Alaska Supreme Court Hears Case Over Benefit Tiers

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In the last decade, Alaska has overhauled its pension system by shifting public workers out of a traditional pension system and into a 401(k)-style system.

But another important change has, until now, flown largely under the radar. Alaska’s public employees used to be able to leave their jobs and come back later while still qualifying for the same benefit “tier”.

But the state changed that rule, so public employees who leave and come back can no longer be reinstated under the same tier. In essence, they have to start from square one again.

The state’s Supreme Court is now considering the legality of the change.

More from Juneau Empire:

Three justices of the high court traveled to Juneau Tuesday to hear grievances about a former state worker who, due to the law change, would be prevented from receiving the same level of retirement benefits as before if he returned to state employment.

Attorney Jon Choate, who along with his father attorney Mark Choate represents Peter Metcalfe, says the state of Alaska “broke its promise” to Metcalfe and as many as 85,000 former Public Employees Retirement System (PERS) members when it took away their ability to be reinstated at the same tier level they had when they left state employment.

“If the state makes a deal that lasts the lifetime of a public employee, the state doesn’t get to argue later, ‘Well, I really regret making that deal, it’s too expensive,’” Jon Choate said during oral arguments held at the state courthouse in downtown Juneau. “… Changing health care costs are a significant concern, but they don’t trump constitutional protection.”

Metcalfe is arguing that the state broke its contractual obligation to workers when it pared back benefits and closed off certain tiers to new hires.

The case is Peter Metcalfe v. State of Alaska.

 

Photo credit: “Flag map of Alaska” by 2002_Winter_Olympics_torch_relay_route.svg: User:Mangoman88, using Blank_US_Map.svg by User:Theshibboleth – 2002_Winter_Olympics_torch_relay_route.svgFlag_of_Alaska.svg. Licensed under Public Domain via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Flag_map_of_Alaska.svg#mediaviewer/File:Flag_map_of_Alaska.svg

Campaign Ad Puts Pensions In Play In Alaska Senate Race

 

A new campaign ad has been released in the Alaska’s Senate race between Mark Begich (D) and Dan Sullivan (R).

In the ad (which can be viewed above), Begich claims that Sullivan put Alaska’s general budget at risk when he and the state’s pension fund struck a $500 million settlement with Mercer over allegedly botched actuarial calculations.

Begich says that Sullivan left billions on the table as a result of the settlement, and Alaskan citizens will likely have to pay for it. But is that claim true? FactCheck.org did the legwork and investigated the claim:

A new Begich ad, called “Reprise,” deals largely with the differences between Begich and President Obama. But at one point in the ad, the narrator says Sullivan “let Alaska’s pension fund get ripped off by a New York financial firm, putting the permanent fund at risk.”

Alaska Sen. Mark Begich exaggerates the impact of a $500 million settlement that his Republican opponent, Dan Sullivan, reached as state attorney general in 2010.

The Alaska Retirement Management Board sued its former actuarial firm, Mercer Inc., in December 2007 for erroneous calculations that the board claimed caused the state to underfund its pension system by $2.8 billion. The state sought $2.8 billion in damages and settled in June 2010 for $500 million.

The ad suggests that all residents — not just teachers and public employees — may have to pay for Sullivan’s settlement when it claims that his decision to settle is “putting the permanent fund at risk.” That’s an exaggeration.

Gov. Sean Parnell in June signed legislation that transferred $3 billion from the state’s rainy day fund, known as the Constitution Budget Reserve, into the state’s pension funds. In signing the legislation, Parnell said the infusion of cash will allow the state to reduce future annual pension payments and help preserve the state’s AAA bond rating. Fitch Rating indeed affirmed the state’s AAA rating for its general obligation bonds on Aug. 11.

Parnell notably did not tap the Alaska Permanent Fund. And there was no legislation proposing to take money from the permanent fund to cover pension costs, according to Laura Achee, the director of communications for the Alaska Permanent Fund Corporation.

