In 2005, Alaska was one of the first state governments to implement significant pension reform, phasing out the traditional defined benefit plan for employees hired on or after July 1, 2006 in favor of a defined contribution plan. The reasons Alaska made this overhaul are the same set of reasons that are prompting increasing numbers of state and local governments to consider doing what Alaska did: rising pension costs and growing unfunded liabilities.
In 2005, Alaska found itself with rapidly growing pension costs for the state Public Employees Retirement System (PERS) and the Teachers Retirement System (TRS). From 2003 to 2005, Annual Required Contributions (ARCs) to PERS had grown nearly four-fold, from $63.3 million to $234.4 million. Worse, under the old system, employees were not sharing any of the costs of this burden. Consequently, Alaska legislators failed to make the full ARC towards PERS beginning in 2005, and has failed to make the full ARC towards PERS ever since. This is similarly true with the TRS, which from 2003 to 2005, also experienced rising pension costs, from $37.8 million to $152.2 million. When the pensions for PERS and TRS are coupled with their respective state retiree health care plans, the costs skyrocketed even further. Taken together, the systems faced approximately $4.5 billion of unfunded liabilities.
In light of this, Alaska transitioned to a cost saving defined contribution plan that shares costs between employees and Alaska taxpayers. The plan works as follows: employees hired on or after July 1, 2006 contribute 8 percent of their pre-tax paycheck towards their retirement plan. This contribution is then matched with a five and seven percent contribution from employers, respectively, for general employees and teachers. The true extent and impact of this reform is unlikely to be felt for years, as the reform only applied to new hires.
Despite this significant overhaul, Alaska continues to deal with the same problems that prompted the reforms. On December 5th, Alaska Governor Sean Parnell issued a press release announcing a fiscal year 2015 plan to use $3 billion of state savings to pay down a portion of the state pension systems now $11.9 billion unfunded liability. This year, Alaska had to contribute $600 million towards its state employee and teacher defined benefit pension systems; next year, Alaska projects it will have to contribute $700 million. Should legislators approve of this measure, Alaska would be able to cap annual payments towards the pension systems (and unfunded liabilities) at $500 million annually, giving state budgeters a bit of breathing room.
Paying down unfunded pension liabilities is a long and arduous process, which is why state and local governments have been content kicking the proverbial can down the road instead. As opposed allocating funds towards services taxpayers need or freeing budget surpluses in the form of tax cuts, paying down unfunded pension liabilities is much harder to do and easier to ignore.
Even so, Alaska is in a better situation than many other pension systems to do just that. However, seven years after pension reform, Alaska continues to deal with rising costs and growing unfunded liabilities. For state and local governments that have yet to take seriously into consideration the option of phasing out the costly, assumption-riddled defined benefit model, the longer they wait, the bigger the problem will be.