Good afternoon, Chairman Weyhrauch and members of the House Ways + Means committee. My name is John Alcantra and I serve as the Government Relations Director for NEA-Alaska. NEA-Alaska represents more than 12,800 public school employees throughout Alaska. I would like to thank the committee for taking their valuable time during another glorious Alaska summer to have this and subsequent meetings on the PERS and TRS issue.
This afternoon, I will be a listening participant to the invited testimony of experts. I trust the presentations may answer some of the questions and address some of the suggestions I will put forth in this public testimony.
I will try to remain cognizant to the scope of this meeting, and not dwell on the pitfalls and problems of the legislation passed during special session (Senate Bill 141). With that in mind I offer the following suggestions:
Calculate past service cost of each tier:
Where is the true liability? Common sense suggests the benefits provided in PERS and TRS tier 1 may produce the majority of the liability. If you separate the tiers and calculate past service costs independently for each tier, is there still liability in the PERS tier 3 and TRS tier 2 retirement packages?
Determine pension versus medical costs:
NEA-Alaska believes that up to 70% of the liability rests in health care and skyrocketing medical costs. Is it factual that Alaska can’t afford to pay its public employees a defined benefit pension or is it the health insurance component that is unaffordable?
Look closely at the actuarial assumptions:
It is worth noting that Mercer is using a methodology that only 11-16% of public systems utilize to determine liability of the systems. Of further note is the fact that the method being used leads to higher liability costs.
It has been NEA-Alaska’s request since May 2004, that the assumptions being used match the experience in Alaska.
Mercer’s Assumptions
Alaska’s Experience
Inflation will be 3.5% 2.6% over any ten year period; PF uses 3%.
Wage Growth 3.75-4.5% 1.36%
Investment return 8.25% 9% over any ten-year period
Health Care Costs 12.5% - 5% 8% (7.5% according to Esuchanko)
Assumptions attached to Alaska’s reality could definitely lead to a different liability amount.
If you address inflation, Mercer assumes a 3.5% inflation rate. Alaska’s experience is 2.6% over any 10 year period in our state’s 46 year history. The Alaska Permanent Fund, one of the most respected funds in the world, currently valued at over $31 Billion dollars, uses the more accepted 3% inflation figure. So what is a ½ percent? Over 20 years it is $800 million dollars! Over a 30 year spectrum (to match retirement eligibility) it is well over a billion dollars!
How about wage growth? Mercer uses a 3.75 to 4.5% figure. How our members wish this was true. Since 1989 teacher salaries have grown by 1.36% per year and the largest growth in the past seventeen years was the 3.23% wage increase obtained this past year. How much does this assumption change the unfunded liability?
Process Recommendations:
NEA-Alaska strongly recommends the state procure the services of an independent actuary. Advice provided by Mercer brought Alaska’s retirement system from over funded three years ago to a liability of about $5.7 billion today! We can’t revise the current system until we have confidence that the actuarial assumptions are valid.
Indeed, NEA-Alaska believes the State should research whether Mercer owns part of the liability.
A final recommendation would be a request that a group of stakeholders be brought together to review and analyze data provided by an independent actuary. This analysis would assist the Ways + Means committee on a final work product.
Again I appreciate the opportunity to provide this testimony. NEA-Alaska and our members look forward to future opportunities to participate.
