Is there a TRS & PERS Crisis?

December 2004

According to some policy makers, an additional tier is necessary for PERS and for TRS because the systems are in bad shape.

However, current reports show that FY ’03 earnings were over 15%.  Further, the average earnings over the past decade were over 9%.  Both of these earnings exceed the assumed rate of return of 8.25% for PERS and for TRS.  FACT:  The three-year period of negative returns was during the decade of 9% average return on investments.  The “bear market” years were balanced with seven years of positive returns and then some!

For FY ’03 the funding ratio with medical is 64%.  This is a great improvement over the ratio of one year ago.

What really caused the decrease in the funding ratio that led to the TRS/PERS “crisis”?

For FY ’03, a new accounting requirement to recognize deferred losses caused a one-time, 15%, increase in the employee contribution rate recommended by Mercer to fund TRS at 100% for 25 years.  FACT:  This is a paper “loss.”  Neither system is broke, but in quite good shape considering Alaska is one of only four state systems which pre-fund health care.

In the early 1990’s the actuaries, Mercer, assured the Legislature that retirement incentive plans “would have a neutral effect on the funding ratio.”  FACT:  RIP’s add liability.  In 2003 Mercer changed their story and informed the Legislature that the retirement incentives had increased the liability to TRS and PERS and caused a decrease in the funding ratio.

For the 1995 assumptions for TRS and PERS Mercer chose to use the 1985 Mortality tables rather than the 1994 tables, the most current available.  The 1994 tables weren’t used until the 2000 valuation, causing a greater impact than if it had been spread over eight (8) years.

During a presentation to the Senate Finance Committee in the spring of 2004, Mercer used a graph to show the fund ratio since 1979.  The graph showed that both PERS and TRS had funding ratios of approximately 64% in 1979.  From 1979 to 1998 neither the State of Alaska nor the school district s had to increase contributions by 5% a year for four consecutive years to “rescue” TRS and PERS.  FACT:  Using prudent investments and maintaining good management the trustees enabled the systems to grow to fund ratios in excess of 100% by 1998.

In 1998 the State of Alaska urged the trustees of TRS and PERS to reduce the employer contribution rate because the fund ratios were over 100%.  The TRS trustees did not take such action, but PERS dropped the rate to 6.5% when the actuarial assumptions were based on a twenty-five year period of 11.5% contributions.  FACT:  Mercer never informed the Legislature that drops in the contribution rates would adversely affect the systems.

The state’s health care insurance costs have increased at rates above Mercer’s actuarial assumptions and the added costs have affected the funding ratio.  Why is the state experiencing greater rate increases than the NEA-Alaska Health Trust?  Participants use the same medical providers?   FACT:  The Administration has done little to manage the health plan, contain costs and provide better care for the participants.

Is there a real crisis?  No.  TRS and PERS have been here before (check out the funding ratio in 1979) and with prudent management brought the system to over a 100% funding ratio.  Poor performance by the actuary should not be visited on the present and future employees.

What is the real motive?  Some policy makers are determined to get out of the retirement business and the health insurance business by putting the burden on the employees.  In spite of the statements of Mr. Boko and Mr. Solie of the Tier Committee and other TRS Trustees, that a defined contributions plan would not meet approval, the Administration has gone over budget with Mercer and DeLoitte & Touche, two paid consulting firms, to present two tier options with defined contributions components.  FACT:  This is bad public policy and could lead to many retired employees needing extra support from the state in their elderly years – a time when they should live with a sense of peace and security.