Pension changes in House Bill 22 and Senate Bill 35 threaten Alaska’s budgets

Alaska House Bill 22 and Senate Bill 35 would re-open a defunct pension plan for public safety workers and allow police and firefighters hired after 2005 to use their defined contribution (DC) benefits to buy their way in. Despite claims that the change would be cost-neutral, this move could realistically add close to $1 billion in additional costs to future state budgets and reintroduce the state to significant pension risk—the same risk that generated over $5 billion in pension debt and spurred the 2005 reform that closed the defined-benefit pension plan to new hires.

HB 22/SB 35 costs are dependent on a flawed discount rate: The claim that the proposed changes will not require any additional funding relies on the pension’s current investment return assumption. Alaska PERS would need to achieve overly-optimistic 7.25% annual returns on investments for decades to avoid additional costs to the state.

• Overly-optimistic investment return assumptions were a major contributor to Alaska’s $5.1 billion debt still owed on the legacy pension plan.
• The average assumed return used by public pension systems around the country is now just below 7%, so Alaska PERS’s current assumption is rosier than peers.
• Capital market forecasts suggest returns closer to 6% for the next 10-15 years.

HB 22 and SB 35 could cost the state an additional $800 million: Actuarial analysis of Alaska PERS that anticipates realistic market stress and multiple recessions over the next 30 years shows HB 22/SB 35 likely expose the state to significant potential costs.

Bottom Line: HB 22 and SB 35 could cost Alaska upwards of $800 million in the coming decades. Since public safety employees make up only about 10% of PERS members, this could be a very costly move that only benefits a relatively small group.