The conclusion: Alaska’s “Permanent Fund” was not damaged as a result of the Mercer settlement. Begich’s campaign ad, according to FactCheck, is an “exaggeration”.

Video: Pension Reform in Alaska, by Sen. Hollis French

The 2014 Council of State Governments Conference was held last month, but video of the presentations has just started to surface.

There were a handful of presentations on public pension topics. One such presentation

focused on pension reform in Alaska. The talk was given by Alaskan Senator Hollis French.

The video description reads:

Shortfalls in state-run retirement systems continue to grow, and in the 2012 fiscal year, the gap between promises to state workers and funding in the accounts reached $915 billion. Unfunded pension obligations can have significant implications for a state’s fiscal stability, including lower credit ratings, increased borrowing costs and the diversion of state resources away from other spending priorities like infrastructure and education.

Alaska Fund Sues 13 Banks Over Rate Manipulation

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The Alaska Electrical Pension Fund filed lawsuits yesterday against 13 banks across the world for alleged rate manipulation. The banks include Bank of America, Citigroup and Goldman Sachs. More from Chief Investment Officer:

The Alaskan fund filed a complaint to the Manhattan Federal Court on Thursday, claiming the banks ran a “secret conspiracy” to set the ISDAfix rate at artificial levels from 2009 to 2012, Bloomberg reported. This action caused billions of dollars of investor losses, the fund claimed.

The ISDAfix is used to set rates for interest rate derivatives and other financial instruments.

The pension fund accused the banks of executing rapid trades just before the rate was set, an action referred to as “banging the close”. This caused brokerage firm ICAP, which was also cited in the filing, to delay processing trades until the banks moved the rate where they wanted, meaning it did not necessarily reflect market activity.

All of the defendants either declined to comment or did not respond to Bloomberg’s calls, the newswire said.

From the fund’s court filing:

“This could not have happened without some form of advanced coordination…even if reporting banks always responded similarly to market conditions, the odds against contributors unilaterally submitting the exact same quotes down to the thousandth of a basis point are astronomical. Yet, this happened almost every single day between at least 2009 and December 2012.”

Alaska Prepares, Municipalities Brace for $3 Billion Pension Contribution

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Most of the news coming out about pension contributions lately has centered on states who aren’t paying enough. But this news item is different–this is about a state going above and beyond the call of duty to try and fund its struggling pension system. That state is Alaska:

Moving to preserve the state’s top credit ratings, Republican Governor Sean Parnell signed legislation last month that takes the unprecedented step of tapping Alaska’s budget-reserve account to pay unfunded pension liabilities. It will pull $3 billion from the pool to reduce a $12 billion gap.
Home to the nation’s third-largest onshore oil reserve, Alaska gets 90 percent of its operating budget from crude-production taxes and royalties. It’s been saving oil proceeds for decades for when the wells run dry. Alaska is just one of nine states with top scores from Moody’s Investors Service and Standard & Poor’s, and it’s seen how pension deficits have hurt the credit standing of states such as New Jersey and Illinois.
“A year ago when I went to New York City and spoke with the rating agencies to make sure that we maintained our AAA financial credit rating on our bonds, they identified our unfunded pension liability as the single biggest risk,” Parnell said during a signing of the bill June 23 in Juneau.

In all, Alaska will put $1 billion in its PERS fund and $2 billion in its TRS fund. The system, which sports a funding ratio of just under 60 percent, is one of the unhealthiest in the United States.

It’s already figuring out where to put the PERS money. According to Pensions & Investments, $400 million will go to international managers, $200 million to a State Street Advisors Russell 1000 Index Fund, and a combined $400 million will go to fixed-income investments.

Alaska’s money-shifting is just one change to the state’s pension landscape. The other: a recently implemented law that extends the amortization period to 2039 and requires future contributions to be calculated based on level pay amortization. The goal: to boost the funding levels of PERS and TRS to 68.8% and 73.3%, respectively. But state municipalities don’t quite share that vision, mostly, they say, because much of the cost will fall to them.

