The most important thing that Alaska Department of Administration Commissioner Scott Nordstrand would like people to know about the Public Employees Retirement System and the Teachers Retirement System is that benefits are guaranteed under the state constitution, meaning it would take a constitutional amendment for the state to cut benefits in order to control costs.
Nordstrand was speaking to about 50 peninsula residents at the Challenger Center in Kenai earlier this month as part of an effort to separate fact from fiction and explain Gov. Frank Murkowski’s proposed solution regarding nearly $10 billion in unfunded liability in the state’s retirement systems.
“We are not in a crisis, but it will be 25 years from now if we don’t start paying off the money we owe,” Nordstrand said.
Nordstrand started his presentation by explaining the nuts and bolts of the state’s retirement system. Funding for PERS and TRS comes from three sources: employer contributions based on a percentage of payroll, employee contributions and investment returns.
Employee contributions into the plan can not be raised, and return on investment varies from year to year, though the return is projected to be 8.25 percent each year.
So, when the state’s actuarial company found that previous assumptions it made regarding administration of the plan were short, the difference in cost was placed squarely on the shoulders to employers.
However, increases to the rates which employers contribute have not risen as fast as the plans’ unfunded liability. As a result, that unfunded liability has continued to grow 2005 numbers put that liability at $6.9 billion, and Nordstrand said it is “safe to say it’s probably closer to $10 billion right now.”
Nordstrand pointed out that there are 161 employers participating in PERS, and each employer is responsible for covering the cost of employee benefits. The state is responsible only for covering the costs of benefits to state employees.
TRS works a little differently, Nordstrand said, with participating employers contributing to a communal pot.
Nordstrand said three things have been done to begin addressing the unfunded liability. First, the Legislature acted to add new tiers to PERS and TRS to create hybrid retirement plans. Previously established tiers are defined benefit plans, such as pensions. A defined contribution plan works like a 401K, where employee and employer contributions are placed in an investment account.
The hybrid plan creates investment accounts for employees to handle their financial needs for retirement, but health care is covered under a defined benefit plan.
“Defined contribution plans are specifically designed to limit unfunded liability,” Nordstrand said.
The same legislation that created the hybrid retirement plan also effectively repealed the cap of 5 percent by which the board that manages the retirement systems can raise employer contributions. For next year, the board has raised contribution rates to 54.03 percent for TRS employers, and to an average of 39.76 percent for PERS employers. Both increases essentially doubled current employer contributions, and Nordstrand said the reasoning was that employers needed to start paying the debt now, rather than waiting until the system is bankrupt and then searching for a fix.
The only place to find the billions of dollars that would be necessary for such a fix, Nordstrand said, would be the Alaska Permanent Fund.
“I think that would have been the great comeuppance of the system,” Nordstrand said of the political battle likely to take place if the system is not fixed before then.
To aid employers now struggling with the cost of retirement benefits, Nordstrand said Gov. Murkowski has proposed $505 million be placed into the retirement systems by the next Legislature, in effect covering the difference in contribution rates between this year and next.
With extra money flowing in to state coffers from the high price of oil, Nordstrand said, now is an ideal time to start to think about the future.
“We have to pay this money eventually, what better time than now?” he said. “We’ve gotta have a lot of gumption out there politically because we’ll have to pay the extra $505 million for the next 25 years.”
Finally, Nordstrand said, his department, which administers the plans, has taken steps to control the costs of benefits already guaranteed to retirees.
The state recently put the task of providing benefits out to competitive bid, providing some savings to the state. The state now is requiring verification that dependents actually are dependents of beneficiaries, as well as verification that students listed on plans are indeed full-time students. Other savings have come from encouraging the use of generic drugs, and from ensuring that beneficiaries’ families use their primary insurance, if it’s different than the state program.
Will Morrow can be reached at email@example.com.
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