by Ray Matiashowski
June 09, 2004
Cost increases are rarely viewed in a positive manner. Nonetheless, they are a fact of the fiscal responsibility that an employer takes on. Benefits that are promised must be paid.
The state retirement systems are defined benefit plans, based on formula and ruled by Alaska law. The state cannot retroactively reduce benefits for members hired prior to the date of a plan benefit change. Yet, the state is required to assume the risk of lower than expected earnings and higher than expected costs.
What accounts for the increased costs?
The present situation is a result of a "perfect storm" between lower than expected investment earnings and, simultaneously, increasing health care costs. The combination of both has a major effect on the rate employers must pay to fulfill obligations they agreed to previously.
A major drop in the investment market took place between April 2000 and late 2002. PERS and TRS investments lost more than $2.2 billion. This was not out of line with losses of similar retirement plans throughout the other 49 states or with private employer retirement plans.
For the 2003 fiscal year, earnings were not negative, but still were only 3.6 percent.
There have been impressive earnings in the past year, but these earnings have only erased a third of the investment losses from the prior period.
To a retirement system, poor investment earnings inevitably mean the employer has to pay more down the road.
At the same time that investment earnings were falling, health care expenses rose sharply. From 1990 through 1998 health care expenses increased an average 5 percent annually. From 1999 through 2004 they rose an average 14 percent per year. Double digit cost increases in health care are expected to continue for some time.
How are the systems' funding levels determined?
In order to determine the funding level and the rates employers pay, an actuarial evaluation is performed by an independent outside actuary. The state retirement systems use one of the largest firms in the United States, Mercer Human Resources Consulting. Each year the system liabilities to retirees and active members are recalculated to bring them up to date. This is a nine-month process. The liabilities are compared with the investment earnings and projection of future earnings (including projections of how things are affected by the latest good investment results).
Rates will likely continue to go up in each of the next several years. There will be a significant cost increase in 2005 totaling about $100 million in employer contributions.
There are well-documented reasons of how we got where we are today and what must be paid to meet the legal obligation. However, the administration and the boards of directors for the retirement systems have taken on the mission to restructure benefits for new employees, in order to further control future costs.
Legislation will be recommended in 2005 to make changes that will help control employer costs and yet allow for adequate recruitment and retention of new employees.
These are difficult times, there are great challenges and no easy answers. But rest assured that this administration and the PERS and TRS boards are committed to maintaining a high quality, well funded retirement system that meets the needs of Alaska employers and employees.
Note: Ray Matiashowski is the Commissioner of the Alaska Department of Administration.
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