Senate Bill 88 would expose Alaska to significant additional costs

Alaska Senate Bill 88 would re-open the defined benefit (DB) pension systems for new hires and allow all teachers and public workers currently in the defined contribution (DC) retirement plan to use their DC account balances to purchase past service in the DB pension plan.

This “past service” purchase mechanism puts an enormous amount of risk on the state in year one and beyond. Despite adjustments to retirement eligibility, this move could realistically add $9.6 billion in additional costs to future state budgets and reintroduce Alaska to significant pension risk—the same risk that generated over $6 billion in state pension debt and spurred the 2005 pension reform that closed Alaska’s defined-benefit pension plan to new hires in the first place.

SB 88’s estimated costs are dependent on a flawed discount rate

The claim that SB 88’s proposed changes would not require any additional state funding relies on the pensions’ current investment return assumption being met. Alaska’s pension plans would need to achieve overly-optimistic 7.25% annual returns on investments for decades to avoid additional costs.

• Overly-optimistic investment return assumptions were a major contributor to the $6.7 billion debt that is still owed on Alaska’s legacy pension plans, the Alaska Public Employees’ Retirement System, PERS, and Teachers’ Retirement System, TRS.
• Nationally, the average assumed rate of return used by public pension systems is below 7%, so Alaska’s current return rate assumption is rosier than most other states.
• Capital market forecasts by most financial experts suggest pension systems should expect investment returns to come in closer to 5%-6% for the next 10-to-15 years.
• The discount rate is used when pricing the amount needed from employees to purchase their “past service.” The plan earning under 7.25% or dropping that assumed rate would add tens, if not hundreds, of millions of dollars in new unfunded liabilities.

SB 88 could cost Alaska an additional $9.6 billion over the status quo

Actuarial analysis of Alaska PERS and TRS that anticipates realistic economic conditions and market stress over the next 30 years shows SB 88 likely exposes the state to significant additional costs.

Bottom Line

Senate Bill 88 would likely cost Alaska more than $9 billion in the coming decades. Since most public employees leave their positions before being fully eligible for their pension benefits, this could be very costly legislation that only benefits a relatively small group of workers.

Read the full backgrounder here.