In the world of retirement plans, it is the "Perfect Storm," and its consequences are sending shock waves through school districts and local governments statewide, as well as the state of Alaska.
Several forces are converging this year on the big public employee retirement programs managed by the state which have resulted in huge increases in the contributions employers must make.
Most significant are the effects of big investment losses during three years of bear markets, from 2000 to 2003; medical costs rising faster than had been anticipated; and the fact that retirees are living longer than they used to.
The Alaska Public Employees Retirement, or PERS, and Teachers Retirement programs, or TRS, along with three smaller funds for judges, the National Guard and elected officials, have combined assets of about $12 billion. During the 2000-2003 bear market, the PERS and TERS funds together lost $4.3 billion in value, according to Melanie Millhorn, director of the state Division of Retirements and Benefits.
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The figures are listed in financial reports pubished June 30, 2003, Millhorn said.
Financial markets have begun to recover but it will take a while for the PERS and TRS retirement programs to make up those losses, Millhorn said.
As of last June, the PERS fund was under water $2.9 billion in terms of its ability to meet future obligations, while TRS was $1.4 billion behind.
"These are total liabilities verses the total market value of assets available to cover the liabilities," Millhorn said. The stock market recovery in the latter half of 2003 will make those numbers look better in the next financial report, to be published June 30, 2004, she said.
Compounding the problem is the fact that health care costs are rising at 10 percent a year or more, and medical costs today constitute about 30 percent of retirement costs being paid out, Millhorn said.
That will increase because the retirement plans for most of Alaska's public employee include generous health benefits for retirees and their dependents. With the state, local governments and school districts trimming staff by offering early retirements, there will be a retirement bulge in the system.
In 2003, 1,730 public employees retired, Millhorn said. Alaska has a gold-plated public employee retirement program that guarantees free health benefits for many retirees. This has since been scaled back, but many of the public employees now retiring were enrolled in the more generous pre-1991 "Tier I" benefit programs.
Finally, people are living longer, on average about 2.7 years, she said. That translates to larger obligations for the retirement fund.
All that combined spells big problems for the state, local governments and schools over the next few years. That's because public employers will likely have to substantially increase their contributions to retirement plans for the next few years to soften some of the investment losses.
Millhorn said increased employer or even employee contributions can't really make up for the stock market losses in the short term because investment earnings typically make up 75 percent of the money coming into retirement plans, with employers and employees contributing the remaining 25 percent.
Unless contributions are raised to ruinously high levels, Alaska public employees will have to hope that long-term cycles in the stock market will even things out.
Kevin Ritchie, executive director of the Alaska Municipal League, said that consultants to the state retirement board say public employers would have to double their contributions to the retirement fund to as much as 25 percent of payroll costs for the PERS fund and 35 percent for TRS, so the funds will be able to pay future liabilities.
Even more modest increases, which the retirement fund board will likely recommend when it meets April 19, will be tough to deal with, he said.
Millhorn believes the system will eventually even itself out. "Retirement and benefit plans are planned over a 25-year period, and we're quite confident that over time and ups and downs of the market will make it whole," she said.
Retirees shouldn't worry about not getting their checks or medical costs paid, however. Court cases have established a legal entitlement for retirees. Public employers are legally obligated to make their contributions unless they go bankrupt, which means the state and other public employers will make up the difference.
Ultimately the state's other assets, including the $27 billion Permanent Fund, are backups for the retirement system.
One bit of good news is that Alaska's public retirement systems are in better shape than many others around the nation because future costs of health benefits are fully factored into the calculations of how much money will be needed.
This isn't true for most of the other public employee retirement systems around the country, Millhorn said.
The immediate pain, meanwhile, will be felt by state and local governments, schools, and ultimately taxpayers.
This year the expected additioinal cost is estimated at $100.8 million, Millhorn said, and that assumes the state retirements board recommends an expected 5 percent increase in employer contributions for the PERS system and something similar for the TRS system.
School districts will bear $34 million of the $108 million, municipalities $21 million, the university will shoulder $7.3 million and state government's share will be about $38 million.
It's a tough year for this to happen. The state itself faces a $500 million budget gap and municipalities and schools across the state are struggling financially.
"It's a huge hit just for municipalities, not including schools," said Kevin Ritchie, executive director of the Alaska Municipal League.
The budget impact on the Municipality of Anchorage could be in the range of $18 million to $20 million over the next three years, he said. Since Anchorage has a cap on property taxes and no sales tax the only option is to cut spending.
It gets worse for small communities, Ritchie said. The city of Wrangell, in Southeast Alaska, may have to increase its property taxes from 12 mills to almost 16 mills just to pay the increased contribution for city employees. The city will also have to pay increased costs for its schools on top of that.
Some state legislators are sympathetic to the problem, and the House Health, Education and Social Services Committee introduced a bill Feb. 24 that would appropriate $46 million in state general funds to the state PERS and TRS systems.
House Bill 521 is in the House Finance Committee, which is wrestling with all other demands as it completes the House version of the state's Fiscal Year 2005 budget.