Extending the amortization period, the time over which that debt would be paid, is comparable to the difference between a 15-year and a 30-year mortgage, [Alaska Retirement Management Board member] Kris Erchinger said. Essentially, the longer period allows lower monthly payments, but at a much greater total cost.
“It’s a better deal for the folks who have to balance the budget today because they have to pay less today,” she said.
“But projections of decline in oil production — oil revenues — does not bode well for our ability to pay those costs in the future,” Erchinger said.
While retirement board member Martin Pihl of Ketchikan joined Erchinger and others in praising the $3 billion, he doesn’t like the Legislature’s cost shift.
“I do have deep regret over what I feel is the unnecessary extension of the amortization period, bringing huge, huge, additional cost — like more than $2.5 billion to the people across Alaska — and forcing even greater numbers into state budgets down the line,” Pihl said.

That increased cost for municipalities stems from a 2005 deal in which state and local government officials negotiated a way to pay off the unfunded liability. It called for municipalities to pay an extra 22 percent of their payroll toward the back debt until it is paid off. Extending the amortization term by nine or 10 years increases the cities’ share while reducing the state’s share of that cost.

Board member Sam Trivette of Juneau said the level-percent-of-pay method adopted by the Legislature will result in less money going into the retirement trust funds initially, weakening them and driving up costs in the long run.
“That’s why we supported level-dollar,” he said. “A shorter amortization period saves everybody billions of dollars.”

Alaska’s oil revenues have allowed it to keep two rainy-day funds stocked with cash. The plan was always to use the funds to cover revenue shortfalls in years when oil prices drop, and to provide payouts to residents. But using the money for paying down pension obligations is a first:

One [rainy-day fund] is the $52.7 billion Alaska Permanent Fund, created in 1976 as the trans-Alaska pipeline neared completion. The pool was established to accumulate and invest oil-tax and royalty money in case the state runs out of crude and to give residents annual dividends. The payout was $900 in 2013 for every man, woman and child who met the residence requirement.

The second fund, the $12.7 billion Constitutional Budget Reserve, was created in 1990 as a rainy-day fund. Initially seeded with settlements from tax and royalty disputes with oil companies, the reserve plugs budget holes in years when oil prices drop and is supposed to be replenished in surplus years.
“Having an oil trust fund like that is unique,” said Keith Brainard, research director for the Lexington, Kentucky-based National Association of State Retirement Administrators. “I am not aware of a state that has dipped into reserve like this, at least in a substantial way like this, to pay down an unfunded liability.”

 

Alaska Governor aims to ease pension shortfall with state savings fund

Alaska Governor Sean Parnell is pushing to transfer $3 billion out of the state’s rainy day fund and into its pension funds, which rank among the unhealthiest in the country. The plan, released today as part of Parnell’s 2015 budget, aims to pay down a portion of the unfunded liabilities which plague the state’s retirement system.

Pensions & Investments reports:

Under the governor’s proposal, $1.88 billion would go to the $14.3 billion Alaska Public Employees’ Retirement System and $1.12 billion to the $6 billion Alaska Teachers’ Retirement System. Both pension funds are administered by the Alaska Retirement Management Board, Juneau. The contributions would increase the funded status of the plans by 10 percentage points each to 73% and 63%, respectively. It also would lower the overall unfunded liability to $8.9 billion.

If the Legislature approves the injection of assets, future contributions through 2035 would be $500 million per year, reducing annual payments by an average of about $400 million per year through fiscal year 2030.

The plan is radical, but the state’s retirement system is in dire straits: Alaska’s pension funds are only 59.2% funded, according to a MorningStar report. The same report found that Alaska has racked up $10,325 in unfunded liabilities for every person living in the state, a liability per capita ratio that ranks as the worst among all 50 states.