Friday, February 19, 2010

Pew Center On The States Releases "The Trillion Dollar Gap" Report On State Pensions And Retiree Benefits; Where Does Alaska Stand?

A new 66-page report from the Pew Center on the States entitled "The Trillion Dollar Gap: Underfunded State Retirement Systems and the Road to Reform", shows why states must take strong action now — or taxpayers will suffer later. National report from the New York Times and the Wall Street Journal, and CNNMoney; Alaska media did not report on this story until February 21st, when Dermot Cole published an analysis in the Fairbanks Daily News-Miner. CNNMoney points out that because the data is from 2008, the economic crash towards the last quarter of that year is not fully reflected, meaning the report could be over-optimistic (nationwide, pensions are estimated to have lost 25 percent of their value because of the crash).

According to the executive summary, the problem is that there is a trillion dollar gap between what states have promised vs. what has been funded. While states have set aside $2.35 trillion to pay for employees’ retirement benefits, the price tag of such liabilities is estimated to be at $3.35 trillion. The deficit reflects states’ own policy choices and lack of discipline:

-- Failing to make annual payments for pension systems at the levels recommended by their own actuaries;
-- Expanding benefits and offering cost-of-living increases without fully considering their long-term price tag or determining how to pay for them; and
-- Providing retiree health care without adequately funding it.

Key Findings:

-- In 2000, just over half the states had fully funded pension systems. By 2006, that number had shrunk to six states. By 2008, only four — Florida, New York, Washington and Wisconsin — could make that claim.
-- In eight states — Connecticut, Illinois, Kansas, Kentucky, Massachusetts, Oklahoma, Rhode Island and West Virginia — more than one-third of the total pension liability was unfunded. Two states — Illinois and Kansas — had less than 60 percent of the necessary assets on hand.
-- Nine states were deemed solid performers, having enough assets to cover at least 7.1 percent — the 50-state average — of their non-pension liabilities. Only two states — Alaska and Arizona — had 50 percent or more of the assets needed.
-- Forty states were classified as needing improvement, having set aside less than 7.1 percent of the funds required. Twenty of these have no assets on hand to cover their obligations.

Pew’s analysis is based on data from states’ own Comprehensive Annual Financial Reports, pension plan system annual reports and actuarial valuations. Pew researchers analyzed the funding performance of 231 state-administered pension plans and 159 state-administered retiree health care and other non-pension benefit plans, which include some localities’ and teacher plans. More details on the methodology are published on page 52 of the report. [Ed. Note: Page numbers refer to the page number on the report itself, not the one indicated on your browser.]

Where Does Alaska Stand: The first mention of Alaska is on Exhibit 1, State Funding Pension Levels, on page 4 of the report. Figures are from 2008, the latest available:

-- Latest Liability: $14,558,255
-- Latest Unfunded Liability: $3,522,661
-- Annual Required Contribution: $282,656
-- Latest Actual Contribution: $300,534

The next mention of Alaska is on Exhibit 2, State Retiree Health Care And Other Non-Pension Benefits, on page 6.

-- Latest Liability: $9,146,629
-- Latest Unfunded Liability: $4,032,052
-- Annual Required Contribution: $558,041
-- Latest Actual Contribution: $600,003

Exhibit 5, How Are The States Doing, on page 12 shows that Alaska was graded as one of 19 states with serious concerns on pension obligations. Alaska was dinged for not having made progress towards funding future obligations. Dermot Cole points out that Alaska pension liabilities grew by 86 percent between 1999 and 2008, while assets grew by 35 percent during that time, which Pew evidently considers not to be "meaningful" progress. However, Alaska was graded as one of 9 states as a solid performer in retiree health care and non-pension benefits.

Exhibit 8, Laggards In State Pension Funding, on page 17 show that Alaska, at 76 percent, is one of 21 states that had funding levels below the 80 percent mark. Many experts in the field, including the U.S. Government Accountability Office, suggest that a healthy system is one that is at least 80 percent funded.

On pp 29-30, the following is written about Alaska:

"Several of the states that pay the full amount required each year for their pension systems have statutes or even constitutional requirements that dictate this practice...In Alaska, where many employees are still on a defined benefit plan, employer contributions are set in statute at 22 percent of payroll for the Public Employees Retirement System and at 12.6 percent for the Teachers Retirement and Pension System. Funding contributions go both to pensions and retiree health care, making Alaska one of the few states to provide ongoing funding for non-pension long-term obligations. When the statutorily set employer contribution rates fall short of what actuaries require, another Alaska law requires the state to make up the difference.

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