Economy and rising health care costs raises unfunded liability of state pension

Recent News — By on May 15, 2010 at 2:07 PM

By Kirsten Adams

After an independent review of Alaska’s public retirement systems revealed more than $10 billion in unfunded liabilities, state officials said the steady annual increases in were caused by a combination of unhealthy markets and rising health care costs.

Jack Kreinheder, Senior Analyst with the Office of Management and Budget, said the latest billion-dollar increase in unfunded liabilities to the Public Employees Retirement System and Teachers Retirement System was largely caused by the poor economic climate of the past few years.

But while the markets could be blamed for the most recent increase in unfunded liabilities for PERS/TRS, Kreinheder said skyrocketing health care costs have also played a central role in increasing liabilities over the life of the program.

“The biggest contributing factor to the increase in the unfunded liability was related to the big declines in the investment market in 2008 and 2009, and that has already been factored in and it’s a positive trend in terms of keeping the unfunded liability from increasing,” Kreinheder said. “Of course, that could be offset by higher than expected increases in health care costs. That’s probably the biggest concern, and a long term trend.”

Director of Management and Budget Steve Hildebrand said the liabilities had historically been increasing at significant rates, but there were no estimates on the size of the unfunded liability by the time the state is scheduled to finally pay off the obligation.

The evaluation of the future of PERS/TRS, conducted by Buck Consultants, predicted recovering markets would help Alaska to steadily increase funding of the retirement liabilities until they are fully funded in 2034. Only two weeks after Buck released the report, however, Dow Jones industrials plummeted by 1,000 points, a record breaking loss for a single trading day that demonstrated the financial markets are not yet as stable as projected.

Kreinheder said decreasing mortality rates and increasing health coverage costs might also be a formidable obstacle in reducing the hefty retirement obligations. Retired public employees are living longer and union insurance demands are higher than ever before, and Kreinheder said those costs were an unpredictable but critical factor in future PERS/TRS obligations.

“We’re paying an amount that, all things being equal, will pay off the unfunded liability over time barring another major downturn in the investment markets, which is really the major risk,” Kreinheder said. “Certainly the unfunded liability could increase in the next few years, but hopefully some of the efforts at health care cost containment might help with that. Will the recovery of the investment markets be able to offset rising health care costs? That’s unknown.”

We previously reported that PERS/TRS had an unfunded liability of $24 billion. The total liability of the systems is $24 billion, and $10 billion is unfunded.

Kirsten Adams is an investigative reporter with the Alaska Watchdog. She can be reached at kadams@alaskapolicyforum.org.

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