptions, assets will balance with liabilities on or before the year 2030. I am not aware of anyone who has supported Senate Bill 141 and the destruction of the public employees retirement system referring to these projections. They have been entirely ignored by the media. But these are the only projections available going into the future and they clearly show that this year and next year the unfunded liability bottoms out, and then over the next 25 years there is a steady accumulation of assets that exceed the accumulation of liabilities until about the year 2030 when liabilities are balanced by assets. This is what the public employees retirement system was designed to do and this is what the actuaries tell us it will do. Where is the crisis?
Lawrence D. Weiss Ph.D. M.S.
Executive Director, Alaska Center for Public Policy
May 16th, 2006 at 6:13 pm
Who stands to benefit from 141? How will they benefit?